Long Term Perspective

President Obama, March 3, 2009:

"What you're now seeing is profit [sic] and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you've got a long-term perspective on it."

End of the week news, March 6, 2009:

MARKET SNAPSHOT
Stocks look cheap, but they could get cheaper; By some measures, P/E ratios are near lows, though it depends how you slice it

By Laura Mandaro, MarketWatch
Last update: 4:45 p.m. EST March 6, 2009
SAN FRANCISCO (MarketWatch) -- Price-to-earnings ratios, a popular measure of how expensive stocks are by historical standards, have surpassed lows seen in recent recessions. But that's no guarantee they won't sink further.

"There's no doubt that people can look at market valuations and determine that stocks are relatively inexpensive -- but that doesn't mean they're going to quit going
down," said Michael Gibbs, director of equity strategy at Morgan Keegan & Co. in Memphis, Tenn.

The price-to-earnings ratio of stocks in the S&P 500 has sunk to 10.6 from nearly 17 at the end of 2007, says FactSet Research. That's based on the Thursday close of the S&P 500 compared to index members' past four quarters of operating earnings, or net income excluding what analysts consider to be extraordinary charges and gains.

Thomson Reuters, which publishes similar analysis, estimates the trailing P/E ratio for the S&P 500 is around 11.

Those numbers are well below the valuations reached during the market low of the 2001 recession, when the ratio stopped at 19. They're also lower than the P/E ratio of 13 touched at the market bottom during the 1990-1991 recession, says Morgan Keegan, which used data compiled by Yale University's Robert Shiller for its historical research.

But widen out the lens, and P/E ratios dropped even further in some earlier recessions. During the market low of the early 1980's recession, for example, stocks in the index were trading at a mere 8 times earnings. "There have been periods when the market multiple [P/E ratio] traded lower. And the economy is declining at a rapid pace, meaning earnings could fall more," Gibbs said.

We read this and we think, how can we use this sterile and unsurprising information to create an overwrought and emotional blog post. Let's try this:

Sydney Brillo Duodenum recently downloaded the iDie application for his iPhone. Essentially an actuarial table showing at any given moment your expected remaining lifespan, iDie finds that SBD has used up approximately 56 percent of his life. This little application has removed any and all sense of any "long-term perspective," as the President might describe it, on anything. It's all short term from here on out. In fact, it was during a highly productive part of that first 56 percent of his life that SBD maintained "a long term perspective" on things and it is that very thing which led him to be a good egg by directing a decent percentage of earnings into nest eggs. The result? A murder of crows has made off with almost half of SBD's little chicks and an unkindness of ravens has its eyes on the remaining little bastards. Living now only in the short term as SBD does, there simply isn't any long term opportunity to get back to break even.

Someone is to blame, of course.

First and foremost, SBD is to blame because he "bought into the system" as it were. His money is locked up in goodietwoshoes, government prescribed financial investment vehicles - 401(k), life insurance, 529, etc. - all designed to minimize taxes in addition to minimizing access to hard earned money. To get it out will cost money and penalties. And then what? Thus, SBD gave up his freedom for some kind of freedom in retirement. Short term advice to the next generation: never give up control of your money.

Second, Obama is most certainly to blame for our present condition. It is absurd and obtuse to claim that he "inherited" this "crisis." He blames out of control government spending, so-called lax regulatory oversight, and capitalist greed. It was Booooooosh that did it. We know that government spending got out of control paying for things President Obama himself is now promising full sized versions of: nationalized health care, education outlays, hidden welfare; bailouts for deadbeats, statist energy policy. And yes, there certainly was a great deal of regulatory blindness, especially the kinds that allow quasi-government entities - Fathead and Frannie Fuckface - to run amok in a vital area of the nation's economy and pysche. And while it's interesting and makes allowance for stern furrowed brow speeches, capitalist greed is what funded President Obama's break the bank presidential campaign. The regime was not built on drib and drab contributions from some hempclothed fat chick with hairy underarms living in a tent under a freeway in Portland, OR. Wall Street and James Bond-type villains paid for President Obama's campaign. It was Barack Obama's "philosophy" that brought us to where we are today. Government meddling and control over market forces, government policies that pervert human action and create moral hazard are to blame. In the past 40 some days, President Obama has promised a degree of government meddling, coercion, perversion, and disruption unseen in modern times. His policies and philosophy took us to where we are today. Falsely, they indict free market principles that have never been allowed to function. Obama is now in control and promising an explicit and accelerated application of his philosophy.

People need to understand that this will not blow over. People sometimes become trapped in their own circumstance, believing it to be global and paradigm altering when it really just an isolated squall in the wide ocean. Not this. This not melodrama or middle age heat or desk draw whiskey or even sour grapes talking. It's sober fear. America is in the grip - the clenched fist - of an egomaniacal academic charlatan.

Our republic is in great peril and there is not a goddamned thing that can be done about it. It must simply play itself out in the short term. Obama will get most of what he wants. In that sense he will succeed. He will create a government chatal class, incapable of ever being a Greatest Generation. Obama's success is national failure. The Republic is dying. SBD's "long term perspective" is that in the short term, he witnesses it die.

Crime of Commission

American Enterprise Institute's Kevin Hassett:

One reason the increase [in spending] is so dramatic is the mystery of compounding. Each year, Congress passed pork-laden expenditure bills, which became part of the long-run baseline the minute they became law. Each time that the federal government wasted a billion dollars, it created budget space to waste $1 billion again and again, ad infinitum.

That’s perhaps the scariest fact about next year’s budget. The skyrocketing spending of 2009 will be the CBO baseline for every year after that. It will be easy to provide health care to everyone; the budget space will be blocked out. Indeed, Congress can spend with impunity in years to come, covered by the protective shroud of the CBO baseline that this year delivers. We can ride big government spending and trillion-dollar deficits all the way to 2017, when the Social Security trust fund itself starts running deficits.

This year may establish a government-spending black hole with gravity strong enough to suck the U.S. economy over the event horizon. Such a spending path has two possible endgames. Neither is pretty.

The Federal Reserve could print enough money to accommodate all of that debt, in which case the dollar will collapse and the U.S. will be looking at a South-America-style run on its debt.

Or the U.S. government could get its fiscal act in order with higher taxes. For that to happen, income taxes would approximately have to double.

While advocates of Keynesian-style stimulus are correct that this economy is terrible enough to warrant dramatic action, it is hard to understand how such a fiscal path might help. So what if second-quarter gross domestic product blips up a little bit? What business is going to expand its operations with the mother of all tax hikes peeking over the horizon? If government spending provided such a wonderful boost to the economy, we would be in Nirvana already.

If we want to create optimism about our future, we need to provide a reason. Putting a ring road around every city in the U.S. will not accomplish that. The only sensible path is for the U.S. to put its long-term fiscal house in order. Without that, this year’s stimulus will likely be a historic flop.

Hassett then reveals his entire column to be a sick joke by proclaiming this bit of "good news":

The good news is that a bipartisan group of senators, led by Democrat Kent Conrad of North Dakota and Republican Judd Gregg of New Hampshire, is on the right track. Their idea is for Congress to empower a commission to make the tough choices about future benefits and taxes to restore sanity to the U.S. budget outlook, and then to fast-track the commission’s recommendations to an up-or-down vote. If Congress fails to take Conrad and Gregg seriously, we may all be headed for the bread line.

A Commission? No. A bipartisan Commission. Well, the timing is certainly right, what with a new Democrat president, who merely holds the entire hope of the world in his uncalloused hands, about to take his seat in the Oval Office and a Democrat-controlled House and Senate run by those unrepentant centrists Harry Pelosi and Nancy Reid. Why wouldn't they share power? Why wouldn't they hand over the power of the purse to a commission of, well, who exactly? No doubt there are BIG, BIG names on that list, all perfectly bipartisan and properly credentialed by the Ivy League, which has been unnecessarily excluded from formulating national policies and programs since the Carter years. Start Richard Ben-Veniste and Lee Hamilton. They look good on Commissions. Ben-Veniste has that Blago hair, which chicks dig, and Hamilton looks kinda like Ike.

Still, one should not be too pessimistic. It would be a tough sell for the American people, but if they'll vote for Obama, then anything is possible. But the Commission's work would need to be as open to the American people as the work of the Congress. How about turning it into a Broadway show? It could be the first big government stimulus project under Obama. A new Works Project Administration Federal Theater -- oops, sorry - Theatre Project. Every city could put on its own show. The real work of the Bipartisan Commission of Bipartisan Bipedals, all the hacking and slashing and "tough choice" making, would be instantly transcribed to the stage. David Mamet could write the scripts. Our children could be pressed into service as stage hands in exchange for college credit or tuition tax credits. Hollywood's prodigious propaganda machine could be volunteered into service, although they will expect certain tax breaks when filming comes around, otherwise they'll have to film in Toronto or Vancouver.

But perhaps there is a better way. Let these people who have been elected to office fight for their agenda, make laws on it, and impose it on the people who elected them. And if the People don't like it, they usually form their own ad hoc, informal committee every two or four years and make a fast track decision with an up or down vote on what they think of those elected people. We may all suffer in the meantime, which could be a longtime, but how the hell else are to we learn from our behavior.

The belief that committees of the unelected, who spare the elected from making tough choices or even stupid ones by allowing them to assign away their responsibility, can save us from ourselves is the worst sort of indictment of our Republic. It's the kind of crazy talk that makes messiahs of politicians. Such a Republic cannot stand for long. Nor should it.

More Like A Crack Whore

Bill Brown on Uncle Sam as Sugar Daddy:

At the very core of the current financial crisis lies the problem of moral hazard.

Moral hazard is the alignment of incentives that encourages the pursuit of short-term gains with scant regard to (or even responsibility for) potential long-term costs. The U.S. Federal Reserve Bank and the federal government helped create the moral hazard problem, but they are not focused on correcting it. In fact, some recent actions are making the problem more acute.

Former Fed Chairman William McChesney Martin Jr., once said that the role of the Fed was to "take away the punch bowl just as the party got going." But under the leadership of Alan Greenspan, the Fed not only left the punch bowl on the table, it also spiked the punch.

When equity markets wobbled, the Fed came to the rescue. Yet when he commented on the "irrational exuberance" of the equity markets several years ago, Greenspan admitted no role in creating that exuberance.

More recently Greenspan failed to acknowledge the moral hazard problem in a different context. In his Oct. 23 testimony before Congress, he expressed "shocked disbelief" that self-regulation failed -- that financial institutions did not do a better job preventing themselves from getting into trouble.

Greenspan's shock is itself surprising. He was right to believe that markets could be self-regulating, and he was right to believe that markets should work. What he failed to see, though, was that self-regulation couldn't work because of the moral hazard that had crept into the way Wall Street operated.

Many of the problems with Wall Street lie with the corporate structure itself. In the idealized world, management should be acting for the benefit of the shareholders, and the shareholders should act through the board of directors to set compensation and power of management.

In the real world, though, shareholders are too numerous to exert any meaningful control, with the result that management tends to operate in a way that favors itself over shareholders. This moral hazard became particularly toxic in the financial service sector where self-regulation came into direct conflict with self-interest.

On the ruins of the current crash, Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke are building yet another moral hazard. In the interest of rehabilitating the financial system, they are taking too much of the sting out of the bad decisions of times past.

They are helping re-inflate subprime mortgages and other toxic instruments that got us here in the first place. They are helping resuscitate the banks that are in trouble (and some of those that are not). Most interestingly, they are allowing our government to become a shareholder of recapitalized banks, while permitting the government to fall into the trap of exercising no power over management. The government is acting rather like a sugar daddy who lavishes attention on the basis of flattery, not need.