Marvin Clark's  Instablog

I was making my way down the stairs late Saturday morning when I spotted my precious 8-year-old daughter.  She was clutching in her right hand this week’s copy of Barron’s.  She looked at me. 

“Daddy, what’s a U.F.O., she asked? 

Rubbing the sleep from my eyes, I responded, “why, do you ask’? 

She retorted, “Alan Abelson failed to explain its meaning in his column this week. 

Precocious kid. 

While heading for the kitchen, I blurted out “it stands for Unrealistic Financial Observations”.  Not bad, I thought to myself since I am minutes away from sipping my first coffee or first weekend Mimosa today. 

“What does that mean”?  She pressed on. 

“When people see things they cannot identify or believe in things that aren’t really there; that’s a UFO”; using my best Jim Anderson, “Father Knows Best” imitation. 

“Daddy, why do people believe in UFO’s?”  Maybe I should skip the coffee and go straight to the Mimosa, I thought. 

“Well, pumpkin, sometimes people talk themselves into believing thoughts as real events and experiences, even though they are not.”  Remember when you were small and you thought monsters might be under you bed at night.  You convinced yourself it was true.  I would lay down with you until you fell asleep.  Remember?” 

“Yes, but I was just a baby, then.  Now, I am older.  I know better than to believe in monsters.  So, do you mean UFO’s are like the green shoots that Larry Ludlow and Mellissa Francis go on and on about every day on CNBC’s The Call?” 

“Yes, honey; exactly!  Perhaps, you can fire off an email to the show’s producer and bring to their attention.” 

(I cannot get this child to watch Nickelodeon.) 

“Daddy, does President Obama believe in UFO’s?”  Do I really need the extra calories orange juice adds to a Mimosa - I think to myself? 

“Some days he does; some days he does not.  On the days he is pandering for additional funding from congress, he is not a believer.” 

Am I making my kid too cynical at too young of age?  Maybe, I am being a poor parent.  Oh well, at least I have earned dos Mimosas this morning. 

“Daddy, do you think the feds will end quantitative easing this year?”

“That’s enough”, I said.  Put down my Barron’s, and go outside and schedule a play-date with the other children in the neighborhood.  You’re too young to be discussing the Federal Reserve monetary policy and macroeconomics – and on a Saturday morning”. 

As she was walking out of the kitchen door, she turned around and with a big smile asked “Daddy, want do you want for Father’s Day, tomorrow?” 

What else could I say, and with a wink, I replied; “Pumpkin, you’ve already given daddy the best gift ever – you don’t believe in green shoots."

That's my little girl.

Disclosure: No positions

 Bill Gross on Bloomberg TV yesterday predicted the inevitability of the US losing its AAA credit rating.  Running deficits at 10% of GDP for many, many years, and projected growth rates of 1% to 2% in the future, this will push debt as a percentage of GDP from current levels of 50% toward 100%.  An inflection point for country credit downgrades.  In addition, a protracted monetary policy of quantitative easing and deficit spending will cause an unhealthy re-inflation and effect interest rates and the value of the dollar.

This comes the day after that Britain’s AAA rating was threaten by Standard and Poor’s lowered outlook from stable to negative.  After listening to Bill Gross, the last scene in Paramount Pictures 1972 classic, The Godfather, written by Mario Puzo, between Marlon Brando’s Don Vito Corleone and Al Pacino’s Michael, then flashed before my eyes:

Don Corleone: I never wanted this for you.  I work my whole life - I don't apologize - to take care of my family, and I refused to be a fool, dancing on the string held by all those bigshots. I don't apologize - that's my life - but I thought that, that when it was your time, that you would be the one to hold the string. Senator Corleone; Governor Corleone. Well, it wasn't enough time, Michael. It wasn't enough time. 
Michael: We'll get there, pop. We'll get there.

In this economic translation, Don Vito represents Thatcherism and supply-side economics is Michael.  Deregulation and lower taxes were supposed to free capitalism from the straightjacket of Keynesian economics and deliver all to a financial utopia.  After a generation of less government, our stock market value is half its worth from as recently as 2007.  Our banking industry and credit markets are broken; propped up by taxpayer’s dollars.  The economy is fighting off depression – and losing.  Moreover, the accumulated wealth of baby boomers, earmarked for retirement, along with their dreams, is truncated. 

The US automobile industry, once the envy of the world, now laid dismantled awaiting auction to the highest bidder for pennies on the dollar; 500,000 jobs are disappearing monthly, and the end game is the lost of our credit rating.  Cities and states have run out of cash just like many of its citizens.  Corporations continue to lower earnings estimates, quarter after quarter, because a de-levered future means a smaller pie.  Therefore, government will continue to print money.  

Treasury Secretary Timothy Geithner stated yesterday that the rise in treasury interest rates is proof the economy is getting stronger.  Perhaps.  Another theory is the world is adjusting the risk premium for holding US debt.  There was no comment on the slumping dollar.  At this point, the godfather, a shrewd business man, would short the dollar, buy gold, and look for emerging markets to invest in. 

However, just as Don Vito deluded himself into believing his actions, a lifetime of criminality, could escape into the non-criminal world, for future generations of Corleones, we deluded ourselves, too.  We believed it was possible to consume reckless leveraging, loose credit, cheap money, zero personal savings, obscene amounts of personal, corporate, municipal, and federal debt, and low taxes, without any cost to our brand of capitalism, jeopardy to our economic system, or any real personal pain. 

Francis Ford Coppola subtle metaphor in the final scene employing Don Vito as a fanged monster to frighten his grandson is the 12 trillion dollars in debt that awaits our grandchildren.  Be very afraid, children.  The beloved monster suddenly dies unfulfilled in his garden. I hope there is enough time for us to redeem our gluttonous spending ways, avoiding sure financial cardiac arrest, so that we can “get there”, like pop wanted us to do.

Disclosure: No positions

I ducked into the afternoon presentation of Joseph V. Battipaglia, Stifel-Nicolaus’ Market Strategist-Private Client Group, at the Money Show in Las Vegas.  Joe delivered a spirited macro-economic presentation of the US economy today.  In a packed room, he treated his fans to an unvarnished analysis of the stock market, real estate, the banking industry, Washington DC, global competition, and the bond market. 

Government has no exit strategy from capitalism.  One of Joe’s many beefs offered investors in attendance about the restructuring political landscape.  America had been a mixed economy of 70% consumer driven and 30% government controlled.  That will change as the Obama administration injects Washington into more and more private businesses.  A 60/40 split is likely to become the new norm in the future.

We are living in a hard dollar environment.  Cash is king.  This is a buyer’s market.  He cited examples of buying more real estate, stocks, oil, goods and services, than was possible two years ago.  This deflationary/low growth period will inhibit recovery and impede growth lower than most are forecasting.  Furthermore, we are overestimating our future exporting prospects globally.  Lastly, domestic drilling for oil and gas, or the lack thereof, is a missed opportunity to help the economy grow.

There are two bond markets.  The treasury market and the municipal/corporate/high yield market.  In a test of wills, the feds are trying to force investors to spend cash through the monetary policy of quantitative easing.  In addition, the issuance of trillions of dollars of government obligations is unsustainable, long term.  Investors are resisting.  Expect treasury rates to remain low for a while.

On the other hand, corporate and high yield bond, he believes, is fairly priced and worth investing in for the moment.  Three questions to ask yourself before buying bonds: 1) does the issuer need more money?  2) Have they missed any payments?  3) Are they holding federal dollars? 

Only buy quality stocks.  There will be another round of winners and losers.  Higher unemployment and lower profitability in the coming years will appear later in stock prices.  Do not attempt to pick the bottom of this market.  Three questions to ask yourself before buying stocks: 1) Do they need money?  2) Can they pay their divided?  3) Do they hold federal dollars?

Disclosure: No positions