Politics and Economics...

Well, it has certainly been an interesting few weeks on the political and economic fronts. Today I'll attempt to relay my viewpoints on both topics.

First the political front. Super Tuesday just passed us by with some interesting results.

Clearly on the Republican side of the house, McCain has pulled out into the front of the pack, but still has quite a ways to go delegate-wise to win the game. The surprises came with Huckabee grabbing more states than was anticitipated beyond Arkansas, his home state, and equally surprising was the fact that Romney pretty much fell way short of expectations. Being a conservative myself (and please note I did not say Republican), ideally if I could combine aspects of all three leading candidates into one person, that is exactly what I would do. I like McCain's national security experience, I like Romney's economic experience, and I like Huckabee's stance on healthcare and the fact that he is a conservative Christian when it comes to being a values voter. Unfortunately, we cannot combine candidates into one person, so what's the best answer at least in my view? I think McCain will inevitably win the Republican nomination, it's almost a forgone conclusion at this point. The problem that remains, is that many a values voter is considering sitting out this election cycle if McCain wins the nomination. I believe this is a serious error in judgement on the part of my fellow conservatives, essentially we'd be cutting off our noses to spite our faces. Not good. So, McCain needs to do something to appeal to the evangelical base if he's going to have any chance of winning the Presidency. I think the best answer is to endorse Huckabee as his VP. Huckabee is a very well spoken somewhat moderate economic conservative, which matches him up well with McCain, yet has the conservative values that will appeal to values voters, especially in the south where McCain is most vulnerable. So, I vote for a McCain/Huckabee ticket. There you go.

What do I like about McCain? Well, as previously stated, I like his foreign policy experience and his national security experience. I also happen to agree with his approach on immigration. Many of my fellow conservatives disagree with McCain's approach on immigration policy, especially surrounding amnesty, but I think they disagree more from an idealistic perspective that is not grounded in reality. Short of agreement upon deportation of criminals, I believe that mass deportation is not only impractical (probably impossible in reality), it would also most likely result in a depression. Yes, not a recession, a depression. Like it or not, most of the 12 million people here illegally, have come here to work hard and to have a shot at the American dream. The fact that they have come here illegally at this point is largely irrelevant. If we were to forcibly remove and/or prevent 12 million people (and this number is most likely considerably higher BTW) from working, we would see a huge contraction in our economic output. Removing 12 million plus consumers, 12 million workers, 12 million debtors, etc., cannot be done and not have a dramatic negative effect on our economic system, our banking systems, our housing sectors, consumer sectors, and the list goes on. McCain knows this, that is why he supported the bill in question, and that's why the Z visa was included in the bill in question. Amnesty isn't pretty, but you know what, we had a chance to resolve this issue back in 1988 and we chose not to, and shame on us for doing so, but now we're going to have to take our medicine and realize that no matter how much we want to sit around the table and talk trash about mass deportation and massive fines against companies that have hired and employed illegals, doing so would take us from recession to depression. Let's be clear, EVERYONE in Congress knows this is the case, because they have economic experts testifying to this end. I know, because I've watched the testimony with my own eyes on C-SPAN. What we in fact have is a largely uneducated America who doesn't realize that we will cut off our nose to spite our face if we choose any policy that endorses mass deportation. Honestly, how could anyone argue otherwise given the vast majority of illegal immigrants do in fact contribute measurably to our economic output?

That said, many of my fellow conservatives have expressed outrage regarding the fact that many people have come here illegally at this point is largely irrelevant. They scream about law breaking, about setting a bad precedent, about stolen socsec numbers, about how illegals should have to adapt not the citizenry. To these points I say that they are all very valid arguments and points to be made, but they do not change the reality we must face economically. Given the dramatic economic consequences that are based in reality and not emotion surrounding the topic of illegal immigration, yes, these facts are largely irrelevant to any real solution. I'm not saying they did not break the law, etc., fact is illegals have, I'm saying that these people are largely integrated into our economic system, and shame on us for letting this problem fester for the last 30 years, now we have to live with the real consequences of our inaction, which is to embrace some form of amnesty when all is said and done.

What don't I like about McCain? Well, he's not very conservative economically. He voted against the Bush tax cuts, even if it was for good reason. He's also a recent convert of conservative social values, probably in an effort to appeal to values voters, meaning it's not a true change of heart on his part, it's about politics at this point in time.

On the democratic front, it's been interesting race to watch for sure. A number of months ago Hillary was all but a shoe-in for the Democratic nomination. Obama has since somehow managed to capture the hearts and minds of the young and the young at heart, as well as the African-American vote across the board. His marketing based upon hope and change resonates with many voters, even some conservative voters, much like John Kennedy did many years ago. After Super Tuesday, it seems delegate counts between Obama and Clinton are nearly equal, which is really saying something for Obama considering how powerful the Clinton political machine is here in the U.S. It definitely shows that our electorate is growing tired of the same old same old. My only real concern is that Obama resides much further to the left from a policy perspective than Hillary does. In this respect, I have to wonder what those big CHANGE signs really mean. Vote for Obama, vote for change, because that's all you're going to have left in your pockets when he's done in office (tax and spend).

Tax and spend has long been an argument used by the conservative Reagan coalition. Unfortunately, this argument has fallen flat on it's face because of runaway spending by Bush and his fellow conservatives in Congress. Fiscal irresponsibility was probably the single largest reason conservatives lost their majority in Congress in 2006. Going into a very important Presidential election, what does Bush do? He proposes the largest budget in the history of our nation. 3.1 trillion dollars, and Bush was the first President to cross the 2 trillion dollar line a few years ago. I don't think this helps the conservative Presidential candidates myself, and I believe proposing a budget of this magnitude demonstrates a serious lack of foresight on the part of the Bush administration. Myself, there is nothing more important to me than fiscal conservatism. We simply cannot continue to spend more than we generate economically and survive as a sovereign nation and as a world power. The fact that we seem to think we can, indicates a major flaw in our national psyche at least in my humble opinion. Every empire before us ultimately failed because of complacency and an increasing dependence on the national treasury to survive. If we think that solely because we are America that we will not ultimately suffer the same fate as nations and empires before us (including the recent demise of the USSR), then we are supremely naive.

On to economics, since I've already started talking about finances. :-) We are hearing a lot of talk about recession of late. A number of popular economic metrics that somewhat reliably predict recession are indicating we are either headed for recession or in some cases are already in recession. Recent numbers from the various guv'mint agencies provide mixed results. BLS numbers (Bureau of Labor Statistics for those who don't know - http://www.bls.org/) that track unemployment still look okay, but job growth numbers took a turn for the worst this month. For those who don't know, if job growth registers anything under, oh about 120,000 jobs per month, then in fact we have contracting overall job growth economically. Obviously, the last several months now, we've not seen numbers above 120k. Not good. Unemployment numbers "appear" to be okay, but if you take a look at how the BLS calculates national unemployment, you'll see that it uses rolling averages year over year. This type of approach yields more stable result sets over the long term, favoring statistical accuracy during steady growth or decline periods, but yields very inaccurate result sets during change periods, when we move from growth to decline, or from decline to growth in the number of jobs. Most of us can remember the democrats in Congress giving President Bush a hard time about slow job growth during years 2002-2004 when we were coming out of the last minor recession, seeing only 80-90000 jobs per month being added. Revisions to the numbers (and these historical numbers are revised very very often as new and more accurate data is gathered from the past 2-3 years of economic and job activities) now show we were actually seeing real job growth in excess of 200,000 jobs per month for that very same time period. Why so inaccurate you may ask? Because this was a change period for job growth, when we were emerging from a recession, from job decline to job growth. With these facts in mind, it becomes easy to explain why both the unemployment rate and the job growth statistics do not yet show recession. My guess is we will probably see revisions to these statistics over the next year or so that actually show greater job losses and higher unemployment than we currently see.

Real GDP fell significantly more than expected in Q4 2007, showing only a meager 0.6% increase. Keep in mind GDP is also subject to statistical anomalies and therefore Q4 2007 GDP could actually turn negative with revisions over the next six months or so as more concrete data becomes available (then again, it could also rise). If you'd like to check out the data for yourself, you can do so at http://www.bea.gov/ (the Bureau of Economic Analysis). My guess is that GDP will turn negative in Q1 2008 and may be revised to indicate economic contraction for Q4 2007 as well, though we probably won't see this revision occur until sometime in Q2 2008 at the earliest.

If you've ever walked down main street and thought to yourself that despite all of the rosy economic growth indicators that your real life experience just doesn't line up with these statistics, a cool site to bookmark is http://www.shadowstats.com/ published by John Williams. This site is chock full of interesting econometrics that show how our previously used econometrics stack up against the currently used econometrics in easy to understand graphical formats with explanations that are written in lamen's terms that most average folks can actually comprehend. I oftentimes refer to this site's data when discussing economic reality versus the statistics we see.

So, what's my point? Well, I believe we are heading into a recession, in fact I believe we are already in recession, and that the econometrics, as always, are slow to show this reality. Eventually they will show us in recession, it's just a matter of time. Yesterday a services sector growth report was released that had rather dismal numbers. Since the majority of our economic output is services based, this is further evidence that we are heading for recessions. The fact is that the housing and financial sectors are already in recession, and the manufacturing sector has been hit hard from foreign competition, though the recent demise of the dollar has helped our manufacturing exports somewhat. If indeed the services sector, the single largest component overall of our economic output next to consumer spending, is slowing down, then recession is but a certainty. I don't mean to be all doom and gloom, but I do count myself a realist in many respects, especially when it comes to economics.

What does this mean for us? It means that we're likely to see a bear market. We've already seen a market correction, defined as a 10% drop in market value (the Dow saw it's peak on Oct, 9, 2007 at around 14300), we're now hovering around the 12200 mark at present. A bear market is defined as anything greater than a 20% drop in market values. A couple more days like yesterday and we are there folks. Given the crisis in confidence brought on by the housing crisis and credit crunch, consumer spending is likely to slow down considerably, for many reasons beyond the two I just mentioned but won't go into again here. Suffice it to say that the U.S. consumer is just about tapped out of credit. Since consumer spending accounts for fully 70% of our real GDP, any slowdown in this sector will result in recession. Given the statistics already show a miserable holiday retail spending season, it is likely we will continue to see consumer spending level off for a while.

What does this mean for your investments? I'm no expert, but my view is that you should take a defensive position in your portfolios. This means a majority mix of cash and bonds for any short term investments. Long term retirement investments beyond ten years, it's really up to you to decide. Some folks will ride this out and wait for the next bull market. With dollar cost averaging, assuming you continue buying on the downswing no matter what, even if you stay majority equities, long term you'll probably do just fine. For those who are a bit more conservative, you may want to consider reverting back to money markets and bonds in the short term. While most folks interpret the words "bear market" to mean decreased market values of 20% or greater, and this is indeed true, that's not the whole story. In reality, bear markets mean increased volatility with an overall downside direction. Much like we are seeing over the past few weeks, seeing triple digit swings will be commonplace if we are indeed in a secular bear market, as I believe we are. In the investment world, the number one rule really is, don't lose money. For the consumer investor, this rule isn't generally discussed, because Wall Street wants you to stay fully invested. Many MANY mutual funds, hedge funds, value funds, growth funds, pension funds, pretty much any managed investment vehicle, have already taken defensive positions to cover for downside risk. Some investment managers do so via shorting the market (this is how George Soros made his fortune), others do so by holding higher percentages of cash, money markets, bonds, t-bills, etc. What you do is up to you. Myself I'm currently about 30% invested in money markets/bonds with 70% equities, with the majority of my 70% equity in foreign equity funds (because I don't feel the U.S. market is the place to be right now). To each his own though, I hope and pray that you ensure you are properly invested in the markets specific to your life circumstances.

Well, that's enough writing for now...see you all a bit later...