Few economists now doubt that private household spending and corporate investment will rescue the economy on their own. The debate now lies in the scale and scope of the government’s intervention, as the only institution with the access to capital, macroeconomic scope, and investment horizon needed to jump-start the labor market, keep production cycles from seizing up, and create the necessary conditions for manageable lending and spending to resume.
In the following commentary, David Kotok of Cumberland Advisors suggests that any stimulus of this size shouldn’t be rushed or it risks not achieving the plan’s most basic objectives: immediate job creation and demand stabilization. While fiscal conservatives and liberals argue over the relative effects of tax breaks versus direct spending, the debate ought to focus on the nature of the spending itself. Infrastructure investments are a great way to support demand for key goods and services that have been disproportionately affected by the economic downturn, but if these projects take months and even years to plan and carry out, there may be better ways of borrowing $3,000 a head for every American and putting that capital to more immediate and productive use…
Washington seems in disarray
February 13, 2009
Imagine! There is a Congressman who actually wants to delay the vote on the stimulus bill so he can read it and make sure it says what he was told it says. Kudos for him. There is still hope for our country.
This 575 page piece of legislation is being rammed through Congress without any hearings, without any detailed examination, without any vetting. It is loaded with pieces of spending that are not going to trigger job creating activity for months or even years or maybe never. It is larger than all the money spent on the Iraq war. Its size rivals the Defense Department appropriations. It will be funded through federal borrowing. And there has not been any comprehensive vetting of the component parts.
Now we are continually told that there will be a “catastropheâ€ or a “disasterâ€ if this 789 billion dollar package is not passed at once. Note that there is a continuing reference that ONLY government can fix the economic problems in the United States.
Not once did anyone mention that Cisco financed a 4 billion dollar bond issue without any TARP funds and without any government guarantees. Note that Intel announced an investment of billions into an entire new facility that will be located in the United States (Arizona) and will be privately funded. Intel didnâ€™t need TARP funds. Intel didnâ€™t need the stimulus package. Not one official in the Obama administration has even acknowledged the Intel commitment.
All we hear is that government can fix what will otherwise be a complete disaster. And all we hear is that banks are not lending and that there is no credit available.
Yesterday our chief monetary economist, Bob Eisenbeis, cited bank lending figures compiled by the federal authorities which show that bank lending is not at a dead stop. Sure credit is tightening. But creditworthy borrowers are getting loans. We see that among the clients in our firm.
In the United States our government is meeting behind closed doors and working up an $800 billion spending package and then giving the country no time to examine it. Even the Members of Congress who have to vote on it havenâ€™t had time for their staffs to examine it. Campaigner Obama promised transparency. President Obama seems to have forgotten his message.
And for those of us in the business of managing the wealth of clients, we must deal with the conflict of emotions when we see the policy prescription in Washington on a collision course with the investment needs of our clients. Our job is to protect the wealth of our clients as best we can. Our job is to try to allocate among the component choices available to them. And our job is to tell our clients, their consultants and those readers who listen to us what we see and how it impacts them.
We see a Washington in disarray. We see repeated failure in assembling a cabinet. We see nominees having to withdraw their names because of their failure to comply with our tax laws. The first scofflaw was confirmed and he used up a lot of the new presidentâ€™s political capital. The series that followed have had to withdraw.
Senator Gregg apparently withdrew when he realized that the Census Bureau was going to be moved from the Commerce Department to the White House. And he realized that this formerly neutral agency would be at risk of political influence. At least his withdrawal was not for failure to pay his taxes.
In Washington we see harsh and shrill rhetoric attempting to force immediate passage of legislation without vetting. And we see apologetic admission of â€œscrewing up.â€ What we donâ€™t see is a stimulus bill that will put people back to work promptly.
We do not believe the United States will fail immediately if something is not done at once. We think the 135 million Americans who still go to work every day and pay taxes and try to save and invest are the backbone of the country. And we think that government is NOT the only answer.
Today we fly to South America. In Argentina we will visit a country that squandered its great natural resources and ran up its debt and has defaulted several times. Argentina can claim the award for the largest US dollar denominated default in history. It, too, had a banking crisis. I remember visiting when â€œno al corralitoâ€ was chanted in the streets by citizens who could not get their money from the banks. We will also visit Chile, a country where dictatorship has been replaced with democracy and market based systems that seem to work. Chile is a success story. Argentina is an example of how populism and socialism destroyed what was once the fifth largest economy in the world.
This is our tenth trip to that region and to Patagonia. The people are friendly and welcoming. They do not trust their government. They have good reasons.
We will travel as best we can in South America. In these times we will carry a satellite phone when in remote areas where black berry has not penetrated. While away on our trip our Cumberland colleagues made up of tax paying employed private sector employees are available to serve our clients.
Our asset allocation remains unchanged. We are invested 50% in Stocks and 50% in bonds and zero in cash equivalents. Cash earning zero is a bad deal in our view. Our normal allocation is 70% stocks and 30% bonds. So we are under on the stock side and over on the bond side. In the bond accounts we are favoring tax-free municipal bonds and in the taxable accounts we favor higher grade taxable spread issues and we are avoiding treasury issues. In stock accounts we are using only exchange traded funds and we are broadly diversifying risk.
The enduring quality of these great United States is that our institutions survive our politicians and endure in spite of them. The real fabric in America is the willingness of its citizens to participate in the government. And it is in the ability of our society to voice criticism and to debate ideas without fear of retribution by the government. Those wonderful characteristics are still alive.
I would still rather be a citizen of our country than anywhere else. But I am very concerned about the start of the new Obama Administration. I supported him and I voted for him I want him to succeed. I repudiated what seemed to be a failed policy of the last few years; that was my personal choice. But I am now very insecure in the way the government is being run by the new folks. I find the thought of a Pelosi dominated policy repugnant. And it seems to me that the House of Representatives is now a one party system without any respect for the tradition of debate on the issues.
2009 is certainly an interesting year. Happy Valentineâ€™s Day and Happy Presidents Day.
David R. Kotok, Chairman and Chief Investment Officer, email: email@example.com