Reuters
The Federal Reserve building in Washington.The meeting comes after several weeks of high drama in the markets sparked by the Fed’s attempts to explain how and when it might pull back from its $85 billion-a-month bond-buying program, and confusing investors in the process. Fed Chairman Ben Bernanke‘s challenge: Lay the groundwork for pulling the program back later in the year without alarming the markets with a sense that the central bank is about to slam on brakes.

Let’s take this step by step:

The Policy Statement: The Federal Reserve’s policy making committee releases its official statement at 2 p.m. today. The Fed appears unlikely to announce any immediate changes in its policies. But what it says about the economy, risks to the outlook and its strategy for the bond-buying program could send important clues about the future. Here are a few to look for:

–Does the Fed insert any signals in its statement about when it expects to make its first reduction in bond buying? Mr. Bernanke told Congress last month that the Fed could reduce the pace of its monthly purchases “in the next few meetings,” and he stressed that such a move is entirely conditional on how the economy performs. If the Fed policy committee wants to send the same message, it would most likely do so in the fourth paragraph of its statement. The committee has made changes — which have been poorly understood by outsiders — in this paragraph after both its March and April/May meetings to signal its evolving thinking on the bond-buying program. If officials want to clarify their intentions, they could use this paragraph of the statement to do so.

–Watch what the Fed says in the statement about the labor market. The Fed has said it will keep buying bonds until the labor market has “improved substantially.” In May, the Fed said the labor market had shown “some improvement in recent months.” If today’s statement strikes a rosier view on job market improvement that could signal officials believe a first step toward reducing the program is getting closer.

–Likewise, look for any changes to how the Fed describes its economic outlook in the second paragraph of its statement. The language the Fed has used to describe risks to the economic outlook have evolved, for instance. In December, the Fed said “strains in global financial markets continue to pose significant downside risks to the economic outlook.” At the next meeting in January, Fed officials said that “strains in global financial markets have eased somewhat” but they continued “to see downside risks to the economic outlook.” In March, financial strains disappeared and the Fed said simply that it “continues to see downside risks to the economic outlook.” The Fed stuck with that simpler sentence in May. Are downside risks still their dominant worry?

–Keep an eye out for any changes in the penultimate paragraph where the Fed discusses its plans for short-term interest rates. According to market indicators and analysts, investors have conflated talk about reducing bond purchases — which are meant to shape long-term interest rates — with the Fed’s intentions about short-term rates. All of the “tapering” talk led investors to think that the Fed could raise short-term rates sooner than expected. Fed officials see these as two different levers and want to set investors straight that a reduction in bond-buying does necessarily not imply earlier rate increases. They’re already being pretty explicit with the so-called forward guidance, saying rates will remain near zero until the unemployment rate falls to 6.5%, as long as inflation remains in check. They could look for ways to emphasize the point in their statement, though it seems like a point Mr. Bernanke could take up in his press conference. (See below.)

Economic Projections: Also out at 2 p.m. are updated projections on growth, inflation and unemployment from the FOMC members, which they release four times a year. What Fed officials say about the economy in these projections should provide insight into what they expect to do with the bond-buying program. Right now, the Fed’s growth forecasts are more optimistic than private analysts’ forecasts. Its inflation forecast for 2013 is also starting to look a little high. Officials might make some tweaks lower on both counts for 2013, but they aren’t likely to make any big changes until they see more data. It’s also possible that they have become more optimistic for 2014, given the economy’s resilience in the face of fiscal headwinds. But on that count too, they are likely to want more data before shifting their outlook.

Press Conference: At 2:30 p.m. Mr. Bernanke steps up to the microphones for a press conference. He is likely to use his opening statement to emphasize that the Fed’s decision on reducing bond purchases depends on the data showing solid, sustainable economic improvement. In other words, he will try to refute the notion plaguing investors that the Fed has decided to dial down the program no matter what the economy does. Mr. Bernanke is also expected to stress that the Fed’s decision-making on bonds has nothing to do with short-term interest rates. J.P. Morgan Chase & Co. analyst Michael Feroli said Mr. Bernanke will avoid talking about the timing of any reduction in the program but rather stress that “tapering is not tightening, and that decisions regarding asset purchases are subject to different conditions than those regarding forward rate guidance.”

Reporters are also likely to press Mr. Bernanke about his future plans after President Barack Obama said in an interview Monday that the Fed chief “has already stayed a lot longer than he wanted or he was supposed to.”

Despite all of the anticipation about today’s meeting, the Fed’s views have been taking shape and becoming more clear over several months.

In March, the Fed made the first hint that the economy might be doing well enough for the central bank to pull back on the bond-buying program when it added — in the fourth paragraph — that decisions about the pace, size and composition of bond purchases would take into account “the extent of progress toward its economic objectives.” Until then, the Fed had only said it would weigh the likely costs and benefits of purchases.

In its May 1 policy statement, the Fed for the first time said it was “prepared to increase or reduce the pace of its purchases” depending on economic data. While it at first was seen as a sign the Fed might feel the need to boost its purchases beyond $85 billion per month, it soon emerged that the Fed meant this to describe its overall strategy for what to do once it decided to dial back the program. It would do so gradually, but not necessarily steadily – a reduction at one meeting did not guarantee a reduction at the next, and the Fed reserved the right to increase the amount of bonds it was buying upward again if the economy showed signs of weakening.

Mr. Bernanke told Congress May 22 that if the Fed continues to see improvement in the economy and if that recovery appeared sustainable, “then we could in the next few meetings … take a step down in our pace of purchases.”

Markets reacted strongly and negatively, largely ignoring the fact that Mr. Bernanke was tying “next few meetings” explicitly to the economic data, not guaranteeing that the Fed was going to shut off the stimulus spigot before the end of the year. Adding to investor anxiety, that same day minutes released from the Fed’s May policy meeting showed some Fed officials were prepared to start pulling back on the program as early as its June meeting, though again there were a lot of caveats to that happening.

After the June jobs report, in which the unemployment rate ticked up slightly to 7.6% because more people started looking for work, the Journal reported that the Fed was likely to signal at its next meeting (the one that concludes today) it was still likely to start pulling back from the bond program later this year, as long as the economy kept its footing.

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Overview

Despite concerns to the contrary, we do not expect the Federal Reserve to change policy quickly or aggressively. Even when the Fed does begin to taper its easy approach to policy, the backup in yields should be muted. The outlook for Europe may be slightly improving, suggesting a less bearish view toward countries like Spain.

Market Unease Persists

Investors’ general sense of uncertainty (particularly over the future direction of Federal Reserve policy) continued last week, as stock markets sank for the third time in the last four weeks. For the week, the Dow Jones Industrial Average lost 1.2% to 15,070, the S&P 500 Index declined 1.0% to 1,626 and the Nasdaq Composite sank 1.3% to 3,423. In fixed income markets, yields remained volatile, although Treasury yields bucked their recent trend by moving slightly lower over the course of the week (prices move in the opposite direction of yields). For the week, the yield on the benchmark 10-year Treasury fell from 2.17% to 2.13%.

Related to the increased volatility markets have experienced of late, we have been witnessing flows out of both stock and bond funds as investors are apparently moving some assets back into cash. Bond funds recently saw their largest one-week outflow in history and flows out of equity funds have also been quite high, with disproportionate outflows coming from emerging markets and Asia.

Concerns Over Fed Policy Appear Overwrought

As we have been saying for several weeks, one of the primary causes of higher levels of volatility and increased selling is the fact that investors are attempting to position their portfolios for a coming shift in US monetary policy. That is one of the reasons money is flowing out of emerging markets: there is a perception that emerging market countries will be negatively impacted by a tighter monetary policy given that a less liquid environment in the United States could translate into diminished demand.

Any movement by the Fed will be gradual given that large segments of the US economy are still quite lethargic.While we believe it makes sense to focus on Fed policy, recent reactions appear to us to be extreme. We agree that it is likely that the Fed will begin to taper its current policy at some point late this year or by early next year, but any movement by the Fed will be gradual (and communicated well in advance) given that large segments of the US economy are still quite lethargic. We saw more evidence of this in last week’s economic data. While May’s retail sales figures were better than expected, the manufacturing sector remains weak. May’s industrial production report confirmed that manufacturing levels continue to slow. Industrial production grew at a scant 0.1% in May, a number that was below expectations and one that followed two straight monthly declines.

Even when the Federal Reserve does begin to move toward a less accomodative monetary policy, the effect of the tapering may be more muted than many investors anticipate. To be sure, the Fed will be buying fewer Treasuries when this happens, but with the US budget improving (at least temporarily) the available supply of Treasuries will be lower. Additionally, other central banks (not to mention pension funds) around the world remain large buyers of Treasuries, which should help maintain demand levels. All of this suggests that when the Fed does begin to taper, the backup in yields should be tempered.

Risks Receding in Europe?

Turning from the United States to Europe, we are starting to see some indications of improvements. To be sure, Europe still has a host of problems. Unemployment remains at a record high and bond yields in Italy and Spain are still creeping higher. We are also seeing a potential roadblock on the horizon in the form of a pending ruling from the German constitutional court on the legality of the European Central Bank’s proposed asset purchase program. All of that said, however, Europe has one distinct advantage: low expectations. In the current environment, even modest signs of good news can have a positive impact on the region.

As such, while we would remain cautious on European equities, our view has turned less bearish, even on some of the peripheral countries such as Spain. The country still faces some severe headwinds, and the Spanish economy is likely to struggle in the coming year, but following some improvements in the real estate and banking sectors, Spanish corporate profits should start to recover. Additionally, after massively underperforming Europe and other developed markets, it appears to us that bad news is already priced into current valuations on Spanish equities. This is hardly to say that we have become bullish on Spain, but the outlook is modestly improving.

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The U.S. financial markets are entering one of the most important periods in years. On Tuesday and Wednesday of this week, the Federal Open Market Committee (FOMC) will be meeting in Washington. During the past few years, those meetings have often acted as catalysts for investors, speculators, bankers and businesses. Each time that Ben Bernanke and his colleagues have promised to extend out the period of extremely low interest rates and to push forward various easing strategies – the markets have reacted accordingly. After the Fed increased its monthly purchases of mortgage-backed securities and U.S. treasuries to a total of $85 billion last year, some people began to think that such easing efforts would remain in place indefinitely. Speculative buying took place in a number of markets – including the stock market. With so many facts hard to pin down involving this process, the door has been open for anyone and everyone to trot out their pet theories about the economy, inflation, currencies, commodities – you name it – and claim that Fed quantitative easing is responsible for nearly everything that has happened in recent years and will set the trend moving forward.

Hardly a day goes by without some analyst or economist that claims a specific percentage of the Fed’s $85 billion in monthly easing is finding its way directly into the stock market. Some of those experts claim that the stock market is only soaking up a small portion of that $85 every month. Others claim that nearly all of the money is flowing into stocks. The truth of the matter no doubt lies somewhere in the middle of the debate. Yes, the Fed’s quantitative easing has bolstered the stock market in recent years. However, I am convinced that the direct relationship between such easing and the surge to a new all-time high in the broad stock market has been exaggerated by Wall Street and the media. Many millions of people in this country (and the world) have missed the boat when it comes to the economic recovery and the stock bull market of the past four-plus years. Along the way, those skeptics have grasped at anything that might justify their negative predictions and give them hope that things will soon reverse and go their way. Let’s face it – politics has played a major role in that process. Some people have refused to consider the possibility that things are improving with the economy and unemployment – because they do not like the politicians that are running the show in Washington. That has been true regarding both sides of the political aisle.

Along the way, I have done my best to try and warn readers away from such politically-charged analysis. That has cost me a few long-time subscribers in the process. Few things in life can light a fire within someone like political beliefs. During the past 4-1/2 years, there have been plenty of laws and regulations out of Washington that convinced tens of millions of Americans that the economy is doomed to crash and burn. Every piece of evidence to the contrary has been ignored – or worse yet – poked, prodded and twisted until it no longer even looks like the real thing. In many respects, the economy does not care who is sitting in the Oval Office. I like to think of the economy like a massive machine – with countless moving parts. In the end, it all comes down to people and money. Ever since the economy hit rock bottom in early 2009, those two forces have been moving in a bullish direction. The Fed and the Federal government have both helped to provide the money part of that equation. As for people, there is an innate human need to believe that things can improve in the future. I suppose that goes back tens of thousands of years, as humans struggled with drought and other forces that were out of their control. Every generation wants to believe that their children and grandchildren will be able to prosper and set down the roots for the generations that will follow. It takes a great force to come along and smother such hopes and expectations. The political climate has managed to achieve that during this recovery.

I am sure that the bears and skeptics would read the above paragraph and immediately come out say that the economic recovery of the past four years has fallen far short of historical norms. GDP has managed to grow its way to a new all-time high, but employment has remained something of a disaster. That latter subject is something that I have covered in detail during the past four years. Despite the fact that millions of new jobs have been created since early 2010, there are simply not enough jobs to go around and that has forced millions of Americans to toil away in multiple part-time jobs (without benefits) or even stop looking for work altogether. The economy is always changing. Just when some people think they have it pushed into a corner – with no escape route – it jumps right over them and heads in a new direction. The financial crisis and recession of 2008 and 2009 left a trail of financial destruction. The damage was far worse than most people expected when the downturn began in late 2007/early 2008. All of that means that the economy and the American people have been forced to climb out of a far deeper hole this time around. The fact that it is taking longer (than historical norms) for the economy to shake off the previous downturn is not a sign that the American Dream has come to an end. I believe that theme (which has been repeated so many times by some people that they have convinced themselves and others that it has already happened) is the biggest red herring to come along in economic analysis in a long time.

Analysts love to talk about past cycles as if they set the course for the future. The fact is that every cycle is different and the current one is extremely unique compared to what this nation has experienced in recent generations. The economy went through some problems back in 2001. GDP was weak for a while and unemployment moved higher. During that cycle, nonfarm payrolls peaked in February 2001. Despite the fact that real GDP was back on a growth track by late 2001, job losses continued to mount. Nonfarm payrolls did not hit their low for that cycle until June 2003. During the course of those nearly 2-1/2 years, the U.S. economy shed a net 2.67 million jobs. It took until February 2005 (five full years!) before nonfarm payrolls got back to their starting point of the cycle. That decline in the economy and employment hurt a lot of people and knocked many households off the rails for a while. Let’s face it though – it pales in comparison to what happened to the economy and unemployment following the early 2008 peak in the nonfarm payrolls near a total of 138 million (it is at 135.6 million today).

We are already a bit more than five years out from the February 2008 peak in nonfarm payrolls and the economy is still some 2.42 million jobs below the peak in the previous cycle. Think about that for a moment. The economy is still short about the same number of jobs as the total net decline seen during the 2001-2003 downturn in employment. This time around is most certainly different. The bears like to say that the relative weakness of the current recovery is proof that the nation will never recover. I believe there is a bit of a silver lining in this situation. The mechanisms of the economy have been moving again in recent years. However, the previous damage has not allowed those gears to crank up to their full potential. That means we are not in the midst of a normal boom and bust cycle. Many analysts have been wasting time talking about how the economy is due for a new recession – based on the timing of past cycles. The current recovery has not been allowed to gain traction. That means the recovery is going to on longer than some of the so-called experts are predicting. The FOMC meeting this week is unlikely to provide much in the way of new themes for the markets. Three weeks later though, on July 10, the minutes of that meeting will likely make it clear that the Fed is moving toward tapering. The stock market has been stuck in the mud since the last such release. It looks like investors want to celebrate today. Such gains will likely prove to be fleeting, but I remain long-term bullish. More next week – including a look at the Fed.

Next hotline will be updated no later than 8:00 P.M. Eastern on Monday, June 24, 2013

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BEGIN TRANSCRIPT

RUSH: Late yesterday afternoon I was sitting in the library at home, and I was just swamped. It seemed like every 90 seconds somebody needed something, or somebody had a question or somebody had a comment, requiring my response. It was during the period of time that I generally devote to reading my tech blogs, you know, where I abandon all of this and get away from it and start spending time on, quote, unquote, my hobby.

But it was one of those days. I’m sure you have them. They may happen every day, but if I had been watching a TV show I would have hit the pause button every minute to deal with something. It would have taken me two hours yesterday to watch a 40 minute program. So in the midst of all of this, I hear about Prism. Not the NSA sweep of telephone records. In fact, let me start before I heard about Prism. Even before I heard about Prism, I am hearing from the intelligentsia in Washington that there’s nothing to be really concerned about here with what we had learned, the NSA demanding and getting every phone record from Verizon. And, by the way, we now know T-Mobile and AT&T have been added to it.

But the intelligent people were saying, “Nothing to see here. The reaction is way overblown.” Those of us who think there’s something worrisome here are overreacting and we’re too oriented in politics. And the mature thinkers that weighed in and sound reason and levelheadedness assured us that there was nothing to fear here because this was just metadata, and in fact this is something we should all be thankful that the government is able to do.

I have to tell you when I’m listening to all the smart people tell me this, my mind is about to explode, and I’m saying, “Do these people not realize what we just learned in the last three weeks?” We got the IRS starting in 2010 taking action to suppress the political involvement and ultimately votes of Tea Party people and conservative Republicans. This regime, this government, on the orders of the highest level. In fact, that investigation is ongoing. We have Fast and Furious. We have Obamacare. The evidence of the totalitarian nature or the authoritarian nature of this administration is on display undeniably every day and yet in the midst of this, “Well, don’t go off half cocked on this, Rush. Be very levelheaded. Nothing really to see,” as though there’s no context here.

It made me once again understand, folks, what you and I are up against here. There are just way too many people — and I’m talking about on our side — who do not want to admit what we face, who do not want to engage or admit or whatever what we really face here. It matters. This kind of stuff matters because of who the people doing it happen to be. It’s one thing if Colonel Sanders would be collecting all this data, but it’s not Colonel Sanders. It’s Barack Obama and everybody that works for him, and we know who they are and we know what their goals are. We know what their intentions are.

Folks, here’s the thing, I guess, that gets me. I mentioned Herbert Meyer. We interviewed him for the Limbaugh Letter a few short months ago. Herbert Meyer was in the national security apparatus during the Reagan administration. He was a good friend of Ronald Reagan, and was instrumental in establishing Reagan administration policies that brought down the Soviet Union. The big news to him that’s really noteworthy, we talked about it, is that he thinks that the world’s coming out of poverty. And it is a big story, The Economist in London had a big story on it recently. We mentioned it to you, and it’s a great testament to capitalism.

It’s not socialism, it’s not welfare, it’s not compassion and it’s not the redistribution of wealth. It’s not high taxes that are bringing people out of poverty. It’s capitalism, and none other than a leftist publication in London had to admit it. Well, Herb Meyer was the first to sound this notice some months ago. I also mentioned he wrote a piece that currently is in the American Thinker earlier this week, and it had the potential to be controversial because he used Adolf Hitler and Nazism in it, and it was his way of explaining, he made a point in the piece that nowhere, you know, people looking for a smoking gun to nail Obama on all these scandals, Herb says, “Ain’t gonna be one.”

He said whether you believe it or not, there is not one document linking Adolf Hitler to the holocaust. Adolf Hitler never put it on paper what he intended to do. There is no smoking gun. And yet what happened? We know that the Nazis engaged in the Holocaust. Herb Meyer’s point was that the people Hitler hired didn’t have to be told. They didn’t have to be given instructions. All they had to do was listen to what Hitler was saying. All they had to do was listen to what his objectives were. And he said the same thing’s happening here with this administration. He went to great pains to say: I’m not calling this administration a bunch of Nazis. I’m just using this as an illustration. I know people will get my point if I use something this notorious, the Nazi regime.

It’s a point that I’ve made here about the IRS. They say, “Well, you can’t link it in to Obama.” You don’t need to link Obama to it. He hired these people. Lois Lerner and everybody at the IRS who’s doing this is doing everything they can to please Obama. There’s not gonna be a smoking gun, but you don’t need a smoking gun to know where this administration’s doing what it’s doing.

Obama puts people in positions that mirror him. Eric Holder, you name it, they’re doing Obama’s bidding. Everybody. Susan Rice and Samantha Power, they are Obama, and there’s a context for what’s happening. Herbert Meyer, if I may quote him again, asserted that essentially what’s taking place in the United States right now is a coup, not a violent coup, and not a million artistic coup, but nevertheless a takeover of a government, and it’s being done by the Obama administration.

He referred to it as a coup. I don’t know if he used the word “peaceful,” but clearly there’s a coup d’etat going. You know it and I know it. This is what animates us. This is why the Tea Party exists. This country was founded on certain concepts, principles, beliefs — and they’re under assault. Chief among them under assault is the right to privacy, and that’s what all this is about. So in the midst of this coup d’etat… I happen to like that formulation.

In seeking ways to persuade, for example, the low-information voters of what’s going on, this happens. These are the people continuing to prop Obama up with high approval numbers. The Limbaugh Theorem. How do we reach ‘em? How do we tell them? How do we explain what’s going on when they have, perhaps, almost an idolatrous relationship with the president? Well, maybe you tell ‘em there’s a coup going on.

There are people attempting to take over this country and to make it something that it wasn’t founded as; turn it into something that it wasn’t intended to be. That is happening. You know it and I know it. It’s peaceful, nonviolent. The military isn’t involved. But nevertheless it’s a coup. So in the context of that and the realization that’s happening, in the midst of learning that the National Security Agency is literally “Hoovering,” vacuuming every telephone record they can, what do we hear?

“Nothing to see here, Rush. Calm down! Slow down, Rush. This is nothing to get concerned about. There’s nothing illegal here. The Fourth Amendment’s not being violated or breached. This is nothing whatsoever to get concerned about.” How can I…? (sigh) I don’t know how people can look at this in context and say that. The people doing this are what make it a big deal. Their motives and their intentions and their clear assault on the whole notion of privacy make it interesting.

I’m sorry for the long detour there, but in the midst of being told that I need to be more levelheaded — and not just me, but all of us who are a little bit concerned here about this Verizon story. We are all being told, “Back off, back off. Nothing to see here. We’re not really, really concerned.” It was in the midst of that that I heard about Prism. That was a Washington Post story that posted on their website around five or six o’clock yesterday afternoon.

The basic tenet of this story is that somebody in the intelligence community — NSA, somewhere — is so concerned over what he’s seeing take place that he went to the Washington Post and took with him a little PowerPoint slide presentation and gave it to the Post and their reporters, and they wrote a story up and put it on their website. The story is that practically every major tech group and company in this country is participating with the government in allowing the government access to their servers.

E-mails, texts, phone calls, photographs. Virtually any communication that’s taking place via the Apple servers, the Microsoft servers, the Google servers, the NSA is able to look at in real time. This is the story now. The guy that went to the Washington Post said, “It was so scary. They can watch us as we type.” The Washington Post published some of the PowerPoint slides. I’m reading this after being told that the Verizon thing is no big deal. “It’s nothing to get concerned about.

“Nothing to see here. Don’t get too worried about that. Don’t go off half cocked!” Here comes the Prism story, and then shortly after the Prism story hits, all of these tech firms start denying it. Apple says, “I never heard of Prism. We don’t know what this is about. We never let anybody have access to our servers without a warrant, without a court order. We never!” Google said the same thing. Microsoft said the same thing. Facebook said the same thing.

They’re all out there denying it. So I thought, “Did the Washington Post get set up?” I’m asking myself, “Did they get set up by somebody walking in and telling them something that wasn’t true?” But then I saw that Prism reported someplace else by this Glenn Greenwald guy at the UK Guardian. So there were two sources for the Prism story, but the tech firms involved continue to deny it. “Nope, it’s not happening.” Now we’ve got audio sound bites.

These guys from the tech firms like Greenwald and some of these others, are blaming Bush for all of this, still. Today! Still today, all of this is the fault of Bush. Bush is the guy that got this ball rolling. So there must be something to it if the left is circling the wagons around Obama and trying to make all of us think that all of this is the fault of George W. Bush. I just gotta tell you something, folks. Richard Nixon never even dreamed of this kind of stuff, and yet most people in this country think that Nixon did 10 times as bad as what’s happening now.

The fact is, Nixon never dreamed of this.

Whatever he wanted to cook up, he never even came up with this. So there is clearly — somewhere, somehow, in some form or another — a coup taking place, and there is an assault on privacy, and there are assaults on people because of their politics and their ideology. It is taking place; it’s undeniable. Yet many of the people we would hope would be pushing back against this and doing their best to join us and warning everybody say, “Nothing to see here! Don’t get all crazy about this. We must be level headed.”

BREAK TRANSCRIPT

RUSH: So Obama’s in California. Why? Fundraising. He’s also got a meeting with the Chinese communist premier, but it’s fundraising. That’s why they go to California. Anyway, he got out there to speak. There was no prompter, and he didn’t have any notes, and he just stood there. He didn’t know what to do. Honestly, folks. Forty-eight seconds or something. Nothing happened. He finally shouted, “People!” and somebody on his staff brought him his notes. He was clueless.

Now, a lot of people yesterday who were saying, “Rush, Rush, don’t get all upset about this. There’s nothing to see here in this NSA business and Verizon. Nothing’s going on.” Look, one of the accusations was that people are just getting upset because it was Obama and just trusting Obama, and it’s not reasonable enough to get concerned about this. My point is, speaking about you and me, we’re not all stupid out here.

We’re not all stupid about this and this is not simply because we don’t trust Obama. I don’t want my government doing this. I do not want my government preoccupied with paying this close attention to what every citizen is doing every minute of the day. This government’s already too big, it’s too damn powerful, and it’s too unforgiving — and this doesn’t have anything to do with competent intelligence gathering. Throwing wide nets like this is BS. It’s assuming way too much to think that this is not a big deal. Left-wing overreaction, my backside.

BREAK TRANSCRIPT

RUSH: There was a time when the United States government earned the trust of its people. There was a time when most people believed that the United States government was protecting them. There was a time when most people believed that the United States government was spying on the bad guys, that the United States government was in fact earning the trust of the people. But this current data collection, scanning, whatever you want to call it, unfortunately has to be judged in context: the IRS leaks, the now unquestionable, undeniable, admitted-to-it IRS tactic of suppressing the vote of Tea Party conservatives, denying them their First Amendment rights.

The regime and its tricks with the Associated Press and Fox reporter James Rosen, the Benghazi cover-ups, the Fast and Furious operation, suing the state of Arizona for simply endorsing essentially federal immigration law. You can’t just try to be the smartest guy in the room and say, “Well, we must be levelheaded about this and understand that this is just metadata.” We cannot take the motives and intelligence guided by experience watching this administration over the last four-and-a-half, five years, and what their express purpose is.

I was reminded this morning, we had a sound bite of Maxine Waters back on February 3rd of this year. She was on a TV show, some network, TV One. It was a show hosted by Roland Martin, who used to be, may still be, a personality at CNN. He was interviewing Maxine Waters, and every time she speaks, you know, we have a good laugh about it because clearly she’s insane. And we nevertheless will play the sound bites. Her natural existence is such that she gives away the game. She will give away what the administration’s all about. She will give away the fact that they want to nationalize all these companies. And she did it again on this Washington Watch with Roland Martin show back on February 3rd of 2013. He said to her, “The reality is like anything else: You’d better get what you can while he’s there, because, look, come 2016, that’s it.”

WATERS: Well, you know, I don’t know, and I think some people are missing something here. The president has put in place an organization that contains the kind of database that no one has ever seen before in life. That’s going to be very, very powerful. That database will have information about everything on every individual in ways that it’s never been done before.

RUSH: See, she gives it up. Now, I remember playing that sound bite, and we made a big deal about it at the website, Rush 24/7, and we thought, “Well, it’s just Maxine being Maxine.” But in this case now going back, looking at it in hindsight, what in the world was she talking about? At the time we thought she was talking about all of his high-tech campaign advancements. But maybe she wasn’t.

I’ll tell you, the New York Times yesterday, this was kind of funny, too, the New York Times decided it was time to get really mad. They wrote an editorial really ripping into Obama over this. They called it: President Obama’s Dragnet. The editors at the New York Times were hopping mad, or at least they’re pretending to be. And they really got carried away. They had to change their original editorial. They reissued it. The original editorial said: “The administration has now lost all credibility.” They changed that in their second issuance to: “The administration has now lost all credibility on this issue.” But the point is they were right the first time. I don’t know, maybe they don’t want shock their readers with so much truth. But they went so far as to say at the New York Times, “Mr. Obama is proving the truism that the executive branch will use any power it is given and very likely abuse it.”

Now, keep in mind this was written by people who are the loudest proponents of the expansion of government. These are people who don’t believe the government can possibly get too big. It’s not possible for it to get too big. It’s not possible for the government to get too powerful. It’s not possible. And yet they are worried at the New York Times about what is happening to it under the guidance of the presidency and Mr. Obama. What everybody knows and nobody wants to really come to grips with is that we are in the midst of a coup taking place.

Now, I know what’s gonna happen. The people on the other side of the glass: “Will you dial that coup talk back?” That’s all the headlines are gonna be. I don’t care. In fact, it’s almost on par with: “I hope he fails.” How does that sound now, by the way: “I hope he fails”? I’m constantly looking for ways here to persuade people of what I passionately believe, and I’m not in it to lie to anybody. There’s nothing to be gained by lying to you about what I really think. There’s nothing to be gained here by lying about facts. There’s nothing to be gained here by gaining ground under false pretense.

So if the Constitution exists as it is, the country was founded as it was, and an administration comes along and doesn’t like that and is doing everything it can to overturn that Constitution without a convention, doing everything it can to change direction of this country, and what’s the word, transform it, what’s wrong with calling this a coup? “Mr. Limbaugh, a coup is when rebels join forces with the military and start launching military attacks and shooting people.” No, no, no. Not always. And that’s my point.

When I was a kid, my dad kept saying, “Son, if things don’t change, the Soviets are gonna take over this country without firing a shot.” What he was talking about was a coup. Anyway, folks, there’s a lot here to be concerned about. And you know it as well as I do. I get a little perplexed when people that I think see the world as I do and are, in my opinion, on my side, want to come along for reasons I can’t fathom to excuse things that need not be excused. Now, Obama went out there today, he’s in Palm Springs, and he addressed this NSA story. He defended the spy programs as legitimate because Congress has been consistently informed about ‘em. He didn’t get mad, but he sort of complained about all the hype over the phone data gathering, because it’s approved by the FISA court. It’s approved by the Congress.

He said (paraphrasing), “Nobody’s listening to your phone calls. They’re looking at megadata,” he meant metadata, “and tracking terrorists. Nobody’s listening to content. Modest encroachments on privacy are worth doing. We’re gonna have to make some choices as a society. You can’t have 100% security and have 100% privacy.” This is what he said today out in Palm Springs. This is the guy, don’t forget, who got elected convincing people that this kind of stuff was never gonna happen anywhere. This is the guy who got elected mischaracterizing the kind of intelligence gathering that was ongoing with the Bush administration.

This is the guy who got elected president by telling us that what is happening now was never going to happen when he was president. This is a guy who got elected telling us in 2007, 2008 that what’s going on now was going on then. Bush was doing this, identical stuff, that’s what they’re trying to tell us, even now. He got elected warning us that what’s happening now was happening in 2007, 2008, and promising us, this was not gonna happen. And everything that was happening in 2007 has only grown. There’s only more of it. It’s more sweeping than it’s ever been.

BREAK TRANSCRIPT

RUSH: Have we already forgotten what this regime has done to the donors to the Mitt Romney campaign, all of the IRS harassment and audits and attention paid them by the EPA, if necessary? This is clearly an administration that wants to identify its enemies and then take action against them somehow, to intimidate them or what have you. You can’t take that context out. The Wall Street Journal has a story here about PRISM. You know, PRISM is a code name, too.

So when these companies like Microsoft and Google and Apple say, “Oh, well, we never heard of it.” Well, they may not have heard of it. It may be called something else, and they say, “Well, we don’t let anybody have access for our servers without court orders.” Well, maybe there have been court orders. If there is a program like this going on, a part of it would have to be that the companies involved would have to be able to deny it. They could not talk about it.

Put it this way: They were sworn to secrecy. They could not broadcast their involvement in it because it’s taking place under the guise of national security. Do you realize what a vacuum cleaner that is? I mean, they can Hoover up everything they want under the guise of national security. Anyway, the Wall Street Journal: “US Collects Vast Data Trove — NSA monitoring includes three phone companies as well as online activity,” and then there’s this:

“The National Security Agency’s monitoring of Americans includes customer records from the three major phone networks as well as emails and Web searches, and the agency also has cataloged credit-card transactions, said people familiar with the agency’s activities.” Now, would anybody who thought maybe the phone company sweep wasn’t any big deal, maybe want to say that cataloging credit card transactions might be news?

I’m just asking.

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The Smartest Man is Bullish on Europe
June 2013

During the course of every year I try to meet several times with the person I refer to as “The Smartest Man in Europe.” In my mind he earned that title by seeing major shifts in the investment landscape long before his peers on both sides of the Atlantic. Among these were the rise and fall of the Japanese stock market in the 1980s, the end of the command economies in Russia and China, the opportunities afforded by the emerging economies, the importance of gold as an asset class and the dangers represented by the overvaluation of American technology stocks in the late 1990s. Along the way he has accumulated some of the material rewards of success, including elegant residences, museum-quality artworks spanning many centuries and sleek means of transportation on the ground and in the air, but what moves him is identifying a major change before others recognize it. I have often attributed at least a part of his acumen to the mercantile tradition in his family that goes back several hundred years. His ancestors operated canteens selling food, supplies and weather protection to travelers along the Silk Road. Dinner table conversation from the time he was a young boy centered around investment opportunities. In his ninth decade he still derives excitement from a fresh idea, and it is inspiring to watch.

“Everyone thinks Europe is hopeless and I can understand why. The European Union is a flawed concept and it may not survive in the long run. There needs to be much more convergence, both economic (which is possible) and political (which is impossible), but a major change in attitude has taken place this year. Until recently the policy makers believed that increasing taxes and reducing spending was the way for the weaker countries to solve their deficit problems, but that was clearly the wrong idea. From a political point of view the austerity approach was impossible because the people in these places wouldn’t accept what their governments were trying to impose on them. Punishing the people for past economic mistakes also made no practical sense. Europe was in a recession and the austerity policies were only going to make conditions worse. Unemployment was becoming a serious social problem and job creation had to be a priority. As we moved into this year the policy makers, even Angela Merkel, began to understand that austerity was the wrong course and that restoring growth had to be an objective.

“Europe is in a kind of equilibrium now which is likely to be sustained by the expansive monetary policy of the European Central Bank. This should continue at least until the German elections in September, resulting in a definitive pullback from austerity. Merkel can only win if she moves away from her hard-line policy stance. Conditions are continuing to improve in Italy even though Mario Monti is no longer in charge. The unions still have too much power in France. François Hollande is beginning to realize that he must restore business confidence by introducing policies that take a positive view of growth. Germany will have to be tolerant of larger budget deficits in Spain, France and Italy.

“At the beginning, as leader of France, Hollande was troubled by the huge disparity between the rich and poor and he wanted to try to correct that, but his program was too severe and he is now softening his stance. People in finance benefited in France but prosperity didn’t filter down to ordinary citizen. The same problem existed in Germany. You don’t want to scare all the rich people out of the country. Spain is recovering more slowly, but will mend itself. I think conditions on the continent might finally drive the United Kingdom out of the European Union. France and Germany might want more transparency on taxes. The U.K. has the opportunity to become even more of a tax haven than it is now. Business conditions there are not good and the prospects for major economic improvement are dim, but if the U.K. adopted a more friendly policy toward wealthy foreigners, there could be a huge boom. There is tremendous pent-up demand in Europe and I think you could see positive growth in 2014.

“In the meantime most investors have reduced their European exposure. Who would want to invest in a place where a recession was underway and likely to get worse? Money managers had been so preoccupied with that idea that they failed to recognize the pullback from austerity which could lead to the restoration of growth. During the last few years European companies, like their American counterparts, have become vastly more efficient. Unemployment in Europe is 12% and part of the reason it is so high is that companies are getting the work done with fewer employees, so profits should improve considerably on any increase in revenues. Stocks are priced assuming conditions will get worse and I see them getting better – not everywhere and not in every sector, but if you are a careful stock picker you can make money.

“The most important factor is that almost no investor likes Europe now and that enhances the opportunity. Two years ago everyone was worried that the European Union was going to break apart. That was never going to happen over the near term because everyone had too much to lose, especially Germany, which has been the biggest beneficiary. Now most people realize Europe is going to muddle through at least for a while, but few people are buying European stocks to take advantage of this conclusion.

“I see a big social problem brewing in the United States. Growth of 2% is not enough to bring down unemployment. I actually don’t understand what’s going on because I consider the quantitative easing program the Federal Reserve is engaged in to be an enormous amount of stimulus and I would have thought growth would have been stronger. But the Fed policy is clearly fueling the stock market’s rise and confidence is building as equities continue to move higher, so you have a problem in the making. People working on Wall Street are doing well, but people in many other fields are not, and the disparity between haves and have nots is building in the United States as it is in Europe. There are many factors holding back growth in the United States. The higher taxes on higher incomes which went into effect in January dampened the enthusiasm of the better paid people. The higher payroll taxes affected all wage earners. Emerging market competition is slowing growth. So is the cut in defense spending. And demand for U.S. products in China is off its peak. Overall demand for the U.S. products from abroad is also down because Europe is in a recession and Latin America and India are slowing.

“I am not particularly positive on emerging markets. Their exports are lower because of reduced demand from Europe and the United States but the standard of living in these countries is still rising. The only country in Latin America worth considering is Brazil, but the political situation there is not good. There is a window of opportunity in Japan that could last a year or two. The monetary and fiscal policies of Shinzo Abe are clearly having a positive effect on the economy. Next year Japan should show some growth and some inflation. The value of the yen has declined considerably and probably has further to go, helping exports. The deflationary recession that the country went through for two decades is over for the moment. I don’t know if Japan can begin a sustained period of growth but right now you can make money there.

“The charm that gold held over investors is clearly broken. I was surprised by the huge liquidation of gold Exchange Traded Funds because the fundamental problems that caused the rise in the price of gold are still there. Central banks in the developed world – the United States, Europe and Japan – are still printing money and demeaning their currencies so you would expect that something real, as gold is perceived to be, would increase in value. You have to ask yourself the question: Where did all the gold that was sold this year go? The answer is Asia, primarily India and China. The people who bought it are going to hold it, not trade it. Next year, when interest in gold picks up again because of the continued expansive policies of the major central banks, gold will be in short supply and the price will rise, perhaps as sharply as it fell. I am not much interested in other commodities. On currencies I expect the Swiss franc to stabilize around current levels and the euro to strengthen against the dollar.

“The situation in the Middle East is very troubling from a humanitarian standpoint. People are dying and the whole area is unstable. Bashar al-Assad will probably endure. Most Westerners thought he would not last as long as this, but he has the support of the Christian population, the Alawites, business, the army and Iran. The rebels are getting help from Sunnis in the region who view Syria as a buffer against Shiite Iran. I think Iran will eventually have a nuclear weapon. Israel will not bomb the country because Iran is in a position to send too many missiles in retaliation and the destruction and loss of life would be devastating. The United States policy toward Iran is more unpredictable in my opinion.

“The major geopolitical problem in the world today is that the United States doesn’t have a coherent foreign policy. It has the most powerful military force in the world but it cannot decide whether to use it. Does it want to be the leader of the free world or not? How does it define its self-interest? Some crowd in the White House will probably convince Obama to bomb Iran without considering all its implications. I think the wars with Iraq and Afghanistan were lost before they began. It is naïve to think you can bring democracies into these countries when they have been torn by tribal factions for centuries. You need a powerful leader, a dictator if you will, to run these places and the United States cannot bring itself to support that. Americans have to ask themselves whether they are in a better position since the Arab Spring came to Egypt than they were when it was under Mubarak’s rule.

“The United States cannot simply walk away from the Middle East because if it does, the Russians will step in and become the dominant western power. The region is likely to remain volatile and in continued conflict, much like Europe in the Middle Ages when there were wars going on all the time. In the Middle East power is not hamstrung by humanitarian considerations. Maliki is a de facto dictator and Iraq is thriving economically. Karzai is another example of a powerful leader who has built a supportive cadre around him. The United States has pursued policies in the region based on its need for an assured supply of oil, but now that America is headed toward energy self-sufficiency, its strategy in the region may change. In any case, don’t worry about Iran having the bomb. Mutually assured destruction is an important deterrent. They may scare people with it, but they won’t use it.

“The real problem in the United States is that Obama is an intellectual president and he doesn’t seem to understand the importance and usage of power. He thinks if he has a good idea, everyone should recognize it and follow him by bringing the idea into reality. But the world doesn’t work that way and if he is going to get anything done in his second term, he has got to get together with the opposition and sell them on his views. In foreign policy he has to be willing to use American power more forcefully. Once he starts something he has to finish it. He didn’t do that in Iraq and Afghanistan and that is why he failed.

“I know you want to make some money so let me tell you what I am buying. I like social media companies like Yahoo and Google. Generally I like technology because it is open-ended. If you buy DuPont you have to worry about whether the economy will be strong enough to enable the earnings to grow. In technology the power of the idea can drive the stocks higher. I also think the U.S. banks are cheap. I see the Standard & Poor’s 500 going higher.”

As usual I didn’t find myself in agreement with all of his ideas, but the discussion was wide-ranging and his positions were clear. I vowed to myself that I would take a hard look at European equities before the summer began. Year after year he always has something provocative and important to say

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Published: Tuesday, 21 May 2013 | 4:39 AM ET
By: Ansuya Harjani

Goldman Sachs has upgraded its target for the S&P 500, forecasting that the U.S. benchmark index will climb a further 5 percent to 1750 by year-end, from an initial estimate of 1625, supported by robust dividend growth and an improving macroeconomic environment in the U.S.

In a report released late Monday, the U.S. investment bank also raised its targets for the coming years, expecting the index to rise by 9 percent to 1900 in 2014, and advance by 10 percent to 2100 in 2015, compared to earlier forecasts of 1775 and 1900, respectively.

“Our positive 2013 outlook for S&P 500 has played out much faster than we expected,” David Kostin, chief U.S. equity strategist at the bank, wrote. “If interest rates stay low despite better growth, then upside to S&P 500 may be greater than we currently forecast. Monetary easing by Fed, BOJ, and ECB keeps sovereign yields low and would support this potential outcome,” he added.
U.S. stocks have had a bumper year, rising over 16 percent since the start of 2013, driven by improvement in the housing and job markets and commitment by the Federal Reserve to maintain a stimulative monetary policy.

Strong earnings and dividend growth will be a key support for the market, according to the bank. It forecasts dividend growth of 30 percent for the S&P 500 between 2013 and 2015, with 11 percent growth in both 2013 and 2014 and 9 percent in 2014.

“We expect the strongest dividend growth from information technology, financials and consumer discretionary,” Kostin said, citing the sectors’ large cash balances and maturing businesses.

“Apple initiated a dividend in 2012 and is now the largest dividend payer in the S&P 500. Other large payers in the sector include Microsoft, Intel Corporation, Cisco and IBM,” he added. Improving investor risk appetite and increasing confidence in the medium-term outlook for the U.S. economy underpin the bank’s optimism over stocks. Goldman believes the U.S. economy will achieve “above-trend” gross domestic product (GDP) growth in 2014, bringing an end to half a decade of weak growth.

While most of the fund flows into the U.S. equity market have been driven by institutional investors, Kostin anticipates a gradual improvement in retail appetite in the months ahead – another positive for the market.

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Now to the present time: In talking with Fred Lange recently, he said he remains bullish on stocks and cautious to negative on long term bonds for all of 2013, something we know in discussing it with him regularly. In addition, just yesterday he explained how the current political situations with the Bengazi scandal and IRS- Gate could prove to be in a way like Gridlock and be at least as good as the Gridlock was a result of the 2010 election. It seems like every technical trader/ investor has been looking for a correction since the beginning of 2013; they have been generally wrong. One thing Fred said years ago was ” if you listen solely to a technical analyst for your decision making then sooner or later you will be destroyed “. It takes fundamentals and technicals together with an emphasis on the fundamental analysis to be successful over the long term.

Furthermore, Fred believes that equities remain very attractive given the favorable economic and earnings forecasts well into 2014. Substantial cash remains on the sidelines awaiting opportunities for deployment in the equity markets. Additionally, central banks around the world have been and are expected to continue purchasing equities like they never have before.

LANGE FINANCIAL SERVICES
December 19, 2010

During the past five-six months we have fully believed that the stock market would move significantly higher into the election and 2011. This optimism heavily reflected the benefits of GRIDLOCK off-setting or tempering the excessively expansive fiscal and economic policies of the Obama Administration, Congress, and their subordinates. These beliefs were the cornerstone of our bullish views on the equity markets. In brief, some of the positives that have emanated from GRIDLOCK were:

1. Extension of the Bush tax cuts for both consumers and business for two years. Further the estate tax rate was lowered to 35% with an individual exemption of $5 million and $10 million per couple.

2. Death of the proposed supplemental pork laden $1.3 trillion Democratic spending proposal.

3. A noticeable increase in consumer confidence as evidenced by sharply higher retail sales.

4. Business is now also showing signs of rising confidence with the sharply increased expectation of higher capital spending. Corporations have $2 trillion on their balance sheets. GDP projections are likely to be increased significantly beginning in the third quarter of 2010 and well into 2011. Growth in developing countries promises to be significant as we enter the New Year.

5. Reciprocally, there is less caution or a less negative attitude on the part of consumers and business.

6. Prospect that the enormous spending and excessiveness will be toned down significantly by the new Congress.

We continue to view the outlook for the equity markets into 2011 very positively. We are projecting earnings for the S&P 500 at a record $100 for 2011 and $110 for 2012. These estimates could prove low if economic conditions become even more favorable than we currently envisioned.

Reflecting rising consumer business and investor confidence, a market valuation of 16 times projected earnings seems realistic as optimism builds as we enter the New Year. If these levels are attained, record levels in the popular market indexes would be enjoyed i.e. above 14,000 in the DOW and 1550 in the S&P 500. This projected valuation would compare quite favorably with the 20 times or more valuations that prevailed in the 1990′s and in the past decade. According to BARRON’S the price/earnings ratio was 17 times as we entered 2005 when the S&P was also at 1200 rising to over 20 times in 2007.

Huge cash reserves are held currently by consumers and business. It is estimated that corporations hold $2 trillion in cash supported by huge borrowing potential. Consumers are believed to hold $8 trillion. Both liquidity factors strongly support the probability of a very favorable economic environment in the year[s] ahead. The pre-Presidential election year has historically been an up year. We are confident that the historic pattern will be enjoyed by investors in 2011. We continue to recommend an overweight position in equities.

Lange Financial Services
Sussex, N.J

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The higher the stock market goes, the more the bears argue that it’s all about easy money from the Federal Reserve. The “QE-xcuse” – says Wall Street is flying high on a wave of new money from Quantitative Easing.

But, this explanation is getting long in the tooth. The S&P 500 and the Dow Jones Industrial Average both reached all-time record highs last Friday, up 161% and 156%, respectively, from their lows of four years ago.

The last time stocks had such sharp and sustained gains near these levels was in the late 1990s when optimism was rampant. Then, the psychology was the opposite. Stocks were over-valued, but talking heads were unwilling to say anything even remotely negative.

When equity indices were hitting records in 1999, after-tax economy-wide corporate profits were just $600 billion. Last year, in 2012, they were $1.5 trillion. Nonetheless, the Pouting Pundits of Pessimism are pounding the podium and spewing pessimistic pabulum on a daily basis. Every tick higher in stocks seems to create even more anger, cynicism and disbelief.

All the talking heads have to do is say “QE” and it seems every viewer/reader has been trained to understand that, “the stock market is going up because the Fed is buying bonds.” They say the market is riding a “sugar high” of new money.

But, it doesn’t stop there. It gets curious-er and curious-er the deeper we dig into the mindset of these bears. The very same people who argue the rise in stocks is phony-baloney-money-printing are also saying that the economy is about to tank and fall into a double dip recession. And, some are now talking about the rising spectacle of deflation.

This defies logic. How can money boost stocks, but not the economy or inflation? This is a mistake in monetary logic. If money were so easy then the economy, inflation and stocks would be lifted together.

But, the pouting pundits never let logic get in the way of a really scary story. For them, nothing can be good. And if it is good, it’s either phony or a lie. For example, if the unemployment rate comes down, or if jobs are created, they start arguing that the Labor Force Participation Rate is falling or the “real” unemployment rate is really much higher. When the data doesn’t cooperate they accuse the government of being wrong or lying.

We don’t claim to have a lock on the truth. As forecasters we know that we will be wrong on occasion and we don’t expect everything to go our way.

What we attempt to do is provide an explanation that is based on fact and not emotion. We want our forecast based on a consistent model, not piecemeal beliefs based in political ideology.

So, let’s build a story that holds together.

1.The Fed is easy, but not as easy as many think. The monetary base has grown roughly 25% annualized since QE started, but M2 money supply is up just 6% annualized during that same period. The difference is sitting idly on bank balance sheets as excess reserves.

2.Government spending and regulation have increased sharply since 2000, but spending has been reduced from 25% of GDP to 22% in the past three years.

3.The stock market – based on a capitalized profits model – is undervalued by at least 25%.

4.New technology – the cloud, smartphone, tablet, fracking, 3-D printing, etc. – is boosting productivity, efficiency and profits.

5.The collapse of 2008/09 was a case of government failure, not market failure. Mark-to-market accounting and TARP were huge mistakes.

We believe new technology is so powerful that it has been able to create new wealth and growth despite the increased size and scope of government. In other words, the Plow Horse recovery is not a case of a “new normal” – where the economy grows slowly after a financial crisis. Instead, new technology is offsetting the cost of government, and the net effect is 2% to 3% real GDP growth.

We also believe the Fed is easy, but not as easy as conventional wisdom believes. This explains two things – why inflation hasn’t surged and also why a recession is not likely. A relatively easy Fed and new technology will continue to boost growth and inflation in the quarters ahead.

Finally, stocks are cheap. They are rising because that’s what cheap things do. We don’t need a QE-xcuse to explain the markets or the economy. Be wary of those who do!

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Millions of Americans will pay more for health insurance, lose their coverage, or have their hours of work cut back.

By DANIEL P. KESSLER

In recent weeks, there have been increasing expressions of concern from surprising quarters about the implementation of ObamaCare. Montana Sen. Max Baucus, a Democrat, called it a “train wreck.” A Democratic colleague, West Virginia’s Sen. Jay Rockefeller, described the massive Affordable Care Act as “beyond comprehension.” Henry Chao, the government’s chief technical officer in charge of putting in place the insurance exchanges mandated by the law, was quoted in the Congressional Quarterly as saying “I’m pretty nervous . . . Let’s just make sure it’s not a third-world experience.”

These individuals are worried for good reason. The unpopular health-care law’s rollout is going to be rough. It will also administer several price (and other) shocks to tens of millions of Americans.

Start with people who have individual and small-group health insurance. These policies are most affected by ObamaCare’s community-rating regulations, which require insurers to accept everyone but limit or ban them from varying premiums based on age or health. The law also mandates “essential” benefits that are far more generous than those currently offered.

According to consultants from Oliver Wyman (who wrote on the issue in the January issue of Contingencies, the magazine of the American Academy of Actuaries), around six million of the 19 million people with individual health policies are going to have to pay more—and this even after accounting for the government subsidies offered under the law. For example, single adults age 21-29 earning 300% to 400% of the federal poverty level will be hit with an increase of 46% even after premium assistance from tax credits.

Determining the number of individuals who will be harmed by changes to the small-group insurance market is harder. According to the Medical Expenditure Panel Survey, conducted by the Department of Health and Human Services, around 30 million Americans work in firms with fewer than 50 employees, and so are potentially affected by the small-group “reforms” imposed by ObamaCare.

Around nine million of these people, plus six million family members, are covered by employers who do not self-insure. The premium increases for this group will be less on average than those for people in the individual market but will still be substantial. According to analyses conducted by the insurer WellPoint for 11 states, small-group premiums are expected to increase by 13%-23% on average.

This average masks big differences. While some firms (primarily those that employ older or sicker workers) will see premium decreases due to community rating, firms with younger, healthier workers will see very large increases: 89% in Missouri, 91% in Indiana and 101% in Nevada.

Because the government subsidies to purchasers of health insurance in the small-group market are significantly smaller than those in the individual market, I estimate that another 10 million people, the approximately two-thirds of the market that is low- or average-risk, will see higher insurance bills for 2014.

Higher premiums are just the beginning, because virtually all existing policies in the individual market and the vast majority in the small-group market do not cover all of the “essential” benefits mandated by the law. Policies without premium increases will have to change, probably by shifting to more restrictive networks of doctors and hospitals. Even if only one third of these policies are affected, this amounts to more than five million people.

In addition, according to Congressional Budget Office projections in July and September 2012, three million people will lose their insurance altogether in 2014 due to the law, and six million will have to pay the individual-mandate tax penalty in 2016 because they don’t want or won’t be able to afford coverage, even with the subsidies.

None of this counts the people whose employment opportunities will suffer because of disincentives under ObamaCare. Some, whose employers have to pay a tax penalty because their policies do not carry sufficiently generous insurance, will see their wages fall. Others will lose their jobs or see their hours reduced.

Anecdotal evidence already suggests that these disincentives will really matter in the job market, as full-time jobs are converted to part time. Why would employers do this? Because they aren’t subject to a tax penalty for employees who work less than 30 hours per week.

There is some debate over how large these effects will be, and how long they will take to manifest. However, the Bureau of Labor Statistics reports on a category of workers who will almost surely be involuntarily underemployed as a result of health reform: the 10 million part-timers who now work 30-34 hours per week.

These workers are particularly vulnerable. Reducing their hours to 29 avoids the employer tax penalty, with relatively little disruption to the workplace. Fewer than one million of them, according to calculations based on the Medical Expenditure Panel Survey, get covered by ObamaCare-compliant insurance from their employer.

In total, it appears that there will be 30 million to 40 million people damaged in some fashion by the Affordable Care Act—more than one in 10 Americans. When that reality becomes clearer, the law is going to start losing its friends in the media, who are inclined to support the president and his initiatives. We’ll hear about innocent victims who saw their premiums skyrocket, who were barred from seeing their usual doctor, who had their hours cut or lost their insurance entirely—all thanks to the faceless bureaucracy administering a federal law.

The allure of the David-versus-Goliath narrative is likely to prove irresistible to the media, raising the pressure on Washington to repeal or dramatically modify the law. With the implementation of ObamaCare beginning to take full force at the end of the year, there will be plenty of time before the 2014 midterm elections for Congress to consider its options.

For those like Health and Human Services Secretary Kathleen Sebelius, who told a gathering a few weeks ago at the Harvard School of Public Health that she has been “surprised” by the political wrangling caused so far by ObamaCare, there are likely to be plenty of surprises ahead.

Mr. Kessler is a professor of business and law at Stanford University and a senior fellow at the Hoover Institution.

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By Sarah Jones – Apr 25, 2013

Central banks, guardians of the world’s $11 trillion in foreign-exchange reserves, are buying stocks in record amounts as falling bond yields push even risk- averse investors toward equities.

In a survey of 60 central bankers this month by Central Banking Publications and Royal Bank of Scotland Group Plc, 23 percent said they own shares or plan to buy them. The Bank of Japan, holder of the second-biggest reserves, said April 4 it will more than double investments in equity exchange-traded funds to 3.5 trillion yen ($35.2 billion) by 2014. The Bank of Israel bought stocks for the first time last year while the Swiss National Bank and the Czech National Bank have boosted their holdings to at least 10 percent of reserves.

“In the last year or so, I have spoken with 103 central banks on diversification,” Gary Smith, London-based global head of official institutions at BNP Paribas Investment Partners, which oversees about $649 billion, said in a phone interview. “If reserves are growing, so are diversification pressures. Equities are not for every bank tomorrow, but more are continuing down this path.”

Managers of banks’ assets are looking for alternatives to holding government bonds after efforts to stimulate growth from the Federal Reserve, the Bank of Japan and the Bank of England helped send yields near to record lows. Central banks’ foreign- exchange holdings have increased by about $8.5 trillion globally in the past decade, exceeding levels needed for day-to-day currency administration.

Currency Moves

Central banks typically hold assets such as government debt that can be sold easily if funds are needed to counter a move in their currency. The reliance on fixed-income securities at a time when bond yields are below inflation in many countries risks allowing to the value of reserves to decline.

While consumer prices are rising at a 1.5 percent annual rate in the U.S. and 1.7 percent in the euro area, the average yield to maturity of securities in Bank of America Merrill Lynch’s Global Broad Market Sovereign Plus Index fell to an all- time low of 1.34 percent on April 23, according to data compiled by Bloomberg.

The SNB allocated 82 percent of its 438 billion Swiss francs ($463 billion) in reserves to government bonds in the fourth quarter, according to data on its website. Of those securities, 78 percent had the top, AAA credit grade and 17 percent were rated AA.

More Risk

The survey of 60 central bankers, overseeing a combined $6.7 trillion, found that low bond returns had prompted almost half to take on more risk. Fourteen said they had already invested in equities or would do so within five years. Those conducting the annual poll had never before asked that question.

“I definitely see other central banks doing or considering equities,” said Jan Schmidt, the executive director of risk management at the Czech National Bank in Prague, which has built up stocks to 10 percent of its $44.4 billion in reserves since 2008. Even so, the risks of owning shares are the same as ever, he said in e-mailed comments.

Currency reserves among the world’s central banks climbed by $734 billion in 2012 to a record $10.9 trillion, according to data from the Washington-based International Monetary Fund. That’s about 20 percent of the $55 trillion market value of global stocks, data compiled by Bloomberg show.

Central banks’ purchases of shares show how the “hunger for yield” is changing the behavior of even the most conservative investors, according to Matthew Beesley, head of equities at Henderson Global Investors Holding Ltd. in London, which oversees about $100 billion.

‘Logical Move’

“Equities are the last asset class standing,” Beesley said in a phone interview on April 18. “When you have dividend yields in excess of bond yields, it’s a very logical move.”

Companies in the Standard & Poor’s 500 Index pay 2.2 percent of their combined share price as dividends, compared with the 1.69 percent yield on 10-year Treasuries, according to data compiled by Bloomberg.

The S&P 500 (SPX) closed at an all-time high of 1,593.37 on April 11 and is up 11 percent this year though April 23. Investors have earned 0.7 percent owning U.S. government debt repayable in one year or more, according to Bank of America Corp. bond indexes.

Stocks are also cheap compared with government bonds using a valuation method favored by former Fed Chairman Alan Greenspan that compares earnings with interest payments. Companies in the S&P 500 (SPX) generate profit equal to 6.4 percent of their share prices, about 4.7 percentage points more than yields on 10-year Treasuries, Bloomberg data show.

Beyond Pale

Even so, 70 percent of the central bankers in the survey indicated that equities are “beyond the pale.”

The growth in reserves has slowed as a strengthening dollar puts less pressure on policy makers to intervene by selling their currencies, data compiled by Bloomberg show. Central-bank assets grew by 1 percent last quarter, the smallest gain since the same period of 2012, as Taiwan’s reserves fell by more than $1 billion to $402 billion and Singapore’s dropped by a similar amount to $258 billion.

Some central banks, including the Fed in Washington and the Bank of England in London, have no mandate to buy stocks directly. The Fed has $42.6 billion in reserves and the Bank of England controls $65.1 billion, data compiled by Bloomberg show.

Other banks are deterred by price swings in equities that can be larger than for other securities. The MSCI All-Country World Index (MXWD) fell 3.3 percent in five days after rising to a 4 1/2-year high on April 11 and tumbled 11 percent in the five weeks through June 12 last year. The gauge of global stocks rose 0.6 percent at 8:33 a.m. in New York today.

SNB, Israel

Among central banks that are buying shares, the SNB has allocated about 12 percent of assets to passive funds tracking equity indexes. The Bank of Israel has spent about 3 percent of its $77 billion reserves on U.S. stocks.

In Asia, the BOJ announced plans to put more of its $1.2 trillion of reserves into exchange-traded funds this month as it doubled its stimulus program to help reflate the economy. The Bank of Korea began buying Chinese shares last year, increasing its equity investments to about $18.6 billion, or 5.7 percent of the total, up from 5.4 percent in 2011. China’s foreign-exchange regulator said in January it has sought “innovative use” of its $3.4 trillion in assets, the world’s biggest reserves, without specifying a strategy for investing in shares.

‘Pursue Yield’

“Central banks are looking at assets that I wouldn’t have necessarily expected in times gone by,” said Paul Price, London-based head of international distribution and client relations at Morgan Stanley Investment Management, which oversees about $338 billion. Low yields and “movement in the ratings around certain sovereigns is forcing central banks to rethink how they pursue yield and how equities are viewed in that context,” he said.

The yield on the benchmark 10-year U.S. Treasury reached a record low of 1.38 percent in July. The same month, German government rates of similar maturity declined to 1.13 percent. France’s 10-year yield retreated to 1.7 percent on April 23, the lowest level since Bloomberg began tracking the data in 1990.

“Government bonds remain a fundamental pillar of central- bank asset allocation, but there is scope to go into other asset classes to help provide a higher return,” said Massimiliano Castelli, head of strategy at UBS Asset Management’s global sovereign markets unit in London. “We are in a lot of discussions with several or so institutions who are considering such a step.”

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net

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Paul A. Volcker is the former chairman of the Board of Governors of the Federal Reserve System under presidents Jimmy Carter and Ronald Reagan. He is credited with ending the high levels of inflation in the 1970s and early 1980s. His policy of “preemptive restraint” reduced inflation and prompted President Reagan and the Congress to address the large budget deficits at the time.


Q: What are the dangers of keeping interest rates low for an extended period of time?

A: I don’t think that’s an easily answerable question. One role of low interest rates is to push people into speculative excess. Whether that is a danger or an advantage depends on what happens to the economy as a result.

In the current case we are hoping that it has some good economic effects. The challenge you face in running a low-interest-rate policy is when to end it. Inevitably, you will end low interest rates too soon or not soon enough. If you worry too much about ending them too soon, it’s too late. The easy part is easing; the hard part is tightening.

Q: Isn’t the Fed’s role to stabilize inflation and maximize employment?

A: This whole business about a “dual mandate” is counter-productive. What does it mean? Sometimes we are against inflation and sometimes we’re for it? It only confuses people.

In trying to influence job creation through monetary policy, we’re trying to control something over which we have no close control. Monetary policy can only control the price lever. The prices of goods are fairly stable now. The prices of services are not.

Q: So are you implying that inflation is a danger?

A: Inflation is a more fundamental danger than speculative investment. Some countries seem to be in the unusual situation where they are trying to create inflation. They will come to regret that. People think they can manipulate the economy in a way that produces a little good inflation to go along with better economic activity. That’s silly. In Japan, they seem to think that they will snap their fingers and have inflation of 2 percent and the economy will recover. We may say that we are aiming for nominal GDP of, say, 5 percent. Who thinks you can really do that? It doesn’t correspond to the real world. When have economists been able to predict how much will be inflation and how much real economic activity? Monetary policy has little or no control over the real economy and issues, and yet we persist in using it as a tool for generating growth.

Q: Most forecasts look pretty stable at the moment. Are the economists wrong?

A: (laughter) After all we’ve been through, all these forecasts look so stable with projections moving by a few tenths of a percent points here or there. It looks like the most stable economy ever. It is more a consequence of economists being afraid that if they make some big projection and they’re wrong, they’ll look bad, than a representation of the real world. You have to imagine that events could turn out to be very different from the typical projection today.

Q: Does financial reform improve the way the financial system functions in this lack-of-a- system world?

A: No, not really. Financial regulatory reform is stalled. Nothing has changed from a year ago. We have seen no action even on something as simple as appointing a vice chairman of the Federal Reserve who is responsible for financial stability. There are important areas like money market funds that should be regulated, but reform hasn’t even started. We should treat them like banks if they want to maintain the par value, or they should have to market like ordinary mutual funds so people understand that there are risks involved.

Q: What is the consequence of inaction on reform?

A: One consequence is that we are turning private credit markets, inevitably the mortgage market, to a public-sector-dominated financial market. Central banks aren’t just central banks anymore. They’re government financial intermediaries. The Federal Reserve is the biggest financial intermediary we have.

Q: All this anti-Fed sentiment, particularly in the blogosphere — where does that come from?

A: It’s actually less true now than it used to be. The Fed — along with the Tri-lateral Commission, the Council of Foreign Relations and these types of organizations — is supposedly part of some plot to rule the world. The Fed is actually more popular now because it’s not strangling the economy. You can’t hate them for that.

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Published: Tuesday, 2 Apr 2013 | 11:59 AM ET
By: John Melloy

Hedge funds, on average, returned just above 3 percent in the first quarter of 2013, a brutal return compared to buyers of an S&P 500 index fund, who enjoyed a 10 percent return on their money.

Vocal activist and founder of Third Point Partners Dan Loeb was the standout, as timely bets on Yahoo, Japan and liquid natural gas play Cheniere Energy drove the firm’s Ultra Fund to a 13.3 percent return through the end of March.

The global diversified hedge fund index from Bank of America Merrill Lynch trailed the S&P 500 by 6.8 percentage points in the first quarter. Typically, hedge funds outperform the market in the first quarter, gaining 3.1 percent on average versus a 1.8 percent average S&P 500 return since 1995, according to the Bank of America report.

Loeb’s biggest winner and top position was Yahoo, which is up 19 percent in 2013 on hopes CEO Marissa Mayer — whom Loeb installed after a board overhaul last year — can generate more search clicks and higher ad revenues for the troubled tech.

The hedge fund manager, once known for his acerbic letters to executives, has been among the most active and talked about people in the hedge fund community over the last year because of his vocal invasion of Silicon Valley through Yahoo, as well as his brief stint in going long Herbalife alongside Carl Icahn in the legend’s battle against Bill Ackman.

The second biggest winner for the hedge fund manager was a “Japanese Macro” trade, according to the firm’s month-end tearsheet obtained by CNBC. Japan’s Nikkei 225 index is up more than 15 percent this year after new Prime Minister Shinzo Abe promised bigger spending and aggressive monetary easing.

Japan’s central bank meets on Thursday.

Cheniere Energy, which operates pipelines and terminals, is riding a wave of expectations for an increased export market for liquefied natural gas.

Loeb’s top positions heading into the second quarter are Yahoo, gold and American International Group.

As for Loeb’s peers, event driven funds, who focus on targeting companies with an upcoming catalyst like a merger, performed the best with a 5 percent return so far in 2013, according to Bank of America. Losses in Europe hit Macro funds the hardest, with those funds little changed on the year.

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A week ago, I closed out the Hotline by saying that Cyprus likely did not carry that much in the way of near-term risks. However, I added that the situation did represent a broader problem for Europe and the rest of the world. As the Cyprus story began to unfold two weekends ago, the media was filled with predictions of imminent doom – not only for Cyprus but for the European Union and the euro currency. Some of the people that have been waiting around for four years for the U.S. economy and stock market to suffer new collapses – jumped right on the latest crisis. They were hoping that Cyprus would be forced to leave the EU. Given the relatively tiny size of the nation’s economy, I just did not see why so many people got excited about the story. A week later, the U.S. stock market has managed to adjust. In fact, the S&P 500 is once again on the doorstep of its October 2007 all-time closing high (1,565.15). Gold is a bit lower than it was a week ago, but the change has been minimal. After all of the talk about how Cyprus would kick off a new financial crisis, the waters are relatively calm.

The Cyprus parliament shot down the initial proposal to put a levy of 6.75% on depositors with roughly $25,770 or less in the bank and a levy of 9.9% on depositors with $128,840 or more. As such a plan would have punished even the smallest of depositors, it was very unpopular. The ECB and the IMF warned the nation’s political and financial leaders that the money spigot would be shut off today if a plan were not put in place where the banking system raised 5.8 billion euros. A deal appears to have been hammered out during the past few days. I have noticed that a lot of the media coverage regarding the new deal fails to tell the whole story. The second largest bank in the nation, Cyprus Popular Bank (known as Laiki), will be shut down. Accounts with deposits below 100,000 euros ($128,740 at the current exchange rate) will be shifted to the Bank of Cyprus. Depositors with more than 100,000 euros are now stuck with frozen accounts. They are going to take big losses. I have seen countless media reports today that claim the new deal is not a levy. I don’t care what you call it, many people are going to see their wealth seized and then used as part of a bailout for the nation’s banking system. Such a precedent is likely to come back to bite the euro zone.

At a minimum, it is going to make depositors in other troubled economies (such as Italy and Spain) wonder if they should spread their money out in various banks and nations – with such actions driven by fears that their wealth will be ripe fruit for a larger bailout down the road. The good news is that smaller depositors are going to see their savings protected. The bad news is that the economy of Cyprus has gone from the frying pan and into the fire. Banking plays a major role in that nation’s economy. You can bet that credit will now be extremely difficult to acquire in Cyprus – leading to the mother of all credit crunches. While the “little guy” in Cyprus has been shielded for now, they are likely to see their disposable income and wealth take a hit all the same as the economy crashes. I would also like to point out that there are many ways in this world for such a deterioration of savings to take place. Here in America, millions of people see the value of their savings reduced every day. That is because inflation is running far above the annual yield offered in most bank savings accounts. Even one-year CDs rarely offer investors an annual rate of more than one percent. Whether you believe the CPI or your own gut, the fact is that consumer inflation is running well above such deposit interest rates. During the past week, there was outrage regarding the initial plan to tax/levy depositors in Cyprus (6.75% to 9.9%). As the Fed has held market interest rates at historically low levels for a while now, exactly how much money have U.S. investors lost parking their money in savings accounts and similar vehicles? Cyprus is seizing money all in one bite. Here in America, the damage is happening slowly – but it is adding up over time. The Fed Funds Rate has been near zero since late 2008.

With the U.S. stock market marching its way toward a new all-time high this year, there is a general sense of confusion in the nation. While most people would agree that the economy is in better shape now than it was a few years ago, there is still an underlying sense of fear. Most people know someone that is having trouble making ends meet. With the budget fiascos unfolding in Washington, there is also a sense that the politicians could slam the brakes on the current recovery. I took a few steps toward a near-term cautious stance earlier this year – mostly in response to the fiscal cliff mess and the willingness of political leaders (on both sides of the aisle) to push the hard decisions down the line. I was particularly concerned about the way so many analysts and investors were not concerned about the near-term impacts of the fiscal cliff (and the myriad of tax hikes that came out of the deal). The low trading volume and overextended readings from some of the bullish sentiment numbers have done little to change my mind. While I remain a long-term bull, the near-term continues to carry above average risk. Many people continue to blame the Fed’s quantitative easing for anything bullish these days (including of course the recent strength in the stock market). However, the fact is that the economy has done much better than expected of late. If that had not been the case, you can bet that the market would be a lot lower by now – despite the Fed’s efforts to keep the economy and financial system well funded.

As part of the fiscal cliff deal, the government decided to allow the Social Security payroll tax to return to its former level – effectively cutting the take-home pay of tens of millions of households by two percent. I thought that the payroll tax hike would have shown up in consumer demand data by now. Later this week (Friday), the February numbers on personal income and personal spending will be released. A month ago, the government reported that personal income had plunged by 3.6% in January. Here we are the better part of two months removed from that time period and yet most of the economic numbers still look okay. In the case of employment, there has been outright improvement. As the U.S. economy has struggled to cast off the shell of the recession and financial crisis, employment has limped along. There has been enough job growth in recent years to help keep the economy’s engine running. Overall though, there are still far too many people that want to work full time (and earn benefits) but cannot find employment. I expect that situation to improve during the next few years. In the near-term though, there are certainly some possible speed bumps ahead.

We are going to find out soon enough just how much of an impact the recent tax hikes are having on the all-important consumer spending part of the economy. Retail sales were relatively strong in February – gaining 1.1% – after increasing by just 0.2% during the first month of the year. The report was bolstered by inflationary forces – such as a year-over gain of 3.6% in sales at gas stations. With the banking system in far better shape now than it was during the recession though, it looks like many consumers will be turning to debt to help maintain their standard of living (and thus help to offset the higher taxes). The ongoing rebound in the housing market is helping to drive that situation – as millions of homeowners are seeing the value of their home increase and thus open up some breathing room with home equity. The FOMC meeting last week left the Fed’s monetary policies unchanged. We will have to wait a while to see the minutes for that meeting. Perhaps some of the members of the FOMC once again expressed concerns about quantitative easing and its impact on inflation and asset values. The stock market would likely give up ground if the FOMC minutes prove to be cautious.

It has been a while since I mentioned the money supply. M2 gained just $1.8 billion during the latest week. That is a continuation of a recent weak trend for the money supply. During the past 12 weeks, M2 has gained a paltry $22.9 billion. There have been plenty of times during the past year when M2 gained more than $22.9 billion during the course of just one week. This situation is worth watching. If the money supply fails to keep up its former health, the economy could run into trouble near-term. However, there have been a number of false alarms concerning the money supply in recent years. I recommend that you stick to the prudent paths during the time ahead – but prepare for a stronger economy a year or two down the line. Both housing and employment look set to improve – especially if Washington gets its collective act together regarding taxes, spending and the deficit. Such changes are going to have to take place if consumers and businesses are going to start spending their cash. More next week.

Next hotline will be updated no later than 8:00 P.M. Eastern on Monday, April 1, 2013

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By Inyoung Hwang

March 18 (Bloomberg) — The two biggest U.S. equity bears
in 2012 see the Standard & Poor’s 500 Index rising more than 12
percent this year to at least 1,600, as strong economic data
point to higher corporate earnings.

Goldman Sachs Group Inc.’s chief U.S. equity strategist,
David Kostin, raised his target today for the benchmark stocks
gauge by 3.2 percent to 1,625 from 1,575. Adam Parker of Morgan
Stanley boosted his 2013 estimate by 12 percent to 1,600 from
1,434. They join strategists at Deutsche Bank AG, Credit Suisse
Group AG and Jefferies Group LLC in increasing their targets for
U.S stocks in the last week.

“The 2013 U.S. equity market story is becoming one of
improving business activity accompanied by increased CEO
confidence,” Kostin wrote in a report. “Recent economic data
has been strong as employment growth, ISM surveys and retail
sales have all posted positive surprises. The ‘sequester’ has
begun, and the federal government is still functioning.”

The rally in U.S. equities has pushed bearish strategists
to capitulate in 2013 after being conservative last year, when
stock seers forecast the smallest gain in seven years for the
S&P 500. Kostin and Parker estimated the S&P 500 would fall in
2012 to 1,250 and 1,167, respectively, making them the two most
bearish strategists among the 14 surveyed by Bloomberg. The
equity index surged 13 percent to 1,426.19 in 2012.

The S&P 500 closed within two points of its all-time record
of 1,565.15 on March 14, as better-than-estimated retail sales
and jobless claims data boosted optimism in the world’s largest
economy. The data helped offset concerns over automatic federal
spending cuts that started March 1.

Manufacturing Data

On March 5, the Institute for Supply Management’s non-
manufacturing index reading for February unexpectedly increased.
A week earlier, ISM factory data showed the fastest pace of
manufacturing since June 2011, as orders climbed the most in
almost two years.

The S&P 500 has surged 22 percent since its low last year
in June amid corporate earnings that have exceeded analysts’
estimates and stimulus measures by global central banks. The
gauge has added 9.2 percent this year. It slid 0.3 percent to
1,556 at 1:21 p.m. in New York today and would need to add 2.9
percent to reach 1,600.

Following the last week’s upward revisions, the average
strategist forecast for the S&P 500 at the end of 2013 is 1,571,
data compiled by Bloomberg. The figure has risen 2.3 percent
since starting the year at 1,534.

Faster Growth

Kostin, the New York-based chief U.S. equity strategist at
Goldman, lifted his estimate for combined earnings by companies
in the S&P 500 this year by $1 to $108 a share. Goldman expects
U.S. economic growth to reach 3 percent in the first quarter and
2 percent in the second three months of the year, he said.

He also said financials stocks should outperform those from
other industries in 2013, citing faster economic growth, rising
interest rates and higher dividends and share buybacks.

Morgan’s Parker, who is based in New York, increased his
projection for S&P 500 profit to $103.20 from $98.71.

“We see improving fundamentals in the second half of the
year and into next year,” Parker said in today’s note. “A
number of things have been responsible for the recent multiple
expansion, but perhaps a major contributor was quantitative
easing, which encompasses Fed and ECB policy.”

Jefferies’ Sean Darby increased his target by 6.9 percent
to 1,673 on March 12, making him the most bullish strategist in
Bloomberg’s survey. The Hong Kong-based chief global equity
strategist said earnings will continue to surpass estimates and
investors will shift money to stocks from bonds.

Equity Strategists

Credit Suisse’s Andrew Garthwaite raised his target to
1,640 from 1,550, the second-highest in the survey. More
aggressive central bank actions and inflows into equities were
among the reasons the S&P 500 warranted a higher forecast, he
said in a March 15 note.

David Bianco, Deutsche Bank’s New York-based chief U.S.
equity strategist, raised his 2013 target to 1,625 from 1,600,
citing positive economic data in a March 16 note.

Wells Fargo & Co.’s Gina Martin Adams is the most bearish
strategist, projecting the S&P 500 will fall to 1,390. That
would require an 11 percent drop from today’s level.

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The U.S. stock market has been doing quite well of late. That rally has been driven by a combination of Fed quantitative easing and a healthier than expected U.S. economy. The bears blame it all on the Fed and come up with silly nicknames for Ben Bernanke. Many of the bulls tend to downplay the role of the Fed’s easy money policies and instead believe that the market has entered an unstoppable rally phase – one that will soon take stocks far above their current level. I believe both of those arguments tend to overstate the case and thus hold risks for anyone that makes them the foundation for their business and investment strategies. The risks of expecting the economy to be on the verge of disaster have been on display for more than four full years. Despite plenty of evidence that showed the slide in the economy had come to an end, millions of people continued to think and act as if the conditions of 2008 and 2009 were still in place. Such mindsets blocked people from participating in one of the most powerful bull markets in modern history. It also cost the business owners and managers that planned for a recession during 2010, 2011, 2012 and 2013. There are risks that come with extreme caution.

Beyond question, the asset purchases by the Federal Reserve stabilized the financial system – and helped to turn what could have been a deflationary depression into a relatively anemic recovery (somewhat average when compared to the past few GDP recovery cycles). When that process is scaled back (and eventually halted) – the impact will be set by the health of the economy. It is really a question of timing. If the Fed ended its monthly $85 billion purchases of Treasuries and mortgage-backed securities right now, you can bet that all sorts of bad things would happen in the financial markets and the economy. The past few meetings of the FOMC have seen a number of discussions on the pros and cons of easing. The positives coming out of Fed purchases are clear. Long-term interest rates have been driven to very low levels. That has enabled businesses, consumers, homeowners and others to lock up financing at low rates. If you talk to most homeowners (that have a mortgage), they will likely tell you that they either recently refinanced their mortgage at a low rate or their bank has been hounding them to make the change. The positive impacts of such low interest rates will be felt not just in the near-term, but for years and even decades from now.

Just imagine what a mortgage rate under 4.00% would feel like in an economy with higher inflation some years down the line. There are going to be millions of households that provide the backbone to the next super boom with their low mortgage costs and home equity. The Fed governors and others at the central bank are well aware of those long-term benefits of quantitative easing. However, there is a growing sense of uneasiness regarding the tens of billions of dollars poured into the financial system every month. With the Fed stepping in to make such purchases, it frees up money for other purposes. The recent run in the Dow to new all-time highs has generated plenty of headlines. The Fed’s easing efforts have no doubt played a role in that stock market strength. Many of the stock bulls have tried to blame the rally entirely on improvement in the economy and growth in corporate earnings. However, fourth quarter earnings were actually quite lackluster. Another force was at work behind the scenes – helping to drive stocks higher. Many analysts and investors in the bullish camp have come to take the Fed’s easing for granted. The market dipped for a few days last month when the FOMC minutes were released. However, that was followed by new strength. (The FOMC will be meeting again this week.) The S&P 500 has failed to close above its October 2007 all-time high of 1,565.15. It came within 0.1% of that mark last week. Sheer exhaustion and the recent troubling news out of Cyprus have capped that index.

As I said earlier, both sides of the economic argument tend to get carried away with their basic points (and downplay the facts presented by their foes). While I agree that Fed quantitative easing has bolstered the stock market, such an impact is impossible to quantify. One thing we know for sure is that a number of other factors have also been driving the market higher. There are some well-known commentators that have been guaranteeing a new recession during the past year or two. Stock investors have not taken such predictions lightly. There have been a number of false starts for the bears during the past few years. The Standard & Poor’s downgrade of the U.S. debt rating in August 2011 was a heady time for the bears. Many of them were sure that the double dip had finally arrived and they bet heavily against stocks in the process. I remained bullish during that time. There were a number of red herrings leading people down blind alleys. A strike by 45,000 Verizon workers knocked down the August 2011 employment report to show a flat reading for nonfarm payrolls (tricking many people into believing that a recession had begun). That was followed by a stronger than expected report for September (when the Verizon workers returned). The market bottomed out just a few days before that September 2011 employment report. The S&P 500 has gained 42 percent since that low. You don’t have to look beyond that gain to see the real world risk of refusing to shift from a bearish view – despite ample bullish evidence.

The people that are blaming all of the good news regarding the economy and the stock market on the Federal Reserve are missing out on some important themes. For a while now, I have discussed the fact that economic recoveries tend to reach a point when they trigger their own “second stage” booster. Recent data have clearly shown that the employment environment is improving. You can forget about writing off that data as nothing but government propaganda. There have been a number of private sources that have shown an improvement in the job market. Population growth and pent-up demand have helped to boost employment recently. Just about everyone (including me) expected the fiscal cliff and the sequester to dent business and consumer confidence – and thus slow the economy for a while. Fourth quarter GDP was pressured down toward the zero mark by temporary factors. When it comes to employment though, growth has improved. The latest report on weekly jobless claims came in at a total of 332,000. That was a new low for the recovery cycle – and was roughly half the weekly readings registered at the worst of the economic conditions during early 2009.

The recent improvement seen in the employment situation is going to give the economy some breathing room if things take a turn for the worse during the time ahead. The ongoing issues regarding the budget (and problems in Europe) could hold things back for a while. That would be countered by all the liquidity measures necessary from the Fed to keep the economy well fueled with MONEY. A few years ago, there was plenty of talk about the Fed pushing on a string with its low interest rates. In the end though, the economy stood up and proved that it was still operating under many of the same forces that have guided activity for decades. Millions of households pulled in their collective horns during the recession (and for a few years after the spring 2009 end of the recession). That created huge pent-up demand for all kinds of goods and services. Cars, homes and other things large and small have been gobbled up by consumers and businesses. With remarkably low interest rates available to finance some or all of that spending, the mechanisms of the marketplace have been able to operate.

There is a still a long way to go until things look and feel normal. The improvement in employment should be a wake-up call for some people. It has shown that the economy is operating under different rules than you will find in the headlines and the swamp of opinions that fill the media and the internet. If Washington manages to get a few of the big decisions right during the time ahead, the economy could be headed into a boom down the road. Such an idea would no doubt be greeted with contempt by millions of people right now. However, I want you to reflect on what the expectations for the economy, housing and the stock market were back in 2009 to 2012. Things can and do change and not all of those changes have to be negative. It just seems that way to some people after going through the kinds of tough times that faced the nation during the recent downturn. – I will likely address the recent events in Cyprus in next week’s Hotline. I spent the past few days studying that situation and if I thought it represented a significant near-term threat I would have devoted this Hotline to it. However, the ramifications of the planned levy on depositors in that nation’s banks appear to carry broader implications for Europe and the world. Gold is up by $13.00 an ounce on the news and the U.S. stock market is down a bit. Overall though, the story pales in significance compared to debt concerns in other euro zone nations. More next week.

Next hotline will be updated no later than 8:00 P.M. Eastern on Monday, March 25, 2013

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By Christopher Condon

Jan. 25 (Bloomberg) — Ray Dalio, founder of Bridgewater Associates LP, the world’s biggest hedge fund, said 2013 will be a “game changer” for the economy as investors reallocate money after risks such as Europe’s sovereign debt crisis receded.

“There’s a lot of money in a place that’s getting a very bad return and in this particular year there’s going to be, in my opinion, a shift,” Dalio said today at a Bloomberg panel discussion at the World Economic Forum in Davos, Switzerland. “The complexion of the world will change as that money goes from cash into other things. The landscape will change, particularly later in the year and beyond.”

Global stocks have rallied 17 percent in the past six months as the U.S. housing market recovers, European leaders take steps to contain their debt crisis, and reports in China suggest economic growth is accelerating. Investors from David Tepper, who runs the $15 billion hedge fund Appaloosa Management LP, to Carlyle Group LP co-founder David Rubenstein have said they’re bullish on the U.S. economy this year.

U.S. stocks rose today, giving the Standard & Poor’s 500 Index its longest winning streak since 2004. U.S. mutual funds investing in domestic equities received net deposits for a second consecutive week, reversing a trend of redemptions over the past six years, a report showed this week.

‘Massive Amount’

As investors grow more comfortable with the outlook for the economy, money will move into stocks and other assets, as well as into goods and services, Dalio said.

“The shift of that massive amount of cash is what will be a game changer,” said Dalio, whose Westport, Connecticut-based firm oversaw $81.3 billion in hedge-fund assets as of Oct. 31.

Central banks will have to be on guard to reduce the supply of money when spending increases, Dalio said, adding a successful exit from six years of loose monetary policy is manageable. Billionaire investor George Soros said yesterday that the U.S. Federal Reserve will have to raise interest rates quickly to contain inflation once the economy shows signs of a stable recovery.

Fed Chairman Ben S. Bernanke’s unprecedented bond buying pushed the central bank’s balance sheet to a record $3 trillion, a report yesterday showed. The Fed is purchasing $85 billion of securities every month, using the full force of its balance sheet to stoke the economic recovery.

Dollar Worry

The head of China’s sovereign wealth fund, speaking on the same panel, said today those policies make him a “little bit worried” about the dollar.

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, has dropped 4.6 percent in the past six months and about 8 percent since the end of November 2008, the month the Fed began quantitative easing. The gauge is weighted 57.6 percent to movements in the euro.

“The printing machine will have to slow down considerably in order for people to have confidence in the dollar,” Jin Liqun, chairman of China Investment Corp., said on the panel, which was moderated by Bloomberg Television’s Francine Lacqua. “I have confidence in the resilience of the U.S. economy,” he said, adding the U.S. can probably achieve 2 percent growth.

Beijing-based CIC was set up to improve returns on the world’s largest foreign-currency reserves by investing overseas. China has $3.3 trillion of reserves, according to data compiled by Bloomberg.

Productivity Key

China’s manufacturing is expanding at the fastest rate in two years, a report showed yesterday, bolstering prospects that economic growth will accelerate for a second straight quarter. The data suggest that China’s expansion at the start of 2013 will equal or exceed its 7.9 percent clip in the fourth quarter.

Dalio said China is in a different part of the economic cycle than the U.S., and Europe will have to contend with social and political pressures this year. Debate about what drives economic growth should focus on how countries can raise productivity, he said.

“The fundamental law is we can’t raise debt faster than income from now on,” he said. “The discussion now is going to be about competition and there are clear benchmarks for competition. Productivity is going to be the question.”

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BARACK OBAMA’s critics and supporters tend to agree: the first four years of the Obama administration have included plenty of disappointment and frustration.

Many say President Obama has not empowered his cabinet. On Jan. 10 the president, with the departing Treasury secretary, Timothy F. Geithner, right, announced that he was nominating Jacob J. Lew, left, for the post.

Some of the that can be attributed to inherited challenges like the financial crisis. Some were caused by unexpected developments overseas. Some are the result of a dysfunctional Congress better known for logjams, corruption and ideological intransigence than action. (So much so that a recent poll showed that Americans like Congress less than cockroaches, colonoscopies and root canals.)

But Mr. Obama and his team would benefit, as they begin the second term, by acknowledging that many of the biggest problems facing the administration flow directly from the man at the top. Mr. Obama is a lousy manager. As chief executive he gets a C — and then only if graded on a curve that takes into account his predecessor’s managerial weaknesses.

For all of the notable achievements of Mr. Obama’s first term — getting troops out of Iraq, passing health care and financial services reform, signing legislation that guarantees that women get equal pay for equal work, removing Osama bin Laden — many of the administration’s shortcomings are traceable, at least in part, to troubles connected to the way Mr. Obama has chosen to run the government.

The administration has not done a good job of delegating to and empowering cabinet officials. Nor does it seem to have built necessary teams and coalitions or anticipated and planned for likely challenges. The Obama team’s failure to make the most of stimulus funding, to make progress on climate change, to react swiftly to international crises in Egypt, Libya and Syria, and to maintain good relations with allies on Capitol Hill and beyond stem from lack of managerial skill.

A predicate problem is that the president’s team has focused so intently on presenting Mr. Obama’s strengths that they, like many senior managers, seem to have begun to believe their own news releases.

Consider what is, perhaps, the iconic image of the Obama presidency: the photo of Mr. Obama, in the Situation Room, with Hillary Rodham Clinton and other members of his national security team, awaiting news of the raid on Osama bin Laden. The May 2011 photo depicts an engaged leader, in the center of a closely knit team, willing to take calculated risks but viscerally aware of the human stakes involved.

Like many official photos, this one said much about the president without revealing the full truth. Seemingly united in that moment, the president’s team is, in fact, a fractious group whose members are often at odds with one another, and Mr. Obama may be the most aloof president since Richard M. Nixon. Shot in the Situation Room, the nerve center of our government, the photo gives no indication that many of the president’s appointees see it and the rest of the West Wing as kinds of fortresses far removed from other government agencies.

There is no single template for the effective exercise of presidential power. In the modern era, Dwight D. Eisenhower applied the skills he mastered as a general, Lyndon B. Johnson horse-traded his way to legislative triumphs, Ronald Reagan managed with a light touch as if he were a congenial “chairman of the board,” the elder George Bush oversaw what was arguably the most disciplined and inclusive national security process in recent history and Bill Clinton was able to strike a balance between master politician and wonk in chief.

Each of these presidents understood the danger of personalizing the presidency, of making it too much about one man; each took care to harness resources within his cabinet and among his deputies.

Successful modern presidents share an experience that Barack Obama does not have: before becoming president, each played an executive or leadership role that provided insight as to how to run an effective government.

The management troubles that have dogged the Obama administration are not unique to Mr. Obama or his team. One of the biggest problems facing America today is that in Washington, the ability to effectively run complex organizations is among the skill sets that is least valued in our leaders.

Often people with no management experience — academics, writers or politicians who have never run an office with more than a handful of people — are put in charge of giant, complicated government agencies or processes. In part this is because so many people in government mistakenly believe that being able to articulate ideas is the same as being able to put ideas into action.

This administration provides an object lesson in how, when too many staffers have excessive influence, political calculations often trump good policy choices. When an inner circle maintains too tight a stranglehold over the president’s time and attention, too few views come into play. If isolated by an inner circle, the president will have a harder time fostering cooperation in his administration. During his first term, Mr. Obama’s inner circle included Michelle Obama, Valerie Jarrett, David Axelrod, David Plouffe and Pete Rouse. Even top administration officials believe these gatekeepers held power too closely. Staff casualties resulted.

When Obama campaign insiders on the National Security Council staff were thought to have more access to the president than their boss, Gen. James L. Jones, the general reportedly felt undermined and left the administration. Ms. Jarrett is said to be seen as so powerful that hardly anyone dares to cross her.

Despite constant behind-the-scenes grumbling from top officials, few appear to have successfully challenged her. Acknowledging how much the president values her opinion, staffers complain about her involvement in matters outside her competence. Battles with Ms. Jarrett reportedly played a role in at least one top official’s decision to leave the administration.

Mr. Obama’s top advisers say they often feel alienated from the president. There is a sense in the White House that “Barack Obama’s theory of government is he is the government.”

Mr. Obama’s perceived aloofness didn’t help his relations with Congress. Many Hill Democrats resent the fact that the president essentially did not consult with them during the last campaign, regularly keeping them away from him during his campaign appearances.

CHIEF executives who have visited the White House for much publicized consultations with the president and senior staff report that Mr. Obama appears to be more interested in delivering his message than in listening to others. This, too, speaks to Mr. Obama’s management weakness. Selecting a diverse team, creating a system in which ideas surface, listening to those ideas and then empowering others to put them into action are the cornerstones of good management — and of effective leadership.

The fact that Mr. Obama is not a good manager does not mean Americans were unwise to have elected him rather than Mitt Romney, who presented himself as an experienced business leader. There is no shortage of successful businessmen who flopped in government; Paul H. O’Neill, John W. Snow or John E. Bryson are examples. Public sector management poses its own unique challenges. Great business leaders and great governmental leaders require different personalities, skill sets, tactics and backgrounds.

The challenge here extends beyond Mr. Obama. The American electorate doesn’t ask questions about management skills. Congress rarely raises the issue of management when considering nominees for large, complicated cabinet agencies, many of which are larger than big corporations. Establishing a culture in which the metrics of successful governance are valued, discussed and evaluated is a vital step toward addressing a problem of which the current president’s management troubles is but a symptom. It would be helpful to have a permanent professional bureaucracy with continuing management responsibilities, as do many other nations. It would also be useful to consider salaries for top officials that provide incentives to the most qualified (much could be learned here from Singapore, which has blazed an important trail in this regard).

In the end, the success of our constitutional system depends primarily on how the occupant of the Oval Office governs. No president can succeed unless he views his job as collaborative, as requiring the motivation and empowerment of a vast United States executive branch bureaucracy, as being in partnership with Congress, as benefiting from a broad and diverse group of advisers, as being the kind of undertaking that promotes creativity even if it means embracing unpopular or even unsuccessful ideas. We know that for the next four years we will have a much more experienced president than the one who occupied it during the term just past. But if Barack Obama is to be a successful president — if he is to lead our country toward economic recovery, climate health and increased security — he must master the day-to-day management of government.

http://www.nytimes.com/2013/01/20/opinion/sunday/managing-the-oval-office.html?partner=rss&emc=rss&_r=0&pagewanted=all

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16 Things About 2013 That Are Really Going To Stink

The beginning of the year has traditionally been a time of optimism when we all look forward to the exciting things that are going to happen over the next 12 months. Unfortunately, there are a whole bunch of things about 2013 that we already know are going to stink. Taxes are going to go up, good paying jobs will continue to leave the country, small businesses will continue to be destroyed, the number of Americans living in poverty will continue to soar, our infrastructure will continue to decay, global food supplies will likely continue to dwindle and the U.S. national debt will continue to explode. Our politicians continue to pursue the same policies that got us into this mess, and yet they continue to expect things to magically turn around. But that is not the way that things work in the real world. Bad decisions lead to bad outcomes. Instead of realizing that what we are doing is not working, our “leaders” continue to give us more of the same. As a result, there are going to be a lot of things about 2013 that will not be great. Sticking our heads in the sand and pretending that everything will be “okay” somehow is not going to help anyone. We’ve got to make people understand exactly what is happening and why it is happening if we ever hope to see real changes.

The following are 16 things about 2013 that are really going to stink…

#1 Taxes Are Going To Go Up

Even if a fiscal cliff deal is reached, some taxes will still go up next year. And if no deal is reached, there will be a whole bunch of different tax increases in 2013.

According to CBS News, these tax increases would be very painful for the middle class…

If lawmakers fail to work out any sort of deal, there will be severe long-term consequences for the economy: According to the Tax Policy Center, going off the “cliff” would affect 88 percent of U.S. taxpayers, with their taxes rising by an average of $3,500 a year; taxes would jump $2,400 on average for families with incomes of $50,000 to $75,000. Because consumers would get less of their paychecks to spend, businesses and jobs would suffer.

#2 The Middle Class Is About To Be Scorched By The Alternative Minimum Tax

Of more immediate concern for the middle class is the Alternative Minimum Tax. Many Americans have never heard of the AMT, but it is truly one of the worst things about our tax code.

If Congress does not act, and right now it does not look promising, millions of middle class households will see a massive increase in their tax bills for 2012.

According to one analysis, households that are forced to pay the AMT will end up paying an extra $3,700 in taxes…

Unless Congress acts by the end of the year, more than 26 million households will for the first time face the AMT, which threatens to tack $3,700, on average, onto taxpayers’ bills for the current tax year. Because those people have never paid the AMT, they have no idea they are in its crosshairs — put there by a broader stalemate over tax policy that has kept Congress from limiting the AMT’s reach.

Do you have an extra $3,700 sitting around to send to Uncle Sam?

If not, you had better contact your representatives in Congress and scream like crazy about passing a fix for the AMT. They have always gotten it done before, but this year there is so much animosity between the Republicans and the Democrats that nothing may end up getting done.

#3 The Economy Will Continue To Get Worse

Despite all of the talk in the mainstream media and from our politicians that our economy is getting better, the truth is that the U.S. economy continued to decline in 2012. If you doubt this, just read the 75 statistics in this article.

And there are a whole host of signs that the economy is starting to slow down even more as we enter 2013. For example, consumer confidence in the United States has experienced its largest two-month drop in over a year, and retail sales during the holiday season turned out to be quite disappointing.

#4 Good Paying Jobs Will Continue To Be Shipped Out Of The United States

Thanks to decades of “free trade agreements”, workers in the United States must directly compete for jobs with hundreds of millions of workers on the other side of the globe that live in countries where it is legal to pay slave labor wages.

We continue to see millions of jobs being shipped out of the country and our politicians stand by and do nothing.

Most Americans have no idea how this emerging one world economic system works. The beautiful product that you buy at the big retail store may have been made by someone working in some of the most horrific conditions imaginable.

A 42-year-old woman named Julie Keith recently found this letter inside a box of Halloween decorations that had been made in China…

“If you occasionally buy this product, please kindly resend this letter to the World Human Right Organization. Thousands people here who are under the persecution of the Chinese Communist Party Government will thank and remember you forever.

People who work here have to work 15 hours a day without Saturday, Sunday break and any holidays. Otherwise, they will suffer torturement, beat and rude remark. Nearly no payment (10 yuan/1 month).

People who work here, suffer punishment 1-3 years averagely, but without Court Sentence (unlaw punishment). Many of them are Falun Gong practitioners, who are totally innocent people only because they have different believe to CCPG. They often suffer more punishment than others.”

But both political parties continue to tell us how wonderful it is that we are trading with communist China. They see no problem with the fact that good paying jobs that used to be performed in America are now being performed by slave laborers on the other side of the planet. And most Americans continue to support this system by filling their shopping carts with lots of stuff that has “made in China” stamped on it.

#5 Small Businesses Will Continue To Be Destroyed

At the same time, small businesses all over America are being strangled to death by taxes and regulations. Just consider the following numbers from a previous article…

We are told that the economy is supposed to be “recovering”, but the number of “startup jobs” at new businesses has fallen for five years in a row. According to an analysis of U.S. Department of Labor data performed by economist Tim Kane, there were almost 12 startup jobs per 1000 Americans back in the year 2006. By 2011, that figure had fallen to less than 8 startup jobs per 1000 Americans.

How is our economy ever going to thrive if we keep killing off our small businesses?

#6 Hunger And Poverty Will Continue To Explode To Unprecedented Levels

As the U.S. economy bleeds jobs and loses small businesses, the number of Americans living in poverty continues to explode.

Here are some numbers to show to people who still don’t understand how desperate the situation is…

-Families that have a head of household under the age of 30 have a poverty rate of 37 percent.

-According to U.S. Census data, 57 percent of all American children live in a home that is either considered to be “poor” or “low income”.

-For the first time ever, more than a million public school students in the United States are homeless. That number has risen by 57 percent since the 2006-2007 school year.

#7 The Number Of Americans On Food Stamps Will Continue To Increase

If the economy is recovering, then why does the number of Americans on food stamps continue to soar?

As I wrote about yesterday, about 17 million Americans were on food stamps back in the year 2000.

Today, more than 47 million Americans are on food stamps.

Does anyone want to explain to me how that is a sign that things are getting better?

Back in the 1970s, about one out of every 50 Americans was on food stamps. Today, about one out of every 6.5 Americans is on food stamps.

How much worse do things have to get before people realize that what we are doing is not working?

#8 Millions Of Americans Are About To Lose Their Unemployment Benefits

During this economic crisis, an unprecedented number of American families have been relying on unemployment benefits in order to stay afloat.

Well, if no agreement is reached in Washington D.C., millions of Americans will shortly lose those benefits…

Three million Americans may become unwitting casualties of the political war in Washington over the fiscal cliff.

Since 2008, the federal government has funded extensions of the unemployment insurance offered by states, more than tripling the amount of aid available to the unemployed in some areas. But the program is expensive, with the Congressional Budget Office estimating it would cost $30 billion to extend it through 2013. President Barack Obama wants to extend the benefits for another year, but Congress has already pared back the program, and Republicans insist it represents the kind of largesse Washington can no longer afford.

#9 Our Infrastructure Will Continue To Rot And Decay

The United States once had the most beautiful infrastructure in the entire world. Our highways, bridges, airports, railroads, sewer systems and electrical grids were the envy of the entire planet.

Well, now we don’t even have enough money to repair what we already have, so our infrastructure will continue to rot and decay in 2013…

Highways and bridges will need $2.5 trillion in upgrades if they are to survive for another 50 years — a must-do to keep commerce thriving. And that figure doesn’t even take into account the airports, railroads, subways, sewage-treatment plants, waterworks, levees, electric grids, pipelines, and all of those other expensive systems that people ignore until they break down.

#10 Many Of Our Major Cities Will Continue To Be Transformed Into Festering Hellholes

A lot of our major cities are also rapidly degenerating. Detroit is one of my favorite examples, but the same kinds of things could be said about dozens of other major cities all over the country. The following is a brief excerpt from one of my recent articles…

If you can believe it, more than 50 percent of all children in Detroit are living in poverty, and close to 50 percent of all adults living in the city are functionally illiterate. The high school graduation rate in Detroit is down to about 25 percent, and the city has become a breeding ground for gangs and violence. The number of murders in Detroit is already higher than last year, and recently groups of young men toting AK-47s have been running around robbing gas stations. How much worse can things possibly get for Detroit?

#11 State And Local Governments Will Find Ways To Squeeze Even More Money Out Of Us

In case you haven’t noticed, state and local governments all over the country are bleeding cash and are desperate for money. In 2013 you can expect them to continue to find more ways to squeeze even more money out of all of us. Here is one example…

Over the course of 2013, the District government will add 134 traffic cameras to its network, more than doubling the size of a system that generated $85 million in revenues for the city in its last fiscal year.

Police spokeswoman Gwendolyn Crump told The Washington Examiner that the city will intensify its camera-based efforts to cite motorists for speeding and stoplight violations while also adding cameras to detect other moving violations.

#12 Drug Cartels Will Continue To Easily Cross Our Borders And Terrorize Our Citizens

The federal government continues to refuse to protect our borders, and that means that drug runners and gang members will continue to pour into the United States.

Down in the Southwest, many ranchers are being absolutely terrorized by these criminals. The following is from a recent NBC News article…

Just before nightfall, 73-year-old rancher Jim Chilton hikes quickly up and down the hills on his rugged cattle-grazing land south of Tucson, escorting two U.S. Border Patrol agents.

He wants to show them the disturbing discovery he made earlier in the day: a drug-smugglers’ camp on his private property. Stacked together under a stand of trees are blankets, jackets, food, water, binoculars and bales of marijuana from Mexico wrapped in burlap. The smugglers, themselves, are nowhere in sight and are believed to have fled the area, which is about 10 miles north of the Mexican border.

Chilton has had his house burglarized a couple of times and his family regularly encounters groups of armed drug smugglers coming across from Mexico…

Their cattle fences are frequently cut and paths heading north from Mexico cross their property. Beckham says a smuggler even fired shots at him while he walked his land with a U.S. Border Patrol agent. Several illegal border crossers have also approached his house at night–one even reaching his hand into their bathroom window.

“Several years ago, one of my children was taking a shower and had a gentleman reach into the shower while he was in there, and he came out screaming, absolutely refusing to take a shower for the next couple months.”

But even if you don’t live along the border, all of this still affects you. According to government figures, Mexican drug cartels are actively operating in more than 1,200 U.S. cities right now. They are probably hard at work in the community where you live.

So what is the Obama administration doing to fix the problem?

Not much.

In fact, the Obama administration is actually encouraging people to come to the U.S. and become dependent on the system. If you can believe it, there is actually a website run by the Department of Homeland Security that teaches immigrants how to apply for welfare benefits once they get into the United States.

#13 Social Decay Will Continue To Accelerate

All over America we are seeing signs of social breakdown. Here is yet another example…

A woman sleeping on a street bench outside a drug store was doused with an accelerant and set on fire early Thursday morning in Van Nuys.

Witnesses told police that a man poured liquid — possibly a beverage containing alcohol — on the sleeping woman at about 1 a.m. outside a Walgreens store near Van Nuys Boulevard and Sherman Way. He lit a match and ran from the location, witnesses told police.

Who would just run up and set a woman on fire?

Sadly, this is not an isolated incident. For many more examples like this, please see this article: “20 Shocking Examples Of How Sadistic And Cruel People Have Become”.

We need to admit that we have a major problem on our hands. Violent crime in the United States increased by 18 percent in 2011, and another huge increase is expected when the numbers for 2012 come out.

America is changing, and not for the better.

#14 Global Food Supplies Will Continue To Dwindle

Did you know that for six of the last eleven years the world has consumed more food than it has produced?

As a result, global food reserves have reached their lowest level in almost 40 years.

So what is going to happen if the world continues to eat more food than it makes?

Let us hope that there is not another major drought in 2013. If there is, we could be looking at a very serious food crunch.

#15 Wall Street Will Continue To Resemble A Giant Casino

Our financial system seems to have not learned any lessons from the financial crash of 2008.

Instead of admitting their mistakes, they just continue to engage in even more reckless behavior.

Today, there are four major U.S. banks that each have more than 40 trillion dollars of exposure to derivatives.

At some point that house of cards is going to collapse and we will be facing a derivatives crisis of unprecedented magnitude.

Will it be in 2013?

#16 The U.S. National Debt Will Cross The 17 Trillion Dollar Mark

In 2013, our national debt will blow past the 17 trillion dollar mark and start heading toward 18 trillion dollars.

How stupid can we possibly be?

During the first four years of the Obama administration, the U.S. national debt has grown by about as much as it did from the time that George Washington took office to the time that George W. Bush took office.

It really takes something to match more than 200 years of debt accumulation in less than four years.

But our politicians don’t seem to care about all of this debt. They will continue to steal more than 100 million dollars from our children and our grandchildren every single hour of every single day. That is beyond criminal, and yet the American people don’t seem to care.

What in the world has happened to this country?

Of course not everything about 2013 will be bad. Personally, I am looking forward to an exciting year. I have a new book that will be coming out, and my family is blessed and healthy. I would like to wish all of you a very blessed 2013. Things may be falling apart all around us, but that doesn’t mean that we can’t have a great year even in the midst of all the chaos.

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The rout was complete, the retreat disorderly. President Obama got his tax hikes — naked of spending cuts — passed by the ostensibly Republican House of Representatives. After which, you might expect him to pivot to his self-proclaimed “principle” of fiscal “balance” by taking the lead on reducing spending. “Why,” asked the Washington Post on the eve of the final “fiscal-cliff” agreement, “is the nation’s leader not embracing and then explaining the balanced reforms the nation needs?”

Because he has no interest in them. He’s a visionary, not an accountant. Sure, he’ll pretend to care about deficits, especially while running for reelection. But now that he’s past the post, he’s free to be himself — a committed big-government social democrat.

As he showed in his two speeches this week. After perfunctory nods to debt-and-spending reduction, he waxed enthusiastic about continued “investments” — i.e., spending — on education, research, roads and bridges, green energy, etc.

Having promised more government, he then promised more taxes — on “millionaires” and “companies with a lot of lobbyists,” of course. It was a bold affirmation of pre-Clintonian tax-and-spend liberalism.

Why not? He had just won Round 1: raising rates. Round 2 is to raise yet more tax revenues by eliminating deductions. After all, didn’t John Boehner offer him $800 billion of such loophole-closing revenues just a few weeks ago?

To paraphrase Churchill on the British Empire, Barack Obama did not become president of the United States to preside over the liquidation of the welfare state. On the contrary, he is dedicated to its expansion. He’s already created the largest new entitlement in half a century (Obamacare). And he has increased federal spending to an astronomical 24.4 percent of GDP (the post-war norm is about 20 percent), a level not seen since World War II.

But this level of spending requires a significantly higher level of taxation. Hence his hardball fiscal-cliff strategy of issuing an ultimatum to Republicans to raise tax rates — or be blamed for a massive across-the-board tax increase and a subsequent recession.

I’ll get you the money by eliminating deductions, offered Boehner. No, sir, replied the president. Rates it must be.

Why the insistence?

(1) Partisan advantage. As I wrote last month, the ultimatum was designed to exploit and exacerbate internal Republican divisions. It worked perfectly. Boehner’s attempted finesse (Plan B), which would have raised rates but only for those making more than $1 million, collapsed amid an open rebellion from a good quarter of the Republican caucus.

At which point, power passed from the House to the Senate, where a deal was brokered. By the time the Senate bill reached the House, there was no time or room for maneuver. Checkmate. Obama neutralized the one body that had stymied him during the past two years.

(2) Ideological breakthrough. Obama’s ultimate ambition is to break the nation’s 30-year thrall of low taxes — so powerful that those who defied the Reaganite norm paid heavily for it. Walter Mondale’s acceptance speech at the 1984 convention promising to raise taxes ended his campaign before it began. President George H. W. Bush’s no-new-taxes reversal cost him a second term.

On this, too, Obama is succeeding. He not only got his tax increase passed. He did it with public opinion behind him.

Why are higher taxes so important to him?

First, as a means: A high-tax economy is liberalism’s only hope for sustaining and enlarging the entitlement state. It provides the funds for enlightened adventures in everything from algae to Obamacare.

Second, as an end in itself. Fundamentally, Obama is a leveler. The community organizer seeks, above all, to reverse the growing inequality that he dates and attributes to ruthless Reaganism. Now, however, clothed in the immense powers of the presidency, he can actually engage in unadorned redistributionism. As in Tuesday night’s $620 billion wealth transfer.

Upon losing the House in 2010, the leveler took cover for the next two years. He wasn’t going to advance his real agenda through the Republican House anyway, and he needed to win reelection.

Now he’s won. The old Obama is back. He must not be underestimated. He has deftly leveraged his class-war-themed election victory (a) to secure a source of funding (albeit still small) for the bloated welfare state, (b) to carry out an admirably candid bit of income redistribution, and (c) to fracture the one remaining institutional obstacle to the rest of his ideological agenda.

Not bad for two months’ work.

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