Things That Make Me Go Hmmm

Health Care Bill Update

Just an interesting side note on the Reconciliation process. As we all know, in order to pass the bill the democrats had to resort to a very controversial process of reconciliation. The republicans were allowed to propose amendments to the bill, but the democrats would have to vote every one of them down or the bill would have to go back to the house for a complete revote. So yesterday, Tom Coburn (R. Okla.) proposed a bill that would prohibit sex offenders and pedophiles from using Medicare to buy Viagra. Sounds like a pretty reasonable proposal, but unfortunately for the democrats they had to vote it down. Unbelievably, in 2005 (last year for data) over 800 convicted sex offenders were able to use Medicare to purchase little blue pills. So remember when you go into the voting booth in November that the democrats voted to continue allowing pedophiles access to Viagra.

The Inequality in Pay

Yes, there is a growing pay gap in America, between private and public workers.

According to today's WSJ and the Bureau of Labor Statistics, the average State and Local Government employee makes $39.66 per hour in wages and benefits, while the average private industry employee makes $27.42 per hour. Thats right, the government employee makes 45% more than the private sector employee! In California alone they have 3,000 teachers who retired at the ripe old age of 55, collecting at least $100,000 per year in pension benefits for the rest of their lives. 

Also, this week the Congressional Budget Office informed us that this will be the first year that the Social Security Administration will pay out more than they take in. They had been expecting this tipping point to occur in 2016, but they underestimated the magnitude by which the recession would reduce tax revenues. 

Warren Buffett as Axl Rose in Geico commercial:

New respect for Warren Buffett as he does his best Axl Rose imitation, while the lizard plays Slash. Cool...

http://www.huffingtonpost.com/2010/03/18/warren-buffetts-geico-com_n_503796.html

In Dodd We Trust

http://www.thedailyshow.com/watch/tue-march-16-2010/in-dodd-we-trust

Be careful out there,

Chris Wiles

www.rockhavencapital.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaran

All The Cards Were Coming From The Bottom Of The Pack

She gave me the Queen
She gave me the King
She was wheelin' and dealin'
Just doin' her thing
She was holdin' a pair
But I had to try
Her Deuce was wild
But my Ace was high
But how was I to know
That she'd been dealt with before
Said she'd never had a Full House
But I should have known
From the tattoo on her left leg
And the garter on her right
She'd have the card to bring me down
If she played it right

"The Jack" by AC/DC  AC/DC - The Jack

Now this is the real World Series of Poker, a real-time economic showdown being played out before our very eyes by the world's Central Banks. As opposed to the annual Las Vegas World Series of Poker, the buy in at the Central Bank World Series of Poker table is exponentially higher, in the range of trillions of dollars, yen, Euros, and Yuan. The stakes are default of sovereign debt and the accompanying collapse of that country's fiat currency. Like any poker tournament, there are players like the UK, the US, and Japan that have terrible hands (too much debt relative to GDP, slow GDP growth, and lousy demographics), versus those players with strong hands like China, and the Middle Eastern States (which have strong surpluses, strong growth, and favorable demographics). The crazy thing about the economic tournament is that we know who the weak and the strong are.

In most high-stakes poker tournaments bluffing is an integral part of the game. Knowing when to bluff, and equally important, when to call your opponents bluff, is crucial. If everyone knows you have a weak hand, you probably shouldn't be bluffing aggressively, unless you are really good at drawing to an inside straight. Last week, in the preliminary rounds, we had Greece bluffing to the Germans that they would run to the IMF if Germany didn't help them. Germany called their bluff and now the IMF is helping rescue Greece.

At the higher stakes table you have 130 US Congressmen calling on the Treasury Secretary to label China a "currency manipulator" and slap them with trade tariffs. Lets just hope that China doesn't call the US's bluff by selling a few hundred billion treasury bonds. Hilarious to think that we who have a constantly stated "strong dollar" policy, are so eager to have our dollar depreciated versus the Yuan! And while we're on the subject, all central banks are currency manipulators, including (though this may be a shocker to those 130 fools we call Congressmen), the US Federal Reserve. If Central Banks set interbank lending rates in their countries and do not allow free markets to set these interest rates (as they do), then by definition, they are manipulating the purchasing power of their domestic currencies.

Furthermore, US economists that continue to state that China is “trapped” by their large amounts of US dollar denominated debt and cannot offload their dollar denominated debt obviously know nothing about poker. The player with the strongest hand often may not win the hand, but they always have many more exit strategies at their disposal that will yield success than players with weaker hands. To believe China has no way out of this situation is patently foolish. For players with strong hands and a better cash position (which China possesses), there are always ways out that will yield acceptable results.

While most attention is focused on the US and China, lets not forget the dark horse sitting at the table, the Middle Eastern Sovereign Wealth Funds. Cumulatively the OPEC nations own hundreds of billions of petrodollars, and they will definitely have a say in who the ultimate winner is. Will the ultimate winner be the fiat currency that depreciates the least, or will it be something else like gold? Let's not forget that China secretly doubled its gold reserves over a 6-1/2 year period, while they bluffed telling the world that their gold reserves hadn't changed. 

When AC/DC wrote this song, several members of the band had caught the clap (venereal disease), hence the cute play on words (clap/jack). Let's hope that our bluffing doesn't result in us catching anything nearly as serious. 

Atlas Shrugged

"When you see that trading is done, not by consent, but by compulsion--when you see that in order to produce, you need to obtain permission from men who produce nothing--when you see that money is flowing to those who deal, not in goods, but in favors--when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you--when you see corruption being rewarded and honesty becoming a self-sacrifice--you may know that your society is doomed." ---"Atlas Shrugged" by Ayn Rand

I'm sure most of you are already sick of reading or hearing about Healthcare Reform, but I thought the quotes from ex-CBO director (2003-2005) Douglas Holtz-Eakin in Sundays NY Times were excellent.  He said that the job of the CBO (Congressional Budget Office) was to take only the data and assumptions given to them and calculate the outcome, he called it "fantasy in, fantasy out". He said, "front-end loaded revenues and back-end loaded expenses promote a fiction that a program that will cost $950 billion over the next ten years actually reduces the deficit by $138 billion." After analyzing the details Mr Holt-Eakin's numbers affirm what everyone suspects...the deficit will actually grow by $526 billion over the next decade. 

Long-term bond buyers beware.

The Federal Reserve is Independent?

If you ever wondered just how independent the Federal Reserve is, wonder no more. A recently declassified transcript of a July 16, 1974 phone conversation between Henry Kissinger and then-Fed Chairman Arthur Burns, demonstrates just how very involved in global financial bailouts the Federal Reserve gets under duress of the administration. In the span of about a minute Kissinger advises Burns to do whatever he must to "not let Italy go down the drain." The facility with which the Federal Reserve throws around US taxpayer capital to bail out the "chosen ones" is simply beyond reproach. Could the Fed be preparing a comparable bail out package for Greece as a measure of last resort? Would Ben Bernanke allow Greece to fail, killing the euro and sending the dollar into the stratosphere, destroying all hope of inflating the trillions in bad debt saddling America's banks and the Federal Reserve (which is now the world's biggest bank holding company)? Time will tell. 

Kissinger: I called you yesterday about the possible assistance to Italy if that becomes necessary and I understand that one idea is to use the swap line and that you are a little reluctant to do it. I don't want to get into fiscal details which I don't fully understand. I just want to point out from a foreign policy point of view we cannot let Italy go down the drain. Whether that is the way to do it or some other way, I don't know.

Burns: I agree and I have been actively trying to get other countries to contribute to a package but what we can do through the swaplines is very limited. The amount could be large but it is a three month loan and that is not what they need.

K. Yes. My people tell me you would not approve more than $300 million.

B. As a start.

K. Yes. Look, on financial things I am not somebody - I cannot get into a debate on numbers. All I wanted to stress to you is to really give this - if it arises - very high priority.

B. I agree and I was active in getting the credit line extended. Also in a meeting with the finance ministers I went around and pushed the Germans and Japanese to contribute to a package for Italy. It is a loan of medium term duration and the swap line does not serve that purpose. That is the essential point.

K. If you can give any other thought to that problem I would appreciate it.

B. You bet I will.

Full memo in the attached PDF:

file:///Users/user/Desktop/28803221-Kissinger-and-Fed-Chariman-Burns-on-300-Mil-Swap-to-Italy.pdf

Spain to join Portugal in issuing dollar denominated bonds 

It appears that Spain wants to jump on the dollar-devaluation bandwagon and is joining Portugal in issuing dollar-denominated bonds. If Europe's most insolvent countries (granted, Greece has yet to issue $-denominated debt, although we are confident that will happen shortly as well) are getting on board of the asset side of the Fed's balance sheet, it can only mean one thing: the InTrade odds for the winner of the currency race to the bottom are squarely in favor of the US currency. Earlier, the Spanish director of Treasury and financial policy Soledad Nunez, told reporters that Spain may issue a dollar bond via syndication. In a page right out of Greenspan's dictionary Soledad said: ""Usually we syndicate in dollars, and we have not made one yet this  year, and we may do so, maybe yes, maybe no. That is the answer." She added in Alan-speak: "Doing a dollar syndication is always in our strategy, it is always depending on market conditions." Translation: while the Euro may end up being the worst currency (hence the best to issue debt in), we want to hedge our bets by also issuing debt in dollars (just in case Ben Bernanke wins the currency devaluation race). 

Be careful out there,

Chris Wiles

www.rockhavencapital.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

  

When I get older losing my hair,
Many years from now,
Will you still be sending me a valentine
Birthday greetings bottle of wine?

If I'd been out till quarter to three
Would you lock the door,
Will you still need me, will you still feed me,
When I'm sixty-four?

"When I'm Sixty-Four" by The Beatles

As many of us can readily attest, aging is a process, not always pretty, but inevitable. We often hear terms like, "act your age" or "age gracefully", and I have to be honest with you, I'm not always sure what they mean. Well economies age too, and not always that gracefully. The most common signs of an aging economy are tied to the exhaustion of factors such as labor productivity, capital, and resources. When an economy begins to develop, labor is an abundant resource (think China, & India). Hence, it makes sense to develop labor intensive industries. When labor is exhausted, it makes sense to develop capital intensive industries. When capital stock is high enough, investment can not drive growth anymore. Economists call this diminishing returns, or more of the same investment yields less output. This isn't too bad though, when consumption and investment are balanced just right a steady state of equilibrium emerges, sort of like permanent middle age.

Youthfulness can be found in a mature economy. Through innovation an economy can produce more with less. Alan Greenspan called this "the miracle of productivity". While this so called productivity miracle is real, it too has limits. In the internet era, innovations rapidly disseminate around the world, and it's not clear if innovation benefits can be contained in one country anymore. For example, even though the United States is more innovative than Europe, it hasn't outperformed by much.

Demographics are Destiny

Historically diminishing returns were the most valid method of defining an aging economy, but population aging is becoming a new and more powerful variable. Of course populations have always aged, but we are now entering a new era where the number of people retired equals the number of people working. Merely decades ago, life expectancy was not high enough for a society to have a large retired population. But because of an increased life expectancy, and a declining birth rate, Japan, Europe, and the United States, are all entering a period where their economies are aging both figuratively and literally. Initially a declining birthrate is beneficial, as fewer resources are needed to raise the young and females enter the labor force. But when a low birth rate lasts a couple of decades, it begins to reduce the labor force, which reverses the prior decades benefits.

When a society ages, its resource allocation increasingly favors the old. Healthcare costs rise exponentially. An older population also takes fewer risks, which makes social and economic change difficult. Rising social burdens of an aging society fall on the shoulders of the younger working population i.e. their tax burden rises ("will you still need me, will you still feed me"). Diminishing returns for those who are working causes them to choose more leisure, hence producing less. A society changes in many ways; it becomes more conservative, less hard-working, and less innovative. The society ages.

Is it possible to "age gracefully"? Perhaps. I've been told that visiting Japan is a story of two countries, Tokyo and everywhere else. Tokyo looks and feels like any other major global metropolis, young, vibrant, and dynamic. Everywhere else you travel in Japan you are surprised at how few young people there are in the streets, most taxi drivers are around 70. Hotels and restaurants are staffed by ladies in their 60's and 70's. Tokyo has sucked the young out of the countryside. Japan has decided to age gracefully, the young have migrated to Tokyo, and the old have accepted the fact that they will work till they no longer can.

Will the culture of Europe and the U.S. allow us to age gracefully? It's doubtful. Already the Greeks are rioting in the streets over threats to their promised benefits, and the Italians are demonstrating to defend their retirement age of 55. Will we American's peacefully accept the fact that we have to work longer to support the benefit programs promised to those no longer working? 

Is it possible to prevent or reverse economic aging? It's doubtful, declining birth rates and rising life expectancy are powerful forces. But, it may be possible to slow the aging process some. Immigration is an often cited solution, as is increased incentives for innovation. Unfortunately, here in the United States we are moving in the opposite direction on both of these fronts.

Investment Considerations

Aging is supposed to be deflationary, and Japan's experience supports that theory. However, deflation is possible only when a government can borrow to cover the costs of aging. When the worlds largest economic powers are aging, and their debt levels are already monstrously high, there are fewer and fewer investors willing or capable to buy their debt...inflation becomes inevitable. Inflation is simply a form of reneging on your promises. Promises to beneficiaries as well as bond holders.

As with everything timing is crucial. I would not be at all surprised to see a fairly heated battle between the forces of deflation and inflation over the next several years, with deflation winning some early skirmishes, but inflation ultimately winning the war. 

We continue to position our portfolios for all possible outcomes, we have equal amounts of U.S. and foreign equities, bonds & Treasury inflation protected securities, and REIT's; as well as commodities, gold, and Chinese Yuan.

As the graph below shows, it is usually pretty smart to bet on the countries growing versus those declining.

Be careful out there,

Chris Wiles

www.rockhavencapital.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

  

Santelli vs. Liesman Cage Match

This morning on CNBC there was a very entertaining and spirited exchange that I thought you might enjoy.

First some background. Rick Santelli began trading at the Chicago Mercantile Exchange in 1979, and is probably the most competent, markets oriented, reporter at CNBC. He is often regarded as the founder of America's most recent tea-party movement due to his famous rant on February 19, 2009 (Rick Santelli and the "Rant of the Year"). 

His opponent, Steve Liesman, is a liberal journalist who is the senior economics correspondent for CNBC.

The two of them have had numerous verbal tussles over the years, usually centered around very opposing ideals. Liesman believes wholeheartedly in the governments (specifically the Fed's) ability to manage the economy through fiscal manipulation. Santelli, on the other hand, believes that the markets are the best mechanism for allocating capital and setting prices, interest rates, etc.

CNBC loves putting these guys on the air together because the sparks almost always fly, and that builds ratings. A quick note on CNBC. This is a 24 hour entertainment news channel. Occasionally they have some actual breaking news and a good interview or two, but most of the time it is just painful. There is nothing wrong with CNBC you just have to understand that very, very, little of it has anything to do with actual investing, its entertainment.

Today Liesman reports what Washington is telling him, namely that the economy is recovering nicely. Santelli believes what the markets are telling him, namely that the economy may be showing near-term signs of strength but nothing has been done to fix the longer-term structural problems. These gentlemen are both right, and they are a good microcosm of the tug-of-war going on in the markets today.

On one side of the tug-of-war rope you have the economy showing signs of recovering, on the backs of massive fiscal stimulus and inventory restocking. On the surface this looks like a classic fiscal recovery. On the other side of the rope you have a market wrestling with the effects of a secular debt deflation, built on decades of currency devaluation and leverage. These structural secular problems are what Santelli continues to warn about.

Well, here's todays entertainment, enjoy:

Economic Analysis 

Be careful out there,

Chris Wiles

www.rockhavencapital.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

  

Sunspot Baby, She Sure Was a Real Good Time

She packed up her bags and she took off down the road

Left me here stranded with the bills she owed

She gave me a false address

Took off with my American Express

Sunspot Baby

She sure had me way outguessed

"Sunspot Baby" by Bob Seger Bob Seger - Sunspot Baby

OK, lets say that last year you made $107,500, but you spent $328,400, for a net deficit of $220,900. Not a bad life style, hey. You've tapped out all the equity in your home, and have ran your credit card balances to the point of no return, but you've had a good time spending that extra $220,000. Now what? 2010 rolls around and you go to your friendly neighborhood banker and explain that while it may look like you are a prolific spender, you're still gamely employed and will probably only need to borrow about $250,000 this year. Borrow, he says, you still haven't paid back any of last years borrowings! All right, enough, this is an absurd scenario...too bad its true.

 The Monthly Treasury Statement (MTS) just came out and announced that the February budget deficit was $220.9 billion, after receipts (mostly tax revenue) of just $107.5 billion and outlays of $328.4 billion for the month. This is a record! That's right in the month of February the Government was spending about three times what they were taking in. Fortunately for us we have a very friendly banker, the Federal Reserve. Could you imagine how crazy this would be if we were talking about real money (like gold) instead of those funny little pieces of paper that the Treasury prints all day long. What makes this even more absurd is that generally when you are spending 3x more than you earn you would expect to have to pay more to fund your lifestyle. Not so for the good old U.S. of A.

Period

Receipts

Outlays

Deficit/Surplus (-)

Jan-09	r226,090	r289,548	r63,457
Feb-09	r87,312	r281,171	r193,859
Mar-09	r128,926	r320,514	r191,589
Apr-09	r266,206	r287,113	r20,907
May-09	r117,217	r306,868	r189,651
Jun-09	r215,340	r309,671	r94,332
Jul-09	r151,481	r332,160	r180,680
Aug-09	r145,529	r249,084	r103,555
Sep-09	r218,880	r264,088	r45,207
Oct-09	r135,294	r311,657	r176,363
Nov-09	r133,564	r253,851	r120,287
Dec-09	218,919	r310,328	r91,410
Jan-10	r205,240	r247,874	42,634
Feb-10	107,521	328,429	220,909

 The interest paid on the debt was a mere $16.9 billion. The reason for this as TreasuryDirect points out, in February the interest on public marketable debt (actual cash outlays), which as of Monday stood at $8.061 trillion (trillion with a T), hit an all time low of 2.548%. How is it possible that unprecedented debt accumulation can result in ever declining interest rates? One answer: the Federal Reserve, which through complete domination of the entire capital market has been able to turn logic upside down. In a normal world, the more money you borrow, the greater the associated risk, and the greater the interest payments on this debt. Not in America though. So, can we assume that the Fed can forever keep rates on debt at record low levels? No. Which begs the question: what happens when interest rates do finally start going up?

 Now we know we are in a recession (great recession) and our income levels are down, but expenditures have exploded, and they've exploded due to spending, not the interest paid on that spending. The bulk of the spending was for entitlement programs at $160 billion. Again, our measly little $107.5 billion of income doesn't even cover entitlements. But here's where the debt comes in. The debt ceiling was just lifted to $14.3 trillion, but will probably be broken by mid-year. If we assume total debt of $14.3 trillion in less than a year, of which about $10 trillion is marketable debt (up from the current $8.06 trillion), then at an interest rate of 2.5%, interest on the debt would be $250 billion (about $21 billion per month). If the U.S. governments borrowing costs were to rise to say 4%, then interest on the debt would be $400 billion. As recently as September 2007 the Fed's borrowing costs were 5%, and they plunged to 2.5% in just over a year.

 For all of those out there worried that all this debt will lead to higher interest rates, you are probably right, but not any time soon. Don't forget that the Fed is very cognizant of what higher interest rates would do to the deficit, and they are in no hurry to see that deficit balloon any faster than it already is. So expect the Fed to keep rates low for an "extended period", and if they have to, they can always roll out the "quantitative easing" apparatus. Until the Fed sees some significant growth in tax receipts (Income), or some significant cuts in spending (not likely), don't expect them to do anything that would cause the rates the government has to borrow at to go up. Add to that todays dovish appointment of the very gellin' (Dr. Scholl's - Gellin' Wedding) Janet Yellen as the new vice chairman of the Federal Reserve, and you have an interest rate environment that is soooo gellin'. 

The Fed does not have complete control over rates though, they still have to sell those bonds to someone. That someone of course (say China) may start to demand a higher rate to compensate for the higher risk. But of course China enjoys the fact that they can keep the value of the Yuan artificially low to stimulate their exports, and they enjoy having us by the short hairs, so they are in no hurry to tip over the apple cart. Oh what tangled webs we weave. If everyone plays nice we have nothing to worry about! 

Investment Considerations:

We have been at maximum weight in TIPS (Treasury Inflation Protected securities) since September of 2009, but lately our indicators are pointing towards a more neutral stance. Meaning that Mr. Market is telling us that inflation is not a near-term risk.  Meanwhile our WIPS (International Govt. Inflation Protected securities) have been in neutral territory since mid January. While higher rates and inflation are a very real risk, it just doesn't appear to be an immediate threat. So join the Sunspot Baby and do a little gellin' this weekend. "She left me here stranded like a dog out in the yard. Charged up a fortune on my credit card. She used my address and my name, man that was sure unkind. Sunspot Baby, she sure was a real good time." 

Be careful out there,

Chris Wiles

www.rockhavencapital.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

  

Funeral For A Friend

And it seems to me you lived your life
Like a candle in the wind
Never knowing who to cling to
When the rain set in
And I would have liked to have known you
But I was just a kid
Your candle burned out long before
Your legend ever did 

"Candle In The Wind" by Elton John

Watch it on YouTube: Marilyn Monroe

"Candle in the Wind" is an appropriate song for todays missive on the loss of a dear old friend, but even more appropriate is the 11 minute epic "Funeral For A Friend" (Elton John - Funeral For A Friend (Love Lies Bleeding).

The global economy entered 2007 with two types of countries: those with sound financial systems and those without. The globalization of the financial system has tied the good to the bad, and no country was spared the pain of the financial systems collapse and ensuing recession. Fortunately for those strong countries, while their financial systems were strained, they were able to weather the economic storm as if it were a regular recession. Many of them are having strong economic recoveries, and are already withdrawing stimulus. Ironically, some of those strong countries are who we normally think of as emerging; China, India, and New Zealand, but also Australia, Canada, and Norway.

Unfortunately those citizens of the countries with weak financial systems entering the collapse, are faced with serious cultural adjustments. Their solution to the over-indebted collapse of individuals (housing), and financial institutions, was to print more money, borrow, and bail out the ever growing list of "to big to fail". Now they are faced with economies where not only consumers continue to de-lever, but their Public sectors must also find ways to de-lever. This de-leveraging leads to the reneging of social promises made, and the increase of tax rates. None of this leads to economic growth. So the fiscally weak countries; the United States, Great Britain, and most of Europe, are faced with years of social unrest and below normal economic growth...if everything goes well. This is vividly playing out in both Greece and Dubai. The real risk to these weak countries is that they have very little ammunition left to fight any unforeseen economic problems.

While economic growth will be sub-par, volatility will not be. There will be a great deal of uncertainty and psychological swings, that will lead to increased financial market volatility. Traditional asset allocation and diversification models will prove ineffectual, and investors will need a much more flexible (open-minded) tactical approach. 

Multiple congressional hearings, endless books, and countless hours of financial news reporting, have tried to lay the blame of the financial collapse at the feet of many. Banks, hedge funds, insurance companies, unions, politicians, and yes even the consumer. While all these parties were active, and sometimes more than willing participants, they were really not part of the cause. No, I believe that this sorry state of affairs began several decades ago, around the time that the cold war ended. You see, one of the consequences of the end of the cold war was a concerted effort, a movement towards globalization. By tying the financial fates of one country to that of another the impetus for war was greatly diminished. Local companies soon grew to become global companies, and nowhere was that more evident than with financial conglomerates. Globalization has had a very beneficial impact on millions, maybe even billions of poor, by helping to raise their standards of living, but it wasn't without a casualty. The greatest casualty of the "modern" global financial system was a gradual, but persistent deterioration of the concept of "fiduciary". As the industry's size, complexity and demand for growth accelerated over two decades, the concept of fiduciary was quietly put to rest. The core values of "trust" and "do no harm" were gradually and systematically replaced by maximizing short-term profits, size, market share and incentive bonuses. R.I.P Fiduciary.

The Honorable Paul Volcker, in his recent testimony to Congress, implied that it is not material whether proprietary trading and internal money management lost money or were instrumental in causing bank failures. The need for their separation is a matter of ethics. Banks and their shareholders should not benefit from profits made on low interest loans subsidized by the public taxpayer. And, banks should not be allowed to profit at the expense of their customers. He went on to warn Congress that if allowed, banks would revert to avarice and "if the new regulation gives free reign to speculation (with taxpayers' money), I may not live long enough to see the crisis that ensues, but my soul will come back to haunt you!" Congress, instead of asking for clarification of his ethical concerns, met his remarks with snickers. Enough said.

As investors, where does that leave us? Politicians have stepped in and stopped the natural capitalistic cleansing of the system, by rewarding those companies ready to fail with the "to big to fail" label. The re-regulation of the massively complex, interconnected financial system will slowly move ahead. Bankers, lobbyists, Congressmen, and special interest groups will do whatever they have to to ensure that they do not kill the goose that has given them all so many golden eggs. The globalization of the financial system can not and probably should not be reversed. Politically, the system can not be meaningfully changed. The prospect of legislating morality is absurd. The outcome will be a nip here and a tuck there, but unfortunately for Mr. Volcker and other consumers, strong regulation and the reemergence of the fiduciary is not likely. While the flame of the fiduciary may have burned out, luckily the legend burns on, in a few lone partitioners out there. Some have been able to survive in the bowels of the financial conglomerates, while others toil away at much smaller firms where the goal is still to "do no harm". However, your best fiduciary is still yourself. You, whether you like it or not, have to take a bigger role in protecting your assets. You, have to be ever vigilant, expecting the unexpected, you have to be your own fiduciary. You do not want to be on the other side of the trade with Gordon Gekko, who so appropriately said, "A fool and his money are lucky enough to get together in the first place." 

Be careful out there,

Chris Wiles

www.rockhavencapital.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

  

"Don't Come Around Here No More"

Hey! Don't come around here no more
Don't come around here no more
Whatever you're looking for
Hey! Don't come around here no more

I've given up, stop. I 've given up, stop.
I've given up, stop. On waiting any longer
I've given up, on this love getting stronger 

"Don't Come Around Here No More" by Tom Petty & The Heartbreakers

Watch it on YouTube:

Don't Come Around Here No More

A little Tom Petty in honor of this weekends new Alice in Wonderland movie.

Sometimes I feel like we all live in wonderland; recently I had the chance to see the new Governor of New Jersey, Chris Christie, on CNBC and I must say I am impressed. He is a no nonsense kind of guy who is simply taking an axe to the New Jersey budget. He is cutting $2 billion from a budget with $6 billion in balances, he is cutting 375 different state programs, and he is not raising taxes at all! But he is warning that next year will be much tougher as he begins to tackle the "Alice in Wonderland" pensions and benefits. Two examples he gave. 1) "One state retiree, 49 years old, paid, over the course of his entire career a total of $124,000 toward his retirement pension and health benefits. What will we pay him? $3.3 million in pension payments over his life and nearly $500,000 for health care benefits - a total of $3.8 million on a $120,000 investment. Is that fair?" 2) "A retired teacher paid $62,000 toward her pension and nothing, yes nothing, for full family medical, dental and vision coverage over her entire career. What will we pay her? $1.4 million in pension benefits and another $215,000 in health care benefit premiums over her lifetime. Is it fair for all of us and our children to have to pay for this excess?" I wish him well because every state in the union is faced with the same bottomless rabbit hole of entitlements.

No Chris Christie in the White House though. No, the White House instead proposes to slap a new, first time ever, 2.9% Medicare tax on interest, dividends, annuities, royalties, and rents! This investment tax on top of the new higher 20% capital gains tax that takes effect when the Bush tax cuts expire next year, for a total investment tax rate of 22.9%, up from the current 15%, a whopping 52% increase in taxes for investors!! In the upside down world that Alice visits I'm sure that some actually believe that this little 52% increase will have no effect on peoples willingness to invest capital. Remember that capital, both monetary and intellectual, will flow to where it is treated the best. 

Food for thought on an area where we might want to think about cutting back...military spending.

Now don't get me wrong, I'm all for a strong military but does anyone really believe we are getting our moneys worth?

As a percentage of GDP the U.S. spends twice as much as any other major country. And on a dollar basis ten times as much as China.

Just something to think about.

I hope a few of our elected officials see "Alice" this weekend and realize that we can't live in a fantasy world any longer. 

Alice: If I had a world of my own, everything would be nonsense. Nothing would be what it is because everything would be what it isn't. And contrary-wise; what it is it wouldn't be, and what it wouldn't be, it would. You see? 

Doorknob: Read the directions and directly you will be directed in the right direction. 

Be careful out there,

Chris Wiles

www.rockhavencapital.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.