Void for Vagueness
There is hope for us all! Last week the Supreme Court ruled that the government wrongly prosecuted Jeff Skilling (you remember, Enron's CEO) under something called the "honest services fraud" law. The honest services fraud law criminalizes employee conduct intended to achieve "private gain" rather than advance the employer's interest. The Supreme Court unanimously ruled that "Honest services" was too vague to apply to Mr. Skilling's actions. "Void for Vagueness" is my new favorite phrase (I think it will make a great bumper sticker), and I think it may prove to be our salvation. Void for vagueness is a legal concept in American Constitutional Law that states that a given statute is void and unenforceable if it is too vague for the average citizen to understand. A statute might be called void for vagueness when an average citizen cannot generally determine what persons are regulated, what conduct is prohibited, or what punishment may be imposed.
Let's start with the 2,000 plus pages of ObamaCare...can the average citizen determine who is regulated, what conduct is prohibited, or what punishment may be imposed? How about the 2,000 plus pages of the new Frank-Dodd (Fraud) Bill for Financial Regulation, any hope that the average citizen will understand this, how about the average businessperson? Lets not even start with the thousands of pages of our Tax Code.
Yes, there is hope for us all, if the Supreme Court unanimously agreed that it was too vague to see if Jeff Skilling was enriching himself at the expense of shareholders, how can we not have hope that just about everything coming out of Washington should be Void for Vagueness.
Not Created Equal
Not all GDP growth is created equal! The President and his Administration are quick to point out how GDP has grown over the last several quarters, due entirely to their very effective stimulus. But, Mr. Market, and most of the fine people of this country, realize that there is a big difference between government deficit induced growth and real private sector expansion. There is a difference between government deficit spending, and massive government intervention, versus private enterprises willingness to hire and grow their corporations...the difference is sustainability. Entrepreneurs, small businesses, and corporations are all hesitant to move forward when the government is constantly changing the rules and becoming more and more entrenched in every aspect of our lives. GDP may have grown for a few quarters, but we all know that it is unsustainable...it is not real.
The other government intervention that is stifling growth is the Fed's "Zero Interest Rate Policy" (ZIRP). ZIRP penalizes savers and bail's out failed financial institutions. I know the Fed believes it is "hunky dory" to sacrifice the income of millions in order to protect wealth of a few, just please don't act surprised when those millions don't feel enthused about running out to the local mall and spending. The Keynesians at the Fed believe that if you make it painful enough for savers that they will simply go out and spend, spend, spend. What the Keynesians haven't figured out yet is that people living off of their savings will actually spend less if their savings earn nothing. Again, ZIRP will not stimulate the economy.
Real Risk
Sitting poolside with the girls the other day I reminisced about my days as a life guard. The most boring job in the world; you sit in the hot sun, you're not allowed to talk, listen to music, or read, it is literally mind-numbing. The most exciting thing about life guarding was the practice sessions. One particular drill that we always found terrifying was when you swim out to rescue someone bigger and stronger than you and they don't come along peacefully. Instead they panic and try and climb on top of you. It's not that they are ungrateful, its just that the fear of drowning has overwhelmed them. What initially was a rescue attempt quickly turns into survival, ours! Fear rises. Can you get away from this crazy drowning person? Will you have enough strength left to try and rescue them again? Will you have to let them drown? Will you make it back to shore? To me this is real risk.
In 2008, the worlds sovereign lifeguards swam to the rescue of the worlds financial markets, who were drowning in loan/derivative losses. They saved them by transferring the massive weight of those sinking loans/derivatives onto their backs and heading for shore. But now, two years later they are still trying to get to shore. The sovereigns are now struggling to keep their heads above water. Greece and Spain are barely able to breath. Self-doubt is creeping in; should they have attempted such a weighty rescue, or should they have left them to drown? Survival is key...is there anyone out there who can save the lifeguards? Or, will we have a big reset of the entire financial system?
Yes, real risk is increasing along the entire spectrum of social strife. Historically global conflicts have been triggered by financial hardship. Globally risk is rising, from Israel's flotilla friction increasing tension with Turkey and Syria, to Iran's nuclear buildup, to saber rattling on the Korean Peninsula, to social conflicts in Europe, and even a few Russian spies. Here in the United States social stress manifested itself in public outrage towards BP, Goldman Sachs, bankers, and politicians. Yes, we are dealing with real risk here and it can't be ignored...survival will be key.
The Tax Trap
This week President Obama stated, "Next year when I start presenting some very difficult choices to the country, I hope some of these folks who are hollering about deficits step up. Because I'm calling their bluff."
In an excellent op-ed in today's WSJ ( The Obama Tax Trap ) we see how the next several months are going to play out. The President all of a sudden becomes a deficit hawk and sets the trap for unwary Republicans. Mr. Obama's plan has been to increase spending to new permanent heights, and then as the public and financial markets scream about unsustainable deficits he whole-heartedly agrees and announces that the only "responsible" policy is to raise taxes. Do not be surprised to see a new VAT (Value Added Tax) or other tax option proposed. We all need to hold the ground that the only "real" way to grow the economy is by cutting deficits through spending cuts, not tax increases.
Investment Implications
This week we saw the end of June, and with it the end of a rather dismal second quarter. The S&P 500 breached a key technical support level of 1040, and we are very close to seeing the 50 day moving average cross below the 200 day moving average (known as the dark cross). It appears that the cyclical bull that started last March is now dead. Remember that this was a cyclical bull within a secular bear. The biggest worry today is the fact that interest rates on bonds continue to signal a slowing economy. In the near term deflation is the larger risk.
All of our indicators continue to point to being defensive. We have over 30% in cash equivalents, and only 12% in US equities and 9% in International equities. Gold and fixed income continue to be bullish.
Patriotism by Penn & Teller
In honor of Independence Day I've included an excellent video from the comedians Penn & Teller, enjoy:
This is another great Penn & Teller skit on "Wealth Redistribution":
Be careful out there,
Chris Wiles
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.
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