Will Congress repeat Smoot-Hawley debacle?

By Brian Ochsner (baochsner@aol.com) At this time of year, Memorial Day and now D-Day, we reflect upon the sacrifices that soldiers have made for our country. It's also good to look back at our economic history, review our successes and make sure we don't repeat our mistakes. The Democrat-controlled Congress now appears bent on repeating the disastrous economic blunders of the late 1920's and early 1930's. Namely, believing that higher import tariffs and income tax rates will make our economy more robust and 'protect' American jobs and incomes from foreign competition. That's like strangling the goose who lays the golden eggs. I'll tell you which two senators are today's Smoot and Hawley, and why this kind of misguided thinking is dangerous for America's economy.

In 1930 – when the US started its descent into the Great Depression - there was a hue and cry for Congress to 'do something' to help struggling farmers and workers. Sound familiar? President Hoover urged that tariff rates be reduced to promote trade, but Senator Reed Smoot and Rep. Willis Hawley (ironically, both Republicans) introduced a bill – the Smoot-Hawley Act - that increased tariffs to record levels on over 20,000 imported goods.

The debate on tariffs started in 1929. After the stock market crash in October, enough support was garnered to pass the bill. President Hoover then reluctantly signed it on June 17, 1930. It resulted in American exports plunging by over 65%, and pushed the US economy over the proverbial cliff. You may be asking – why am I bringing this up now, and why is it relevant today?

There's been recent talk from Senators Chuck “Smoot” Schumer (D-NY) and Lindsay “Hawley” Graham (R-SC) that 'something needs to be done' to correct the large trade deficit the US has with China. Senator Graham has complained about China's 'currency manipulation' and how it's hurt South Carolina textile manufacturers.

They believe that raising tariffs on Chinese goods to 27% will 'get China's attention,' force them to revalue the Yuan to more American-friendly rates, and level the playing field for US manufacturers.

Unfortunately, this is misguided economic stupidity. Even if the US Dollar and Chinese Yuan were at a 1 to 1 ratio, the US couldn't compete with Chinese slave labor, where workers are paid a fraction of what Americans earn for the same work. Not to mention their manufacturing facilities and infrastructure are more modern than ours. We've encouraged this activity by buying billions of dollars of cheaper Chinese goods over the past few years.

China is also our second largest holder of US Treasury debt behind Japan. Our congressmen are in no position to bully or demand anything from the Chinese about the Yuan-US Dollar exchange rate (or anything else). The Chinese are very financially savvy, and they'll lower the value of the yuan to the US Dollar on their terms – not ours.

If Congress did pass this economic insanity, it would be like you going into the office of your mortgage banker (who holds your largest debt) and slapping him in the face. Chinese lending has helped prolong the positive economic growth in the US over the past few years. Asian money along with cheap US interest rates extended the American prosperity party through booming real estate values. Many owners of real estate used their property as their personal ATM, kept spending this newfound cash to keep the good times rolling.

Given our huge balance of trade deficit, we need as much exporting to other nations as possible. Enacting these import tariffs and starting a full-blown trade war is the last thing our economy needs. My hunch is that President Bush will veto these tariffs, if they make it to his desk. However, given his judgment on other issues, that's not exactly a 'slam-dunk,' as George Tenet would say.

If these tariffs are signed into law by the President (or Congress overrides Bush's veto), I'm not saying we're heading into another Great Depression. But 'Smoot-Hawley 2007' wouldn't be a shot in the arm for the American economy. If (or when) this bill comes up for a vote, tell your Senator and Congressmen to vote no.

Doing nothing is much better than doing something stupid like this.

Beware the ethanol hype

By Brian Ochsner (baochsner@aol.com) What's the solution to rising oil & gas prices? Time and the free market will tell, but Rebecca Hagelin of World Net Daily explains why America should steer away from ethanol. US News & World Report gave a similar caution signal in its Feb. 12 cover story. Beware the hype.

Jittery markets and helpful government

By Brian Ochsner (baochsner@aol.com) Exactly as Ronald Reagan said, the nine scariest words a small business owner (or investor) can hear is: “I’m from the government, and I’m here to help.” Government ‘helps’ just like a 5-year-old helps his mom make breakfast: the actions may be well-intentioned, but the results aren’t that positive.

The Sarbanes-Oxley regulations for publicly-traded companies are Exhibit A. Next I would mention Fannie Mae and Freddie Mac’s involvement in lessening risk with mortgage lending, along with former Fed chair Alan Greenspan’s lowering of interest rates to all-time lows.

In the aftermath of corporate scandals with companies such as Enron and MCI/WorldCom, Congress felt they had to ‘do something’ to protect investors from unethical companies. But just like the little kid helping mom with a meal, the results were worse than the intentions.

It’s increased compliance costs for publicly-traded companies such as Berkshire Hathaway – Warren Buffet’s firm. In a recent CNBC interview, he mentioned the costs of auditing Berkshire’s 2006 financial statements totaled about $24 million. After Sarbanes-Oxley was signed into law, IPOs (Initial Public Offerings) for companies in the US dried up. A lot of companies went private or did their IPO on a foreign stock exchange where regulations weren’t as onerous.

The government’s ‘help’ in creating the real estate bubble came from Greenspan lowering interest rates to rock-bottom levels and encouraging Americans to take out interest-only loans – also known as ‘option ARMs’ (Adjustable Rate Mortgages). This allowed many homebuyers to finance a home they really shouldn’t have bought in the first place.

When these ARMs re-set after usually two or three years, the payments increased, which resulted in the higher rate of foreclosures in Colorado and around the country. After these risky loans were made, lenders were able to sell a good portion of them to Fannie Mae and Freddie Mac.

They bought the mortgages that were originated with other lenders, such as Washington Mutual and Wells Fargo to lessen the risk to mortgage lenders – especially those in the sub-prime (translated: high-risk borrower) market – and keep the real estate mania/bubble going.

Now Fed Chair Ben Bernanke is calling for Congress to rein in Fannie and Freddie from buying these risky mortgages. This action is too little and way too late. Kind of like closing the barn door when the horse is a mile away.

Government’s ‘help’ increased the value of real estate prices, and kept the economy going for awhile after the dot.com fallout of 2000. Now that the real estate/mortgage market bubble has popped, Wall Street is getting a little nervous. The Dow has gone down triple digits twice in the past two weeks.

The result of this government-sponsored ‘help’ is probably going to be a downturn in the economy over the next few years, maybe even a decade or so. The solution to these challenging times won’t be more government involvement. You should never ask the people that got you into the problem to get you out of it.

Unfortunately, I see more and more Americans looking to government instead of themselves to solve their financial and economic problems. So what do I suggest folks do to prepare themselves?

First of all, learn how to invest – namely, how to read financial statements: the Income Statement, Balance Sheet, and Statement of Cash flows. Look at financial and economic trends throughout history, especially over the past century, not just the past few years.

You could put your money with a financial planner or stock broker and forget about it, but I don’t think that’s a smart way to invest. Frankly, I think most of them are good salespeople, but not necessarily good investors. Their job is to get you – and keep you – in the stock market, not necessarily to maximize the returns on your money.

Next, learn about Austrian economics (not the Keynesian garbage that’s taught in almost all universities), the role of gold and silver as money. You also should learn how to sell and market, and preferably be in business for yourself. Job security is a myth nowadays with global competition for labor, American economic risk and company management risk. Not to mention what happens to jobs when companies are merged or acquired – they usually get cut.

Even with all these financial storm clouds brewing, there are still plenty of opportunities to get ahead financially. Turn off the TV, and take some time to invest in your own financial and economic education. As Louis Pasteur said, “Fortune favors the prepared mind.” This financial preparation will be very important for self-reliant Americans in the years to come.

An economic observer turns the page

By Brian Ochsner (baochsner@aol.com) I look back on 2006 with some satisfaction, some regret, and the realization that we live in a constantly and rapidly changing world. There’s a Chinese proverb that sums up what I see for 2007 and beyond: “May you live in interesting times.” This can be either a blessing or a curse. Which one it is depends on the preparation and actions you take to stay ahead of these trends.

One reason why some Americans are frustrated and confused about things is because they don’t understand the trends happening around them. The traditional ‘Mom and Pop’ retail shops are generally struggling… unless they know how to market well, and preferably on the Internet. They also see their dollars not going as far as they used to because of high inflation.

For folks looking for job security, well, they may be looking for a very long time. Ever since companies started downsizing in the ‘80s and outsourcing to foreign countries in the ‘90s, this trend has accelerated and will only continue. Not to mention changes in industries, combined with management risk in some companies, such as GM and Ford.

Douglas MacArthur said it best: “The only security a man has in this world is his ability to produce.” In today’s economy, you should learn sales, marketing, the ability to read financial statements, and to know what a good business looks like. If you have any (and preferably all) of these skills, you’ll have no problem getting employed, and should be able to start your own business. Best places to start learning these skills is by reading books from Robert Kiyosaki and Dan Kennedy – two of the best business and marketing minds I know.

One prediction I can make with certainty: In 2007 and beyond, big, dumb, slow companies will not be around for very long. If firms don’t adapt to business and economic conditions (and quickly), they won’t be in business.

Retail business is a maturing and slightly declining industry. Rising energy prices and overhead, time-crunched consumers, and less-than-knowledgeable employees are three big strikes against it. Having said that, I still believe that retail stores will still be around for a while.

But their days of dominance are done. So what businesses will be taking their place? Preferably ones that are Internet-based, have products or services that are in demand, and where customers buy them on a repeat basis. I can’t make a blanket recommendation, since everyone has different skills, abilities and personalities. One-to-one marketing and mass customization are two emerging trends that smart companies are utilizing. I’ll explain more about these trends in future posts.

2006 was a year where one of my commodity predictions was exactly true. This time a year ago, I took a stab at predicting the year-end prices of gold and silver. I wasn’t so close on silver, it was about $1/ounce higher than my prediction of $11.70/ounce, but my gold call was golden.

My gaze into the crystal ball had gold at $637.50/ounce (for proof, here’s the actual blog post, scroll down 2/3rds of the page). Here’s the December 29th screen shot from Kitco.com for Friday’s year-end close of New York gold:

SPOT MARKET IS CLOSED opens in 37 hrs. 32 mins. Dec 29, 2006 13:30 NY Time Bid/Ask 636.00 - 637.50 Low/High 636.00 - 637.50 Change +1.80 +0.28% 30daychg +1.00 +0.16% 1yearchg +120.60 +23.40%

I don’t know if I can repeat that again for 2007… if so, I’ll have a website with paying subscribers. I’ll tempt fate and call my shots again. For 2007 year-end, I’ll say silver will be at $18.40/ounce, and gold at $818.00/ounce. The reason I like commodities (and especially gold and silver) is because they’re great hedges against rising inflation that we’ll continue to see in the years ahead.

But my satisfaction with being right is tempered with sadness. An uncle of mine passed away Thursday night after 88 years on this earth. He became ill Christmas Eve and went to the hospital, where my dad and I visited him on Christmas Day, and said our goodbyes the day after.

Services will be in western Kansas on New Year’s Day. I’ll have a low-key (and pretty sober) New Year’s Eve, and a melancholy way to start 2007. You never like losing a friend or relative, but it’s a good reminder that our days on earth are numbered, and we need to make the most of them.

And it’s not just about using your talents to their utmost (which you should make every effort to do), or being financially successful. When you see someone on their deathbed surrounded by family members, your priorities and what you’ll be remembered for become very clear.

While I’ll still work hard at being a better copywriter and marketer, I’ll make sure that in 2007 I put enough time and effort to stay connected with friends and family.

I still believe it’s important to be flexible and adapt to changing business and economic conditions, I also believe you need to stay grounded in common sense, wisdom and Judeo-Christian principles. That’s a winning combination to navigate the interesting times of 2007 and beyond.

Best wishes to everyone for a Happy, Healthy and Prosperous New Year.

When deficits finally matter

By Brian Ochsner (baochsner@aol.com) While the financial press has been trumpeting the Dow hitting the 12,000 level, I’ve been doing some contrarian financial research. I’ve looked at the prices of certain key commodities and indices – namely, gold, silver, and the US Dollar Index.

I’ve heard well-respected commentators such as Larry Kudlow and Mike Rosen make solid cases about why budget deficits aren’t that important and won’t negatively affect the US economy. This is usually to support the case for continued confidence and investment in the US stock market. They’re correct, based on two big assumptions: 1) The rest of the world still has confidence in the US Dollar as a store of wealth, and 2) Foreign central banks will continue to lend us insane amounts of money (over $2 billion/day) to keep the credit party going.

There’s a great phrase from the book Atlas Shrugged: “Check your premises.” Based on recent statements from foreign central bankers, respected financial analysts, and price movements in the metals markets, I think Larry and Mike may want to recheck their premises. I believe we’re close to the day when these deficits finally matter.

Investing and economics can be complex and confusing issues at times. I’ll give a simple explanation why foreigner’s confidence in, along with the value of the greenback is declining. The US is carrying a huge debt load, and is buying more goods from foreigners than foreigners are buying from the US.

Think of our country as a business: U.S.A., Inc. I’ll use round numbers to make this explanation easy to understand. Let’s say U.S.A., Inc. makes $1 million of gross revenue a year (also known as GDP), but carries about $700,000 of debt on its books (the level of stated national debt). It also has future obligations to pay in the next 15-30 years of about $5 million (Social Security, Medicare, military and government pensions).

And – there’s no guarantee that the gross revenue of this business will increase, or even stay the same. Today, our national GDP is about $12 trillion. The level of stated national debt is about $8.2 billion. According to a report from Professor Laurence Kotlikoff issued through the St. Louis branch of the Federal Reserve, the United States will go technically bankrupt very soon, if we’re not there already.

That’s because of “ballooning budget deficits, and a pensions and welfare time bomb,” according to Kotlikoff, with future obligations of over $65 trillion. This financial problem can’t be pinned on one party or administration. While Democrats are the usual suspects for growing bigger government, Republicans in the past six years deserve an equal share of the blame for this bloating bureaucracy.

This is why more Americans need to be financially and economically literate. That’s to navigate what could be turbulent financial waters ahead. If you haven’t done so already, check out the Mises Institute -- a great resource to learn about Austrian economics. It’ll give you a much better understanding of economics, government policy, and how they affect you and our country.

The Daily Reckoning is where I’ve also learned about the Austrian school of economic thought since 2000. It’s a well-written, entertaining and educational daily e-zine. And for the best weekly webcast on financial issues, check out the Financial Sense Newshour with Jim Puplava and John Loeffler.

What I’ve written may be shocking, and you may not agree with or like this analysis. Believe me, I don’t enjoy being the prophet of future financial pain. However, success in investing – and in life – requires you to look at the way things are, and not how you wish they were.

The reasons I’ve given (which I think are sound) are why I believe we’re at the point where deficits finally matter. Take some time to examine your financial and investing philosophy, and see why you believe what you believe. Checking your premises now could help you avoid financial disaster later.