6 Degrees of Separation

Six degrees of separation refers to the idea that, if you are one step away from each person you know...and two steps away from each person who is known by your acquaintances, then everyone in the world is on average just six "steps" away from you!


I had an opportunity to see if I could make this theory work in practice--and help out a friend of mine, Jim Perry. Dr. Perry is dean of the University of Wisconsin-Fox. He has a goal of raising $2 million for a new Communication Arts Center on campus. They have reached 3/4 of the goal--and when Jim called me, I suggested that he think outside of the Fox Cities for potential donors.


I had a few celebrities in mind. Jim said they had already contacted actor Willem Dafoe. I suggested PGA Tour golfer, JP Hayes. I gave him a possible avenue of connection.

Then I suggested Greta Van Susteren. She hosts a nightly program called On the Record with Greta on Fox News.


I am only two degrees of separation from Ms. Van Susteren. So I told Jim I'd give it a try. And it worked. In very rapid order, via a friend of mine who I contacted, he talked with Greta over the Christmas holidays.

As Jim said, you never find out unless you try, or as I fondly remember from a Disney World ride...it's a small, small world after all!

Closing Corporate Tax Loopholes

President Obama says he will close loopholes that let companies ship jobs and stash profits overseas, meaning that you pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, N.Y.

Major corporations are arming for a brawl over overseas tax breaks that could be the year’s biggest clash between business and the White House.

Bruce Josten, chief lobbyist for the U.S. Chamber of Commerce, says, This really is the mother of all schisms between the business community and the administration. It also could create massive fractioning among the business community. You have one set of interests for a company that manufactures in the U.S. but sells around the world, another set for one that manufactures abroad.

The Administration anticipates $220 billion over the next nine years by changing the taxation of foreign-source income, according to a Wall Street Journal article by Martin Feldstein.

Marty is a highly respected economist from Harvard University, and the president and CEO of the National Bureau of Economic Research (NBER). That's the group that officially determines when the US is in a recession.


While some extra revenue could no doubt come from ending the tax avoidance gimmicks that use dummy corporations in the Caribbean, most of the projected revenue comes from disallowing corporations to pay lower tax rates on their earnings in countries like Germany, Britain and Ireland.

The purpose of the tax change is not just to raise revenue but also to shift overseas production by American firms back to the U.S. by reducing the tax advantage of earning profits abroad.

The administration is likely to be disappointed about its ability to achieve both goals.

• Bringing production back to be taxed at the higher U.S. tax rate would raise the cost of capital and make the products less competitive in global markets.

• American corporations would therefore have an incentive to sell their overseas subsidiaries to foreign firms.

• That would leave future profits overseas, denying the Treasury Department any claim on the resulting tax revenue. And new foreign owners would be more likely to use overseas suppliers than to rely on inputs from the U.S.

• The net result would be less revenue to the Treasury and fewer jobs in America.

Here is a good illustration from the Tax Foundation of how closing so-called "tax loop-holes" greatly hurts American enterprise.

My Favorite Financial News Show

Hands down, I like Larry Kudlow's CNBC program which airs every weekday in the early evening. I have followed Larry for over a dozen years. He is a sharp economist.

This is not a commercial for his show...but if you are looking for insightful & balanced coverage of the economy and stock market, I can think of none better. One word of caution. Larry is very optimistic. Guard against getting overly excited about economic progress or stock market growth possibilities. Weigh what he has to say against the contrary views of some of his guests! Visit his web site to find out more about Kudlow & Company.

He has a wide range of guests on his program. To balance Larry's optimistic point of view, you can listen to people like Gary Schilling.


You can hear counter viewpoints from Robert Reich, Secretary of Labor under President Clinton, and Steve Moore, economist & member of the Wall Street Journal editorial board.



Larry will have guests like Doug Kass, president of Seabreeze Partners Management, and Dennis Gartman, publisher of the Gartman Letter, two individuals who often hold forth a bearish outlook on the economy in times of trouble.



From time to time, Larry will interview significant business leaders, like former chairman & CEO of GE, Jack Welch, named by Fortune magazine as Manager of the Century.


I often like to reflect on the down-to-earth comments from Ben Stein and the thoughtful ideas from Steve Forbes, editor-in-chief of Forbes magazine.



Finally, Larry will frequently have my favorite economist, Brian Wesbury, on his program. These are but a few of the outstanding guests on Kudlow & Company...people who provide a wide range of views about the US economy.

The Unconvinced Trio

On May 5 (see It's a V...Oops) I wrote about some very encouraging signs of a recovering US economy. Not everyone agrees, however: in particular, some noted economists--who often hold a rather pessimistic view of the US economy these days.

Paul Krugman, from Princeton University, won the 2008 Nobel Prize for economics. He has the ear of President Obama. He thinks a V-shaped recession is extremely unlikely. The market seems to be looking as if this is going to be an average recession, but it’s not.


Nouriel Roubini, known as the Doctor of Doom, from New York University, is calling for a more cautious outlook on growth. Roubini says analyst comments expecting the U.S. economy to rebound in the third and fourth quarter are too optimistic.


Nassim Nicholas Taleb, the author of Black Swan, says the current global crisis is vastly worse than the 1930s.


Krugman goes on to say, Some of the measures that have been taken to deal with the crisis seem to be predicated on the belief that this is going to be a short, short recession. Everything says that’s wrong, that this is going to be a sustained period of weakness.

This noteworthy trio's opinions stand in stark contrast to Treasury Secretary Timothy Geithner who says, The financial system is starting to heal. These are all welcome signs, but the process of financial recovery and repair is going to take time.


While we are experiencing pain now, I observe that the problems of the Great Depression were several magnitudes greater. The facts are in sharp contrast to Nassim Taleb's opinion.


The Philadelphia Federal Reserve Survey of Professional Forecasters projects the average unemployment rate for 2009 to be 8.4% and the average forecast for 2010 is 8.8%.

It is probable that the jobless rate in this recession won't even reach the minimum monthly rate of the 1930s, and won't come anywhere close to the 17.3% average jobless rate during the Great Depression.

Just this week Krugman appears to have softened his outlook, saying at a conference in South Korea, I think it's quite possible that industrial production in the United States and perhaps in the world as a whole will bottom out sometime in the next few months, that GDP growth in the United States will be positive in the second half of the year and maybe a little bit later than that in Europe.

Personal Values

My niece, Angela, is graduating in Denver this weekend with a degree in social psychology. This is the study of how people and groups interact.

Angie has done very well in school--and she succeeded by working her way through college. Congratulations!!

Her goal is to move forward to earn advanced degrees in this field of study.

In honor of her achievement, I have prepared this article about personal values.

Values are those things that really matter to each of us ... the ideas and beliefs we hold as special. Many of us learned our values at home, at church or synagogue or at school.

Values are difficult to see in a person. People often have difficultly articulating their full set of values. When they do, values can seem a complex array of ideas--and usually come out disorganized in a person's thought process.


Often companies undertake an examination of their core values...and put them in words for employees, shareholders and customers to see. Here is an example of Perpetual's values as expressed collectively in this values box. Perpetual is an Australian-based investment services group.


Values are very personal--very serious--and often groups of people form cultural norms based on core values. Those norms can at times be rigid and harsh.


Much of my research into personal values also reveals a rather disorganized discipline. Often I see a long list of adjectives--and people can pick from them to create values sets that are most meaningful to them. I have not found these exercises to be particularly useful.

Attention to our values helps us in many ways:

• We become more self-aware,
• We make better ethical decisions,
  
• They help us prioritize our tasks,
  
• We can develop credibility, and
• We can be at greater peace with the world around us.
  

About 10 years ago I did come across a useful values survey instrument. This was provided to me by Cheryl Hall of Winning Words, a business consulting firm in California.

This personal report took those adjectives, analyzed them and then organized information into a measure of relative prominence of six basic interests or attitudes which become a way of valuing life. They are:

• Theoretical
• Utilitarian
• Aesthetic
• Social
• Individualistic
• Traditional

Knowledge of this helps to tell us why we do certain things.

On the other hand, behavioral assessments (see my Behavioral Style article on DISC from February, 2009) helps us understand how we behave and perform in our environment.

Of the six attributes, it is often the top two (or three) which will significantly move you into action. You will feel positive when talking, listening or doing activities that satisfy these top attributes.

Here is a summary of these attributes, in the order that apply to me.

Utilitarian. This is an interest in money and what is useful. This means that an individual wants to have the security that money brings not only for themselves, but for their present and future family.

This value includes the practical affairs of the business world--the production, marketing and consumption of goods, the use of credit and the accumulation of tangible wealth.

This type of individual is thoroughly practical and conforms to the stereotype of the average American business person.

Is it any wonder that I choose to produce most of my blog articles on macroeconomic topics?

Theoretical. The primary drive with this value is the discovery of truth. In pursuit of this value, an individual takes on a cognitive attitude.

Such a person is non-judgmental regarding the beauty or utility of objects and seeks only to observe and to reason.

Since the interests of the theoretical person are empirical, critical and rational, the person appears to be an intellectual.

The chief aim in life is to order and systematize knowledge--knowledge for the sake of knowledge.

My friends, Phil & Ed, have both observed and expressed this value trait about me. They are amazed at my broad diversity of interests, sometimes learning just for learning sake.

Individualistic. The primary interest of this value is power, not necessarily politics. Research studies indicate that leaders in most fields have a high power value.

Since competition and struggle play a large part in all areas of life, many philosophers have seen power as the most universal and most fundamental of motives.

There are, however, certain personalities in whom the desire for direct expression of this motive is uppermost--and who wish, above all, for personal power, influence and renown.

Social. Those who score very high in this value have an inherent love of people. The social person prizes other people and is, therefore, kind, sympathetic and unselfish.

They are likely to find the Theoretical, Utilitarian and Aesthetic attitudes cold and inhuman.

Compared to the Individualistic value, the Social person regards helping others as the only suitable form of human relationships. Research into this value indicates that in its purest form, the Social interest is selfless.

Traditional. The highest interest for this value may be called unity, order or tradition.

Individuals with high scores in this value seek a system of living. This system can be found in such things as religion, conservation or any authority that has defined rules, regulations and principles for living.

Aesthetic. A higher Aesthetic score indicates a relative interest in form and harmony.

Each experience is judged from the standpoint of grace, symmetry or fitness. Life may be regarded as a procession of events, and each is enjoyed for its own sake.

A high score does not necessarily mean that the individual has talents in creative artistry. It indicates a primary interest in the artistic episodes of life.

There are different strokes for different folks. When you are surrounded by people who share similar attitudes, you will readily fit into the group and be energized.

However, when surrounded by people whose attitudes are significantly different from yours, you may be perceived as being out of the mainstream. These differences can induce stress or conflict.

When confronted with this type of situation, you can:

• Change the situation,
• Change your perception of the situation,
• Leave the situation, or
• Cope with the situation.

Dancing Stars

I have saved this article for several months--now it's time to release it in honor of my daughter, Anna, who is graduating this week from the University of Wisconsin-Oshkosh. Previously, she graduated from Lawrence University with a liberal arts degree.

This time she is specializing as a Medical Technologist. I explain that as someone who analyzes blood samples.

I looked it up in Wikipedia. A Medical Technologist (MT) is a health care professional who performs chemical, hematological, immunologic, microscopic and bacteriological diagnostic analyses on body fluids such as blood, urine, sputum, stool, cerebrospinal fluid (CSF), peritoneal fluid, pericardial fluid and synovial fluid, as well as other specimens.

Recently I sat in on a quiz bowl--and I couldn't even comprehend the questions--let alone their answers! I guess I'll stick to macro-economics, a subject that is much easier for me.

So in honor of Anna, I'd like to share one of my very favorite movie scenes.

Arguably one of the best dance sequences in filmdom appeared in the Broadway Melody of 1940. This is the only on-screen pairing of Fred Astaire and Eleanor Powell, who were considered the finest movie musical dancers of their time.

Near the end of the movie, they danced to Cole Porter's Begin the Beguine. The set for this number cost $120,000 to construct. It utilized a sixty foot multi-paneled mirror mounted on a revolving track to change backgrounds. The floor is made of glass, too.

Sit back and enjoy. It includes a lengthy passage in which they tap dance with no musical accompaniment. (Click in lower, left corner to start.)



In Fred Astaire's biography, he said there was only one dancer in his career that intimidated him. It was none other than Eleanor Powell.

What Went Right?

Bad news sells. I have nothing to sell--just some good news about things that apparently went right as we seem to be moving through and out of the current US recession.

The National Bureau of Economic research says this recession began in December, 2007. That is certainly debatable, but they have the official US word on this matter.


Certainly there was a recession within the home construction industry, and businesses peripherally related. However, many other sectors of the US economy were coming along fine until late last summer. By September the bottom was about to fall out!

Fed Chairman Bernanke senses a crisis and acts. Last September our financial world started to crumble. Mortgage giants Fannie Mae & Freddie Mac were rescued by the federal government. The following week insurance conglomerate AIG received a huge bail out. However, it was decided to let Lehman Brothers fail.

That week Ben Bernanke sensed an enormous financial problem and realized he didn't have all the necessary tools to help the economy.

He saw that the TED spread was increasing dramatically. This is a common measure of fear and risk in the capital markets (see my January 8 article. Where's TED Now?).


When the TED spread increases, that is a sign that lenders believe the risk of default on interbank loans is increasing. A rising TED spread often presages a downturn in the U.S. stock market, as it indicates that liquidity is being withdrawn.

On September 17, 2008, an all time record was set as the TED spread exceeded 300 bps. On October 10, the TED spread reached another new high of 465 basis points.

This situation was so serious that the US, indeed the world, was on the verge of economic meltdown--an event which would have made the Great Depression look like a picnic.

So he contacted Treasury Secretary Hank Paulson. Together they worked on this issue. This was the genesis for the $700 Troubled Asset Relief Program (TARP) that was debated in Congress, and ultimately signed into law by President Bush in early October.

The crucial point here is that Bernanke knew we were witnessing a slowdown in the velocity of money. People were becoming fearful and US citizens stopped spending. When that happened, the Fed was compelled to pump in an enormous amount of money into the US economy to offset this slowdown in spending.

Over the coming months, the Fed pumped trillions into the US economy. This has had a very positive impact for recessionary recovery.



If there is any one hero in this crisis, I would nominate Fed Chairman Ben Bernanke.



We catch a break on inflation--particularly gas prices. I remember how devastating inflation was in the era of stagflation in the late 1970s.

It wasn't that long ago that gas at the pump was over $4 per gallon. Many were saying that crude oil would get to $200 per barrel. That never happened. Instead it receded significantly.

If we use T Boone Pickens numbers, Americans are saving about $1 billion every day on gasoline (compared to just last summer). This is an enormous savings.

This is far more powerful than any tax break that will dribble into workers wallets in the next several months from the economic stimulus package that was passed in February.

Compared to the real (that is, inflation adjusted) retail price today, gas was more expensive in the decades of the 1920s, 1930s, 1940s, 1950s, 1960s, 1970s (except for one year), and the first half of the 1980s.


We have nothing to fear but fear itself. Following the collapse of Lehman Brothers, Americans panicked. That's when we stopped spending as much. This is the slowdown in the velocity of money that Bernanke was so painfully aware of.

When people stop spending, manufacturers cut back on production. They lay off people. More and more companies and people are effected--as Americans are caught in this viscous recessionary cycle. It's that simple--it that's easy--it's that devastating--to begin the recessionary death spiral.


President Bush did not help matters. During his presidential address on prime-time TV, he stressed the importance of approving the $700 billion bailout package. Without immediate action by Congress, American could slip into a financial panic and a distressing scenario would unfold. Millions of Americans could lose their jobs, he declared. We must not let this happen.

Initially, President Obama didn't help either. In an attempt to gain rapid passage of his $787 billion economic rescue package, he warned that if we don't act immediately, our nation will sink into a crisis that, at some point, we may be unable to reverse.

During his first press conference he referred to a potentially negative spiral that becomes much more difficult for us to get out of.

But Americans are starting to gain a bit of confidence. This is another thing that is going right. After two horrible quarters of consumer spending, we saw a nice 2.2% bounce-back in the 1st quarter.

This can be the seeds needed to unwind the recessionary spiral.


Widespread bank failures are averted. One of the initial goals of Bernanke and Paulson was to minimize banks failures.

Our government expanded the FDIC insurance on deposits to $250,000--to reassure Americans and to suppress any run on the banks.

The Troubled Asset Relief Program (TARP) and other measures were put in place to mitigate bank failures.

As a result, failures have been few compared to past financial crises.


Banks are making money on yield spreads.The spark that ignited the stock market rally in early March was comments from Vikram Pandit, CEO of Citi, telling employees they will turn a handsome profit in the first quarter, their best money gain since 2007. This was followed up by similar comments from Ken Lewis of BofA and Jamie Dimon of JPMorgan.

Banks make money on spread. They borrow at low interest rates--and then lend at 1, 2, 3 or more percent higher rates. This is a significant source of operating profit, and since last year, they have gone about their normal business of leveraging for profit.

Here is a chart showing how much banks pay depositors, in general, for short-term certificates of deposit (CDs)--and how much they charge home owners these days--who are happy to either obtain new credit or refinance their homes at relatively low interest rates.


People are snapping up houses. We got into this mess due a bubble in housing--and we will also need to see a reduction of home inventory in order to move forward in a healthy manner.

Here we see a nice, steady decline in the inventory of unsold new homes.



Now is the time to buy a home. Mortgage interest rates are attractive. The Housing Affordability Index--and indication of whether buyers can, in general, afford to purchase homes--is providing a clear indication that many Americans are positioned to purchase a home.


So in summary, many things have gone right in the past few months:

• Fed Chairman Ben Bernanke acted decisively to stave off a depression and address the velocity of money problem in the economy.

• We were fortunate to experience low inflation...low gas prices at the pump.

• Americans are finally beginning to come out of their shell--fear isn't as prevalent--and people are again beginning to spend.

• Widespread bank failures have not occurred thanks to actions by the Feds and the Treasury.

• Banks, which have been devastated by losses on sub-prime mortgages, are starting to make some money again. Their healing is underway.
  

• We are beginning to reduce the excess inventory of houses on the market.
  

It's a V...Oops

We are seeing some very encouraging signs of a recovering US economy. Astute readers are aware of the V-shaped recession curve. That is an optimistic view of economic recovery. It now seems that even the optimists were too pessimistic!

The U.S. recession will probably end before the summer is out, the Economic Cycle Research Institute (ECRI) says. This research group says enough of its key gauges have turned upward to indicate with certainty that a recovery is coming.

The "giant error of pessimism" is now rampant. This is why many will be blind to the light at the end of the tunnel that marks the exit from this recession.

For example, a key measure of manufacturing activity rose for the fourth straight month in April, suggesting the sector may be stabilizing. Assuming continued increase in May and June, there is a good chance that second quarter real GDP will be positive, or at least very close to zero.


In fact, the following chart shows how well correlated the ISM's manufacturing index is to the Gross Domestic Product (GDP), which represents an overarching view of the health of the US economy.


We also experienced a significant bounce in the ISM service sector index in April. The new orders component of this index increased 8.2 points. This is the largest one-month increase in the history of the ISM service index (back to 1997).


Next we see that real disposable income continues to improve. This is the sixth consecutive month of positive growth in real personal income compared to the same month in the previous year, following negative growth in August and September 2008.


You may recall my April 21 article, Let's Get to Work. Weekly unemployment claims seems to be signaling the end of the current recession.

New claims for unemployment insurance are probably the very best single indicator for the end of recessions. The monthly average for claims normally peaks one or two months before the economy bottoms.

If subsequent data confirm that the 4-week average of initial claims did indeed reach its peak on April 2, and if Robert Gordon's pattern holds up, the recovery may start in June.


Now for the really good news. GDP acts as a scoreboard for the economy by measuring all goods and services produced. Its biggest component is consumer spending, which accounts for about 70% of GDP. First-quarter spending increased 2.2%, after dropping 4.3% in the fourth quarter.


The end of the recession does not mean we won’t lose more jobs. Employment is always a lagging indicator.

We will still face challenges with some banks. GM has yet to resolve its problems.

The stock market does not increase in a straight line following recovery from a recession. We may well see a correction during the summer months.

Nor is this the last recession we will ever experience. Consider my recent article about the average length of recessions, and you will see that about 30% of the time the US experiences a recession. It's a common occurrence. So that alone implies we will have to endure 3 years of recession in the next decade--and with the massive government spending now afoot, the US may be poised for even greater hardship. (But that will be the subject of future articles--much unrelated to this current recession.)

Of course, these negatives are always the fodder of naysayers. In my next article we will examine some of the reasons things went right.

Cost of Getting Around

Americans are becoming more resourceful in their travel habits these days. Something changed in the middle of 2008. Perhaps it was the shock of paying over $4 per gallon at the pump.

I know my driving habits have changed. Now I drive down our area 6-lane highway at 60 mph instead of 70. I checked the savings out with my Corvette. At 70 mph I average 32 mpg--and at 60 mph that increases to 38 mpg, a full six miles per gallon savings!

That hooked me--plus I find life is more relaxing in the slow lane.


Motorists across the nation are driving less these days. Couple that with the major decline in a barrel of oil and it's quite a savings.


Just consider:

• The typical car is driven 10,000 annually.
• Say it gets 20 mpg on average.
• Once gas was $4 per gallon--now let's say it's $2 per gallon, or a $2 savings over last summer.
• That's a $1,000 annual savings. Ie, 10,000/20 times $2.

A typical American owns 2 cars--for a total annual savings then of $2,000.

If that household makes $50,000 per year, it's the equivalent of a 4% boost in spendable household income.

It's one of the reasons why we are starting to see some recovery in the US economy--people have a bit of disposable income, and they are starting to spend it again.