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“Don’t focus on probability. Focus on consequences.”
By Richard L. Kesner, President
The CommonWealth Group
December 2009
“There are two kinds of experts. A soufflé chef really is an expert and can be trusted. An economist is a pseudo-expert. Never take advice from someone wearing a tie. All you get from a Council of Economic Advisors is an illusion of control. Stock market analysts have proved to be worse than nothing.”
Nassim Nicholas Taleb
Taleb wrote “The Black Swan,” a philosophy book (epistemology, philosophy of history & philosophy of science). Until I read the book, I had never heard of, nor seen, a Black Swan. During the past 10 years, we have all seen too many of them to count. Most of us have not been in a position to recognize them or to take advantage of them. Examples include 9/11, Harry Potter, First World War, Beatles, the PC, and Google.
In the current economic environment, we will probably experience many Black Swan events. It is our job to position you best to take advantage of these events (if possible) so that the opportunity increases the value of your investments or, at worst, limits the downside exposure of the investment portfolio. We are FOCUSING ON THE CONSEQUENCES.
Yesterday, I read that the economy was doing much better. I question the statement. I am skeptical of reports that state things are better when the reported unemployment percentage is at 10.8% and the unreported percentage is about 21% (www.shadowstats.com). A recent headline stated that retail sales were better than expected. If that is true, why are sales tax revenues collected by states throughout the country at all time lows?
I recently read a column by John Mauldin, who is in my opinion, one of the best financial writers in the country. John’s article refers to a Pew Research column on sales tax receipts. John stated: “No one can avoid sales tax. Whether you shop at WalMart or Saks, if you are spending money you are paying the state. So if retail sales are up, why are the state sales tax revenues at all time lows?” If you are interested in reading the Pew Research report, the link is www.pewresearch.org.
According to the Pew study, Texas, which has a balanced budget, has sales tax receipts that are down 12.8%. Arizona is down 14% and state income taxes are down 32%. On average, revenues are down about 12%. Oregon’s revenues are down 19%. It just gets worse as you read the study. Deficits are also increasing. States cannot run deficits. They cannot print money so they have to cut expenditures or raise income. Illinois has a projected deficit of 47% of its budget, second only to California at 49%.
Recently we learned that New York was about as broke as California. Obviously Illinois is not far behind. If things are getting better, why are the states in trouble? Didn’t the stimulus money go to the states to bail them out? I will bet that you will see a new stimulus to help the states out of their problems. But these are temporary fixes as revenues continue to decline everywhere. According to the Pew Research Report, nine states are in fiscal distress and only two have balanced budgets. Michigan is planning a 20% budget cut for next year and Indiana is planning a 10% spending cut. This cannot be good for employment or growth.
Some businesses are doing better due to less competition. With Circuit City out of business, Best Buy’s sales are up. I am sure that is probably true with Bed Bath and Beyond also. The closing of Linens & Things has increased their market share. This is not very good for employment, but it does help profitability.
With unemployment rising, albeit at a slower rate, it is difficult to see inflation on the short-term horizon. We look for deflation or stagflation to be of greater concern. Certain products will continue to inflate (commodities), but if demand dries up, the cost of goods and services should come down. Healthcare costs would probably not deflate but maybe they would at least stay level.
We would need to create about 15 million jobs over the next five years to get back to where we were when the recession started. That works out to about 125,000 new jobs each month to handle the new workers coming into the market plus eight million in jobs we lost. This amounts to 250,000 jobs each month for the next five years just to get even. It is a daunting number.
I think that is enough for today. I am writing this while riding on my way to Austin to visit my son and daughter-in-law for Thanksgiving. We decided to take a road trip to see different parts of the country…actually we really just wanted to take the dog with us.
I wish all of you a great holiday season.
Richard L. Kesner
The CommonWealth Group, Inc.
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