As I sat down to start writing this, an hour or so into the trading day, the NASDAQ was down about 2% despite a continuing stream of very encouraging earnings releases from the likes of Boeing and Amazon. A Debt Ceiling Countdown Clock at WSJ Online informed me that we have not quite six days and fifteen hours until something really awful happens, something right up there with Y2K, Carmaggedon, the invasion of Kuwait and the SARS pandemic of 2003. No wait, those weren’t so awful, at least not an in “oops, there goes the present value of the global economy’s future cash flows” sort of way. This “crisis” is probably destined to join those others in the Hall of Shame for Infamously Overhyped Events. It is possible, but not probable in my estimation, that like an avalanche triggered by a single ill-considered snowball, somebody somewhere will feel the need to dump their putatively risk-free assets “before everyone else does”, and the “price signals” thus generated convinces others that there really is a problem and its worse than we think, and then it feeds on itself for a while. Such is the nature of panic. So there is an element of danger in this debt limit impasse, but only if panic takes hold.
This situation is as distasteful as it is because it is so much about short term politics, positioning for next year’s election, at the seeming expense of longer term stakes that are so high. But there is a sense in which we should be grateful for this unseemly display of human nature. Factions within people groups will always disagree, always compete for power and access to resources. We work these differences out through politics. The process is distasteful in the extreme, but considering the alternative, the mobs, assassinations and other sanguinary routines with which most people in most times and places have resolved their differences, it is almost a blessing to have to watch middle-aged men and women go at each other with mere words. This dispute will come to some sort of conclusion in the next few trading days. The Democrats seem to believe that they can make the Republicans look heartless and irresponsible and then get the media to reinforce that message right through the election. As if anyone under the age of about 70 was watching the evening news. The Republicans just want to force the Democrats to have to keep talking about raising taxes, or propose another hike in the debt ceiling, preferably right before the election. Once both sides have decided they have hung something intolerable around the other side’s neck, some compromise will be reached. It will probably constitute and tiny and contingent baby step in the direction of fiscal probity, a long overdue journey that will only get underway in earnest in 2013, but it will be hailed as progress and the Market will move on.
This crisis reminds me of nothing more than a reality show about staging an intervention with some pampered young princess whose credit fueled lifestyle has reached a breaking point. She always seems oblivious to what I, from about age twelve, always thought that any reasonably well educated twelve year old knows, that more money going out than coming in will come to a bad end eventually. There is also that element facing up to how what were once considered luxuries have become necessities or even “rights”. I am optimistic that a plurality at least of voters understand that there will have to be an era of sacrifice, at least a little bit by nearly everyone and a lot by some (i.e., those currently living large on cash flows emanating from that plethora of government programs). They should be able to understand that entitlements conceived a couple of generations ago, when life expectancy was around 58 years and geriatric medicine was mainly palliative, can at some basic level be protected but have to be retooled to the 21st Century. The problem, as always, will be those special interests, whose “sacrifice” (i.e., giving back some of what they have contrived to take from the rest of us) will be acute and possibly life changing. So we will get drama. We will get fear mongering, which we can only hope does not trigger panic (Like the ill-considered “mark-to-market” rules that greased the skids on the way to the brink of catastrophe in 2008, rules that mandate rather than advise with respect to bond ratings are more than a little unsettling at this juncture.)
In the meantime, what’s not to like about this latest batch of earnings releases? Well, some of the action we saw early on, stocks getting crushed for very decent or even outstanding reports, got me thinking about What Time is It? My sense is that in terms of a Bull Market that started in March 2009 and will end at some point to be followed by a 20%+ decline, we are not yet late in the game, but we just might be getting to the late innings. That low water mark is going on 2 1/2 years already. The money at the margin seems to have gotten used to earnings “beats” as a matter of course, and inclined to dump if the “beat” falls short of another construct that seems to have crept back, the “whisper number”. If all this strikes you as faintly familiar, you are not alone. I could not help wondering, especially given the initial reception given some of my Old Tech stocks, if it wasn’t starting to feel like 1999 again. It’s not just the IPO Market back in force, cranking out multi-$B market caps for entities that will probably never turn a profit. No, what the response to the likes of INTC, CYMI and MKSI reminded me of is the way the investing world got starting in April 1998, when New Economy stocks floated as if gravity had been outlawed, and in so doing sucked all the oxygen out of the room for the Old (or, as I liked to put, Real) Economy stocks. This went on for almost two years before reality reasserted itself and valuations of these respective groups reversed course. For a few hours anyway, watching the Market at best yawn at the great results of worthy enterprises while going bananas over yet another dubious social media startup, it was tempting to worry that we were about to go through all that again.
This temptation would prove fleeting. Whatever seemingly orchestrated, trading desk induced “disappointment” at the results of the Old Tech stalwarts was quite short-lived and in some cases (MKSI in particular) no doubt painful for the perpetrators. Investors have not quite taken leave of their senses in the manner we endured through 1999. There is still a realization extant that if Facebook and Linkdin and the rest of their ilk, and even Apple and Google for that matter, are going to realize anything close to their purported potential, they will need Intel continuing to march on what it does so incomparably well. And for that to happen, the likes of ASML and CYMI, athwart that bottleneck in the path denoted by Moore’s Law, are going to have to continue to execute to plan as well. And as they move forward, the likes of MKSI follow right behind. Web 2.0 is most definitely happening, but none of us are truly capable of knowing who the biggest winners will be, and who is going to end up in that vast, teeming herd of also-rans. We can, however, recognize those companies who are key enablers of what the whole world seems to want more of, whose capabilities cannot be replicated and whose valuations are grossly out of synch with any but the most dismal of prospects. Once the data from these earnings releases had time to sink in, the Market at least hinted that it kind of gets this (at least until the Debt Ceiling Countdown got to about seven days), with even dinosaur MSFT shaking off its naysayers.
So what time is it? It’s nowhere near 1999, or even April 1998 for that matter, but it is closer to April 1998 (for Real Economy stocks) than it is to March 2009, i.e., a long ways already from early in the game. There are other factors that make this moment starkly different than what culminated in the Tech Bubble. For starters, the valuations achieved on the way to Y2K were a recognition of how massive and decentralized computing power was going to enable globalization over the next few decades. An Internet based economy has indeed developed, its just not the one the promoters were telling us about 14 or sp years ago. Massive wealth, and not just at the top, was about to be created. That prospect is not exactly gone today, but it is at the very least up against diminution at the margin. Then there is the matter of that national debt and the deficits that caused it. It seems like ancient history today, but in 1998 the Market was loving on federal budget surpluses, with the prospect of more to come (“a shortage of Treasuries, anyone?”). Today’s reality finds a federal deficit unlikely to shrink to even a low-single-digit percentage of GDP unless said GDP starts growing at 5%, and how likely is that?
Finally, in 1998 it had been a very long time since investors had endured a market downturn that wasn’t over and made up for in a matter of months. (Even the Crash of ’87 was over and forgotten, except perhaps for banks and real estate whizzes in the Northeast and the Oil Patch, by mid 1988.) Enough time has passed for the sting that was 2008-09 to fade, but the scars of what probably will be the Bear Market of a lifetime are still very much on our collective psyche. So we can expect the animal spirits to come out and play. And given how long it has now been since the Big Tide turned (that -18% correction last summer notwithstanding), the time has come, in my estimation, to be giving at least as much thought to taking profits and building up for the next rainy day as we give to taking advantage of the momentary buying opportunities that develop when it sure seems like somebody somewhere is trying to trigger a panic.
Thursday, July 28, 2011
Monday, July 18, 2011
Train Wreck Just Ahead?
This edition of Musings finds us freshly returned from what has probably become an annual pilgrimage to the mountains of Northern New Mexico and Southern Colorado. Being 9000+ feet above sea level, the water at one’s feet perhaps only hours removed from a snow bank, matching wits with salmonids that, while pea-brained, are quite exquisitely programmed for survival (at least if they are going to grow as large as the ones I tangled with) is a good thing. Sitting through an unrelenting succession of 1000 + days in what hopefully are the late innings of a bona fide contender for Drought of the Century, not so good. The 870 mile drive each way? A mixed bag, but definitely worth it. It makes for a couple of very long sits for what have become old bones, much of it through flat featureless country, but occasionally punctuated by very lovely scenery. This was also the year we learned that contrary to everything I had heard, speed limits will be enforced on the empty roads of West Texas. Specifically, 78 MPH will get you pulled over and warned on US 84 between I-20 and Snyder. (As the radar will see you up to a mile away on that flat, straight stretch, the officer will be rolling with lights flashing when you first see him.)
As much as I try to leave “the job” behind on trips like this (wireless Internet at the B&B not making that any easier), there was no getting away from the inner economist out on the sparsely peopled spaces traversed by US 84 between Lubbock, TX and Fort Sumner, NM. This is because on that stretch the highway follows the BNSF railroad. Inclined as I am to wonder about the actual state of the economy, the activity that is only symbolized by “indicators”, I could not help but notice the length and frequency of freight trains. Unless old-time games are being played with empty rail cars and containers (no doubt at least some of the eastbound containers were empty, but that is a trade balance issue), there is an awful lot of stuff moving from one side of the continent to the other this summer. Globalization and population density around port cities has made rail transport a decent business again after a generations-long decline (back to Henry Ford’s time, at least), unless of course the new owner of BNSF has lost his grip and succumbed to a childhood fantasy many of us had about playing with trains. In any case, highways were anything but devoid of trucks despite the massive numbers of containers that now go “most of the way” from port to destination by train. All this tells me that the global economy is not conking out.
Train traffic brings to mind that normally this far into the calendar quarter, we have seen a lot more earnings releases, including perennial early reporter CSX. Thus far we have seen Alcoa, Citigroup and Google, not much really in the way of a peek into how the economy is faring. This will change over the next few days, with IBM on Monday, CSX on Tuesday, and Intel on Wednesday, among many others that are going to make the next two weeks an unusually dense data dump indeed. I am especially looking forward to Intel, given the little throwdown that erupted a few weeks back when IDC cut its PC forecast. In a matter of just a few hours, and in a manner quite unlike anything I have seen them do in the years I have been watching, Intel came out with the statement that “Our Q2 results will speak for themselves.” This escalated a months-old tiff wherein Intel suggested that IDC does not quite have a handle on where PC demand is coming from in the still rapidly growing parts of the world. Considering how consistently and, quite often, grossly, the Street has underestimated the performance of Intel, one has to wonder who if anybody has a grip on just how well this company has responded that “crisis moment” a few years back (when AMD was supposedly on a rampage). We will see on Wednesday.
We should be surprised if this earnings release season does not depict an economy that is showing all the usual signs of recovery, however tepidly in the U.S., most of the EU and Japan, where effects of the earthquake dampen the already soggy prospects that go with such awful demographics. The global economy is recovering, and the earnings just ahead should spark a realization of this that manifests in another stair-step up in equity valuations. Unfortunately, there is this little distraction that is the budget impasse in Washington D.C., stinging the eyes of investors and otherwise making them uncomfortable, much like the smoke from that Las Conchas fire that threatened the Los Alamos National Labs. (Actually, while the smoke from that was pretty bad around Santa Fe, it was not evident up towards, Chama, NM, a stretch of highway as spectacular as I have seen in a very long time.) The politicians will probably (i.e., much more likely than not, if experience is any guide) manage some kind of compromise, probably one part chipping away at spending, ten parts kicking the can down the road. I cannot bring myself to bet otherwise, and uncertainty will abate, if only for a while. However, I cannot quite shake the uneasy feeling that this could end up being very ugly. It is not the substantive threat of technical default that should concern us. Owners of long term Treasuries should be delighted if perchance an interest payment were delayed by a matter of a few days or even weeks if the result was real progress towards assuring that principal will be returned on schedule and with dollars that have not been inflated into oblivion. What should concern us is the prospect of panic, that lethal admixture that bubbles up when craven demagoguery taps into seemingly programmed credulity. Like a bad accident no one saw coming.
How much of the bad stuff we see in history happened on purpose? Some of it, to be sure, like the fall of Constantinople, but probably not most of it. Did nineteen year old Gavrilo Princip have any idea he would spark WW1 when he shot that Archduke? Did Abraham Lincoln have any idea when the set out to preserve the Union that he would unleash a war that would rage for years and leave scars that would be generations in healing? And contrary to what some in the tinfoil hat set would have us believe, the Great Depression was an avoidable bad accident, too. 2011 finds us in a financial situation that while not yet precarious will become so if spending is not moderated and revenues are not increased (preferably by economic growth). An actual poll question I heard as I was taking a break from writing this (paraphrased): “Is the President incompetent or deliberately trying to make us more like Europe?” could easily and honestly be answered “Both”. The prospect of deliberate sabotage (making us more like Europe would be the same as sabotage, IMO) while not implausible given the atmosphere of the faculty lounges where his adult character hardened into shape, can be set aside and still leave us very nervous. This is because history has shown us that even truly competent leaders can cause the bad accidents that are history at its worst, and (at best) marginally competent leaders whose notions of their own competence have been inflated well beyond reality are especially dangerous in this respect.
My bottom line as Earnings Season Q2 2011 gets underway in earnest is that stocks are probably about to pop due to both confirmation of just how profitable many companies have become and at least an easing of the uncertainty attendant when the Inmates Running the Asylum have the power to cause bad accidents. Train wrecks, literal and figurative, only very rarely happen because someone wanted them to. Fortunately, they don’t happen all that often, and certainly not as often as the near misses that we never even think about unless we happen to have been there and paying attention. This should be a good week to be on board.
As much as I try to leave “the job” behind on trips like this (wireless Internet at the B&B not making that any easier), there was no getting away from the inner economist out on the sparsely peopled spaces traversed by US 84 between Lubbock, TX and Fort Sumner, NM. This is because on that stretch the highway follows the BNSF railroad. Inclined as I am to wonder about the actual state of the economy, the activity that is only symbolized by “indicators”, I could not help but notice the length and frequency of freight trains. Unless old-time games are being played with empty rail cars and containers (no doubt at least some of the eastbound containers were empty, but that is a trade balance issue), there is an awful lot of stuff moving from one side of the continent to the other this summer. Globalization and population density around port cities has made rail transport a decent business again after a generations-long decline (back to Henry Ford’s time, at least), unless of course the new owner of BNSF has lost his grip and succumbed to a childhood fantasy many of us had about playing with trains. In any case, highways were anything but devoid of trucks despite the massive numbers of containers that now go “most of the way” from port to destination by train. All this tells me that the global economy is not conking out.
Train traffic brings to mind that normally this far into the calendar quarter, we have seen a lot more earnings releases, including perennial early reporter CSX. Thus far we have seen Alcoa, Citigroup and Google, not much really in the way of a peek into how the economy is faring. This will change over the next few days, with IBM on Monday, CSX on Tuesday, and Intel on Wednesday, among many others that are going to make the next two weeks an unusually dense data dump indeed. I am especially looking forward to Intel, given the little throwdown that erupted a few weeks back when IDC cut its PC forecast. In a matter of just a few hours, and in a manner quite unlike anything I have seen them do in the years I have been watching, Intel came out with the statement that “Our Q2 results will speak for themselves.” This escalated a months-old tiff wherein Intel suggested that IDC does not quite have a handle on where PC demand is coming from in the still rapidly growing parts of the world. Considering how consistently and, quite often, grossly, the Street has underestimated the performance of Intel, one has to wonder who if anybody has a grip on just how well this company has responded that “crisis moment” a few years back (when AMD was supposedly on a rampage). We will see on Wednesday.
We should be surprised if this earnings release season does not depict an economy that is showing all the usual signs of recovery, however tepidly in the U.S., most of the EU and Japan, where effects of the earthquake dampen the already soggy prospects that go with such awful demographics. The global economy is recovering, and the earnings just ahead should spark a realization of this that manifests in another stair-step up in equity valuations. Unfortunately, there is this little distraction that is the budget impasse in Washington D.C., stinging the eyes of investors and otherwise making them uncomfortable, much like the smoke from that Las Conchas fire that threatened the Los Alamos National Labs. (Actually, while the smoke from that was pretty bad around Santa Fe, it was not evident up towards, Chama, NM, a stretch of highway as spectacular as I have seen in a very long time.) The politicians will probably (i.e., much more likely than not, if experience is any guide) manage some kind of compromise, probably one part chipping away at spending, ten parts kicking the can down the road. I cannot bring myself to bet otherwise, and uncertainty will abate, if only for a while. However, I cannot quite shake the uneasy feeling that this could end up being very ugly. It is not the substantive threat of technical default that should concern us. Owners of long term Treasuries should be delighted if perchance an interest payment were delayed by a matter of a few days or even weeks if the result was real progress towards assuring that principal will be returned on schedule and with dollars that have not been inflated into oblivion. What should concern us is the prospect of panic, that lethal admixture that bubbles up when craven demagoguery taps into seemingly programmed credulity. Like a bad accident no one saw coming.
How much of the bad stuff we see in history happened on purpose? Some of it, to be sure, like the fall of Constantinople, but probably not most of it. Did nineteen year old Gavrilo Princip have any idea he would spark WW1 when he shot that Archduke? Did Abraham Lincoln have any idea when the set out to preserve the Union that he would unleash a war that would rage for years and leave scars that would be generations in healing? And contrary to what some in the tinfoil hat set would have us believe, the Great Depression was an avoidable bad accident, too. 2011 finds us in a financial situation that while not yet precarious will become so if spending is not moderated and revenues are not increased (preferably by economic growth). An actual poll question I heard as I was taking a break from writing this (paraphrased): “Is the President incompetent or deliberately trying to make us more like Europe?” could easily and honestly be answered “Both”. The prospect of deliberate sabotage (making us more like Europe would be the same as sabotage, IMO) while not implausible given the atmosphere of the faculty lounges where his adult character hardened into shape, can be set aside and still leave us very nervous. This is because history has shown us that even truly competent leaders can cause the bad accidents that are history at its worst, and (at best) marginally competent leaders whose notions of their own competence have been inflated well beyond reality are especially dangerous in this respect.
My bottom line as Earnings Season Q2 2011 gets underway in earnest is that stocks are probably about to pop due to both confirmation of just how profitable many companies have become and at least an easing of the uncertainty attendant when the Inmates Running the Asylum have the power to cause bad accidents. Train wrecks, literal and figurative, only very rarely happen because someone wanted them to. Fortunately, they don’t happen all that often, and certainly not as often as the near misses that we never even think about unless we happen to have been there and paying attention. This should be a good week to be on board.
Saturday, July 2, 2011
Signs of Recovery
That five day burst of enthusiasm that was the week just passed was nothing if not a collective “Aha!”, a realization that for the global economy, May was a mere speed bump rather than the start of an increasingly rough and rocky road. The road got smoother in June, and looks to get even more so in July and beyond. This week saw a tipping point, a burgeoning accumulation of outlooks by corporations that confirmed that the “double-dip” scenario is not meant to be. It was really not much of a surprise. The combination of what looked for all the world to be accelerating energy costs, along with business decision-makers rightly waiting out the full implications of Japanese supply chain disruption, did indeed produce something of a “soft patch”. As June progressed, however, it became apparent that it was just a patch, and that it is behind us. The Greek tantrum was really just a sideshow, a handy diversion jacked up by the owners of the channels who compete for our attention. Global economic recovery continues unabated, and this was the week that the Market figured it out.
Musings managed to tune the first few days of it out by taking a trip down to the coast. While the winds have moderated some, months of unrelenting southerly winds seem to have pushed the water up to a level well above ideal for flats fishing. This did not stop us from connecting with a few unsuspecting redfish and otherwise enjoying the natural splendor. I have tried to make this trip more than once or twice a year for the past several, and in doing so have gotten quite familiar with a thin slice of the thoroughly rural country between Austin and Aransas Pass. Observant old cuss that I seem to be, whatever changes occur between trips seem to stand right out. On this trip, I noticed two starkly different sorts of change that could be described as economic stimulus at work. Passing through the orbit of San Marcos/Seguin, I was struck by the plethora of road signage that has sprouted up since the last trip. A whole lot more marginally paved side roads have big signs or even lights. Coupled with various construction projects along the way, this is yet another partial answer to “So where did the $700B+ in stimulus spending go?” It is pretty obvious that it filters down through counties and other local, politically connected authorities. It rubs off on those politically connected enough to get the contracts to put up the signs and otherwise perform all that activity that passes for work along the by-ways. (Leasing those big plastic barriers, for who knows how many $$/day each, must be a great way to dip one’s snout into the public works trough, a political “in” well worth playing dirty to obtain.) Of course, some of the money goes to the politically connected sign manufacturers. Last but not least, the politically connected (in a low-rent sort of way) folks who belong to the political influential union whose members are allowed to put up the signs (when they are not leaning on shovels or taking a break) get a slice of the pie. So there is some perceptible economic activity, but once the signs are up it is not long before it has pretty much fizzled out.
A much different sort of stimulus is evident as one traverses Karnes County, towns like Karnes City, Kenedy and Panna Maria. This is where the highway passes over the Eagle Ford shale play. Three years ago, these little towns struck one as somewhere between sleepy and slowly dying. They are now positively alive with economic activity. Aside from having to pass a six vehicle drilling rig convoy going just under the speed limit, it was a delight to see. There are all kinds of new businesses, or spiffed-up, expanded businesses that a couple of years ago looked to be on death’s door. Pipelines are being laid, which should supplant the endless procession of tanker trucks now shuttling back and forth to the Corpus Christi refinery complex. There seems to be a complementary uptick in activity down on the coast, though more on the shipping and refining end of things. And lunchtime in Karnes County saw nearly full parking lots at every eatery we passed. Looking at the map and seeing just how tiny a speck this intersection of shale play and highway is in the grand scheme of recent discoveries around the country, it is hard not to feel a bit more optimistic about economic recovery.
Well, maybe a little hard. The technological breakthrough that is shale development (both gas and oil) is but one of many good things that the Texas economy has going for it. Of all the states that could use a boost, Texas is pretty close to the bottom of the list. Contrast this with New York, a state that needs all the help it can get. Sitting atop a reputedly even larger gas play, the used-to-be Empire State has opted to remain in the thrall of whatever influences seek to keep that gas off the market. (Anyone worrying about chemicals a couple of miles below the surface somehow getting into the water table, or an increased likelihood of earthquakes, isn’t thinking too clearly.) Texas and Pennsylvania get it, New York doesn’t have a clue. What is striking about this contrast at this particular point in time is what we can hope will be a salient if not preeminent issue in the upcoming election. To the extent that the governor of Texas gets into the race, we will be hearing about and hopefully talking about it. It is in my estimation just about the only prospect around which hope of undoing the current fiscal mess might be grounded.
We should be greatly encouraged if this election prompts a sustained revisitation of the Tenth Amendment to the Constitution. If we are to escape from the mire of debt and open ended liabilities that might otherwise swallow us up and diminish us, it will be from a concerted effort to reassert that “the powers not delegated to the U.S. by the Constitution, nor prohibited by it to the States, are reserved for (and must be returned to) the States respectively, or to the people.” This is not to be seen as an ideological imperative, though it has elements of that, nor as deference to the wisdom of the Founders (that some of them were slave holders is a non-issue, a condition to which they were born. That they struggled with this issue and failed to resolve it is a shortcoming, not an indictment. That they laid the groundwork for something that has succeeded a well as it has for as long as it has is a miracle.) It is a management issue. What we seem to have learned in the past few decades of our 235 year grand experiment is that while States are for the most part manageable entities, capable of turning themselves around when bad policy and other circumstances turn against them, the federal government as it has recently evolved is not. It seems to able to conduct that inherently wasteful activity that is war, in a boundlessly deep-pocketed sort of way, of course, and to undertake special project like Apollo or the Interstate Highway system, but everything it does seems to cost way too much and deliver far less than promised or hoped for. We cannot afford this anymore. It’s time to restructure, and that means devolving power to entities that at least have a shot at being manageable.
Almost every state was dealt a tough blow by the economic tsunami that was 2008. A good number of them seem to have responded quite effectively. States with strong executives and serious minded legislators seem to be able to find ways to cut costs and balance their budgets. If New Jersey of all places (where I lived for nine years), can right its boat, what state can’t? Probably three or four of them. Upwards of 45 states are what could be deemed “manageable entities”, i.e., capable of planning for growth and executing on it, and responding effectively when adversity upends those plans. These states are either undergoing a turnaround or, like, North Dakota, didn’t really wobble in the first place. The exceptions would be California, Illinois, New York and (possibly) Nevada, which almost doesn’t count as a state. All of these are largely rural in terms of space but dominated by megapoli, which in turn have deeply rooted traditions of corruption. These states might not be able to fix themselves. The rest of us should not be stuck with having to enable their obdurate dysfunctionality.
The beauty of federalism as demarked by the Tenth Amendment is that it pushes power toward the manageable entities and away from those entities that are too large, complex and as is inevitable with the passage of time corrupt to be manageable. It is entirely consistent with the venerable Catholic principal of subsidiarity, which recognizes that functions which subordinate or local organizations perform more effectively belong more properly to them than to a dominant central organization. This has been entirely at odds with the Progressive notions of government that have erupted like so many cold sores from time to time over the past 100+ years. An electoral campaign that is in large part a conversation about the inherent profligacy of unfettered federalism and the need to shift power back to more manageable entities should be taken as a sign of encouragement. Similarly, the recognition that the status quo on entitlement spending is broken and unsustainable. The “they’re feeding granny to wolves” demagoguery isn’t getting the traction it might have in the past. This is only because it is demonstrably not true. It is because a preponderance of the grannies understand, if only intuitively, the mess that will befall their beloved grandchildren if the open-ended obligations that were conceived a couple of generations ago are not reined in.
As I ponder the future, it is relatively easy to see a few more quarters at least of “good enough” economic growth (good enough to sustain earnings growth for well-situated global companies, not necessarily good enough to bring down unemployment to normal levels). Given the revenue prospects and open-ended obligations that the federal government finds itself up against, it is way to easy to default to pessimism further down the road. However, if we see movement toward becoming more a union of states, most of which will conduct themselves like FL, IN, NJ, VA and WI have in recent months (their growth no doubt spurred by in-migration from the recalcitrant few states that can’t get it together, i.e., that right to “vote with one’s feet” that overblown federalism forecloses) and less like a vast, mostly rural space dominated by the singularly corrupt megapolis which straddles the Potomac, there just might be a basis for longer term optimism.
Musings managed to tune the first few days of it out by taking a trip down to the coast. While the winds have moderated some, months of unrelenting southerly winds seem to have pushed the water up to a level well above ideal for flats fishing. This did not stop us from connecting with a few unsuspecting redfish and otherwise enjoying the natural splendor. I have tried to make this trip more than once or twice a year for the past several, and in doing so have gotten quite familiar with a thin slice of the thoroughly rural country between Austin and Aransas Pass. Observant old cuss that I seem to be, whatever changes occur between trips seem to stand right out. On this trip, I noticed two starkly different sorts of change that could be described as economic stimulus at work. Passing through the orbit of San Marcos/Seguin, I was struck by the plethora of road signage that has sprouted up since the last trip. A whole lot more marginally paved side roads have big signs or even lights. Coupled with various construction projects along the way, this is yet another partial answer to “So where did the $700B+ in stimulus spending go?” It is pretty obvious that it filters down through counties and other local, politically connected authorities. It rubs off on those politically connected enough to get the contracts to put up the signs and otherwise perform all that activity that passes for work along the by-ways. (Leasing those big plastic barriers, for who knows how many $$/day each, must be a great way to dip one’s snout into the public works trough, a political “in” well worth playing dirty to obtain.) Of course, some of the money goes to the politically connected sign manufacturers. Last but not least, the politically connected (in a low-rent sort of way) folks who belong to the political influential union whose members are allowed to put up the signs (when they are not leaning on shovels or taking a break) get a slice of the pie. So there is some perceptible economic activity, but once the signs are up it is not long before it has pretty much fizzled out.
A much different sort of stimulus is evident as one traverses Karnes County, towns like Karnes City, Kenedy and Panna Maria. This is where the highway passes over the Eagle Ford shale play. Three years ago, these little towns struck one as somewhere between sleepy and slowly dying. They are now positively alive with economic activity. Aside from having to pass a six vehicle drilling rig convoy going just under the speed limit, it was a delight to see. There are all kinds of new businesses, or spiffed-up, expanded businesses that a couple of years ago looked to be on death’s door. Pipelines are being laid, which should supplant the endless procession of tanker trucks now shuttling back and forth to the Corpus Christi refinery complex. There seems to be a complementary uptick in activity down on the coast, though more on the shipping and refining end of things. And lunchtime in Karnes County saw nearly full parking lots at every eatery we passed. Looking at the map and seeing just how tiny a speck this intersection of shale play and highway is in the grand scheme of recent discoveries around the country, it is hard not to feel a bit more optimistic about economic recovery.
Well, maybe a little hard. The technological breakthrough that is shale development (both gas and oil) is but one of many good things that the Texas economy has going for it. Of all the states that could use a boost, Texas is pretty close to the bottom of the list. Contrast this with New York, a state that needs all the help it can get. Sitting atop a reputedly even larger gas play, the used-to-be Empire State has opted to remain in the thrall of whatever influences seek to keep that gas off the market. (Anyone worrying about chemicals a couple of miles below the surface somehow getting into the water table, or an increased likelihood of earthquakes, isn’t thinking too clearly.) Texas and Pennsylvania get it, New York doesn’t have a clue. What is striking about this contrast at this particular point in time is what we can hope will be a salient if not preeminent issue in the upcoming election. To the extent that the governor of Texas gets into the race, we will be hearing about and hopefully talking about it. It is in my estimation just about the only prospect around which hope of undoing the current fiscal mess might be grounded.
We should be greatly encouraged if this election prompts a sustained revisitation of the Tenth Amendment to the Constitution. If we are to escape from the mire of debt and open ended liabilities that might otherwise swallow us up and diminish us, it will be from a concerted effort to reassert that “the powers not delegated to the U.S. by the Constitution, nor prohibited by it to the States, are reserved for (and must be returned to) the States respectively, or to the people.” This is not to be seen as an ideological imperative, though it has elements of that, nor as deference to the wisdom of the Founders (that some of them were slave holders is a non-issue, a condition to which they were born. That they struggled with this issue and failed to resolve it is a shortcoming, not an indictment. That they laid the groundwork for something that has succeeded a well as it has for as long as it has is a miracle.) It is a management issue. What we seem to have learned in the past few decades of our 235 year grand experiment is that while States are for the most part manageable entities, capable of turning themselves around when bad policy and other circumstances turn against them, the federal government as it has recently evolved is not. It seems to able to conduct that inherently wasteful activity that is war, in a boundlessly deep-pocketed sort of way, of course, and to undertake special project like Apollo or the Interstate Highway system, but everything it does seems to cost way too much and deliver far less than promised or hoped for. We cannot afford this anymore. It’s time to restructure, and that means devolving power to entities that at least have a shot at being manageable.
Almost every state was dealt a tough blow by the economic tsunami that was 2008. A good number of them seem to have responded quite effectively. States with strong executives and serious minded legislators seem to be able to find ways to cut costs and balance their budgets. If New Jersey of all places (where I lived for nine years), can right its boat, what state can’t? Probably three or four of them. Upwards of 45 states are what could be deemed “manageable entities”, i.e., capable of planning for growth and executing on it, and responding effectively when adversity upends those plans. These states are either undergoing a turnaround or, like, North Dakota, didn’t really wobble in the first place. The exceptions would be California, Illinois, New York and (possibly) Nevada, which almost doesn’t count as a state. All of these are largely rural in terms of space but dominated by megapoli, which in turn have deeply rooted traditions of corruption. These states might not be able to fix themselves. The rest of us should not be stuck with having to enable their obdurate dysfunctionality.
The beauty of federalism as demarked by the Tenth Amendment is that it pushes power toward the manageable entities and away from those entities that are too large, complex and as is inevitable with the passage of time corrupt to be manageable. It is entirely consistent with the venerable Catholic principal of subsidiarity, which recognizes that functions which subordinate or local organizations perform more effectively belong more properly to them than to a dominant central organization. This has been entirely at odds with the Progressive notions of government that have erupted like so many cold sores from time to time over the past 100+ years. An electoral campaign that is in large part a conversation about the inherent profligacy of unfettered federalism and the need to shift power back to more manageable entities should be taken as a sign of encouragement. Similarly, the recognition that the status quo on entitlement spending is broken and unsustainable. The “they’re feeding granny to wolves” demagoguery isn’t getting the traction it might have in the past. This is only because it is demonstrably not true. It is because a preponderance of the grannies understand, if only intuitively, the mess that will befall their beloved grandchildren if the open-ended obligations that were conceived a couple of generations ago are not reined in.
As I ponder the future, it is relatively easy to see a few more quarters at least of “good enough” economic growth (good enough to sustain earnings growth for well-situated global companies, not necessarily good enough to bring down unemployment to normal levels). Given the revenue prospects and open-ended obligations that the federal government finds itself up against, it is way to easy to default to pessimism further down the road. However, if we see movement toward becoming more a union of states, most of which will conduct themselves like FL, IN, NJ, VA and WI have in recent months (their growth no doubt spurred by in-migration from the recalcitrant few states that can’t get it together, i.e., that right to “vote with one’s feet” that overblown federalism forecloses) and less like a vast, mostly rural space dominated by the singularly corrupt megapolis which straddles the Potomac, there just might be a basis for longer term optimism.
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