Capital Ideas Newsletters



May/June 2012

This is the new word circulating on the internet used to describe our current political and governmental system. It is, perhaps, the system now in place in most developed westernized nations – a system of government where the least capable to lead are elected by the least capable of producing; and, where the members of society least likely to sustain themselves or succeed are rewarded with goods and services paid for by the confiscated wealth of a diminishing number of producers.

Whether you believe this is the case here in the U.S., it is clear that socialist parties are gaining power in developed nations. These nations’ economies were built on capitalist fundamentals and are now being threatened by their electorates.

“Banks a Lot”

That is what Wall Street said to Jamie Dimon. Just as legislators were quieting down with respect to banking regulations, J.P. Morgan stunned the financial world with a $2 billion trading loss. In the context of J.P. Morgan’s earnings or balance sheet, the loss was by no means earth-shattering. What it does point out, however, is that big banks are not only too big to fail, but have also become too big to manage. We continue to pound the table—please bring back the Glass-Steagall Act!

Thank China

China’s holdings of U.S. Treasuries rose by 1.3% to $1.17 trillion. Japan, our nation’s second-largest foreign creditor, watched its holdings slip to $1.08 trillion. Behind those big buyers of U.S. debt stood the Federal Reserve which remains the top holder of U.S. debt with $1.665 trillion on its balance sheet.

The U.S. stock markets are swooning from the uncertainty in global trends: China’s growth is slowing, Europe has its debt mess and slowdown, the national election looms large, and U.S. growth and unemployment are disappointing.

One positive from this retreat is that the price of oil has come down, which equates to a tax cut for most Americans. This, in turn could boost consumer confidence.

Commodity prices and gold have weakened considerably. Does this portend low inflation and continued low interest rates? We believe so. It just may be that in the next few months the ten-year U.S. Treasury Note falls below its all-time low of 1.672%.

A “Weak” Later

As of this writing, Facebook shares have traded down from their IPO price of $38.00 to $28.00 per share. The underwriting was successful in that Facebook raised capital at an extremely high valuation, but unfortunately, small and unsophisticated investors got burned if they did not sell quickly, or if they bought in the aftermarket. Now the company will have to prove itself. The jury is still out…

Polio (yes Polio!), is now endemic to just three countries: Afghanistan, Nigeria and Pakistan. Bloomberg News reports that in recent years, visitors have carried Polio back to 39 previously Polio-free states. Proper funding is needed to continue to keep the disease from returning, but with the global economic slowdown, monies have not been available.

As the news from Europe vacillates, U.S. stock markets, and markets worldwide, will experience continued volatility. Germany, France, Italy, Spain etc. must find a solution to the Euro debt crisis. Europe’s woes must not be underestimated. The European Union was the second most important destination for U.S. exports, comprising 19.2% of the total – just behind Canada at 19.9%. Make no doubt about it, a weakened Europe is a negative for U.S. growth.

However, volatility of markets should not obfuscate positive developments in the U.S. economy and in the standards of living worldwide. American companies are well-positioned to benefit from the national gas and oil boom. As energy becomes abundant and cheaper to American manufacturers versus their international counterparts, we as a nation should become more competitive globally. This element of the economy can be viewed positively from a long-term point of view.

We are very bullish on American businesses. Yes, there are problems – there are also solutions. Good leadership is the answer.

Until our system brings the best back to the top, stagnation is likely.

Each of us must do our part and participate to bring about the necessary change. Get involved in the political process – it is your duty. Following this Memorial Day weekend, let us pay homage to those who fought to keep our nation free and strong. It is truly in our own activism as citizens that we pay respect to those who have given their lives to protect it.

Wear Sunscreen!

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