Author: Steve Boren

Crooked campaign hits mall-loving teens

Forget shady strangers and bags of candy… the biggest threat to our daughters and granddaughters comes from health officials armed with mall gift certificates.

In one of the most irresponsible government programs I’ve ever heard of, clinics in Birmingham, England, are bribing teenage girls to get vaccinated.

Believe it or not, they’re offering girls up to $70 in "Love2Shop" mall vouchers in exchange for getting one of the most dangerous vaccines ever approved: Gardasil.

They call this an incentive; I call it physical assault on a minor. They want a pat on the back; I want them pat down and tossed in jail.

And if, as a parent, you don’t like it… tough. In Jolly Old England, your daughter doesn’t need your permission to get vaccinated… so you’ll only find out when she comes home showing off her new earrings… or when you get a call from the emergency room after she suffers one of this dangerous drug’s many side effects.

I’ve been crusading against Gardasil from Day One. The media calls it a "cervical cancer vaccine," but don’t be fooled by this fancy nickname. This vaccine doesn’t protect against cervical cancer — it protects against certain forms of HPV, an STD that can cause cervical cancer.

It’s far from 100 percent effective, and it’s even farther from 100 percent safe. But do you expect these teenage girls to know that? Do you think they’re going to go home and do the research before accepting their shopping bribe?

Sadly, most of them have no clue that Gardasil has been linked to dozens of deaths and thousands of reactions ranging from anaphylactic shock and grand mal seizures to coma and paralysis. Some girls have come down with the incurable nerve disorder Guillian-Barre Syndrome after getting vaccinated, as I’ve warned before.

And according to a stomach-turning report I found in the Daily Mail, officials in Britain are already talking about expanding the Birmingham mall scheme nationwide.

If you think this won’t happen here, you’re only partly right. Health officials might not be bribing girls at shopping malls, but the approach they’re taking could be far more devastating.

Big Pharma is hard at work pressuring local officials across the country into making HPV vaccines a requirement for school.

The worst part is that all of this hoopla is over something that’s completely preventable. Vaccine or no vaccine, the only surefire 100 percent effective means of preventing HPV infection is abstinence. You can’t spread a sexually transmitted virus without sex. It’s as simple as that.

William Campbell Douglass II, M.D.

Sugar peddler talks heart health

Would you take investment advice from Bernie Madoff?

No? Then don’t let Coke lecture you on heart health.

The world’s largest peddler of sugary drinks has purchased a partnership with the National Heart, Lung and Blood Institute, giving Diet Coke a prime role in a bit of nonsense called the "Heart Truth Campaign," allegedly to raise awareness about heart disease among women.

The NHLBI is part of the National Institutes of Health, which would explain their complete lack of judgment.

And it doesn’t stop with Coke. When it comes to bad marriages, the NHLBI is a polygamist — they’ve also climbed into bed with snack queen Sara Lee and the pretzel king Snyder’s of Hanover for this program.

Any awareness of heart health should begin here: Soda and carb- packed snacks will leave you fat, sick, weak and prone to heart disease — and switching to diet soda won’t save you.

Since the word "truth" is right there in the name of this cockamamie campaign, they should put that right on the product labels.

Of course, they’ll do no such thing. You won’t sell much soda with honesty.

Instead, they’re decorating Diet Coke cans with little hearts… and because there’s nothing like a big star to obscure the real issues, they’ve named supermodel Heidi Klum the official "Diet Coke heart health ambassador."

Talk about doublespeak.

Coke defends its sponsorship, claiming its money is paying for free heart screenings for women… which is kind of like Jack the Ripper offering free abdominal examinations.

But what would you expect from these people? Coke has been trying desperately to buy credibility. Last year, the company paid its way into the American Academy of Family Physicians, causing members of the group to resign in protest. (Read "The great Coca-Cola rebellion.")

This newest effort is just one more step over the line… and another reason why you can’t trust any piece of medical advice from the mainstream — especially if it comes from our own government.

By the way, I’m not the only one critical of the NHLBI’s partnerships. The deals have led to a wave of bad press. Since it’s a government body, you’d think they’d have to be accountable for this one, right?

WRONG!

When contacted by CBS News, the NHLBI refused to talk about it. So much for open government and change we can believe in.

Not drinking the Kool-Aid over soda sponsorships,

William Campbell Douglass II, M.D.

Newest tobacco fear reeks of lies

Apparently the secondhand-smoke demons aren’t scaring enough people… because in their latest desperate move, the Health Nazis have conjured up a new tobacco monster. They’re calling it "thirdhand smoke."

That’s right, folks. You can’t make this stuff up.

A new study published in the Proceedings of the National Academy of Sciences claims that smokers create toxic particles that linger long after their cigarette has been snuffed. The researchers are suggesting that smokers carry a little invisible cloud of these particles around with them wherever they go, kind of like that dust cloud that always follows Charlie Brown’s friend Pig-Pen.

In other words, smokers are constantly contaminating everyone, everywhere, all the time with their filthy habit — whether they’re actually smoking around anyone or not.

I’m sure you can see where this is going. More rules, more laws, and less personal freedom — all in the name of health. And sure enough, the researchers claim that the only solution is 100 percent smoke-free places. And to assure a victory, they’re pulling out their ace in the hole: the children.

The scientists claim that since these particles linger on floors, walls and furniture, children who crawl around touching everything are in grave danger. Never mind that they can’t present a single child — not one! — who’s ever been harmed by this supposed health risk.

It’s pure bunk designed to scare more people away from the healthy use of tobacco.

Don’t believe a word of it. The truth is, smoking can save your life — and I’ve got all the science to prove it. Click here to find out more.

William Campbell Douglass II, M.D.

03.15.10 11:00 AM

Long time readers of Thoughts from the Frontline will be familiar with the name The Liscio Report. It is one of my “secret” sources of high quality analysis on a wide range of topics including taxes, employment and the underpinnings of the economic headlines that we read which can be so distorted. I say secret because they get nowhere near the attention their work deserves. Philippa Dunne & Doug Henwood, authors of The Liscio Report, do actual on the phone conversations with each of the various states on their tax collections, employment and so on. I find their primary research to be invaluable. Their real time proprietary research based on state withholding and sales tax receipts gives their clients a unique insight into the state of the US economy.

I have talked them into letting me send out their most recent letter, which I found very informative. While their work is not inexpensive ($7,500 annually), for hedge funds, banks, proprietary trading desks and those who need to know what is actually happening as opposed to whatever spin is being put out in the press, you should check them out at www.theliscioreport.com.

And before we jump into their report, I feel the need to comment on the revelations this last week about Lehman and what looks like can only be called fraud. How much more of this is going on? Regulators now have a road map to know what to look for. Auditors are now on notice that this lack of transparency and cooking the books at quarter's end must not be condoned.

And while we re on the topic of transparency, for God's sake, can't we get credit default swaps on an exchange before they blow us all up again? Please? Someone? Anyone? It's been two years. It's what brought Bear and Lehman down. Bluntly, the reason the banks oppose this is that the commissions for an OTC credit default swap are astronomical when compared to what will become a $10 commission on an exchange.

OK, I'll now stop my rant, and allow you to enjoy The Liscio Report. Have a great week.

John Mauldin, Editor
Outside the Box

Revenues stabilizing, though it helps to be rich

The Liscio Report

By Philippa Dunne & Doug Henwood

In February, 56% of the states in our survey met or exceeded their forecasted sales tax collections, up from 50% in January, and 13% reported positive collections over the year, down from 30% in January. Our intensity index, over-the-year rate of change weighted by state population, was –2.33%, about even with January's –2.28%, and the aggregated divergence from forecast held in the positive range at 0.26%, down a bit from January's 0.5%.

Both of the two last measures are showing real improvement: the over-the-year change, although still negative, is well off its record-setting lows (see below) and the divergence from forecast, with a few small exceptions, hasn't been positive since the fall of 2006.

For the various geographic regions, the good news is generally of a muted variety, and uneven no matter how you break them up. The best results came from states with large investment banking sectors–a few were both positive over the year and above forecast, one quite substantially so. The housing-bubble states without such sectors are slowly clawing back in the long, slow haul they anticipated, with one actually beating forecast by a hair.

The Midwestern manufacturing states continue to report mixed results. One reported the strongest year-over-year gains in the survey, and our contact there believes the relative stability of the major auto-makers is allowing “those who have jobs” to spend a bit more freely. Other states in the region did not do so well, but continue to report a stabilizing trend.

Greatest impatience was expressed by revenue officials around the country in smaller states with mixed economies. They expect to see revenues now moving into positive territory and another month of disappointing results is hard to take.

affluent tightwads

For the last two years, Gallup has been asking 1,000 Americans every day how much they've been spending at stores, restaurants, gas stations, and online. The average for upper-income households–those with incomes above $90,000–in February plunged to a new low of $98, down 13% from January. The numbers aren't seasonally adjusted, so the monthly changes have to be taken with a grain of salt, but the yearly change is a sharp –19%.

By contrast, spending by middle- and lower-income households has been more or less flat for a year. Both are way off their May 2008 peaks–down by almost half for both groups.

As Gallup's chief economist, Dennis Jacobe, pointed out in reporting these results on Wednesday, the retail economy badly needs freer spending by the well-off. That's where most of the discretionary juice is; households of more modest means just don't have the money to ramp up spending beyond the level of basics.

Jacobe attributes this tight-fistedness to “the new normal”–a general cautiousness born of economic uncertainty. Upper-income households are much less exposed to the vagaries of the job market than middle- and lower-income ones. For example, as a study by the Center for Labor Market Studies at Northeastern University reported in February, at the end of 2009, the average unemployment rate for the upper fifth of the income distribution was 2%; for the middle fifth, it was 6%; and for the bottom fifth, it was 19%.

the new normal

It's not just Gallup that's talking about a new regime of lower spending. In a new joint report, the consulting firms Kantar Retail and Price Waterhouse Coopers declare that “an enduring shift has taken place as a result of the Great Recession.” Conspicuous consumption will give way to a more mindful sort of spending, and “rampant deal-seeking will be replaced by more purchases selectivity.” Over the near future, people will apply the tools and consciousness they learned during the recession even as the economy recovers. Shoppers will put more effort into buying. Gone are the days of recreational browsing and impulse buying; shoppers will plan their purchases more, making lists and Googling for deals. There will be a stigma attached to wasteful spending–and purveyors of luxury goods will have to content themselves by selling to the actually rich alone, without any help from the aspirationally affluent. “Good enough” will take the place of the very best. The mix of goods may change. As Boomers approach retirement, they'll spend less and save more, ceding the cyclical lead to Gens X and Y–which means a bigger role for high-tech gadgetry. But overall spending is likely to remain muted.

Or so they say. The older among us, or the subset of those with still-intact memories, will recall that similar things were said in the early 1990s, when private labels and generic goods were all the rage. That trend faded as the job market recovered, the stock market bubble got going, and the former Chevy driver eventually just had to have an Escalade. Still, this sobriety is likely to be with us for some time–at least until the job market seriously recovers.

That said, spending on nonessentials has been recovering in recent months. Its growth rate is still lagging that of essentials, but the gap is closing. That's to be expected, but a return to 2006 certainly isn't.

By the way, as the graph below shows, the yearly change in sales tax collections in the SDI's universe correlates very nicely with movements in spending on nonessentials (r=0.87). This makes sense, since so many essentials are exempt from sales tax, but it's always gratifying when you can confirm good sense empirically.

Is this recovery secretly strong?

Every now and then you hear respectable analysts claiming that this recovery is stronger than anyone knows, or admits, or wants to contemplate. Rodney Dangerfield, who couldn't get no respect, is invoked in support of this claim.

We wish we could find something this encouraging in the data. To take the measure of the recovery, we've put together four cycle graphs, showing the behavior of some important indicators for the year before and after business cycle troughs. In all but one case (more on that one in a bit), values are indexed so that the trough month = 100. (We're assuming that the trough of the recent recession was in June 2009.) But instead of the usual recovery average, which blends together all upturns since the end of World War II (and which is how we've done this exercise most times in the past), we've done two averages–one representing the weak recoveries of 1991–1992 and 2001–2002, and the other, the strong recoveries of 1975–1976 and 1982–1983.

Graphed below are payroll employment and the unemployment rate. The recent trajectory of both measures is a lot closer to the “weak” line than the “strong.” Employment is actually weaker than the “weak.” In fact, if employment were hugging the “weak” line, there'd be over 600,000 more jobs in the economy than there were in February. If it were following the “strong” path, there'd be 3.2 million more jobs. Unemployment is close to the “weak” line; if it were following the “strong” path, the jobless rate would be a full point lower than it was in February.

Of course, the job market is only one part of the economic picture–though it's a very important part. What about the broad business cycle indexes? These have the virtue of giving a composite picture of all the economy's major aspects–and using them is a nice check on the temptation to cherry-pick data to prove the point you want to prove.

Two of those composite indexes are graphed below–the Conference Board's coincident index and the Chicago Fed's National Activity Index (CFNAI). The Conference Board index, after having fallen hard in the recession (like the employment indicators), is almost a dead-ringer for the “weak” line.

The CFNAI is the only one of these indicators that isn't indexed so that the trough month is set to 100. The reason for that is that the index itself is normalized over time so that its long-term average is 0, which is also the economy's long-term trend growth rate. Any value above 0 is over trend; any under 0, under trend. A value of 1 is a standard deviation above average. Values above .70 are thought to be where the economy is running far enough above trend that inflation is a worry. Historically, the CFNAI has proven to be a good real-time measure of the state of the business cycle.

Here too, we're much closer to “weak” than “strong”–and still below 0. Seven months into a strong recovery, the CNFAI has averaged 1.0–meaning that we're more than a standard deviation below a strong recovery's reading.

So, no, this is not a Rodney Dangerfield recovery. Maybe it will become one–but we doubt that the markets will be inclined to badmouth the strength of the thing in the coming months.

Philippa Dunne & Doug Henwood

http://feedproxy.google.com/~r/John_…o-be-rich.aspx

The end of the sideshow fat man

The fat man used to be a sideshow staple: Pay 10 cents and watch his belly jiggle. But not anymore. We’ve gotten so big we’ve put the genuine freaks out of work.

Just look at the recent death of Bruce Snowdon, the last professional sideshow fat man who often performed under the name "Harold Huge."

But what struck me wasn’t the end of his oversized life at the age of 63 so much as the death of his career years earlier. When the 607-pound Snowdon retired in 2003, he was the last of his beefy breed… not because we ran out of fat men, but because we have too many.

And there’s certainly nothing funny about that.

So today you’ll still find bearded ladies, strong men, snake charmers, sword swallowers, glass eaters and geeks on the midway… but if you’re waiting for the fat man to sing, just look around you. It shouldn’t be hard to find one.

And maybe future carnivals will feature a new kind of freak: the healthy man.

A rare breed myself,

William Campbell Douglass II, M.D.

03.13.10 06:00 AM

The Velocity of Money
Our Little Island World
GDP = (P) x (T)
P=MV
A Slowdown in Velocity
Dallas and Thoughts on the Economy

This week we do some review on a very important topic, the velocity of money. If we don’t understand the basics, it is hard to make sense of the hash that our world economy is in, much less understand where we are headed.

But before we jump into that, I want to let my Conversations subscribers know that we have posted a recent conversation with two hedge-fund managers, Kyle Bass of Hayman Advisors [and his staff] here in Dallas and Hugh Hendry of the Eclectica Fund in London. Our discussions centered on what we all think has the potential to be the next Greece, but on a far more serious level. It was a fascinating time.

Then next Wednesday we will post a Conversation I had with George Friedman of Stratfor fame, and then the following Wednesday a Conversation that I just completed with Dr. Ken Rogoff and Dr. Carmen Reinhart, the authors of This Time Is Different.

For new readers, Conversations with John Mauldin is my one subscription service. While this letter will always be free, we have created a way for you to “listen in” on my conversations with some of my friends, many of whom you will recognize and some whom you will want to know after you hear our conversations. Basically, I will call one or two friends each month and, just as we do at dinner or at meetings, we will talk about the issues of the day, with back and forth, give and take, and friendly debate. I think you will find it very enlightening and thought-provoking and a real contribution to your education as an investor.

And as you can see, I can get some rather interesting people to come to the table. Current subscribers can renew for a deeply discounted $129, and we will extend that price to new subscribers as well. To learn more, go to http://www.johnmauldin.com/newsletters2.html. Click on the Subscribe button, and join me and my friends for some very interesting Conversations.

The Velocity of Money

The Federal Reserve and central banks in general are running a grand experiment on the economic body, without the benefit of anesthesia. They are testing the theories of Irving Fisher (representing the classical economists), John Keynes (the Keynesian school) Ludwig von Mises (the Austrian school), and Milton Friedman (the monetarist school). For the most part, the central banks are Keynesian, with a dollop of monetarist thrown in here and there.

Over the next few years, we will get to see who is right about debt and stimulus, the velocity of money, and other arcane topics, as we come to the End Game of the Debt Super Cycle, the decades-long cycle during which debt has grown. I have very smart friends who argue that the cycle is nowhere near an end, as governments are clearly increasing debt. My rejoinder is that it is nearing an end, and we need to think hard about what that end will look like. It will not be pretty for a period of time. The chart below shows the growth in debt, both public and private.

But the end of this debt cycle involves more than just debt reduction. There are a number of ideas we have to get our heads around, including the velocity of money. Basically, when we talk about the velocity of money, we are speaking of the average frequency with which a unit of money is spent. To give you a very rough understanding, let’s assume a very small economy of just you and me, which has a money supply of $100. I have the $100 and spend it to buy $100 of flowers from you. You in turn spend $100 to buy books from me. We have created $200 of our “gross domestic product” from a money supply of just $100. If we do that transaction every month, we will have $2400 of annual “GDP” from our $100 monetary base.

So, what that means is that gross domestic product is a function of not just the money supply but how fast that money moves through the economy. Stated as an equation, it is P=MV, where P is the nominal gross domestic product (not inflation-adjusted here), M is the money supply, and V is the velocity of money. You can solve for V by dividing P by M. By the way, this is known as an identity equation. It is true at all times and all places, whether in Greece or the US.

Our Little Island World

Now, let's complicate our illustration a bit, but not too much at first. This is very basic, and for those of you who will complain that I am being too simple, wait a few pages, please. Let's assume an island economy with 10 businesses and a money supply of $1,000,000. If each business does approximately $100,000 of business a quarter, then the gross domestic product for the island is $4,000,000 (4 times the $1,000,000 quarterly production). The velocity of money in that economy is 4.

But what if our businesses get more productive? We introduce all sorts of interesting financial instruments, banking, new production capacity, computers, etc., and now everyone is doing $100,000 per month. Now our GDP is $12,000,000 and the velocity of money is 12. But we have not increased the money supply. Again, we assume that all businesses are static. They buy and sell the same amount every month. There are no winners and losers yet.

Now let's complicate matters. Two of the kids of the owners of the businesses decide to go into business for themselves. Having learned from their parents, they immediately become successful and start doing $100,000 a month themselves. GDP rises to $14,000,000. In order for everyone to stay at the same level of gross income, though, the velocity of money must increase to 14.

Now, this is important. If the velocity of money does not increase, that means that (in our simple island world) on average each business is now going to buy and sell less each month. Remember, nominal GDP is money supply times velocity. If velocity does not increase, GDP will stay the same. The average business (there are now 12) goes from doing $1,200,000 a year down to $1,000,000. The prices of products fall.

Each business now is doing around $80,000 per month. Overall production is the same, but divided up among more businesses. For each of the businesses, it feels like a recession. They have fewer dollars, so they buy less and prices fall. So, in that world, the local central bank recognizes that the money supply needs to grow at some rate in order to make the demand for money “neutral.”

It's basic supply and demand. If the demand for corn increases, the price will go up. If Congress decides to remove the ethanol subsidy, the demand for corn will go down, as will the price.

If Island Central Bank increases the money supply too much, you will have too much money chasing too few goods and inflation will rear its ugly head. (Remember, this is a very simplistic example. We assume static production from each business, running at full capacity.)

Let's say the central bank doubles the money supply to $2,000,000. If the velocity of money is still 12, then the GDP will grow to $24,000,000. That will be a good thing, won't it?

No, because with the two new businesses only 20% more goods are produced. There is a relationship between production and price. Each business will now sell $200,000 per month, or double their previous sales, which they will spend on goods and services, which only grew by 20%. They will start to bid up the price of the goods they want, and inflation sets in. Think of the 1970s.

So, our mythical bank decides to boost the money supply by only 20%, which allows the economy to grow and prices to stay the same. Smart. And if only it were that simple.

Let's assume 10 million businesses, from the size of Exxon down to the local dry cleaners, and a population that grows by 1% a year. Hundreds of thousands of new businesses are being started every month and another hundred thousand fail. Productivity over time increases, so that we are producing more “stuff” with fewer costly resources.

Now, there is no exact way to determine the right size of the money supply. It definitely needs to grow each year by at least the growth in the size of the economy, the population, and productivity, or deflation will appear. But if money supply grows too much then you have inflation.

And what about the velocity of money? Friedman assumed the velocity of money was constant, and therefore he stated that inflation is always and everywhere a function of the supply of money. And it was, from about 1950 until 1978 when he was doing his seminal work. But then things changed.

Note that nothing Friedman says contradicts the equation MV=PT, if you assume constant velocity. Almost by definition you get inflation if the money supply grows too fast.

Let's look at two charts sent to me by Dr. Lacy Hunt of Hoisington Investment Management in Austin (and one of my favorite economists). First, let's look at the velocity of money for the last 108 years.

Notice that the velocity of money fell during the Great Depression. And from 1953 to 1980 the velocity of money was almost exactly the average of the last 100 years. Also, Lacy pointed out in a conversation that helped me immensely in writing this letter, that the velocity of money is mean reverting over long periods of time. That means one would expect the velocity of money to fall over time back to the mean or average. Some would make the argument that we should use the mean from more modern times, since World War II; but even then, mean reversion would result in a slowing of the velocity of money (V), and mean reversion implies that V would go below (overcorrect) the mean. However you look at it, the clear implication is that V is going to drop. In a few paragraphs, we will see why that is the case from a practical standpoint. But let's look at the first chart.

Now, let's look at the same chart since 1959 but with shaded gray areas that show us the times the economy was in recession. Note that (with one exception in the 1970s) velocity drops during a recession. What is the Fed response? An offsetting increase in the money supply to try and overcome the effects of the business cycle and the recession. P=MV. If velocity falls then money supply must rise for nominal GDP to grow. The Fed attempts to jump-start the economy back into growth by increasing the money supply.

In this chart from Hoisington, the recessions are in gray. If you can't read the print at the bottom of the chart, he assumes that GDP is $14.5 trillion, M2 is $8.2 trillion, and therefore velocity is 1.7, down from almost 1.97 just a few years ago. If velocity is to revert to or below the mean, it could easily drop 10% from here. We will explore why this could happen in a minute.

P=MV

But let's go back to our equation, P=MV. If velocity does slow by another 10%, then money supply (M) would have to rise by 10% just to maintain a static economy. But if we assume 1% population growth, 2% (or thereabouts) productivity growth, and a target inflation of 2%, then M (money supply) actually needs to grow about 5% a year, even if V is constant. And that is not particularly stimulative, given that we are in recession.

Bottom line? Expect money-supply growth well north of 7% annually for the next few years, or at least the attempt. Is that enough? Too much? About right? We won't know for a long time. This will allow armchair economists (and that is most of us) to sit back and Monday-morning quarterback for many years.

A Slowdown in Velocity

Now, why is the velocity of money slowing down? Notice the real rise in V from 1990 through about 1997. Growth in M2 (see the above chart) was falling during most of that period, yet the economy was growing. That means that velocity had to rise faster than normal. Why? Primarily because of the financial innovations introduced in the early '90s, like securitizations, CDOs, etc. It is financial innovation that spurs above-trend growth in velocity.

And now we are watching the Great Unwind of financial innovations, as they were pursued to excess and caused a credit crisis. In principle, a CDO or subprime asset-backed security should be a good thing. And in the beginning they were. But then standards got loose, greed kicked in, and Wall Street began to game the system. End of game.

The financial innovation that drove velocity to new highs is no longer part of the equation. Its absence is slowing things down. If the money supply hadn't risen significantly to offset that slowdown in velocity, the economy would have been in a much deeper recession, if not a depression. While the Fed does not have control over M2, when they lower interest rates it is supposed to make us want to take on more risk, borrow money, and boost the economy. So they have an indirect influence.

And now we come to the policy conundrum for the Fed. They have pumped a great deal of money (liquidity) into the economy. Normally, banks would take that money and multiply it by lending it out (through fractional reserve banking at a potential 9-times factor), increasing velocity and the overall money supply. In the past, the more the Fed increased the money supply, the more banks lent.

But today bank lending is still falling at an average of 15% annually, so far this year. But what if that trend stops?

Corporations in the US have more money on hand than ever in the last 54 years. They are more productive. Their debt-to-equity ratio has been dropping by about 25% for the last 3 quarters, as they repair balance sheets. Capital spending jumped 18% annually in the last quarter. If we are not at an inflection point of rising employment, we are close to it (although we do need at least 100,000 new jobs a month to make up for increased population). And thus are the stock market bulls inspired, and we hit new trend highs weekly.

While growth this quarter will not be as robust as last, it will be fairly good for an economy with 10% unemployment. If you are a Fed governor, you have to be worried that things could turn around quicker than now seems plausible. What if corporations decided to take their cash and start investing in growth?

The last chart showed a small uptick in velocity at the end of last year. What if that is for real? What if we have turned the corner? Then the Fed will have to start taking back the money they have put into the economy, unless they want to see inflation. And indeed, that is what some Fed governors are arguing. They want to raise rates now, or at least signal that they will begin to do so soon. Note there have been a number of speeches by Fed officials of late assuring the bond market that they are aware of the problem, and that they have all the tools they need to keep inflation (and higher interest rates) at bay.

But then again, while there are signs that the economy may be picking up, it is a strange type of recovery. It is what I call a statistical recovery. Let's look at this litany from my friend David Rosenberg of Gluskin Sheff. He notes that there are measures of economic health other than the stock market and GDP. To wit:

• More than five million homeowners are behind on their mortgages.
• There are over six million Americans who have been unemployed for at least six months, a record 40% of the ranks of the jobless.
• The private capital stock is growing at its slowest rate in nearly two decades.
• Roughly 30% of manufacturing capacity is sitting idle.
• Nearly 19 million residential housing units, or about 15% of the stock, is vacant.
• One in six Americans is either unemployed or underemployed.
• Commercial real estate values are down 30% over the past year.
• The average American worker has seen his/her level of wealth plunge $100,000 over the last two years, even with the recovery in equity markets this past year.
• Bank credit is contracting at an unprecedented 15% annual rate so far this year as lenders sit on a record $1.3 trillion of cash.
• Unit labor costs are down an unprecedented 4.7% over the past year, and what has replenished household coffers has been the federal government, as transfer payments from Uncle Sam now make up a record 18% of personal income (and the Senate just passed yet another jobless benefit extension bill!).”

Wow. 18% of personal income in the US is now from the US government (also known as taxpayers, current and future).

If you take away the punchbowl too soon, you risk strangling a very shaky recovery that is significantly dependent on stimulus spending, which is going to rapidly go away the second half of this year. Further, the Fed situation is complicated by the fact that taxes are highly likely to go up in 2011 (maybe the largest tax increase ever), which will put a serious strain on the economy.

I think the Fed is on hold throughout 2010 and well into 2011, as they see what effect the tax hikes, coupled with decreased stimulus, bring. Next week we will explore the potential effects of the tax hike on the 2011 economy. Stay tuned.

Let me ask for a little bit of help. I am trying to find data on the potential tax increases, and what I am finding is all over the board. In fact, I had intended to write about that topic this week, but simply don't trust the numbers I am reading. If you have a source or RECENT paper, I would love to see it. Thanks.

Dallas, and Thoughts on the Economy

What started me thinking about tax increases was the problems that so many people I know personally are having, including my kids. It is difficult watching your kids struggle with fewer work hours, the need to make car payments and buy diapers. For many, it's cuts in pay, lost jobs, and more. Lack of health insurance is often a worry, too.

And knowing it could get worse is rather sobering. Trust me, I see the human side of the need for health-care reform, but also balance it with the need for some fiscal responsibility. We have $38 trillion in unfunded Medicare liabilities. How can we add more? Does anyone really believe that this bill being offered will actually cut spending? How do you cut Medicare by $500 billion when it is already so underfunded? Really? But what about kids and families with no insurance? Something better than what we are seeing is needed to get the problem solved. More on this next week.

I will be a panelist in the inaugural “America: Boom or Bankruptcy?” summit to be held in Dallas on March 26. There will be five of us, presenting problems (plenty of those!) and possible solutions. This promises to be a no-holds-barred, full-throttle event. It should be a lot of fun. Details at www.fedfriday.com.

It's time to hit the send button. I have kids coming to the airport, and I want to be there. Spring break and all, and I look forward to it. Have a great week.

Your worried about the kids analyst,

John Mauldin

http://feedproxy.google.com/~r/Thoug…-velocity.aspx

Low-tax Texas beats big-government California

Washington Examiner

"Now it is California’s ruinously expensive and increasingly incompetent government that seems dysfunctional, while Texas’ approach has generated more creativity and opportunity. So it’s not surprising that Texas voters preferred Perry over an opponent who has spent 16 years in Washington. What’s surprising is that Democrats in Washington are still trying to impose policies like those that have ravaged California rather than those that have proved so successful in Texas."
Read more…

Health Care Action Alert

Call these targeted members of the California Congressional Delegation and tell them to vote NO on the Healthcare Bill:

Dennis Cardoza (202) 225-6131
Jim Costa (202) 225-3341
Jerry McNerney (202) 225-1947

Find your congressman…

Peter Foy
Contact us about booking Chairman Peter Foy to speak at your event.
[email protected] or (805) 229-1117

California Protecting Bureaucrats’ Pay

Ronald Reagan once said, "A government bureau is the nearest thing to eternal life we’ll ever see on this earth!" California is proving his point by protecting the bureaucracy wasting taxpayer money…

Los Angeles, Friday, March 12, 2010

Too Many Holes in the City Budget Dike CITYWATCH
By Ken Draper

There are so many holes to fill in the City’s budget dike and so few fingers and so little time to stop the hemorrhaging.

The Mayor and Controller combo issued a citywide spending freeze [LINK] on Thursday. No furniture or equipment purchases or food and beverage purchases for employee events or office remodeling effective immediately.

No travel expenses except to Sacramento or Washington DC.

Prompts the question: What took so long? People are losing their jobs here. Read more…

New at L.A. County Jail: Inmates serve half sentences
"I already didn’t feel safe in my own neighborhood," says lifetime Sherman Oaks resident Ron Sorrentino. "Now this … it’s not good. Law enforcement is crying out louder than citizens like Sorrentino, analysts say. "Cops know that many people serving time for nonviolent offenses may also have committed violent crimes for which they did not get caught. And even the nonviolent offenses are worrisome," says Jack Pitney, political scientist at Claremont McKenna College.

Christian Science Monitor

LAPPL

Pink slips for city workers coming soon

The cash-strapped city of Los Angeles will hand out pink slips to 15 employees by the end of this week, it was revealed Wednesday. They represent the first batch of 1,000 layoffs ordered by Mayor Antonio Villaraigosa this fiscal year, which ends June 30. The City Council ordered an additional 3,000 layoffs by July 1. Maggie Whelan, general manager of the city’s Personnel Department, said her staff will notify supervisors today about which 15 employees will be laid off. Supervisors will then have 48 hours to break the news to the employees and give them two weeks notice.

City News Service

After a successful and memorable "Day at the Museum" with First Lady Maria Shriver and The Women’s Conference last Thursday, the celebration of National Women’s History Month continues each Saturday in March with FREE Admission Days at The California Museum!

From the hours of 10am to 5pm, Museum visitors will be able to enjoy interactive exhibits, including the California Hall of Fame, contemporary and cultural content, as well as locally made arts and crafts.

· March 13: Mixed Mediums – ceramics, mosaics, stationary, embroidery

· March 20: Sacramento’s Indie Trunk Show & Craft Bazaar featuring vintage crafts

· March 27: Paintings

Organized by Northern California artists, the unique art showcases are a wonderful addition to the Museum’s already festive atmosphere this month. Current exhibits on display include historic artifacts in African American Treasures: History and Art from the Collection of Bernard and Shirley Kinsey, vivid photography in Under the Dragon: California’s New Culture, signature exhibitions California’s Remarkable Women and the 2009 California Hall of Fame, the serious side of California Canines, and dramatic American Masterpieces: The Artistic Legacy of Native Indian Basketry.

Free Admission Saturdays in March are a wonderful opportunity for families to visit and fall in love with The California Museum.

The California Museum

1020 "O" Street

Sacramento, CA 95814

Home Page | California Museum

Free Weekend Parking

Special Offer from Sky Angel: A Special Sponsor of the PTC

PTC in the News: Jeffrey McCall on Children’s Media Use

Study: Children Overexposed to Sexual Imagery

FCC FINALLY Taking Action on Indecency Complaints!

PTC Supports R.I. Video Game Law

The Rhode Island state legislature is considering legislation to keep adult-rated video games out of the hands of children and teens — a measure the PTC whole-heartedly supports. ► more

Supplements yanked from Canadian pharmacies

Saddle up the Mounties and sound the alarm, boys — someone’s been caught selling vitamins north of the border.

Canadian health officials are telling pharmacists to pull thousands of perfectly natural supplements from store shelves, as new regulations kick in that they claim will bring order and safety to the vitamin industry.

In reality, all they’ve done is give Big Pharma a chance to tighten the death grip it has on modern medicine. And as those drug companies pad their profits, supplement makers are caught up in a bizarre Catch-22 that could lead to job losses and business failure.

The new rules require supplement makers to have a license to sell their vitamins. But the bureaucrats who issue those licenses are either so overwhelmed or so inept — or both — that they can’t get them out fast enough

Canada’s National Post tells of one little company that makes just two supplements. One’s a homeopathic treatment for diabetes pain, the other is a vitamin. I have no idea if either work — but it may not matter, because neither one’s been given that government blessing yet.

If those two products get the Canadian heave-ho, the company will be toast — or whatever else it is that they burn for breakfast up there.

I hate to break it to them, but they should probably polish up those resumes: There’s an estimated backlog of 10,000 vitamins and supplements waiting for approval.

That’s one hell of a waiting list.

Over six years, the regulators issued around 18,000 licenses. I’m no math whiz, but that’s 3,000 licenses a year — which means it’ll take more than three years to get to everyone still waiting.

This is the precisely the kind of disarray and "regulation" that Big Pharma lives for… because while you can’t get many completely ordinary vitamins and supplements in Canada now, you can still get Avandia.

Mad enough to melt the snow,

William Campbell Douglass II, M.D.

Common med tied to heart risk

Diabetes is deadly enough on its own… but some patients are getting extra help finding their way to that early grave.

And as usual, you can thank Big Pharma for lighting the way.

A new report pegs tens of thousands of deaths on the diabetes drug Avandia. No real surprises there — anyone paying attention knows this med is bad news, even if the FDA still refuses to pull the plug on it.

No, the real shocker here isn’t the report itself… but the fact that it came from the Senate Finance Committee.

Now I’ve seen everything!

If we have to rely on grandstanding D.C. politicians to save us from Big Pharma’s riskiest meds, then we’re in it even deeper than I thought.

The bipartisan report says the FDA’s own numbers show 83,000 heart attacks caused by this drug between 1999 and 2007. Government numbers obtained by the New York Times find that simply switching diabetics to a rival med would prevent 500 heart attacks and 300 cases of heart failure every month.

And two of the FDA’s own epidemiologists — including Dr. David Graham, the hero who blew the whistle on Vioxx — are calling for this drug to be pulled from pharmacies.

So where’s the FDA on all this? They’re urging patients… to keep taking the drug! They say they’re still reviewing "new" numbers that were delivered to them last summer… and hope to hold a meeting on this in July.

Going by the conservative numbers in the Times, that means at least 2,500 unnecessary heart attacks and 1,500 preventable cases of heart failure will have happened between now and then.

Nice work, guys. America’s safe in your hands.

Of course, they’re just doing what they do best: Buying time for Big Pharma to sell more meds before the party comes crashing to a halt.

After all, there will probably be some legal bills to pay when all’s said and done.

William Campbell Douglass II, M.D.