The One Thing that really doesn't Change

Taxes? Is this one of the things that doesn't change? Well, we know from much of the political campaigning that we hear, that approximately 50% of people pay no "taxes" at all. And, the taxes we do pay does change from time to time. But even the 50% of those not paying taxes do pay taxes because what the political campaigners are referring to is the Federal Income tax. Unless, you are a true homeless person on a true cash basis and never buys anything in a store, you do pay sales tax and other taxes (often called fees) for driving licenses and other similar privileges. So, yes, it is fair to say that taxes are a certainty, even as they change every year.

Death? This is the other thing we hear of that is sure. But, while death is certain, it is certainly different as time goes on. People are living longer and the persistent march toward death takes longer with life sustaining drugs and medical care.

When we look back in history we see that this adage about the certainty of death and taxes is true. During the time of the Roman Empire, the  primary charge of the Roman Army was to keep the peace and to see that taxes were collected. The longer people lived, the more taxes could be paid. I have recently completed my second book, Turning North. It takes place in the 8th century, during the time of Charlemagne when the Frankish Empire had replaced the Romans.During this time, death and taxes continued to be a certainty.

However, there is one thing that is even more certain than death and taxes. It is change  itself. We can see that we always seem to have death and taxes, but the nature and the details of them change. So, as we go into the next year, the one thing that we should be prepared for is change. Be ready for it. It is our natural desire to resist those things that we have already adjusted to. And, when we need to make another adjustment, it makes us mad. My advice, learn to welcome change. God's plan for us will be the ultimate outcome for us. This does not mean we shouldn't plan for the future, but it does mean that we should remain flexible in our plans, because as sure as we will proceed toward death and taxes will be a certainty, we can rely most heavily on the notion that whatever plans we have made, a change will occur.

Have a Merry Christmas and a Happy New Year

Democracy: The Problem and the Benefit

We tend to think of the Roman Empire as a single entity with an Emperor at the head. But, before the Empire, Rome was a democracy with the famous Roman Senate as the primary governing body. Rome was a republic in those days. In the time of Julius Caesar, democracy ended and the Empire began. There was no set way for new Emperors (or Kings) to succeed one another until the middle ages. In my book, The Fall and Rise, I discuss the unwieldiness of the Roman Empire and how the Emperor Diocletian developed the East and West Empires and a succession scheme of Caesars and Augusti. It didn't work well, so Rome was plagued with civil wars and eventually, the West was overrun with barbarians.

I mention this because one of the topics that seems to be on everyone's minds these days is the inability of our own, U.S. democracy to work. I would actually challenge that notion and suspect the Founding Fathers would be delighted with the "grid lock". That is the way they designed our government. I won't go into a civics class here, but they way our system of government is set up, it is bound to frustrate any major change except almost immediately after an election, usually a Presidential election. This feature of our government is both a problem and a benefit. Have you noticed that people in power seem to get very frustrated in their jobs? Why? They can't get anything done.

There is one problem, however, which is serious. The entitlements are moving in a direction that will mortgage our children's future and when it finally dawns on them that this is the case, politics will move from "class warfare" to "age warfare". In the meantime, the developed economies will continue to struggle with high unemployment, slow growth, a growing gap between unskilled wage earners (if they have a job) and highly skilled, well educated earners. Another question. How much longer will the highly skilled workers support the unskilled workers?

Low Growth, Low Returns -- For Now

One of the major themes in my book, The Fall and Rise, is the wavy-ness of just about all things. It's in the title of the book, in how we think about the Roman Empire, about loss and redemption. All of this is in my book. But we see it everywhere. I learned this after several decades in the investment management business. The stock market is certainly a familiar example of the ups and downs of stock prices, the Bulls and Bears, the fortunes and the wipe-outs. Understanding this phenomenon will help one to gain the virtues of patience and persistence.

We are in a period of time where investors can expect low returns. We have been in this mode since the beginning of the millennium. It means that we have been in this low return market for 11 1/2 years. Yes, during this time we have had some great markets along with the declines, but for the past decade plus, returns have been meager for most asset classes. Compare this to the period from 1982 to 2000. The Dow Jones Industrial Average was below 1000 in 1982. It was a high return market. And when one looks back further, one can very easily see a pattern of low returns followed by high returns; i.e., 1948-1966 and 1966- 1982. These periods have lasted 16 to 18 years each. If the pattern holds (and I do emphasize if), We should remain in the current low return market for about 5 or 6 more years.

And, when we look at the economy, we can see that it will take some time to come out of the current slow economic mire we find ourselves. It will take some time to get on the right path for lower debt and to adopt saner fiscal policies, just as it took several years for the nation to come to grips with rampant inflation of the late 60's and 70's. Remember the price controls President Nixon tried and the WIN (Whip Inflation Now) buttons of the Ford Administration and then President Carter having to address the plummeting U.S. dollar by appointing Paul Volker who finally raised interest rates high enough to pressure down inflation? Then, of course, there was the Great Depression which lasted throughout the 1930's and into WWII.

I am optimistic and believe we will survive and thrive after the next few years. But, it will take some time to get to a happier economic and investment environment. I know how hard it is to have patience at times like these, but that would be my advice.

Why Won't Jobs Recover?

So far, in this economic recovery, we have noticed two contrasting characteristics. One is that the number of people un-employed has stubbornly refused to recover as it has in the last seven recoveries. The second characteristic is that Industrial Production has recovered well; in line, if not better, than the average of the last seven recoveries.

If Industrial Production has recovered, why haven't jobs? The hard truth is that in the U. S., we have had, for a long time, an over-supply of low- and semi-skilled workers and a shortage of highly skilled, educated workers needed in those businesses that produce the specialized and technological products made here in the U.S. (Incidentally, this also accounts for the growing gap in incomes here in the U.S. Whereas, for the rest of the world, the gap in incomes is narrowing.) When the recession occurred in 2008-9, businesses laid off lower skilled workers and as the economy improved, the demand for lower skilled workers was being met by developing countries. The number of jobs improved, but did so at much slower pace that the average of past recoveries.

There really is no short-term answer for correcting this problem, because the answer is to provide the lower skilled workers with skills, which means education and training, which involves time measured in years. It's frustrating for many of those that have no jobs because many of them have reasonable skills. Again, the hard truth is that it is not a static problem. That is, the attainment of greater skills is a journey and not a destination. It's just the way the world is at this time.

An interesting aspect is that we also have a shortage of un-skilled workers. Those jobs are being filled with immigrants (many illegal) that come across our borders to take those jobs. Why we don't make it easier for those people, this writer just doesn't get.

Ancient Rome didn't have this kind of problem. As depicted in my book , The Fall and Rise, the un-skilled workers were slaves or the low classes. The high skilled jobs went to Romans and others in the higher classes just didn't work at all.

The longer-term solution is that the global marketplace will sort this out. I know this sounds like a mis-placed faith, but when wages in developing countries rise to the level such that there is an equivalency in wages globally, this particular employment problem will no longer exist. Unfortunately, this solution is several years into the future.

Inflation; Still only a potential danger

The multiple crises in Japan, North Africa, the Middle East and the continuing problems in the aftermath of the economic downturn and massive debt problems have, once again, raised fears of inflation. Certainly, consumers have noticed real increases in the prices of food and gasoline. Even so, forces continue to bear down on the general level of prices and there are currently no signs of a let-up in those forces. While many prices have risen, inflation is usually defined as a rise in the general level of prices and here we find that the significant declines in real estate values and high unemployment keep the overall level of prices (often measured by the Consumer Price Index or CPI) at a low level that is not rising.

It's true that Governments are trying to stimulate the economy through fiscal policy and monetary policy, but, so far, those policies have failed to generate economic growth. Inflation will be a problem when economic growth really starts to grow, but that is not happening. And this is one of the major forces that prevent inflation. There are, at least, three important forces that are holding down inflation. First, is the poor demographics of the big economies that hold down demand. As populations age and retire, they tend to spend less and, at the same time, save less. And, with fewer young people entering the labor force, overall demand is restrained. Strong demand is needed for inflation to take hold.

Second, technology is helping to hold down inflation in two ways. It is good for productivity, thus keeping wage growth low and it has a tendency to drive down prices of technology products. The third force is the relatively low labor costs that still exist in the developing world such as China and India. Until incomes in those countries rise to an equivalency with those in the developed world, wage growth in the larger, richer economies will be restrained.

So, in spite of efforts of Governments to stimulate growth and Central Banks to print money, nothing much will happen over the next few months in this writer's view. That does not mean one should become complacent, because at some point, the excess money that is "sloshing" around the world will find an outlet in some market. So, keep an eye out for a developing bubble. Governments throughout the ages have tried to manipulate the money for their own purposes. That certainly happened in the Roman Empire as described in my book, The Fall and Rise. Usually, these efforts do not help and often result in unintended bad consequences. Watch out!

What's Changed About Political Discourse?

Being a student of history, I'm not aware of any studies regarding political discourse per se. I am aware of things that have been said by politicians about each other, or about one political party or interest group, but the current concern over the incivility of political discourse, while legitimate is without validation of progression. Said in more simple language, I do not think political discourse has gotten worse over the past decade, century or millennium. I'd guess it's about the same.

There have been some pretty bad things that been said in public in the past about political figures. What concerns people about un-civil political discourse (discourse is defined as oral expression or conversation)is two-fold. First is it irritates our sensibilities (incivility is a big "turn-off" for me)and second, what it may lead to, such as violence. It seems obvious that the the recent violence that occurred in Tucson was not in any way politically motivated. Even so, people cannot help to blame such irrationality on a rational thing and in this case, un-civil political discourse is getting the blame in some quarters.

It's the opinion of this writer that discourse of any kind can lead to action, good or bad. Certainly, history shows that rhetoric often leads to bad things. Look at Adolph Hitler, a mesmerizing speaker, but also look at Churchill. In both of these cases, however, it doesn't appear that either individual was particularly rude, and certainly not when they were giving a formal speech. The point to be made here is that discourse and/or rhetoric can lead to both good and bad action. I'm sure there are many cases where less well-known personages have given speeches or held conversations that may have led to serious destruction as well as inspired edification. In researching the historical elements of my book,The Fall and Rise, I learned that many leaders were assassinated; the most famous being that of Julius Caesar that took place in the Roman Senate.

What has definitely changed has been that what politicians say has been magnified many times over by the media. The media has done a lot of good, but in the context of political discourse, it does a disservice.