Cliff, Stocks, Churchill

Shared by my friend David Kotok:

We have written about the Washington charade, including the fiscal cliff and the debt limit.  For details see .


Our friend and fishing buddy Jim Bianco summed the situation up in a note.  What we like about Jim’s work is his numeracy and his intellectual commitment to accuracy.  We thank Jim for permission to quote him.

“Currently the Treasury is just $81 billion from the $16.394 trillion debt ceiling limit.  This limit is expected to be reached in the next two weeks.  After that the Treasury will run down its cash balances and ‘borrow’ from government trust funds and pension funds.  This should allow the government to fund itself through February.  As a side note, if a private sector company funds itself by running down cash balances and raiding trust and pension funds, everyone goes to jail. When the government does it, it is considered sophisticated asset/liability public sector management.”  Jim Bianco, November 28, 2012


Meanwhile, financial markets are looking past the political debate.  Stock prices are rising worldwide.  The US seems to be a leading market among the larger mature ones.  Payroll growth in the US continues slowly, and Fed policy remains predictable for a considerable period.  Inflation is low and likely to be tame for some time.  Cumberland remains fully invested.  We expect stocks to go higher and, maybe, much higher.


Our bond positions continue to maintain mid-to-longer durations.  It is too soon to sell out all the bonds and panic about a future rise in interest rates.  That time will come but not for a while.

Bond credit decisions are key!  This is especially true in the state and local government sector.  We worry about states such as Illinois and California.  The so-called state fiscal “fixes” of higher taxation and inadequate reforms are not working.  California cities remain a danger spot.  We are seriously avoiding most of them.  General fund balances deteriorate.  More trouble lies ahead in the local budgeting arena.  The key for an investor is to dig, dig, dig.  Research in municipal credits is critical.  The old days of “it’s insured and AAA” are gone.


Now to another correction of a quote we used.  We are bullish on intellectual pursuit and the importance of accuracy.


In a writing that followed our error with the Tocqueville quote, we cited two attributions to Winston Churchill.  We published the links to the verification sources.  The exact text we used is, “Winston Churchill said, ‘It has been said that democracy is the worst form of government except all the others that have been tried.’ Churchill also said, ‘You can always count on Americans to do the right thing – after they’ve tried everything else.’ ”


Well, we were half right.  That is better than the zero percentage we scored on Tocqueville.

Our friend and another fishing buddy Scott Frew drew on his relationship with a Churchill scholar, who sent the reply copied below.  We asked for and obtained permission to reproduce the message.  For those who are still reading and enjoy the intellectual pursuit of accuracy, as we do, here is the message that Scott Frew received.


Dear Mr Frew


Thank you for your email. I have conducted some research on these two quotes using an extensive book we have here on Churchill’s words and those misattributed to him by Richard Langworth.


It seems that the quote, ‘Americans can always be trusted to do the right thing, once all other possibilities have been exhausted’ is unattributed to Churchill. He certainly would never have said this publicly, as he was careful about slips such as this, and it cannot be found in the memoirs of his colleagues. The author has it as a ‘likely remark’ as he did have sentiments like this from time to time during World War II.


Of the other quote on democracy Churchill certainly said it, in the House of Commons on 11 November 1947, but he was quoting an unknown predecessor and did not originate the famous remark about democracy.

‘No one pretends that democracy is perfect or all-wise. Indeed it has been said that democracy is the worst form of government…’



Philip Cosgrove

Archives Assistant

Churchill Archives Centre

Churchill College




Thank you, Scott Frew, Philip Cosgrove, and all readers who noted the issues about quotations and accuracy of research.


David R. Kotok, Chairman and Chief Investment Officer


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Video clips of Premium Follow-up Workshop

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Wake-up call to France!

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Downgraded: France Gets a Wake-Up Call
November 21, 2012

This commentary was written by Bill Witherell, Cumberland’s Chief Global Economist.  He joined Cumberland after years of experience at the OECD in Paris.  His bio is found on Cumberland’s home page,  He can be reached at


Moody’s cut France’s rating one notch to Aa1 and is maintaining a negative outlook for France. This is not surprising, as it follows a similar move by S&P last January, but it caps what has been a very difficult month for France and its leaders. Our October 1 commentary, “French Impressions,” laid out the problems, concluding that if France is “… to avoid what could be a steep increase in its cost of funding the large deficits, it needs to undertake a number of market-oriented economic reforms.”  This refrain has been repeated and amplified in recent weeks from many quarters. Last Friday’s issue of The Economist included a 14-page Special Report on France entitled “The time-bomb at the heart of Europe” and a cover featuring a bomb made of French baguettes.  We discuss below why the spotlight is now on France.

On November 5th, in its annual report on France, the International Monetary Fund (IMF) warned that the outlook for France is “clouded by a significant loss of competitiveness relative to its trading partners. This competiveness gap is reflected not only in deteriorating export performance, but also in the low profit margins of enterprises, which constrain their capacity to invest, innovate and create jobs.”  This problem could become  “… even more severe if the French economy does not adapt along with its major trading partners in Europe, notably Italy and Spain, which following Germany, are now engaged in deep reforms of their labor markets and service sectors.” The IMF urged France to carry out “a comprehensive program of structural reforms,” including fiscal deficit reductions and an improvement in the quality of fiscal adjustment in order to strengthen incentives to work and invest; to correct labor-market impediments to investment, employment, and ultimately growth; and to increase competition in the services sector.

The problems the IMF flagged were reflected in the Global Economic Forum’s low ranking of France at the 21st position in their latest Global Competitiveness Report, well under the ranking of their most important trading partner, Germany, which is ranked 6th, behind only Switzerland, Singapore, Finland, Sweden, and the Netherlands.  France remains considerably above Spain’s 36th and Italy’s 42nd positions, but these rankings do not yet reflect the substantial reforms in those two countries.  France, in fact, has slipped in its current ranking from position 18 in the previous survey.

Drilling down into the subcategories and components of the Competitiveness Report, notable problem areas for France include its macroeconomic environment (68th), labor-market efficiency (66th), goods-market efficiency (46th), institutions (32nd), and higher education (27th).  Relative strengths are infrastructure (4th), market size (8th), and technological readiness (14th).

The World Bank has recently published Doing Business 2013, the latest volume in an annual review of regulations that enhance or constrain business activity, covering 183 economies.  Here too France’s ranking slipped, from 29th in 2011 to 34th in 2012. The worst subcategories for France were registering property (146th), protecting investors (82nd), getting credit (53rd), paying taxes (53rd), dealing with construction permits (52nd), and resolving insolvency (43rd).

Reducing the regulatory impediments to doing business in France will be a formidable task, in view of the nation’s long love affair with regulation.  The above-cited issue of The Economist cites one example of this excessive regulation: France has a remarkable number of firms with 49 employees. This is surely due to the fact that many regulations become effective when a firm has 50 or more employees.

On the same day France received the warning from the IMF, Louis Gallois, former head of the aerospace group EADS, released a report on France’s competitiveness, commissioned by the French government.  Gallois recommended a 30-billion-euro “competitiveness shock” in the form of a cut in the heavy social-welfare charges on employers and employees.  This followed an open letter from the chief executives of companies listed on the CAC 40 stock exchange, calling on President Hollande to slash public spending by 60 billion euros – 3% of GDP – over 5 years.

The Hollande government responded with some positive moves but indicated they would prefer to use the term “competitiveness trajectory” or “pact,” rather than “shock.” The positive steps include a 20-billion-euro tax break for business and some 34 other measures, which together are projected by the government to lead to the creation of 300,000 jobs and add half a percentage point to annual economic growth over the next five years.  Prime Minister Jean-Marc Ayrault said the tax credits amount to a 6% cut in France’s labor costs, now among the highest in Europe.  These are moves in the right direction, but substantially more is needed, and time is running out.

France’s finance minister, Pierre Moscovici, rejected the idea that France could become the next focus of the eurozone crisis. He stressed that France remains the world’s fifth largest economy. It is also the sixth-biggest exporter, and in the first half of this year it was the world’s fourth-biggest recipient of foreign investment. It is at the core of the eurozone both economically and politically. These facts underline how important France is, not only to Europe but also to the global economy and markets. While the “time-bomb” cover picture featured by The Economist might well be considered an overly dramatic view of the present situation, the title of one section of their report, “So much to do, so little time,” sums up our concerns. The bond market is not known for its patience. Market sentiment could rapidly turn against France.

So far markets have been kind to the Socialist government in France, despite the S&P downgrade last January and the anti-business actions of the new government soon after coming to power. The French bond market has rallied over 9% since the S&P downgrade, more than double the gains of the rest of the global bond market, according to the Bank of America Merrill Lynch indexes. French credit default swaps remain below 100 basis points. They were well over 200 basis points last summer. Tuesday’s yield increase following the Moody’s downgrade was only 8 basis points, not that different from the 7-basis-point increase for the U.K. and 6-basis-point increase for Germany. Relative to the Italian bond market, the 1.3 trillion French bond market continues to attract safety-conscious investors and it does provide a positive, if small, return compared to Germany’s negative short-term yields.

The French equity market, as measured by the CAC 40, actually ended up +0.65% yesterday and is up over 8% year-to-date.  That is less than the 15.8% year-to-date increase in the MSCI equity index for Germany but about the same as the +8.3% year-to-date for the MSCI equity index for the world.

France clearly has the means to avoid becoming the “sick man of Europe.”  Sweden, Germany, and now Spain and Italy have shown what needs to be done. While the Hollande government shows signs of finally recognizing the problem and while its party is very well-situated to act, controlling the legislature and most regional governments, it still appears to be hesitant to act with the boldness and the speed that is required. Hollande and Ayrault have yet to demonstrate that they have the leadership qualities needed to face down the protests in the streets that such changes will surely generate.  We wish the best for France but are still refraining from including France in our International and Global Multi-Asset Class portfolios. Indeed, we have recently reduced our positions for Germany, our only eurozone position.

Bill Witherell, Chief Global Economist

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Fiscal Cliff v Slippery Slope

David Kotok reiterated:


We think the Obama, Reid, McConnell, Boehner, and Pelosi nexus may have begun to understand this. The election is over. We shall soon see whether we have adults in Washington.  Both sides now lose if they do not reach an agreement.  My colleague Bob Eisenbeis and I discussed this on Bloomberg TV on Friday.  See for the clip or go to .


Fiscal Cliff or Slippery Slope?
November 19, 2012

When it comes to US fiscal policy, are we faced with a cliff, or a slippery slope?  There is a difference between off-the-cliff Greece, the slippery-sloped European periphery, and the not-there-yet US.


We shall see if Alexis de Tocqueville may be right in his quote, “A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury.”


George Santayana was certainly right in his quote, “Those who cannot remember their past are condemned to repeat it.”


Fiscal cliffs are not unique to the US. However, there is a big difference between the European confrontation and the US confrontation. In Europe, the political forces have to deal with the results of failing to address budget gaps. They now confront debt in excess.  In many of those countries the debt-to-GDP ratio exceeds 100%.  Italy is the worst case among large economies; it is the third largest debtor in the world.


In Europe government budgets continue to swell. In France, the Economist reports, government has swelled to 57% of GDP.  This kills investment.  The CAC Index hasn’t had a new addition in a very long time.  The top income tax rate of 75% is driving wealth out of the country.


I will stop about Europe, since their rolling disaster is so well-known.


In the US, the Congress and the President are trying to negotiate a deal to avoid a European-style outcome. Our debt-to-GDP ratio is low enough (about 70% in publicly held debt) and our economy is strong enough (slow growth is not the same as shrinking) to permit that from happening. But to avoid disaster will require prompt, no-nonsense action.


In the US, it is possible to deal with our deficit problem prospectively. We have already done that once with the entitlement system, by recalculating Social Security payments over a longer time span and extending the retirement age.  We have the capacity to do it again with regard to post-retirement benefits and with additional changes in long-term entitlements. We also have demographics that have not deteriorated to the extent of Europe’s or Japan’s. If we wait long enough, however, we will descend to the same state of no return.


If we are smart enough to change our immigration laws and permit younger, entrepreneurial, enthusiastic people to enter our country legally, we will change our demographics for the better. The demographics would then favor robust growth for an extended period and provide adequate funding for our future entitlements and post-retirement benefits.  Is the US Congress smart enough to make that change?  I wonder – the indications are uncertain at best. We still elect too many idiots to the national legislative body.


By the way, those who accuse me of being either a Democrat or a Republican, depending on what I write, are quite wrong. I am neither. I believe both our political parties remain corrupted by money and ambitious politicians who are driven by short-term, election-driven agendas. Until our country is so disgusted with both of these parties that it is ready to demand material change, we will continue to get the shoddy government we asked for.


Let us get back to the difference between the US and Europe. European peripheral countries waited too long.  Now they cannot fund the promises that they made for retirement and post-retirement benefits, and so they have to impose austerity budgets. Those budgets strip away promises that were made. That is what drives people into the streets and increasingly threatens the political regimes of Europe.


European political leaders realize they have run out of rope. Especially in Greece, where the turmoil has been greatest, governmental leaders realize they must either severely alter the form of their government through austerity measures or see their society collapse into anarchy and chaos.


When governments impose austerity, they need police power to maintain civil order. In some sections of European cities, the police presence has been withdrawn or reduced and there is turmoil and deterioration of safety for the citizens. Other European countries are experiencing a migration of wealth. Citizens are not dumb; they vote with their feet if they are able to do it.


In the US, we see increasing divisions among the states. States that impose increasing levels of taxation continue to lose wealth to states that invite wealth and entrepreneurial spirit.  A good case in point is California, which has now imposed a higher level of taxation in order to preserve the payment streams from its pension system.  That system is bankrupting California cities, due to the overly generous pension policies they have put in place.


Here’s an example reported by Reuters:


“In bankrupt San Bernardino, a third of the city’s 210,000 people live below the poverty line, making it the poorest city of its size in California. But a police lieutenant can retire in his 50s and take home $230,000 in one-time payouts on his last day, before settling in with a guaranteed $128,000-a-year pension. Forty-six retired city employees receive over $100,000 a year in pensions.  Almost 75 percent of the city’s general fund is now spent solely on the police and fire departments, according to Reuter’s analysis of city bankruptcy documents – most of that on wages and pension costs.”  Hat tip to my colleague, Michael Comes, for sending me the report.


Until California changes its behavior, it will lose wealth and income to other states.  We see this in comparisons among states around the country.


Now the US federal system is in the throes of a great debate as to whether it can remain a functional democracy and act prospectively.  Will it do so, rather than being forced to act retrospectively?  Consider this:  Barron’s reports that New Jersey’s median income for a household of four people (two kids) is $102,000.  That household will see a $6900 tax increase if we fall over the fiscal cliff and stay there.  Mississippi’s median income for the same-sized household is $58,000.  That household will get a $3100 tax hike.  I think you get my point about the cliff.


With regard to market impact of the fiscal cliff, one of the best summaries we’ve seen is from Strategas. We excerpt:


“Negative economic growth is typically associated with a drop in the S&P 500 of -30%.  Perhaps the Fed can help cushion this blow, and perhaps a “QE4” could boost the market +10% (QE1 saw the market rise +80%, QE2 was +33%, Operation Twist & LTRO were +29%, and QE3 was +15%, i.e., diminishing returns).  So, even if QE4 helps mitigate, say, +10% points of the -30% equity decline, that’s still a -20% decline, based on history.  It would be much better for fiscal policy makers to simply remove the cliff.”  Source: Strategas Weekly Economics Summary, November 18, 2012.


Let me repeat their final sentence for the congressional members who read this and for their staff.


It would be much better for fiscal policy makers to simply remove the cliff.”


We think the Obama, Reid, McConnell, Boehner, and Pelosi nexus may have begun to understand this. The election is over. We shall soon see whether we have adults in Washington.  Both sides now lose if they do not reach an agreement.  My colleague Bob Eisenbeis and I discussed this on Bloomberg TV on Friday.  See for the clip or go to .


We wish readers a Happy Thanksgiving. This is a uniquely American celebration. Perhaps its traditions can inspire our politicians to seek compromise for the good of the nation.


David R. Kotok, Chairman and Chief Investment Officer


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CMC Winning Formula




Winning Formula

Last Saturday, CMC presents a series of presentations by Ray Barros and his two nephews: Kurt and Kane Petersen to a good turnout on a Saturday.

A-Trading Compendium to BarroMetrics ebook – Printable

-By Dame Anna Wang with Ray Barros

Updated to: By Baroness Anna Wang with Ray Barros

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Mark Laudi was the MC.

Obama wins another term

Now that President Obama has won another term, David Kotok has this to say:

Re-elected President Obama and Fiscal Cliff
November 7, 2012

The almost interminable season of acrimony is over.  We have the results.  The Obama-led wing of the Democrat party will continue leading the nation in finance, economic matters and social direction.


One hopes the nation sets aside the meanness that we have witnessed and becomes serious about compromise.  Issues need to be addressed.  This process starts in the lame duck session of congress.


The spending side debate has been beaten to death in the press and during the campaign.  Any more discussion of the Ryan plan or the Simpson-Bowles plan or other plans is likely to induce nausea. The time has arrived for action.


The catch phrase is “fiscal cliff.”  Both candidates allowed voters to infer things from their political vagueness and attacks on each other.  Neither was direct and honest with the voters.  Their advisers kept them from being specific, since specificity opens the candidate to distorting attacks by the other side.  Now the re-elected president must immediately act to avoid the cliff.


The cliff is summarized well on John Mauldin’s website, .  Find the piece entitled “The Perils of the Fiscal Cliff.”  We will excerpt below.  Many thanks to John and to Jim Bianco (hat tip for reinforcing our reference to Mauldin).  Here is a link: .  The fiscal cliff essay is found in one of the columns listed  on the right side.


John Mauldin wrote:


“Let me break down the major components of the Fiscal Cliff:


“1. Abolition of the Bush tax cuts, which amount to $265 billion, of which $55 billion is for the ‘wealthy’ and $210 billion for the ‘middle class’ (everyone else). Almost no one on either side of the aisle wants to actually go forward with axing the tax cuts for the middle class. Republicans want to hold on to the top-level tax cuts, and to my mind that’s a bargaining chip (see below).

2. The Budget Control Act, or the debt-ceiling deal, comes in at roughly $160 billion, with $110 billion of that in sequestration, mostly for defense; and there seems to be a growing consensus that not all of these cuts should be made.

3. The 2009 stimulus will also roll off (this is the 2% Social Security break and extended unemployment benefits). This amounts to $140 billion or almost 1% of GDP. Almost everyone agrees that these tax cuts were supposed to be temporary.

4. The ‘ObamaCare’ $24-billion tax increase on high-income households is almost sure to be allowed to go through.

5.Technically, there is $105 billion in the temporary ‘doc fix’ and Alternative Minimum Tax, which every year are supposed to expire and every year are postponed, which of course allows Congress and the president (whoever is in control) to project lower deficits in the future, even though those cuts never happen.


“If you add the $105 billion of fixes in #5 and the middle class tax cuts, you get $315 billion, or almost half of the Fiscal Cliff, which reduces the impact to 2% of GDP. Take some of the sting out of defense and you get to less than 0.5%.  But this creates a big but… What is your fiscal multiplier? It is not so simple as looking at what the IMF manufactures as a number and then extrapolating. Without trying to be cute, the US is not Greece or Spain or Germany; we are perfectly capable of creating our own unique brand of chaos. It is all debt-related to be sure, but the similarities begin to break down when you look at the gory details.


“Not all tax increases or tax cuts have the same multiplier, just as not all spending increases or spending cuts do. There is a big difference, as Gavyn Davies pointed out, between a fiscal multiplier of 0.5 and one of 1.7.”


Thank you, John, for an excellent summary.  We will soon know what the Obama multiplier is and not what the campaign’s say it is.  We expect that the multiplier is a lower number so Obama projections and Krugman certainties are about to become frustrated.


Readers may note that item number 5 in John’s list is an example of why we found, and find, both political sides disingenuous, during the campaign and, regrettably, after it.  The government’s projections are now rigged by congressionally-made rules which dampen their credibility.  We expect no change in this congressional deception in 2013.


As for the fiscal multiplier, this is what all these projections are about.  And it too is an assumption, just as tax rates are an assumption when you try to project what the outcome of a tax-rate change will be.


Election night celebrations aside, the lame-duck session negotiation has already commenced.  It is influenced by the election outcome as each side tries to determine whether a deal now is better than a deal next year.  Remember, to get to next year, we need to go over the fiscal cliff or pas a temporary extension of the present system.


The democrats maintain the majority but neither side has locked the Senate.  Thus, the only way to avoid the 60-vote filibuster rule is to have a global agreement in the budget reconciliation bill.  This unique structure only requires a simple majority in each chamber and a president willing to sign it.  Such a deal is possible in the lame duck if enough Republican Members of Congress can be bought off with their favorite Christmas tree decorations.  But it may be easier to go over the cliff and then buy off fewer Republicans in the House in the new term.


Massive negotiations lie ahead.  The nickname for this process is “the mother of all reconciliation bills” (MARB).  The attribution is to Norm Ornstein, American Enterprise Institute.  Ornstein thinks it might happen after the New Year, when the US actually falls off the fiscal cliff for a temporary period.  Either way, before or after yearend, MARB is the tool that can lead to a deal.


We believe hope of real reform is wishful thinking.  Flat taxes or simplification are not likely when the government remains divided.  So a real grand bargain is possible but likely to remain elusive.


Now let’s get to the markets.  We have maintained that markets fear uncertainty more than anything else.  Give market agents good news or bad news and the market’s agents can figure out what to do.  Give them no news and uncertain outcomes and they wait for more direction.  That is why the economy has struggled and that is why the markets have experienced a sense of malaise.


All this now changes.  We know the winners and losers.  We will know who will lead each chamber and what the chambers will look like.  And we will quickly have a better guess at taxes (higher?), spending (staying high?), fiscal cliff (the threat will be worse than the actual pain?), and other outcomes (rogue nations will test Obama’s resolve in the second term?).


The greatness of America is that we tolerate this bizarre system and then move right on.  Our institutions are strong and survive changes in our government, without recourse to guns, tanks, and civil disorder.  Of the nearly 200 national jurisdictions in the world, only a few can match that tradition.  The US is a leader among those who do.


We congratulate President Obama and the new national legislature.  Now let’s move on.  There is serious work to do.


Markets will close higher at the end of 2012.  The fog is lifting.  We hope.


David R. Kotok, Chairman and Chief Investment Officer


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