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Boston: Some Bullets and a Polemic

Posted By David Kotok On April 24, 2013 @ 1:30 am In Taxes and Policy,Think Tank,War/Defense | Comments Disabled

Boston: Some Bullets and a Polemic
David R. Kotok
April 23, 2013

 

 

1. Unfortunate and tragic events in Boston. More will be revealed as investigations delve deeply. We now ratchet up expectations in spending on security apparatus, employment in the security surveillance industry, compliance with additional restrictions, time delays, and productivity losses as every major event in the US goes through transitional changes that will result in more police, cameras, photos, searches, examinations, and time interruptions. This is the price we pay for public safety, whether in Boston or at Columbine. We relinquish, incrementally, aspects of free movement in return for perceived safety. Diligence and judicial review is needed here. If you give up freedom for perceived safety and are not careful about how you do it, you end up with neither safety nor freedom.

2. A specific post-Boston issue now confronts the country. The younger brother, 19-year-old Dzhokhar Tsarnaev, not withstanding his despicable acts, is a naturalized American citizen. That means he probably knows more about the history of the US than many Americans who enjoy citizenship as a birthright do, because he had to go through a naturalization process and education to obtain American citizenship. Authorities want to interrogate and learn as much as they can from him. He says his brother was the ringleader and there is no foreign element involved. Is he lying? What is this Russian warning connection?

In the US, American citizens are entitled to a lawyer and a judicial process, and the Miranda decision dictates that a suspect be informed of these rights, along with a right to remain silent, before questioning. Since that 1966 decision, the litany has become so familiar that most of us can very nearly repeat it word for word, just because we’ve heard it so many times on television: “You have the right to remain silent. Anything you say can and will be used against you in a court of law. You have the right to speak to an attorney, and to have an attorney present during any questioning. If you cannot afford a lawyer, one will be provided for you at government expense.” Many were therefore shocked when the Justice Department sponsored invoking “public safety exception” to the Miranda rights and questioned Dzhokhar Tsarnaev on Sunday night before reading Tsarnaev his Miranda rights on Monday.

While the Attorney General of the US initially pursued a process to avoid the Miranda rights reading and the ability of this 19-year-old to obtain the advice of counsel, others hotly debated this move. We do not defend the two brothers or their behavior. We despise acts of terrorism. But, as cited in the first bullet above, there are some very basic rights in the US that are designed to protect those who are innocent. When you waive them, you open a Pandora’s Box by a notch. When you give up elements that protect our citizenship and our freedoms in a judicial proceeding launched by the President of the US and his Attorney General, you open the door to misuse of that proceeding. The issue is a subject for intense debate in the US among legal scholars and constitutionalists and may find its way to the US Supreme Court before it is resolved.

3. The linkages in Washington are completely broken. On one hand, members of Congress can talk about the Boston attack and what to do with terrorists. Senators and Representatives, 535 of them, offer 536 opinions. At the same time, they cannot find a way to pass a very narrow piece of legislation to address the shortage of air traffic controllers, closure of air towers, and impediments to air travel. So we are now encountering reduced surveillance at airports, where we have experienced serious terrorist penetration in the past. We watch air safety compromised due to sequester. Call the Capitol switchboard at 202-224-3121. Ask the operator for your senator or representative and leave him or her a message.

By the way an when talking about threats to our safety, this is the same Congress that can pass a piece of legislation exempting companies that produce genetically modified food sources from liability claims if their GMO food happens to be toxic to someone. Barbara Mikulski, Democratic Senator from Maryland and chair of the Senate Appropriations Committee that oversaw the bill, later protested that she did not know the provision was there. She pledges not to have it there in 2014. A Congress that cannot pass a narrow bill to relieve the American public of air travel delays and a Congress that passes legislation without knowing what that legislation says is an utterly broken enterprise. The ownership of those legislative acts belongs to the Senate Democratic majority led by Senator Harry Reid of Nevada, the House Republican majority led by Speaker John Boehner, and the White House inhabited by a president who attempts to blame everyone but himself. President Obama signed that budget and the sequester legislation into law. President Obama, the Republicans in the House, and the Democratic majority in the Senate own that legislation. If you are delayed for a flight, blame the Senate, the House, and the President. If you get sick or die from GMO, you have no federal recourse. These politicians and their colleagues did it to you. The system is rotten and broken.

4. Meanwhile, the recovery of employment in the US is tepid. The baseline distinction between part-time workers looking for full-time employment in cycles prior to 2007 and in this cycle reveals a spread of 3.5 percentage points, or approximately 5-6 million part-time people who want to find full-time work and cannot do so. In addition, the proportion of the labor force now collecting permanent disability in the US is up to approximately 5 percent, or approximately 3-3.5 million people. That is double what it was at the end of the Clinton years. We have over a million young Americans, mostly men, incarcerated for offenses that are no longer illegal in many states. They are not counted in the employment statistics. They have a 80% plus recidivism rate and a felony conviction on their records. One third of those folks had jobs when they were arrested. In addition, we have a large disillusioned portion of our population that has given up looking for work. Thus, we have employment targets that are eventually going to be reached statistically but may be reached because the shrinkage of the labor participation rate will continue, possibly reaching a level of 60 percent. The labor participation rate is currently just above 63 percent, lower than it has been in 25 years, and the trend continues in a negative direction. What does that do for stability of a society with regard to the themes of safety vs. freedom and security vs. insecurity? For an excellent dissection of the labor issues, see this piece by Bob Brusca, who gave us permission to post it on our website: “Labor force growth, jobs policy and the 42%.” – http://cumber.com/content/special/fao-economics.pdf.

5. We see the G20 in benign agreement with global policies. I suppose lack of contentiousness is a good thing. Japan has a green light and will hugely expand its monetary system. We expect the yen/dollar relationship to break through 100 on its way to the 115-130 range. This is bullish for Japanese stocks and has implications worldwide. At the same time, the US Federal Reserve continues $85 billion per month in QE application. Other central banks have their own versions of stimulus. Gold has gone through wild gyrations in the last few weeks as European finance ministers triggered the notion of central bank gold sales involving Cyprus and potentially elsewhere. Note that exchange-traded fund (ETF) holdings of gold before the selling started were the third-largest gold hoard in the world. Only the holdings of US and Germany exceeded them. Even after the selling, the ETF holdings, according to Goldman Sachs, are the fourth largest in the world. Note how the world is searching for alternate payment mechanisms involving other-than-fiat currencies. A wild example is Bitcoin. Will this search lead to an electronic transfer system involving gold? Such things exist in a very small way right now. We might find them expanding rapidly. Think about safety and security in a world where money is increasingly distrusted.

We see large gold purchases in China and India at the new lower price level. They seem to be offsetting the sales. Remember that the marginal production cost of gold is estimated to be somewhere around $850 to $900 per ounce. That would act as a floor on the gold price, as we know from the last century when gold originally was $20 per ounce until the Depression era, when President Franklin D. Roosevelt increased the gold price to $35 per ounce, thereby effectively devaluing the dollar, and eliminated gold convertibility for American citizens. Since then, the price of gold has moved inexorably higher as the value of the dollar in which gold is denominated has moved ever lower. The short-term relationships between precious metals, other assets, and fiat currencies are highly volatile and very difficult to trade. But the long-term relationship is predictable: cheapen money and the assets denominated in that money will rise in price. Cheapening money never leads to more safety and security.

6. The Obama budgetary attack on tax-free municipal bonds is a second-derivative attack on state and local governments and therefore on safety and security throughout the US. Remember that the current tax rates in the US run up to 39.6 percent. The Obama budget proposes a cap at 28 percent on tax-free bonds and wants to apply it prospectively and retroactively. That includes the entire $3.7 trillion in existing bonds plus all new bonds. The issuance of municipal debt at the state, county, and city levels and by other authorities involves the raising of funds that support the infrastructure for police, fire, and emergency services, the educational facilities that train those people, the airports and hospitals, and all of our “taken for granted except when they fail” municipal services. If you take away part of the benefits that are used to induce the financing of that infrastructure, you raise the cost to the issuer. The city still needs the police and fire. The county still needs the airport services. We still need water and sewers and the protection for them so that they cannot be poisoned. We use rail. We drive our cars and transport our goods across bridges and through ports and tunnels. Attempting to balance the federal budget by transferring costs to state and local governments under the guise of taxing the rich for the benefit of the poor is not only misguided but disingenuous. The havoc wreaked in Boston proves the importance of local infrastructure and response when pressured by an act of terror. Will the bombing change the budget debate? That is another question for broken Washington.

We have compiled some bullets that share a basic theme. They start with the events in Boston. However, they encompass more than Boston, Columbine, or any other single event. A confluence of policies is compounding risks to our society and our freedom. The most precious asset of all, our ability to speak openly and to move freely around our country, is threatened by economic policy and by terroristic forces. Elevated risks impose new costs on us. And to offset those costs, we require leadership in a governmental sense. We need a government that tells us the truth promptly, looks out for the 325 million of us living in the US, and does not put its own political fundraising and next year’s election ahead of the public good.

We need those things more than ever and we need them quickly.

~~~

David R. Kotok, Chairman and Chief Investment Officer, Cumberland Advisors [1]

 


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