Kick the habit of begging for new stimulus

The Fed minutes from their most recent meeting have just been released, and talking heads in the media are debating whether the Fed needs to "do more" to stimulate the economy. Many pundits are calling for a third round of asset-buying by the Fed in order to increase Fed balance sheets -- a process known as "quantitative easing" which we explained in detail in this previous post -- the possibility of which is colloquially referred to as "QE3."

We believe the markets need to kick their long-time "Fed addiction," in which many on Wall Street and in the financial media look to the Fed to steer the economy and to take "bold action" at every bump in the road.

Granted, an unemployment rate at 9% is no mere bump in the road -- it is a disgrace -- but as we have frequently explained, stimulating consumption through various forms of easy monetary policy does not truly create the need to hire among business owners. To do that, the government should remove roadblocks to growth, lower corporate income tax rates, and get rid of regulations which make hiring more costly than beneficial to business owners.

The Fed is not the savior of the economy, and Fed stimulus can be like a drug to which the markets have been addicted for far too long. In fact, we would argue that this addiction to the Fed goes back at least to the tenure of the previous Fed Chairman, Alan Greenspan, who became known as "The Maestro" on Wall Street among those who felt that he always knew what to do in order to direct the "unruly" economy like a master conductor in control of a symphony orchestra.

While it would no doubt cause pain and outrage on the Street, we would like nothing better than to hear the current Fed Chairman declare, "I am going to give you a stable dollar and nothing more -- QE1 and QE2 were probably more harmful than beneficial, and you are not going to get a QE3. The economy knows how to grow itself, if we just give businesses a stable dollar." It's not his job to lower tax rates or repeal burdensome regulations, but if Congress wanted to follow such a declaration with legislative actions along those lines, we would welcome those moves as well.

Of course, the markets might well react with a temporary plunge upon learning that the Fed Chairman was no longer in the business of providing them with their regular stimulus "fix" whenever they started to crave it. The reaction might become quite ugly, but we truly believe that such a detox would be beneficial, and that after the rage and the withdrawal symptoms wore off, everyone would be a whole lot better for it.

Unfortunately, such a scenario is not very likely to ever take place, based on what we have observed during the tenure of the current Fed Chairman. But we believe investors should thoroughly understand the position we have outlined above, and should remember that the Fed does not grow the economy, the next time they hear someone on the financial news basing their arguments on the assumptions that it does.

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Does NPR speak for "investors"?

This morning, Fed Chairman Ben Bernanke said something we agree with for a change: that it's really up to elected officials to initiate policy changes if they want to "do something" for the economy.

In their spin on the Fed Chairman's remarks, NPR presumed to speak for "investors" whom they described as "waiting breathlessly" in hopes that the Fed was going to ride to the rescue with more "solutions" to the present state of the economy.

While NPR announcers may be very good at their job, we question their ability to speak for investors. As professional investors with decades of daily experience analyzing the economic situation and businesses in the economy, we would like to point out that these announcers certainly do not speak for us.

The NPR commentary this morning began:

Nervous investors -- and these days that's most investors -- were all ears this morning as Federal Reserve Chairman Ben Bernanke delivered a speech in Wyoming. The investors were listening for any clues about additional steps the Fed might take to shore up the sagging economy. Bernanke did not outline any big rescue plans, but he did say the Fed has tools it can use if necessary.

Later, the back-and-forth between two commentators included this exchange:

David: So, investors were waiting for this breathlessly. Why all the buildup?
Scott: Well, precisely it's because the economy has been in such a slump, David. You know growth in jobs has slowed dramatically since the beginning of the year, we've seen signs that factories are losing steam. Just this morning the Commerce Department came out with a revision of it's economic growth numbers for the second quarter, showing that the economy grew at just one percent, barely above stall speed, and so there's a lot of interest in what the Fed, or anybody, can do to try to come to the rescue.
David: And I gather Bernanke did not have as much to say as some investors would have liked. Tell us what he included in the speech.
Scott: Well, there was very little specific, in terms of what the Fed is prepared to do, there was no grand new silver bullet unveiled, nothing for investors to really grab onto as a strong dose of economic medicine. But as you say, Bernanke did again reiterate that the Fed has tools in its tool kit that it is prepared to employ as appropriate to support a stronger economic recovery. He also acknowledged that the weakness of the recovery is not just a result of some of the temporary factors that we were talking about this spring, the Japanese tsunami and the disruption in supply chains that caused, or the higher oil prices that resulted from the Arab spring. Bernanke said there are more persistent drags at work on the economy, so I guess if you want to look for a silver lining, that negative assessment of the problem could indicate some willingness in the future for the Fed to take some action. Bernanke said Fed leaders will be looking more closely at this when they meet again next month.
David: But Scott, a year ago -- I believe in the very spot, in Jackson Hole -- the Fed seemed ready and took some bolder action. If we're talking about "persistent drags" on the economy now, as you put it, what's changed? Why not take bold action today?

We've already published a series of posts which explain that "bold action" from the Fed is not what investors -- or anyone else who cares about economic growth -- should be pining for. To suggest that the Fed's negative assessment of the economic conditions could be a "silver lining" that will lead to "some bolder action" (such as QE3) in the near future is quite troubling, and demonstrates a clear bias towards Keynesian economic views by those running taxpayer-supported NPR.

Contrary to what the NPR commentators say when they presume to speak for investors, we are not looking for a "silver bullet" from the Fed, or a "strong dose of economic medicine" for investors to "really grab onto." Indeed, we think that those who can read between the lines of the above commentary will perceive that there are some other "persistent drags" holding the economy back, and we would include the effects of QE2, and all the other so-called forms of "government stimulus" among the drags!

We believe the Fed Chairman is right to have said that the real problem and solution lies with the elected officials. However, while some will interpret that as a call for some kind of short-term stimulus to the consumer, we would argue that government attempts to throw money at the consumer do not create a sustainable economic recovery. Companies do not hire more workers just because of temporary consumer stimulus -- they hire more workers based on their outlook for long-term business conditions, which can be improved primarily by removing obstacles to growth, including obstacles that make hiring workers or increasing profits more expensive.

If elected officials really want to take "bold action" to get the economy growing faster, they should consider actions such as replacing our byzantine tax code with a flat tax, lowering or eliminating the corporate tax rate in the US, repealing regulations that make healthcare more expensive for employers, replacing welfare payments with a negative income tax, signing free trade agreements (some of which, such as the agreement with Columbia, have been stalled for years), and repealing unnecessary regulations such as Sarbanes-Oxley, and even the recently passed Dodd-Frank financial reform bill.

We do not make these suggestions as representative of one political party or another -- we are speaking on behalf of investors, and for policies that we believe are good for overall economic growth, innovation, and the investors whose capital fuels that growth and innovation. After all, we actually are investors and professionally represent investors.

Finally, we would like to point out the fact that economic growth of 1%, while anemic, does not indicate an impending crisis. The commentators in the NPR clip above imply that 1% growth is "just above stall speed," as if an economy that does not grow fast enough will automatically stall, in the same way that an airplane that does not go fast enough will stall. But that is a false analogy. Airplane engines require a certain amount of speed in order to force air into the engine, but there is no law of physics or of economics that says that a country must grow at a certain speed or else it will simply "stall" and go into a recession.

This view comes from the idea that economies are fragile things that will naturally break down unless they are constantly tinkered with and stimulated by governments. In fact, economic activity is the natural state of human affairs. Left to themselves, people will grow crops, start businesses, invent solutions to problems, look for cures to diseases, and generally "do economic activity" that will enable them to make money for their families in greater and greater amounts. It is government tinkering and interference that disrupts this natural pattern. Thus, the cure for the sluggish 1% growth is not more stimulus but rather removal of some of the "persistent drags" that we talked about above.

In summary, the NPR story above is full of very poisonous ideas, all pleasantly masked by congenial banter between likable reporters with sophisticated diction. Investors should be wary when listening to such stories, which imply that the writers are accurately reporting the sentiments of investors at large. In fact, nothing could be further from the truth.

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Tax rates and employment in Illinois

Above is a chart from the Illinois Policy Institute, based on US Department of Labor Statistics, showing employment in Illinois since January 2010. In the article accompanying the graph, the Institute authors note that Illinois lawmakers approved a tax rate increase in January, and point out that the employment gains in Illinois turned around the same month.

The tax rate hike raised individual income tax rates by 66% (from 3% to 5%, still well behind California) and corporate tax rates by 45% (from 4.8% to 7%). The rate hikes were retroactive to the beginning of 2011 and were designed to last for five years, in order to help pay off budget deficits, after which they expire at the end of 2015.

While some may argue that other factors may have caused employment to turn around, and that the graph above does not necessarily prove cause-and-effect, we believe that people do indeed modify their behavior in response to changes in tax law and tax rates. In particular, venture investors become less likely to risk capital to fund new companies, because the risk-reward equation changes (the potential reward is reduced), companies become less likely to expand (leading to fewer employment opportunities than would otherwise take place), and individuals who have the option of working or not working weigh the costs and benefits differently (because the costs have increased and the benefits decreased).

This whole discussion goes back to a very important post we published back in 2010 entitled "Growth is the answer: the primacy of human creativity." Ironically, that article featured a quotation from a professor of finance from the University of Chicago (in Illinois) who said, "Countries only pay off debts by growing out of them." We would add that the same thing applies for states.

In the same post, we cited sage words from George Gilder, who argued that the two most important ingredients for innovation and growth are low taxes and sound money. Creating conditions that do not impede growth will ultimately lead to greater tax revenues and the ability to pay off debts.

We hope that other leaders around the world are paying attention to the evidence from Illinois.

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Excellent article from Marc Andreessen

All investors should carefully consider an article published in the Opinion section of today's Wall Street Journal from entrepreneur and venture investor Marc Andreessen, entitled "Why Software is Eating the World."

It explains the paradigm-shifting impact that technology is having on businesses that at first glance might appear to have nothing to do with software. In fact, in the article, Mr. Andreessen declares that "Companies in every industry need to assume that a software revolution is coming." He also believes that "this is a profoundly positive story for the American economy, in particular."

This is a subject which we believe is profoundly important for investors to understand, and one which we have written about many times in the past. For previous discussions of the important concept of a business paradigm shift, see this previous post (or search for posts containing those words). For previous discussions of the transformative impact that technological advancements are having and will increasingly have on all areas of business, see this previous post (or search for posts containing the words "unstoppable wave").

In the past, we have advised readers to learn from the way venture capitalists look for companies in which to commit investment capital. We believe that this new article from Marc Andreessen provides an excellent opportunity for exactly that kind of thinking and learning.

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A notable study on imports

Hat tip to our friend Steve Waite of Research 2.0 for alerting us to this research from two senior members of the Federal Reserve Board of San Francisco entitled "The US Content of 'Made in China.'"

In their analysis, senior economist Galina Hale and senior research advisor Bart Hobijn determined the percentage of US consumer spending which goes to imported goods made overseas. Further, they determine the percentage of the cost of imported goods which actually ends up going to the value added by US transportation, wholesale and retail activities. Their findings are very interesting.

For starters, they find that 88.5% of US consumer spending actually goes towards goods and services produced in the US. Of course, they note that a large percentage (about 66%) of this number is spent on "services," which are largely produced in the US. Durable goods, on the other hand, contain a higher percentage of goods made overseas (about 33%).

In total, the study found that only about 11.5% of the total personal consumption expenditure went to foreign goods. About 2.7% of the total went to goods that were made in China. Of the amount spent on goods made in China, the authors found that about 55 cents of every dollar went to services that were provided by people in the US who were involved in getting those goods to the end consumer.

We believe that the numbers in this study are important for investors to understand, especially in light of the fact that politicians and pundits of all political persuasions are fond of declaring that the US economy is dead or dying because "we don't make anything here anymore" (a complaint we have debunked many times in the past, such as in this previous post). The most recent politician we have heard floating this complaint is Republican presidential candidate Jon Huntsman in the recent Iowa debates, in which he said, "We don't make things anymore in this country."

Besides proving this sentiment to be wrong, the analysis also reveals something that should be obvious: Americans and American jobs are involved in importing, distributing, marketing and selling those goods which are imported. We pointed this out before in a post entitled "The ugly tomatoes of protectionism," in which we showed how a Supreme Court case back in 1893 which ruled to protect domestic tomato growers from foreign competition ended up hurting the family business run by John Nix and his three sons, who initiated the court case. The modern data shows that imports are just as important to the livelihood of many Americans as they were back then.

The entire article is worth reading and understanding, as an antidote to the anti free-trade sentiments which still surface frequently in political discussions from both members of both major US parties.

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Some investors worry that government IV bags will run out

US markets are reeling again on increased concerns over European debt defaults and this morning's latest jobless-claims-number ticking back upwards across the 400,000 mark to 409,000.

Investors are voicing concerns that governments (especially the US government) don't have much ability to "help" out due to their deficits. For example, in this Wall Street Journal article from this morning, a professional investor declared, "I don't see much help from Washington."

What surprises us is the fact that anyone still believes the fallacy that "help" in the form of increased government spending has a positive effect on the economy. The evidence that increased government spending has a damaging effect on economic growth and on employment is overwhelming, as we will see below.

Nevertheless, NPR this morning ran an interview with University of Texas economist James Galbraith advancing the exact same argument, that government spending is good for the economy, especially in a sick economy. Professor Galbraith argued that government spending is like an "IV bag" that keeps a sick patient alive, saying:

Well, the IV bag in an emergency room provides fluid -- saline solution -- that keeps a patient who's very sick alive. What the federal deficit does -- the federal government spending in excess of what it takes out of the economy in taxes -- is to put money into the pockets of private individuals, businesses, and it keeps them able to continue their consumption, so it buffers the effect of the severe economic shock we had three years ago and makes it less difficult for ordinary citizens to get through tough times when their incomes are low and they may be experiencing bouts of joblessness.

The sheer wrong-headedness of this argument is shocking. As Dan Mitchell of the Cato Institute explains in the video below, the argument that the government can "put money into the pockets of private individuals" completely ignores the fact that in order to do so, the government must first take that money out of the pockets of private individuals!



Mr. Mitchell goes onto demonstrate that arguments like the one articulated by Professor Galbraith on NPR are not only illogical and theoretically unsound, but that these theories have been an utter failure every time and everywhere they have been attempted.

For example, he points out that Herbert Hoover boosted government spending by 47% during his term, during which time economic growth dropped and unemployment increased. Under Franklin D. Roosevelt from 1933 - 1940, government spending went up 106%, during which time the economy tanked and unemployment averaged 17.2%*. Gerald Ford in the 1970s and Japan in the 1990s had similar unsatisfactory results from their attempts to "stimulate" the economy.

There is a rising chorus of voices saying that further government stimulus cannot be attempted right now because "we can't afford it" from a budgetary perspective, but we wonder why there aren't more who instead argue against further government stimulus because it doesn't work!

In fact, we ran the above video about the bankruptcy of the argument for government "stimulus" over two years ago. Since then, government stimulus has resulted in slower economic growth and continued stubborn unemployment.

At the end of his NPR interview, James Galbraith says that cutting government spending "willy nilly" would be "like running through the emergency room pulling IV needles out of people's arms." We would suggest that his metaphor might be in need of a little modification. Government IV bags, instead of carrying helpful Ringer's solution, contain a mix of depressants that keep an economy weak, sluggish and dependent.

It's amazing to us that academia and the media continue to flog this tired old theory, and that people continue to buy into it.


* Henry Morgenthau, Jr. (1891 - 1967), FDR's Treasury Secretary, declared in 1939 in a quotation that is now famous (and should be more famous):

Now, gentlemen, we have tried spending money. We have spent more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong, as far as I'm concerned, somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. [. . .] But why not let's come to grips? And as I say, all I am really interested in is to really see this country prosperous and this form of Government continue, because after eight years if we can't make a success somebody else is going to claim the right to make it and he's got the right to make the trial. I say after eight years of this Administration we have just as much unemployment as when we started.

Mr. Doughton: And an enormous debt to boot!

Mr. Morgenthau: And an enormous debt to boot!

Source: microfilm roll #50, Henry Morgenthau Diary, May 9, 1939. FDR Library, Hyde Park, NY. Pages 3 and 4 of the pdf scan of the microfilm; pages 42 - 43 of the original document. Hat tip to Burt Folsom, author of New Deal or Raw Deal, who linked to this microfilm source on his website in response to questions about the authenticity of the Morgenthau quotations. We note that we do not agree with Mr. Morgenthau's belief that "taxing the rich" would be the best solution to address the deficit FDR created (for reasons see here and here), but note that his frustration at the ineffectiveness of government spending to create jobs should be powerful evidence to anyone who still believes the myth of the "IV bags" perpetuated by NPR and James Galbraith.

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What to do during a financial panic

The recent market gyrations have largely resulted from fears that the economy (either the global economy in general or the US economy in particular) is poised to drop into another recession similar to the most recent recession of 2008-2009. The memory of the market plunge that accompanied that recession is still fresh in investors' minds, and many are fearful of returns to the lows of early 2009.

There have been many articles written and video interviews broadcast about the differences between today's situation and 2008. We believe that an important distinction that should help investors understand why 2011 is not 2008 is the distinction between what we might call a "financial panic" and what we might call an "economic panic."

We explained the distinction at least as far back as December, 2008, when in this blog post we explained that the recession of 2008 was very different from typical recessions. In a typical recession, "companies have been over-optimistic, built up their inventories, hired too many people, and then were caught flat-footed when the economy suddenly slowed." In contrast, the recession of 2008 was not caused by anything that companies had done: it was caused by a panic in the financial sector caused by the implosion on Wall Street, which then caused companies to slam on their own brakes. Companies hastily canceled orders for more goods to sell, trimming their inventories and going into a sort of "state of shock" in which all expansionary activity was shut down until the panic subsided. In other words, a financial panic led to an economic panic.

Here in 2011, we are again not faced with the sort of behavior that typically precedes a recession: companies have not been over-optimistic, they have not built up excessive inventories, and they most certainly have not been hiring too many people in anticipation of massive increased demand.

However, in the past week we have experienced something of a mini-panic, in which markets around the world plunged in response to the S&P downgrade of the US credit rating and in response to fears of the loss of stable value in funds invested in European banks. The plunge was steep and violent and certainly characterized by panic selling, with severe volatility -- wild swings from one minute to the next -- and heavy volume. It reminded some observers less of 2008 than of 1987.

The question of the hour is whether this financial panic will result in another economic panic, as companies slam on the brakes and gape in slack-jawed amazement at the chaos in the markets. So far, we believe there are some encouraging signs that the economy may avoid catching the financial sector's panic this time around.

For one thing, the damaging mark-to-market accounting rule that was so critical to the previous implosion on Wall Street, by creating a vicious cycle or "feedback loop" which we described in numerous previous posts in 2008 and 2009 such as this one, this one or this one, has been put to rest. In fact, the end of that terrible accounting regulation during the first half of March 2009 initiated the beginning of the market and economic recovery.

For another thing, economic data, including real-time or very close to real-time data, shows that the economy continues to expand slowly, as explained in this video by respected economist Brian Wesbury, entitled "This is not 2008."

Finally, we believe that those parts of the economy where the government is less intrusive, real growth and innovation are still taking place -- especially in the area of networking communications, what we call "the Unstoppable Wave" (see for example this previous post). Evidence of the importance of this area of innovation and technology was reaffirmed today by Google's dramatic deal to acquire Motorola Mobility Holdings for $12.5 billion in cash.*

All of this, we believe, translates for investors into advice that we have reiterated before. First, don't panic. It has often been said that investors tend to damage their long-term returns in anticipation of economic calamity than in actual economic calamities themselves.

Second, swear off the advice of those who pretend they can predict what the economy or the market is going to do next -- we have explained before that this is a "persistent delusion" that has led many investors to ruin.

And finally, we believe that the best course of action for long-term investors is to commit their investment capital not to "the market" but to well-run businesses positioned in front of fertile fields for future growth. We believe that this is always good advice -- in fact, our entire investment discipline has always been based upon this conviction, and it has served us well through not just the 2008-2009 panics but previous recessions, going back in fact to the one-day panic of 1987. We believe it is just as applicable -- in fact, maybe even more applicable -- today as it has ever been.


* At the time of publication, the principals of Taylor Frigon Capital Management did not own securities issued by Google (GOOG) or Motorola (MOT).

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Commentary on the S&P downgrade and the current situation

We still recommend that readers go back and read the previous two posts discussing the latest market volatility and widespread fear of impending recession that has been rising over the past couple weeks and escalated sharply at the end of last week.

Those two posts were published before the S&P downgrade of the US Treasury's credit rating on Friday afternoon. For some perspective on this latest development and how it fits into the larger picture, check out the video above of Gerry Frigon speaking on KCOY television this morning.

We would also recommend the perspective of economists Scott Grannis (see his post from yesterday here) and Brian Wesbury (see his essay from this morning here).

It is also noteworthy that the US Treasury prices are actually going up rather than down in the first day of trading after the S&P downgrade. This fact may be evidence that the downgrade has more political significance than economic significance. However, it is also important to note that this downgrade forces large institutional investors to sell other forms of debt that they own for their investors and to purchase more Treasurys. This perverse consequence is the result of the "law of unintended consequences" explained two weeks ago in a different post by economist Scott Grannis.

We have previously highlighted other instances of consequences that well-meaning politicians often create when they write legislation that attempts to restrict the free decisions of rational actors and tells them what they are allowed to do with their own money (how much they should be allowed to pay employees, for instance, or what kinds of bonds they should be allowed to buy). For discussions of that subject, see here and here.

Also highly recommended is the editorial from the opinion-page editors of the Wall Street Journal this morning. They point out that the rating agencies only care about balance, and have no opinion over how to make it happen. The debate about how to reduce the imbalance has been raging for some time now and intensified over the weekend.

Increasing revenues and lowering spending are obviously the two components of a solution, but some politicians continue to believe that increasing revenues is best done by raising tax rates. We believe that such an idea couldn't be further from the truth: the best way to raise revenues, as the WSJ piece points out and as we have argued many times in this blog, is to unleash innovation and growth. Increased tax rates squash innovation and growth. For a few previous posts with evidence to support this fact, see here, here, and here.

We believe that the most important thing for investors to do in times like these is to remain disciplined, and to focus on the fundamentals of the individual companies to which they are providing investment capital.

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Lions and Wildebeests: Excellent commentary from Jeb Terry

Our friend Jeb Terry of Aberdeen Investment Management has just published an excellent examination of the current fear-ravaged market entitled "The Wildebeests are running . . . Be a Lion!" It should be required weekend reading for all investors to provide some perspective on the current situation.

His arguments, backed up with extensive data, provide further support for some of the things that we wrote yesterday in the post entitled "Don't Panic (August 2011 edition)." We believe investors should consider all these arguments very carefully.

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Don't Panic (August 2011 edition)

The equity markets have been reeling for the past weeks, and today they were particularly savaged as additional fears of impending economic doom took over. The Dow Jones Industrial Average plummeted 512 points, and the S&P 500 index dropped a whopping 60 points (an even greater drop in terms of percentage than that of the Dow). The drop sent the markets into "correction" territory (defined as a pullback of 10% from most-recent highs). Both indexes are now in negative territory for the year, and the Dow closed at its lowest point in six months.

Markets began sliding as the artificial crisis over the debt ceiling intensified -- we call it an "artificial crisis" because politicians on both sides of the aisle explicitly threatened that the US would "default" on its debt obligations if a resolution was not reached by the arbitrarily-selected August 2nd deadline, a possibility that we showed was utterly ridiculous (see this previous post).

Now that a debt-ceiling deal has been reached, markets have shifted their angst to the ongoing weak economic reports, including a weak GDP number (the first estimate of US 2nd quarter GDP came out this past Friday at a meager 1.3% annual rate of growth), weak numbers for ISM manufacturing and non-manufacturing for the month of July (50.9 for ISM manufacturing and 52.7 for non-manufacturing), and another disappointing jobs number (400,000 unemployment insurance claims for the week ending July 30, as reported today). The ongoing fears about sovereign debt in Europe are adding to fears that a major economic catastrophe is just around the corner.

However, we believe that fears of impending Armageddon are ill-founded and overblown. For starters, we would argue that ham-handed government interference with the economy in the US, including "stimulus" spending and sharp increases in regulation, have hampered the economic growth that would otherwise have been stronger. However, we believe the recent debt-ceiling debates reveal that the American people and their elected representatives are now sharply focused on the question of spending in a way not previously seen in this country. For some insightful commentary on the debt-ceiling deal from an economist we respect, we would advise investors to check out the video entitled "We have a deal" by Brian Wesbury.

Further, while the government's inept intrusions have hampered growth, the economy is still growing (albeit slower than anyone would like, and certainly slower than it otherwise could). While 1.3% expansion is nothing to write home about, it is expansion. Similarly, both of the ISM numbers noted above indicate expansion as well, just at a slower pace than expected.

We would also point out that the red line above, which indicates GDP growth, continues a fairly steep increase, while the stock markets continue to trade as though we were no better off today than we were in 1997. If you look at the blue line, representing the S&P 500 index as of close of markets yesterday, and trace its current level back in time to the first time it crossed that level, you will see that the underlying US economy was well below $10 trillion in size back then. Today, even with the recession of 2008-2009 and even with the obstacles that the government keeps throwing in its path, the economy is well over $14 trillion and very close to $15 trillion in size. This is an astonishing fact for investors to keep in mind.

However, these sorts of data do not make much impact on investors who believe that another huge recession is yawning ahead of them. To put those fears into perspective, we recommend they avail themselves of some of the historical and economic data discussed by Larry Kudlow in his most recent posting, "No Recession." We would also recommend our own posting from less than two months ago (when similar fears began to push their way to the forefront) entitled, "Do we have a dead economy walking?"

Finally, we would point investors to the most important point, which is our deeply-held conviction that trying to call economic ups and downs -- and trying to time one's equity ownership of promising companies to those economic forecasts -- is a loser's game, and a very dangerous one at that. We recommend that investors commit their financial market capital to well-run, growing businesses, and hold those investments through economic cycles. This ties their potential success to the quality of the business, rather than to their ability to make correct economic predictions (predictions that even professional economists botch quite frequently).

We would also point to previous posts we have written to try to pass along our convictions on these matters during previous times of panic, such as a post entitled "Don't Panic!" in 2010 here, and a series of posts entitled "Don't Get Off the Train" here and here.

Finally, we would note that corrections like this can be a good opportunity to contribute to investments which have long time horizons, if done as part of a plan of regular, disciplined contributions. For more on that subject, we recommend investors read "Paying yourself first," published on this blog on March 26, 2009. Those who followed its advice at that time had an opportunity to do very well indeed.

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