Happy Thanksgiving to All

This year, Thanksgiving comes during a time of economic fear and uncertainty.

Market drops have been as brutal as any in the past hundred years, and dire economic commentary can be heard on the news around the clock.

Bearish commentators are having their day, taking credit for predicting the current crisis. Now many are using their media platform to predict further doom and the end of America's economic prominence.

Peter Schiff, for example, says that "the growing imbalances in the U.S. economy, its twin budget and current account deficits, its lack of domestic savings, and the erosion of its industrial base, have now reached a point where a severe recession, culminating in a substantial decline in the over-all American standard of living, is imminent." Jim Rogers in an interview yesterday said "I hope you're worried . . . the demise of the UK as it went from being a great power to a declining power -- I'm afraid it's happening here."

The bears are having their day now, but Americans should not let themselves be talked into believing that our system is ready to collapse. The American economy remains the greatest example of the incredible blessings of freedom and free-market capitalism in the world. In spite of the imperfections and encroachments on freedom present in the system, America remains among the freest economies in the world in terms of protection of private property and the right of the individual to participate in the economy in whatever legal manner he decides to do so for his own economic improvement.

At Thanksgiving, it is appropriate to take a step back and see the big picture and the incredible advances that this economic freedom has enabled.

At the turn of the last century (just over a hundred years ago), for example, the life expectancy for male infants was just 32.5 years for non-whites. For white males it was a few years longer: 38 years. Those who survived to the age of ten had a longer life expectancy -- to an age of between 42 and 48 years old.

The free market has enabled tremendous advances in medicine that explain much of the incredible increase in life expectancy from those amazing early 1900s statistics. But medical advances are not the whole story -- free-market capitalism has enabled incredible advances in food production and distribution, in the distribution of electricity to homes and businesses, and the ability of homes to have indoor plumbing, to the point that having water delivered right to a tap in the kitchen instead of being pumped by hand from a well is now taken for granted by almost everyone in society. The widespread availability of air conditioning and central heating have also played a role in lengthening lifespans, as have a century of technological advances that have made greater productivity possible with less physical danger than in centuries past.

Free markets mean that you are not restricted from entering the market to sell your goods or services based on your race, or your religion, or your sex, or your country of origin. Those who seek to restrict economic activity on those grounds (as well as on the fear that you may take away their business by offering a better product or better value than what they are offering) are acting against free markets. There are generally far fewer of such barriers to participation in markets today than there were in 1900, and this fact is also part of the story of the incredible increase in opportunity and prosperity that we have seen in this country and that we can be thankful for.

That it is still very possible in this country to start with an idea and turn it into a business that does a billion dollars in annual sales (or more) is evidenced by the entrepreneurs who come to Silicon Valley from all over the country, and all over the world, to try to do it -- and by those who have and continue to successfully do so, not just in Silicon Valley but in other parts of the country as well.

The advances of the past hundred years -- from the introduction of the Ford Model T to the introduction of the Apple iPhone, and countless other ideas before and since that have added value to our lives -- were made possible by a system that is very much still in place.*

The current economic chaos has given an opening to those who say that the American system is ready to fade into history, and that standards of living are doomed to suffer a horrendous collapse. We can be thankful that these reports are, as Mark Twain would say, "greatly exaggerated."

Happy Thanksgiving to you, from Taylor Frigon Capital Management.

* The principals of Taylor Frigon Capital Management do not own securities issued by Ford (F) or Apple (AAPL).

For later posts dealing with the same topic, see also:

• "Dent vs. Schumpeter . . . and Kurzweil" 03/24/2009.

• "The dark side of zero-sum thinking" 04/20/2009.

• "Happy Thanksgiving 2009" 11/24/2009.

• "Happy Thanksgiving 2010" 11/24/2010.

• "Lawlessness in California" 12/16/2010.

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Stimulus package, revisited

Today in the Wall Street Journal, Stanford University economist John Taylor explains why the first "stimulus package" didn't work, and why a new and larger one won't either. John Taylor is the author of the so-called "Taylor Rule" for fiscal policy which is cited in virtually any economic textbook you can find.

In an opinion piece called "Why permanent tax cuts are the best stimulus," Professor Taylor includes a revealing graph which shows that the stimulus package of May of this year had little or no effect on personal consumption expenditures.

Back when that "stimulus package" was passed (in February of this year) we wrote a blog post entitled "Where is the leadership?" In that post, we noted that "in the face of market turbulence and howls to 'do something' no leader arose to call for action that would really have an impact beyond shuffling dollars from one taxpayer to another in a shell game."

Yesterday, in an interview on Bloomberg (see below), former FDIC Chairman Bill Isaac repeated his call to end the mark-to-market accounting rules that have played such a role in causing the crisis in the banking system, and which continue to cause havoc:

In the interview, Mr. Isaac says that the simplest thing for the government to do would be to "simply call the Chairman of the SEC over to the White House and say 'knock it off' -- get rid of this mark-to-market accounting. You're costing the financial system hundreds of billions of dollars and the taxpayers are having to replace it."

Again, back in the first half of March, we published a post entitled "It's not worth zero, but if the market says it is . . ." in which we made the same assertion. Mark-to-market accounting is an attempt to price assets more transparently, by using the changing market price for that asset. As Mr. Isaac explains in the interview above, however, it totally ignores any fundamental analysis of the cash flows of the asset and instead uses "the market" as a shortcut for that analysis.

Respected economist Brian Wesbury made the same point in a research report yesterday, a point which he has also been making since early this year. His metaphor at the top of the second page of that two-page report explains why mark-to-market has fanned the flames of a financial industry brush fire, causing it to spread out of control to the rest of the economy.

The economic insights that are necessary to put out this problem are out there and available to Washington leaders, and they have been available since before the problem got out of control. Why they have not taken advantage of these insights is inexplicable and inexcusable.

For later posts dealing with this same subject, see also:

• "Taking stock of 2008" 12/31/2008.

• "The consumption/production distinction with regard to stimulus plans" 01/15/2009.
  

• "It's a panic, not a Great Depression" 01/21/2009.
  

• "First, do no harm" 02/02/2009.

• "Big news on mark-to-market accounting" 03/13/2009.

• "The end of 2009" 12/30/2009.

• "How your view of 2008-2009 impacts your understanding of today's big events" 02/03/2010.

• "Why can't we all just get along (on economic policy)?" 02/08/2010.

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Change -- The Investor's Only Certainty

The markets have been going through a protracted and agonizing testing of the lows they reached in October 2008. On an intraday basis the S&P 500 today broke those lows and briefly touched the closing lows of the previous bear market reached on October 9, 2002: S&P 776.

There are few investors alive today who have gone through markets as ugly as the current one. No bear market since World War II has been down as much as this market is now down from the peaks it reached in October 2007. The S&P 500 index is down 48.5% from its peak reached in that month, as of yesterday's close, surpassing even the bear market of 1973-74.

The current crisis meets the definition not only of a bear market but also of a panic, as we noted in this previous post. Selling has reached irrational levels: the market is priced as if there has been no value added since 2002. This is irrational.

However, markets are forward-looking, and they represent the sum of what investors feel about future value. As such, it is reasonable to conclude that many investors right now are acting as though the entire system is going to fail, or at least experience a contraction unlike anything since the Great Depression.

During times like this, our first point is that we do not believe the system is going to fail. In fact, the seeds of recovery have already been sown, as we have pointed out in this post and will discuss further in future posts.

Nevertheless, it is also true that "change is the investor's only certainty." Forty years ago, in June of 1968, Thomas Rowe Price wrote a short pamphlet entitled "The New Era for Investors." The late Dick Taylor, who managed portfolios with Mr. Price and from whom the investment process used at Taylor Frigon Capital Management is descended, kept a copy of that bulletin, which contains insights that are valuable today.

In particular, that pamphlet contained a paragraph which reads:

"Keep in mind that forecasting the future is always a very difficult task. Opinions are bound to be only partly accurate because of the unforeseeable and unpredictable events which change the normal or expected trends which appear logical at the time. This is why hindsight is always much easier than foresight. By way of illustration, it is almost impossible to foresee such events as wars, assassinations, and nature's catastrophes, such as floods, droughts, famines, etc. Also, inventions and changes in personal leadership influence the course of history. A forward-looking investor must be able to reasonably assess and evaluate the currents and the tides and be prepared to reckon with winds or storms, which are unpredictable. He must be constantly alert. He must stick to the basic concepts which have proven sound over a period of centuries, be flexible of mind and be willing to change opinions, change tactics, and not stubbornly stick to old opinions and buck new trends, or try to swim against the tides."

This tension between the dictum "stick to basic concepts which have proven sound" and the requirement to "be flexible of mind" is something we have written about before, for instance in the January post "Remaining calm without being blind or obstinate."

The most important lesson from this voice from forty years ago is that massive change is nothing new or unique to the present time. In fact, in the 1968 bulletin, Mr. Price refers to a 1966 bulletin he wrote entitled "Change -- The Investor's Only Certainty."

The frame of mind described in the paragraph above -- that the investor "must be constantly alert" and "willing to change opinions" -- is clearly valuable today. The upheavals of the 1960s and the 1970s, which Taylor and Price experienced, were not the end of American capitalism -- far from it.

The future will not look exactly like any previous decade; in fact, as the paragraph above reveals, current opinions and predictions will no doubt turn out to be "only partly accurate." But the attitude of holding to proven principles while remaining alert is an important lesson from a professional investor who lived through the 1920s and the 1930s, and who survived and succeeded by following those tenets.

For later posts dealing with this same subject, see also:

• "Change -- the investor's only certainty, revisited." 06/16/2009.
  

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Some perspective during gut-wrenching markets

The stock market is going through a grim period, with market declines that have rivaled those of any bear market since World War II (see the chart of bear markets in this blog post, and click on the chart to enlarge).

As the markets test the lows that they reached about a month ago, many investors are understandably dismayed. It seems there is little to no good news in sight, and the relentless, grinding market drops will never end.

We like to refer to the historical bear market chart because it is so helpful in providing perspective -- it reminds us that this is what happens in bear markets. How long it will continue is impossible to say, but it is important to understand that the current market swoon is not the first such situation in history, and as we have witnessed in past bear markets this one will also pass.

Larry Kudlow recently published an excellent piece entitled "Mustard Seeds," in which he noted a few pieces of positive data in important areas. It is worth a read, especially by those who are ready to conclude that nothing will ever be positive again, or at least not in their lifetime. As Larry references in his article and we note in the chart above on retail gasoline, there are some positives trends that are developing however minor they may seem at the moment.

Bear markets are gut-wrenching. However, an investing lifetime that spans several decades (as it does for most investors) inevitably encounters bear markets. It is important to keep perspective during such periods and to process all the data that is available, not just the data that is front-and-center in most media outlets.

For later posts dealing with the same subject, see also:

• "Invest like Mr. Howell" 05/18/2009.

• "If Rip Van Winkle took a one-year nap before September 15, 2008" 09/14/2009.

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Gerry Frigon on Peninsula TV's "The Game"

Taylor Frigon Capital Management's President and Chief Investment Officer Gerry Frigon was recently asked to be a guest on the San Francisco Bay Area's Peninsula TV show "The Game." Here are three segments from that show.

Part two:


Part three:

Video services courtesy of Gallagher Video, Paso Robles, CA.

For later posts dealing with the same subject, see also:

• "Managing Investments in the New Era," 02/18/2009.

• "The hard-money real-estate sinkhole" 09/17/2009.

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