Cap and Trade May Be The Catalyst For Inflation

Recently Warren Buffett and Alan Greenspan joined the chorus warning about serious inflation down the road due to the vast amounts of money being spent by the Federal Government. The Obama administration rebuttal is that we won't have significant inflation because we have so much excess capacity and unemployment. When the economy improves causing business to start sopping up capacity and employment starts tightening, the fed can remove liquidity from the system and moderate any brewing inflation. Yeah right.

At present wage and price inflation isn't a pressing issue. Financing inflation is a fact and government borrowing rates would be a lot higher without the Fed's market support. I suspect that the voracious needs of the U.S. Government will continue to meet growing scepticism from bond buyers and result in continued interest rate inflation. Higher government rates will lead to increases in all categories of financing.

Cap and Trade taxation is thought to cause utiity bills to rise 25%, Per David Sokol-Buffett's utility guru, and gasoline will also experience upward price pressure as refiners and retailers pass on their additional expenses. Utilities and gasoline are expenditures that Americans can't postpone. There is very little discretionary nature to those expenses. Even with unemployment at 10+% there will be agitation for wage increases to help absorb the additional costs affecting consumers. Hence, going green is going to lead to demands for more green, paychecks.

I remain hopeful that sanity will return to the U.S. Congress, but I'm attempting to prepare for the inflation that is increasingly likely in the next few years.

WE NEED A NEW, BETTER NEWT

America is in dire need of a new crusader for smaller government. When that leader emerges he will need a posse of co-zealots that perform better than Newt's freshman class as they morphed into government as usual.

Today, more government is the preferred answer to any problem. Unfortunately, more government means more bureaucracy. Until the new Newt appears Americans should fight for "more government with no new bureaucracy". If we must, impose new mandates without new departments, agencies, and bureaus.

The financial news is rife with discussions on Obama's Systemic Risk Council and Federal regulator reorganization. We are NEVER going to get perfect government supervision so if systemic risk monitoring is worthy then lets minimize the bureaucratic impact. The Fed, with its supervision of bank holding companies, could identify and control systemic risk to the system. They should have years ago, but they didn't. The blameshift states that they couldn't do anything since they didn't supervise the AIGs, Goldmans, and GEs of the financial world. True, but they did watch JPMorgan, Citi, and BofA. They had people on site daily. If they were truly watching they could have seen the off balance sheet activities and the growing, non-regulated counterparty risks. The Fed might not have had power over AIG, but they could have told all the big banks to no longer book new deals with big non-banks. No need for a new bureaucracy, just require regulators to keep their eyes open and ACT.

The same is true for Cap And Trade. If lowering U.S. carbon emissions is good public policy, then change the standards and enforce compliance. We already have one bureaucracy tracking compliance, why duplicate matters. The taxation effect of Cap & Trade will be terrible enough, please lets not compound that mistake with a new agency.

The Big Daddy of them all is Universal Healthcare. If anyone thinks this boondoggle will arrive without huge bureaucracy, just think TSA and the thousands of Federal employees, in their new blue uniforms, that have taken over our airports. If the new Federal approach to preventative healthcare is so radically transformative, why do all the TSA screeners have body mass indexes that are off the charts?

We do have healthcare problems in America and we have a problem with the costs associated with insurance, but a government run universal program is not the best answer. I know that Obama says no one's private insurance is going away and we get to keep the same doctors, but that is just smoke and mirrors. When you take away a business' deductiblity of medical benefits and tax the recipient of company supplied medical benefits you soon end up with the government plan by default.

I'm not smart enough to design the new, ideal healthcare system, but I can sense that the way we are headed isn't going to be good. Change what needs to be changed by mandate, not takeover.

Now who's going to step up and become our next Newt?

Insiders Keep Buying Flowers Foods

I already own a good position, for me, in Flowers Foods and am being tempted to buy more because of continued insider activity. This baker is one of the few companies that is continuing to grow sales and hit earnings targets during this recession. It just isn't an exciting company. But it is a performing company.

The latest purchases were from the CEO and a director. Both for reasonable amounts of money. Other directors and officers have been exercising options, paying the taxes, and keeping the stock. You've got to go back well over a year to see insiders disposing of their holdings. These good ole boys like their company. So do I.

As a steady, growing earner with an attractive dividend, FLO stands a good chance of recovering to its old highs of $30ish. I don't think anything terrible is imminent or insiders wouldn't be buying. I'm happy with my position and, as I said, that position my get larger.

Cash For Clunkers

Our family is not well known in automobile showrooms. We tend to buy sturdy cars and drive them for decades. My wife's Omaha car is typical. A 1999 Lexus RX300 with 95,000 miles.

It runs like a champ and hasn't had any mechanical problems.

Still, its ten years old and she was contemplating a change even though car ownership in Nebraska is punitive as autos are taxed annually as property. So, if you buy a Mercedes you have the equivalent of an out of the way lake house. The "Cash for Clunkers" proposal and its $4500 tax credit was a possible way to take the sting out of Nebraska property taxes.

The Clunker bill showed up as part of a war funding package Friday and it is like most legislation: worthless. The Clunker has to get less than a 18MPG city/highway rating to qualify and then you must purchase a vehicle that gets 2MPG better mileage. The Lexus doesn't qualify as it is rated as more gas friendly than a Clunker. So ten year old SUVs cannot be taken off the road with this wonderful sounding piece of legislation.

What will qualify? Evidently older cars and trucks. Since most people don't start with a Lexus quality car, the drivers of 10+ year old vehicles are probably the second, third, or fourth owners of these cars. My assumption is that with our new, tighter credit standards they will not come close to qualifying for a car loan on a new car. Unless the government strongarms GMAC, Citi, and Bank of America into making those loans to the uncreditworthy. I wouldn't put it past them.

The success of this legislation will be marginal at best. Not many new cars will be sold as a result. Our leaders in Washington will pound their chests and tout the benefits to the economy, the auto industry, and our environment, but it is just another instance of looking like progress rather than progressing.

Crusty's New Blog

When I'm out of investment ideas I can be found at crustyshowitoughttobe.blogspot.com. I published my first post today. If you have the time, please visit. Crusty

Busy With Everything Other Than Investments

Several readers that are fortunate enough to personally know Crusty have asked what I've been up to since I haven't blogged in a number of weeks. I've had difficulty responding, but assured them that I was sure that it was important stuff.

Lets see, I've made a batch of Limoncello using Everclear grain alcohol which will give birth near the end of Summer. My golf game has been honed to a smooth 16 handicap. And mostly I've had to closely supervise my wife as she doesn't understand that we are in a recession and embarked on a house renovation project that is capable of keeping the craftsmen of Omaha busy for months. My crustiness, and insistence on bids, has kept the financial pain to a minimum. I should have made the Limoncello earlier so I could have used it in the renovation negotiations.

On the investment front not much has changed. I remain convinced that the market's enthusiasm has gotten way ahead of where it should be and have not been pursuaded to join the stampede. My June covered calls will expire on Friday and I will keep the premium and sell calls again on the stocks that I do own.

The only addition I've made to my long portfolio is an ETF proxy for natural gas:UNG. All commodities have been on a tear this year as inflation fears have grown and the dollar has weakened. That is all commodities except natural gas! There has been too much supply and weak demand. Inventories have been growing each month. However, drilling has been curtailed and futures are pointing to significantly higher prices this winter. Ratios of oil price to natural gas prices have gotten way out of whack when compared to history. I've been adding to a position in UNG while exiting the few oils and drillers that I owned, with the exception of Conoco Phillips, COP, that I've kept for the dividend. I don't plan on betting the farm on UNG, but it has a lot more potential upside that remaining downside risk.

Since times are slow in the investment thought area, I'm thinking of starting another blog of Crusty's brilliant musings on every other topic. It's fun growing older and finding fault in nearly everything. I feel the need to share my disdain for the way things are run; local, state, and federal. If only they would ask Crusty. Stay tuned for Crusty's Common Sense. Thomas Paine would be proud.