[1] Richard E. Haskell, Sr.

 

March 8, 2010 Edition, Volume IV

 

Inside Signature Update

 

• The Market – Believe It or Not, We’re All Liberals Now
• The Economy – Difficult Times for the Postal Service
• The Takeaway –  Insurers in the Spotlight

THE MARKET – Believe It or Not, We’re All Liberals Now

 

The DOW closed up sharply Friday afternoon after posting gains of almost 250 points for the week.  Better housing, employment and retail sales figures added to an active M&A (mergers and acquisitions) market, as well as more solid plans for a return to solvency for Greece.  Oil and gold closed higher on the day ($1,138 and $81.50 respectively) based on increased US demand and a stabilizing, though weak, Euro. The DOW is now back to within 200 points of its near-term high of 10,767 and many analysts believe the index is poised to make a run at the 11,000 mark. 

 

It’s a relief to enjoy a relatively calm and upward trending market at the moment.  The VIX (volatility index) is at a near-term low reflective of the current calm, but it won’t likely stay this way for too long.  So while we’re here, rather than delve into the market’s technical details or proclaim its fundamental virtues, I thought this might be a good opportunity to discuss the terms market liberalism and free market capitalism; terms that are not all that much different from each other and not at all what most believe.

 

In the US, most accept the label “liberal” to represent association with social liberalism and ideals representing the left end of the traditional political spectrum.  It’s what conservatives like to call Democrats when they want to contrast their points of view.  It’s also a label the Democratic Party has sought to shed as party leaders have worked to rebrand Democrats as “progressives”. 

 

This is quite the opposite of what the term represents in economics and how it is used in political circles outside of the US.  Since the 18^th Century, the term “[2] liberal” has represented those supportive of free and open markets, a social structure free from government or monarchal interference, or a political structure that allowed everyone open access.  The terms “labor”, “welfare” and “socialism” have been more likely to be connected to left-of-center political groups in other polities.  The fact is the vast majority of Americans, almost regardless of political affiliation, are considered “liberals” in the larger economic, political and social sense of the term.  We’re committed to free and open economic, social and political markets, whether we all realize it or not.

 

In this context, a free market is a liberal market, and represents an economy in which open markets are encouraged and where most public services are the purview of the federal, state or local governments.  Sound familiar?  It should, we live in an economy and polity governed by such a structure.  We also live in a market based on capitalism, and while most suppose the terms capitalist and liberal are contradictory terms, they are not.  Moreover, they’re complimentary at the core and, right or wrong, both have come to be associated with democracy the world over.

 

Capitalism is the economic state in which those with property rights have the opportunity to invest resources in pursuit of productivity gains and returns on their investments, without the expectation of undue government competition or intrusion.  Anyone who ever expects to earn interest on savings, invest in a retirement plan, thinks of having their own business and work for themselves, or even expects to receive the benefit of their own labor is, dare I say it, a capitalist; and a liberal.  Capitalists recognize that economic growth and development are best cultivated in an open market structure where opportunity exists for each economic actor.

 

In this regard, property rights includes real property, but also extend to anything able to be used for the sake of production; including various types of intellectual, intangible and physical property, as well as the value of one’s own labor.  

 

Many economists have come to believe that progression towards a liberal, or open, democracy is inevitable for virtually all developing economies and expect that some form of capitalism likely accompanies the trend.  While we’ve seen some evidence that this form of political and economic development does occur, we’ve also seen numerous examples of meaningful economic development where capitalism has not been accompanied by democracy.  It may be that regardless of how attractive capitalism or democracy are to a developing nation’s transformative leaders, other long-standing economic, political and social institutions are all but impossible to counteract.

 

In the US, even the most socially and politically “progressive” among us, including those who would shudder at being considered capitalists are in fact, capitalists.  Likewise, many conservatives around us, including those who decry liberalism via various forms of popular media and hang their reputations on their conservative views, are committed economic, political and social liberals in the truest sense of the word.

 

So here we are a nation in which the most conservative among us are liberals and the most socially liberal are capitalists.  All of a sudden the unpredictability of the stock markets, the vagaries of corporate and municipal finance and volatility of the commodity markets seem a lot less daunting and complex, don’t they?

 

 

THE ECONOMY - Difficult Times for the Postal Service

 

The US Postal Service, long a symbol of consistency and commitment in US culture, is once again at a cross roads, and this time the stakes are higher than ever.  In an age in which hundreds of millions of emails and text messages have replaced traditional letters, and overnight carriers UPS and FedEx continue to employ low cost and innovative solutions to deliver documents and packages in a fraction of the time and resource of only 5-10 years ago, the US Postal Service is struggling to remain relevant.

 

The postal service, now a business-like, quasi-government agency is projected to lose $7 billion this year on its way to a cumulative loss of $238 billion over ten years.  Recent rate hikes have only served to decrease operating income as higher postal costs and an ailing economy have repressed postal transactions so deeply that the service is finally looking at cutting delivery costs by excluding Saturday deliveries.  This is certainly too little and may quite possibly be too late.

 

Daily mail delivery became the norm as transaction costs were lower (labor, benefits, fuel) and competition was virtually non-existent.  Rather than being a necessity for households, it’s a luxury to which we’ve became accustomed; even if only for a sense of daily rhythm.  With so many of the functions formerly assigned to the postal system now being handled electronically (paying bills, writing letters, delivering advertizing), few are able to make the argument that daily mail delivery is a luxury we can’t afford to do without.  But there’s a problem with scaling back delivery at this particular time; and that is the job market.

 

It’s likely that the average American household would do just as well with three postal delivery days a week as it now does with six; as households now collect their mail less frequently than in years past and many allow mail to pile up until the weekend before being opened.  Business and government offices may be a different story, but many of these now operate on a four-day work week, with Saturday business delivery already unavailable in most areas.  Though reducing household delivery by half (three days versus six) would cut postal service operating expenses by over $10 billion a year and return the service to profitability, it would also cut some 90,000 direct employees and as many as another 120,000 indirect jobs, as the ripple spreads through sub-contractors and service providers.  Our highly political and still-brittle economy isn’t in a position to deal with the issue right now.

 

However, if we chose to repurpose the newly available workforce into jobs in education, technology, energy and infrastructure development, the costs to the economy would remain constant, but the potential additional economic output could be enormous.  Such an effort could not be affected overnight; the phasing out certain postal services and the efficient and effective ramping up of other educational and industrial structure takes several years; and that presumes complete cooperation from some of the most powerful labor unions in the country. Sadly, it’s not at all likely.

 

The only benefit of supporting jobs related to a bloated postal industry is the income of the employees and tangential service providers, but what if the resources were able to be re-tasked to those parts of our economy offering long-term growth and development?  We can only imagine the benefits; unfortunately we can also imagine the near-term difficulties the transformation would create; the political maneuvering, the fiscal damage to thousands of households in transition and the prolonged weakness it would add to the nation’s real estate market. 

 

In the [3] February 19, 2010 issue of Signature Update we committed to discussing potential solutions to some of the difficulties facing our economy, and stated that they would not be easy, would require sacrifice, and could only be carried out by courageous and innovative leadership.  This is one of those solutions.

 

Necessary though they may sometimes be, labor transformations are not short-term events.  Most take at least several years before economic advantages can be realized.  Perhaps the opportunity created by the postal service’s difficulties can be capitalized for the good of the country; the taxpayer is already set to bear the cost, we may as well direct it to a more productive purpose.

 

 

THE TAKEAWAY – Insurers in the Spotlight

• President Obama unleashed a surprisingly aggressive attack against insurers this morning (Monday) as he continued his push for healthcare reform.  It showed a renewed commitment to the effort and may once again have an adverse affect on share values of insurers and healthcare related firms.

• AIG’s announced sale of its Alico unit (AIG’s international life insurer) to MetLife and AIG–Asia unit to Prudential PLC takes it closer to being able to pay its $180 billion bailout loan provided by the US taxpayer, but there are no signs that the federal government intends to sell its stake in AIG any time soon.   The move boosted both AIG and MetLife’s value to shareholders in the short run; the real question is what comes next?

• Just as Greece seems to be making credible strides to shore up its sovereign debt crisis, Portugal fell under greater scrutiny by Moody’s Investor Services.  Moody’s warned that the debt and deposit ratings of Portuguese banks are at risk not just from a potential downgrade of the sovereign rating, but also from “an assessment of the government’s decreasing ability and, potentially, willingness to support the country’s banking system.”  As a result, the Euro’s remains weak and the US dollar stronger; if only on a relative basis. 

 

[4] Signature Update is offered by [5] Richard Haskell, Managing Director of [6] Signature Wealth Management  and CEO of [7] Signature Management, LLC