Eight Stupid Rules That Are a Drag On The U.S. Economy—Follow-Up
Goldman Sachs and the Fiscal Cliff
One Great High-Potential Stock
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Your responses to last week’s column on “Eight Stupid Rules That Are a Drag On The U.S. Economy” were terrific! Many thanks to all who voted. I will report on the winning “Stupid Rule” in a minute.
But first a note about the voting.
Because there was not a simple ballot that allowed just one choice, a lot of you voted for more than one. In fact, roughly 32% of respondents agreed that all eight rules were stupid. Happily most of those people indicated a favorite. Many people, however, selected two or three.
In the end, I counted every vote, giving more weight to top choices, and the result was clear.
The biggest problem is the lawyers.
To refresh your memory, my original comment focused on The American Rule, stating, “Americans litigate far more often than the residents of other countries. In fact, the share of our economy spent on litigation is at least twice that of Germany, France, England and Northern Ireland. Why? Because our system of risks and rewards is screwed up. In every other country in the world, the loser pays at least part of the other party’s legal fees; this rule not only inhibits the filling of nuisance suits with little merit, it helps encourage law-abiding behavior. In the U.S., however, the American Rule encourages the filing of nuisance suits that clog the court system, rewarding above all the lawyers. That’s one reason the U.S. has more lawyers per capita than any other country; there’s a lawyer for every 265 Americans. And because the people who “run” the country in Washington are generally lawyers, there’s little incentive to change.”
Your comments:
“Our problem is our failed legal system! The lawyers & the legal attack system are impacting all parts of our lives (insurance, daily activity, medical care, family interrelationships).”
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“Rule #1 is by far the most expensive...litigiousness drives many businesses to paranoid extremes...perhaps foremost is my profession, medicine. I regularly see docs ordering, testing, retesting and overprescribing...and I am strongly suspicious that fear of lawsuit (in some high-risk areas, like OB and ER, justifiable paranoia) drives this behaviour.”
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“This is very consequential because it drives so many smart people to study law instead of other more productive professions like science, engineering, etc., which actually produce something and would make the USA much better off. We wouldn’t have a shortage of those talents.
“Also, working for attorneys most of my life, I agree there are too many and too many really dumb lawsuits!!
“Maybe you should run for office! (if you are not an attorney!!)
“Oh, and I sent it to my boss to see his opinion (an attorney, mediator, arbitrator). He thought you were spot on! This is all from a Democrat (him) and a Republican (me)! Thanks for the good read.”
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“I agree that the ease of filing a lawsuit and the large potential gain for the attorneys is resulting in a proliferation of frivolous lawsuits, in many cases class-action suits instigated by law firms and promoted heavily in the media (“If you or a loved one has suffered hangnails as the result of using Product X, you may be entitled to damages”). What is even more amazing are some of the inane decisions being handed down by juries who are awarding outrageous sums of money to plaintiffs. My favorite product label has to be “Do not use to trim hedges” affixed to a lawn mower. I’ve always wondered about the person who obviously performed this maneuver with a lawn mower and then sued the mower company!”
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“As to your list, #1 bothers me the most, especially in jury trials where the jurors are only paid $7 per day and upon jury selection are subject to the ego educated minds of the lawyers. Our state made a video that says the person setting on the jury is subject to only these questions: if they know the person accused; if they have read about the crime in the paper or about the situation if it is a civil suit; and if they have an opinion or relation to the accused or know the persons in a civil suit. Now the first thing the lawyers do when they give instructions to the jury is ask personal questions of the potential jurors. What I have experienced is very insulting and demeaning and as a result it’s getting harder to get jurors in our area. Also part of the problem is the time consuming Mickey Mousing around that goes on just to get the selection made. These lawyers have no respect for the time of other people.”
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“#1 is very important, and one of the hardest to achieve because of the law lobby. This one issue increases costs for everyone for everything we use in life. Our way is the equivalent of a regressive tax, increasing the cost of food and medicine for everyone, especially those least able to afford the items. And perhaps that’s why it’s the most important. Adding a safety tag on a child’s umbrella stroller adds cost to the production of that stroller, but it’s not going to save anyone anything, with the exception of the company being sued. “Remove child before folding.” Yep. A label will help increase safety by stating the obvious. Not. All the warning labels on everything are not there to save people from being stupid. They’re there to reduce damages from frivolous lawsuits.”
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Coming in second in the voting was ”The Continuing Federal Prohibition of Marijuana”
But what was interesting here was that this “Stupid Rule” also had the highest proportion of defenders.
Here are the best comments.
“It’s a no brainer! How foolish to think that we can stop the use of marijuana! We can not, have not and will never stop its use. Besides, as a mood-altering substance, it is much more benign than alcohol. The spineless pandering prigs in Washington don’t have the where-with-all to take a proactive stand on this issue.“
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“I would have to go with #2. One cost you failed to mention is the incarceration costs of the users. A National Geographic Special on drugs reported there are 800,000 people in American prisons for drug offenses. 600,000 of them are there for simple possession. The average inmate costs $75 per day which means the nation pays $45 million a day to incarcerate people convicted of simple possession. So add another $16.5 billion a year to the $30 billion figure you quoted.”
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“Legalize it already ... It would generate tax revenue and reduce drug enforcement costs; maybe even lower gang violence and create a whole new agriculture crop and jobs.”
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“Yes, but here’s why it’s not going to happen soon. There’s no simple test for drug use. If you drive goofy on the highway and blow above .08 (alcohol concentration) on a breathalyzer, you will get convicted for drunk driving. It’s simple, non-invasive and easy to administer by the cop on the beat. There’s no comparable way to simply, easily find out if someone who’s driving goofy is drug-impaired above a certain level. There are no simple standards that can be applied universally and that won’t succumb to item #1 {Lawyers]. The first company that comes out with a simple, verifiable, reliable and easy-to-use system to determine if someone is drug-impaired will make million$. That’s all the cops want. The public has a right to get drunk drivers off the road. Right now, there’s no way to ensure the public will be able to get doped drivers off the road.”
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“I disagree. I think marijuana seems to screw people up much more than other substances like alcohol and people can’t seem to control themselves using it.”
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“I agree with all except the legalization of marijuana. Starts a slippery slope.”
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“I agree with all 8. Tough to chose which bothers most, but I’ll go with marijuana prohibition. Even my smart phone knows the word marijuana before I finish typing it.”
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As for the third worst “Stupid Law,” the result depends on how the votes are counted. Top contenders are the Farm Bill and the Ethanol and CAFE Laws, with Immigration close behind. You can read the best comments (and leave your own) on our blog at www.iconoclast-investor.com. $insert("/sitecore/content/ads/CSC/2012-01-Risk-Takers”,"wc21")
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Moving on to investing, I recently received the following from a subscriber.
“Timothy,
“As a current subscriber to several of your investment services I’m interested in your opinion on the ‘Fiscal Cliff’. With Goldman Sachs and several other firms telling their clients to get into cash right now, it is somewhat confusing.
“It’s difficult to tell if these firms are simply posturing their clients, forcing a vote for Romney or a no vote for Obama or are they really looking out for the best interest of their clients? Since one of the bankers at Goldman Sachs is promoting this I assume that other brokerage houses are getting this message.
“Perhaps I missed an email on your thoughts but I am interested in your opinion.
“I trust your integrity and look forward to your response.”—D.J., Dade City, Florida
I told D.J. it was a great question, and that I would answer it here, because it reflects common concerns.
The concept of the Fiscal Cliff is well known, so I won’t bother to go over it here. Nor will I go into the potential scenarios that might arise from going over it; these scenarios have been explored elsewhere, and I have nothing to add to the discussion, from an economic point of view.
Sure, I could speculate about what might happen from a fundamental perspective, as others do. I could spin tales of economic collapse. I could assert that some pockets of the economy would benefit from driving over the cliff. I could tell you what will happen to interest rates as a result. And I could even tell you I am confident that the stock market will react in precisely one way, and tell you how to invest to take advantage of that reaction.
But I see no point in doing that, not only because I am quite confident that no one can know for sure, but because this is not a question about the economy but about investing, and I can answer that question easily by referring to three aphorisms, one of which is found on our website of Contrary Opinion buttons (more about that below).
Here they are.
Concern yourself least when others fear most.
Trouble tends to come from where it’s least expected.
Trends tend to last longer and go further than originally expected.
So when it comes to the Fiscal Cliff, and the propriety of retreating to cash as my reader says Goldman Sachs advises, here’s what I do.
Looking at the first aphorism, I remind myself that if everyone is worrying about a problem, it won’t be a problem from an investment point of view, because the market has already recognized the problem, evaluated it, and reacted as it judges appropriate. In expert parlance, the market has “discounted” the problem. So while I have strong beliefs about our national debt as a U.S. citizen, employer and taxpayer, I don’t allow those thoughts to affect my decision-making as an investor. In short, because so many other people are worried about the Fiscal Cliff, I’m not.
Looking at the second aphorism, I remind myself that real trouble, when it comes, will come from another quarter. It might be military escalation in the South China Sea. It might be a new virus, biological or digital. It might be a work stoppage by the Occupy Movement, currently lying low—or simply chilling out. It might be a stampede out of T-Bills, which yield almost nothing, and into gold, silver, copper—even coffee, for all I know. And it might even be Martians, retaliating for our trespass on their soil. But there’s no point in worrying about these either—from an investment point of view—because there’s no knowing what to focus on—though it’s probably not the Martians.
Finally, looking at the third aphorism, I ask myself, what are the relevant trends?
There’s a trend toward lower interest rates that’s been going on for more than 30 years. (In the middle of that trend, not one person in a thousand imagined rates would fall so far and so low. Think about that.)
And there’s a stock market uptrend that’s been going on for more than three years, in the process taking the S&P up 110% from its low of March 2009 to the present and the Nasdaq Composite up 142%.
If these trends continue, as history says they are likely to, interest rates will continue to fall and the stock market will continue to trend higher, albeit with the usual short-term corrections.
Now, that doesn’t mean you should make long-term bets on both of those trends. Each one, in time, will end, to be replaced—for an indeterminate time—by a counter-trend. But you don’t need to identify those turning points before they arrive (it’s extremely difficult to do so successfully, and those who try often wound their portfolios fatally); you just need to invest with the current trends, while retaining the flexibility to change when the trends change.
Thus today we’re bullish; we’re advising subscribers to be substantially invested in leading stocks, and those subscribers are making money.
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Which brings me to today’s featured stock.
It’s Home Depot (HD) a store that I seem to visit several times a month.
Admittedly, the days when HD was a market leader are long gone. But if you’re looking for market exposure with low risk, and the thoughts of a 2.1% dividend make you consider shifting out of some bonds, it’s worth a look.
Here’s what editor Mike Cintolo wrote in a recent issue of Cabot Top Ten Trader.
“Home Depot … represents the large liquid play on the rebounding housing market. The catalyst for the stock’s recent resumption of its major uptrend was the firm’s solid second quarter report—in the three months ended July 31, revenues were up just 2%, but earnings rose 17% (beating estimates by a few cents) and management hiked its fiscal year outlook above expectations. (Analysts now see earnings up 20% this year and 14% next). While those growth figures aren’t extremely exciting, the fact is that Home Depot is a safe, steady play on the recovering housing market; the combination of higher new housing starts (up 40% from their multi-decade lows) and a pickup in existing home sales should continue to translate into higher sales and earnings for the company. Moreover, the firm plans to pay out half its earnings in dividends.“
Looking at the chart I see the long uptrend since early 2009—in sync with the broad market—capped by a pause between 56 and 57 over the past three weeks. Buying here would be okay, but I’d feel even better getting in on a pullback to its 50-day moving average, now at 55.
Even better, you could take a no-risk trial subscription to Cabot Top Ten Trader to get Mike’s latest advice on investing in HD and other high-potential market leaders. Details here.
Yours in pursuit of wisdom and wealth,
Timothy Lutts
Editor of Cabot Stock of the Month
