"Dear Ben" (er, Santa Claus)

An Open Letter to the Federal Reserve Chairman

Dear Ben Bernanke (er, Santa Claus):

Speaking for millions of my fellow investors, I want to thank you for all your efforts to date, uh, "supporting" stock prices.

I/we are certainly better off for it (at least in the short run; in the long run, direct federal interference in markets is a terrible precedent).

However, perusing my portfolio, I can't help but notice a couple of laggards.

Specifically, my meager holdings in Wal-Mart, General Mills, and Procter & Gamble have all underperformed the market averages year to date.

So, as the Fed prepares to pump more money directly into debt and equity(?) markets, here is my 2010 Christmas "wish list" for what you should buy:

100 million shares of Wal-Mart
50 million shares of General Mills
50 million shares of Procter & Gamble

The above purchases will scarcely cost you $10 billion -- a veritable rounding error relative to your $1.5 trillion balance sheet.

Considering that these are all blue chip companies, there's no reason why you shouldn't make a profit on these investments, just like you say you did bailing out Wall Street.

In return, I promise to spend some of my new-found "wealth" stimulating the economy, thereby making your job easier.

So, you see, you're not just helping me, you're helping yourself.

"Win-win," as they say.

Expectantly,

Ross Kaplan

P.S.: No need to wait for Christmas, if you're so inclined; it's Chanukah right now!

Flushing Savers From Their Foxholes

"Certificates of Confiscation" Once Again?

Certificate of Confiscation: 1970's term for bonds, certificates of deposit (CD's), etc. yielding less than (rising) inflation.

How do you get people (and corporations and banks) to stop hoarding cash, and put it to work, stimulating the economy?

Reduce interest rates to zero.

But what if that still doesn't do the trick?

Make holding cash not only unremunerative, but costly.

The best way to do that is to devalue the currency and/or create inflation, so that the value of cash steadily erodes, precipitating an inexorable stampede into . . . anything else.

Fleeing Cash

Which is basically what has been happening since late August, when The Federal Reserve signalled its intent to further stimulate the economy by printing more money (called "quantitative easing").

Since then, stocks have rallied about 10%, and commodities -- especially gold and oil -- are up anywhere from 15% to 40%.

Meanwhile, the dollar is down 8% against a basket of major currencies.

(Un)Intended Consequences

The problem with driving savers out of their negative-yielding foxholes is, what comes next?

The Fed hopes that all that liquidity will find its way into the stock market, driving up prices and creating a "wealth effect" that will spur spending and the broader economy.

But it's just as plausible that erstwhile savers will switch their affinity to something -- anything -- that promises immunity from central bank debasement.

That list includes: gold, silver, oil, wheat futures, Swiss francs, Australian dollars -- you name it.

As those things appreciate, they create inflation, which punishes consumers, which hurts the economy.

Can you say, "full circle?"

More Pressure on Mortgage Interest Deduction?

Strapped Governments
Look for "Honey Pots"

"Because that's where the money is."

--bank robber Willie Sutton, explaining why he targeted banks

For the same reason Willie Sutton robbed banks, financially strapped governments (federal and state) inevitably are going to revisit the home mortgage interest deduction as they seek to close record deficits. (Also getting scrutiny: deductions for state property taxes.)

According to some estimates, doing away with the mortgage interest deduction completely could raise as much as $100 billion in additional revenue annually (read, taxes).

As policymakers try to restrain themselves, though, they should ask: what will that do to housing prices?

Given that the cumulative value of all U.S. housing is something like $16.5 trillion, according to Freddie Mac, even a 1% drop would destroy $165 billion in value, swamping the "benefit" of increased tax revenues.

Even that arguably understates the damage, due to a phenomenon called the "wealth effect" -- basically, economic-speak for people consuming more (or less) as their wealth fluctuates.

So, the ultimate economic hit would likely be a multiple of the $165 billion drop in home prices.

In view of the foregoing, what's far more likely is some combination of a cap on deductions, means testing, and the like.

P.S.: our legal system has a principle, called stare decisis, that requires judges to defer to -- rather than disturb -- established precedent. Literally tens of millions of Americans going back decades have bought homes with the expectation that the mortgage interest deduction would be respected.

If that isn't long-established precedent -- I don't know what is!