Friday, February 15, 2013

Wal-Mart- Payroll Tax Increase Starting to Bite Sales

According to emails obtained by Bloomberg- Wal-Mart's February month-to-date sales have been a 'disaster'. These same emails are blaming the increase in the payroll tax. So much for the payroll tax increase being much a do about nothing. This just adds to the recession risks that I highlighted here (stall speed GDP) and here (changes to employment levels).

“In case you haven’t seen a sales report these days, February MTD sales are a total disaster,” Jerry Murray, Wal- Mart’s vice president of finance and logistics, said in a Feb. 12 e-mail to other executives, referring to month-to-date sales. “The worst start to a month I have seen in my ~7 years with the company.”
Wal-Mart Stores Inc.'s shares rose 14 percent in the 12 months through yesterday, compared with an 8.5 percent gain for the Dow Jones Industrial Average. Photographer: Andrew Harrer/Bloomberg.

Wal-Mart and discounters such as Family Dollar Stores Inc. are bracing for a rise in the payroll tax to take a bigger bite from the paychecks of shoppers already dealing with elevated unemployment. The world’s largest retailer’s struggles come after executives expected a strong start to February because of the Super Bowl, milder weather and paycheck cycles, according to the minutes of a Feb. 1 officers meeting Bloomberg obtained.

Murray’s comments about February sales follow disappointing results from January, a month that Cameron Geiger, senior vice president of Wal-Mart U.S. Replenishment, said he was relieved to see end, according to a separate internal e-mail obtained by Bloomberg News.

“Have you ever had one of those weeks where your best- prepared plans weren’t good enough to accomplish everything you set out to do?” Geiger asked in a Feb. 1 e-mail to executives. “Well, we just had one of those weeks here at Walmart U.S. Where are all the customers? And where’s their money?”

Gold Purchases By Central Banks Largest Since 1964

Now take this a with a grain of salt, as none of the purchasing is data normalized in any way. Additionally, any apparent comparison is probably just a coincidence. However, my pattern-loving monkey brain finds the 1964 to 2012 gold purchasing comparison by central banks interesting. Considering that 1964 (in or around) marked the turning point in inflation, right before inflation rates accelerated upward through the 1970's. See the chart from the St Louis Fed below. It is probably just spurious, but I wanted to provide you with something I was thinking about.


FRED Graph

Where is the Gold- Rothbard

Published originally at the Economics Policy Journal


More Amazing Video of the Russian Meteorite

This is a compilation of videos, dash cams, and phone cams. The second video looks as if the sky is burning while the third, you would think it was out of Hollywood and not reality.


Soros and Bacon Cut Gold Ownership

My gut says the move will be correct in the short run, but the contrarian in me is starting to get interested. That is as gold is down more more than 1%, or around $20 per ounce, in trading this morning.

And the below excerpt comes via an article on Bloomberg. It concludes and surmises that an economy on the mend is cutting into gold demand. I don't know what the commentators discussing this dynamic are seeing, as in my mind a 1.5% year-over-year change in GDP and accelerated downside in employment levels suggest increased recession risks.

“The reduction in holdings by George Soros may unnerve the market a little bit,” said Nick Trevethan, a senior commodities strategist at Australia & New Zealand Banking Group Ltd. “The market may also be watching Paulson, and those are steady.”

Gold for April delivery fell as much as 0.3 percent to $1,630.10 an ounce on the Comex, the cheapest since Jan. 4, and was at $1,632.10 at 8:15 a.m. in London. The most-active price, which has lost 2.6 percent this year, declined 5.5 percent in the final three months of 2012, the most since the three months ended June 30, 2004.

‘Downside Risks’

Hedge funds have cut bets on a gold rally by 56 percent since reaching a 13-month high in October as manufacturing rebounded from the U.S. to China. It’s increasingly probable that prices peaked in 2011 and so-called downside risks are building as the world expands, Tom Kendall, an analyst at Credit Suisse Group AG in London, said in a report e-mailed Feb. 1. Futures rallied to $1,923.70 on Sept. 6, 2011.
Growth will accelerate in the U.S. and China, the two largest economies, in the coming quarters, according to more than 100 economists surveyed by Bloomberg. In the U.S., claims for jobless benefits dropped 27,000 to 341,000 in the week to Feb. 9, fewer than any of the 49 economists surveyed by Bloomberg projected, the Labor Department said yesterday.

Lone Pine Capital LLC, the hedge fund run by Stephen Mandel Jr., and Scout Capital Management LLC sold their entire stakes in the SPDR Gold Trust in the quarter, filings showed.
‘Looking Better’

Global gold investment, including bars, coins and ETPs, dropped 8.3 percent to 424.7 tons in the fourth quarter from a year earlier, the World Gold Council said in a report yesterday. Full-year investment slid 9.8 percent to 1,534.6 tons, it said.

The Standard & Poor’s 500 Index climbed to a five-year high yesterday and has surged 6.7 percent in 2013. The gauge has more than doubled since bottoming in March 2009 as the U.S. Federal Reserve conducted three rounds of bond buying to lower interest rates, boost growth and support the labor market.
The U.S. central bank will keep purchasing securities at the rate of $85 billion a month, according a statement from the policy-setting Federal Open Market Committee on Jan. 30. Gold may have a sharp rally as investors seek so-called real assets, Elliott Management Corp., the hedge fund founded by Paul Singer, said in a document accompanying its fourth-quarter report on Jan. 28, a copy of which was obtained by Bloomberg.

‘Come Back’

While people would rather invest in “economically sensitive commodities and equities” as data improved, “we may see people come back to gold if troubles in Europe get worse and problems in the U.S. reappear,” said Adrian Day, who manages about $160 million of assets as president of Adrian Day Asset Management in Annapolis, Maryland.

Germany’s economy, the largest in Europe, contracted 0.6 percent in the fourth quarter, and French GDP dropped 0.3 percent, according to data this week. Japan’s economy, the world’s third largest, is in recession after contracting an annualized 0.4 percent in the final quarter of 2012, following a revised 3.8 percent fall in the previous three months.

Michael Vachon, a spokesman for Soros, was not immediately available when called for comment and did not reply to an e-mail. Armel Leslie, a spokesman for New York-based Paulson & Co., which manages $18 billion, declined to comment. Kenny Juarez, a spokesman for Moore Capital, also declined to comment.
Money managers who oversee more than $100 million in equities must file a Form 13F with the SEC within 45 days of each quarter’s end to show their U.S.-listed stocks, options and convertible bonds. The filings don’t show non-U.S. securities or how much cash the firms hold.

“The economy is looking better, and people are moving to more remunerative assets like equities,” Paul Dietrich, chief executive officer of Foxhall Capital Management Inc., said in a telephone interview from Alexandria, Virginia. “A lot of people have lightened up on gold.”

I Guess It is Meteor Friday

I guess chicken little may have been right. But seriously, I wonder if the events in Russia and the flyby this afternoon (Eastern Standard Time) are related in some fashion. First, here is an amazing video from Bloomberg

Second, here is a link to the Daily Mail showing a myriad of pictures and more videos.

Finally, NASA will live follow the flyby later afternoon, information of which can be found here.

Diagram depicting the passage of asteroid 2012 DA14

The Real State of the Union with Peter Schiff


Thursday, February 14, 2013

Update on Gold- Gold Price at Critical Juncture

We shall see pretty soon as to the future course of gold prices, at least in the short term. I am still leaning on the odds for lower gold prices at some point in the future. I also continue to hold my targets of mid-to-low $1,500's on the price of gold and low $150's on the Gold Spider ETF (ticker GLD). This is as gold stocks  point to lower gold prices, while the lack of any upside conviction in either the metal or the stocks tells me that it is still a sellers market.


With that said, it appears that the price of the GLD closed in or around a critical juncture. In the last year or so, the $158 (in or around) price point has served not only as a significant swing point, but has been a resistance and floor in certain time periods. Additionally, the price of the GLD is now sitting between two price gaps, one to the upside of $160 and the other to the downside of $157 in change. In the immediate short-term, meaning a few days, I would not be surprised if the price of gold closes the upside gap, possibly even alleviating the oversold condition on the stochastic. If the price of the GLD does close the gap, I would also expect it to fail to the upside, as upside volume has been lackluster for a few months now, and do not see any reason for this to change provided the technical backdrop (i.e. moving averages that are rolling over along with negative MACD, cash flow, and A/D). On the other hand, if the price of the GLD breaks the $158 price point, expect the price to head lower faster.

Valentine Day Edition of Volume Off the High

A few new volume off the highs for Valentine's day. Running through the list, CTL, the regional phone operator, cut its dividend, sending shares reeling. GNRC, despite better results and guidance, was crushed by more than 9%. I guess the stock had gotten ahead of itself. ITRI also reported earnings, but its earning results fell below the Street's guess. A previous high flyer, ULTA lost its CEO due to resignation and the shares dropped. Finally,  TRIP reported lackluster earnings while WFM lagged on sales guidance.







Valentine Days Edition of High Volume High

A numerous amount of new high volume highs. I am not going to through all of the names, but quite a few are energy related companies- be it the service company or E&P company. Additionally, HNZ's (on the list) buyout by Buffet and private equity sent other food company stocks higher. Although I doubt Buffet will corner the food market, I would not be surprised to see a private equity takeover of one or more of these firms.
















Corelogic February MarketPulse Report Less Optimistic

I have talked about this a few times before, but I think the housing market in the US is in the bottoming phase, albeit a phase that will likely be uneven and may take a long time to play out. The monthly Corelogic MarketPulse report has been fairly positive, that is up until the February report. The synopsis reads.

Additional key findings in the February MarketPulse report include:
  • Consumer spending levels will likely be impacted by the reduction in disposable income due to the expiration of the payroll tax holiday.
  • Purchase demand for homes may be negatively impacted by uncertainty created by ongoing debt ceiling debates.
  • Strong mortgage origination volumes in 2012 were dominated by refinance transactions; in 2013 and 2014 refinance transactions as a share of the total mortgage origination market is expected to decrease.
  • Only about half of the total mortgage originations today would qualify for QM coverage if there was no GSE exemption.
  • The states most impacted by QM are Nevada and Hawaii.
Not negative, but not necessarily the brightest outlook.

Here is the full report, which can also be found here.


Legacy of Benjamin Graham

A great look at Ben Graham and his investment philosophy.

Japan’s Looming Singularity

Probably one of most interesting and important articles you will read...... via Economonitor.com

by Claus Vistesen and Edward Hugh
According to Wikipedia, in complex analysis an essential singularity of a function is a “severe” singularity near which the function exhibits extreme behavior. The category essential singularity is a “left-over” or default group of singularities that are especially unmanageable: by definition they fit into neither of the other two categories of singularity that may be dealt with in some manner – removable singularities and poles.
———————————————————
No need to panic, a lot of analysts tell us, since far from being on the verge of some earth shattering event Japan  has invented the economic equivalent of a mechanical perpetual motion machine. Or as Nobel economist Paul Krugman put it recently, “while there is much shaking of heads about Japanese debt, the ill-effects if any of that debt are by no means obvious”. Maybe there is just one word missing here – yet.
This, however, will not be the viewpoint taken here. The rise and rise of Japanese debt is far from benign, and the dynamic, we are convinced, will at some point become unsustainable. Unfortunately by the time we reach that point it will be too late. Indeed, given that we agree with Krugman that the underlying cause of Japan’s malaise is demographic, after several decades of ultra-low fertility in all probability it already is too late. The root of the problem is, as he says – wait for it – that there is “a shortage of Japanese”.

Far from being like that woeful economist so tellingly characterised by Keynes, the one who through many travails and pages and pages of equations is only able to tell us that when the storm is long past the ocean is flat again, we feel we have more in common with the character so ably played by Mike Shannon in the Jeff Nichols’ film “Take Shelter” – “there’s a storm comin, one like none of you have ever seen before….”


If You Print Your Own Money, And You Run An External Surplus, How Can There Be a Problem?
Japan’s problem is benign, so the argument goes, since the country has an external surplus, and can print its own money. As a result there is a savings surplus, and no problem selling government debt, even at ridiculously low interest rates. And since the interest paid remains ridiculously low, then there is no problem servicing the debt, and if there ever was, why then the Bank of Japan could just buy even more of its own government bonds, effectively driving the interest rate even lower. In theory there is no good reason why it couldn’t even follow the lead being currently set in Germany, and push the rate into negative territory. Heck, the government would then be even earning income on its debt. It would be a good investment.

But somehow or other this view fails to convince. In particular it fails to get to grips with why Japan has gotten into this situation. It also doesn’t offer any kind of road-map for how the country could ever get back to the sort of monetary regime that was once widely considered to be “normal”. Or perhaps, in the world we now live in, as the US novelist Thomas Wolf once put it “you can look homeward angel” but in fact “you can never go home again”. Which is just a very poetic way of saying that time has an arrow, and that some processes are irrevocable and irreversible.

So, if this is what you were hoping for, then bad luck, since there is simply going to be no such thing as a return to normality for Japan. That being said, what we have to avoid at all costs is Japan becoming the “new normal”, the text book case of a society where the fundamental mismatch between declining demography and appeasing an ever older electorate with populist politics leads to complete dysfuncionality, a dysfunctionality which is then reiterated in one country after another. From this point of view it is fascinating to note just how fast Japan is getting towards “the end of the road”. Some investors have even been getting ahead of themselves and frantically shorting Japanese debt in the anticipation of future and continuing credit downgrades, without asking themselves the really awkward question – what happens to the country if it is eventually forced to default on its debt.

If on the other hand we are able to see that something is going on in Japan which is neither normal, nor desirable, nor sustainable, then we just might like to ask ourselves what then gets to happen next? Certainly there is nothing in conventional economic theory which can help us anticipate the answer, since this kind of end of the road point has not been foreseen, anywhere.

It’s equally fascinating that so few people are really talking about this development at the moment. The assumption that things can more or less go on and on is widespread both in and outside Japan. Despite the frequent references to “Japan’s lost decade”, the country has now lost not one, but two – what was it Oscar Wilde said, losing one child could be an accident, but losing two surely has to constitute negligence – and as things are shaping up we seem to be all set to have a third one in front of us, markets and weather permitting, always assuming the Japanese government remains able to finance its debt.

Yet at the moment there seems to be no danger of that. Japan has become flavour of the month among investors, following the continuing verbal interventions from prime minister Shinzo Abe. Against all odds, people are buying the story that an inflation target of 2% is attainable, and that the country can permanently devalue its currency by a sufficient amount to produce an ever larger trade surplus, despite the war of words that has already broken out about “currency wars”. Or perhaps it has become convenient to believe the impossible will be possible, simply to make money on short term trading positions. Given the quantity of long run uncertainty, this seems to be the main obsession of markets right now,  following the dictum of the 1960s philosophy made famous by Jack Trevor in the film “Live Now, Pay Later.”



A Country Growing Short Of People?
But let’s keep the debt issue for later and start with the demography – here Japan is certainly a real global leader, in this case for its advanced population ageing. Japan is not only an ageing society: It’s THE ageing society. Following decades of an ultra low birth rate and negligible immigration, it faces a steady decline in its working-age population and a rising dependency ratio for decades to come. There is no changing this now. Even some “miracle” reversal of the fertility problem would take decades to work through, so whatever happens next, things will get worse before they get better.

Japan’s population – in median age terms – is the oldest on the planet. Median age is around 45, and it will continue to rise. There is no real prospect of it coming back down again, since the process it is experiencing appears to be totally irreversible. Forecasts see the median age in Japan rising to more than 50 within the next two decades, and really here we are breaking totally unknown territory – no society in the whole of human history has ever been this old.

Given this prospect, it is natural to expect that the country should save heavily to make provision for the future–and it does. But a country with an ageing and declining workforce gets an additional problem, one of structural demand deficiency due to the changing balance between saving and borrowing. Investment opportunities in Japan are limited, so that businesses will not invest all those savings inside the country itself. The only surprising thing is that people are still surprised by this.

This demand deficiency results in a process we have come to call export dependency (leveraging the global rather than the local economy in the search for customers). Japan has now well passed the threshold at which the economy, as a modern market economy, can rely on domestic demand and domestically oriented investment to grow. The trouble is, that given its export sector cannot grow fast enough to keep pace with the contraction in private internal demand, the country has become increasingly dependent on large fiscal deficits to keep the ship right side up.

However contrary to the expectations of the classic life cycle model, the conclusion we have come to is that rapidly ageing societies will not, in the main, be characterised by aggregate dissaving but rather by the fight against it. In the context of international capital flows this means that rapidly ageing economies will be characterized by an external surplus and not, as theory would predict an external deficit. According to the said life cycle theory, savings by consumers should not affect total aggregate savings in the long run because savings today, by definition and through the idea of consumption smoothing, turns into consumption tomorrow. Yet this might be the wrong way to read the life cycle hypothesis: ageing may be associated with the propensity to run an external surplus and this may lead a country to a state of export dependency.
The conclusion we draw from the above is a simple one – if Japan is going to see a decline in working population over the next several decades (and possibly much longer, since so long as fertility remains below replacement rate each generation will be smaller than the previous one) and if this lies at the heart of the deficient domestic demand deflation problem, then it means the issue is a deep structural one which won’t be resolved by any kind of “kick start”, however large. The only consequence of having permanent fiscal injections will be not to give stimulus, but rather an accumulation of debt that will be increasingly harder for those smaller and poorer workforces to pay down in the future – especially if the process is associated with ongoing deflation.

To use an analogy – it isn’t simply a question of a planet which has slipped off or strayed from its orbit (or “good equilibrium”), and just needs a nudge to get it back on, what we have is a planet which has veered off onto a whole new trajectory, one which leads to who knows where. This situation was never contemplated by the founders of neoclassical theory, and yet, having started in Japan, the phenomenon is now extending itself steadily across all developed economies in one measure or another.

As long as Japan is the only guy in town facing this kind of problem, there is a simple solution – invest national savings abroad, in countries where populations are younger and still growing, and returns on capital are surely higher. These other nations should be able to pay back loans when they are richer and older, supplying some of the funds needed to meet Japan’s pension promises and other obligations.

Up to the arrival of the global financial crisis Japan played this game well because it was the only one playing it. The problem is that now every single OECD economy, one after another, will steadily be looking to do the same. So in similar fashion, those who urge a solution to Europe’s imbalances via an increase in German fiscal deficits to stimulate consumption miss the point: arguably what people in these societies need to do is save more, not less, and certainly when it comes to the public sector.

External demand and foreign asset income become crucial elements of growth for ageing societies, and if we end up with every developed country trying to export its way out of the mess it is surely not going to work! The first signs of this can already be seen in the Euro Area, where the sterling attempts of the countries on the periphery to escape from their trap through the ramping up of exports is simply leading to economic stagnation, since the core countries (largely net savers) are unable to take up the demand slack.

What makes the country different is that in Japan the cracks are starting to become visible. The positive external balance which is essentially the only source of growth for the economy is quickly evaporating. The trade balance is now well negative in large part because of the continuing need for energy imports (mainly LNG and oil) and this has started to drag the current account down. Even worse the income balance is also now falling lead the country to recently post its lowest current account surplus since 1985.

Seen in the light of the above, these recent trends in Japan’s external balance are deeply worrying.
To become even more worried, let’s get back to the debt.

A Balloon Which Just Grows And Grows
Amazingly, Japan is the only developed economy still expanding its annual budget deficit even though the economy is saddled with, by far, the biggest debt burden – gross government debt is now around 235% of GDP. Now many make light of Japan’s economic growth problem since with the 15 to 65 population falling, output per worker is not performing badly. As Paul Krugman so cogently puts it, “you can argue that demographically adjusted, the whole tale of Japanese stagnation is a myth.” You could, that is, if it weren’t for the growing debt. Simply thinking about GDP per member of the active population is very misleading, since what you need to thing about is the elderly dependency ratio, how many people, that is, each member of that steadily shrinking workforce has to support. This is where the real action is.


Evidently a large chunk of this growing debt problem is demographically related. In fact, since the early 2000s, Japan’s non-social security spending has been reasonably well contained and, at about 16% of GDP in 2010, it was the lowest among G-20 advanced economies. Meanwhile, social security costs have risen steadily due to the steady attrition from population aging. Social security spending rose by 60% between 1990 and 2010, accounting for about half of consolidated government expenditures in 2010. Moreover, a sustained increase in the old-age dependency ratio has implied larger social security payments supported by a shrinking pool of workers, and again this has rapidly deteriorated the social security balance.
As long as the interest rate is close to zero, even sky-high debt seems to be fine. But, as the IMF puts it: “Should JGB yields rise from current levels, Japanese debt could quickly become unsustainable. Recent events in other advanced economies have underscored how quickly market sentiment toward sovereigns with unsustainable fiscal imbalances can shift.”

And the IMF draws a scenario, in which a wrong combination of circumstances at an inopportune moment in time could easily send Japan spiralling to where Italy and Portugal are now: “Market concerns about fiscal sustainability could result in a sudden spike in the risk premium on JGBs, without a contemporaneous increase in private demand. Once confidence in sustainability erodes, authorities could face an adverse feedback loop between rising yields, falling market confidence, a more vulnerable financial system, diminishing fiscal policy space and a contracting real economy”.

We’re just now seeing the beginning of this scenario. The average rate of maturity on JGBs is being pushed down due to investors buying the short end in combination with the purchasing program from the BOJ. Where have we seen this before … oh yes, the eurozone periphery. You try to see what yield Japan would need to pay for for a MARKET based 10y or 30y issuance of a decent size. Our best guess is way, way above its nominal growth and herein of course lies the problem. Japan ran a 10% deficit last year and there are no signs of consolidation in 2013. Meanwhile the current account surplus is starting to play the vanishing man act.

Japan will run out of sufficient savings to buy the whole issue of JGBs by 2016, but the possibilities are the market will respond sooner. If the Japanese government continues to issue debt, the Japanese economy is going to run out of savings to buy the new debt. The share of government debt to total currency and deposits will soon reach close to 100%. At this point of the endgame, there is no way out for Japan: either the central bank or foreigners must take up the bid, or Japan must begin to sell off foreign assets. Markets will price in the endgame before it happens…. then it will be game over!

What does game over mean?
How does a country accept its fate of having no other chance of growing other than simply growing old?
How does a country accept its fate of seeing its private savings evaporate? How can a country get along with the discovery that what was seen as a secure source of private wealth and old-age provision, national government bonds, just dematerializes?

Of course, each country is different, especially if it goes through a heavy crisis. And, at least, over the years the Japanese built up a strong net external investment position which leaves the current account strongly positive despite the negative goods trade balance due to the high income flow from investments abroad. This is very different from Italy and Portugal, countries which have long run both trade and current account deficits and have very poor net external investment positions. But these external assets and the internal savings are distributed differently, and in case of heavy losses on the domestic side – will the Japanese Gerard Depardieus and those leading global companies with large foreign assets still be happy to pay the surcharge needed for elderly care of all those elderly people that lost their savings because they trusted the government?

Or Japanese young people, will they still be prepared to stay and work in a country which may well have some of the highest income tax rates on the planet?

No matter how Japan will act in its battle to survive the endgame, it is going to provide us with a fascinating experiment to follow because whether it succeeds or not will tell us a lot about our own future, and of how the rest of the OECD will cope with the rapidly ageing societies they have in their own back yards.

Gold Demand Down in 2012, Central Banks Purchase Most Since 1964

The World Gold Council released their latest report on gold supply and demand through the fourth quarter of 2012. Total demand, in tonnes, declined year-over-year on the back of lower turnover from jewellery, bars & coins, and ETF's. This was only partially offset by an increase in demand from global central banks. Central banks purchased 534.6t of gold in 2012, the greatest gold purchase volume by Central Banks since 1964. Most of the purchasing appears to be concentrated in emerging market nations. In my mind, global central banks are ramping up gold purchases to protect themselves from the volatility in currency markets, the later a direct result of QE efforts.

The report can be found below and here at the World Gold Council Site.

How to Become a Multi-Billionaire- Jim Rogers


Feb 13th Edition of High Volume Highs

And a few high volume highs....... SCI, AMRI, and VMI  all reported earnings that beat on either the top or bottom lines. As for the other names, HHC, the Ackman owned property development company, gained on the announcement of the development of certain owned properties. GE's shares gained on the announced sale of NBC and a $10 billion buyback. Lastly, NNN was up for no apparent reason. The company did release an 8K with earnings reported late last week. Go figure.







Feb 13th Edition of Volume Off the High

A few names with volume coming off recent highs..... BLT, the chainsaw part manufacturer, tanked on no apparent news, at least the few sites that I looked at. Then we have a host of companies providing forecasts that were light of estimates. This includes DPS, DF, RAX, PNK, and SGEN.







Wednesday, February 13, 2013

The Fed's Asset Inflation Machine- An Op Ed

This Op Ed from George Melloan was printed in the WSJ late week and can be found here

In a 1996 speech to the American Enterprise Institute, Federal Reserve Chairman Alan Greenspan famously warned about the dangers when “irrational exuberance” fueled asset inflation. By that he meant that rising values of stocks and real estate might reflect only a cheapened dollar, not an increase in their real worth. Since he was the man in charge of the dollar, his remark caused quite a stir.

We’ve learned a lot about asset inflation since that speech, but maybe not enough. The nearly 2,000-point rise in the Dow Jones Industrial Average since last June no doubt at least partly reflects asset inflation, since there has been very little in the economic or political outlook to justify it.

Midwest farmland prices were rising at a 13% annual rate last fall even after a summer of crippling drought. How could droughtstricken farms be gaining value so rapidly, other than through inflation generated by cheap credit? House prices also are climbing again in many areas, much as they were during the asset inflation of the 2000s.

Those are the same houses that were on the down escalator not long ago. Call it “asset reflation.”
Asset inflation often produces something called “wealth illusion,” the belief that pricier asset holdings necessarily make one permanently richer. Illusions are dangerous. Eventually, painful reality intervenes.

We’ve been down this road before. Mr. Greenspan was cautioning himself as well as Wall Street in his AEI speech when he said, “we should not underestimate, or become complacent about the complexity of interactions of asset markets and the economy.” After nearly a decade on the job, he knew the uncertainties of managing a fiat currency. He also knew that tightening the money spigots in boom times required the courage to face the political outrage that invariably results.

Seven years later, Mr. Greenspan would fail to heed his own warning. Urged on by his soon-tobe successor, Ben Bernanke, Mr. Greenspan would hold interest rates down too long, setting off a mid-2000s credit binge that sent assets soaring, home prices in particular. Congress developed a blasé attitude toward huge budget deficits, simply because Fed policy made them easy to finance. State and local governments overleveraged themselves. This was “irrational exuberance” indeed.

When the Fed finally tightened credit, the bubble burst, with a resulting stock-market crash, a vast wave of home foreclosures, public-sector pension funds in distress, and many state and municipal governments technically bankrupt. As Mr. Greenspan had feared, a crash in asset values did profound damage to the real economy. We are still living with it.

At least Chairman Greenspan understood the risks. It is not clear that Chairman Bernanke is aware that he has now set the Fed’s asset-inflation machine on automatic pilot by promising near-zero interest rates well out into the future. The longer the policy continues, the greater the difficulty in climbing down from the debt mountain it is creating, particularly the rapidly rising national debt.

President Obama and Mr. Bernanke worsened the effects of the 2008 crash by adopting the same Keynesian antirecession measures—fiscal and monetary “stimulus”—that had failed before, most dramatically in the 1970s. Stanford economist and former Treasury official John Taylor recently argued persuasively on these pages that “stimulus” measures had retarded rather than speeded recovery.
Mr. Bernanke will have great difficulty letting go of the nearzero interest rate policy without severe consequences for both the Fed and the economy. The Fed’s own economists recently warned that the Fed itself could lose as much as $100 billion on its vast portfolio when bond prices finally fall from their artificially elevated levels. Meanwhile, higher interest rates will cause the cost of financing government debt to skyrocket.

The Fed policy of quantitative easing is designed to rebuild the asset inflation edifice that collapsed in 2008. German banker and economist Kurt Richebächer provided some of the earliest warnings of the dangers. In his April 2005 newsletter, he wrote that “there is always one and the same cause of [asset inflation], and that is credit creation in excess of current saving leading to demand growth in excess of output.”

Richebächer added that “a credit expansion in the United States of close to $10 trillion—in relation to nominal GDP growth of barely $2 trillion over the last four years since 2000—definitely represents more than the usual dose of inflationary credit excess. This is really hyperinflation in terms of credit creation.” Richebächer died a year before the debacle of 2008. The crash that surprised so many bright people wouldn’t have surprised him at all.

The rising Dow is of course good news for savers, who have been forced into equities to try to find a decent return on investment. Thanks to Fed policy, “safe” 10-year Treasury bonds yield a near-zero or negative return, depending on whether you measure price inflation at the official rate or at higher private estimates.
Winners on stocks or land holdings should happily accept their gains as the best to be expected in a very unsettled financial environment. But they should also remember the 2000s, when so many people thought their newfound riches were real and cashed them in for yet more debt, such as home-equity loans.

They later had a rude awakening. The “wealth illusion” of asset inflation is seductive, which is why central banks in charge of a fiat currency and subject to no external disciplines so often drift in that direction. Politicians smile in satisfaction and powerful Washington lobbies cry for more.

But an economy built on an illusion is hardly a sound structure. We may be doomed to learn that lesson once again before long.

Prepare for More G-7 Currency Confusion: El-Erian

My comments- currencies are likely the likely it-investments to watch. 
 
By: Mohamed El-Erian, CEO & CO-CIO, Pimco Via- CNBC.com

Within the last 24 hours, G-7 officials issued a currency statement, "clarified" it and then criticized the clarification! Here, in summary terms, are three possible reasons for this muddle, as well as what it may mean for investors.

Let us start with the context.
Yesterday's statement was a response to increasing global concerns about "currency wars." It stressed that members' policy approach "remains oriented towards meeting … domestic objectives using domestic instruments." And to make things totally explicit, officials added that exchange rates are not being "targeted."
So why have reactions been so confused?

First, the statement's impact was immediately blunted by officials' attempt at a forced analytical distinction between direct and indirect influences on exchange rates. Simply put, the G-7's stab at economic diplomacy collided with economic reality.

Yes officials may not be directly manipulating their currencies; and yes, they do not have specific targets in mind (unlike the traditional FX intervention triggered by the trade tensions of old). 

But undoubtedly they are indirectly influencing their exchange rates, and in a meaningful manner. They are doing so through the aggressive choice of monetary policy and the manner it is being pursued – particularly the ever-deepening experimental combination of floored policy interest rates, bold forward policy guidance and, of course, unprecedented use of their balance sheets.

Second, the G-7 itself is far from united on the issue.
Some countries, like the U.S., are advocating a broader adoption of "reflationary national policies" around the world. Essentially, they believe that the income effects will dominate the prices effects. Others, such as Germany, worry about the inflationary implications and related financial fragilities of such policies.

Third, domestic and regional political realities translate into overly constrained macro policy approaches, placing an excessive burden on monetary policy, and thereby increasing the likelihood of collateral damage and unintended consequences (or what Federal Reserve Chairman Bernanke calls "costs and risks).
Given all this, it is not surprising that the G-7 statement did very little to dampen currency movements. I also doubt that the other likely short-term objective – that of pre-empting currency disagreements at Friday's G-20 meeting – will be fully successful.

For these reasons, investors should: 
• expect currency volatility to continue,

• look for policy interest rate convergence to spread throughout the world (read: more emerging economies) as a larger number of central banks succumb to the Fed's approach, and

• expect equity investors to separate even more into two major camps when it comes to characterizing the future impact of unusual monetary policy activism: between those who have unfaltering blind faith in the effectiveness of central banks, and those who respect central banks but recognize that their policies' are
becoming increasingly ineffective and that collateral risks/unintended consequences will mount.

Then there is the really complex, longer-term question – and one that I tried to address on Monday in a Financial Times column: The longer this regime of unusual central bank activism continues, the greater the bar bell in macro expected outcomes. The Fed-led global shift to expansionary monetary policy could help transition major economies from "supported growth" to "genuine growth." But it could also stress the global system to such an extent that it could cause significant fragmentation and breakage.

Neither historical experience nor analytical studies points convincingly to how the systemic effects will ultimately tip. In the meantime, look for more official statements that – almost inevitably – will likely fall somewhere between confused and incoherent.

Libertarian Party Response to the State of the Union

I will stand on a soap box for a moment and provide the Libertarian response to the State of Union address from the President last night.


Tuesday, February 12, 2013

The Text of the 2013 State of the Union Address

Remarks of President Barack Obama -- As Prepared for Delivery 
Mr. Speaker, Mr. Vice President, Members of Congress, fellow citizens: 
 Fifty-one years ago, John F. Kennedy declared to this Chamber that “the Constitution makes us not rivals for power but partners for progress…It is my task,” he said, “to report the State of the Union – to improve it is the task of us all.” 
Tonight, thanks to the grit and determination of the American people, there is much progress to report.  After a decade of grinding war, our brave men and women in uniform are coming home.  After years of grueling recession, our businesses have created over six million new jobs.  We buy more American cars than we have in five years, and less foreign oil than we have in twenty.  Our housing market is healing, our stock market is rebounding, and consumers, patients, and homeowners enjoy stronger protections than ever before.
Together, we have cleared away the rubble of crisis, and can say with renewed confidence that the state of our union is stronger.
But we gather here knowing that there are millions of Americans whose hard work and dedication have not yet been rewarded.  Our economy is adding jobs – but too many people still can’t find full-time employment.  Corporate profits have rocketed to all-time highs – but for more than a decade, wages and incomes have barely budged. 
It is our generation’s task, then, to reignite the true engine of America’s economic growth – a rising, thriving middle class.
It is our unfinished task to restore the basic bargain that built this country – the idea that if you work hard and meet your responsibilities, you can get ahead, no matter where you come from, what you look like, or who you love.
It is our unfinished task to make sure that this government works on behalf of the many, and not just the few; that it encourages free enterprise, rewards individual initiative, and opens the doors of opportunity to every child across this great nation.
The American people don’t expect government to solve every problem.  They don’t expect those of us in this chamber to agree on every issue.  But they do expect us to put the nation’s interests before party.  They do expect us to forge reasonable compromise where we can.  For they know that America moves forward only when we do so together; and that the responsibility of improving this union remains the task of us all.
Our work must begin by making some basic decisions about our budget – decisions that will have a huge impact on the strength of our recovery.
Over the last few years, both parties have worked together to reduce the deficit by more than $2.5 trillion – mostly through spending cuts, but also by raising tax rates on the wealthiest 1 percent of Americans.  As a result, we are more than halfway towards the goal of $4 trillion in deficit reduction that economists say we need to stabilize our finances.    
Now we need to finish the job.  And the question is, how?
In 2011, Congress passed a law saying that if both parties couldn’t agree on a plan to reach our deficit goal, about a trillion dollars’ worth of budget cuts would automatically go into effect this year.  These sudden, harsh, arbitrary cuts would jeopardize our military readiness.  They’d devastate priorities like education, energy, and medical research. They would certainly slow our recovery, and cost us hundreds of thousands of jobs.  That’s why Democrats, Republicans, business leaders, and economists have already said that these cuts, known here in Washington as “the sequester,” are a really bad idea. 
Now, some in this Congress have proposed preventing only the defense cuts by making even bigger cuts to things like education and job training; Medicare and Social Security benefits. 
That idea is even worse.  Yes, the biggest driver of our long-term debt is the rising cost of health care for an aging population.  And those of us who care deeply about programs like Medicare must embrace the need for modest reforms – otherwise, our retirement programs will crowd out the investments we need for our children, and jeopardize the promise of a secure retirement for future generations. 
But we can’t ask senior citizens and working families to shoulder the entire burden of deficit reduction while asking nothing more from the wealthiest and most powerful.  We won’t grow the middle class simply by shifting the cost of health care or college onto families that are already struggling, or by forcing communities to lay off more teachers, cops, and firefighters.  Most Americans – Democrats, Republicans, and Independents – understand that we can’t just cut our way to prosperity.  They know that broad-based economic growth requires a balanced approach to deficit reduction, with spending cuts and revenue, and with everybody doing their fair share.   And that’s the approach I offer tonight. 
On Medicare, I’m prepared to enact reforms that will achieve the same amount of health care savings by the beginning of the next decade as the reforms proposed by the bipartisan Simpson-Bowles commission.  Already, the Affordable Care Act is helping to slow the growth of health care costs.  The reforms I’m proposing go even further.  We’ll reduce taxpayer subsidies to prescription drug companies and ask more from the wealthiest seniors.  We’ll bring down costs by changing the way our government pays for Medicare, because our medical bills shouldn’t be based on the number of tests ordered or days spent in the hospital – they should be based on the quality of care that our seniors receive.  And I am open to additional reforms from both parties, so long as they don’t violate the guarantee of a secure retirement.  Our government shouldn’t make promises we cannot keep – but we must keep the promises we’ve already made. 
To hit the rest of our deficit reduction target, we should do what leaders in both parties have already suggested, and save hundreds of billions of dollars by getting rid of tax loopholes and deductions for the well-off and well-connected.  After all, why would we choose to make deeper cuts to education and Medicare just to protect special interest tax breaks?  How is that fair?  How does that promote growth?
Now is our best chance for bipartisan, comprehensive tax reform that encourages job creation and helps bring down the deficit.  The American people deserve a tax code that helps small businesses spend less time filling out complicated forms, and more time expanding and hiring; a tax code that ensures billionaires with high-powered accountants can’t pay a lower rate than their hard-working secretaries; a tax code that lowers incentives to move jobs overseas, and lowers tax rates for businesses and manufacturers that create jobs right here in America.  That’s what tax reform can deliver.  That’s what we can do together.
I realize that tax reform and entitlement reform won’t be easy.  The politics will be hard for both sides.  None of us will get 100 percent of what we want.  But the alternative will cost us jobs, hurt our economy, and visit hardship on millions of hardworking Americans.  So let’s set party interests aside, and work to pass a budget that replaces reckless cuts with smart savings and wise investments in our future.  And let’s do it without the brinksmanship that stresses consumers and scares off investors.  The greatest nation on Earth cannot keep conducting its business by drifting from one manufactured crisis to the next.  Let’s agree, right here, right now, to keep the people’s government open, pay our bills on time, and always uphold the full faith and credit of the United States of America.  The American people have worked too hard, for too long, rebuilding from one crisis to see their elected officials cause another.
Now, most of us agree that a plan to reduce the deficit must be part of our agenda.  But let’s be clear: deficit reduction alone is not an economic plan.  A growing economy that creates good, middle-class jobs – that must be the North Star that guides our efforts.  Every day, we should ask ourselves three questions as a nation:  How do we attract more jobs to our shores?  How do we equip our people with the skills needed to do those jobs?  And how do we make sure that hard work leads to a decent living?
A year and a half ago, I put forward an American Jobs Act that independent economists said would create more than one million new jobs.  I thank the last Congress for passing some of that agenda, and I urge this Congress to pass the rest.  Tonight, I’ll lay out additional proposals that are fully paid for and fully consistent with the budget framework both parties agreed to just 18 months ago.  Let me repeat – nothing I’m proposing tonight should increase our deficit by a single dime.  It’s not a bigger government we need, but a smarter government that sets priorities and invests in broad-based growth.
Our first priority is making America a magnet for new jobs and manufacturing. 
After shedding jobs for more than 10 years, our manufacturers have added about 500,000 jobs over the past three. Caterpillar is bringing jobs back from Japan.  Ford is bringing jobs back from Mexico. After locating plants in other countries like China, Intel is opening its most advanced plant right here at home.  And this year, Apple will start making Macs in America again.
There are things we can do, right now, to accelerate this trend.  Last year, we created our first manufacturing innovation institute in Youngstown, Ohio.  A once-shuttered warehouse is now a state-of-the art lab where new workers are mastering the 3D printing that has the potential to revolutionize the way we make almost everything.  There’s no reason this can’t happen in other towns.  So tonight, I’m announcing the launch of three more of these manufacturing hubs, where businesses will partner with the Departments of Defense and Energy to turn regions left behind by globalization into global centers of high-tech jobs.  And I ask this Congress to help create a network of fifteen of these hubs and guarantee that the next revolution in manufacturing is Made in America.
If we want to make the best products, we also have to invest in the best ideas.  Every dollar we invested to map the human genome returned $140 to our economy.  Today, our scientists are mapping the human brain to unlock the answers to Alzheimer’s; developing drugs to regenerate damaged organs; devising new material to make batteries ten times more powerful.  Now is not the time to gut these job-creating investments in science and innovation.  Now is the time to reach a level of research and development not seen since the height of the Space Race.  And today, no area holds more promise than our investments in American energy. 
After years of talking about it, we are finally poised to control our own energy future.  We produce more oil at home than we have in 15 years.  We have doubled the distance our cars will go on a gallon of gas, and the amount of renewable energy we generate from sources like wind and solar – with tens of thousands of good, American jobs to show for it.  We produce more natural gas than ever before – and nearly everyone’s energy bill is lower because of it.  And over the last four years, our emissions of the dangerous carbon pollution that threatens our planet have actually fallen.
But for the sake of our children and our future, we must do more to combat climate change.  Yes, it’s true that no single event makes a trend.  But the fact is, the 12 hottest years on record have all come in the last 15.  Heat waves, droughts, wildfires, and floods – all are now more frequent and intense.  We can choose to believe that Superstorm Sandy, and the most severe drought in decades, and the worst wildfires some states have ever seen were all just a freak coincidence.  Or we can choose to believe in the overwhelming judgment of science – and act before it’s too late.   
The good news is, we can make meaningful progress on this issue while driving strong economic growth.  I urge this Congress to pursue a bipartisan, market-based solution to climate change, like the one John McCain and Joe Lieberman worked on together a few years ago.  But if Congress won’t act soon to protect future generations, I will.  I will direct my Cabinet to come up with executive actions we can take, now and in the future, to reduce pollution, prepare our communities for the consequences of climate change, and speed the transition to more sustainable sources of energy.
Four years ago, other countries dominated the clean energy market and the jobs that came with it.  We’ve begun to change that.  Last year, wind energy added nearly half of all new power capacity in America.  So let’s generate even more.  Solar energy gets cheaper by the year – so let’s drive costs down even further.  As long as countries like China keep going all-in on clean energy, so must we.
In the meantime, the natural gas boom has led to cleaner power and greater energy independence.  That’s why my Administration will keep cutting red tape and speeding up new oil and gas permits.  But I also want to work with this Congress to encourage the research and technology that helps natural gas burn even cleaner and protects our air and water. 
Indeed, much of our new-found energy is drawn from lands and waters that we, the public, own together.  So tonight, I propose we use some of our oil and gas revenues to fund an Energy Security Trust that will drive new research and technology to shift our cars and trucks off oil for good.  If a non-partisan coalition of CEOs and retired generals and admirals can get behind this idea, then so can we.  Let’s take their advice and free our families and businesses from the painful spikes in gas prices we’ve put up with for far too long.  I’m also issuing a new goal for America: let’s cut in half the energy wasted by our homes and businesses over the next twenty years.  The states with the best ideas to create jobs and lower energy bills by constructing more efficient buildings will receive federal support to help make it happen.
America’s energy sector is just one part of an aging infrastructure badly in need of repair.  Ask any CEO where they’d rather locate and hire: a country with deteriorating roads and bridges, or one with high-speed rail and internet; high-tech schools and self-healing power grids.  The CEO of Siemens America – a company that brought hundreds of new jobs to North Carolina – has said that if we upgrade our infrastructure, they’ll bring even more jobs.  And I know that you want these job-creating projects in your districts.  I’ve seen you all at the ribbon-cuttings.
Tonight, I propose a “Fix-It-First” program to put people to work as soon as possible on our most urgent repairs, like the nearly 70,000 structurally deficient bridges across the country.  And to make sure taxpayers don’t shoulder the whole burden, I’m also proposing a Partnership to Rebuild America that attracts private capital to upgrade what our businesses need most: modern ports to move our goods; modern pipelines to withstand a storm; modern schools worthy of our children.  Let’s prove that there is no better place to do business than the United States of America.  And let’s start right away.
Part of our rebuilding effort must also involve our housing sector.  Today, our housing market is finally healing from the collapse of 2007.  Home prices are rising at the fastest pace in six years, home purchases are up nearly 50 percent, and construction is expanding again. 
But even with mortgage rates near a 50-year low, too many families with solid credit who want to buy a home are being rejected.  Too many families who have never missed a payment and want to refinance are being told no.  That’s holding our entire economy back, and we need to fix it.  Right now, there’s a bill in this Congress that would give every responsible homeowner in America the chance to save $3,000 a year by refinancing at today’s rates.  Democrats and Republicans have supported it before.  What are we waiting for?  Take a vote, and send me that bill.  Right now, overlapping regulations keep responsible young families from buying their first home.  What’s holding us back?  Let’s streamline the process, and help our economy grow.
These initiatives in manufacturing, energy, infrastructure, and housing will help entrepreneurs and small business owners expand and create new jobs.  But none of it will matter unless we also equip our citizens with the skills and training to fill those jobs.  And that has to start at the earliest possible age.
Study after study shows that the sooner a child begins learning, the better he or she does down the road.  But today, fewer than 3 in 10 four year-olds are enrolled in a high-quality preschool program.  Most middle-class parents can’t afford a few hundred bucks a week for private preschool.  And for poor kids who need help the most, this lack of access to preschool education can shadow them for the rest of their lives. 
Tonight, I propose working with states to make high-quality preschool available to every child in America.  Every dollar we invest in high-quality early education can save more than seven dollars later on – by boosting graduation rates, reducing teen pregnancy, even reducing violent crime.  In states that make it a priority to educate our youngest children, like Georgia or Oklahoma, studies show students grow up more likely to read and do math at grade level, graduate high school, hold a job, and form more stable families of their own.  So let’s do what works, and make sure none of our children start the race of life already behind.  Let’s give our kids that chance.
Let’s also make sure that a high school diploma puts our kids on a path to a good job.  Right now, countries like Germany focus on graduating their high school students with the equivalent of a technical degree from one of our community colleges, so that they’re ready for a job.  At schools like P-Tech in Brooklyn, a collaboration between New York Public Schools, the City University of New York, and IBM, students will graduate with a high school diploma and an associate degree in computers or engineering. 
We need to give every American student opportunities like this.  Four years ago, we started Race to the Top – a competition that convinced almost every state to develop smarter curricula and higher standards, for about 1 percent of what we spend on education each year.  Tonight, I’m announcing a new challenge to redesign America’s high schools so they better equip graduates for the demands of a high-tech economy.  We’ll reward schools that develop new partnerships with colleges and employers, and create classes that focus on science, technology, engineering, and math – the skills today’s employers are looking for to fill jobs right now and in the future.
Now, even with better high schools, most young people will need some higher education.  It’s a simple fact: the more education you have, the more likely you are to have a job and work your way into the middle class.  But today, skyrocketing costs price way too many young people out of a higher education, or saddle them with unsustainable debt.
Through tax credits, grants, and better loans, we have made college more affordable for millions of students and families over the last few years.  But taxpayers cannot continue to subsidize the soaring cost of higher education.  Colleges must do their part to keep costs down, and it’s our job to make sure they do.  Tonight, I ask Congress to change the Higher Education Act, so that affordability and value are included in determining which colleges receive certain types of federal aid.  And tomorrow, my Administration will release a new “College Scorecard” that parents and students can use to compare schools based on a simple criteria: where you can get the most bang for your educational buck.  
To grow our middle class, our citizens must have access to the education and training that today’s jobs require.  But we also have to make sure that America remains a place where everyone who’s willing to work hard has the chance to get ahead.
Our economy is stronger when we harness the talents and ingenuity of striving, hopeful immigrants.  And right now, leaders from the business, labor, law enforcement, and faith communities all agree that the time has come to pass comprehensive immigration reform. 
Real reform means strong border security, and we can build on the progress my Administration has already made – putting more boots on the southern border than at any time in our history, and reducing illegal crossings to their lowest levels in 40 years. 
Real reform means establishing a responsible pathway to earned citizenship – a path that includes passing a background check, paying taxes and a meaningful penalty, learning English, and going to the back of the line behind the folks trying to come here legally. 
And real reform means fixing the legal immigration system to cut waiting periods, reduce bureaucracy, and attract the highly-skilled entrepreneurs and engineers that will help create jobs and grow our economy.
In other words, we know what needs to be done.  As we speak, bipartisan groups in both chambers are working diligently to draft a bill, and I applaud their efforts.  Now let’s get this done.  Send me a comprehensive immigration reform bill in the next few months, and I will sign it right away.
But we can’t stop there.  We know our economy is stronger when our wives, mothers, and daughters can live their lives free from discrimination in the workplace, and free from the fear of domestic violence.  Today, the Senate passed the Violence Against Women Act that Joe Biden originally wrote almost 20 years ago.  I urge the House to do the same.  And I ask this Congress to declare that women should earn a living equal to their efforts, and finally pass the Paycheck Fairness Act this year.
We know our economy is stronger when we reward an honest day’s work with honest wages.  But today, a full-time worker making the minimum wage earns $14,500 a year.  Even with the tax relief we’ve put in place, a family with two kids that earns the minimum wage still lives below the poverty line.  That’s wrong.  That’s why, since the last time this Congress raised the minimum wage, nineteen states have chosen to bump theirs even higher.
Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour.  This single step would raise the incomes of millions of working families.  It could mean the difference between groceries or the food bank; rent or eviction; scraping by or finally getting ahead.  For businesses across the country, it would mean customers with more money in their pockets.  In fact, working folks shouldn’t have to wait year after year for the minimum wage to go up while CEO pay has never been higher.  So here’s an idea that Governor Romney and I actually agreed on last year: let’s tie the minimum wage to the cost of living, so that it finally becomes a wage you can live on.
Tonight, let’s also recognize that there are communities in this country where no matter how hard you work, it’s virtually impossible to get ahead.  Factory towns decimated from years of plants packing up.  Inescapable pockets of poverty, urban and rural, where young adults are still fighting for their first job.  America is not a place where chance of birth or circumstance should decide our destiny.  And that is why we need to build new ladders of opportunity into the middle class for all who are willing to climb them.
Let’s offer incentives to companies that hire Americans who’ve got what it takes to fill that job opening, but have been out of work so long that no one will give them a chance.  Let’s put people back to work rebuilding vacant homes in run-down neighborhoods.  And this year, my Administration will begin to partner with 20 of the hardest-hit towns in America to get these communities back on their feet.  We’ll work with local leaders to target resources at public safety, education, and housing.  We’ll give new tax credits to businesses that hire and invest.  And we’ll work to strengthen families by removing the financial deterrents to marriage for low-income couples, and doing more to encourage fatherhood – because what makes you a man isn’t the ability to conceive a child; it’s having the courage to raise one.
Stronger families.  Stronger communities.  A stronger America.  It is this kind of prosperity – broad, shared, and built on a thriving middle class – that has always been the source of our progress at home.  It is also the foundation of our power and influence throughout the world.
Tonight, we stand united in saluting the troops and civilians who sacrifice every day to protect us. Because of them, we can say with confidence that America will complete its mission in Afghanistan, and achieve our objective of defeating the core of al Qaeda.  Already, we have brought home 33,000 of our brave servicemen and women.  This spring, our forces will move into a support role, while Afghan security forces take the lead.  Tonight, I can announce that over the next year, another 34,000 American troops will come home from Afghanistan.  This drawdown will continue.  And by the end of next year, our war in Afghanistan will be over. 
Beyond 2014, America’s commitment to a unified and sovereign Afghanistan will endure, but the nature of our commitment will change.  We are negotiating an agreement with the Afghan government that focuses on two missions: training and equipping Afghan forces so that the country does not again slip into chaos, and counter-terrorism efforts that allow us to pursue the remnants of al Qaeda and their affiliates.
Today, the organization that attacked us on 9/11 is a shadow of its former self.  Different al Qaeda affiliates and extremist groups have emerged – from the Arabian Peninsula to Africa.  The threat these groups pose is evolving.  But to meet this threat, we don’t need to send tens of thousands of our sons and daughters abroad, or occupy other nations.  Instead, we will need to help countries like Yemen, Libya, and Somalia provide for their own security, and help allies who take the fight to terrorists, as we have in Mali.  And, where necessary, through a range of capabilities, we will continue to take direct action against those terrorists who pose the gravest threat to Americans.
As we do, we must enlist our values in the fight.  That is why my Administration has worked tirelessly to forge a durable legal and policy framework to guide our counterterrorism operations.  Throughout, we have kept Congress fully informed of our efforts.  I recognize that in our democracy, no one should just take my word that we’re doing things the right way.  So, in the months ahead, I will continue to engage with Congress to ensure not only that our targeting, detention, and prosecution of terrorists remains consistent with our laws and system of checks and balances, but that our efforts are even more transparent to the American people and to the world.
Of course, our challenges don’t end with al Qaeda.  America will continue to lead the effort to prevent the spread of the world’s most dangerous weapons.  The regime in North Korea must know that they will only achieve security and prosperity by meeting their international obligations.  Provocations of the sort we saw last night will only isolate them further, as we stand by our allies, strengthen our own missile defense, and lead the world in taking firm action in response to these threats. 
Likewise, the leaders of Iran must recognize that now is the time for a diplomatic solution, because a coalition stands united in demanding that they meet their obligations, and we will do what is necessary to prevent them from getting a nuclear weapon.  At the same time, we will engage Russia to seek further reductions in our nuclear arsenals, and continue leading the global effort to secure nuclear materials that could fall into the wrong hands – because our ability to influence others depends on our willingness to lead.
America must also face the rapidly growing threat from cyber-attacks.  We know hackers steal people’s identities and infiltrate private e-mail.  We know foreign countries and companies swipe our corporate secrets.  Now our enemies are also seeking the ability to sabotage our power grid, our financial institutions, and our air traffic control systems.  We cannot look back years from now and wonder why we did nothing in the face of real threats to our security and our economy. 
That’s why, earlier today, I signed a new executive order that will strengthen our cyber defenses by increasing information sharing, and developing standards to protect our national security, our jobs, and our privacy.  Now, Congress must act as well, by passing legislation to give our government a greater capacity to secure our networks and deter attacks. 
Even as we protect our people, we should remember that today’s world presents not only dangers, but opportunities.  To boost American exports, support American jobs, and level the playing field in the growing markets of Asia, we intend to complete negotiations on a Trans-Pacific Partnership.  And tonight, I am announcing that we will launch talks on a comprehensive Transatlantic Trade and Investment Partnership with the European Union – because trade that is free and fair across the Atlantic supports millions of good-paying American jobs.
We also know that progress in the most impoverished parts of our world enriches us all.  In many places, people live on little more than a dollar a day.  So the United States will join with our allies to eradicate such extreme poverty in the next two decades: by connecting more people to the global economy and empowering women; by giving our young and brightest minds new opportunities to serve and helping communities to feed, power, and educate themselves; by saving the world’s children from preventable deaths; and by realizing the promise of an AIDS-free generation.  
Above all, America must remain a beacon to all who seek freedom during this period of historic change.  I saw the power of hope last year in Rangoon – when Aung San Suu Kyi welcomed an American President into the home where she had been imprisoned for years; when thousands of Burmese lined the streets, waving American flags, including a man who said, “There is justice and law in the United States.  I want our country to be like that.”
In defense of freedom, we will remain the anchor of strong alliances from the Americas to Africa; from Europe to Asia.  In the Middle East, we will stand with citizens as they demand their universal rights, and support stable transitions to democracy.  The process will be messy, and we cannot presume to dictate the course of change in countries like Egypt; but we can – and will – insist on respect for the fundamental rights of all people.  We will keep the pressure on a Syrian regime that has murdered its own people, and support opposition leaders that respect the rights of every Syrian.  And we will stand steadfast with Israel in pursuit of security and a lasting peace.  These are the messages I will deliver when I travel to the Middle East next month.

All this work depends on the courage and sacrifice of those who serve in dangerous places at great personal risk – our diplomats, our intelligence officers, and the men and women of the United States Armed Forces.  As long as I’m Commander-in-Chief, we will do whatever we must to protect those who serve their country abroad, and we will maintain the best military in the world.  We will invest in new capabilities, even as we reduce waste and wartime spending.  We will ensure equal treatment for all service members, and equal benefits for their families – gay and straight.  We will draw upon the courage and skills of our sisters and daughters, because women have proven under fire that they are ready for combat.  We will keep faith with our veterans – investing in world-class care, including mental health care, for our wounded warriors; supporting our military families; and giving our veterans the benefits, education, and job opportunities they have earned.  And I want to thank my wife Michelle and Dr. Jill Biden for their continued dedication to serving our military families as well as they serve us.
But defending our freedom is not the job of our military alone.  We must all do our part to make sure our God-given rights are protected here at home.  That includes our most fundamental right as citizens:  the right to vote.  When any Americans – no matter where they live or what their party – are denied that right simply because they can’t wait for five, six, seven hours just to cast their ballot, we are betraying our ideals.  That’s why, tonight, I’m announcing a non-partisan commission to improve the voting experience in America.  And I’m asking two long-time experts in the field, who’ve recently served as the top attorneys for my campaign and for Governor Romney’s campaign, to lead it.  We can fix this, and we will.  The American people demand it.  And so does our democracy.
Of course, what I’ve said tonight matters little if we don’t come together to protect our most precious resource – our children. 
It has been two months since Newtown.  I know this is not the first time this country has debated how to reduce gun violence.  But this time is different.  Overwhelming majorities of Americans – Americans who believe in the 2nd Amendment – have come together around commonsense reform – like background checks that will make it harder for criminals to get their hands on a gun.  Senators of both parties are working together on tough new laws to prevent anyone from buying guns for resale to criminals.  Police chiefs are asking our help to get weapons of war and massive ammunition magazines off our streets, because they are tired of being outgunned. 
Each of these proposals deserves a vote in Congress.  If you want to vote no, that’s your choice.  But these proposals deserve a vote.  Because in the two months since Newtown, more than a thousand birthdays, graduations, and anniversaries have been stolen from our lives by a bullet from a gun.
One of those we lost was a young girl named Hadiya Pendleton.  She was 15 years old.  She loved Fig Newtons and lip gloss.  She was a majorette.  She was so good to her friends, they all thought they were her best friend.  Just three weeks ago, she was here, in Washington, with her classmates, performing for her country at my inauguration.  And a week later, she was shot and killed in a Chicago park after school, just a mile away from my house.
Hadiya’s parents, Nate and Cleo, are in this chamber tonight, along with more than two dozen Americans whose lives have been torn apart by gun violence.  They deserve a vote.
Gabby Giffords deserves a vote.
The families of Newtown deserve a vote.
The families of Aurora deserve a vote.
The families of Oak Creek, and Tucson, and Blacksburg, and the countless other communities ripped open by gun violence – they deserve a simple vote.
Our actions will not prevent every senseless act of violence in this country.  Indeed, no laws, no initiatives, no administrative acts will perfectly solve all the challenges I’ve outlined tonight.  But we were never sent here to be perfect.  We were sent here to make what difference we can, to secure this nation, expand opportunity, and uphold our ideals through the hard, often frustrating, but absolutely necessary work of self-government.
We were sent here to look out for our fellow Americans the same way they look out for one another, every single day, usually without fanfare, all across this country.  We should follow their example.
We should follow the example of a New York City nurse named Menchu Sanchez.  When Hurricane Sandy plunged her hospital into darkness, her thoughts were not with how her own home was faring – they were with the twenty precious newborns in her care and the rescue plan she devised that kept them all safe.
We should follow the example of a North Miami woman named Desiline Victor.  When she arrived at her polling place, she was told the wait to vote might be six hours.  And as time ticked by, her concern was not with her tired body or aching feet, but whether folks like her would get to have their say.  Hour after hour, a throng of people stayed in line in support of her.  Because Desiline is 102 years old.  And they erupted in cheers when she finally put on a sticker that read “I Voted.”
We should follow the example of a police officer named Brian Murphy.  When a gunman opened fire on a Sikh temple in Wisconsin, and Brian was the first to arrive, he did not consider his own safety.  He fought back until help arrived, and ordered his fellow officers to protect the safety of the Americans worshiping inside – even as he lay bleeding from twelve bullet wounds.
When asked how he did that, Brian said, “That’s just the way we’re made.”
That’s just the way we’re made.
We may do different jobs, and wear different uniforms, and hold different views than the person beside us.  But as Americans, we all share the same proud title:
We are citizens.  It’s a word that doesn’t just describe our nationality or legal status.  It describes the way we’re made.  It describes what we believe.  It captures the enduring idea that this country only works when we accept certain obligations to one another and to future generations; that our rights are wrapped up in the rights of others; and that well into our third century as a nation, it remains the task of us all, as citizens of these United States, to be the authors of the next great chapter in our American story. 
Thank you, God bless you, and God bless the United States of America.