Manarin Investment Counsel, Ltd.

This is a guest post from Tim Bastian.  Tim is a Manarin investment advisor and an economics instructor at Creighton University.

Every now and then, I like to revisit some of the things that we previously said to our clients, or in this case, anyone who would listen.  If you remember back last October when it appeared the entire US economy along with the stock market were going down the tubes, we made some very bold statements about what was causing the meltdown and what could be done immediately to stem the rising tide of panic.

Thanks to the research and writings done by Brian Wesbury, Chief Economist at First Trust, we were very early joiners of a then very small chorus that was singing about the problems created by what is known as "mark-to-market" accounting standards.  Here is a link to one of Mr. Wesbury's excellent articles on this subject.

Officially, this is known as FAS 157.  FASB is the Financial Accounting Standards Board.  Here's a brief description of FASB:

Since 1973, the Financial Accounting Standards Board (FASB) has been the designated organization in the private sector for establishing standards of financial accounting.  Those standards govern the preparation of financial statements.  They are officially recognized as authoritative by the Securities and Exchange Commission (SEC) (Financial Reporting Release No. 1, Section 101, and reaffirmed in its April 2003 Policy Statement) and the American Institute of Certified Public Accountants (Rule 203, Rules of Professional Conduct, as amended May 1973 and May 1979).  Such standards are important to the efficient functioning of the economy because investors, creditors, auditors, and others rely on credible, transparent, and comparable financial information.  (Source: www.fasb.org)

Between October 2008 and February 2009 several attempts to provide more guidance on FAS 157 failed to bring about any significant changes in the way it was being applied.  This prompted Congress to finally call for, and have a hearing on the matter.  Prompted by threats of government action, FASB loosened the rule to allow firms to value their assets based on, in my opinion, more realistic assumptions (like using a "mark-to-maturity with a sensible default rate assumption").  Since the announcement of that Congressional hearing, the stock market, as measured by the S&P 500 Index, has increased by a stunning 58%.  Here is a short timeline with links to original stories for you to read:

• Rep Kanjorski call for hearing:   March 5, 2009
• Federal Reserve Chairman Bernanke calls for MTM changes:  March 10, 2009
• Congressional hearing held:  March 12, 2009
• FAS 157 New Guidance Issued:  April 9, 2009

I have also included a graph below of the S&P 500 to show you the connection between its value (the underlying values of the firms that make up the index) and the changes in FAS 157.  Coincidence?  I think not.

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This is a guest post from Tim Bastian.  Tim is a Manarin investment advisor and an economics instructor at Creighton University. 

Every now and then, I like to revisit some of the things that we previously said to our clients, or in this case, anyone who would listen.  If you remember back last October when it appeared the entire US economy along with the stock market were going down the tubes, we made some very bold statements about what was causing the meltdown and what could be done immediately to stem the rising tide of panic.

Thanks to the research and writings done by Brian Wesbury, Chief Economist at First Trust, we were very early joiners of a then very small chorus that was singing about the problems created by what is known as "mark-to-market" accounting standards.  Here is a link to one of Mr. Wesbury's excellent articles on this subject.

Officially, this is known as FAS 157.  FASB is the Financial Accounting Standards Board.  Here's a brief description of FASB:

Since 1973, the Financial Accounting Standards Board (FASB) has been the designated organization in the private sector for establishing standards of financial accounting.  Those standards govern the preparation of financial statements.  They are officially recognized as authoritative by the Securities and Exchange Commission (SEC) (Financial Reporting Release No. 1, Section 101, and reaffirmed in its April 2003 Policy Statement) and the American Institute of Certified Public Accountants (Rule 203, Rules of Professional Conduct, as amended May 1973 and May 1979).  Such standards are important to the efficient functioning of the economy because investors, creditors, auditors, and others rely on credible, transparent, and comparable financial information.  (Source: www.fasb.org)

Between October 2008 and February 2009 several attempts to provide more guidance on FAS 157 failed to bring about any significant changes in the way it was being applied.  This prompted Congress to finally call for, and have a hearing on the matter.  Prompted by threats of government action, FASB loosened the rule to allow firms to value their assets based on, in my opinion, more realistic assumptions (like using a "mark-to-maturity with a sensible default rate assumption").  Since the announcement of that Congressional hearing, the stock market, as measured by the S&P 500 Index, has increased by a stunning 58%.  Here is a short timeline with links to original stories for you to read:

• Rep Kanjorski call for hearing:   March 5, 2009
• Federal Reserve Chairman Bernanke calls for MTM changes:  March 10, 2009
• Congressional hearing held:  March 12, 2009
• FAS 157 New Guidance Issued:  April 9, 2009

I have also included a graph below of the S&P 500 to show you the connection between its value (the underlying values of the firms that make up the index) and the changes in FAS 157.  Coincidence?  I think not.

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Look what we dug up from the high school archives ... it's Manarin Investment Counsel Vice President and Portfolio Manager Aron Huddleston, CFA!

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Until more people come to a more realistic, fact-based understanding of the government and the economy, little hope exists of tearing away from their quasi-religious attachment to a government they view with misplaced reverence and unrealistic hopes.  Lacking a true religious faith yet craving one, many Americans have turned to the state as a substitute god, endowed with the divine omnipotence required to shower the public with something for nothing in every department - free health care, free retirement security, free protection from hazardous consumer products and workplace accidents, free protection from the Islamic maniacs the U.S. government stirs up with its misadventures in the Muslim world, and so forth.  If you take the government to be Santa Claus, you naturally want every day to be Christmas; and the bigger the Santa, the bigger his sack of goodies.

- Bob Higgs via Marginal Revolution

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Last week I returned from the Von Mises Institute's Birthplace of Economic Theory Summit held in Salamanca, Spain. 

Here is a brief overview of what I observed:

- The genesis of free market economics wasn't really Adam Smith.  He merely brought to the Anglo-Saxon world that which the Jesuit scholars in the 1500's brought to Spain.

- The same free market model that was applied all those centuries ago hasn't changed because it's based on human actions. 

- My time in Salamanca reinforced my inner beliefs that free market economics (or what we in the West call Austrian economics) is absolutely the best out there because it takes into consideration the natural state of human behavior. 

- The pragmatists there agreed with my thoughts that the next two years in the market and economy ought to be fine and thereafter the outcome will hinge on what changes may occur with our fiscal and monetary policies. 

- It seemed half of the Americans in attendance were followers of the Von Mises Institute, free market advocates and Libertarian/Classic Liberal thinkers.   

- There is a wonderful free market renaissance going on in Europe but unfortunately not in America yet.  The internet is driving this movement and opening a lot of eyes to show people there is an alternative to big government.

Photo Credit: Ludwig von Mises Institute

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GDP for the third quarter was released.  Real gross domestic product was up 3.5% at an annualized rate.  Let's compare that to the first quarter when it was falling at a 6.4% annualized rate.  So in other words, from the trough to where we are today, we have a 9.9% swing in economic activity.  That is a V-shaped recovery. 

That's economist Brian Wesbury in his recent Wesbury 101 video on why we appear to be in the midst of a V-shaped economic recovery.  Later he says why the government's stimulus spending has hurt this process:

... every dollar the government spends it has to tax or borrow from someone else which means they can't spend it.  I believe the more the government spends, the more they take from the private sector, the slower economic growth is.  In other words, what I'm saying is the economy would be even stronger today if it weren't for the stimulus spending.  

And finally, he touches on the error being made by conservatives in Washington:

Today they're on the defensive.  They're trying to argue that GDP was not good, that it was only because of Cash for Clunkers and only because of the First Time Home Buyers Tax Credit that the economy is growing.  And once those go away, in fact the economy will slow down and we'll find out that things aren't really as good as they should be.  This is a strange place for conservatives to be in.  I think they're making a big mistake in this argument because the economy is highly likely to stay strong for the next 12 to 18 months.

I can't say there is much here to disagree with.

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