Sunday, June 9, 2013

How Jerry Brown Saved California

jerry brown californiaKevork Djansezian/Getty Images

THE CALIFORNIAN

One Friday morning this spring, I drove to Washington’s Dulles airport at dawn, to catch the first nonstop flight to San Francisco. When I got off the plane six hours later, the morning sun still slanting through the terminal windows, my cellphone began ringing practically as soon as I turned it on.

“Okay, you’re here!” the man on the other end of the call said, cheerily. I’d been trying to arrange a visit to his office for quite a while, and just the previous evening he’d let me know that if I got there in a hurry, he’d have time to talk the next day, as well as over the weekend. As I walked through the airport, he began reeling off turn-by-turn instructions for reaching his office in Oakland in my rental car. “You’ll take the Bay Bridge to the exit for the 580 East and the 24. But don’t go all the way to the 24! That would send you out to Concord. Take the 980 West until the exit for 27th Street, and then …”

It was like a moment from a Saturday Night Live sketch of “The Californians”—­which seemed appropriate, since the man I was talking with wasthe Californian, Jerry Brown. Brown began his first two terms as governor in 1974, at age 36, following one Republican former actor, Ronald Reagan. He returned to the office at age 72, following another, Arnold Schwarzenegger. In between he ran for president three times and the U.S. Senate once, all of course unsuccessfully; served eight years as Oakland’s mayor and four as California’s attorney general; and lived in both Japan (studying Zen meditation) and India (volunteering for Mother Teresa). He celebrated his 75th birthday the weekend I was in Oakland, which means that if he runs for reelection next year and if he wins, both of which are considered likely—his approval rating this year has been the envy of other politicians in the state—he could still be governor at age 80. “This is certainly a new identity for Brown, so flighty in his first ‘Governor Moonbeam’ period as governor,” Bruce Cain, a political scientist and an expert on California politics at Stanford’s Bill Lane Center for the American West, told me. “Now he is the most trusted, stable, and reliable leader around.” I asked Kevin Starr, of the University of Southern California and the author of the acclaimed Americans and the California Dream series of books, how Brown was seen in his return to office. “He is now liked,” Starr said. “Eccentric, but liked.”

Life and health are provisional, and within the past two years, Brown has undergone radiation treatment for early-stage prostate cancer (while maintaining his normal work schedule) and had a cancerous growth removed from his nose. But he moves, talks, reacts, and laughs like someone who is in no mood, and feels no need, to slow down. He is nearly a decade older than Bill Clinton but comes across as younger and bouncier.

“I love what I am doing,” he told me once I got to his Oakland office. “I love it much more than the first time. Back then I got bored because we didn’t have big problems. Now I am very enthusiastic. Everything’s interesting, and it’s complicated. There is a zest!” He likes to pound the desk or table as he talks, and this passage was punctuated: love (bang) … love (bang) … zest! (bang bangbang!). Anne Gust Brown, a former Gap executive in her mid-50s, who became his wife eight years ago and is widely regarded as his most influential and practical-minded adviser, arched an eyebrow from the other side of the room, where she was half-listening while working at a computer. “Ed-mund!” she said smilingly, but being sure to get his attention. (His official name is Edmund Gerald Brown Jr., after his father, Edmund G. “Pat” Brown, who was governor for eight years before he lost to Ronald Reagan in 1966.) “Don’t get yourself too worked up!” As a note on nomenclature: apart from his wife’s occasional joking use of Edmund and my own antiquated sense that I should address him as Governor, every other person I heard speak about—or with—him called him Jerry.

THE MAN

“Jerry to me is still the most interesting American politician,” Nathan Gardels, the editor of New Perspectives Quarterly, in Los Angeles, and a longtime friend of Brown’s, told me. “He is the only one I know who is ruthlessly practical but with a civilizational outlook. Kind of a combination of Erasmus and Machiavelli”—the latter meaning that Brown is highly skilled rather than evilly manipulative.

As a reporter, I have never encountered a politician more willing to talk with, as opposed to talk at, other people than Jerry Brown. “I think as I speak,” he told me early this year, underscoring the obvious, when I met him in Washington. He and his wife were in town for the National Governors Association conference. As I waited for them in the conference-center lobby on a Sunday morning, I saw governors from modest-size states bustle through, each with an earpiece-equipped security detail and a covey of aides. When the Browns arrived, they were alone.

“I find that a lot of people are more invested in position-taking than they are in the inquiry,” he continued. “Generally speaking, I am in the inquiry. I live in the question. People have so many positions, and usually the evidence is not strong enough for them really to be so confident in those conclusions. There are just a lot of things that are not certain.” He rattled off a list of decade-by-decade fads and gimmicks for “saving” America’s struggling school system, most recently No Child Left Behind and the “teacher accountability” movement. “The question you have to ask yourself is, if teacher accountability is really the whole key, how can it be that from Comenius”—a 17th-century European pioneer in education—“through John Dewey and Horace Mann, and going back to the Greeks, every­body missed this secret, and we figured it out just now? I’m skeptical of that—and of you, and Washington, and myself.” This was the “civilizational” outlook Nathan Gardels was referring to. Then, the practicality: “The world is so rich and diverse, and there is this technocratic imperative to impose rules, by small minds.” I realize that on the page this could look airy or pompous. In real conversation, Brown gives a convincing impression of weighing thoughts and evidence as he goes.

“Do you know what ‘metonym’ means?” he asked out of the blue one time. Unfortunately, I didn’t. (To spare you my embarrassment: it’s a name used as a reference for something else, like “K Street” for Washington’s lobbying culture, or “Silicon Valley” for the tech industry.) The surprise, coming from a politician, was that he was actually asking for information rather than testing me or pretending he already knew. “Me neither,” he said after my admission, “but I know it’s very big with the deconstructionists.” I did better when he asked whether I knew where the phrase “no country for old men” had come from. Yes! It’s the first line of Yeats’s “Sailing to Byzantium,” which became the title of a novel by Cormac McCarthy, which was in turn the basis for a 2007 movie by the Coen brothers. Brown said that he was wondering because he’d just talked with a Washington media grandee who used the phrase without knowing that it had any history. “Jerry didn’t know there was a movie,” his wife said.

Another time he was telling me that “deracination,” and the loss of local loyalties like the ones he felt as a fourth-­generation Californian, made it hard to create political consensus. “But California was built by deracinated people, who keep on coming here—and America was too,” I broke in, being careful to add “Governor.” “Right, maybe I’m going too far,” he answered, thinking as he spoke. “But …” and he proceeded with a slight revision of his point.

Brown’s State of the State address this year, which he wrote with the help of his wife (he ad-libs most speeches and has no writers or “message people”), included an account of a party of Spanish explorers, led by Gaspar de Portolá, who in 1769 went from Baja California to Monterey Bay. Classing up a speech with historical nuggets is a standard political move. But usually speakers like to imply that the quote from Mark Twain or insight from the Punic Wars is something they’ve known since earliest tutelage rather than something they recently happened across. In speeches and in conversation, Brown emphasizes his ongoing discoveries. “I was just reading about Cicero, and did you know they chopped his head off and put it on a pike—and a lady put a pin through his tongue with a sign saying Enough of his eloquence?,” Brown, who was a classics major at Berkeley, said to me. “I’ve been reading a lot about how screwed-up the Roman Republic was.”

THE STATE

As for the problems Brown and his state are wrestling with, they are America’s problems—but worse. Here we leave the governor for a moment to consider the environment he is working in, which is both emblematic of and surprisingly different from America as a whole.

You can go too far with the idea that California shows how all of America will look a few years from now. The state’s population is already more heavily Hispanic than the U.S. population might ever be: Hispanics, at nearly 40 percent, are about to overtake California’s “non-Hispanic white” percentage to become the largest ethnic group in the state. (Nationwide, Hispanics are about 17 percent of the population.) Relative to the country as a whole, Asians also make up a larger share of California’s population—­roughly 15 percent of the state, versus about 8 percent of the country—while blacks and whites represent smaller shares. (California is about 40 percent white and 6 percent black, versus 63 percent and 12 percent, respectively, for the United States.) Largely because of these demographic shifts, the Republican Party, which a generation ago relied on California as the largest element of its Sunbelt base, now barely bothers to mount statewide races except those self-financed by political-novice millionaires like Meg Whitman, who lost badly to Brown in 2010, and Carly Fiorina, who lost badly to Barbara Boxer for the U.S. Senate that same year. In 2012, Barack Obama beat Mitt Romney by 3 million votes in California—and by only 2 million more in the other 49 states combined. In both houses of the state legislature the Democrats have, for now, a two-thirds “supermajority” that allows them to prevail even against California’s version of the filibuster. “The Republicans appear to have no power,” Jerry Brown told me. “Some of them are nice people, but they aren’t needed for any votes [in the legislature], and they don’t participate.”

In other ways tangible and subjective, California is an outlier. Its median income is much higher than America’s—but so is its unemployment rate. Its prison system is large and fantastically expensive. Two of its sizable cities (Stockton and San Bernardino) have filed for bankruptcy. And it has myriad other problems. Still, California is usefully representative of the country in one very important way. What is good, and bad, about America is better, and worse, in its most populous state.

So, what is strongest about America relative to other societies and economies—its ability to attract and absorb outside talent, its university-based research system, its advantages of scale and natural resources, its acceptance of risk and second-chance-taking, its fecundity in creating new companies, industries, and products—is, across the board, stronger still in California. The state’s brand names and the creativity and wealth they signify—Apple and Intel, Google and Facebook, Disney and Fox, Stanford and Berkeley, Sunkist and Napa/Sonoma, the nuclear technologies of Lawrence Livermore and the biotech centers of San Diego—outshine those of most nations. It is one of the few states whose range of economic strengths, from agriculture to manufacturing to mining to services to education to tourism to medicine and nearly every sub­sector in between, mirrors that of the country.

But what is weakest about America—the squabbling paralysis of the governing structures, the relentless pressure on the middle class, the steady decline of public schools, roads, parks and the simultaneous rise of the public-security state—is weaker and worse in California. Taxes are high, school performance is low, classrooms—and, most glaringly, prisons—are jammed, and the bridges and freeways that, when brand-new, enabled California’s expansion under Pat Brown in the ’50s and ’60s are now crumbling constraints on its potential.

Anyone with ties to California has personal illustrations of this shift, and here is one of mine. As a small-town Southern California schoolchild in the Pat Brown era, I had barely heard of such a thing as a private school, nor an overcrowded road, nor of any reason being in California could be a minus rather than a plus. For my two sons, as they build their businesses and start their families there, “California” has become a metonym for high taxes, rigid bureaucracies, substandard schools and services, and an overall drag on rather than boost for the businesses that nonetheless continue to emerge there. The city government of San Francisco has the manpower to put spray-painted markings around cracked parts of the public sidewalks, and to note which buildings have been tagged with graffiti—but not to fix the problems it identifies. Instead, it sends notices to the owners of homes and buildings saying that they face stiff penalties if they do not repair the sidewalks or remove the graffiti themselves. The kind of urban-dystopia stories I heard from Manhattanites in the 1970s or about Washington, D.C., in the 1980s come from Californians now.

America’s dynamism and ingenuity have kept it ahead of its public-institution paralysis, so far. The same is true, barely, for California. “The idea that people are really going to move their companies to Nevada because of taxes is nonsense,” Paul Saffo, a longtime technology analyst based in Northern California, told me. “Silicon Valley has always been a high-cost place to operate and, like the state, has always been in danger of drowning in the products of its own success.” Jerry Brown told me about a Look magazine cover story from the mid-1960s, which after the Watts riots in Los Angeles and Free Speech Movement upheaval at Berkeley declared California a “failed state.” Since that time Look magazine has disappeared, California’s population has doubled, and its economy has grown larger than those of Brazil and Spain.

Still, California’s challenge is America’s: how to manage public business competently enough—collecting taxes, covering costs, educating children, fostering research, protecting the environment, maintaining order—to allow the creative carnival of its private activities to go on. And this is where Jerry Brown’s accomplishment seems most impressive. Arnold Schwarzenegger left office with a budget deficit of about $27 billion, having covered some of the state’s obligations during his final year in office with IOUs. This year’s budget shows a surplus of at least $500 million. “We are governable!,” Brown told me, emphasizing it because so many people have argued the reverse. “We balanced our budget. Arnold just borrowed money, but we’re paying down our debts. We’re coming back.”

That is what I’ve been going back to my home state to ask about. Is the turnaround real? Has California’s brokenness been fixed? And do the answers, whatever they are, make any difference to the country as a whole?

THE COMEBACK—OR THE REPRIEVE

The easiest question to answer is how California has pulled its way out of its budgetary disaster. Three things have happened since Jerry Brown replaced Arnold Schwarzenegger: the overall economy got better, so more people paid more taxes; state spending went down, largely at Brown’s insistence; and California’s voters approved a significant tax increase, mostly on annual incomes higher than $1 million.

Each of these has its fine points. California depends more on income tax, especially from rich taxpayers (even before the new increase) than it used to. This makes its revenues notoriously volatile. They fall very fast when the state economy is contracting—Brown had 10 percent less money to work with in his first year than Schwarzenegger had had in his last—but also rise quickly when conditions improve, as they have begun to do. One other aspect of the state’s tax structure compounds its problems. The fastest-growing parts of its economy are those classified as “services,” from entertainment and health care to infotech and finance. But most of these are untaxed. In the words of a recent report on the state’s finances, “California’s tax code is so outdated that nearly $1 trillion—that is, roughly half—of the state’s economic output is not taxed.” And this despite the state’s image as being overtaxed.

The budget cuts have been substantial, and came at Brown’s insistence to an often skeptical Democratic-dominated legis­lature. This may be the place to note a difference between state and national budgets. During economic slowdowns, national governments do and should run budget deficits, to keep un­employment from getting worse. Otherwise public-sector layoffs intensify, rather than offset, what is already happening in the private economy. It is different for state governments. Many, though not California’s, have constitutions forbidding deficit spending. And not even California can view deficits as a state-level stimulus program, since so much of the spending sloshes out beyond state borders.

During Brown’s first stretch as governor, details of his austere personal life—unglamorous Plymouth, sparsely furnished apartment, mattress on the floor instead of a bed—seemed merely part of his oddball ex-seminarian image. (Brown entered a Jesuit seminary at age 18 and spent several years there. He frequently quotes lines from his Jesuit training about learning to limit one’s demands and thus be happy with less.) His main working office is in a third-story loft in an old Sears, Roebuck building in the “uptown” area of Oakland, the revival of which was one of his projects during his years as mayor. (Many modern governors have maintained only a token presence in Sacramento; through most of his eight years in office, Arnold Schwarzenegger commuted from his home in Los Angeles rather than spend the night in what is still an out-of-the-way town.) The most luxurious aspect of Brown’s current life is the house he and his wife bought six years ago in the Oakland Hills, which is valued at about $1.8 million.

Brown has also inherited a share of what was once his great-grandfather’s 2,700-acre ranch in Colusa County, in the foothills of the Sierra Nevada. This forebear, his father’s maternal grand­father, August Schuckman, was born in Westphalia but left after the revolutions of 1848 and made his way across North America by wagon train during the California Gold Rush. “He’d lend money to people, and when they couldn’t pay, he’d get their land instead,” Brown told me. “That’s how he put together this big spread.” Brown said that when he was a boy, his father, then an aspiring politician headed toward the governor­ship, would take the family up to see the property. “I never cared about it then. It was too hot. Too many rattlesnakes. Now, as I get older, I go more and more and think about what it took my great-­grandfather to get there.”

“By the time he returned as governor, he still had an image as an ascetic person,” Bruce Cain told me. “That image was consistent with his message that he would be careful with your money.” Brown’s current role as the Democrat who is cutting budgets brings up the inevitable “Nixon goes to China” analogy, but I think the more important comparison is to an earlier Republican president, Dwight Eisenhower. The most admirable part of Eisenhower’s policy, in retrospect, was his effort to push big infrastructure and national-greatness efforts—the interstate highway system, more money for schools and basic research, much of it of course with a Cold War rationale—while holding the line on other spending, including the Pentagon’s. I’m oversimplifying the story of the ’50s to make the point that the Jerry Brown of 2010 comes closer to that part of Ike’s balance than anyone else I’m aware of.

“For me to get the budget cuts these past two years, I had to go to the legislature and say ‘Please, please, please!’ ” he told me. “The Democrats”—who control the legislature—“didn’t like it, but they agreed as part of getting the tax increase.” In California, the governor has line-item-veto authority—one more indication of the legislature’s feebleness—and Brown says he will use his veto power to resist spending increases. “The budget is more or less balanced,” he told me. “To un­balance things now, they have to come through me. That is a real shift in power.” Meanwhile, Brown’s reduced and balanced budget includes more spending for what he considers the big challenges of the future: clean-energy initiatives, an expensive (and controversial) north-to-south high-speed-rail project, new canals and aqueducts, even California-based medical-research projects beyond those sponsored by the National Institutes of Health.

For students of California politics, Brown’s most surprising achievement was persuading the legislature to eliminate urban “redevelopment agencies” against the bitter opposition of nearly every big-city mayor in the state, most of them Democrats. “Redevelopment agencies” were a stratagem that one San Francisco analyst has described as “the California equivalent of the national military-industrial complex.” Without getting into the details, their effect was to channel a certain share of tax money into a special fund that mayors and local officials could use to finance housing projects, malls, and similar efforts. In theory this was a step toward wholesome decentralization, but in practice the agencies were often wasteful and occasionally corrupt. “This was Brown’s really interesting move,” Joe Mathews, of the Los Angeles–based civic group Zócalo Public Square, told me. “These had turned into a racket, and he understood that and was able to unplug it.” Most state legislators had no idea why these agencies mattered, or how much money was involved. Brown, a two-term mayor, knew just what was at stake.

“I think the root of his transformation was his being mayor of Oakland,” Lou Cannon, a longtime reporter for The Washington Post and the author of several books about Ronald Reagan, told me in Los Angeles. During the 1970s and ’80s, Cannon had often criticized Brown’s performance as governor. “He did a very good job as mayor, and obviously has learned a lot about the realities of government.” Brown has tried to cut spending so much that the main complaints about him are from the left, and budget-related—­especially about his resistance to federal court orders to spend more on California’s enormous and overcrowded prison system. “Fiscal discipline is not the enemy of our good intentions but the basis for realizing them,” he said in this year’s State of the State speech, justifying a hard line against letting spending increases sop up new revenues. “It is cruel to lead people on by expanding good programs, only to cut them back when the funding disappears.”

“This time Brown has been on the sensible side of every fiscal issue,” Lou Cannon told me. “There are people who will want to spend like crazy, and Brown will use his line-item-veto power to resist.”

The third and most publicized part of the California budget turnaround was Brown’s success last fall in winning passage of Proposition 30, which (among other things) raised high-end tax rates for several years, with a commitment to use the money to avoid cuts in school funding and to pay down the state debt. Everyone I asked said that Brown’s personal stumping for the measure made the difference in its relatively easy win (by a 55–45 margin), and that the extra money it is expected to bring in—$6 billion or more a year—will make a difference in the budget. The higher rates will last for seven years, and Brown in his speeches told the biblical story of Joseph, Pharaoh, and the seven fat years and seven lean years. “The people have given us seven years of extra taxes,” he said in his State of the State speech. “Let us follow the wisdom of Joseph, pay down our debts, and store up reserves against the leaner times that will surely come.” I cannot think of another prominent Democrat who would put it just that way, especially the final few words.

Keep reading about the California comeback at The Atlantic >

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17 Major US Bridges That Should Be Fixed Immediately

Max Nisen | May 24, 2013, 12:19 PM | 43,970 | bridge collapseAP

The collapse of a bridge carrying Interstate Highway 5 in Washington State on Thursday has reignited the debate about America's decaying infrastructure.

Although this collapse was apparently caused by a truck with an oversize load hitting a girder, the bridge was not in great condition to start.

The bridge was inspected last year and received a "sufficiency rating" of 47 out of 100, according to The Wall Street Journal. That's not great, but there are worse bridges out there.

It was not among the 11.5 percent of US bridges, crossed by an average of 282,672,680 vehicles daily, deemed "structurally deficient" by the Federal Highway Administration in 2011.

A rating of structurally deficient or functionally obsolete doesn't mean a bridge is necessarily near collapse. But all of them need work, and many hold up traffic on some of America's busiest roadways.

Using a report from Transportation for America, we have picked out 17 of the most heavily-trafficked, structurally deficient, and functionally obsolete bridges in America.

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What The Lives Of Smokers Can Tell Us About Economic Tradeoffs

Smoking takes 10 years off your life - but is this a sufficient reason to give up smoking? Why is a long life a better life?

The United Nations Human Development Index uses life expectancy as a measure of life quality because:

a long life is valuable in itself and... various indirect benefits (such as adequate nutrition and good health) are closely associated with higher life expectancy 

That longevity is a proxy for the things that make life enjoyable is a reasonable argument, especially in the context that the UNDP is making it. The elimination of polio, for example, not only increased life expectancy, but also improved life quality, by preventing people from experiencing years of disability. But to the extent that smoking shortens life by taking low quality years off at the end, is that such a bad thing?

And the statement that "a long life is valuable in itself" takes us back to the original question: why?

John Broome's bookWeighing Livestakes on some hard questions about longevity. Increasing one person's life has costs, either because it takes up resources that could have been used to improve another person's life, or because it decreases that person's life quality. Trade-offs have to be made. Broome provides a way of thinking about those choices that an economist can understand:

This diagram shows the evolution of well-being over time for a person with a terminal disease. Palliative care provides a higher quality of life for a shorter time; aggressive treatment extends life, but at the cost of life quality. Contemplating the problem, one can imagine that sometimes one might choose palliative care, and sometimes one might choose aggressive treatment, depending upon the precise well-being - longevity trade-off. 

It's a bit like economics. Once the problem is expressed in a diagrammatic form, the answer is fairly straightforward - it's drawing the diagram in the first place that's the challenge. Also, as in economics, the predictions of the model depend critically upon the underlying assumptions - in this case, the relative value given to longevity versus life quality. I didn't read Broome's book carefully, but I suspect he's too smart to even try to address that question.

What I like about Broome's framework is that it shows that trade-offs must be made, and it provides a way for planning, rational people to think about choices. Yet when life and death decisions have to be made, planning goes out the window. The primitive part of our brain, which has been shaped by millennia of fighting for survival, takes over, and votes to hang on at all costs. Death, yes - but not yet.

So how can we think about longevity? How can we abstract from the immediacies of life and death, and discover what our planning selves would want?

I've been thinking about this question lately, because my dog has just reached the grand old age of 14. As his puppyhood friends gradually disappear, and he himself increasingly suffers from bladder stones, cataracts, arthritis, deafness, flatulence, toothlessness, and (I suspect, though it's hard to tell) doggy dementia, I find myself wondering: is longevity all it's cracked up to be? 

When a person selects a pet, she reveals her preferences for life expectancy. Using Broome's framework, one can compare the life quality of different breeds. In this case, I've compared a standard poodle, which has an average life expectancy, and a miniature poodle, which has an exceptionally long life expectancy. I've drawn a diagram showing two dogs with identical patterns of life-quality over time, but with one life compressed, and the other extended.

I don't think it's obvious that, in the diagram above, the miniature poodle's life is any objective sense better. Both dogs experience identical average life quality, it's just that one, by virtue of its genetic make-up, experiences that life quality over a longer period of time.

Indeed, when a person selects a pet, life expectancy is one of the last things considered (see, for example, this pet selection guide, or this one or this one). Instead, "experts" recommend choosing a pet who will be a good match for his or her owner in terms of activity level, sociability, and so on. Good health matters - sensible owners avoid breeds prone to health problems. But not life expectancy per se.

Actions speak louder than words, and reveal preferences more clearly. People who choose shorter-lived pets reveal that longevityper sedoes not matter much.

With my dog, I try to let him live his life to his full potential - but the fact that his maximum possible life span is 17 or 20 years, and not 10 years or 40 years, is of little consequence.

In the same way, a good human life is one that is lived to its full potential.

But, as a practical matter, what does that mean?

Addendum: some people have argued in the comments that smoking leads to a reduction in average life quality, as well as life length. On average Canadian smokers are less satisfied with life than non-smokers - around 40 percent of non-smokers report being very satisfied with life, as compared to around 30 percent of smokers. There are two big caveats to this graph however. First, it excludes institutional residents, including people in long-term care facilities - that is, the people who are experiencing low-quality late-life years. Second, it's not clear that smoking causes lower life satisfaction - people may smoke because they're unhappy, rather than the other way around.


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This Week's Volatility Reflects A Major Change In The Market's Trend

Wednesday’s market action revealed more about the overbought and overvalued status of the market itself than it did of the perceived reasons for the downturn, as the underlying monetary and economic fundamentals did not change anywhere near enough to justify such a reaction. 

Briefly, the Dow jumped 155 points on release of Bernanke’s statement that eased market fears by stating that premature tightening of monetary policy would be undesirable.  So far, so good.  Shortly thereafter, however, in answer to a question by Committee Chairman Brady asking when QE could be expected to taper off, Bernanke stated “We could, in the next few meetings….take a step down in our pace of purchases.” The market immediately turned around and started downward.  Within a short time the Dow was down 122 points from the previous day’s close, a total swing of 277 points.

A few hours later the Fed’s minutes of the last board meeting was released and re-emphasized the fear by stating that “A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting.”  The result was that the market ended up recording a so-called “key reversal day”, meaning a day in which the market makes a high that is significantly higher than the previous day’s high, only to close at point substantially below the previous day’s low.  This is usually a sign of an important trend reversal, a signal further emphasized by the fact that Wednesday’s highs and lows exceeded the highs and lows of each of the prior three days. 

The 7.3% decline of the Japanese market the following night was a separate event.  Despite knowing about the monetary events in the U.S., the Japanese market opened higher, only to be shocked by the release of China’s Purchasing Managers Index, which came in at a recessionary 49.6, abruptly ending a powerful run that began with the Japanese central bank’s announcement of a massive easing program.  The Chinese data also helped extend the downtrend in industrial commodities that are so important to many of the world’s economies.

We regard the action of the U.S. market as a “shot across the bow” that indicates a significant change in the trend of the market rather than a change in Fed policy  The Fed did not change policy, but was basically restating its prior stance.  Strategists and economists get paid to parse all the Fed’s words to pick up any minor change and put it under a magnifying glass where it seems much larger than it actually is.  In the name of transparency, they also expect the Fed to tell exactly what it is going to do and when.  But the fact is that the Fed doesn’t know what it’s going to do at any future point. No matter what words the Fed uses, they always follow and react to the data. 

In our view it is best to go back to Bernanke’s written statement indicating the undesirability of a premature tightening of monetary policy.  That is what he and his allies on the committee believe, and it is they who are the majority.  They may well consider a reversal of the current policy at future meetings, as Bernanke stated, but that is dependent on their confidence that the economy has indeed turned around and can sustain growth on its own without further monetary help.

In our view, however, the economy is showing distinct signs of softening as we discussed in our most recent comments, and the Fed may have to continue its QE program at current levels for a longer time than many think.  The irony is that the pending market downturn may be a result of a weakening economy and declining earnings estimates rather than the cessation of QE. 


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Coal Has Regained A Big Lead As America's Top Source Of Electricity

Rob Wile | May 24, 2013, 10:10 AM | 2,227 |

Back in 2011 and 2012, natural gas was rapidly rising as a source of electricity in the U.S., displacing coal.  In April 2012, the two sources were tied, each supply 32% of the America's energy.

But environmentalists will be disappointed to hear that coal is now back to providing 40% of the nation's electricity output, more than all other power sources.

According to the EIA, the U.S. tapped 131,000 megawatt hours worth of coal in March, compared with just 84,000 for natgas. 

Here's the chart:

The reason: natural gas prices have now climbed back to well above $4, after falling to as low as $2 a year ago. EIA:

Heading into the 2013 spring shoulder season (between winter and summer), when demand for electricity typically falls, higher prices for natural gas reduced the fuel's share of total generation below the record levels of last April.

The good news is that coal still comprises far fewer megawatt hours than it ever has — since 2009 annual coal generation has fallen well below its historical 2 million megawatt hour norm.

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The Bloodletting Continues In The Stock Market

BloodlettingWikimedia Commons

U.S. stocks closed lower on Wednesday and Thursday. That's not something we're used to seeing too much lately.

This morning, the bloodletting continues. The S&P 500 is trading near 1644, down 0.4%.

This comes after a totally insane session in Japan again Friday, which saw the market rally 3% in the early going before going red in the afternoon and then bouncing back by a hair late in the day.

European markets closed in the red across the board. Spain took the worst of it there, ending down 1.0%.

In commodities, WTI crude oil is down 0.4%, while metals and agricultural commodities are down pretty much across the board.

Ten-year Treasury yields are a basis point lower at 2.01%, while Italian and Spanish government bond yields widened 11 and 12.5 basis points to 4.12% and 4.40%, respectively.

Durable goods orders surprised to the upside this morning, but the release was unable to buoy markets.

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