March 19 2011

Starving the Beast -- Part ll

 The US deficit in February of this year was 223 billion dollars.  That is more than the entire deficit in 2007.  Yet many of our elected officials and political and economic pundits say we dare not cut government spending--especially to the degree Tea Party Members are pushing for. We are told that any large cuts will be disastrous to the economy, and warned that even a fraction of the proposed 1 to 3% cuts in spending would be "draconian.”  After all, if we make cuts we will have to lay off police, firefighters, shut down government services, and kick kids out of school.


Then came a new report put out by the U.S. Government Accounting Office (GAO) detailing where a lot of the money we are paying out is going. The report revealed over 100 government programs being conducted by four massive departments whose multiple agencies overlap and duplicate many of the same functions. In most cases we are paying bureaucrats to do the same things over and over again--and to do it poorly.  In infrastructure alone there are 35 programs within four separate agencies all duplicating services.  Would it be such a disaster to reduce those to one? 


In an attempt to improve teacher quality there are currently 82 separate programs administered by ten different agencies.  Under the Department of Education we have seen education and student scores decline dramatically, while teacher salaries and benefits have skyrocketed. If we had to grade this agency, we would give them an "F" for failure.  Is it really impossible to envision junking the whole department?  Is it such a reach to consider going back to the previous system which worked better and cost less?


The same report identifies three billion dollars spent on 20 overlapping programs for the homeless.  That is enough to build 145,000 homes at $200,000 apiece.  Brian Darling of the Heritage foundation has said that it would make more sense to just cut the homeless a check or voucher and let them go purchase medical or other forms of assistance, than to pay a bunch of bureaucrats to do nothing but push paper around.


There are 18 programs for "food waste and nutrition assistance" at a cost of 62.5 billion dollars.  Eleven have never even been reviewed to see what they are doing, if they are working, or if they have ever accomplished anything


What was the GAO’s conclusion? After inspecting only 1/3 or our government’s discretionary spending, they discovered over 200 billion in waste!


Last year I suggested we collar taxing and borrowing, and force government to cut spending to within its means. I also suggested we let Democrats make up the list of proposed cuts in defense, farm subsidies, and corporate welfare, while Republicans suggest cuts in entitlements.  With a divided Congress this may be the perfect time to initiate such a tactic.


One thing is painfully clear; there are many ways to cut the size of government and spending, and there is no shortage of places to begin.  One positive that has resulted from the Tea Party's takeover of the agenda of Congress is that for the first time in memorable history, there has been a real cut in government spending. Congress submitted, and the President passed, a four billion dollar cut. It may not seem like a lot of money relative to the big picture, but the government has not taken a step like this since the end of WWll.  It is a small step, but also a new beginning, and a change in the direction of government spending.


Below is a link to my original article "Starving the Beast.”  Written only 9 months ago, this article already deserves a re-read and gives perspective on how far we have traveled in such a short time.  At the time it was almost wishful thinking to hope we would freeze tax rates where they were, and vote in a new Congress who would cut spending. But now--less than a year later--we have actually begun the process of "Starving the Beast.”


Be sure to take a look at the Market Update which follows the article. I think you will find that we are in an entirely different economic environment than we were on June 10, 2010. But please bear this in mind too; there is no guarantee that we will not be right back into that world nine months from today.


Market Update:


The markets were extremely volatile this week. When the smoke cleared my portfolio was profoundly different.  The most noticeable change was the huge move upward in Copper Fox.  It was on the move in the beginning of the week then jumped 20% plus on both Wednesday and Thursday.  It is now by far, my largest holding. For those of you who are interested in the background and reasons for this move and my maintenance of this position, I included two reasons at the end of this section.


As I said last month, I thought March would be when I started taking profits and raising cash.  I have done so this week with the sale of half of my CDE.  I think the first quarter of the year could turn out to be the best quarter.  I believe as estimates of world and US growth are trimmed back, and inflation pick up, markets will fall into a funk.  At present levels, I am happy with the value of the portfolio and am attempting to preserve present values rather than search for the next ten bagger .


For those of you that are still in search of those companies with major upside potential, check out the following. My portfolio by weight follows.


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