Author: Helping Families Flourish

Financial Planning is a relatively new profession. I learned of it myself for the first time in 1989. I returned to the classroom to study accounting, economics, and finance. I also enrolled in a two-year course in Financial Planning with The College for Financial Planning in Denver, Colorado. Upon completion of that course, I began my career in the financial services industry in 1991. In 1995, I was awarded the CFP® designation by the Certified Financial Planner Board of Standards. At Family Wealth Management, L.L.C., our policies and processes are consistent with the standards established by that board. My purpose has always been to build a financial services practice that enhances the lives of everyone it touches, and that will be doing so one hundred years from now. In the twenty years that have elapsed since I was introduced to the financial planning profession, I have worked with literally hundreds of families. I like to think I’ve made a difference. We at Family Wealth Management, L.L.C. sincerely look forward to working with you and your family, too. (Mike holds FINRA Series 6, 7, 63, 65, and 24 registrations* and is licensed in Kansas for Life, Health, and Variable Insurance Products)

Washington’s Immigrant Secretary

by Helping Families Flourish, posted in Flourishing Article

Originally published in Flourishing Jan/Feb 2013

For Christmas 2011, our daughter Janelle gave me a copy of Laura Hillenbrand’s most recent book, Unbroken,1 which tells the life story of Louis Zamperini.  The son of Italian immigrants, Louis didn’t learn to speak English until his parents moved from Olean, New York to Torrance, California.  In the 1930’s, he became a national sensation as a track star at USC, where he set a national record time for the one mile run, which stood for fifteen years; and in Berlin at the 1936 Olympiad—at the age of nineteen—he finished eighth in the 5,000 meter run.  While in Berlin–to make a statement about Hitler’s racism and to celebrate America’s Jesse Owens—Louis climbed a flagpole and stole Hitler’s personal banner.  Remember—he was only nineteen.  After graduating from USC,  Louis became a bombardier on a B-24 Liberator, and when his plane went down in the Pacific in the summer of 1943, he and other members of the plane’s crew spent more than a month drifting on a tiny raft, before becoming Japanese prisoners of war.  The Japanese guards remembered Louis from the Olympics—not a good thing.  After the war, Louis became one of many veterans suffering the effects of PTSD.  And finally, thanks to a persistent and loving wife, Louis found his true calling as an inspirational Christian speaker.  The book is oxygen for the soul, and you should read it.  But, that’s not the subject of this essay; I just had to get it in here somewhere.  Perhaps it will help set the tone for what follows:

He was born in 1757.  His birthplace is uncertain, but was likely the island of Nevis near St. Croix.  His mother, Rachel Faucett, was a beautiful woman of British and French Huguenot descent. While still a young woman, Rachel was forced to abandon her first child and his abusive father, and she went to live with James Hamilton, a Scottish ne’er-do-well, on the nearby island of St. Kitts.  Though they never married, she and James had two children together, James and Alexander.  Before long, the elder James deserted Rachel and the two boys, never to be heard from again. When Alexander was nine years old and James was eleven, Rachel, who was not yet forty, died on the island of St. Croix of yellow fever.  Upon becoming orphans, the boys were separated from each other; and Alexander went to work for the local office of a New York-based firm that was engaged in shipping and trading.  He made such a name for himself, that by the time he was fifteen, he was landed in New York with letters of introduction to several well-to-do families.  By the time he was thirty-two, Alexander Hamilton was George Washington’s, and our nation’s first, Secretary of the Treasury.  The Founders and Finance2   was my Christmas gift from our daughter Sara in 2012.  How do those girls know so much about their father? 

There is much history to learn from this book, and the theme is compelling and timely.  Of our six leading founders—Washington, Adams, Jefferson, Madison, Franklin, and Hamilton—Alexander Hamilton was by far the youngest.  He was also, perhaps, the most visionary, and he was the only immigrant. 

Hamilton was thoroughly self-educated in finance, he had studied and practiced the law, he was an extraordinary administrator, and a prolific writer. To General George Washington, he had been a most trusted aid and confidant during the Revolutionary War. 

By the time Hamilton took office in 1789, the Revolutionary War had been history for six years, the Constitution was two years old, and the young nation’s debt exceeded $74 million at face value.  America’s finances were in such bad shape that both state and federal bonds were trading for ten to twenty cents on the dollar.  Historical documents show that for the year 1789, federal tax receipts were a mere $162,000.3  And, you think we’re living beyond our means!

All this debt had been issued to pay for the War, and most of it had no physical collateral to back it up.  America’s financial situation was so desperate that many people thought that the young republic wouldn’t survive.  Alexander Hamilton understood how hopeless the situation was, but he had a plan.  Just as important, he had experience; and despite his age—and being foreign-born—he had the trust and support of President Washington.  

Following the success of the American Revolution, many skilled European artisans saw opportunity across the pond.  But European governments were opposed to the exporting of manufacturing talent; in some cases departing artisans came under the threat of fines and imprisonment.  Such was the case with young Samuel Slater, who in 1789—the same year that Hamilton became Washington’s Secretary of the Treasury—disguised himself as a farm boy and sailed from England to New York with the blueprints for a cotton mill etched in his brain.  Slater soon moved from New York to Providence, Rhode Island, where he was introduced to the Brown family.  The Brown’s—for whom Brown University was later named—had prospered from trans-Atlantic commerce,  and wanted to invest in domestic American manufacturing.  With the Brown’s acting as venture capitalists, Slater established a cotton mill near PawtucketFalls that produced machine-spun cotton thread.  That was the beginning of the Industrial Revolution in America, and it was exactly what America’s young Treasury Secretary had in mind when he submitted his Report on the Subject of Manufactures to Congress in 1791.  Perhaps he was channeling the great Scottish philosopher and economist Adam Smith4 when he wrote:

“The results of human exertion may be greatly increased by diversifying its objects.  When all the different kinds of industry obtain in a community, each individual can find his proper element, and call into activity the whole vigor of his nature.”

Hamilton understood that social harmony could be produced through free and mutually self-interested exchange—Adam Smith’s invisible hand—and that the natural division-of-labor implicit in a free society would mean full employment for everyone able and willing to work. In another passage from the same report Hamilton wrote:

“[immigrants] would probably flock from Europe to the United States to pursue their own trades or professions, if they were once made sensible [aware] of the advantages they would enjoy.”

As indeed they did.  During the entire colonial period, only eight for-profit corporations were chartered in North America.  During the 1790’s, three hundred and eleven such corporations were chartered.  A total of 3,884 entrepreneurs participated in these ventures, often pooling their resources to underwrite their more capital-intensive projects. 

One hundred and fifty years later, Joseph Schumpeter (1883-1950), the great Austrian economist, wrote of Hamilton’s report, …“applied economics at its best.”  Of Hamilton himself he wrote, “…[Hamilton] was one of those rare practitioners of economic policy who think it worth while to acquire more analytical economics than that smattering that does such good service in addressing audiences of a certain type.”  I thought it interesting that Schumpeter himself was only thirty-six, when he was appointed Finance Minister of Austria. 

But, I’ve skipped ahead of myself.  As mentioned above, President Washington’s most pressing problem upon taking the oath of office in 1789 was the crippling debt left over from the Revolutionary War.  It was in answer to that problem that Alexander Hamilton first displayed his mastery of finance before Congress.  Advised by Hamilton, Congress quickly passed a law establishing modest tariffs on imports.  Hamilton also advised taking care not to make the tariffs punitive or restrictive of trade.  For the next one hundred and twenty-four years—until the Sixteenth Amendment authorized a tax on income in 1913—such tariffs provided by far the greater part of our government’s revenue.  But, passing The Tariff Act was the easy part.

The more difficult problem was how to (re) establish America’s credit rating and begin to pay down its debt.  Like many others, Hamilton believed that if the country couldn’t borrow money on reasonable terms it wouldn’t survive. 

To begin the restructuring of America’s debt, Hamilton submitted to Congress a Report Relative to a Provision for the Support of Public Credit in January of 1790.  In the report, Hamilton first asked for authority to repay the $12 million (at face value) of loans owed to foreign governments, plus all accrued interest.  He would accomplish that by refinancing all the outstanding debt on terms agreed upon by the parties involved. 

Second, Hamilton proposed that the U.S. Treasury issue new bonds to replace the total principal of all the other old debts, again at face value.  Those bonds would not have a fixed maturity date, but neither could the government redeem the bonds if interest rates fell; e.g. the buyers would have “call protection”.

Third, Hamilton insisted that the war debt accumulated by the states be assumed by the federal government, and restructured in the same manner as all other federal debt.

Fourth—and this idea must seem eerily familiar to almost every reader—Hamilton insisted that the federal government set aside a fixed portion of its receipts to pay the interest on its bonds as it became due each year.  This would reassure bond holders, and it would avoid the annual renewal of bitter and partisan showdowns over the nation’s debt in Congress.

Hamilton also insisted that interest on the federal debt would be paid in gold and silver.

There is much more to Thomas McCraw’s important and elegantly written book.  Alexander Hamilton’s story consumes only the first half of the book, which ends with his death by duel at the age of forty-seven.   If you were to read only that chapter—The Duel—and especially, Hamilton’s final letter to his wife, you might benefit by insight into the nature and strength of his character.  That’s an important thing; it was their character, more than anything else, that drew Hamilton and Washington together. 

Then there is the story of Albert Gallatin, the stoic, French-speaking Swiss runaway, who was appointed Secretary of the Treasury by Thomas Jefferson in 1801.  It was Gallatin who corrected Jefferson’s long-standing vilifications of Hamilton; and who helped America finance the Louisiana Purchase, among many other achievements that helped to define our nation.

Did I mention that Alexander Hamilton was a poor immigrant boy with no formal education, and that he was orphaned at the age of nine?  Yes, I guess I did.  But, I didn’t tell you that four of America’s first six Secretaries of the Treasury were immigrants, and that those four immigrant Secretaries served for twenty-one of the first twenty-seven years under the Constitution.  The full title of Thomas McCraw’s book is The Founders and Finance: How Hamilton, Gallatin, and Other Immigrants Forged a New Economy. 

My friend and mentor Nick Murray is fond of quoting Harry Truman:  “The only thing new in this world is the history you don’t know.”  So Nick, in his monthly newsletter for advisors, frequently recommends books that he thinks we should read for the historical context they can provide.  And, unknown to Sara, The Founders and Finance  was Nick’s “first must-read book of 2013.”  Now, it’s mine, too. mh

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1.  Unbroken: A World War II Story of Survival, Resilience, and Redemption, Laura Hillenbrand, Random House, 2010.   Hillenbrand is also the author of Seabiscuit, which became a hit movie in 2003.

2.  The Founders and Finance,  Thomas K. McCraw,  The Belknap Press of HarvardUniversity Press, 2012.

3.  This was for only a partial year.  The full amount for 1789 is unknown.

4.  An Inquiry Into the Nature and Causes of the Wealth of Nations, Adam Smith, 1776.  Smith was also the author of The Theory of Moral Sentiments, published in 1759, for which he was better known during his own lifetime.  Smith (1723 — 1790) is now regarded as one of the key figures of the Scottish Enlightenment, a movement that greatly influenced America’s founding fathers.

A Notable February Birthday

by Helping Families Flourish, posted in Flourishing Article

Originally published in Flourishing Jan/Feb 2013

Joseph Alois Schumpeter believed that capitalism would be destroyed by its successes.  He predicted that by its unparalleled economic output, capitalism would spawn a large intellectual class that made its living by attacking the system of economic freedom that made its own existence possible.  But, unlike Karl Marx, Schumpeter didn’t take pleasure in his predicted destruction of capitalism.

In his most famous book, Capitalism, Socialism, and Democracy1, Schumpeter defended capitalism, primarily for nurturing entrepreneurship.  Indeed, he was among the first to distinguish entrepreneurship from inventing and inventions, pointing out that entrepreneurs also innovate by creating new uses for old products, new markets, and new forms of business organization and management.  The question he said is not “how capitalism administers existing structures, … [but] how it creates and destroys them.”  This “creative destruction” is what causes continuous economic progress and improvements in the standard of living for everyone.

Schumpeter was also a giant in the history of economic thought. His magnum opus, History of Economic Analysis2, was edited by his third wife, Elizabeth Boody, who had a PhD. in English; and published posthumously in 1954.

Joseph Schumpeter was born on February 8, 1883 in Třešť, Habsburg Moravia, then part of Austria-Hungary, where his parents owned a textile factory. 

Though his father died when Joseph was just four years old, he was very familiar with business when he entered the University of Vienna to study economics and law.  While there, he was one of the more promising students of the great Austrian economist, Eugen von Böhm-Bawerk.  He earned a PhD.  in 1906, and at the age of twenty-eight he published his first major work, Theory of Economic Development3. 

After serving in several teaching appointments throughout Europe, and a brief stint as Finance Minister of Austria; Schumpeter immigrated to the United States in 1932, accepting a permanent position at Harvard.  He remained at Harvard until his retirement in 1949. 

Joseph Alois Schumpeter died at his home in Connecticut on January 7, 1950.

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 1.  1942. Capitalism, Socialism and Democracy.New York: Harper and Brothers. 5th ed. London, George Allen and Unwin, 1976.

2.  1954.  History of Economic Analysis. Edited by E. Boody. New York, OxfordUniversity Press.

3.  1912.  The Theory of Economic Development. Leipzig: Duncker and Humblot. Translated by R. Opie. Cambridge: HarvardUniversity Press, 1934. Reprint. New York, OxfordUniversity Press, 1961.

La Vida Loca

by Helping Families Flourish, posted in Flourishing Article

Originally published in Flourishing Jan/Feb 2013

“You’re too smart to be from Mexico.”  Alfredo’s new friends and classmates were stunned into silence by that comment, made by a post-graduate teaching assistant (TA) at the University of California (U.C.) at Berkeley.  For his part, though, Alfredo mentally filed it among the many reasons he had for earning a college degree.  He was still using a Spanish-English Dictionary to interpret his professors’ lectures; and he still carried a heavy load of self-doubt. This wasn’t a hill to die on.

It had only been a few months since Alfredo Quiñones had earned an Associate’s Degree at San Joaquin Delta College (SJDC); and it was on the basis of his academic record there that he had been admitted at Berkeley.  In fact, he had innocently thought that when he finished at SJDC, his college education would be complete.  Fortunately, in his final semester, one of his SJDC professors discovered Alfredo’s confusion and referred him to a faculty advisor, who was able to explain his educational options.  In the process of advancing his education just that far, Alfredo had pulled weeds and picked tomatoes and cotton on San Joachin Valley produce farms; he had shoveled sulphur from rail cars; and he had learned to weld heavy steel in Stockton, California’s railroad yards.  Now at U.C. Berkeley, he was still burning the candle at both ends.

Alfredo’s big dream was to become an American citizen.  He had already helped bring his parents, Sostenes and Flavia, and his four siblings to the San Joachin Valley from their two-room home in Polaco, Baja, Mexico.  They were all on the road to American citizenship.  That journey had started the day that Alfredo hopped the eighteen foot fence topped with barbed wire that separated Mexicali, Mexico from Calexico, California. 

It had taken two attempts.  The first time over the top, Alfredo was greeted by American border guards. “Ay, Dios mío!” he thought to himself, not knowing what fate awaited him.  But the guards somehow understood that he wasn’t a threat to American national security, and they delivered him through the nearest checkpoint back into Mexico. 

After being released, Alfredo returned immediately to the same spot in the wall and scaled the rampart again.  This time, he vanished into the dark streets of Calexico, and by dawn he was in the San Joachin Valley at the home of his uncle.  That day had been his eighteenth birthday—the happiest day of his life he thought—January 2, 1986. 

Fortunately, Alfred0’s illegal crossing was soon forgiven when President Reagan signed the Simpson-Mazolli Immigration Act of 1986.  That’s when he felt it was safe to enroll at SJDC.

By the time he received his Bachelor’s Degree in Psychology from U.C. Berkeley, Alfredo no longer needed his Spanish-English dictionary.  And, he had decided to become a doctor.  Indeed, with his dazzling academic record, he was faced with choosing among medical schools at Stanford, Cornell, and Harvard.  He chose Harvard, where he again made a name for himself, this time with the nation’s most respected medical faculty. 

In 1999, at the age of thirty-one and with his medical education at Harvard nearly complete, Alfredo showed his academic credentials and letters of recommendation to the lady at the citizenship office in Boston.  Examining them carefully, she asked, “How did you go from being a migrant farm worker to all this?”  Alfredo Quiñones didn’t have an answer, and unsure of where the question would lead, he was trembling.  “Ay, Dios mío! Not again.” he thought to himself.  Then the lady smiled, stamped his papers, and offered her congratulations: “Alfredo, you are now a citizen of the United States of America.”  

He had often reminded himself of the words of his grandfather, Tata Juan Quiñones: “Alfredo, whenever you have the choice, don’t follow where the path leads.  Go instead where there is no path and then leave a trail.” La vida loca!  Live the crazy life, yes; but always with a worthy purpose in mind.  Alfredo knew he had done that, exactly.  He no longer had to explain—to himself, or to anyone else—that he was worthy of the risks he’d taken and the opportunities he’d been given.  He was chosen by his graduating class at Harvard to deliver their upcoming commencement address.  “That triumph”, he now says, “was also an exorcism. …with my photo on the front page, I was truly living la vida loca.”  And with that speech, his self-doubt was gone. 

Dr. Alfredo Quiñones-Hinojosa (he added his mother’s maiden name to his own) is now teaching and practicing medicine at Johns-HopkinsUniversity and Hospital in Baltimore, where he is one of America’s leading brain surgeons.  Dr. Q. has also created a brain research laboratory at Johns-Hopkins, dedicated to discovering the causes of brain cancer and for developing more effective treatments.  He is fully supported in his efforts by his wife, the former Anna Peterson of Mendota, California, and their three children. mh

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* This article is based on the book, Becoming Dr. Q: My Journey from Migrant Farm Worker to Brain Surgeon, by Alfredo Quiñones-Hinojosa, M.D.,  University of California Press, 2011.  You should read it.  Really!

Hercules vs. the Hydra

by Helping Families Flourish, posted in Flourishing Article

Originally published in Flourishing November/December 2012

In the June 2012 issue of this newsletter, I asked you to think about the reasons for America’s high unemployment rate.  Then in the next two issues, I wrote that government interference in the form of minimum wage laws have helped raise the unemployment rate among black inner city youth to nearly 40%; and that laws favoring union bosses over non-union workers have in many states forced wages to uneconomic levels. 

The important thing to keep in mind is that for most businesses, wages are their most significant cost.  So, when the price of labor is forced to uneconomic levels by government interference, unemployment and business failures are certain to be the result.  The principle also applies to government mandated, one-size-fits-all, health insurance benefits. All labor costs—however necessary or desirable they may seem—consume capital that might otherwise be deployed in new business investment and in creating new jobs. 

Now, as an exemplar of government overreach in other areas, let’s consider the national 55 miles-per-hour speed limit.  Passed by Congress in 1974 with the intention of reducing fuel consumption, that law—when it was obeyed—increased labor costs for the obvious reason that it required at least twenty percent more time for shippers to deliver the goods.  Because it was virtually unenforceable and widely ignored, the 55 miles-per-hour speed limit was ultimately repealed in 1995.  That alone tells you just how economically silly the law was. 

Then consider that from January 1, 2009 through December 31, 2011, the Code of Federal Regulations has increased by 11,327 pages.  According to the Office of Management and Budget, that brings the total register of federal regulations to 169,301 pages.  That’s a stack of paper 32 feet high.  I’m not sure I can throw a football that high.  Common sense tells me that every one of those pages adds to the cost of doing business.  And, what are the odds that in 169,301 pages of regulations there will be contradictory and ambiguous rules? The probability must be pushing 100%.  If I’m right, a regulatory violation is virtually guaranteed for every business in America.  That makes me suspect that the real purpose of our government is not to catch criminals, but to create them. I have to ask, “How many productive jobs could be created with the dollars it takes to pay and entertain the little Caesars who dream up 11,327 pages of regulations in just three years?”

Taxes come at businesses from virtually every legislative body, and for an unending variety of “needs”.  These costs—with the exception of most sales taxes—are not generally passed along to consumers, as is frequently claimed. It’s a myth; like labor costs, they’re usually paid out of capital.  Virtually every dollar taken out of the private economy by taxes is consumed; either by the government directly—where waste, fraud, and abuse are notoriously rampant—or by those who are the beneficiaries of government largess.  These are all dollars that won’t be voluntarily invested in the expansion of existing businesses, the launching of new enterprises, or the creation of new jobs.  Higher business taxes mean fewer jobs. 

Contrary to another myth, most entrepreneurs and business managers aren’t keen to take unnecessary risks.  In recent years, though, they’ve faced bellicose, irresponsible, and undeserved taunts and vague economic threats; all for the purpose of media attention and/or political expediency.  When the most productive people in America are collectively demonized by politicians and pundits for allegedly being selfish, predatory, unpatriotic, and unnecessary—as if every successful business in America is run by Bernie Madoff or Vito Corleone—is it any great surprise that many companies, especially relatively small businesses with 50 to 500 employees and limited legal budgets, are reluctant to expand and hire new workers?  I think not.

Finally, if this discussion wore you out or made you angry—as it just did me—I’m sorry.  But, just imagine how a business executive or small business owner must feel.  Concerned for the welfare of her employees and their families, responsible to her bankers and her investors, trying desperately to provide quality products and services to her customers—all the while dealing with government’s taxes, rules, mandates, and threats—she  must feel as Hercules felt in his battle with the Hydra.  She is my hero. mh

All of Them

by Helping Families Flourish, posted in Flourishing Article

Originally published in Flourishing November/December 2012

As recently as 2005, the annual average price of natural gas in the U.S. was $8.81 per thousand cubic feet (mcf)1; and gas ended that year at the astronomical price of $13.05 per mcf.  In September 2012, the cash price for natural gas was $3.52 per mcf.2  For American job-seekers, this trend could be a game-changer.

And, not that long ago, the bullies in Russia and Iran imagined they were going to corner the world market for natural gas.  Even now, there is an omnipresent threat of politically motivated supply shortages throughout Europe.  That situation may be about to change, too.

The short explanation for these possibilities is that investment in oil and gas exploration and development has exceeded $1.5 trillion in just the last three years3.  Much of that capital outlay has gone into various shale formations throughout the U.S., including the Mississippian Lime that underlies Cowley County.   

The somewhat longer explanation is that with persistent research and field experimentation in the 1980’s and 1990’s, George Phydias Mitchell, the son of an immigrant Greek sheep herder, developed technologies for drilling into shale formations horizontally, and then fracturing the rock so that oil and natural gas could flow into a concrete-sealed, steel-lined well-bore, and rise safely to the surface.4 It was largely as a result of Mitchell’s work that so much capital was attracted to shale development and hydraulic fracturing.  Mitchell sold his company to Devon Energy in Oklahoma City for $3.5 billion in 2002.

In 2011, the U.S. became a net exporter of oil for the first time since 1949.5  Within a few years, we may become the world’s biggest natural gas exporter; but that depends on the approval and completion of liquefied natural gas (LNG) export terminals. 

You might ask yourself, “What about European oil companies?  Can’t they do the same thing?”  Maybe they will, someday, but what makes North American shale formations viable as new sources of energy isn’t just geological or technological.  It’s also philosophical.  American entrepreneurial energy, which in this case is a by-product of private ownership of the means of production, including land, equipment, and mineral rights, is a critically important factor.  Julio Friedman, chief energy technologist at the Lawrence Livermore National Laboratory in California, sums it up nicely, “The mineral rights, the availability of small players to enter the market, the availability of geological data, these things are all part of an entrepreneurial model that is unique to the United States.”6

(Incidentally, the first commercial use of hydraulic fracturing occurred near Hugoton, Kansas in 1947.  The best illustration of the fracturing process that I’ve seen is at http://www.devonenergy.com.)

Incentivized by George Mitchell’s success, American oil companies have recently discovered (or rediscovered) and begun to develop more than twenty different shale formations in North America, each with more than 20 billion barrels of recoverable oil7; and, according to the U.S. Energy Information Agency (EIA), nearly one quadrillion cubic feet of natural gas. Thanks to these discoveries, North America could increase its production of oil and natural gas liquids from 15 million barrels per day (b/d) in 2010 to as much as 27 million b/d by 2022.   That would be an increase of 80% in just twelve years.  The U.S. may become the world’s largest oil exporter as early as 2017.8 

Why is this important?  It’s not because it makes us “energy independent”.  It doesn’t.  But, follow me closely, because the potential is much bigger than that:

In the fantasy world of Keynesian9 economics, it is believed that if the government will create sufficiently large budget deficits (stimulus packages), and if the Federal Reserve will print enough money to buy the government’s bonds to keep interest rates low; then jobs will be created, the economy will grow, and everyone will be fat and happy. 

But, we’ve repeatedly seen what those policies really produce: Corruption and carelessness in banking and on Wall Street; rampant mal-investment and cronyism in government programs; credit crises; and inflation. 

So, what does stimulate job creation and real economic progress?  The answer was provided by French economist Jean-Baptiste Say more than two hundred years ago:

“It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus, the mere circumstance of creation of one product immediately opens a vent for other products.” 10

In economic science that’s called Say’s Law.  It’s often misrepresented and derided by those who think that deficit spending and the Federal Reserve printing press can create wealth.  But you, and I, and the Little Red Hen11 know—as Say’s Law suggests—that if one wants to reap a bountiful harvest, one must actually plant and nurture a fertile seed.  And, that is precisely what America’s oil industry entrepreneurs have done—in spades.  Thanks to their tireless efforts and their colossal investments, we’re seeing lower energy prices, a rebound in manufacturing, a cleaner environment, and thousands of good new jobs.   

Consider, for example, that companies as diverse as GE and Cummins are now partnering with smaller companies to develop products for the emerging natural gas transportation market.  And, why wouldn’t they?  Natural gas is now $1.50 to 2.00 per gallon cheaper than gasoline or diesel.  Natural gas refueling stations are springing up all across the country, and as many as one thousand commercial truck fleets are already sporting natural gas engines.12  (Paul Abram of Abram Ready Mix in Beloit, my friend and former employer, just sent me an article from Heavy Duty Trucking magazine, which shows Ferrara Brothers Ready Mix of New York City, using trucks powered by Cummins’ compressed natural gas (CNG) engines to deliver concrete to the World Trade Center.)

Then, there is the matter of electricity generation.  In previous issues of this newsletter, I’ve touched on the  lousy economics of solar and wind power, but natural gas is also making changes in the electric utility industry by driving down the demand for coal.  In 2004, natural gas provided for less than 18% of all electricity generation in the United States, while coal accounted for nearly 50%.  In 2012, natural gas will provide for more than 30%, and coal will provide for less than 38%.13   I wouldn’t write coal off completely, though. It’s still a plentiful, inexpensive, and with the latest technology, clean source of energy. 

Natural gas is not just a fuel, it’s also a key ingredient in many chemical manufacturing operations.  Chevron Phillips Chemical Company (a joint venture of Chevron and Phillips Petroleum) is planning to spend $5 billion to build a new, state of the art ethylene plant in Baytown, Texas, along with two polyethylene plants and related infrastructure.  According to the company’s executive vice-president Mark Lasher, the chemical industry is likely to spend up to $30 billion on such plants in the next few years.14  Confirming this, Dow Chemical has announced that it will build a new ethylene plant in Freeport, Texas, spending more than $4 billion and creating 2,000 new jobs.15.  Most of the remaining $20 billion or so will likely come from Sasol Limited, Formosa Plastics Corporation, and Royal Dutch Shell. I expect many more such announcements.

According to a report by the global research combine IHS-CERA, posted on the Exxon/Mobil website16, there were 37,000 new jobs created directly by the oil and gas industry in 2011.  That activity drove the creation of another 111,000 new jobs in industries that serve the energy producers.   But that only  begins to tell the story.  The technological transformation of the energy industry, led by the horizontal drilling and hydraulic fracturing innovators, couldn’t have been predicted, or even believed, as recently as ten years ago.  Yet today, the “unconventional” gas and oil industry employs, directly and indirectly, more than 1,300,000 Americans.  The average starting salary for petroleum engineers, for whom demand is rising, is now $79,000 per year.

As a further demonstration of Say’s Law, it might be interesting to discover how many jobs are ultimately made possible by the production of oil and natural gas.  With a moment’s reflection, you’ll probably realize that you don’t need a calculator or a degree in labor economics.  The answer is: All of them.  That is the reality of today; and it’s our assurance—if we will let it be—of a prosperous tomorrow.  mh

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Notes:

1.  U.S. Energy Information Agency (EIA).

2.  Ibid., EIA

3.  Citi/GPS, Energy 2020: North America, the New Middle East? 2012, p 3.

4.  http://newsok.com (Mitchell, who was born in 1919 in Galveston, graduated first in his class from TexasA&M.University.  He served in the U.S. Army during WWII, attaining the rank of Captain.)

5.  Oil: The Next Revolution, Leonardo Maguerri, Belfer Center, Harvard Kennedy School, 2012, p 20.

6.  CTIT/GPS, Energy 2020.

7.  Ibid., Maguerri

8.  Ibid., Citi/GPS

9.  Refers to Lord John Maynard Keynes, whose 1936 book, The General Theory of Employment, Interest, and Money,  has corrupted the science of economics for three generations.

10.  J. B. Say, A Treatise on Political Economy, 1803; available in PDF at http://www.econlib.org/

11.  The Little Red Hen is a children’s story, popularized in the 1940’s and 1950’s, emphasizing personal initiative and a work ethic. Truly a classic.

12.  http://www.marketwire.com

13.  http://www.bloomberg.com

14.  http://www.downstream.com

15.  Ibid.

16.  http://www.exxonperspectives.com

Kansas–An Appreciation

by Helping Families Flourish, posted in Flourishing Article

Originally published in Flourishing September/October 2012

Several months ago, I was reconnected with an old friend and classmate (Washington Elementary, Hays; and she also happens to be a former newspaper editor).   I sent her a copy of one of my favorite books.  She sent back a note to the effect that the book had been quite informative, and she returned my act of friendship by sending me one of her own favorite books, The Web of Life, by Richard Louv.

Richard was born in Brooklyn in 1949 and now lives in California, but he is a graduate of the William Allen White School of Journalism at the University of Kansas.  So, quite naturally, The Web of Life draws significantly on Richard’s experiences of the Sunflower State.  Here is a sampler from one of the book’s many beautiful essays, Flyover Land:

…from Salina to Arkansas City, I can see giant rolls of hay that look like mammoth shredded wheat, and the long hedgerows of Osage Orange trees planted as windbreaks during the Depression…

…Cream-white waves of tall grass.  The wind coming across, always the wind.

…The land is soothing and nurturing and layered with mystery.

…Now and then a half-hearted dust-devil skips across the fields, and nodding pump jacks suck oil from beneath the land, their heads and necks moving up and down like prehistoric birds.

…In most places of Kansas, the land is like some long symphony with repeating themes and subtle notes, but never monotony.

…square-box white farmhouses stand up large with lonely dignity, and of course the windmills and silos are there…

…So much of this land was lifted up during the Dust Bowl years and flung into the air and so many of the people landed in California.

…Now, the fields are ripe, rich in color—the rust of sorghum, the gold of cut wheat, the deep black of plowed earth, and all the lines of trees in different shades of green; some turned by sudden shadows from moving clouds tar black against yellow grass, cedars and hedgerows leaning like herds of something forgotten into a wind that has stopped.

…More trees here than a century ago.  Now past the Smoky [Hill] River…

…At night this land turns endless and bottomless.  On some nights there is nothing but stars.  On other nights frighteningly violent storms and hours of calm just as frightening, and then sometimes God’s fingers or perhaps the devil’s claws reach down, and twisting, scrape across this long, sinuous back with a roar that one can only describe if one has heard it.

…The flyover land is breathing land.

This is where East becomes West.  This is where the sensuous hills of Kentucky and Illinois and Missouri meet the hard, spare rockiness and dryness of the masculine West.  These are the plains of fertility.  This is not the heartland, really.  It is the seedland. 

So, why am I sharing this with you?

Because, we are in business to help families flourish—literally.  And, as my friend said she learned from her experience as the editor of a small town Kansas newspaper, community and family life are the sometimes fragile networks that help us form our values and connect those values to our daily lives.  The Web of Life is an eloquent reminder that we are at our best when we savor and celebrate the things that connect us to our families, our friends, and our neighbors.  (Happy Birthday, Andrew!) mh

An Autumn Weekend in New York

by Helping Families Flourish, posted in Flourishing Article

Originally published in Flourishing September/October 2012 

At 7:00 AM on October 4, 2012, Linda and I boarded a United Airlines flight bound from Wichita to Chicago, where we changed planes and proceeded to New York City.  For the third time in four years, I was attending Nick Murray’s Behavioral Strategies Conference. Nick has long been recognized as our industry’s foremost writer, speaker, and mentor; and I’m proud to say that we’ve become friends.

While I was attending the conference on Friday, Linda was busy planning our agenda for Saturday.  However, she also found time to attend “Joan’s Coffee Hour”, where she visited with Nick’s wife, their daughters, and the spouses of other conference attendees.  She came back to our room with Joan’s autograph, of which she is immensely proud.

If you’ve been in my office, you may have seen a framed print of Frank Lloyd Wright’s original conceptual drawing of the GuggenheimMuseum.  It’s in the corner behind the glass in my (open) office door. I’ve been a fan of Wright’s work since my mother first introduced it to me, perhaps fifty years ago; she wanted me to become an architect.  Linda bought that print for me over twenty years ago as a Christmas present, and as a way to celebrate my transition from the construction industry to the retail financial services business.  Typically then, Linda put visiting the Guggenheim at the top of our to-do list for Saturday.

As many of you know, Linda is afflicted with rheumatoid arthritis, which can make walking difficult for her – and uncomfortable.  So, you know it was an act of love that she insisted on hiking the entire 2.4 miles from our hotel at 49th Street and Lexington Avenue to the Guggenheim on Fifth Avenue at 89th Street – and back again. 

Once at the Guggenheim, we took the elevator to the 6th Level, and then descended the spiral ramp that allows the museum visitor a leisurely and continuous viewing of the art on display.  As it happened, the Guggenheim is currently featuring an astounding exhibition called “Picasso in Black and White”.  It’s fair to say that I’m not a fan of Picasso’s work, but being in the presence of such famous pieces – and in Wright’s final act of creation, the building itself – was both inspiring and a bit intimidating.  Lucky for me, in one of the museum alcoves, we had the opportunity to view works of art—like Wright’s Guggenheim—that I could understand and enjoy.  In particular, I loved a large painting by Camille Pissarro entitled The Hermitage at Pontiose (1867), and In the Vanilla Grove, Man and Horse (1891), by Paul Gaugin. Both made me feel at home.

But, what did I learn at the conference?  I’d like to answer that question forthrightly, but I long ago discovered that learning from Nick is—like art appreciation—mostly a right brain function. A month from now—after my intuitive mind and my deductive mind have had time to talk to each other—some of what I learned may appear with some clarity in this newsletter.  It’s more likely, though, that it will just show up without warning in something that I say or do to help a client.  mh

The Unemployment Question (Part Two)

by Helping Families Flourish, posted in Flourishing Article

Originally published in Flourishing September/October 2012

Last month I discussed the effects of minimum wage laws, particularly on young and unskilled workers.  I showed that by mandating a cost of labor in excess of that labor’s value to employers, the government causes high levels of unemployment among these groups of workers.

Similarly, by mandating that companies recognize and negotiate with unions, government often causes even highly-skilled workers’ wages and benefits to rise to uneconomic levels.  Since companies have budgets with limited income and fixed costs—like land, machinery, and buildings—higher wages and benefits mean that fewer workers can be employed.  Of course, companies can try to raise their prices to cover their higher labor costs, but I invite you to ask any GM or Chrysler shareholder how that worked out. 

In 2007, just before the housing and credit meltdown, The Center for Automotive Research1 estimated that Detroit’s automakers were paying $6365 per hour for production labor and benefits, while Toyota was paying 4750 in its American auto plants.

At about the same time, CNBC reported2 that U.S. automakers had a future burden for union-negotiated healthcare benefits of $1,500 per car, which Toyota and other non-union auto manufacturers did not have.  Indeed, GM was referred to as a “benefits” company, not as an auto manufacturer.  In 2007, GM lost $38.7 billion – a loss of $4,055 per car sold. In that same year, Toyota earned a profit of $17.1 billion – a profit of $1,874 per car sold.  

In 2008, the U.S. auto industry lost more than 400,000 jobs.  Most have not returned. 

When government chooses sides in the business arena—sooner or later—both sides will lose.  mh

(The Unemployment Question will conclude in the next issue.)

+++++++++++++

1.  Katie Merx, “UAW Contract: Nuts and Bolts,” Free Press, September 29, 2007.

2.  Phil LeBeau, “GM and UAW Seal Deal: Was the Strike Worth It?” CNBC, September 26, 2007.

Ideas Having Sex–Redux

by Helping Families Flourish, posted in Flourishing Article

Originally published in Flourishing September/October 2012 

Some time ago (April 2011), in an article entitled Ideas Having Sex, I shared with you one of my favorite books, The Rational Optimist1, by Matt Ridley.  In contrast to the financial media, who have a vested interest in promoting crises and conflicts, Ridley’s fundamental message is that optimism is the rational approach to life.

According to Ridley, who is a Scottish geneticist, human beings long ago learned the benefits of voluntary and mutually beneficial exchange.  (You may have noticed that those who have not learned the art of such exchange are most often found to be criminals or demagogues.)  The art of voluntary and mutually beneficial exchange, especially here in America, has become part of our cultural DNA.  We call it “win-win”, and it explains why our unique experiment in economic freedom created a cultural and economic expansion that snowballed into an empire of benevolence and wealth.

Tom Gardner, co-founder of the Motley Fool newsletter companies, recently endorsed2 Matt Ridley’s theme, “Exchange is to cultural evolution as sex is to biological evolution.”  And the extension, “Most powerful of all is the exchange of ideas.”  Paraphrasing Gardner:  …while the exchange of hard goods is at any given moment a zero sum enterprise, an idea can be shared to an infinite degree – hundreds or even billions of people can benefit from a single idea.   Moreover, ideas may combine with a virtually infinite number of other ideas, thus creating exponentially expanding human benefits; as, indeed, they already have.

Gardner points out that in today’s networked world, the benefits of voluntary exchange of ideas include greater literacy, greater transparency, more shared best practices, and deeper empathy and mutual awareness than ever before in human history.  Our lives are richer because of the Internet and wireless communication technology. 

I recently thought to download from Amazon’s Cloud Player to my iPod a song I’ve always enjoyed and taken inspiration from, Lacy J. Dalton’s hit single, The Boys of 16th Avenue3.  It was written by Thom Schuyler in 1983, and recorded by Dalton in the same year.  It celebrates the “million dollar spirit” of aspiring young musicians, who give up everything else to follow their dreams to Nashville.  I hadn’t heard it for a long while, but when I played the song a few days ago, I was struck by this line:

There’s cowboys, drunks, and Christians,
Mostly white and black and blue.
They’ve all dialed the phone collect to home
From 16th Avenue.

Forget for a moment the remarkable fact that my iPod (for which I paid less than a hundred dollars) has more computing power than all the Apple computers on the planet in 1983; what struck me about those lyrics was—though I’ve placed more than a few collect calls in my time—that I can’t remember the last time I saw a telephone booth.  And, who among us does not now carry a smart phone they can’t live without? 

I have no opinion on the future of smart phones; the iPod, or of Apple, the company that makes and sells it; or of Amazon, the ubiquitous, world-wide Internet shopping mall.  But I’m very sure that the future of the world economy is not in the hands of criminals or demagogues.  These people do exist—indeed, they swarm—and they are an impediment to progress.  But, the future is, as it has always been, in the hands of the creators—people who today may have, like the boys of 16th Avenue in 1983 or the cofounder4 of Apple in 1976—little else than a million dollar spirit, one good idea, and a burning desire to manifest their talents in the marketplace of voluntary exchange.  Today, ideas are dispersed, democratized, and mated with other ideas at light speed; and many are then concretized in the lives of millions of people through investors like you and me, and the managers and marketers and laborers of the world’s great companies.  The iPod is just one example. 

The proliferation and mating of ideas has been expanding human horizons for nearly one hundred thousand years; and that omnipresent, long-term trend is not seriously threatened by today’s faux-populist politicians or by the vainglorious sideshow we call “network news”.  Still, I can appreciate that despite decades, centuries, and millennia of accelerating improvement in the human condition, our contemporary politicians and pundits have the volume and circuitry to influence our thinking in ways we may not fully realize.  For example, during every market setback, I hear people echoing CNBC and its ilk with questions like,  “But, what if the economy/market doesn’t recover?”  I know that some advisors, in response to such queries, are telling people to turn off the television, and that’s probably fine advice, as far as it goes.  But, I still think it wouldn’t do any harm, and it might do much good, for investors to read—for calming, historical perspective—books like The Rational Optimist, by Matt Ridley.  For another setback is surely coming, though we cannot know when or from what level. mh

1.  http://www.amazon.com/The-Rational-Optimist-Prosperity-Evolves/dp/006145205X

2.  http://newsletters.fool.com/   (subscription required)

3.  http://en.wikipedia.org/wiki/Thom_Schuyler

4.  Steve Jobs, by Walter Isaacson, Simon and Shuster, October 24, 2011.

Boomer Dis-Entitlement

by Helping Families Flourish, posted in Flourishing Article

Originally published in Flourishing July/August 2012

When I was growing up in the 1950’s, retirement as we think of it today was a rarity.  According to a poll taken in 1950, most workers aspired to work for as long as they were physically able.  Quitting was for the disabled and infirm, and so was Social Security.  Neither normal life nor the government offered decades of uninterrupted leisure.

But, since 1960, the percentage of men over age sixty-five still working has been cut in half.  My own father, who was born in 1917, retired at age sixty-four.  Probably due to the recession, average retirement age has risen recently from sixty-two to sixty-four.  That still gives the average man nearly two decades in retirement.  The average woman can expect even more. 

With Social Security, Medicare, and both corporate and public pensions, we have created a large new class of societal dependents.  These promised, but mostly unfunded, benefits have already bankrupted dozens of companies, and now have our nation careening toward fiscal disaster. Yet, current beneficiaries are so insistent—perhaps justifiably in most cases—that their benefits be maintained or even increased, that few politicians have the courage to say what everyone knows:

Those payments can’t be sustained much longer.

Our children and grandchildren are working to pay our benefits, knowing full well that the country can’t afford to pay those same benefits to them.  And yet, generationally speaking, we have the cheek to question their drive, ambition, and willingness to save.

Frankly, I don’t see any lack of ambition or a lack of a savings discipline among the young people I work with; but what I’m saying here is that it’s time to tell ourselves the truth about what we’re doing to all of our children and grandchildren.  If we boomers are to have any credibility with our kids, we’d better be willing to share the burden with them.  So, are you sitting down? 

Boomer entitlements, specifically our future Social Security and Medicare benefits, will be reduced—or better yet—phased out and replaced entirely in coming years.  (See The Chilean Model in our May 2011 issue.)

I’ll have much more to say on the issue of retirement income and boomer entitlements in future issues of this newsletter.   mh