T HIS IS THE ISSUE OF VIEWPOINT EACH YEAR where we attempt to encapsulate an entire year’s worth of notable events, highlights, lowlights,

unfortunate incidences, boneheaded moves, defining moments, record achievements, feats of daring do, acts of cowardice, wild successes and utter failures, frauds, scan-dals and other political milestones. As if that’s not enough of a literary challenge, we’ve got to summarize a multitude of events with humor, thoughtful insights and witty repartee while putting it all into historical context and minimizing the grammatical and spelling errors. (Thank heaven’s for spell chex.) So, after much consideration, research, contempla-tion and years of learned observation we can offer the following summation of the year of 2008: “lots of stuff happened, and most of it wasn’t good.” Hey, what’d you want for free? Seriously though, 2008 was crammed full of so much stuff we almost blew a brain cell trying to boil it down to a measly 12 pages of this annual expanded addition of VIEWPOINT. And then we just gave up. What follows is not so much a recap of the events of 2008, (who wants to relive most of it anyway) but rather some commentary on what the potential impact of the events may have on our lives, particularly the part we know something about—the economy and the stock market. Let us state right up front so there’s no misunderstand-ing, we’re strongly opposed to the big government solutions to our economic plight being pushed by our rookie President and the Clinton administration retreads that make up the key members of his economic team. We’re opposed to them for one simple reason, they won’t work.

You’ll also glean from reading this quarter’s VIEW-

POINT, we’re dismayed at the lack of challenge to the in coming administration’s economic plans. As Harvard economist Robert Barro pointed out in the Wall Street Journal recently, the “stimulus” claim is based on some-thing called the Keynesian “multiplier,” which is that each $1 of government spending yields 1.5 times that in economic output. There’s no evidence to support this theory. It assumes government can create wealth out of thin air. If that’s true, why doesn’t the government spend $10 trillion (or $100 trillion) and make us all rich beyond our wildest dreams. Why a measly $850 billion? We’d like to know where are the defenders of the free market? Where are the alternatives to public works spending that’s only going to grow big government big-ger? Why are we propping up a dead industry like autos without so much as a debate as to the economic merits of doing so? As we note on page 5, the auto industry has spent over $500 billion in the last ten years trying to “fix” their competitive problems and we’re suppose to believe that another $38 billion (or even another $500 billion for that matter) will make them right? All in the name of saving a few over-priced jobs. Over that same period, U.S auto industry employment dropped from 1.3 million to just

over one million. If we do the math, the $500 billion spent by the auto companies works out to about $167,000 per auto job lost—per year.(1) T h e e c o n o m i c “stimulus” being kicked about in Washington is replete with similarly economically absurd numbers that simply don’t add up, yet nary a word of challenge from the “capitalists” among us.

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Looking for Economic Salvation from the Devil?Looking for Economic Salvation from the Devil?Looking for Economic Salvation from the Devil? Trying to Solve the Problem of Too Much Government with More Government

Year End 2008 Viewpoint

Volume 9 Issue 4

1) It took all of 15 minutes to research the numbers, it seems to me it would be relatively easy for someone on Capital hill to score politi-cal points with such figures. But then again maybe not. 2) All information provided to us is held in strict confidence!

Helping You Navigate an Uncertain Investment World

Inside this issue:

Looking for Salvation 1

The Front Seat 2

Blame it on Reagan 3

So much for Change 4

Saving the Auto Makers 5

The Keynesian Fallacy 6

What do we Do? 7

Change it don’t come Easy 8

Special EIP Annual Update

World Headquarters 128 South Fairway Drive

Belleville, Illinois 62223 Phone: (618) 397-1002

Fax: (618) 397-4102 E-mail: mdeschaine@charter.net

We’re on the Web at: deschaineandcompany.com

Deschaine & Company, L.L.C. A REGISTERED INVESTMENT ADVISOR

Market Summary 2008 Annual Returns 2008 SINCE 2000

D&C EIP EQUITIES “ONLY”* - 23.7 7.5

D&C EIP TOTAL RETURN* -17.9 9.4

S&P 500 - 38.5 - 2.9 DOW JONES - 33.8 - 2.6 NASDAQ - 40.5 - 5.5

LEAMAN BOND 4.86 5.5 D&C Equity Income Portfolio returns net of fees. See performance disclosure on page 8.

We want to thank President Bush for keeping our country safe for 2689

days after September 11, 2001. God Bless you Mr. President.

Note to Viewpoint Readers Worried about the economy and the financial markets and not sure what to do next? See our Year End 2008 Strategy Update for some specific suggestions for your consideration. If you like, you can call me directly at (618) 397-1002 to discuss your financial situation. Or email me your quest ions at mdeschaine@charter.net. There’s never any obligation. We’re here to do all we can to help you survive the most difficult and challenging investment environment of our lifetime.(2)

Page 2

VIEW FROM THE FRONT SEAT by Mark J. Deschaine

Our Fix for the Economy? How about Eliminating All Corporate and Business Income Taxes!

T IMING IS EVERYTHING. And so it is with our newly ensconced President Obama and his fellow Democrats in Congress. They’re

salivating at the prospects of assuming power at a moment in time when the slumping economy is handing them the mother-of-all opportunities to expand government. And not in small increments as is usually the case, but in colossal and profound ways. As far as Obama (and again his fellow Democ-rats in Congress) are concerned, it’s 1933 and happy days are here again. The problem is Obama’s spending plan isn’t any more likely to fix our economy than FDR’s spending did in the 1930s. FDR’s massive government spending (for the period anyway) didn’t bring the country out of the Great Depression, World War II did. Some economists even believe FDR’s New Deal pro-grams prolonged the Great Depression. But Obama isn’t about to let history keep him from passing an $850 billion goodie-bag of campaign promises masquerading as an economic stimulus plan. Obama claims he’ll create (or save) 3.5 million jobs over two years. What you won’t hear from the omnipotent one and his minions in Congress is just how much all this government spending is going to cost each of us. Note the $850 billon comes on top of $700 billion already allocated under the Trouble Asset Relief Program (TARP) passed in Septem-ber. But even those numbers dramatically understate the total amount of federal money allocated in the last four months to try to fix the economy. Bloomberg estimates that the government has committed a total of $8 trillion in an effort to fight the deflationary cycle now engulfing the economy. The $8 trillion averages out to a total of a whopping $58,148 or $29,074 a year for the two year period of the program for each of the 135 million tax returns. If those numbers seem absurd it’s because they are absurd. What’s also absurd is that Congress is finding it difficult to allocate this massive infusion in capital to the sectors of the economy most in need. If the bu-reaucrats in Washington can’t allocate the stimulus effectively why not send a $29,000 check to the 135 million tax filers each year and let us decide how best to allocate our money. Many would pay down debt strengthening their personal balance sheets. Others might buy a new car, thus helping the struggling auto makers. Some might even venture into the depressed real estate market and buy a house. And yes, many will simply save the money in a bank account helping the banking system stabilize. Even crazier, some might invest it in the stock market helping to boost stock prices. You may think my idea sounds crazy, but isn’t that essentially what Team Obama and his bench-mates in Congress are doing? What if I told you there’s a way to stimulate the economy, strengthen the stock market, end the shenanigans of accounting manipulation, lower the cost of doing business, generate massive new cash flow allowing busi-nesses to pay down debt and hire new workers, attract billions in new capi-tal and investment in our country by foreigners and dramatically simplify the cumbersome and outdated tax code—all at little or no cost to taxpayers or the government. Most of you would ask: what are you smoking? So how do we achieve all of these wonderful objectives? Simple, eliminate all corporate and business income taxes. Most Americans see taxing business as a good thing. “Tax those evil

corporations; they’ve got gobs of money.” The truth is, businesses don’t pay taxes, they passed on all their tax burden to consumers in the form of higher prices, to workers by offering fewer jobs and lower wages, and to shareholders with lower re-turns on their investment. Since 2000, taxes collected by business for the government averaged about $229 billion a year, ranging from a low of $132 billion in 2003 to a

high of $370 billion in 2007, which averages out to about 10% of the Federal government’s total revenue. Notice I said “collected,” (of course you did) because businesses don’t pay taxes, they just collect them. Not only that, but it costs businesses millions each year just for the privilege to act as a tax collect for government. For instance, Warren Buffett estimates that it costs Berkshire Hathaway about $29 million to file his company’s 9,000 page tax return each year. (Yes, nine-thousand pages). If we divide $29 million by $50,000 then Berkshire’s tax filings expense alone repre-sent 580 potential jobs. And that’s before counting the $6.6 billion in federal taxes his companies paid in 2007. Of course, if we eliminate all business income taxes; how does government replace the $225 billion in lost revenue? Here’s how. First, put business on a cash basis accounting system. The current accounting system known as the generally accepted accounting principles, or

GAAP, is a mess and dramatically understates the true cash generated by the average business. In the extreme, it completely distorts it, think Enron. For the stocks in the S&P 500, earnings using “GAAP accounting rules” reflect less than 40% of usable cash generated by the business each year. The significance of cash verses accounting is that companies spend billions to manipulate the accounting data for one purpose—to minimize their tax liability. If we put all businesses on a cash basis, they would not be able to manipulate the company’s earnings allowing for much greater trans-parency. The company either produced a cash profit or it didn’t. Under cash basis accounting, revenues coming in each year would be measured by bank deposits and expenses would be measured by checks written to pay bills. The difference between the two is the company’s cash profit, (or loss). Businesses would then be required to pay out half of the cash flow “profit” as dividends to shareholders which would be taxed on their tax return at 15%. The other half of the profits would be retained by the com-pany and invested in the business tax-free to generate future cash flow. That means the effective tax rate on business profits would be 7.5%. The lowest in the industrialized world. As a result we would be the most com-petitive economy on the planet. Our trading partners would have to lower their business taxes to compete or they’d be left behind. Believe it or not this tax structure provides the same level of revenue to the government while at the same time eliminating the need for companies to spend mil-lions to prepare tax returns. It would generate cash flow for companies to grow their business, hire new workers and attract foreign capital. It’s a winning plan at no cost to us as tax payers. But it involves cut-ting taxes, which Obama and the Democrats would never go for. Besides, they wouldn’t get to control our money. Which means it’ll never happen.

Year End 2008 VIEWPOINT

Fixing the Economy “Businesses don’t pay

taxes, they collect them. Eliminating them would

lower the cost of doing business, generate cash to pay down debt, attract foreign capital, simplify the tax code, and make the U.S. the most competitive economy in the world.

It’s a plan that wouldn't cost the taxpayers a dime! Which means it’ll never happened.

The voters may have bought a bill of goods when they voted for change in the last elec-tion. If Obama and the Democrats in Con-gress get their way, and it certainly looks like they’re going to, we’re going to get change alright. Yet, is it the change voters thought they’d get when they pulled the lever last November? But then we’ve gotten ahead of ourselves. Read on for our unsalted opinion of what we think is coming and what we plan to do about it to protect our hard earned assets in what is certain to be the most difficult and chal-lenging investment environment of our lives. It’s all about the Political (Economy); Stupid! It’s obvious to us, and we should know be-cause we’re masters at picking up on the obvi-ous; our economy’s in the worst shape it’s been in since at least the early 1970s and quite likely since the Great Depression. And we’re talking the world economy, because there’s not an economy on the planet that’s been spared the ugly downside to the credit bubble.

As we’ve expected and have discussed at length over the last three years, the unwinding of the debt bubble is unleashing deflationary forces which are pushing down asset prices at an unnerving clip. While we saw it coming, we’re the first to admit even our pessimistic expectations didn’t anticipate the speed or severity of the crisis. Price declines in asset categories from stocks, to real estate to a barrel of oil are painfully and relentlessly washing away wealth like a sand castle at high tide. Wealth that was in many respects built on artificially cheap and easy credit in the first place it should be noted, but it’s painful and discombobulating just the same. A brief survey of the financial landscape shows stocks (world-wide) down more than 50%, housing down more than 25%, and the barrel of crude oil, down a whopping 70% from their respective highs. Of course, by now mentioning declining asset prices is be-side the point. What’s most pertinent is that we don’t think the bottom in prices—in any asset category—has yet been reached, or is not likely to be for some time. Needless to say, if the average stock market mutual fund is down 50% over the last 12 months than a lot of folks are down more than 50%. Compounding the financial pain is the fact that investors are being whacked on multiple fronts as their investments plummet, their home values plunge and their purchasing power declines all taking a heavy toll on their financial security. The only positive is the recent plunge of oil prices from $141 a barrel in July to less than $40 a barrel has driven gasoline prices at the pump to the lowest they’ve been in three years, providing some relief for consumers in the process. All told, the cumulative financial losses so far in the down side of the credit bubble are in the trillions while the untold human suffering from the economic slowdown could very well go on for years. Curing the Disease by Killing the Patient The Bush administration and the Federal Reserve responded to the crisis caused by easy money fueling excessive credit by what else, extending trillions in new credit to just about every corner of the U.S. financial sector. That is, with the notable exception of normal every day, responsible and credit worthy borrowers. No sir, responsible individuals and enterprises that prudently managed their affairs and didn’t go on a drunken credit binge over the last

decade will get stuck with the bill in the form of a debased currency, (i.e inflation) the afore-mentioned price haircut on their assets and probably cut off from access to new credit. Rather than letting the fiscally foolish like Fannie and Freddie, Citigroup, and GM and Chrysler go the way of the do-do bird—cleansing the system of a massive misalloca-tion of capital in the process—our benevolent government is fighting deflation by throwing more than $10 trillion in new credit at the system hoping to stabilize credit markets and halting the slide in the economy. Foolishly, (is there any other way for govern-ment to behave) most of the money has been handed out to many of the same people who perpetrated this mess in the first place trans-ferring trillions in capital to the least efficient segments of our economy in the process. All this intervention and massive incursion by the government in the private economy, much to our dismay, is taking place under a supposedly “conservative” administration. Again, not to belabor the obvious, but isn’t the prescription for the ailing economy precisely the cause of the crisis. As James Grant pointed out in the December 20, 2008 Wall Street Journal; “In the boom, a superabun-dance of mispriced debt led countless people down innumerable blind investment alleys. E-Z credit financed bubbles in real estate, commodities, mort-gage backed securities and a myriad of other assets. It punished saving and encouraged speculation. Imagine a man at the top of a stepladder. He is up on his toes reaching for something. Call that some-thing “yield.” Call the step ladder “leverage.” Now kick the ladder away. The man falls, pieces of debt crashing to the floor around him. The Fed, watch-ing this preventable accident unfold, rushes to the scene too late. Not only did Bernanke et al. not see it coming, but they actually egged the man higher. You will recall the ultra-low interest rates of the early 2000s. The Fed imposed them to speed recov-ery from an earlier accident, this one involving a man up on a stepladder reaching for (overpriced) technology stocks.” Don’t misunderstand, we don’t poke fun at the crisis out of insensitivity, it’s just our way of pointing out the madness of trying to solve a problem made up of too much bad debt by supplementing it with, ah, more debt. As we wrote in VIEWPOINT last year: “In all seriousness, as much as we appreciate the Fed’s efforts to keep the financial system from a

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Deschaine & Company, L.L.C. Page 3

We say: Blame it on Reagan

I N THE ENDLESS SEARCH FOR SCAPEGOATS for our current economic plight, we nominate Ronald

Reagan. That’ll come as a shock to veteran VIEW-

POINT readers because they know we hold Reagan in near reverence for cutting our taxes and containing inflation by controlling the growth of money in the early 1980s. But recently it occurred to us that much of our current economic problems can be directly traced back to two of his high profile appointments. The first was his selection of George H.W. Bush as his running mate in 1980, thus saving Bush 41’s political career in the process. The only thing Bush is remembered for is breaking the only promise he ever made, (again, not that anyone remembers) by reneging on his “Read my lips, no new taxes,” pledge in his 1988 Presidential campaign. He did so when he agreed to raise the top marginal tax rate from 28 to 31% in a budget agreement with George Mitchell (D-Senate Majority Leader) and Tom Foley (D-Speaker of the House). The only thing the “agreement” achieved was to push the economy into a recession and cause Bush to lose the 1992 election to Clinton. Without Bush one, it’s unlikely we would’ve had the economic disaster that was Bush II. The other appointee? Why Alan Greenspan as Fed Chairman in 1987. Greenspan spent the next nineteen years printing money anytime the economy ran out of gas and by doing so pushed the day of reckoning of each successive credit bubble until now. So, as much as it pains us to denigrate the big guy, we see no alternative but to blame our current economic plight on Reagan. Ouch!

Year End 2008 VIEWPOINT Page 4

complete meltdown, (which, just so you know, we don’t favor) we also recognize there are two very painful consequences of the Feds actions. First, as much as everyone would like to think the current credit crisis can be resolved simply by the Fed plying the financial system with large piles of money, that’s just not the case. Believe it or not (and we know we're going to disappoint some folks when we say this) the Fed can’t prop up the stock market (or the economy) each time it threatens to unravel over every crisis that happens along. Second, as Newton’s third law of motion states, “for every action there is an equal and oppo-site reaction.” In the case of the Federal Reserve, the “reaction” to their actions is a little phenomenon known as “inflation.” In case you haven’t noticed, prices on everything from stocks to real estate to gold, as well as commodities from corn to oil have

been setting record prices of late. The price of an ounce of gold, as just one example, has more than double since 2005. The price of a barrel of oil is up more than 500% since 1999. As investors have found out several times since 2000, asset price “inflation” is just fine on the way up, like when stock or real estate prices are climbing, it’s just the long and painful slide down the other side of the price spike that’s the killer.”

Upping the Ante on Bush Of course, it’s hard to make a case for inflation in the face of rapidly “deflating” prices and a sinking economy. While that’s true in the short run, eventually the exponentially accelerating growth in the supply of money will win the inflation argument. Especially, when we consider that President Obama is more than willing to accelerate the pace of spending—exponentially again—all in an effort to “borrow and spend” the economy out of its precipitous slide. We’ll spare you the subtleties, as we note at the top of page one of last quarter’s VIEW-

POINT, if government spending or loans to prop up failing businesses (or whole industries) was the route to economic prosperity, then Argentina would be the richest country in the world. Yet, despite the overwhelming eco-nomic evidence to the contrary, that’s pre-cisely what Obama intends to do over the

next four years. A massive intervention in the economy in the form of direct investment, loans and loan guarantees, subsidies and the greatest infrastructure spending and govern-ment directed investment since World War II. Couple that with what is sure to be the greatest re-writing of industry regulation since the 1930s saddling a struggling economy and the plunging financial markets with the added burden of more government just as they be-gin to recover. A Ray of Hope or just Audacity? On Meet the Press, Obama advisor Bill Daly suggested that Obama has “kind of” put on hold his plan to sock-it-to the rich. Daly said; (Obama will) “more likely than not” delay a tax increase for the rich until 2011, after the Bush tax cuts expire, rather than repeal them now. We don’t take this as a change of heart, only a pragmatic nod to the political reality that repealing the Bush tax cuts now would likely lead to a disastrous election for Democ-rats in 2010 and single term for the new guy. To try to stimulate an economy in need of electric shock, Obama asked his economic team to come up with a spending plan to “jolt” the economy, with an objective of sav-ings or creating 3.5 million jobs by 2011 and urged the new Congress to have a plan ready for his signature as soon as he takes office. Obama described his stimulus package as a “two-year, nationwide effort to jumpstart job creation in America and lay the founda-tion for a strong and growing economy.” He said; “We’ll put people back to work rebuild-ing our crumbling roads and bridges, modern-izing schools that are failing our children, and building wind farms and solar panels, fuel-efficient cars and the alternative energy tech-nologies that can free us from our depend-ence on foreign oil and keep our economy competitive in the years ahead.” Hum, if that all sounds familiar, it should. It’s Obama’s campaign platform all neatly rolled into one big spending plan. From a “Private” to a “Political Economy” “We live in a more and more politicized economy, which is to say that we need to pay even more attention than ever to government action.” — David Galland Of course, saving and creating jobs is the role of the free market, not government. Further “stimulus,” reminiscent of a “new” New Deal, is a recipe for economic disaster. Unfor-

tunately, no one, especially in Washington sees it that way, or are willing to challenge the very notion of government as job creator. “This is the best deal since 1932,” said House Financial Services Committee Chair-man Barney Frank (D-Mass) regarding the increased public appetite for government intervention in the economy. “You never want a serious crisis to go to waste,” in-coming White House Chief of Staff Rahm Emmanuel told the Wall Street Journal. House Majority Leader Steny Hoyer, (D-MD) endorsed the latest estimated $800 billion package but be-lieves the administration needs to do more to address home foreclosures and that “a large stimulus package must be enacted in the short term.” We’ve seen this Act Before Despite compelling evidence to the contrary, it is still generally believed, at least among Democrats in Washington, that FDR brought us out of the Great Depression by spending money. But as FDR’s own Treasury Secretary, Henry Morgenthau testified before the House Ways and Means Committee in 1939: “We are spending more money than we ever have spent before and it does not work. I want to see this country pros-perous. I want to see people get a job. I want to see people get enough to eat. We haven’t made good on our promises. I say after eight years of this administration, we have just as much unemployment as when we started, and enormous debt to boot.” The lesson: We couldn't spend our way to prosperity then and we can’t do it now. But is any-body in Washington listening? So Much for Change! “Can Government Really Create Growth? By Mark Deschaine, January 1993(3)

A BRAHAM LINCOLN ONCE SAID, “You can fool some of the people all of the

time and you can even fool all of the people some of the time, but you cannot fool all the people all the time.” That axiom was proven once again this past November 3rd (1992) as Governor Clinton managed to convince 43 percent of the electorate that the public sector (otherwise known as government) can produce economic growth and create jobs simply by raising taxes and spending more money. The fact that Clinton was able to sell his program to the voting public is testament to both Clin-ton’s salesmanship and the voting public’s gullibility in the face of overwhelming histori-cal evidence to the contrary. Actually, if you

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3) This article was published in January 1993, just prior to Clinton’s inauguration. Which goes to show, how little change is in the “change” being offered by Obama.

“There is a fundamental difference between taxing people to pay the necessary expenses of government and taxing them to transfer their earnings to others, in exchange for votes.” —Thomas Sowell, 1993

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think about it, it shouldn’t come as a surprise that Clinton was successful because the in-vesting public (just like voters) has shown them-selves quite susceptible to being sold a bill of goods time after time. Rarely a week passes without a story about a scam perpetrated on the investing public in Forbes, Business Week or Wall Street Journal. So it’s understandable that Clinton was able to sell his “government spending creates jobs” premise to the voters. Each time I read a story about a scam, I ask myself, how can so many reasonably smart people can get sucked into such obvi-ously fraudulent deals? Then I came across an article written by a former con-artist in which he outlined his techniques for pulling off his scams. What’s fascinating about the average investment scam is that they all rely on the same basic psychological hooks over and over again to lure their victims. Do you know what the most common denominator is among investors who have been scammed? They have been scammed before! That’s right! When a con-artist is out looking for a potential victim to lure into a new scam, who does he look for? Someone who has been successfully scammed in the past, because he knows that if this victim has bit in the past, it is highly likely he’ll bite again. How does the con-artist then success-fully lure his potential victim (remember, the guy’s been duped at least once already) into biting again? First, by making the scam sound so simple it has to be true and second, by repeating it so often that the victim is literally brainwashed through sheer repetitiveness into believing the scam. Doesn’t that sound an awful lot like Governor’s Clinton’s campaign rhetoric of selling the myth that government spending can create economic growth and jobs? For one it sounded simple, raise $150 billion in new taxes from people who save and invest the most (read those that create the most economic growth) and spend $220 billion, (borrowing the difference, although that was never specifically articulated as such during the campaign) over the next four years on high profile public works and construction programs. Second, to 43 percent of the voters at least, the concept rang true. Why everyone knows government spending creates jobs, just look at all those high-way workers laying asphalt and repairing bridges. Finally, the lie is repeated often enough; in the case of Clinton, every day for at least the last eighteen months than it had to be

true. However, repeating a falsehood, no matter how compelling, doesn’t make it true. Donald Lambro, in a recent Washington Times article, pointed out the fallacy behind the myth that government spending creates prosperity. He wrote: “If you take money out of the economy through taxes or borrowing, that’s money that would otherwise be spent

on business investment or consumer pur-chases of homes, furnishings, automobiles and other goods and services. In fact, you have made the economy weaker by taking the money out of it. If you then return that money to the economy via government pro-grams, whether for roads, bridges, job train-ing, etc., you may produce some short-term public employment in those specific sectors. But you will not have produced any new jobs by doing this. In macro-economic terms, the impact is virtually zero. You are merely put-ting back, minus the government’s costly overhead charges, what you have taken out of the economy in the first place. There can be no impact, other than the continuing burdens that remain on the economy when the taxes remain long after the roads and bridges and other public works projects are completed. In the end, the economy will be weak-ened even further as a result of continued spending increases and higher levels of taxa-tion—all of which must come out of the lifeblood of the economy, the earnings of its businesses and workers. This is the Keynesian economic model that Clinton skillfully sold to 43 percent plu-rality of the nation’s voters. He and his eco-nomic advisors are going to get a chance to see if it works in January, when the economy may be showing some additional signs of life, but which the government seems to ready to suffocate with more taxes, more spending and more regulations.” Richard Rahn, the former chief economist for the U.S. Chamber of Commerce, talked about this economic theory in testimony before the Joint Economic Committee of Congress just three days before the election. His testimony, a lesson in economics of growth verses the eco-nomics of redistribution, should be read by anyone who believes that entrepreneurial capital-ism is the greatest engine of social change and upward economic mobility. In his usually no-nonsense style, Rahn delivered a devastating critique of what is the heart and soul of “Clintononmics: “the claim that government spending creates jobs.” Rahn told the committee, “One needs only to realize that government cannot spend money without either taxing or borrowing it from the private sector, and the extraction costs of taxation and borrowing are very high, to understand the silliness of the claim that government can “create jobs.”

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“Saving” the Auto Makers Throwing Good Money After Bad?

Making cars is difficult. Or more accurately, making cars at a profit is difficult. It takes a lot of capital to run a car business. Capital for plant and equipment, engineering, design and devel-opment, marketing, shipping, dealership sup-port, etc., and the list goes on. Then every few years you have to spend a pile of money to re-tool to do most of it all over again for a fancy new model. If you re-tool an ugly new model, say an Edsel, or if you tool up to build a lot of cars and sales drop like a stone, because of such fixed overhead, you’ll quickly run out of money. Companies die when they run out of money. GM, Chrysler and Ford to a slightly lesser degree, have essentially run out of money. They should be allowed to die a digni-fied death. To demonstrate how difficult it is to make cars at a profit and stay in business consider that between 1900 and 1910 over 3,000 manu-factures took a shot at building cars in the U.S. By 1930 there were about 30 major manufac-tures, by the 1950s less than 10 and today the last three U.S. car makers stand (barely) on the brink of bankruptcy if they don’t get help from the government—and soon. What most people don’t realize GM, Ford and Chrysler have already spent over $500 bil-lion in the last decade in an effort to “fix” their businesses and they have nothing to show for the money. For a half a trillion dollars, the three could have closed all of their facilities and ac-quired Honda, Toyota, Nissan and Volks-wagen. It’s time to cut our losses and invest our scarce capital in industries and companies with more long-term potential to create jobs and economic wealth. P.S. Why should taxpayers bailout Chrysler, i.e. Cerberus, the private equity group that bought Chrysler, and GMAC, the financing arm of GM in 2007? They made their choice, let them deal with it. You can bet they would’ve reaped the benefits had the deal worked. Besides, no ones bailing us out of our losses in the stock market over the last year.

Year End 2008 VIEWPOINT Page 6

Rahn, went on to say, “The economy is weak because government spending is taking too much out of the economy through ineffi-cient taxing and borrowing and directing it to the weakest sectors of the economy in hopes of propping them up at the expense of healthy growing sectors. When government curbs spending and cuts taxes, the economy always regains its health.” “The evidence for this is in the eco-nomic record of the last 30 years,” Rahn notes. “We experienced two high growth periods from 1962 through 1966 and from 1983 through 1989. We had low growth and high inflation from 1967 through 1982 and slow economic growth since 1990. Both high growth periods were characterized by eco-nomic policies that included cutting marginal income tax rates and keeping government spending below the growth in nominal GDP, and restrained regulatory growth.” “In both cases,” Rahn said, “only when we succumbed to higher levels of government spending and rapid growth in regulations did the economy leave the high economic growth path,” he concluded. Rahn who correctly forecasted the 1990-91 recession, is pessimistic about the econ-omy next year, (1993) predicting after a cou-ple of reasonably robust quarters of growth: “we’re likely to slip back to the meager eco-nomic crawl we’ve experienced over the past year. This is likely to occur if Congress agrees to create a new income tax rate of 36 percent to 37 percent, boost spending as a share of the nation’s total output and add new layers of regulation, all in the name of strengthening the economy and creating jobs. Now, before I’m permanently branded a Clinton basher, I want it duly noted that I wish him well. It’s not in our interest as an investment advisor to see the economy strug-gle or the stock market languish. It is just that I don’t see how government spending gets us there. What I favor are policies that promote economic growth, create jobs and make stock prices go up—ideally a lot. The fact is, pro-growth economic policies would make my job easier and if it meant Clinton gets re-elected, that’s just fine by me. What’s important is that history clearly shows that if the country has policies that enable the economy to grow faster than gov-ernment, the economy booms and the Presi-dent gets re-elected. If, on the other hand, the

President supports policies that grow the government faster than the economy, the economy declines, the budget deficits grow and the sitting President has a difficult time getting re-elected. Just ask George Bush. Unfortunately, it appears Clinton’s bent on growing the government at the expense of the private sector. If that turns out to be the case, we expect slow economic growth until we see policies that promote the growth of the pri-vate sector over the growth of government.” So much for the newness in Obama’s message of “change.” Insert Obama’s name for Clinton’s in the commentary written in January 1993, and it applies today. It’s instruc-tive to note that Clinton’s first two years in office were not his best and as a result the Republicans took control of Congress in the 1994 mid-term elections. In the case of the House of Representatives, the Republicans took the majority for the first time since 1954. Clinton, being the most adapted politician in a generation, was famously able to “triangulate” the Republicans and his own party in Con-gress to win re-election in 1996. But then, he also had the good fortune to run against a tired and underwhelming Bob Dole. There’s been much made in the press of the Obama camp being mindful of the Clin-ton experience and how they’re determined not to make the same mistakes. However, there is a big difference between then and now—the economy. Clinton took office in 1993, just as the economy was well on its way

to an economic recovery, while today the economy is heading for what may be a long and painful slow down. The relatively modest (by today’s standards) growth in government under Clinton was largely absorbed by a growing economy. Still the tax increase the Democrats pushed through in late 1993 was unpopular with voters none-the-less. This time around, however, the plans for govern-ment spending, taxation and regulations are on a scale that’s never been tried before. So there’s really no historical road map to give us an idea of how all this massive government might shake out. A t the same time, it’s possi-ble the initial “jolt” to the economy by all the government spending might cause it to turn direction, if just in the short term. Long term, the government’s inter-vention will likely quell the “animal spirit” of entrepreneurship in the private sector and therefore dampen economy growth for years.

The Keynesian Fallacy By David Galland, Managing Editor An Excerpt from the January 2009 Casey Report

O N SEVERAL OCCASIONS we’ve heard the phrase, “We are all Keynesians

now,”(4) as a canny way of expressing the idea that the free market is dead. And that the fate of the global economy now relies almost entirely on pragmatic measures yet to be taken by governments, most notably that of the United States. Given that the word “pragmatic” is often used to describe Presi-dent Obama, it appears that the man of the hour has arrived just in the nick of time. Not to be a spoilsport, but there’s much wrong with this premature entry in the annals of presidential folklore. Even practicing skeptics like us have to admit Team Obama has done an amazing job of spinning pragmatism into the Obama brand. It is another thing altogether to actually demon-strate pragmatism when he actually sits in the Oval Office and the whole world waits breath-lessly for his next utterance. I’ve heard Obama supporters comment lately that “if the private sector won’t spend money,

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4) Richard Nixon first uttered the phrase after taking the country off of the gold standard in 1969. Notably, that move lead to the crash of 1973-75, and the stag-flation for the rest of the 1970s under Jimmy Carter. Hum, not a pretty example to emulate, don’t you think?

“To compel a man to subsidize with his taxes the propagation of ideas which he disbelieves and abhors is sinful and tyrannical.” —Thomas Jefferson

“Change” It Don’t Come Easy “The U.S. standard-gauge railroad track is four feet, eight and a half inches wide. Why such an odd measure? Because that was the width in England and the United States when railroads were built by British expatriates. Where did the English get that measure? The first rail lines were built by the same people who built the tramways that preceded rail-roads. They built the trams with the same jigs and tool used for building wagons. The wag-ons were built to that width so their wheels would fit the ruts of England’s ancient long-distance roads. The ruts had been made by the war chariots brought to England by the occupying Imperial Roman army. And the chariots were that wide to accommodate the rear ends of two horses, side by side. So you’re not alone if you struggle with change.” — Don Connelly

then the government has to.” Like beauty, pragmatism, it seems, is in the eye of the beholder. What Obama might consider pragmatic–soaking the successful, slapping on an energy tax, revving up the money engines ever higher—might be con-sidered by others, yours truly included, to be very un-pragmatic. That’s because even if Mr. Obama is a pragma-tist, the same can hardly be said of the American public, who have been lead to believe he’ll work wonders. Ironically, it is his very pragmatic nature that could be his undoing given the unrelenting nature of our nation’s election cycles. And we’re not referring just to the next presi-dential election cycle, which won’t kick off for another two years…but to the next Congressional election of November 2010, less than two years hence. In that election, one third of the Senate and a smaller percentage of the House of Repre-sentatives will be up for grabs. With history as a guide, we’re going to hypothesize that few of Mr. Obama’s supporters in Congress, avid though they may be, will be willing to make their reelection campaigns more difficult by supporting unpopular legislation . . . no matter how pragmatic. Sure, maybe they’ll inch a little way out on the limb during a brief honey-moon period. But, once the 24-hour news-as-entertainment channels start in with a vengeance, cracks in the voting coali-tion will begin to appear causing Obama to turn from mak-ing “hard choices” to the “easy give aways” the American public requires for continuing to support his party come November 2010. After that, we move seamlessly into the next presidential election cycle, and things will go downhill from there. Of course, this situation is not unique to De-mocrats–rather, it is an intractable and, in time, terminal disease of our late-stage democracy itself. Even ignoring the near impossibility of organizing consistent and sensible government policies in a rapidly degrading democracy, the whole idea that a government can effectively manage an economy–Keynes’ central theme–just doesn’t hold water. Despite hundreds of experiments along those lines, none has shown any real durability. There have been some examples, however, of long-term free market successes, the most powerful being the early, laissez faire days of the United States. There are lesser examples such as Dubai in recent decades, or Hong Kong under the British – economies where the operating manual was thin and almost entirely supportive of wealth creation and free markets. Were they perfect? No, because there is no such thing as a perfect world. But in terms of creating the wealth needed for a society to advance to a more refined stage, they performed exceptionally well. In sharp contrast, today’s freshly minted Keynesians call for increased penalties on success and a steep ramping up of regulation, the very opposite of the prescription needed. There is another problem with the utopian aura now surrounding Team Obama, and it’s simply that government doesn’t produce anything tangible. Someone I know tried to counter that proposition by pointing out that the Internet

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What Do We “Do?” By Marnie E. Deschaine

Mark has taken me up on my offer to contrib-ute to VIEWPOINT (at least for this issue). If you enjoy what you read, let him know and maybe he’ll give me my own column. My goal is to share some thoughts that may be particularly helpful in this new year.

I T SEEMS THE ECONOMY and fi-nancial markets have pretty much

everyone living in a state of anxiety to one degree or another. We hear, see or read about it every day. Every negative event or set back seems to be “because of the economy.” Some of us are aware of this state of unease and others may remain unconscious to it. In fact, I can’t help but think that our collective “state of anxiety” actually contributes to our current economic situation. (We can tackle that in another article . . . ) When we feel fear and anxiety; worry arises within us. We begin to project negative stories about our future adding to our anxiety. We then scram-ble to fix the problem; we ask, “What do we do?” which causes us to begin “doing”. We “scramble” to fix the problems. In this mental state, we’re not really conscious and certainly not per-forming at our best. Maybe what we really need is to “NOT” do anything. (Unless, of course, if “doing” means hiring a competent investment manager—hint, hint). Maybe, we need to simply become aware and accept what we feel for a moment. In this state, peace will enter and answers will come. The late Richard Carlson said it insightfully in his book, Don’t Sweat the Small Stuff About Money. I hope the following excerpt will help you awaken to a little more peace in your life in the New Year and beyond. He wrote: “In business and in life, we have essentially two psychological modes that we are in most of the time: reactive and responsive. The reactive mode is the one that feels stressful. In it, we feel pressured and are quick to judge. We lose perspective and take things personally. We’re annoyed, bothered, and frustrated. Needless to say, our judgment and decision-making capacity is severely impaired when we are in a reactive state of mind. We

make quick decisions that we often regret. We annoy other people and tend to bring out the worst in them. When an opportunity knocks, we are usually too overwhelmed or frustrated to see it. If we do see it, we’re usually overly critical and negative. The responsive mode, on the other hand, is our most relaxed state of mind. Being re-sponsive suggests that we have our bearings. We see the bigger picture and take things less personally. Rather than being rigid and stub-born, we are flexible and calm. In the respon-sive mode, we are at our best. We bring out the best in others and solve problems gracefully. When an opportunity comes our way, our mind is open. We are receptive to abundance. Once you are aware of these two drasti-cally different modes of being, you will begin to notice which one you are in. You will also notice the predictability of your behavior and feelings when you are in each mode. You will observe yourself being irrational and negative in your reactive mode and calm and wise in your responsive state of mind. Simply becoming aware of the different dynamics of your mind will open the door to tremendous changes in your life. You’ll begin to notice when you fall into a reactive state of mind. You will feel your own impatience. When this happens, simply say to yourself, “Whoops, there I go again” or something to this effect. Any type of simple acknowledgement will do the trick. You will discover, as you notice and acknowledge your own reactivity, coupled with your understanding that, in all cases, it pays to be more responsive, you will quickly come out of a reactive mode and fall into a more responsive state of mind. A responsive state of mind is fertile ground for success. When your mind is clear and relaxed, you pave an open channel for abundance and joy. There is a direct and clear relationship between how much time you spend in a responsive state of mind and your own level of success. The more you are able to stay out of reactivity, the more opportunities will present themselves. Beginning right now, use the power of responsiveness to create your own success.” The simple practice of being aware of my thoughts throughout the day has given me a more joyous and peaceful life experience. Maybe it will enrich your life in the new year as well. May the New Year bring you growing awareness, abundance and peace. MED

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VIEWPOINT is a complementary publication of Deschaine & Company, L.L.C. a registered investment advisor in Belleville, Illinois. This information has been prepared from sources deemed reliable, but its accuracy is not guaranteed. It should not be assumed that any securities discussed will be profitable or will equal past performance, or is it an offer to buy or sell any security mentioned. Deschaine & Company and/or one or more of its clients, employees, family or friends may have a position in the securities discussed herein. © 2009 All rights reserved. Reproduction of this publication is strictly forbidden without written consent from Deschaine & Company. This issue was published on January 21, 2009. If you would like to receive a complementary copy each quarterly, simply send us your preferred address (home or e-mail) to 128 South Fairway Drive, Belleville, Il 62223 or by e-mail to mdeschaine@charter.net and we would be happy to add you to our lists. Rest assured no one from D&C will never contact you, unsolicited. We simply don’t have the time or the desire to hassle people.

was incubated by DARPA, a government agency. Such a view completely discounts the presence of telephones, electric lighting, com-puters, etc. Government or not, the Internet would exist. Regardless, when it comes time to “manage” the economy, government is left with only a couple of tools. One is to force you and me to use our time and capital for purposes they view as important. Bush, for example, felt invading Iraq was a priority. Naturally, Team Obama has a slate of fresh ideas on the best use of your money, and say they want even more of it. I take umbrage at the notion that I should open my wallet even further for “the public good,” especially when the perceived public good so often runs con-trary to my own beliefs. For instance, on principle, I am against war–it is always the innocents that suffer the most. And I’m against the creation of new and expensive regulatory structures, a govern-ment specialty. To quote Thomas Jefferson on the topic, “To com-pel a man to subsidize with his taxes the propagation of ideas which he disbelieves and abhors is sinful and tyrannical.” The other tool available to Team Obama is, of course, the creation of money. And we are now hearing a steady drumbeat that we the people should pay no attention to the deficits for the next few years. To which I can only wonder, “Isn’t that exactly what’s been going on for the last eight years?” It sure seems that way, considering the unprecedented levels of debt added to the economy under Bush’s watch. Something Old, Nothing New To the extent that there is an abundance of political as well as economic and investment coverage, this edition doesn’t reflect some hidden agenda, but rather simply acknowl-edges that there has rarely, if ever, been a period of time where the economy of the U.S. has been more politicized. Today it is not enough for an analyst to paw through the fundamentals and correctly identify the best – or worst – sectors or even individual companies to be invested in or to avoid. Success in the current environment

depends equally, and maybe even more so, on correctly anticipating what actions the govern-ment is likely to take (or not) in regards to any particular enterprise. By any possible metric, save one, GM may be a dead man walking, but the one metric that counts most is whether the government will decide to prop the company up. In all the rhetoric coming out of the Obama camp during this transition period, there is much talk about Keynes and the need for an activist government, and pitifully little that is actually encouraging of the free market. And so, despite the brave new world packag-ing, the ideas trotted out by the Obama team so far strike me as all straight out of the recy-cling heap. The only real question at this point has to do with intensity. Or, rather just how far are they willing to go in push their agenda?

A Word About the Madoff Mess By now you’ve heard about the incredible story of one Bernie Madoff, and his swindle of $50 billion in client assets. Holman W. Jenkins, wrote in the January 7, 2009 Wall Street Journal some well chosen words regard-ing the Madoff affair, we excerpt them here: Journalism follows its own well-trod folkways, of course, and some now insist on trying to make the Mr. Madoff symbolic of all that’s wrong with our financial system. Yes, the SEC, could have done a better job, but polic-ing side deals that rich investors make with money managers arguably is not central to its mission of ensuring fair and orderly markets. And the law is already well-equipped to clean up after fraud. Bankruptcy judges are versed in the peculiar justice of “fraudulent convey-ance” that allows them to claw back Ponzi profits from some client for the benefit of

others. And tort lawyers and prosecutors will likely find it shooting fish in a barrel to hold various “advisors” liable for steering clients into the Madoff scam. In no book of wise investing however, is it written: “Entrust all your money to magical figure who claims to produce uncannily consis-tent profits by means he refuses to explain.” Nor is it written. “Pay princely commissions to any perfumed popinjay who can open the door to this mystical kingdom.” Barney Frank (D, MA) didn’t help by fibrillating on Monday that investors everywhere would be afraid to invest after Mr. Madoff. Mr. Frank would have done better to emphasize the many ways a mutual fund, and even most hedge funds are different from a Madoff scam, begin-ning with an independent custodian of the un-derlying assets.

Better yet, Washington might spend its time profitably examining its own role in the recent housing blowout, which has destroyed more wealth than a hundred Madoffs, of which Mr. Frank himself is an expert.”

T HE  DISMAL  TRACK  record  on government  spending  as  an 

economic  stimulus  should  be  clear to anyone willing to look honestly at the historical data. It is equally clear that Obama believes otherwise, and that the massive government spend‐ing that’s occurred under Bush and is going to continue under an Obama 

administration. Which will not do anything to correct the  credit  imbalances,  grow  the  economy or help revive  the  stock market. Much  to our dismay, we think 2009 will be a continuation of 2008.    Given what we  know  today, we  expect  the economy to decline as much as 5% in Gross Domes‐tic Product  for  the  year, unemployment  could ex‐ceed 11% or even 12% by year‐end, and the stock market is likely to have another rocky  year.    We also expect interest rates to remain low at least  for  the  first half of 2009, but expect them to begin to rise once the excess money in the economy begins to push inflation higher.    For more specifics on our investment strategy see the Year End 2008 VIEWPOINT Special Insert.    May God bless you and yours with a happy, health and prosperous New Year in 2009.    As always, ah, thanks for reading. MJD 

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