Corporate earnings are improving, but unemployment remains high.  These are not unrelated. As the weak economy has held down wage increases, this alone will translate into lower costs and better profits. But this is true only if high competitive pressures have not squeezed margins, which has occurred and if volume remains healthy which varies based on industry.  Demands for technology are solid; demands for housing and construction and related banking services are not.

With tax increases on the horizon investors and business managers are using whatever tools are available to push earnings into 2010 and expenses into 2011.  This will make the current year look better, but it will make 2011 look worse. Business people know this and this is why they are reluctant to make long term investments. For example there is a growth in Rolph IRAs and 401k’s which allows investors to convert current retirement plans and pay taxes this year and get tax free distributions later.

The insistence on class warfare and only increasing taxes on the rich plays well to those seeking social justice, but the reality is that this class will change their behavior the most in response to higher taxes.  They will swap labor for leisure, which they can more easily afford to do, and they will swap tangible assets for financial assets.  They do not have pay tax on the enjoyment of a second home or a new boat. This will drain investable assets that are desperately needed to create new jobs.

Complicated laws measured in thousands of pages have two distressing effects.  They increase the need and function of lobbyists who seek to carve out special advantages for their representatives.  A president who campaigned on the malignancy of lobbyists will cause them to proliferate.

These laws put a burden on the smaller businesses who often lack the political power to influence the legislation that controls them or the counsel to advise them on minimizing their impact.  These small businesses are the backbone of the middle class, and the complex regulations will hurt the middle class and small business much more than the rich who are more adept at managing political risk.

The destruction of the middle class is more destructive to our social fabric than all of the excesses of Wall Street, both real and imagined.

Business is frozen from radical and uncertain legislation and clear anti-business jawboning from the presidential pulpit. Nobody wants to play a rigged game. As some retire early they will not likely re-enter the business world until confidence is restored and they just do not trust the administration as Neil Cavuto so appropriately put it. There is some cost to the loss of the most experienced business people; their wisdom is needed to avoid mistakes they learned from.

All of this keeps unemployment high.  Higher minimum wages and longer unemployment benefits make hiring both more expensive for businesses and less desirable for workers. I have never had a worker ask to be laid off… until this recession.

The only thing keeping unemployment as low as it is has been is the number of workers just exiting the workforce.  Those who are not actively looking are not counted. But at some point these people will return to the workforce. Perhaps they run out of money or their brother in law just tires of them sleeping on the couch.

Ironically the very thing that may push them to re-enter the workforce may be the renewed optimism that may accompany a sharp political reversal in November. We can thus expect an increase in unemployment if the Republicans make significant gains. This will be short lived if the Republicans can make the proper policy changes that we desperately need.

If the Republicans do not make the material political gains so many expect then this terrible business climate and the related unemployment will be with us for some time.

While I share the great concern about her destructive economic policies of this administration, I am getting a contrarian tick about the dollar and gold.

Every right wing talk show and business TV show is flooded with adds selling gold to consumers.  “The dollar decline is inevitable” the pitchmen warn, “Gold is the only safe money.”

When there is this much noise and whenever anything is inevitable it is time to be cautious.

I remember during the seventies when inflation seemed inevitable. The doomsday newsletters like Harry Brown and Howard Ruff had middle class investors buying gold coins, opening us accounts in Swiss banks and investing in Swiss Franc CDs.  Gold reached over 800 dollars an ounce.

And then the inevitable did not happen.

Volcker and Reagan wrestled inflation out of the system, the dollar soared and gold plummeted. Silver which ran as high as $50 an ounce came crashing down to under $5. The real reason for its rise and spectacular bubble was not the desire for sound money but the manipulations of the notorious Hunt brothers.

Middle class investors who bought into the fear and invested heavily in foreign currencies and gold were badly damaged.

It is challenging enough to get accurate information about domestic stocks. Understanding the factors affecting currency values and foreign markets are far beyond the scope of middle class investors (and most professional investors as well.)

Interest rates are near zero. They cannot go down any further, and given the deficit will likely go up.  When interest rates go up the costs of holding a non interest bearing asset like gold goes up, and this puts down ward pressure on the price of the metal.

While the dollar may seem vulnerable its value on world markets are relative to other currencies. As we see the Dubai fantasy teetering on the brink of bankruptcy and countries like Greece nearing default, the dollar may start looking better if for no other reason than other countries are looking worse.

The amount of uncertainty multiplies greatly when you leave our borders. If you are concerned and want some gold limit your exposure to 10% of  your assets and even dollar average that to avoid buying at a top. Consider gold stocks like Newmont or Goldcorp that you can sell easily and quickly if the market turns against you.

Do not put gold in your 401k or retirement account. The tax protection is better suited to income investments, even low yielding but secure Treasuries. If you think interest rates are going up (I do) avoid long term bonds of any nature. Bond face values drop as interest rate rise.

Successful investing requires controlling your emotions.  Anger and fear over this administration’s policies can easily influence your investment decisions.  Rarely does such emotional influence lead to better decisions.

There are those who see our financial problem as a moral failure. In one sense it is, but not in the sense those who wish to frame it in moral tones believe.

To blame greed for the meltdown is simplistic and irrelevant. Greed has been with us forever. Why would it appear in its ugliness now?

I would say that our economic collapse was the fault of a moral supremacy that ignored sound economic principles and common sense.  In an effort to encourage home ownership for the poor, the government demanded that prudent lending standards be forced out of the system. To assure a market the government through Fannie Mae guaranteed mortgages and ridiculous financial instruments to feed the market.

When alarms were being sounded the regulators and legislators were being hounded with political pressure from lobbyists for the very firms they were regulating. Chris Dodd, Hillary Clinton and Barak Obama were among the largest recipients of campaign funds from Fannie Mae.  Barney Frank and many others loudly protested those who warned of a problem, insisting that these programs providing housing for the lower income were somewhat sacrosanct.

It was the unwillingness to understand the limits of government to fulfill our moral wishes that fed this mania.  It was our pursuit of moral justice through government force that led taxpayer funded ACORN to pressure banks to make high risk loans to those who otherwise would not have qualified.

It was not greed or the absence of morality that caused this disaster; it was the ignorance of basic economic principles and the belief that the government can create wealth by making promises it can’t fulfill and that it can erase risk by ignoring it.  In its malfeasance it made the poor worse off and destroyed equity value for millions of the middle class.

If there is a moral failure it is that the government refused to accept its limitations, and that the voters wanted a government that will promise them everything.

The greed of those who wanted a modest house they could not afford caused us more damage than the titans on Wall Street who found a way to get rich delivering the voters their delusion.