Why I Don't Support the Separation of Upstate from Downstate New York

Following the reelection of Andrew Cuomo as New York's governor, I began thinking hard about separating upstate New York from downstate New York.  Downstate New York includes the five counties of New York City and the four counties that surround it--Westchester, Rockland, Suffolk, and Nassau.   Upstate New York is more Republican than downstate, although it is not as Republican as it was 50 years ago because few retirees can afford to remain here, and most of the productive business--as opposed to real estate developers, Wall Street, and other businesses on public outpatient support--have fled.

The issues of guns, fracking, religion, and regulation divide the state, but views are variable. The upstate urban centers of Albany, Buffalo, Rochester, and Syracuse are Democratic, and the many university-and-college centers sprinkled throughout upstate also are Democratic. Woodstock and Olive, where I live, dominated by  the music, film and art businesses as well as weekend homeowners from New York City, is Democratic too.  Nearby Kingston and New Paltz, home of a state university campus, are also Democratic.  Therefore, upstate New York is variegated; nevertheless, there is a difference because the big-government philosophy dominant in New York City is less prevalent upstate.  The recent gubernatorial election saw small-government candidate Rob Astorino lose in downstate New York but win the majority of the vote and the majority of the counties in upstate New York.  Crooked, big-government advocate Andrew Cuomo, closely linked to super rich real estate developers, hedge fund managers, and other of the privileged rich on government outpatient support, handily won downstate.

I thought I'd write a piece about separating the two regions for the Lincoln Eagle, and I interviewed a leading activist in the separation movement. He told me that there is increasing support for the idea, especially following Cuomo's reelection.  Cuomo's dictatorial approach to guns and his fascistic attitude toward conservatives (he says that they don't belong in New York) stimulated strong opposition upstate.

My thought was that the values and needs of upstate differ sharply enough from New York City that government would be more representative if it were more decentralized.  I've changed my mind.  Having interviewed the separation activist and read an interesting piece in the Rochester Business Journal, I am coming to the conclusion that separation isn't worth the fight.

The decision to separate or not should not be financial; it should not be based on on net monies transferred from downstate to upstate.  First, no one is clear about the direction in which money actually flows. Second, even if money flows upstate, if the political union doesn't work, then the money isn't worth it.  Readers who posted   on the Rochester Business Journal article claim that upstate could not build roads without New York City's financial support; they might consider turning their heads toward Vermont, Maine, and New Hampshire, whose roads are fine without New York City's help.

Two elements counterbalance each other.  First, New York City probably does subsidize the rest of the state because of the taxes collected from the financial industry, although the subsidization probably benefits two categories: special interests and welfare recipients.  Second, upstate suffers heavily from regulation and political mandates that emanate from the city.  These include a bloated, stupidly managed Medicaid system and heavy demands from public sector unions, to include the Service Employees International Union--which has successfully lobbied for the bloated Medicaid plan--teachers' unions, and statewide bureaucrats' unions like PEF and CSEA.  There is also the current prohibition on fracking, by which the environmental ignorance and superstitions of New York City's ideologues and cranks have deprived New York's Southern Tier of billions in revenue.

The question that remains is whether, given freedom, upstate will repeal the mandates,  regulations, and bloat that the city has imposed.  If it does not, will not, or cannot, there is no point to separation.  Having lived in Albany, Kingston, Potsdam, Binghamton, and New York City, my guess is that the people of New York are unable to overcome the lobbying of the special interests, the unions, the developers,  and crackpot green advocates, who have driven business away from the state.  The same processes of special interest brokerage will continue to dominate upstate New York, just as it has,  and I have no reason to think that upstate New Yorkers will gain 15 IQ points and start to think rationally about the costs and benefits of government policies.  North Dakota, with a population not much bigger than Buffalo's, has, but few states have.

The inner cities in upstate New York, such as the small city of Kingston, which is near me, are as backward as New York City; New Yorkers in rural areas are often co-opted by welfare and Medicaid programs that make them advocates of the bloated state, and a large share of upstate New Yorkers are public union looters.  The result will be, like the breakup of Standard Oil, two behemoth operations rather than one.  In the case of Standard Oil, the oligopoly included Exxon, Mobil, Chevron, ARCO, Sohio, and Pennzoil. In the case of New York, the oligopoly will become the bloated bureaucracy to the north and the bloated bureaucracy to the south. I don't think upstate New Yorkers have the brains to end the bloat that has deprived them of an economic future.

I'm Betting on a Rising Stock Market

The belief that the stock market will go up forever is  a bubble psychology that goes back to the South Sea Bubble, which fooled even Sir Isaac Newton. Since 2009, and especially since President Obama's reelection in 2012, the stock market has been going at a tear. The tear will continue. The editorial page of the New York Times proves it.  The Times wrote this yesterday: 

On one side is a small yet vocal minority of Fed officials who want to head off inflation by raising rates sooner rather than later. On the other is a majority that thinks a near-term rate hike would stifle growth and, with it, any chance of restoring health to the labor market. That group includes Janet Yellen, the Fed’s chairwoman, and most members of the Fed’s policy committee…The economic evidence indisputably favors Ms. Yellen, who has indicated that rate increases should not begin until sometime next year, at the earliest. It will take until then to be able to say with confidence whether recent improvements in growth and hiring are sustainable.

The reason that the Times's editorial is important is that the nation's hierarchy of decision making with respect to interest rate policy is as follows:

Investment banker cronies--> Ochs Sulzberger family-->The New York Times--> public opinion among Democrats --> President Obama's opinon --> Janet Yellen's opinion --> Federal Open Market Committee decision

If a Republican were in office, the Wall Street Journal would play the equivalent role.

Rates will be lower, or will increase less, than stock market participants expect because the Democrats have a commitment to boosting the stock market. The Times goes on to make the curious claim that keeping interest rates low will improve real wages; that real wages have declined while interest rates have been kept at historically low levels for the past 43 years does not deter them.  Recall the old saying about insanity.  

 Seeking Alpha says that George Soros is currently hedging the S&P 500. I'm sure that there is a logical or statistical basis for his tactic  because all evidence says that the stock market is high now.  The support of the Fed will continue to keep the market at high levels into next year, though.  I'm not buying the S&P short ETF, SH, just yet. However, I have about 1% of my portfolio in the VIXX index and an interest rate short index, both of which have declined and are near all-time lows. The VIXX index measures market volatility, and it goes up when the stock market goes down.  It is at all-times low, which is an indicator that the stock market will go down.  

From a policy standpoint the New York Sun's Seth Lipsky continues to offer a still, small voice of financial sanity among the Sodom and Gomorrah of the American media.  Sadly, Paul Krugman will have to turn into a pillar of salt before any change in America's addiction to print-and-spend economics ends. 

For now, I'm buying a little more Chicago Bridge and Iron (CBI).  It's gone up a few percent since Buffett bought a second set of shares; according to Seeking Alpha several other hedge funds are piling in.  The sharp decline due to rumors about improper accounting and the firm's president's illness seems to have offered Buffett and other hedge funds a buying opportunity; including pension fund holdings, Berkshire may own 25%. 

Opposition from Giuliani, Christie Suggests That Astorino Is a Man of Character

Big-government Republicans like Rudolph Giuliani and corrupt ones like Chris Christie have chosen to either support Andrew Cuomo or avoid supporting the small-government GOP candidate, Rob Astorino.

The New York Daily News reports that on July 24 Christie gave Astorino the brushoff because he doesn't think Astorino can win. Unlike Democrat Andrew Cuomo, who is facing a corruption investigation concerning the Moreland commission,  Astorino probably isn't corrupt enough for Christie.  Like Cuomo, Christie is under a corruption investigation:  Christie's close aides have admitted to closing lanes at the George Washington Bridge because the mayor of Fort Lee, Mark Sokolich, didn't endorse Christie in 2013. Christie has allowed his aides to take the blame, but why on earth would anyone believe that he didn't know?  The Newark Star Ledger adds that Christie's private attorneys have billed New Jersey taxpayers $6.5 million for legal services in his private defense.

At the same time, New York City's Mayor Giuliani, a guy who claimed to be for less government but never cut government, has been quietly supporting Andrew Cuomo.  There are so many things that Giuliani might see in Cuomo: the exodus of 400,000 New Yorkers during Cuomo's three years as governor, his attack on the Second Amendment, his failed Common Core school reform, or his narcissistic plan to rejuvenate New York's economy by appointing eight SUNY campuses to house a few well-connected tech firms, then spending $200 million dollars in TV ads around the country that use the dumb plan as a pretext to promote Cuomo himself.

 I rejoined the GOP out of desperation to get Cuomo out, but the GOP's bankrupt leadership is truly a gang that can't shoot straight. Perhaps Astorino would be best off disowning the GOP and using the GOP ticket to run a Libertarian campaign.

Is It Time to Buy Socialism Insurance Now That Federal Debt Exceeds GDP?

On April 8 2013 when the gold index fund, the GLD, was at 153, I got out of much of my gold, and I wrote that gold might hit $1,200. The GLD is currently at 127, and gold has already dipped below $1,200.  My guess is that there is still some downside in the gold market, though.  The reason is that the effects of the monetary creation since late 2008 through this year have had stimulative effects on the stock market.  The monetary stimulus of Reagan-Bush-Clinton years had a depressing effect on commodity prices,  which is part of why inflation was not as extreme as it might have been. The Bernanke-Obama monetary creation since 2009 will have larger effects than I initially thought, although I did start buying stocks around Thanksgiving of '09.

One of the characteristics of markets is that they tend to bottom with an overreaction, and we haven't seen capitulation in gold.  The decline has been orderly.  I am therefore still somewhat bearish in gold, although buying gold now will make sense in the long term.   Gold is socialism insurance, and we need socialism insurance now more than ever.  The monetary expansion keeps interest rates low, so gold exploration--along with other natural resource exploration--becomes more competitive, pushing down gold and gold stocks. Lower interest rates lead to more exploration, which leads to lower commodity prices, which lead to lower short-term inflation. Ultimately, inflationary expectations will escalate.

Writing in Seeking Alpha, Kirk Lindstrom points out that federal indebtedness, $17.7 trillion, now exceeds the US GDP, $17.3 trillion, a sign of socialist excess.  Lindstrom posts a revealing chart: Gold has gone steadily down since November '12 while the stock market has gone steadily up since April '11.

The gold market is complicated by additional factors.  The Chinese and other central banks have been buying gold in spite of Wall Street, Warren Buffett, their wholly owned media and academia's persistent hostility toward gold.   Second, the Obama monetary expansion occurred on top of a significant contraction and rising gold price.  Therefore, the deflationary and the inflationary processes are intermingled.  Third, the dollar is heavily subsidized by the world's central banks, so inflation may not come gradually; rather, there is a risk of a sharp monetary correction or collapse.  The third consideration makes owning gold more important than it was in the 1970s--even in a flat or declining market.

I am still waiting for capitulation in the gold market.  My stock investments have been OK, but I made the error of focusing on low-risk (low-beta) stocks that didn't appreciate to the same degree as tech stocks. VNR, Vanguard Natural Resources, is one of my holdings, and it's had a few short-term setbacks, but I'm holding onto it. It yields over 8%, and until the recent setbacks everyone believed the management to be fine, and most still do.  At the same time, there has been good news about Kinder Morgan, which I also own, and the MLP went up almost 30%.  I was also holding Heniz when Buffett bought it.  I had been holding CBI, Chicago Bridge and Iron, but I pulled out when it fell by about 20% on rumors.  I am going to buy it back soon. (It's since fallen another 20%.)  I also bought Kellogg (K) recently. It had fallen on poor Special K sales.  I am holding Philip Morris, Pepsi, and Kimberly Clark, which all had nice price appreciation over the past few years.  I like the MLPs because they pay rich dividends.  I also am making long-term investments in Dollar General, Traveler's Insurance, and Dominion Resources (D).  D is priced high for a utility, but they also hold a considerable amount of energy pipelines, which makes them similar to a midstream MLP.  Critics of D say that the dividend coverage is poor.  Also, I am making an exception to my pe-below-15x earnings rule. At the same time, the company is poised for more rapid growth than other utilities when natural gas prices rise.  The down side to investing in lower-risk companies with low price-earnings ratios is that they don't jump in a hot market like last year's.  However, I am holding Intel, Apple, and Microsoft, which have been doing well this year.  I also bought CSX, the railroad.  The railroads have been a play on energy, and I believe that they still have a way to go.  My stocks have been weak in the past few weeks, but so has everything else.  I have to learn not to listen to Warren Buffett's friend, Mr. Market.  

I am waiting for the gold market to fall. Maybe I'm on a fool's errand, but I don't believe that either the stock market run up or the gold market run down is over.