Saturday, December 31, 2011

Happy New Year

Bad policies are not enough to derail the most powerful economic engine the world has ever seen -- the US economy.

Here is where we are headed in 2012:

Higher stocks prices, lower bond prices.

A slowly expanding economy -- roughly 2 percent. Because of the way GDP is measured, the reported numbers will bounce around, but should average about 2 percent for 2012 as a whole.

China will stumble but recover. Bad government policy will be overcome by the hard work and entrepreneurial spirit of ordinary Chinese. China will continue to be on a roll.

Europe will sink further into the abyss. The failure to rationalize sovereign debt problems (meaning the failure to begin some managed default process) will mean negative economic growth in Europe for 2012. At the end of the day, it will turn out that Europe is less important than everyone thinks. Except for very isolated situations, Europe as an economic entity has been moribund for a generation. That situation will only become more obvious in 2012.

Emerging markets will plod along, but if you own emerging market stocks, you'll wish you had bet on the US market by year end (same as 2011).

Growing disparities in the Western economies between the haves and the have nots. But, not what you think. The "haves" in the Western economies are those with "protected" jobs -- public employees, teachers especially, people that work for Universities, heavily regulated industries,companies that are basically the government (Fannie, Freddie, etc.), and elected politicians.

The have-nots in the Western world are those in the bottom half of the income spectrum -- the aged, the young and poorly educated, the minorities. These folks are going to see their situation deteriorate more in 2012, mostly because of the impact of government policies that have built up over the past fifty years.

Inflation will begin to be significantly more visible in 2012, but runaway problems are still a couple of years or more down the road. It will feel good in 2012, but the seeds of future problems will be evident.

So, 2012 will be a plus year and will feel better for the "haves" than 2011.

Friday, December 30, 2011

Another Economist Off The Rails

Laura d'Andrea Tyson has now joined the chorus of academic economists spouting economic nonsense. (Although Tyson is more a politico and a professional board sitter these days and is definitely one of the 1%).

Tyson has a piece in today's NYTimes attacking the Wyden-Ryan proposal to reform medicare that would move medicare more into the free market. Tyson notes that the cost of medicare, in the past ten years (and especially in the last three years) has grown more slowly than private insurance. That is an absurd comparison.

Medicare grows by whatever it's budget is and that's that. Private insurance is beset by changes in state legislation (and virtually every state has dramatically altered it's health insurance rules making them more expensive by mandate) in the past ten years. Tyson also seems relatively unconcerned that medicare has a $ 66 Trillion unfunded liability into the future while private insurance has a zero unfunded liability into the future.

Tyson's argument is like saying if I buy now, pay later, then the cost is zero.

Reading Tyson's piece in today's NYTimes is one more trip down the anti-capitalism roadway that so many "star" economists seem to have taken. Economics to these folks is more about have the right politics than about economic logic and economic facts.

Before medicare came into existence, health care was cheap and plentiful and health insurance cost almost nothing. Go back and read newspapers and articles about health care in the world pre-1964 and you will find that health care was a backburner issue. Health care did not become a major problem until the last thirty years and most of our problems with health care provision have to do with too much government, not too little.

The free market is the best way to allocate a scarce resource. Subsidies for the less affluent are a humane way to deal with poverty and low income families. Entitlements for Warren Buffett and Bill Gates are a prescription for disaster and result in a $ 66 Trillion unfunded liability. Where are economists when we really need them?

Thursday, December 29, 2011

Gold and Investment

Most thoughtful observers realize that the US and the major Western economies are going to have significant inflation at some point. It is unlikely that politicians will ever deal forthrightly with the entitlement issues and the only thing left is to monetize the debt -- print money -- and hope that rampant inflation will destroy the value of the outstanding sovereign debt. An interesting future.

The conclusion that some draw is that gold (and perhaps other precious metals) should thrive in a world of out-of-control inflation and the absence of a safe haven asset. It is an appealing idea and gold has done well in recent years, until recent months.

But, how do you value gold? or silver? Normally things have some alternative use. But the prices of gold and silver are way beyond any alternative use value. Gold could trade anywhere -- up or down. There is no way of establishing a value for gold.

Should gold be a part of a diversified portfolio? No. But gold mining companies should.

Which brings us to the Hedge Fund industry in 2011. The hedge fund industry has stubbed it's toe big time by holding outsize positions in gold and in gold stocks. Why? What "expertise" that is worth paying money for leads a hedge fund to take a huge long position in gold? What are the analytics? Is it simply that Europe is imploding and the US is next? Is that it?

Is their some serious analytics behind the huge gold positions taken by hedge funds in 2011 or is this simply the herd instinct speculating in something with a bubble-like recent history?

Wednesday, December 28, 2011

Professor Cochrane and Dodd-Frank

Professor John Cochrane of the University of Chicago opines today on the implementation of "too big to fail" in the Dodd-Frank legislation in the Wall Street Journal. As Professor Cochrane notes, the Dodd-Frank structure has nothing to do with the problems that beset the financial industry in the 2008 collapse but instead empowers arbitrary control of the US financial institutions by an unelected bureaucracy, accountable to no one.

Cochrane, correctly, redirects our attention to the stifling impact the Dodd-Frank "reforms" are having on our financial system and, as a result, on our economy. Economic stagnation by design. That's the Dodd-Frank regime.

The spirit of Dodd-Frank has breathed life into an anti-lending campaign by bank regulators the past two years. The result -- a bifurcation in the lending market. For those who don't need credit, it is available in abundance. For those who need credit, it is prohibited by the activities of the regulators. Obama could change this, but he chooses not to.

The time to tighten lending standards is during the boom, not during the bust. Tightening lightening standards during the bust just prolongs the bust. Why isn't that obvious?

Tuesday, December 27, 2011

More Goofball Economics

Today's NY Times has yet another economist in action. Nancy Folbre, whose byline in today's blog puts her at University of Massachusetts as an "economics professor," argues that "...most ordinary people understand that the incentives built into the global capitalist system tend to reward some very bad behaviors." She then goes on to list things like "dumping waste products into the environment" and other capitalistic ills.

That would suggest that where there is no capitalism, there must be no real environmental damage. Is she kidding? The non-capitalist countries lead the league in environmental pollution. Try breathing the air in a typical non-capitalist country. I guess Professor Folbre doesn't travel much.

So, what does Professor Folbre recommend? She cites "calls for changes to articles of incorporation that would allow companies to pursue social missions without fear of shareholder litigation." What a great idea! Who would buy stocks with the knowledge that companies could toss company assets down the chute in pursuit of whatever "social mission" that Professor Folbre approves of? Do we all agree what a "social mission" is? Is my social mission the same as your social mission?

What is truly unbelievable is that Professor Folbre teaches young minds about economics. No mention in her blog today that only countries with capitalism can afford professors who indulge in this kind of nonsense. Countries without capitalism and who pursue "social missions" are mired in poverty, corruption, and, yes, environmental degradation. The non-capitalist countries don't have the luxury of blog-writing economics professors who detest capitalism.

Sunday, December 25, 2011

More Nonsense from Academic Economists

Peter Diamond (MIT) and Emmanuel Saez (Berkeley) recently published an article in The Journal of Economic Perspectives (Fall 2011 issue) entitled: "The Case for a Progressive Tax: From Basic Research to Public Policy." This article exhibits the total absurdity of modern academic economic research.

The point of the article is to show the "scientific" case for progressive taxes. Their conclusion: the highest marginal income tax rates should approach 80 percent! That is the conclusion of Diamond-Saez so-called science.

Here are a few of the assumptions in this "science:"

1. "Because the government values redistribution, the social marginal value of consumption to top bracket taxpayers ...can be ignored..."

Transalation: rich people don't value income at all so they won't miss it if it is taxed away. (Note this is an assumption!) You might wonder how Diamond and Saez know what "the government values" (or what that expression even means). They don't elaborate. They just make the statement "...the government values..." and then they fill in the blanks. Must be nice.

Here's another "scientific" assumption:

2. "Since the goal of the marginal rates on very high income incomes is to get revenue in order to hold down taxes on lower earners, this equation does not depend on the total revenue needs of the government."

Translation: regardless of whether government spends anything we should tax rich people at the highest possible marginal rate so that we can redistribute income.

3. "..the tax avoidance or evasion component of the elasticity e is not an immutable parameter and can be reduced through base broadening and tax enforcement."

Translation: By eliminating all deductions and exemptions and taxing capital gains and all other forms of revenue to high income tax payers as ordinary income, we can eliminate any tendency to avoid taxes.

Turns out this is utter nonsense. All the wealthy have to do is borrow the necessary money to live their lifestyle and not show any income at all -- ordinary or capital income. Consider Warren Buffet. He could just borrow $ 100 million per year and live on that without showing any income for tax purposes at all. Diamond and Saez are probably unaware that high income folks borrow, so they have ignored this among the myriad other things this "scientific" study has ignored.

Or, alternatively, high income folks could move to a country with more rational policies regarding income taxes. Diamond and Saez did not consider that possibility. Perhaps, they should talk to the states of California and New York to discover whether high marginal rates drive people away.

Here's the ridiculous conclusion of this "scientific" paper: "Thus we have identified basic research findings that we find relevant in thinking about practical tax setting......the case for higher rates at the top appears robust in the context of this model."

The above is what passes for economic research in modern academia, along with the argument that increasing minimum wages increase employment. Next, I guess we will be reading about how enacting maximum home price laws will revive the housing market. You can't make this stuff up. This is why tuition levels are going through the support this nonsense.

Saturday, December 24, 2011

The Poverty of "Economics"

An article in this morning's NYTimes by Catherine Rampell outlines the minimum wage increases that are coming on the 1st of January in eight states. As if lower income employees don't have enough problems this Christmas season, leave it to politicians (and economists) to make their lives worse.

The minimum wage increases will take place in Arizona, Colorado, Florida, Montana, Ohio, Oregon, Vermont and Washington. Note that some of these states are controlled by Republicans, some by Democrats. This is bi-partisan mischief.

Imagine that these same states passed a law saying that a gallon of milk can't be sold for less than $ 10 per gallon. Would dozens of economists step forward with studies showing that milk consumption would be unaffected by this kind of law? Would there be a bi-partisan consensus that a minimum price of milk is a good idea and would promote milk drinking? But, precisely this kind of absurd reasoning is brought forward to defend minimum wage laws (and their increases). Economists are notorious for putting forward their partisan political views as if they were science.

Minimum wage laws are an infringement on the freedom of contract and they deny job opportunities to people who need them. Those who might wish to work free as a way of gaining skills are legally prohibited from doing so. Those with skill sets below the minimum wage level would like to have a job at a lower wage (rather than no job at all), but are forbidden by law to have that first step up the ladder.

Why not just pass a law saying that poor people should be required to stay poor by law? That would have an effect similar to that of minimum wage laws. Economists and politicians who support minimum wage legislation should be ashamed of themselves. Perhaps we should pass a law saying that economists should be paid $ 10,000 per hour or otherwise be forbidden to work. Then, perhaps, economists would begin to understand the pernicious effects of minimum wage laws.

Thursday, December 22, 2011

Another "Rip Van Winkle Year"

In 1987, the Dow Jones Industrial Average began and ended the year in the neighborhood of 2200. In July it topped out above 2700 and hit a low of 1700 in October. A lot of sound and fury to end unchanged!

It looks like we have a repeat performance this year. After the big rally in the first half of the year and the huge slump at the end of the summer, the Dow and the S&P are within a day's rally of being unchanged on the year. Not bad given all the bad news and disappointments.

Look for a big rally in 2012. 2011 isn't over yet, but it certainly seems to be about to finish about where it began, if not better.

Europe is a mess. US government policy is a mess. But, business is getting better and profits are improving. If you're looking for a job and you are in the bottom half of the nation's skill set, you're still in trouble and things aren't going to improve much for you in 2012. But, for the highly paid and for government employees, next year looks pretty good. Stocks will do well, bonds won't. Europe will adopt something akin to a monetization of the sovereign debt of the Eurozone countries -- a big mistake, but one that will give them a few years' breathing space until disastrous inflation overtakes them.

So, the long run future is pretty bleak, but the next couple of years will be good for stocks, good for rich people and good for protected government employees. For everyone else, let them enjoy the liberal rhetoric, because the liberal policies have undermined their future.

Republicans Blink and Cave -- Once Again

Extending the two percent payroll tax holiday is bad policy. The Republican House's rejection of the Senate bill was the right thing to do. Now, for purely political reasons, they are reversing course. Big mistake.

If, at the end of the day, Republicans can't show more backbone than this, then the future is not bright. Obama, even with no constructive policies (he has lots of destructive one) will coast to re-election if the public sees Republicans as lacking principles. Capitulating on the two month payroll tax holiday is not a good sign.

Tuesday, December 20, 2011

What Explains Corzine? Really?

Who would have thought: a former top dog of Goldman Sachs betting the ranch on Spanish and Italian sovereign debt. Really?

This is one for the behavioral finance boys. Hubris is the only real explanation. You would have to believe that you are the smartest man in the world and that there is virtually no possibility that you could be wrong. Then, away you go! Load up on junky sovereign debt and show the world!

Is this were a movie script, no one would buy it. It's too ridiculous.

But, happen it did. Not only that, Mr. Corzine appeared before Congressional committees and tritely explained that he knew nothing at all about how his company, MF Global, was meeting the daily margin calls (all repo transactions are marked to market daily). But, of course, Corzine did not know anything about that. He bought 6.5 billion in bonds and didn't give a thought to what the necessary cash position was that would be necessary to sustain that position as it collapsed in the market place. Really?

I suppose the reason that Corzine wasn't concerned about how his firm was going to meet the cash marks on their huge bond bet was that it was 100% certain to go his way. No need for cash!

Did they have to dip into customer accounts to meet margin calls? Apparently, this was not Corzine's concern. He was not involved in how the firm met the growing cash margin calls that were escalating daily at MF Global. Really?

I suppose Corzine was merely a face man. Someone else must have been running MFGlobal all this time. I wonder when that person will appear and own up to what happened to the customers $ 1.2 billion in missing funds. Really?

The Payroll "Tax Cut"

Is reducing the payroll tax for one year by 2 percentage points a good idea? Normally, I think reducing any tax is a good idea. Why feed the beast?

But, don't forget the real issues are: 1) economic stagnation; 2) size and reach of government; 3) the growing national debt. A temporary drop in the payroll tax doesn't do much about any of these issues. So, what good is it really?

It's interesting that the politicos have seized on this debate as a big deal. In truth, whether or not the payroll tax is temporarily reduced by an amount of this magnitude is mostly political theater.

The big Obama concession in this drama is the Senate Democrats retreat from the millionaire surtax. The millionaire surtax is a completely absurd idea that moves us away from the resolving the three problems cited above.

Name me a millionaire who cares what the tax rate is. Millionaires can simply readjust their assets (or better yet just take out loans) and avoid taxable income at their pleasure. Thus raising the tax rates on millionaires just guarantees a lower level of tax revenues from millionaires. Who wins with that outcome?

The House Republicans are the only adults in the room. They see the folly of a two month drop in the payroll tax. It is political theater and should be rejected as such.

If the public can't see through this silliness, then they deserve the government (and the economy) that they have.

Sunday, December 18, 2011

Visions of Sugar Plums

One more week and Santa comes cruising our way. What will be in his stocking and what does the New Year portend?

The good news for many Americans is that the US economy is not falling off the cliff. Even the coming debacle in Europe will not prevent the American economy from a slow and steady climb out of the abyss.

Bad economic policy has throttled the American and western economies in ways that the Asian economies haven't yet learned (they will learn in time). But even bad policy can't completely eliminate economic growth, if some remnants of capitalism remain.

So, the future is bright for Asia and the future is bright for most of the under-developed world. The advanced economies have mortgaged their futures, so the lights will dim for the coming generations in the western economies. At the end of the day, someone has to work, someone has to save, someone has to hire people. This is a message that the western world has forgotten, but the underdeveloped world has not.

There will continue to be cycles of all types, booms and busts, bubbles, bankruptcies and all the rest. These are all necessary ingredients of healthy capitalism and will not go away until capitalism is extinguished by ardent reformers.

True economic fairness and justice requires providing the opportunity for every citizen to use his/her talents to the fullest. Policies in the US and Western Europe go in the other direction. Anyone with real talent will be stifled in the western economies over the next few generations. The bright lights are on in Asia, the dimmer switch has been hit in the Western world.

Perhaps this is not all bad. The advanced economies have had their moment in the sun and the current advancing economies are hungry to supplant them. That they will do so will write the history of the 21st century.

Friday, December 2, 2011

The Equity Market Spurt

This is another extraordinary week for global stock markets. The US market has climbed nearly eight percent in just the past four market days. Why?

Once again, the pundits look to Europe and the ongoing circus of inept politicians struggling to keep defaults from occurring on their watch. This week's announcement of non-Euro central bank swap facilities' rate drop to provide liquidity to the ECB, to be passed along to the European banking community, is cited as the reason for the rally. Not likely.

The political antics in the Eurozone will provide no relief to the inevitable defaults that will sweep the Eurozone. Nothing will prevent that from happening. The only thing the European politicians are trying to do is kick the can down the road. No one is discussing the real solution, which involves dismantling the entitlement structures and reducing the role of government in their economies. Anything short of the real solution is no solution and will ultimately fail.

But, does it really matter all that much for global equity markets? The markets have struggled to find any direction since late July even though the microeconomics of public companies have rarely been as good as they appear today. The US economy, in particular, is not falling into a second recession. The US economy is growing, though saddled with some of the most perverse economic policies in its history. Today's NY Times has a very instructive article detailing the plight of the unemployed who are at the bottom of the skill pyramid. The administration's policies have doomed these folks to permanent penury.

But, the US economy as a whole is growing. The rich get richer and the poor get poorer under the Obama regime's policies, which, ironically, are designed to help the poor at the expense of the rich. Policies like that always boomerang. The US economy will continue to grow slowly and businesses will continue to find ways to avoid hiring in any large numbers.

Remember September, 1983 when the economy produced 1.1 million jobs? That seems like a lost memory of the bad old days of Reagan-economics. That won't happen again as long as the Obama team is in place. An administration committing to demonizing job creators will find job creation a long, slow process and the many Americans that are looking for jobs will keep looking until these policies change. But stocks will do fine.