Wednesday, September 18, 2013

A Rose By Any Other Name

The Fed announced today that it would continue it's bond buying binge to the tune of $ 85 billion monthly, a policy that has been in place since the 2008 financial collapse.  This has expanded the once miniscule Fed balance sheet to over $ 4 trillion. 

The Fed, of course, can create money digitally.  That's what it uses to buy the bonds.  It just says:  "let there be money" and there is money.   This massive expansion in the monetary base has created huge excess reserves in the nation's commercial banking system.  Why doesn't anyone loan this money out?

The pitiful loan activity is a result of two factors.  Dodd-Frank and activism in the Justice Department and others has made it a criminal activity to loan money to anyone who doesn't have the very, very best credit.  And people with that kind of credit have lost interest in borrowing to build businesses in the new Obama world of massive regulation and impending soaring health care costs.  So, not too many loans are getting on bank books.  The reserves are simply piling up.

But what happens if, heaven forbid, the economy recovers?  Ah, an outcome not contemplated by the Obama-Bernanke clique.  So far, they have successfully prevented any serious chance of a strong economic recovery that would quickly expand loans and the money supply, bringing on the inevitable out-of-control inflation.  But, that won't happen if you keep the economy from recovering.  I think that I am beginning to understand the Obama-Bernanke plan.  It's working.

Saturday, September 14, 2013

Inequality and the Poverty of Economics

The Journal of Economic Perspectives is an academic journal that summarizes the state of research in various fields of Economics.  Perusing this journal shows the extreme political bias of much of modern day economic research.  The Summer 2013 issue was devoted to "income inequality."  The main theme was that rich folks are getting richer, but, of course, the facts actually show just the opposite.  Not deterred by the facts, the various economists that opine in this edition blithely parrot absurdities such as wealthholders ability to "sustain their preeminence.

What is the analysis?  Imagine that you wanted to know if baseball teams created dynasties and "perpetuate" their dominance of baseball.  What facts would you want to assemble to prove this?

Here's the way economists think:  collect data that shows that back in the old days, the baseball teams that won the pennant won 65 percent of their games each year.  Then show that, today, the teams that win the pennant win 70 percent of their games each year.  (Don't bother to check whether the teams that won in the old days are the same teams that win today.  Why would that matter, say economists?)  Would that evidence convince you that certain teams are dominant and "maintain their preeminence?"  That is the precisely the kind of logic that perpetuates the factually incorrect myth that the rich get richer.  Check out the articles in the JEP and you will see.

The truth is that if you list out the 100 richest Americans today and then compare that to the one hundred richest Americans 25 years ago, you will find very little overlap.  The richest folks have more of the wealth (if you totally leave out the huge proportion of wealth transferred by government transfers such as social security, welfare, medicaid, food stamps and on and on), but it is a different set of rich folks as time goes on.  Wealth rises and falls in the US.

The opposite is true in Europe.  The wealthiest families in Europe are the same families that were wealthy 50 years ago.  Contrary to the complete nonsense you read from economists, the chances of improving your lot in Europe are almost non-existent.

Now, in the US, the Obama Administration would like to create the European model, which traps people into whatever economic group that are born in....or, actually reduces the life chances of the folks born into the bottom half of the income distribution.

Notice the data since Obama came into office.  Since mid-2009, long after the bottom of the financial collapse and well after the Obama $ 800 billion stimulus package, the economic position of lower income folks in the US has deteriorated.  The Obama sledgehammer on business has delivered results.  Jobs are scarce and what few jobs there are, are part-time.  (Obamacare, of course, influences this trend toward part-time employment by creating built-in disincentives to businesses to hire full time employees).

The real truth is that the US has historically always been the best place to be born if you want a chance to move up in the income distribution and it remains the best place for that purpose.  Obama is trying to kill off that opportunity, but so far he has not totally succeeded in this strange endeavor.

Economists have done a disservice to the public by presenting facts in a way that is totally misleading and obscuring the real truth about the economy and about the historical dynamism of the US economy.

Saturday, August 31, 2013

College Grads and Jobs

There is a growing discussion about whether or not college graduates are generally prepared for the workforce.  This is a very interesting (and revealing) discussion.

This is not so much about GPA as it is about more fundamental problems -- attitude tops the list.  Far too many college graduates think that they have 'paid their dues' by attending college and collecting a degree.  Many seem to think that joining the work force is akin to joining a fraternity or sorority.  They seem disappointed that employers' have high work expectations and are in no hurry to provide massive benefits and a club-med work environment to a rookie employee.

What every employer wants is someone committed to work hard, to learn new skills, and to already possess basic writing and mathematics skills.  The vast majority of college graduates, measured against these expectations of business do not measure up. 

That's the sad truth about higher education.  We don't insist that our graduates have adequate writing and math skills to perform at a high level in the work force.  Those graduates who do have these skills, likely had them before they entered college.  They certainly don't gain or nurture these skills in college.

As for attitude, there is no more-forgiving environment than the modern university.  Students can argue a C grade into an A grade, if they understand how things work.  It is a simple task to manage one's GPA to end up with a 4.0 without serious study.  Meanwhile, skipping classes, scrimping on assignments, cheating, massive drug and alcohol abuse are all tolerated with little or no punishment.  Moving from the university environment to a work environment is a real culture shock for most college graduates in the modern era.

More and more the modern college and university is a great four year social experience that probably makes it more, not less, difficult to adjust to the realities of a market-based economy.

Thursday, August 22, 2013

The Nasdaq Flap

The Nasdaq halted trading today and was down for a couple of hours.  Listening to the financial media (CNBC, Larry Kudlow, etc.), you would have thought a great crime had occurred.  99 percent of the investing public had no idea and could care less, me included.

What serious investor could possibly be harmed by a two hour shutdown of the Nasdaq?  Are these pundits serious?  If there was ever an 'inside baseball' issue, this is it.  Only manic traders and hedge funds could possibly care one way or another about the Nasdaq shutdown.

No portfolio of any serious investor could possibly be damaged by a temporary shutdown of a stock exchange.  This is a ridiculous tempest in a teapot.

Obama and Higher Education

Just what we need, the Obama tenacles reaching into higher education.  In typical style, Obama points to a problem -- the high cost of higher education -- and proposes a solution that has nothing to do with the problem and actually will likely make the problem far, far worse than it is now.  This has been the pattern with the economic rescue plan, with the 'affordable' health care act, with wind and solar initiatives, and on and on.  Every problem that Obama has inherited has become a much bigger problem under his leadership.

What is wrong with higher education?  Mainly the government, as in most other things.  Federal funding for research grants and student loans has made higher ed less interested in scholarly pursuits and more interested in the pursuit of federal largesse.  Students are borrowing huge amounts of money to maintain a college lifestyle that for prior generations was simply unavailable.  Who could spend that kind of money on beer and fitness centers in the good old days?

Education itself doesn't cost much to provide; less today than a generation ago thanks to the advent of the digital age.  But 'higher education' is no longer in reach for middle income Americans unless they are willing to bankrupt themselves and their children to enrich university bureacrats and aging academics (and they are aging thanks to tenure).  There is a growing gap between 'education' and 'higher education.'  More and more these two concepts are separate and distinct -- perhaps, incompatible.

Obama is going to measure the inputs to higher education to figure out what the outputs are -- a completely absurd approach to measuring the effectiveness of an education program.  Why not measure the difference between a student's life chances when entering the institution with the life chances when leaving the institution.  The 'elite' colleges would not fair very well using a measure like that.  But, if only inputs are measured -- the Obama plan -- then the elite colleges will do very well indeed (that's why they are called 'elite'), but the community colleges, who fare much better using my measure will not do well under the Obama plan.

Once more, under Obama, the rich get richer and the poor and middle class will be left holding the bag.

Media Misleads Once Again

Reuters has a story today about the jobless claims number that is completely absurd.  According to Reuters, "...then new claims... rose...but...gave a positive signal for hiring during the month."  This conclusion is based upon absolutely nothing. 

What the data, in fact, shows is that jobless claims rose last week and rose more than the market expected -- not good news at all.  Worse, the numbers are barely (five percent on average) lower than the numbers in the early part of the year.  Given that revisions are typically well above five percent, a drop of five percent is statistically irrelevant.

The real truth is that the economy is not producing enough jobs and the few that are produced are mostly part-time, low wage jobs.  Not surprising, given the Obama economic program, which guarantees economic stagnation as far as the eye can see.

The media has made a habit of consistently distorting the truth about the American economy in their cheerleading effort to defend failed policy.

Read David Stockman

A new book by David Stockman, "The Great Deformation," challenges the current orthodoxy of financial market regulation.

This book is a great read.  Don't expect a calm and collected analysis.  This book is definitely not calm and collected.  Stockman takes on all comers and his style is blatantly polemical.  He aims his brickbats at the right and the left as he excoriates the rise of indebtedness, public and private, since the 1960s.

Don't think conservatives get a free ride in this book.  They don't.  Ronald Reagan and Milton Friedman are targets of Stockman.  Indeed, Stockman sees Reagan and Friedman as major culprits in the incredible growth of America's financial liabilities.  Some of this is, no doubt, sour grapes for his well-publicized split with the Reagan Administration in the 1980s when Stockman was Director of the Bureau of the Budget.  He resigned that post in a feud with the Reagan folks over their unwillingness to support spending reductions to accompany the famous Reagan tax cuts.

But, the heart and soul of Stockman's book is his interpretation of the 2008 financial crisis.  Here, Stockman makes a real contribution to what has been an embarassingly simple-minded consensus view of government policy.   Stockman argues that the federal government, including the Fed, should not have intervened to save AIG, Morgan Stanley and Goldman Sachs.  According to Stockman, saving these firms was the main purpose of the hastily-assembled $ 780 billion bailout backage, known as TARP.

Stockman argues that the financial system and the American economy was not threatened by the collapse of AIG, MS, and GS, as was argued at the time.  He shows, by analyzing the balance sheets of these firms, that the American economy could have easily survived the collapse of these firms.  Few, today, agree with that, but Stockman makes his case convincingly.

In essence, Stockman is challenging the "too big to fail" crowd that dominates government policy today and that dominated government policy in the Bush Administration in 2008.  By challenging a hackneyed consensus devoid of analytical underpinning, Stockman has done a great service, writing this book.  He's right.  Read his book.

Monday, August 19, 2013

Time to Buy Emerging Markets?

Emerging market stocks have been hammered this year as the US and Europe have enjoyed one of the best stock markets in history.  Why?  What happened to the argument that slow (GDP) growth in the developed world and much higher (GDP) growth in the emerging economies argued in favor of a heavy commitment of investment funds to emerging market?

As it turns out, emerging market economic growth has, indeed, been much, much higher than economic growth in the Western nations.  So, why did their stock markets put in such a pitiful performance thus far this year?  A similar pattern occurred in US history when foreign investors, mostly British and Russian investors, lost bucketloads of money betting on growth in the US economy in the 19th century.  This is not the first time that dramatic GDP growth failed to help investors in public stocks.

Many of the most vibrant companies in the countries that fall into the 'emerging market' category are not public companies.  They are privately owned companies that aren't included in any of the emerging market portfolios that you and I can own.  Instead, roughly 40 percent of the capitalization of 'emerging market' ETFs are typically government-owned or heavily regulated companies, such as the local telephone company or local utility company.  Are these good investment bets in a third world political environment?

If emerging markets boom, you are much more likely to make money owning Coca Cola stock than the stock in the local telephone company in Egypt or Venezuela.  The inherent logic behind huge investments in emerging markets never made any sense in the first place.

That said, it may now be time to buy the emerging markets, since everyone seems to be abandoning them in a rush.  India's stock market lost four percent of its value in a single day at the end of last week. 

It may be time to take another look at emerging markets, now that their staunchest supporters seem to be running for the exits.  But, one should be cautious.  Emerging markets involve stocks that have fundamentally different characteristics and corporate governance rules than Western investors may be accustomed to.

Wednesday, August 14, 2013

European Recovery -- Seriously?

The news services are abuzz this morning with the "news" that Europe has finally turned the corner with an economic rebound in the 2nd quarter of this year.  Underneath the headline is the dismal number of an annualized 0.3 percent estimated growth rate for the 2nd quarter.  Whoop-to-doo!  This is a recovery.  This number is not significantly different from a negative number, given the pattern of revisions.  Meanwhile, unemployment in Europe remains above 12 percent and sovereign debt is soaring on to new highs.

There are further stories that Greece is on the road to recovery.  What are their current statistics?  GDP only dropped an annualized four percent in the first half of this year.  Wow!  That's really something to write home about.  Combined with almost 28 percent unemployment overall and nearly 70 percent unemployment among youth, it sure sounds like Greece is just humming along.

Wonder what the statistics would show if Europe was doing poorly?

Monday, August 12, 2013

Some Good News for the US

Steve Moore's column today in the Wall Street Journal is worth a read.  The sequester, according to Moore, has worked.  Total federal spending has been slowed, even reversed, in the past two years, according to Moore.  This is, indeed, good news.  Let's hope it continues.

Moore notes that all it takes to continue to hold federal spending in line is to not undo the budget deal that led to the sequester in the first place.  It will be interesting to see if politicians can stick with the plan by doing nothing.

Update on Greece

Now, after five years of European Union policies, how do things look in Greece.  The headline today on Yahoo looks encouraging: "Greece Beats January-July Budget Target."  In fact, Greece did not do any such thing.  More bailout funds from the EU, though, made it look that way. 

Here is what the EU has done for Greece:  GDP today is 20 percent lower than it was in 2008, when the EU bailouts began.  Unemployment is at a record pace, pushing toward 30 percent.  These numbers are not very different from where the US was in 1933 at the lowest point of the Great Depression.

Meanwhile, civil order is breaking down in Greece.  Crime is rife and the only things growing are the nation's indebtedness and the black market.   Political discourse is moving to the extremes as the center breaks down.

Finally the debt to GDP ratio is rapidly climbing to 200 percent.  The EU has made a small problem into a large problem and has obligated the entire European continent to back a bailout that has absolutely no hope of success.  Politicians hard at work again!

Sunday, August 11, 2013

The Changing Face of the American Workplace

The US economy was once the envy of the world.  From 1865 to 1965, the US economy grew faster than any large economy in the world.  The great American middle class came into prominence during this period and American income and wealth had no rivals anywhere in the world.  For most of these years, there was no Federal Reserve or central bank in the United States, though central banks had a long history in every other large country in the world.  For most of these years, there was little business regulation and no income tax.  The Federal Reserve and the Federal income tax came into existence in 1913, coming on the heels of the best 60 years of economic growth in the history of the US.

Not that everything was rosy.  Financial panics and the great depression occurred during this 100 year span.  Unemployment rose and fell.  Markets rose and fell.  The dynamics of American growth were chaotic, though powerful.  But, with all of the chaos and panic, the American pie grew at an unprecedented rate, matched, in world history, only by modern China.  The standard of living of the average American grew at the fastest pace ever.  Unemployment levels above 6 percent were considered a sign of a 'recession.'  The current 7.6 percent unemployment rate would have been seen as an extreme economic slowdown  (not an economic recovery).

Since 1965, the American economy has grown at a dramatically slower pace.  The American middle class has consistently struggled, except for the 20 year period that followed the inauguration of Ronald Reagan.   The financial position of the average American is today untenable, if proper account is taken of the federal, state and local government debt.  America is headed for financial disaster and the American middle class is sitting in the passenger seat.

In the driver's seat is the new political class.  The fastest growing demographic in America is the American government or quasi-government employee.  On the defensive is the American private economy.  Besieged by so much regulation that most companies are not even aware of most of the regulatory burden that they face, small business is no longer the engine of American economic progress -- government is where the real growth is taking place.  Government employment has been the largest source of employment growth in the US economy since 1965.

Unfortunately, government doesn't produce anything but problems for the private sector.  Most government employees (including public school teachers, university professors, and bureaucrats of all stripes) view the private sector with suspicion.  They see private businesses as quasi-criminal enterprises bent on polluting the environment and exploiting their employees.  This culture dominates the media characterizations, not only in the daily news, but in television series and movies.

So what does all of this mean for the workplace in modern America?  Private businesses realize that they are the target of the political classes and they make adjustments.  They know that if they hire full time employees, their regulatory burden goes up.  They know if they hire 50 employees or more, they fall into certain categories that must face significantly higher costs of complying with the modern legal environment that has been imposed upon them.

So, what happens?  Small business reacts by hiring as few full time employees as possible.  Part time workers are easier to fire and are not subject to Obamacare and other regulatory burdens.  Many companies keep their companies deliberately smaller to avoid certain employment trigger levels that put companies under a much more severe regulatory regime.  Employees that are 'protected' under current laws -- minorities, women, persons over the age of 55 -- involve far greater expense to a private business than other employees.  So, fewer of them are hired.  Protecting an employee with legislation simply means making that employee more expensive to the employer.   Employers aren't stupid (a common assumption of the political class that supports these 'protections).'

So, today, the workplace is a very rigid bureaucratic environment.  The blizzard of paperwork that employees face is nothing compared to the blizzard of paperwork that companies face.  There is more concern with what might be said at the water cooler than what the work output might be.  Private email communications are now perused for politically incorrect comments.  Free speech doesn't apply to the workplace.  In financial service companies, mistakes or errors are seen as criminal (the 'whale' episode at JP Morgan is a modern instance).  Gone are the old processes of free people making free decisions in free markets.  Now you have to worry about whether Barney Frank or Elizabeth Warren is looking over your shoulder.

All of this means that America is in a period of relative economic decline.  The middle class will remain an endangered species as the political class bent on the destruction of the middle class continues to claim that all they care about is the middle class.  Gradually, less and less of America is based upon free market economics and more and more is driven by un-elected elites, who have spent most of their lives either in politics or academia.  The workplace is now a bureaucratic environment with rigid rules and little or no room for initiative and energy.  The dull and the routine is more and more a description of the modern American workplace.

The workplace is also becoming more and more a land of part-timers.  Businesses in America, like their European counterparts, are increasingly reluctant to hire people that, by law, they cannot fire.  Workers now have protections and guarantees that mean, even if workers received no wages at all, they are still very, very costly to business.  Increasingly, wages are a smaller and smaller fraction of the costs to an employer of hiring an employee.  The result is a much reduced take home pay and more and more of worker income is siphoned off to worthy causes, favored by elite bureacrats in the Elizabeth Warren mold -- bureacrats with virtually no life experiences similar to that of ordinary American workers.

A hundred years ago, a young employee could take a job at a reduced wage or no wage at all as a way of entering the work force and learning a trade.  Minimum wage laws, promoted by big unions, are designed to block such work force entrants and preserve a monopoly for existing workers.  These laws are effective and help destroy a large part of the Horatio Alger culture that once was.  The elite that make these rules don't face such problems since they, by and large, go to elite colleges and universities and find that entry into the work force doesn't involve wage and salaries anywhere near the minimum wage.

It is no accident that college students are in the forefront of the call for a "living wage."  A living wage virtually guarantees that the college students will not face future competition from folks whose start in life is not as pampered as their own.  The poor simply can't get through the front door, since their skill set rarely justifies a "living wage."  Meanwhile, those who support the "living wage' think of themselves as bastions of morality, while crushing the hopes of folks who would simply like to have an opportunity to move up in the world through their own work efforts.

Great wealth creates idle time for the wealthy.  It is no accident that the wealthiest US politicians are also those who most vociferously support the agenda of ever bigger government.  Why not?  It will never effect them.  As fewer and fewer Americans derive their living from the free market, the free market has fewer and fewer defenders.  The wealthy and the new bureacrats are the power brokers in modern America.  Their contempt for the American middle class and for free enterprise is on display every day in our media and in their political program.  It has changed the face of America and the American workplace.  Meanwhile, folks like Obama ponder why part-time workers are replacing full time workers in America.  He blames that on greedy businesses.  But, the reality is that Obama policies are one of the key reasons that full time workers are becoming an endangered species.

Friday, August 2, 2013

Another "European" Jobs Number

162,000 new jobs in July.  Not only is that an absurdly low number for an economy as large as the US, the job numbers for both May and June were revised downward as well.  No one is much interested in hiring anyone.  That's the main message of this report.

A subtext is reflected in the unemployment rate, which fell to 7.4 %.  How, if a pitifully low number of jobs are created each month, is the unemployment rate falling?  When people give up looking, they aren't counted anymore and more than 6 million have given up looking. Unemployment could get down to 1 percent if almost everyone just gave up and went on public assistance.  Is this the Obama plan?

The White House is succeeding in getting the economy that they have wanted -- the European economy -- no growth, no opportunity for the young and ever rising debt levels that have no conceivable way of being repaid.  This is the liberal dream.

Thursday, August 1, 2013

Big Companies More Valuable Than Small Companies

So what explains the surging stock market, when the fundaments of the economy remain weak?  Again, micro-factors favor large companies with access to government.  This is true for banks as well as for non-financials.  Smaller companies are getting hammered by higher tax rates, more mandates, and looming ObamaCare.  Large businesses, with some exceptions like coal, can deal with all the bureaucratic regulatory stuff because they have so much scale.  Not true for smaller businesses.

So what you're seeing is a change in the playing field.  The big guys are doing relatively well and small business is in the doldrums.  That is keeping with the Obama playbook of the grand corporate-government teamwork.  Obama can relate to big giant companies, because they are so much like the government and, in some ways, indistinguishable.  But small business is an annoyance in the Obama scheme.

The problem is: small business produces the new jobs for the economy; big business is a stagnant employer in the aggregate.  So folks looking for a job are out of luck.  The Obama economy is great if you're big and rich, but not so great if you're an out of work American or a small business enterprise.

Wednesday, July 31, 2013

Urban Renewal -- The Big Government Way

Having spent the past four days wandering the neighborhoods of Washington DC, it is clear that this city is a prosperous, booming area.  Wonder what business enterprises are sparking this growth?  Big government.

Years ago, when I was a newbie intern for the US Treasury, walking a couple of blocks from One Washington Circle (where I lived back when it was an apartment complex) was a dangerous undertaking.  No More.  For miles around, there are now leafy suburbs with casually dressed joggers and dog walkers.  The homes are well maintained and coiffed and the comfortable residents seems at ease with their plush surroundings.

Who lives here?  The new "protected" class.

These are the people that work for the federal government or the numerous so-called private businesses that devote their endeavors to providing services to government or lobbying to gain a share of government largesse.  These are the folks that view people outside the beltway as moronic environment-destroyers and homophobes.  They are comfortable in the knowledge that they are doing God's work, protecting the environment and defending the minorities and the poor from the caprices of the evil private sector.  These are the regulators, the tax collectors and the righteous -- living high on the taxpayer.

Out in the hinterland, struggling Americans are laboring with massive unemployment and stagnant economies and providing the tax revenues to support this ruling class that lives in modern luxury in much of Washington DC.  No real products are produced here. Indeed, the primary function for most of these Washington upper income folks is to find ways to restrict the private sector and to increase the flow of resources into their own pockets.  This is the new "European prosperity" for the ruling classes.

You wonder how much longer this can continue.  A dwindling private sector carries this elite group on its backs.  Meanwhile the poor in DC are shunted off into ghettoes with some of the worst public schools in America.  But, those folks are out of the view of this elite.  This elite lives in safe neighborhoods with protected jobs.  Even folks who take the fifth amendment before Congress, when they are asked about what they are doing, continue to prosper at full pay with zero work responsibilities.  This is the liberal dream, right here in Washington DC.

Friday, July 26, 2013

Guilty Until Proven Innocent

I carry no brief for people that break laws, but, in the securities industry, indictments destroy businesses and innocent shareholders are usually left picking up the tab.  That was the result when Drexel Burnham was indicted in 1988.  Many of Drexel employees who trudged silently in the back office found their retirement hopes and dreams destroyed when Rudolph Guliani's over-zealous indictment caused Drexel to go bankrupt overnight -- long before anyone produced any evidence to a judge or jury to peruse.  Most of the folks who lost their life savings by the indictment of Drexel were innocent and had no knowledge of any wrongdoing.  That's what happens when you indict corporations, as opposed to individuals.

This same theme plays out in the litigation and settlement arena.  Pension funds who trumpet their lawsuits against corporations are really only suing themselves and enriching the legal profession.  The wrongdoers go unscathed, while innocent shareholders get hammered.  This is what happened in the tobacco settlements, in the BP settlement, and on and on.  Shareholders, who often have no idea that they are really shareholders, find their own retirement hopes and dreams crushed by breast-beating righteous souls who run these pension funds involved in all of this litigation.  The lawyers love this as they salt away fortunes.  It's simply a transfer from working class people to wealthy lawyers, while pension executives proclaim that they are fulfilling their fiduciary duty.

In the SAC case, why doesn't the government indict individuals?  How can a corporation get inside information without an individual being involved?  Could it be, they can't prove their case.  By simply indicting SAC, they destroy the business and, presumably, a lot of Stevie Cohen's net worth.  But, what if Cohen is innocent (and I am not saying that he is).   We may never know.  What we do know is that SAC is done for, whether innocent or guilty.  The indictment will destroy SAC's future and much of Stevie Cohen's net worth, regardless of guilt or innocence..  At least in this case there are no public shareholders being looted -- just Mr. Cohen as far as I can tell.  But, still.

What happened to the rule of law?

Monday, July 22, 2013

Same Ole; Same Ole

So what is the New York Times offering up this morning.

First, European sovereign debt continues to skyrocket to new levels -- both in absolute terms and as a percentage of GDP.  Guess the bailout is working, if more debt is the goal.  Meanwhile the long running recession in the Eurozone continues unabated with no end in sight.

What about the US?  Economists are now busily reloading their economic forecasts, according to the NY Times this morning, to accommodate much slower economic growth in the US than they anticipated previously.  The latest consensus forecast -- 1.5 percent.  That's barely a pulse.

Meanwhile the same article puzzles over why this is such a jobless recovery.  They should be reading my blog.

Here's what they are missing:  employers do the hiring.  The Times (and the Obama Administration) don't seem to get that.  Along with their main cheerleader, Paul Krugman, the Times believes that government borrowing and spending is all it takes to convince someone to hire employees.  After five years of this, you would think they would see the folly of their ways.

The coup de grace this morning is, of course, the NY Times' coverage of Detroit.  Think of Detroit as a snapshot of the American future -- promises abandoned, hopes crushed, politicians running for cover, unions screaming for justice, and no money left in the till.  NY Times can't seem to figure out how Detroit came about (especially while the auto industry's profits are soaring).

Same ole NY Times.

Saturday, July 20, 2013

Denial in Detroit

Detroit's problems are not the fault of the decline of the auto industry -- an industry that is, in fact, on a bit of a roll these days.   Detroit's problems are the same problems that plague Illinois, California and the US Treasury -- promises paid for with ever increasing levels of promises and debts.

Detroit's problems were compounded by corrupt and incompetent politicians, which are a staple of modern big city government in the US.  Citizens vote for these folks, so there is some justice in the fact that these cities are all collapsing fiscally.  The absurd notion that taxing a few rich people can solve a city's problems simply matches a similar absurd notion at the national level.  (Taxing a few rich people is mainly a way of having rich people move to friendlier places).

No defined benefit pension plan is ever going to survive.  Social security is a defined benefit system .  It won't survive either.  Any system that makes future promises without any means of payment is not going to make it.  Detroit is just the beginning; Chicago can't be far behind.  And yes, Virginia, you will have your day in the bankruptcy court as well.

All of those defenders of defined benefit systems forgot to ask what happens when there is no money to pay the benefits.  Is the great advantage of a professional investment process worth much when the system can't pay the benefits?  Even bad investments by individuals in defined contributions systems would have been way better for Detroit pensioners than the outcome that is headed their way.

By the way, it is worth noting that it is not possible to be on a financial loss if you own a typical index fund.  Not possible.  How's that?  Well, as of Thursday's close, the stock market has never been higher. 

For all of the villification of Wall Street by the Obama Administration and the media, it turns out that a simple buy-and-hold strategy by ordinary investors is a ticket to wealth that has been and is available to everyone.  I bet a lot of Detroiters now wish they had had the opportunity to opt out of the defined benefit system and invest their own money, their own way.

Not to mention that if you have a defined contribution plan and you die, your children can inherit the assets, something that cannot happen with defined benefit and and its twin -- social security.

Just like ObamaCare, promises are made that politicians have no intention of keeping.  But, the media pretends that these promises are true.  Detroit shows us the reality.

Wednesday, July 17, 2013

The 1970s Without the Inflation

We are now entering a long term period of economic stagnation that is reminiscent of the 1970s.  The only real difference is that inflation is subdued today.  The term "stagflation" came to prominence as a description of the 70s economy, as inflation soared toward the end of the the 1970s.  Ronald Reagan rescued us from all of that after his election in 1980.  How soon we forget.

Inflation, of course, is only temporarily subdued.  The only way to retire our absurd debt levels is to inflate our way out of them.  That's coming.

For now, we live in world of never-ending promises of things that cannot possibly come to pass -- medicare, social security, ObamaCare, state and local pension funds.  All of these things will run out of funding within the lifetime of those now reaching adulthood.  As politicians dream of even more things to promise the citizenry, the funding for the existing promises is rapidly drying up.

Meanwhile, a dwindling percentage of Americans are actually working these days.  While records are being set every day in the percentage of Americans on welfare, on food stamps, on disability, the percentage of the economy devoted to the free market is shrinking. 

The culture is following suit.  Think of the last time that you watched a television show where the bad guy wasn't a businessman or woman -- polluting the environment, stealing from unwitting investors, or fleecing someone in a novel way.  Who are the media heroes?  -- the government or the non-profit world (or media).

Making a profit is viewed with suspicion in our modern American culture.  Unfortunately, that means creating wealth and hiring folks is tainted with the same brush.  There is a certain consistency here, since working for a living is losing its hold on the American lifestyle.

Tuesday, July 16, 2013

"We're Recovering"

It is now mid-July of 2013, more than 4 1/2 years since the financial collapse and still we hear the phrase: "we're recovering."  How long are we going to hear that?

Below 2 percent economic growth and almost 8 percent unemployment means that the US economy is paralyzed.  The Obama Administration seems to have thrown in the towel on the subject of growing the economy.  Right they should!  The Administration policies, piled on top of the policy history of the past fifty years, virtually guarantee that the vibrant economy of the Old USA is not in our future.

There are bright spots -- autos, housing, energy -- but there are always bright spots.  What is missing is small business vitality.  That's gone and not coming back until folks figure out how to get around the mass of regulations and taxes that bedevil the American economy.  Other than outsourcing, it is not clear how to avoid the strangling effect of American regulatory policy.  As for employment, hiring anyone seems downright irrational, given current tax and regulatory policies.

The Obama Administration has reduced the expectations of most Americans to the kind of future that Europeans now have -- stagnation, limited opportunity for the young, guarantees for the oldest demographic that are coming apart at the seams, and debts that no one has any intention of honoring.

So the phrase "we're recovering" is getting tiresome.  We're not recovering, we're changing.  The quasi-socialism that has supplanted free enterprise is preventing a serious recovery like the one we had in the 1980s.  The "bad old days" were actually "good old days" as Americans are learning to their dismay.

Friday, July 5, 2013

The Real Message in Egypt

The Egyptian economy has collapsed.  This was a process that began with the 'Arab Spring' and accelerated with the election of Morsi, deposed over the weekend by the Egyptian military.

What this shows is that the average Egyptian, Islamist or not, prefers to have food, shelter and safety to political ideology.  Democracy doesn't mean much of anything if there are no free institutions.

The US foreign policy is not helpful here, because the US government is busily dismantling free institutions as a cornerstone of its own domestic policy.  The US can hardly be expected to promote free institutions -- a free press, for example -- if it doesn't believe in free institutions on its own home turf.

A rule of law would be helpful as well, but current American domestic policy -- witness, the recent suspension of the employer mandate in the Affordable Care Act until elections are safely over -- is mainly a retreat from the rule of law.    Actions speak louder than words and the world is plugged in these days.

The right to start a business and provide for your family is all that the average Egyptian wants and the demonstrations that crushed the political power of Morsi were a testament to that desire.  Perhaps the Obama Administration should take notes.

The Next New Thing

Are you ready for this?  How about "unlimited vacations for all."  Paid for, of course. 

Check out the NY Times editorial page today.  These folks have launched their latest job-killing, economy-crushing plan -- unlimited paid vacations.

That should really entice employers to increase their work force.  The new idea from the left is to have employees on the payroll who, in reality, are always on vacation.

Check out today's NYTimes editorial page if you think this is a mirage.

Thursday, July 4, 2013

Affordable Health Care?

The truth on ObamaCare is gradually unfolding.  Two things are becoming increasingly clear: 1). Health care provision in the United States is going to deteriorate dramatically in the future because of the 'Affordable Care Act'; and 2). Health care costs in the US are going to escalate dramatically because of the 'Affordable Care Act.'.

You would think that the above two facts are inconsistent, but they aren't.  There are a number of parts of the Act that are driving 1) and 2), but they can all be summarized by the following:  The "Affordable Health Care Act" promises services but provides no real means of payment.   Sound familiar?  The same truth is why medicare and social security (and public pension funds) are on a pathway to insolvency.

The Obama Administration's decision to postpone enforcement on the 'large employer' part of the "Affordable Care Act" is an open admission that they don't want the public to see the true costs of the new laws and regulations.  Once the elections are past, then, they say, they will enforce the law.  The "Act" itself does not provide the Obama Administration with the wiggle room to postpone enforcement, but in the new Obama world of 'selective enforcement' of American law, the Obama Administration announced (in a blog message, no less) that they do not plan to enforce the large employer provisions until elections in 2014 are safely over.

The best health care system is a free market health care system.  The insurance industry should be free to offer whatever health insurance plans they wish, to whoever they wish to offer them to.....period.

Concern about the uninsurable can be dealt with in the same manner as is done with auto insurance for drivers that are not normally insurable.

There is no reason for the government to take over the health care industry in the US.  Just as with public pension funds and social security, the government promises to take care of its citizens, but, in reality, has made no plans to honor those promises.  Ditto for the Affordable Care Act.

Wednesday, July 3, 2013

Political Unity Collapses in Portugal

Enforcing austerity doesn't win much popular favor as the politicians in Portugal have discovered.  The center right government in Portugal has pretty much collapsed over the weekend.  Greece is also back in the news as it struggles to implement its own version of austerity.

No European government backing austerity will survive.  Germany's Angela Merkel will be the most prominent casualty as she faces the electorate next year.  Gone already are the political leaders of Greece, Spain, Italy, and France.  It won't be long before their successors are under siege as well.

The EU-ECB plan of increasing debt and forcing austerity on their populations has been a failure from day one.  The political unraveling of Europe was easy to predict and not at all surprising to watch.  The fear is that extremists of the far left will eventually assume power and Europe will become a different place.

Monday, July 1, 2013

China Slows

Asia is beginning to weaken.  Given the stagnation in the western economies, this is not good news.  Unemployment in the Eurozone remains above 12 percent and US unemployment rates have fallen only because of the massive shift of workers out of the work force.  Growth in the West is so slight as to be within the margin of error for measuring the data.  The only real global economic strength has been Asia and that may be ending.

Granted there are bright spots in the US -- fewer in Europe.  US housing is stabilized and there are pockets of feeding frenzy here and there in the residential market.  But, overall, there is still weakness.  Now with Obamacare looming and the unleashing of the EPA, things could easily deteriorate in the US.

While everyone watches the Fed, the real story is a micro story.  The mass of regulation, rules and additional costs that businesses face, even if demand were to increase, will keep a lid on economic expansion.  Debt problems will also limit the future of Western economies.  Too many promises, too few resources to deliver on those promises.

Fed activity is mainly important for inflationary expectations and pressures.  With a sick economy (made sick by federal policies since 2008), there isn't much inflation.  But there will be.  That's what the recent uptick in treasury rates is all about.

Friday, June 28, 2013

Moodys is Right On

Moodys released a report on state pension funds today that implied that such funds currently hold only 48 cents out of every dollar needed to properly fund their obligations.  Three cheers for Moodys!

For decades, state and local pension funds have released grossly misleading and inaccurate figures suggesting that they are better funded than is merited by the facts.  Politicians have acquiesced in this charade since it was inconvenient, to use Al Gore's phrase, to speak the truth.

The chief method of disguising the truth is to make over-optimistic assumptions about future asset returns and unrealistic assumptions about the contributions that will be forthcoming in the future.

Based upon false information, state and local governments have touted reforms that hardly make a dent in the real problems.  Virginia is a great example.  The so-called pension fund reforms enacted by the Virginia General Assembly and backed by Governor McDonnell were misleadingly hailed as a 'major' improvement in funding.  Nothing could be further from the truth.  By maintaining mostly a defined benefit system supported by optimistic and unrealistic assumptions, the Virginia reforms simply locked in concrete a failing system without any serious reform.

The only properly funded pension systems are defined contribution systems.  Period.  If you are a participant in a defined benefit system (social security is a good example), the best advice for you is to start saving as much as you can.  Your pension system is most likely in deep, deep trouble.

Thursday, June 27, 2013

GDP Revised Downward

Instead of 2.4 percent as originally advertised, the US GDP grew at a revised 1.8 percent during the first quarter of 2013.  Consumption spending fell off the cliff, which was unexpected.

So, the stock market rallied...big time.  Why?  Because the bad economic news suggested that the Fed might continue its bond purchases indefinitely.  "Long live QE3" was the rallying cry.

Meanwhile the President and his cronies were busily designing more strategies to lengthen unemployment lines: increase minimum wage, bury the coal industry, continue down the road on Obamacare, push for higher taxes, and stall the Keystone pipeline.

Nothing discourages this White House.  They will not likely be satisfied until unemployment gets back into double digit territory (so they can match their heroes in Europe) or until millions more Americans give up on working and move into disability or off into the black market.

On the ObamaCare front, the Administration is now recruiting Hollywood types and NFL superstars to begin a campaign to get young folks to sign up for ObamaCare health insurance, which will cost  the 18-25 set roughly twenty times the penalty for not signing up.  The premiums for young people are more then ten times what free market insurance would cost them.

There is some justice here, since young folks backed Obama's candidacy in overwhelming numbers.  Now, the young will find first hand what it is like to pay to subsidize others.  Don't expect the young to buy in.  Coffee house conversation is one thing; actually paying for ObamaCare is another.  They will not buy in.

Without the youth 'buy-in,' the ObamaCare numbers don't work.  But that's okay one supposes, since the so-called insurance exchanges mandated by the law are not in existence anyway.  ObamaCare is mostly an idea -- a terrible idea.  No one knows what the reality will be because no one in the Obama administration is doing anything significant toward implementation.  All of this will slam into the economy as the year progresses.

Between the coming of ObamaCare, higher taxes, the war on the coal industry, and the push for higher minimum wages, don't expect much improvement in the economy.  Even housing is going to struggle with the new regulatory environment which makes it border-line criminal for a bank to make a mortgage loan to someone who needs a mortgage loan.  Not to mention higher mortgage rates, which zoomed up from 3.7 percent to over 4.5 percent just in the last thirty days.

Meanwhile the stock market moves higher.

Wednesday, June 26, 2013

Unilateral Energy Disarmament

As the rest of the world gears up to massively increase their carbon footprint, Obama is moving to put the US out of the coal business.  That won't keep worldwide coal production from soaring.  It just takes the US out of the coal business.  Obama has made no effort at all to get global partners to sign on board.  Instead, the US is walking this plank all alone.

This is in keeping with the Obama strategy of strangling the US economy to gain accolades from the Harvard coffee houses.

Once again, American workers will bear the brunt of the Obama agenda.  It is not enough to have the worst economic recovery on historical record (at least since 1850).  Now, with Obamacare on the horizon, Obama provides one more nail to the coffin of American prosperity with his arbitrary EPA war on the American worker and energy user.

The route to third world status is paved with good intentions and truckloads of hubris.

Tuesday, June 25, 2013

Why Employment Problems Aren't Going Away

Suppose you had a business that would improve revenues by $ 60,000 per year if only you could add one additional employee.  Should you add that employee?

That depends upon what the employee costs.  It does not depend upon what you pay that employee.  Is there a disconnect here?

Yes.  What an employee costs in modern America is a far, far greater number that what an employer might pay that employee.

If you hire an employee these days, the costs, beyond salary, are enormous.  In some states these extra costs can make the overall costs nearly double the wage or salary that the employee is paid (before tax).  Why?

You can begin with social security taxes, medicare taxes and workmen's compensation.  If the company offers a health care insurance plan, you can add that in.  Under ObamaCare, you must add something in for health care insurance. 

What about complying with various federal rules?  OSHA?  Disability Laws?

What about potential lawsuits for "protected" employees?  If you hire females, minorities or anyone over the age of 50, you must reserve or insure against lawsuits (regardless of whether you are likely to win or lose such lawsuits).  Just defending yourself is expensive.  Often the litigation involves activities that take place between employees away from work and during non-work hours.  That is how absurd the "protections" are for employees.  But, the point is, they are costly to the employer.

Imagine that the employee who can help you increase your revenues by $ 60,000 per year requires a salary of $ 45,000 per year.  Whether you hire that employee will depend upon all of these other costs that whittle away the $ 15,000 margin of profit.  If your business is located in California or New York, the "extra costs" typically exceed $ 25,000 per employee.  At $ 25,000 in extra costs, the total costs to an employer become $ 70,000.

Would you pay $ 70,000 to add an employee that could increase your revenues by $ 60,000?

It's worth noting that the "extra costs" are relatively less for highly paid and highly skilled employees, which explains what so many high income Americans don't care if low income employees are priced out of the market by these extra costs.  Greenwich, Connecticut votes left.  For good reason,  Practically no one who resides in Greenwich is priced out of the labor market by these "extra costs."

The losers in this story are the lower skilled employees, the minorities, the single moms and older workers.  These policies that encourage lawsuits and saddle employers with health care costs, retirement costs, unemployment costs and the like dramatically reduce the employment prospects of "protected" employees.

No wonder employment is growing at the slowest rate in American history during a period of economic recovery.  Don't expect things to get much better.  This is a micro problem, not a macro problem.

Monday, June 24, 2013

Elizabeth Warren and the Minimum Wage

The newest Senator from Massachusetts is Harvard faculty member -- a native American according to her resume (as opposed to her true heritage) -- Elizabeth Warren.  Her main claim to fame is villifying Wall Streeters for lining their pockets, a practice she seems especially adept at.  No wonder she notices it in others.

Senator Warren was singing the praises of the minimum wage last week during Senate hearings.  According to Senator Warren, increasing the minimum wage actually increases jobs.  Employers, I presume, get excited, knowing that employees now cost more than before and therefore expand their hiring.  I guess that's Senator Warren's logic, since she didn't offer any logic during the hearing.

Using Senator Warren's logic, I propose we cut to the chase.  Increase the minimum wage to $ 1,000 per hour.  That way, it will impact fat cats like Senator Warren, not just minorities and high school graduates. 

People like Senator Warren have a noblesse oblige approach to the unemployed.  Let them eat cake (or better yet, raise the minimum wage).

Employers really are a silly lot if the they behave as Senator Warren thinks they behave.  Wonder why they didn't think of raising wages themselves so that they can then offer more jobs?

Warren's absurd statements should be good fodder for a comedy show not a Senate hearing.

Wednesday, June 19, 2013

"Our Work Is Not Yet Done"

So said President Obama speaking in Berlin earlier today.  The president referenced unemployment and poverty as items left undone.

What the president meant, of course, is there is more for big government to do.

It was appropriate that the president's venue was Europe.  Europe, by policy, has ruled out any hope of full employment or prosperity.  Creating 'justice' and 'fairness' in the labor market has meant that, for European youth, there is no economic future.

Unemployment is above 12 percent, on average, across the Eurozone and over 25 percent in the hardest hit areas.  Youth employment (18-25) is rarely below 25 percent even in the best of times in Europe.  This is the new European reality.  The Eurozone GDP has been mired in recession for more than two years and there is little prospect for the European recession to end.

America is learning the European way.  The unemployment rate in the US is kept below double digits only by the fact that millions of Americans now consider their own job prospects so hopeless that they have given up looking for a job.  That means that millions of Americans are no longer counted in the unemployment data. 

US GDP is growing almost imperceptibly.  That is not likely to continue with the Fed finally reversing course on bond purchases and the looming implementation of Obamacare.

So, what is left for government to do?

If markets were free, Europe would have an unemployment rate below 5 percent, as would the US.  Economic growth would exceed four percent in both Europe and the US.  But free markets are frowned on by policy makers and their admiring press.

But, Obama sees more to do.  Not a good omen for those looking to the future.

Friday, June 7, 2013

Crummy Numbers - Big Rally

As expected, the economy continues to limp along.  The jobs report this morning showed 175,000 new jobs.  With net downward revisions for the prior months, the number was barely above the 150 K mark.  The result -- 7.6 percent unemployment unchanged.  Five years after the bottom, still a pitiful recovery.  But, that's good news for Wall Street because it suggests that expansive liqudity provision by the Federal Reserve will remain the policy.

For a while, higher stock prices will paper over the continued stagnation of the American economy.  But those looking for jobs and wage gains have all but given up hope in this tepid recovery.  The economy figures to soon be body slammed by Obamacare, so don't expect a healthy economy for quite a while.

Hoping for Bad Economic Numbers

World stock markets appear to be hoping for a bad employment number this morning.  Why?  They want Bernanke to continue QE3.  That's why.  Global markets reflect the new wave:  hope for bad economic news and expect a bailout.  This mentality encourages homeowners to borrow more than they could ever afford to pay back.  Student borrowers are encouraged to do the same.  Gaming the system by behaving economically foolish pays off because of the expectation that the government will step in.  At the end of the day, that is what Obamacare is all about as well.

In the bad old days, we expected free markets and incentives to fuel economic growth to raise living standards.  That is no longer the plan.  Now, it is all about slicing up the pie, while the pie no longer grows.  The taxpayer is assumed to have endless resources.  A bad assumption.

The 'entitlement mentality' has permeated every level of society and has infected global equity markets as well. 

Those who are hoping for bad economic numbers will likely get their wish.

Wednesday, June 5, 2013

The Equity Risk Premium Puzzle

One of the more interesting, yet to be explained, facts in finance is the fact that common stocks perform so well, as compared to less risky assets.  Treasury bills are earning almost nothing these days, but stocks are on a tear.  Why?

The same pattern has held historically.  The gap between what stocks earn and what much safer assets earn has been much, much bigger than could possibly be explained by aversion to risk.  Something more is afoot.

The question is front and center today.  Usually the question is posed as: "why are short term rates near zero, but other assets -- stocks, housing, e.g. -- doing so well.  Why don't people simply shift from treasuries to stocks and housing?"  Apparently folks are doing just that, but not by enough to narrow the return gap.

You could argue that there is not enough investment by ordinary folks in stocks.  That means that stock prices never get quite high enough to deflate their long run return prospects.  But, what about housing?  It is hard to believe that a similar argument would apply to housing.

I'm no fan of the equity market these days (I became bearish at 1391 in the S&P and the market is 15 percent higher than that today).  But, long run, you can't beat equities.  You just have to somehow ride through the rough patches, which may lie just ahead.

Tuesday, June 4, 2013

Bad News is Good News

Stock markets rallied yesterday upon learning that US factory activity plunged to new lows.  The factory activity index reached a low of 49, where anything below 50 is considered a sign of economic contraction.  Three cheers!  Weak economic news means the Fed will continue its QE3 purchases of more than $ 80 billion of debt each month.

Stock market mavens no longer hope for good economic news.  That seems an unlikely prospect.  Instead weakness suggests more aggressive Fed activity, so market prognosticators stay tuned in to see how bad it can get.  The more the economy worsens the better.

Maybe the Obama Administration is long the stock market.  If so, that might explain policies that seem designed to prevent the economy from what should have been a strong economic recovery.

So, instead of jobs and economic growth, we get higher stock prices.  At least for a while.

Friday, May 31, 2013

Europe and Its Politicians

Europe's unemployment rate increased once more -- now at 12.2 percent.  This is the highest level since data collection on European unemployment began in 1995.  Expect new records ahead.

Too bad if you are young and live in Europe.  The unemployment rate is above 25 percent for those under age 25 almost everywhere in Europe and is well above 40 percent in places like Spain and Italy (lets not talk about Greece...their data, at this point, is probably suspect).

Meanwhile, the IMF has noticed that taxpayer bailouts mainly enrich hedge funds.  Why?  Because after sovereign debt collapses in price, hedge funds come in and buy it for 20 cents on the dollar and then sit back to wait for the bailout.  So, who wins.  The average taxpayer simply transfers large amounts of private wealth into the coffers of rich hedge fund tycoons.  Great policy!

It is now dawning on the IMF that restructuring sovereign debt (meaning a controlled bankruptcy) is a far better idea.  It puts the losses where the losses belong and doesn't end up using taxpayer wealth to subsidize hedge funds.  Wonder what took the IMF so long to understand what has been painfully obvious since this whole process began?

The assumption that Europe's problems were temporary and could be solved by taxpayer bailouts was an absurd assumption.   Just one look at European government spending and government revenues would convince anyone with a modicum of common sense that Europe's debts are unpayable.  There is no way out by the simple expedient of 'temporary' bailouts.  The numbers don't work and the sooner that is acknowledged the better.

Now that hundreds of billions of Euros of ordinary Europeans citizens' wealth has been siphoned off into the pockets of hedge funds by these absurd bailout policies, the IMF shows signs of waking up.  It's a bit too late, unfortunately.  Europe's problems are now far worse.  If Greece has been permitted to default on their sovereign debt four years ago, Europe would now be in a much better place.  But, politicians stepped in. 

The only way to reform Europe is to begin the process of controlled bankruptcies across the entire Eurozone.  It will be painful.  But, there is no choice.  Europe will end up with either a controlled bankruptcy or an uncontrolled bankruptcy.  That's the real choice.

Thursday, May 30, 2013

The Significance of the Smithfield Acquisition

Chinese food giant Shuanhui  announced the purchase of Smithfield Foods this week.  This is a salient example of a process that has been underway for many years.

If one country has a 40 percent savings rate and another country has a zero percent savings rate, the country with the larger savings rate will, in time, buy all of the assets of the country with a zero savings rate.  That process is underway.

The US has had no net savings for several decades.  The reason for the absence of savings is twofold: 1) the private sector doesn't save because most Americans see no need; after all, the government guarantees income security and health care into old age (social security, medicare, medicaid); why bother to save (the Obama administration's recent suggestion to begin taxing IRA's provides some additional reasons for Americans to avoid saving); 2) the government sector is a big, big dissaver (that's what fiscal deficits are all about).

But America has investment spending.  Who provides the savings for this?  Foreigners.  Foreigners pay for this by buying up US assets.  Every year that passes, Americans own a smaller percentage of American stocks, American housing, American office buildings, etc.  Eventually, we will own nothing in this country.

Government policies that actively discourage savings work.  They are working now.  (Obama policies that actively discourage hiring work as well.  They are working now.  You get what you encourage and you lose what you discourage).

Monday, May 20, 2013

The Significance of the JP Morgan Fight

For the past 100 years, small investors and lower income Americans have been able to invest in public securities and make huge gains.  No one with a diversified portfolio of American stocks today has a loss.  More remarkable, anyone who has held on for twenty years or more has huge, huge gains.  And this same statement is true for nearly all twenty year periods since the 1930s (eighty years ago).

The success of the public markets has provided a way for folks without access to financial acumen to take on capital risk and be successful.  You would think such markets would be applauded.


Here comes the left.  First Sarbanes-Oxley was passed to make sure that small companies faces huge hurdles in taking their firms public.  Then along came Dodd-Frank, a creature of the Obama Congress, that continued the process of crushing public companies with mounds of mind-boggling regulations.

The final coup d'etat is now underway in the JP Morgan struggle.  If "shareholders" force JM Dimon out as Chairman of the Board of one of the most successful companies in world history (a company that has greatly enriched its shareholders), the public will pay the ultimate price.

And, who are these "shareholders" that would topple Dimon?  They are the 'agents' who, in theory, represent shareholders -- trustees who run endowments, pension funds, foundations.  The vast majority of these folks don't like free markets and seem upset by the prospect of lower middle income folks having a path to wealth through the public markets.

The real shareholders are workers and taxpayers who directly and indirectly provide the funding for these endowments, pensions funds and foundations.  They have no say at all.  They certainly wouldn't vote to lower their future retirement income, which is precisely the direction their trustees are pursuing.  In the name of 'corporate governance reform,' these trustees are destroying the access that ordinary citizens have to public markets.

So, topple Dimon and crush public companies and bend them to your will.  That is the plan of the leftists who dominate pension funds, endowments and foundations these days,   That ordinary Americans and real shareholders will have to pay the price for this nonsense is the great tragedy.

Ultimately, if the public market can be crushed, ordinary Americans will be forced to look to the government for their retirement, assuming the government has anything left at that point. 

Sunday, May 19, 2013

Why IRS Scandals Will Never End?

The tax laws and IRS enforcement efforts are guaranteed to result in political favoritism on a grand scale.  Why?  Because they are complicated and ambiguous.

The American people do not understand the tax laws in their own country.  One suspects that tax specialists don't understand these laws either.  That leaves a lot of latitude to regulators.  They can pick and choose, as we now know that they did in recent years.

Every so-called tax reform simply puts more complicated things into the tax laws.  

The income tax needs to be abolished.  There is no generally agreed way to define income (that's the main reason why tax laws are so complex).  Even value-added tax concepts suffer from problems of definition.

Better to go to a uniform national sales tax.  That could be easily understood by all Americans.  The only way a national sales tax could become problematic is if there were exceptions (for food, medicine, etc.).  There should be no exceptions.

Imagine how much time and money could be saved by abolishing the IRS and substituting a national sales tax.  You can always make equity arguments, of course, but simplicity and transparency would be of enormous benefit to the average American.

We could rent out the IRS headquarters to a charter school.

Thursday, May 16, 2013

Meanwhile, On The Government Front

According to President Obama, we need more provide 'fairness' for the American middle class.  The latest series of scandals -- Benghazi, the AP snooping situations, and the IRS targeting of conservative groups, should serve to show why government is not likely to be the solution to the problem of getting the economy going again.

Government scandals are not new and are certainly not limited to the Democrats.  Republicans are just as willing to bend government to their will as the Democrats.  That's why government is not the proper place to put our trust.  Our trust should belong in the free market, not in the bureaucrat, who may have another agenda.

Regulators can have a will of their own and it is very hard for the average citizen or company to fight them, especially when the regulators are willing to bend the law.

Free markets don't have political biases.  Free markets are all about individuals trying to make a better life for themselves and their families through their own efforts.

Government is about taking from one person by force and giving to another.  Those on the receiving end typically vote for politicians willing to do pretty much anything to demonize their opponents.  Again, Republicans are just as likely to do this as Democrats. 

Health care and pretty much every other endeavor should be provided in the free market.  The government should butt out.  By having medicare, medicaid and Obamacare, the US virtually guarantees that health care will be doled out according to the whims of the ascendant political party and the losers will pay and suffer the indignities of a disastrous health care system.

A good example of this is education.  Look where government employees and politicians get their education.  Then compare that to where the children of the middle class get their education.  This is the outcome you get when government is providing the service.

Pretty much the same applies to all of the provisions of government services.  The free market delivers best.  The government, ultimately, is mainly a purveyor of corruption.  Witness the current plight of the Obama Administration.

Wednesday, May 15, 2013

Are You Still Unhappy With Wall Street?

Those who invest in the US stock market have nothing to complain about.   Stocks are on a tear in 2013 and have produced returns north of 8 percent annually over the past 100 years.  What else does that well?

It has been almost impossible to avoid a lush retirement if one simply salted away money into an index fund regularly over the past 40 years.

So why do you continue to hear that Wall Street cannot be trusted and why do Congress and the Administration continue to try to crush Wall Street under a sea of litigation, regulation, and hyperbole.?

Will we really be better off without Wall Street?  The average American has had the rare ability to simply plump his money down into an index fund and retire in splendor ($ 2,000 salted away in an IRA annually produced over $ 2 million in 40 years).  I guess this kind of independence is too much for politicians to bear.

No one who has ever purchased an index fund at any time in history and still owns it today has a loss.  In fact, it would be hard to find anyone who hasn't made an enormous amount of money in their index fund.

But, give Obama some time.  Besides bludgeoning Wall Street into submission, his administration has sounded the first bugle in its war against IRAs.

Look for more of this.  Obama will leave no stone unturned in his war against America's middle class.  The war against Wall Street is designed, one supposes, to prohibit the average American from funding his retirement safely and force more Americans to fall back onto the US government for their retirement.

Friday, May 10, 2013

Jamie Dimon's Lament

Shareholders will vote soon.  Right.  Wrong.  Shareholders typically have no idea that they are shareholders.  Shareholders' agents -- pension funds, endowments, foundations, money managers -- these folks vote the shares, acting as agents for shareholders.

What do these agents think?  They think that capitalism is fundamentally flawed and that corporations spend too much time seeking profit opportunities.  Instead, public companies should be more concerned with 'activism.'

How does this help the ultimate shareholders?  It makes them poorer.  Retirement income is lowered and assets are frivolously wasted by the so-called agents.

But, what do the agents care.  It doesn't affect them in the slightest. 

In the name of corporate governance reform, these 'agents' are trying to impose an outside (of the company) Chairman of the Board for Citigroup, replacing Jamie Dimon and pushing Dimon to a subsidiary role.  This would recreate the corporate governance structure that prevailed at Enron (and others) before they famously slid into a scandalous bankruptcy.

JP Morgan is one of the best performing large financial institutions in the world.  Shareholders have been richly rewarded for the past five years by owning stock in JP Morgan.  So, what to do? 

Make a mountain out of a mole hill out of a $ 6 billion hedging loss by the great whale!  What a waste of time!  That loss did not keep JP Morgan from producing huge income and income growth, even in the same time period as the $ 6 billion loss!

So, what's the right answer? Decapitate JP Morgan.  Maybe, we can create another Enron.

The move to replace JP Morgan as Chairman is anti-shareholder.  If successful (and it will be ultimately), it will weaken JP Morgan, make retirees poorer and less able to cope financially, and enrich politicians and wealthy social activists (and their foundations and endowments).  It will also serve to continue to undermine free markets and common sense.

Thursday, May 9, 2013

Cantor Off Track

Eric Cantor has mostly good ideas, but his latest effort at appearing 'kindler and gentler' is a good example of modern Republican policy initiatives at their worst.

Fearing the appearance of always saying no, Republicans like Cantor look for ways to push 'feel good' concepts to compete with Democrat 'feel good' concepts.  Cantor's bill to provide for time off instead of cash for overtime pay is a good example.  What Cantor should be doing is trying to repeal the overtime laws, not make them even worse.

Why is the government defining overtime?  Why isn't that something that should be worked out between employer and employee?  Why presume that one size fits all?  Arranging overtime should be strictly a discussion between employer and employee.  Government bureaucrats should take a hike.

By introducing legislation like this, Cantor joins a long list of Republicans that seem willing to outdo their Democratic brethren in pushing the government into more nooks and crannies of areas that should be left to private citizens.  The government should butt out and Cantor should know that.

Saturday, May 4, 2013

Hold The Applause

The stock market roared on Friday, relieved, one supposes, that the onset of a new depression has not yet begun.  A paltry 156,000 new jobs were created in April, which, normally, would be bad news.  But previous month's revisions gave 2013 a monthly average of over 200,000 jobs created per month.  That was better than previously thought, but is dismal and inadequate to reduce unemployment unless folks simply quit looking for work.

Since Obama took office, 9.5 million Americans have given up looking for work.  Why bother, when there are alternatives?  Besides, the Obama Administration and the Congress have made it almost un-American for businesses to hire anyone, so why not go with the flow.

It's pretty amazing that the pitiful record of the Obama Administration on the economic front has now become acceptable.  Europe has gotten use to the spectacle of double digit unemployment and widespread economic stagnation.  It looks like America is following suit.

Thursday, May 2, 2013

Keynes was right: rate cuts don't work

Today the ECB lowered their lending rate.  They are moving toward the US Federal Reserve effective target of zero interest rates.  It's done nothing for the US, why should it offer any hope for Europe.

Keynes argued persuasively in the 'General Theory' that, absent the 'animal spirits' of entrepreneurs, lowering interest rates may have little or no effect on a stagnant economy.  He was right.

Lower rates don't make an employee that is paid $ 50,000 in wage and salary but costs $100,000 to hire (because of government) worth doing.  You can subsidize rates --make them negative -- and it won't matter.

An economic policy that confiscates profits from businesses, pushes labor costs to a multiple of what the employee actually receives in income, arbitrarily outlaws important free-market economic initiatives (Keystone), and rewards political cronies (Solyndra) is not likely to produce economic growth quite apart from the level of interest rates.

Tinkering with Fed policy might matter if the other economic policies were not in place.  But, the other policies are in place and they matter.

With an Administration fighting a daily war against free markets, the economy is not going to go anywhere.  The economy needs a return of  'animal spirits' in the business community, as Keynes argued.  Absent that, expect more of the same dismal economic news.

Wednesday, May 1, 2013

From the European Front

While yields on Italian debt are lower, the rest of the economic news continues to get worse.  Unemployment in the Eurozone reached 12.1 percent on average according to figures released this week, while major strikes and employee walk outs plague Greece, Spain, and France according to today's NY Times.  The European economy is still in free fall.

Surprisingly, you hear almost no news about the European economy other than self-serving statements from Euro-officials about how the crisis is over.  The crisis is not over; it is deepening.

Politically, Europe is moving toward the extremists on the right and on the left.  The European center, devoted to big government and the welfare state, is losing credibility with voters. The great European experiment has run out of (other people's) money.  Now the day of reckoning is at hand.

Americans traveling in Europe report increasing street crime, especially in frequently-visited tourist areas.  Life is changing in Europe and it is not getting better.

Americans should pay attention.  We are on the same path.  The next shoe to drop in the US will be Obamacare.  When Americans realize that they are paying for insurance and health care that they cannot afford, do not want and do not need, the rebellion will begin here.  US debt is on an unsustainable path and the economy is weakening.  The stock market and improving home prices are about the only bright spots.  Employment gains have corroded and GDP growth is disappearing from view.

The American media does not tell this story and glosses over the hard facts on the ground.  But the media will become irrelevant as the facts on the ground will eventually overwhelm a fawning media.  The American economy is getting worse and Europe is headed for a depression.

Friday, April 26, 2013

This Is As Good As It Gets

The GDP announcement this morning for the first quarter of 2013 was 2.5 percent, well below the 3 plus estimates that economists were expecting.    This will not be the first disappointment.  Folks like Jim Cramer on CNBC can't understand why businessmen are reluctant to expand capital equipment and hire employees.  That's because Cramer is a media celebrity not a businessman.

If Cramer were even remotely aware of the actual business climate that ordinary folks have to contend with, he would know what the problem is -- over regulation, absurd tax levels, Obamacare, EPA regulations, Dodd-Frank.  It is almost as if the Obama Administration has declared war on the US economy.  Anything that smacks of business success is viewed suspiciously by the Administration (and by Jim Cramer, I might note).

The talking heads can't figure it out, but the economics are simple.  If hiring an employee at a $ 35,000 salary means it costs you $ 75,000 per year, you are not going to make that hire.  End of subject.

Why the simple economics of hiring and firing eludes people like Jim Cramer is amazing.

There is no reason that health care costs should be borne by employers. reason at all.  But one thing is certain, if employer bears the cost of health care, they are going to be reluctant to make new hires and anxious to reduce their existing work force.  Why is that hard for the Obama fans like Jim Cramer to figure out?

Citizens should finance their own health care.  That would keep costs down and make the market efficient, as in the provision of anything else in a market economy.  The only way to get health care costs to spiral out of control is to get the government involved. 

There is so much double talk in an attempt to circumvent the obvious facts on the ground.  The economy is grinding to a halt in Europe and in the US.  The West is in deep, deep trouble.  They have drunk the nectar of socialism and wealth redistribution.  All of that feels good for a while until the economy begins to fall apart.  We are now witnessing the collapse of the West.

This is not going to get better.  It is going to get worse.  Economic policies in Europe and in the US are not designed to make economies grow.  They are designed to make economies fair, according to the fairness whims of the political elite.  That kills economic growth.

So, get used to it.  This is as good as it gets.

Wednesday, April 24, 2013

Ignorance and the NY Times

Eduardo Porter, an "economics" columnist with the NY Times, has penned an article this morning in the NY Times that purports to address the lack of solutions to today's economic stagnation.  Porter reports on a recent IMF sponsored conference of economists that was supposed to address problems posed by the "financial crisis of 2008."

According to Porter, the 2008 collapse discredited policies of lower taxes and de-regulation.  You have to wonder what world Porter lives in.  Was Sarbanes-Oxley an example of the deregulation?  Were the Congressionally-imposed strengthening and rule-making for Fannie and Freddie examples of de-regulation?  Exactly what is Porter referring to?  Or do facts matter anymore when you have a convenient agenda ready?

Here is an example of the absurd conclusions that Porter draws in his article: "One lesson from the crisis -- first learned in the 1930s and corroborated in several contemporary analyses -- is that when interest rates lose their power to stimulate the economy, additional government spending can help generate real growth."  Really?  Could have fooled me! 

Government spending in the US has exploded since 2008, as well as the national debt.  And what have we gotten for this explosion in government spending?  Economic stagnation -- the worst economic recovery since?  Guess what -- the 1930s.  Yes, the last time government spending was tried as a solution was the last time the economy failed, for a genertion, to recover from an economic downturn.

The way out of our current quagmire is easy and historically established. Go back to the early 1980s.  Drastic tight money, high interest rates, major tax cuts and de-regulation spurred the most dramatic economic recovery in world history.  All of this took place in the US under President Reagan in the bad old 1980s.  The Clinton years benefitted from these policies, but Clinton couldn't handle prosperity.  He and a Republican Congress raised taxes which began to produce economic contraction by mid-2000.  Further regulatory nightmares, led by Sarbanes-Oxley, the dramatic push by Congress to expand Fannie and Freddie set the stage for the 2008 disaster.

What has been discredited is the idea that expansive monetary and fiscal policy can substitute for free market capitalism.  The facts have turned naive Keynesiasm on its head.  Free markets produce economic growth.  Governments produce economic stagnation.  The IMF wasted its time holding their conference last week.  They would have been better served reading some economic history and learning the facts.

Sunday, April 21, 2013

Even the WSJournal Doesn't Get It

David Wessel has a lengthy article in this morning's Wall Street Journal about the future direction of the world's economies.  He begins with Europe and then walks the reader through the US, Japan, China, and the rest of the world.  In every case, Wessel's discussion is about government policy.

The overall theme is that economic recovery depends upon government policy, discretionary policy at that.  He discusses the twists and turns of policymakers as they, according to his story line, attempt to guide their economies to the promised land.

But, that is exactly the problem.  Once government policy becomes the determinant of the economy's future, the economy no longer has a future.  The proper role of government in a free market is to lay down the rules of the road and then to get out of the way.  Increasingly, a government of rules is not to be found.

Instead we watch daily as policy makers, who frequently have a very limited knowledge of economics, move this way and that in a vain attempt to get economic growth going.  Such things cannot work.  They never have worked and they never will.

Economic growth occurs when businesses make capital expenditures and hire workers to create product.  They aren't going to do that if they have to spend their time wondering what the next move is going to be by their government.  Government action is detrimental to an economy's future.  Government inaction and consistent application of the rules of the road is the ticket to prosperity, not frenetic political activity and polarizing rhetoric.

If Obama had played more golf and forgotten about the stimulus, Obamacare and Dodd-Frank, we would probably be looking at 4 - 5 percent unemployment today and economic growth rates of 3 1/2 to 4 percent.  Unfortunately, Obama thought he had something to contribute.  So, we stagnate.  that's the price of a responsive government.

Wednesday, April 17, 2013

Taming the Beast

When an economy collapses, usually with the financial sector leading the way, everyone fears that it will not soon recover.  But, history tells us otherwise.  The numerous financial and economic collapses from the end of the civil war in the US up to the start of World War I took place during the fastest spurt of economic growth in US history.  The US economy had no central bank during this period and the government was so tiny that fiscal policy was largely non-existent.  Absent modern policy tools, what happened?

What happens, when government is not around to step in, is that economies recover on their own.  That's what the period from 1865 to 1914 teaches us.  It was during that period that the US overtook other economic power houses to become, by the end of the first World War, the most powerful economic engine in the world.  That is the outcome one can expect if the central bank is non-existent and if government fiscal policy is non-existent.

But what happens when government attempts to "tame the beast?" and "reform" the economy and the markets.  After the 2008 collapse, an unprecedented effort by central banks and governments took place throughout the Western economies.  Combined with aggressive "regulatory reform" to prevent future financial collapses, political actions by western economies have attempted to "tame the beast" of modern capitalism for the past 4 1/2 years.

And what is the outcome of all of this government action? -- economic stagnation and distress.  Economies that chugged along with 3 - 3 1/2 percent real GDP growth and 4 - 6 percent unemployment, now face zero real GDP growth and unemployment rates between 7 1/2 percent and 30 percent (Spain, Greece).

What next?  The beast has been tamed.  The furious fires of capitalism have been successfully tapped down by government policy.  Now, policy makers have abandoned any serious effort to get free markets going again and are focused on taxing rich folks.  That is the new agenda -- move more and more activities from the private to the public sector (think health care) and go after the wealth of anyone who played by the old rules.

We now have new rules.  Bond indentures (think GM, think Stockton) can be rewritten by the judiciary and by politicians.  Raiding government protected checking accounts are now policy tools for dealing with excessive sovereign debt (think IMF recommendations on Cyprus).  Nothing is safe from the wandering policy eyes of the Obama administrations and European politicans.  Even IRA accounts in the US have now become targets of the new political elite.

The beast has been tamed.  Look for the economies in Europe and the US to roll over.  In the US, the imposition of massive tax increases, major new hikes in employee costs (Obamacare), an onslaught of new EPA regulations, and blurring of the legal status of ordinary financial contracts (GM) is enough to snuff out the tepid recovery in the US.  Absurd policies designed to increase sovereign debt in heavily indebted Europe will put the nail in the coffin for Europe.  The future is not bright.

Saturday, April 13, 2013

Once Upon A Time

The American dream was, once upon a time, the idea that if you worked hard, postponed consumption, saved your money and invested it, you could live whatever lifestyle that you wanted.  The flip side was that if you failed, you paid the price for that failure.  That idea fueled the economic engine that made American the wealthiest country in the world.  Millions of people came to America, because of the freedom that the American dream represented -- the freedom to be who you wanted to be without the heavy hand of the government telling you what you could or could not dream.

We are now embarked, along with our friends in Europe, upon the journey to the American nightmare.  Political struggles, both in Europe and the US, are degenerating into class warfare, pitting higher incomes against lower incomes, and producing economies that no longer grow.  Massive unemployment is becoming accepted and commonplace.  The Eurozone unemployment rate exceeds 12 percent and American workers are leaving the work force to enjoy that leisure that an over-abundant "safety net" provides.

Freedom includes the freedom to fail, the freedom to make mistakes, the freedom to pay the price of your failure and your mistakes.  Once upon a time the discipline that was imposed by the freedom to fail provided the necessary incentives to succeed.  Taking away the freedom to fail with the heavy hand of government takes away the freedom to succeed.  It is not only the "too big to fail" that is the problem, it is the "too politically correct to fail" as well that eliminates the freedom necessary to make an economy successful.

Friday, April 12, 2013

Economists Who Think Incentives Don't Matter

I nominate Simon Johnson for an award as an economist who has managed to reach the remarkable conclusion that economic incentives do not matter.  He joins a long list of politicians who seem to think that government policies that take money from one group of Americans to give it to another have no effect on behavior.

Save and save and save and then find out that the government will take the proceeds of your savings away from you.  That's the message of the recent Obama message and Simon Johnson's column today in the New York Times.  Obama's new war on the IRA promises to slap the hands of any American who decided to forego that extra TV or car or who bought a house that they could afford, putting the money into an IRA account instead.

The new crime is saving, investing and accumulating assets.  According to Obama, that is un-American and he proposes bringing it to an end.  Somehow eliminating what paltry private savings the American economy generates doesn't seem to bother Obama and his economic advisers.  After all, I suppose, China can continue to supply whatever savings we need as the Chinese own an increasing share of American assets and Americans own less and less of their own country.

Meanwhile those who don't save and who splurge on consumer goods and purchase homes they cannot afford will continue to receive bailouts, special new program proposals from the Obama-led White House, and higher levels of dependency on government.  Already the number of Americans even remotely interested in working for a living is at a forty year low and the number of Americans collecting disability checks is at a record and a new record is achieved every day.

Reward the indolent and punish the thrifty and those with a work ethic -- that is the Obama mantra, ringingly endorsed by his adoring economists.  Simon Johnson thinks he hasn't gone far enough.  I suppose Johnson would like to raise the minimum wage to $ 100 an hour as well.  That should go far to eliminate poverty (at least for the handful of Americans who would still have jobs).

Thursday, April 11, 2013

Sanofi and the Future of France

Sanofi is a drug company with a research facility in Toulouse, France.  The facility needs to be closed.  It is a research facility that hasn't produced a new drug in twenty years and costs are prohibitively high in any event.  600 workers are employed there.

So, what happens when Sanofi decides to close the plant?  Mass demonstrations and a protracted legal battle.  In the end, Sanofi will be refused by the government and the plant will stay open, regardless of what Sanofi shareholders want.

So, what happens when another company is considering opening a plant anywhere in France?  They will think about Sanofi's troubles and look elsewhere.  Markets work and learn -- which is bad news for France, a country with a declining GDP and absurd economic programs.

Obama thinks that they are on the right track.  I guess it depends on what destination you are shooting for.