Wednesday, February 29, 2012

Selective Enforcement Once More

Prosecutors are now quietly leaking that they don't see any criminal activity in the demise of MFGlobal. Recall that MFGlobal fraudently looted $ 1.6 billion from customer accounts that were, by law, supposed to be segregated from the firm's own assets. Now, it turns out, prosecutors are leaking that this all seems to be an innocent mistake.

Interesting, after Goldman Sachs has been blistered over and over again by the SEC and by state prosecutors for activities that no one had ever considered anything other than ordinary market-making. In the brave new Obama world, Attorney General Holder and his cronies in state law enforcement invented new criminal activities where there were none, in order to make political headlines at the expense of Goldman Sachs.

But now, when former Democratic Senator and Governor John Corzine is the one whose hands appear to have dipped into the cookie jar, this all is being washed up as simply an innocent mistake. Never mind that innocent customers, whose accounts have been looted, were not protected by the Obama-led CFTC, too busy on political witch-hunts to provide for the simplest of their regulatory responsibilities.

If customer accounts at broker-dealers that are, by law, supposed to be segregated from the broker-dealers' own funds, can be looted any time the firm is run by folks friendly to the President, then no one's funds are safe -- in broker-dealers or in mutual funds either. The blank check that is being issued to Obama's cronies to steal from the public is just one more example of the collapse of the rule of law.

But, this time, the real economy will suffer. Gradually investors will begin to sense that their assets, held in broker-dealers or in mutual funds, are not safe from looting by the people running those firms. So long as the leadership of these firms, like Corzine, worship at the Obama shrine, the investors will be unable to pursue criminal wrongdoing and their losses will be simply chalked up to "innocent mistakes."

Monday, February 27, 2012

The Price of Energy

As gas prices careen toward $ 5 per gallon, we are reminded that fossil fuels are the only game in town. For all of the waste and corruption of the Obama energy policy, it is good old drill, drill, drill that provides any hope of slowing the increase in gas prices at the pump.

Obama seems perplexed. He notes that energy consumption is down. So, why are prices up? Is he aware of China and India? They use energy too. Guess what? They are going to keep pushing the demand for energy higher and higher. Even with oil at $ 300 per barrel, one wonders if Solyndra would have made it. This is the most naive administration regarding fundamental economics in the past hundred years. Somehow, they think a few windmills will get it done. It won't.

Sooner or later, even the Obama crowd will realize that the US must tap its fossil fuel reservoir, potentially the largest such reservoir in the world.

Higher prices at the pump has a partial offset in profits and jobs in the US energy sector. No doubt, the bad guys in the Middle East will get their share as well. But, all in all, the only thing Americans have to fear regarding energy supply is more bad policies from the Obama Administration.

Buffett as Buffoon

Becky Quick and Joe Kiernan took Warren Buffett to task this morning on CNBC for his hypocritical stance on income taxation. Joe suggested, as has Governor Christie recently, that if Warren is so intent on paying more in income taxes why doesn't he write a check. Buffett's response: his writing a check would not solve our deficit problem.

Interesting answer. Neither would putting a surcharge on "millionaires and billionaires." Raising taxes on the rich would not put a dent in the deficit problem that the US faces. It doesn't matter whether just Buffett pays up or whether he is joined by his rich buddies. It won't move the needle.

So, why won't he write a check and show the way if he believes that is the "right thing to do."

Why? Because, Buffett is a hypocrite. He wants to appear to be the good guy, knowing full well that all he has to do to avoid income tax is shift his assets around and have no taxable income at all and pay no taxes whatever.

If Buffett wanted to pay more taxes, the route is obvious. As Governor Christie put it so eloquently: "shut up and write a check."

Buffett likes to hear the sound of his own voice, but he isn't about to share any of his wealth with the US taxpayer. Let others do that, says Warren!

Kiernan went on to query Buffett about his love for big government and having the government deciding winners and losers in the private economy and invest taxpayer dollars in the Solyndras of the world. What was Buffett's answer? "The US has the greatest industrial machine on the earth," said Buffett.

Buffett, like a lot of the far left, gives the free market zero credit for the US economic engine. To Buffett, the government is the be-all and end-all of American greatness. No wonder he supports Obama.

He should write a check!

Wednesday, February 22, 2012

"The Rich are Bulletproof"

So spoke Meredith Whitney, bank analyst of some note this morning on CNBC. As Ms. Whitney described our current economic plight, she marched through one set of new regulations after another that are roadblocks set up to thwart the economic future of middle and lower income Americans, while noting that the rich are unaffected by all of the new Obama Regulatory regime.

Dodd-Frank and the Consumer Protection Agency are open assaults on the American middle class. It has now become much, much harder to get any kind of credit -- be it a mortgage, a home equity loan, a credit card, a pay day loan, whatever. The nanny state has decided that middle and low income Americans should take their business to the loan shark community. We've seen all of this before.

In the name of protecting middle and low income Americans, the Obama Administration has put middle America into an economic straight-jacket. Credit is the life blood of any economy, but by declaring war on those who issue credit to middle America, the Obama Administration is laying waste to the hopes and dreams of the average American.

It is a mistake to blame lenders when folks get in debt over their heads. Let people do whatever they want. People will learn. By declaring war on those who provide credit, American policy is making sure that people who need credit won't be able to get it when they need it.

This is one of the many terrible consequences of our new over-regulated economy.

Tuesday, February 21, 2012

A Silly Deal

The Greek bailout announced overnight is ridiculous and will not avert plunging the Greek economy into chaos. It will only be a matter of a few months until this deal will create political conditions in Greece that will shake up the Eurozone. There is simply no way the Greek citizenry will abide this deal.

Meanwhile Merkel and Sarcozy will take a victory lap for nothing. Note that on the bailing side is the IMF, of which the biggest single donor is the US taxpayer. So, Obama has stepped the US into this quicksand and dragged the US taxpayer in with him.

No one wins with this outcome. But, it will look like a win to the politicians ... for a while.

The only apparent winners are the French and German banks. But, their victory is only temporary until this deal unravels as it smacks up against reality.

Saturday, February 18, 2012

Myopia Reigns

A "Greek Deal" will be cheered by stock markets as taking the Greek issue off the table. But, does it? Will Greece honor the severe austerity embodied in any Greek deal? Not likely.

Politicians love situations like this. A patchwork solution that makes the long run problems far, far worse than simply ignoring the problem and letting nature takes it's course.

Greece needs a "workout," not a debt expansion and extension and austerity.

The Eurozone needs policies that promote economic growth and economic opportunity. European politicians are supporting policies that do the opposite. Default is not a bad thing. "Extend and pretend" is not a policy. It is a cop-out.

What is needed are two things: 1) a recognition that the high levels of debt in the Eurozone are not only unsustainable, they are unpayable; 2) the absurd "protection" and "entitlement" programs that characterize the European welfare model are inconsistent with economic growth and economic opportunity.

But, in the short run, the Tim Geithner mentality will reign, no doubt. A Greek deal is reminiscent of the famous "Emporer Has No Clothes" story. For a while, it works, but it has no chance of working in the long run.

None of this will matter for long as the Greeks will not live up to the austerity programs forced upon them by their politicians. The bailout will simply buy time for the present disastrous economic policies to continue unabated until discussion begins about the next bailout that Greece will need.

Thursday, February 16, 2012

Hopelessness for the Young in Europe

The New York Times has an excellent article today detailing the plight of youth in England. But, English youth are better off then the rest of European youth. Staggeringly high levels of youth unemployment, reaching 50 percent in some Eurozone countries, are creating a generation of drifting, aimless young Britons and Europeans with no economic future.

This is the natural outcome of government policies that guarantee the good life. The good life has to be paid for. The youth are victims of all of this. By making it virtually impossible to fire anyone, Europe has guaranteed mainly that no one wants to hire any young people. Why? If they don't work out, you can't fire them. So, why hire them in the first place?

Those who thought that the European model was the way to go or that every country in the world can "afford" health care for all of its citizens (and other "affordable" things that government can do), should take a good hard look at Europe today. It is a catastrophe and it is simply a question of numbers.

Economic recovery won't even do the trick given the arithmetic of the welfare state. But, economic recovery is not in the cards with government policies like this.

Take a hard look. This is America's future playing out before our eyes. It is easy to promise, and, for a while, it works. But, eventually massive debt and kicking the can down the road leads to economic chaos and disaster. Europe is paying the price for policies that keep the free market from working. The US is next up on this stage.

Romney on China

President Obama is likely to be re-elected by default. Mitt Romney, the most likely Republican nominee has penned an article on China in today's Wall Street Journal that is an embarrassment to good sense. Far from appreciating the significance of a China that has turned hard in the direction of free markets and away from the communist model, Romney has once again given voice to the know-nothing crowd.

Blaming China for American economic weakness guarantees that Romney really doesn't understand why the American economy is faltering. America's problems have nothing whatever to do with China and pretending that it does eliminates the possibility of promoting the necessary reforms to get the US economy back on track.

It becomes increasingly more difficult to see any real difference between Romney and Obama. That favors the re-election of the President.

Wednesday, February 15, 2012

Fair and Balanced Trade with China

Once again, President Obama has shown a lack of understanding of the simplest of economic fundamentals. Yesterday he reiterated his argument that Chinese trade policy is what causes our balance of payments problems. Nothing could be further from the truth.

The problem that the US has is that we have no domestic savings, but we do spend a significant amount on investment (plant and equipment spending, for example). Where do the funds come from to fund our domestic investment, since every beginning economics student understands that savings must equal investment?

If we don't save, then we must "import" savings from other countries. China has a private savings rate that exceeds, by some estimates, forty percent. Since China has an excess of savings and we have a dearth of savings, Chinese savings are "imported" to the US. This is the balance of payments problem, not some issue with currency valuation or Chinese import controls.

No amount of China bashing will ever reduce the massive US balance of payments deficit. Only if Chinese domestic savings collapses or if the US increases its own savings rate will the balance of payments move toward zero.

It is worth noting that all of Obama's economic proposals actually encourage Americans to save less not more by promising to take care of their health care, mortgage problems, old age, ad infinitim. Why save? Big government will come to your rescue.

Their are good reasons why China should get rid of import controls and let their currency freely fluctuate in value, but nothing China could do, short of lowering their domestic savings rate, can move the needle on the US balance of payments problem. We created that problem by our own policies that encourage people to save as little as possible.

Obama is not the only one who seems not to understand this issue. Add Romney, Newt Gingrich, Donald Trump, Tim Geithner, etc., to the list of folks that don't understand this simplest of issues.

Tuesday, February 14, 2012

The Volcker Rule -- Another Bad Idea

The Volcker Rule -- the idea of banning proprietary trading by investment banks -- is a terrible idea. This rule is designed as a response to the 2007-09 financial crisis. But, proprietary trading made no contributions to the financial crisis. This is simply one more punitive attack on Wall Street with unfortunate side effects for average Americans.

The problem is that in order to ban proprietary trading, you must define what you mean by market making and therein lies the problem. Market making is faciliting the purchases and sales of investors. The Volcker Rule requires no trade unless the other side of the transaction can be found. The bank itself is not permitted, under the Volcker Rule, to participate in any way on its own account to facilitate the transaction.

This is ridiculous.

The impact would be increased volatility and terrible transaction outcomes for traders and investors.

This reduced liquidity will adversely affect everyone.

Volcker's response: liquidity is a bad thing. Liquidity creates asset pricing bubbles.

Volcker's response shows that he really doesn't understand capital markets as well as he thinks he does. There has been a massive amount of research on liquidity and as yet no one has advanced the argument that liquidity creates asset bubbles. In fact, most research on this topic suggests exactly the opposite.

Andrew Sorkin reports in today's NY Times that JPMorgan's highly respected CEO (and Obama supporter) Jamie Dimon had this to say of Volcker: "Paul Volcker by his own admission has said he doesn't understand capital markets. He has proven that to me."

The country owes a great debt to Volcker for his management of the Federal Reserve in the early 1980s, but the "Volcker Rule" is a discredit to his legacy.

Monday, February 13, 2012

Sentiment is Changing

It's interesting how much people's views of the market's future is so dependent upon its recent past. There is not much new in fundamental news from last summer until today, but the stock market is up nearly twenty percent over that period and you can see the shift in sentiment that has taken place. People now see less risk in the stock market and better prospects for higher prices than last summer when prices were much lower.

So, what's new (other than higher stock prices). Europe is in worse shape than last summer. The US fiscal situation continues to deteriorate and the political environment has become even more toxic. The future of the bond markets looks worse than ever. There is a threat of war in the air in the Middle East. Unemployment is still above eight percent and employment growth is still the slowest on record for an economic recovery.

But, prices are higher, so everyone extrapolates.

My guess is that stocks will continue to go higher. Stocks are still cheap, but not as cheap as they were. I expect 2012 to produce US stock returns in excess of twenty percent, but we shall see. The smart money is still bearish.

Saturday, February 11, 2012

The $ 1.6 Billion Example

When you regulate everything, you regulate nothing. The recent MFGlobal disaster is just one more example of the failure of the over-regulation of the financial services industry.

Nothing could be more important than making certain that customer accounts are not commingled with their broker-dealer's accounts and looted in the interests of protecting the rich and powerful. Nothing! This is the most important regulatory function that the CFTC performs. And, how did it do? Total and complete failure, bordering on a lack of interest.

Meanwhile thousands upon thousands of new regulations proliferate. These new,stifling, regulations serve only to increase costs to consumers and protect the largest banks in our midst at taxpayer expense without adding one iota of protection for the hapless customer. The spirit of Sarbanes-Oxley and Dodd-Frank is punitive. Barney Frank is finally getting his revenge on the capitalist system. Who cares if the average American is the victim.

Meanwhile, customers who were told that their assets were "segregated" and protected by MFGlobal and by the CFTC regulatory protection are left with no protection at all as regulators were busy pursuing political agendas.

So, where is former Democratic Senator from New Jersey John Corzine who presided over this disaster? Is he to be protected as well. Is their no one to be held accountable when customer funds "go missing?" Obviously, this is not an issue the regulators are much concerned about, which gives one a pretty good idea of their priorities. I guess if you are a Democrat there are a different set of rules that apply.

Thursday, February 9, 2012

They Won't MakeThat Mistake Again

Several states led by California and New York (two states whose irresponsible spending is spiraling the states toward bankruptcy) have gleefully announced a settlement amounting to $ 26 billion from banks that made the mistake of lending money to prospective home buyers in the last ten years. That is pretty evil, I suppose. Imagine the temerity of providing a loan to someone who was buying a home. That deserves a whopping fine.

One thing for certain, banks won't make that mistake again. From now on, these banks will take care to lend only to those who they are 100 percent certain will pay them back, which means mainly people who don't need the loan in the first place. For the rest of the borrowing public, this settlement will make it much more unlikely that they will be able to borrow to buy a home in the future.

It is worth noting that the most irresponsible states in the US led the charge to tag the banks. Next they will complain that banks don't loan enough to underserved communities. They will be right. Who in the world would willingly loan to the underserved after experiencing these kinds of fines. No one.

Tuesday, February 7, 2012

Startup Act Is a Non-Starter

Republic Senator Jerry Moran and Democrat Senator Mark Warner have introduced another way of cluttering up the US Federal Tax Code -- the "Startup Act." (See their editorial in today's Wall Street Journal). This is another "targeted" tax measure that puts more pages in the federal tax code, is another bonanza for tax lawyers, is another way to pick winners and losers by using the tax code.

Warner, who never saw a tax he couldn't support or a new regulation that he couldn't back, is always positioning himself as a moderate. In fact, he and Nancy Pelosi think alike on everything of substance. Who knows how Senator Moran got duped into supporting this? But, Moran is from Kansas, after all.

Like all good ideas that get inserted into the tax code. This one promises major tax benefits to rich people like Mark Warner without any real hope of moving the needle for the unemployed or those at the bottom of the economic pile.

What is needed is true tax reform and simplification, not more clutter in the tax code with someone's next great idea. Great ideas get amended and amended so that only the Warren Buffetts of the world can truly derive any benefit. Meanwhile, the average American picks up the tab for the taxes that the truly wealthy, like Mark Warner, have no intention of paying.

If Warner and Moran wanted to do something for the jobs market, try eliminating minimum wage laws. That would provide more jobs quicker than any other measure that Congress could consider.

It's time the politicians stopped dreaming up new ideas to make the federal tax code worse and thought about returning to free market policies and reducing the reach of big government.

Sunday, February 5, 2012

Thinking About Debt

Lurking behind the good news of last Friday's employment numbers is the long running concern over sovereign debt problems in the developed world. Europe, the US, and Japan have unsustainable levels of national debt that get worse daily and there are no plans anywhere to deal with growing debt levels. There is conversation, but only conversation. No politician anywhere is willing to risk their political career by providing an honest assessment of the spiraling debt situations that the developed world faces.

Does this mean we are doomed and we should be storing up canned food in nearby caves?

The fear, of course, is that much of this sovereign debt will prove worthless and the collapse in values of the debt will be disastrous for the developed world.

Imagine the collapse of a stock market. In that case their is a real wealth loss of significance (just as a market bubble can create, if only temporarily, a real wealth gain).

But, debt is different. Debt is a zero sum game in a way in which other assets are not. If you owe money and can't pay it, sit down with your lender and restructure your debt, the gain to you is offset precisely by the loss to the lender. In the event of bankruptcy the bankrupt entity no longer owes the debt once legal bankruptcy is established. So, with defaulted debt, there is always a winner and a loser and one cancels out the other. There is no real net worth loss.

The only way that defaulted debt can lead to a net worth loss is if the lender has been pretending that there is no chance of a default -- not marking-to-market.

In the case of Greece, for example, the debt is trading well below 50 cents on the dollar, so that a default of 50 percent doesn't even penalize current bond holders, since the market would not give them 50 cents on the dollar anyway. But, one advantage of doing a workout for Greece is that now they don't owe the amount of debt eliminated in the restructuring. That is a plus for Greece and offsets the loss to its lenders.

Debt is different.

The point here is that if sovereign debt is restructured, the outcome need not be as disastrous as all the pundits think. It is only if these countries bury their head in the sand and refuse to proceed with restructuring, which is the route that Merkel and Sarcozy seem to be pursuing, will the exploding sovereign debt lead to catastrophe.

Pretending to have wealth that you don't have seems to be a national pastime in France. That should stop and the realities should be recognized for French and German banks who hold much of increasingly less valuable sovereign debt of Greece, Portugal, Spain and Italy. Germany and France will be forced, eventually, into nationalizing most of their major banks. Why not recognize the liabilities of these these banks now and proceed instead of a policy of "extend and pretend," patterned after the absurd policy antics of the the US government in 2008 and 2009.

As in most things, honesty and candor will lead to a good outcome, while obfuscation and hubris will only lead to disaster.

The realities of sovereign debt should be faced squarely in the developed world and the sooner that debt can be structured the better. Then, the developed world can rebuild their sagging economies and provide economic prosperity for their citizens, instead of the current plans for austerity and retrenchment.

Friday, February 3, 2012

Outstanding Employment Numbers for January

Big numbers for January! Plus 240,000 jobs for January plus 60,000 more jobs in revisions for December. This is a strong number. This is the kind of number that you would normally expect in an economic recovery. It's the first strong number of the recovery. Let's hope this continues!