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.