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.
Friday, June 7, 2013
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.
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.
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.
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).
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.
Nope.
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.
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.
Nope.
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.
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.
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