This final sketch - a tad delayed given Santa was in town.
Let’s try to make interest rates work for us. One of the first places to look - one’s portfolio.
The last 10 years have been good to bond holders. Fine. But recalling what we learned earlier, if we still hold bonds then perhaps an adjustment is in order, especially if maturities are far down the road. It’s not likely we want to keep it all there if interest rates are header higher.
Or perhaps we own fixed income mutual funds; perhaps some of those holding are offshore, perhaps sovereign debt (Ger., UK, Finland, Spanish, etc.). Maybe a few of us even own this debt outright. Here too, an adjustment may be in order. With very recent downgrades of Greek and Spanish debt, sovereign risk is assuming center stage. This is something quite new, at least for advanced economies, forcing many of them to pay more for their borrowing regardless one's outlook for the inflation component.
Finally, let’s look at the dollar. The dollar's rise from all-time lows is at least partially due to the expectation that the Fed will begin raising interest rates sooner than previously expected. Higher interest rates, coming off a base of zero, can hardly be considered a threat to economic activity, although as we know now, they are a threat to fixed income prices. But there’s another aspect to consider. Higher interest rates might in fact benefit a good many of us, those who have significantly more floating-rate assets (e.g., bank CDs and money market funds) than floating-rate debt (e.g., adjustable rate mortgages). Just a thought.
Take a look at the yield curve from time to time:(http://www.bloomberg.com/markets/rates/index.html.
We’ve got some tools; add to them, then go for it.
Robert Craven
Thursday, December 31, 2009
Friday, December 18, 2009
Interest Rates III
Interest rates, continued.
The Term Funds market is the largest slush fund in the world. This is where US banks come to take care of business. Some banks are flush, some banks are short; they work things out. All banks have reserve requirements to meet and other short-term needs. Here is where they come to fund these liabilities. Maturities are from o/n to two weeks, some even longer. Banks lend/borrow to/from one another, without collateral. This is the heart of bank liquidity. Early Q4, 2008 this market seized up; it locked in place. As a result we were only weeks away from a free fall, one which would have made the Great Depression look like a party. Only thanks to the G-20's quick maneuvering were we spared.
In Q4, trust vanished. No single world institution trusted any other (notwithstanding decades worth of relationship). No one knew just how poisoned collateralized mortgage paper really was, or, who owned how much of it. The banks lied to each other, and, to regulators. Thus, even though funds extended in the term funds market are of a very short maturity, no one was sure if they’d get anything back.
We all remember that time. To most of us, there was an uneasy feeling, but of exactly what we weren’t sure. Major world financial institutions on the other hand, being players, feared they might not see another sunrise. They knew the implications. In what is called a "flight to quality" they sought shelter in short term US obligations - Treasury bills. These offered the least specific credit risk (visited earlier) of anywhere else in the world and no inflation risk. Recalling our anchor, prices erupted, and yields plummeted, so that the 90 Tbill yielded a tick or two away from 0%!
Next, the Fed came to life, pumping money into the system. To do this they target Fed Funds, the O/N rate in the term funds market, as a gauge of tension. The rate had been 2% end of Q3; the Fed cut it to 0.25%, effectively 0%. This means one thing - all the money you guys need is there for the taking. But, it did not help. It was, like the old saying goes - pushing on a string.
Finally, G-20 central banks guaranteed inter-bank transactions. Slowly, normalcy returned to the world’s liquidity situation. Since that time, the Fed has expanded its balance sheet, buying practically anything under the sun - they can buy a herd of longhorn steers if they want The Fed is using its balance sheet to support the housing market and economy generally (a process effective over the near term but fraught with danger).
This brings us conveniently to the Yield Curve - the pattern of US interest rates from O/N to 30 years. This is a very handy tool. We should all keep an eye on it. In Jan/08, FF’s were 3.5%, 90 day LIBOR (another short-term measure) was 3.31%, the 2 yr Treasury 2.19%, the 10yr 3.56% and the 30 yr 4.27%. At this writing, FF’s at 0.14%, 90 day LIBOR is 0.25%, the 2 yr, 0.85%, the 10 yr 3.55% and the 30 yr, 4.48%. Whoa! Quite a story this gives up. Observe how short rates out to 2 yrs are in the cellar compared to the period just ahead of sub-prime concerns, yet observe how the 10 and 30 yr yields are near the same levels. Given what we learned earlier what does this tell us? Easy. Everyone in the world wants to own short paper as is obvious by the exceptionally high prices, thus negligible yields. We know why. No one is investing, no one is hiring. Most are content to sit on it. Keep it short and safe. What about the long end, 363 basis points (a b.p. =’s one hundredth of 1%) over the 2 yr vs only 208 in Jan/08? That tells us that because short term rates are so cheap, the world’s markets are beginning to price in inflation, that is, an expansion of that component in the summary yield. This is the message of a steeper yield curve. This is not reality necessarily but consensus anticipation of reality, right now. The 30 year is cheaper (lower price, higher yield) than it was almost two years ago, but the economy is weaker. This should be the other way around should it not? If this situation continues, it will be a read flag to the Fed; for the moment however, the recovery is too fragile for the Fed to begin to reverse its past actions.
In the next and final sketch of this series we’ll look at more practical considerations, a tad closer to home.
Robert Craven
The Term Funds market is the largest slush fund in the world. This is where US banks come to take care of business. Some banks are flush, some banks are short; they work things out. All banks have reserve requirements to meet and other short-term needs. Here is where they come to fund these liabilities. Maturities are from o/n to two weeks, some even longer. Banks lend/borrow to/from one another, without collateral. This is the heart of bank liquidity. Early Q4, 2008 this market seized up; it locked in place. As a result we were only weeks away from a free fall, one which would have made the Great Depression look like a party. Only thanks to the G-20's quick maneuvering were we spared.
In Q4, trust vanished. No single world institution trusted any other (notwithstanding decades worth of relationship). No one knew just how poisoned collateralized mortgage paper really was, or, who owned how much of it. The banks lied to each other, and, to regulators. Thus, even though funds extended in the term funds market are of a very short maturity, no one was sure if they’d get anything back.
We all remember that time. To most of us, there was an uneasy feeling, but of exactly what we weren’t sure. Major world financial institutions on the other hand, being players, feared they might not see another sunrise. They knew the implications. In what is called a "flight to quality" they sought shelter in short term US obligations - Treasury bills. These offered the least specific credit risk (visited earlier) of anywhere else in the world and no inflation risk. Recalling our anchor, prices erupted, and yields plummeted, so that the 90 Tbill yielded a tick or two away from 0%!
Next, the Fed came to life, pumping money into the system. To do this they target Fed Funds, the O/N rate in the term funds market, as a gauge of tension. The rate had been 2% end of Q3; the Fed cut it to 0.25%, effectively 0%. This means one thing - all the money you guys need is there for the taking. But, it did not help. It was, like the old saying goes - pushing on a string.
Finally, G-20 central banks guaranteed inter-bank transactions. Slowly, normalcy returned to the world’s liquidity situation. Since that time, the Fed has expanded its balance sheet, buying practically anything under the sun - they can buy a herd of longhorn steers if they want The Fed is using its balance sheet to support the housing market and economy generally (a process effective over the near term but fraught with danger).
This brings us conveniently to the Yield Curve - the pattern of US interest rates from O/N to 30 years. This is a very handy tool. We should all keep an eye on it. In Jan/08, FF’s were 3.5%, 90 day LIBOR (another short-term measure) was 3.31%, the 2 yr Treasury 2.19%, the 10yr 3.56% and the 30 yr 4.27%. At this writing, FF’s at 0.14%, 90 day LIBOR is 0.25%, the 2 yr, 0.85%, the 10 yr 3.55% and the 30 yr, 4.48%. Whoa! Quite a story this gives up. Observe how short rates out to 2 yrs are in the cellar compared to the period just ahead of sub-prime concerns, yet observe how the 10 and 30 yr yields are near the same levels. Given what we learned earlier what does this tell us? Easy. Everyone in the world wants to own short paper as is obvious by the exceptionally high prices, thus negligible yields. We know why. No one is investing, no one is hiring. Most are content to sit on it. Keep it short and safe. What about the long end, 363 basis points (a b.p. =’s one hundredth of 1%) over the 2 yr vs only 208 in Jan/08? That tells us that because short term rates are so cheap, the world’s markets are beginning to price in inflation, that is, an expansion of that component in the summary yield. This is the message of a steeper yield curve. This is not reality necessarily but consensus anticipation of reality, right now. The 30 year is cheaper (lower price, higher yield) than it was almost two years ago, but the economy is weaker. This should be the other way around should it not? If this situation continues, it will be a read flag to the Fed; for the moment however, the recovery is too fragile for the Fed to begin to reverse its past actions.
In the next and final sketch of this series we’ll look at more practical considerations, a tad closer to home.
Robert Craven
Wednesday, December 16, 2009
Interest Rates II
We continue with interest rates.
All of us encounter interest rates, either as borrowers or as creditors (investors) or both. And for a lot of us, casualty is a big mystery. What forces move these things? Greenspan for example and other "experts" make them out to be nothing if not bewildering. But in fact the basics are not bewildering at all. We can fetch all the tools we need to make our lives more comfortable around and about interest rates.
Before we can translate economic activity into interest rates we need to know the fundamentals; we’re not launching a satellite here folks, just developing an anchor. After we have done that, we can take a look at a real life petri dish, the breakdown of Q4, 2008, and the follow through. We hope to acquire some tools in the process.
What is interest? It is in fact an aggregate composed of three elements. First, the pure or base rate, second, the inflationary premium (or lack of) and finally, the credit risk, that is, risk of default specific to the debtor. Assume you own the debt (bonds) of a corporation. The maturity is 10 years and the coupon is 6%. Of that 6%, perhaps 3% is the base, or fair rate at which, all else equal, you will lend money to a near riskless credit, and that borrower will pay for the privilege. That leaves 3%. One and one half percent assume is due to inflationary expectations, that is, the expected corrosion in value due to a weakening currency that you will demand over 10 years. Finally, the remaining 1 ½ % is credit risk, that risk the market has assigned to the probability that the borrower which owes you money, will fail. This all adds up to 6%. The calculation, the process is usually more complex; we don’t care. For our purpose, this is enough.
Next, we must understand how the movement in interest rates impacts debt prices. Very simple - interest up, price down / interest down, price up. Back to our example - bonds at 6%. Assume you are the owner of one bond (usually in denominations of $1000). The coupon of 6% pays $60 annually. You decide to sell, not waiting for maturity. But assume a recession has interceded so that interest rates are now 3% for similar credits. Only a fool would give the buyer $60 a year or 6% when the market rate is 3%. You adjust the bond price and demand $2000. The $60 coupon now yields 3%. That’s all there is to if folks. This is the core or heart of the process.
Institutional markets trade interest rate-bearing instruments regularly, in billions of dollars equivalent every day. These trades, no matter how complex, always adhere to the two rules above. It is instructive to look at a few of these. For example, speculators may sell short US treasuries if they believe interest rates are headed higher (interest up, price down) with the intent to buy back the bonds cheaper at a profit. Easy. Here they are targeting the inflation component noted earlier. Or, major world banks may trade interest bearing instruments relative to one another, so-called spread trades. For example, if Morgan believes that the recovery in the UK will significantly lag that in the US, Morgan will buy UK Gilts (gov’t bonds) and sell US Treasuries. The bank (speculator) does not know where UK or US interest rates are going outright and doesn’t need to. All it needs to make a profit is for US rates to move higher, quicker than those counterparts in the UK (in this case, presumably because the US recovery will pressure rates higher, faster - the bet). This trade then focuses on relative inflation. US debt prices will fall faster than UK debt prices so the bank will make more on the US side than it loses on the UK side. Easy. Finally, a speculator may expect Germany to be downgraded as a result of the recent financial turmoil. He will buy US debt and sell Euro debt, with no particular view to relative growth at all, but specifically to creditworthiness, expecting Euro debt prices to fall relative to US as soon as the downgrade becomes reality. Here the target is the credit risk, the other of our three components.
So it’s not so tough after all, understanding interest rates and price movement. We’re getting there, that is, closer to acquiring the tools we need to make our own decisions about interest rates and our investments.
In the next sketch we will look at the near meltdown in the world debt/interest rate markets, Q4, ‘08. That process will further assist our own ends, which reside much closer to home.
Robert Craven
All of us encounter interest rates, either as borrowers or as creditors (investors) or both. And for a lot of us, casualty is a big mystery. What forces move these things? Greenspan for example and other "experts" make them out to be nothing if not bewildering. But in fact the basics are not bewildering at all. We can fetch all the tools we need to make our lives more comfortable around and about interest rates.
Before we can translate economic activity into interest rates we need to know the fundamentals; we’re not launching a satellite here folks, just developing an anchor. After we have done that, we can take a look at a real life petri dish, the breakdown of Q4, 2008, and the follow through. We hope to acquire some tools in the process.
What is interest? It is in fact an aggregate composed of three elements. First, the pure or base rate, second, the inflationary premium (or lack of) and finally, the credit risk, that is, risk of default specific to the debtor. Assume you own the debt (bonds) of a corporation. The maturity is 10 years and the coupon is 6%. Of that 6%, perhaps 3% is the base, or fair rate at which, all else equal, you will lend money to a near riskless credit, and that borrower will pay for the privilege. That leaves 3%. One and one half percent assume is due to inflationary expectations, that is, the expected corrosion in value due to a weakening currency that you will demand over 10 years. Finally, the remaining 1 ½ % is credit risk, that risk the market has assigned to the probability that the borrower which owes you money, will fail. This all adds up to 6%. The calculation, the process is usually more complex; we don’t care. For our purpose, this is enough.
Next, we must understand how the movement in interest rates impacts debt prices. Very simple - interest up, price down / interest down, price up. Back to our example - bonds at 6%. Assume you are the owner of one bond (usually in denominations of $1000). The coupon of 6% pays $60 annually. You decide to sell, not waiting for maturity. But assume a recession has interceded so that interest rates are now 3% for similar credits. Only a fool would give the buyer $60 a year or 6% when the market rate is 3%. You adjust the bond price and demand $2000. The $60 coupon now yields 3%. That’s all there is to if folks. This is the core or heart of the process.
Institutional markets trade interest rate-bearing instruments regularly, in billions of dollars equivalent every day. These trades, no matter how complex, always adhere to the two rules above. It is instructive to look at a few of these. For example, speculators may sell short US treasuries if they believe interest rates are headed higher (interest up, price down) with the intent to buy back the bonds cheaper at a profit. Easy. Here they are targeting the inflation component noted earlier. Or, major world banks may trade interest bearing instruments relative to one another, so-called spread trades. For example, if Morgan believes that the recovery in the UK will significantly lag that in the US, Morgan will buy UK Gilts (gov’t bonds) and sell US Treasuries. The bank (speculator) does not know where UK or US interest rates are going outright and doesn’t need to. All it needs to make a profit is for US rates to move higher, quicker than those counterparts in the UK (in this case, presumably because the US recovery will pressure rates higher, faster - the bet). This trade then focuses on relative inflation. US debt prices will fall faster than UK debt prices so the bank will make more on the US side than it loses on the UK side. Easy. Finally, a speculator may expect Germany to be downgraded as a result of the recent financial turmoil. He will buy US debt and sell Euro debt, with no particular view to relative growth at all, but specifically to creditworthiness, expecting Euro debt prices to fall relative to US as soon as the downgrade becomes reality. Here the target is the credit risk, the other of our three components.
So it’s not so tough after all, understanding interest rates and price movement. We’re getting there, that is, closer to acquiring the tools we need to make our own decisions about interest rates and our investments.
In the next sketch we will look at the near meltdown in the world debt/interest rate markets, Q4, ‘08. That process will further assist our own ends, which reside much closer to home.
Robert Craven
Monday, December 14, 2009
Interest Rates
We thought it very timely to comment on interest rates. This sketch is the first of a series. The topic is sure to put a bunch of folks quickly to sleep; the irony of course is that we’re all impacted one way or the other by these pesky little things. They’re key stuff. The better grasp we have as to causality and direction, the better shape our personal balance sheets.
OK. Where to start? How about the near meltdown of Q4, 2008? We all remember that. The guy down the road with three cars up on blocks in his front yard, falls behind in his mortgage payments, and the economy of Iceland implodes. Whoa now! I'm missing a few pieces of this puzzle myself, but hey, that about wraps it up.
A lot of lousy mortgages were handed out to this guy and his drinking buddies. P.J. O’Rourke, always the tutor, takes it from there: "Wall Street looked at the worthless paper and thought, ‘How can we make a buck off this?’ The answer was to wrap it in a bow. Take a wide enough variety of lousy mortgages--some from the East, some from the West, some from the cities, some from the suburbs, some from shacks, some from McMansions–bundle them together and put pressure on the bond rating agencies to do fancy risk management math, and you get a ‘collateralized debt obligation’ with a triple-A rating. Good as cash. Until it wasn't."
So that was a shock of the first order. Indeed, come mid-Dec/08 we find Fed Funds at 0.25%, the 2yr Treasury at 0.92%, the 10 year at 2.10% and the 30 yr at 2.60%; these were collapsed levels. Why? And, we find the dollar in the cellar, one Euro buying $1.4446. But so what? What’s all this mean? What’s "Fed Funds" and what’s the two year? Why should we care? And the Fed was up to something then too. What was it?
Change was compressed into a very brief time frame during this period. This provides a useful lab for us to fetch a notion of the dynamics impacting interest rates, our single purpose in this exercise. Once we do that we can develop a view for the direction of interest rates, the course of least resistance over the near term. Better than a stick in the eye any day.
Robert Craven
OK. Where to start? How about the near meltdown of Q4, 2008? We all remember that. The guy down the road with three cars up on blocks in his front yard, falls behind in his mortgage payments, and the economy of Iceland implodes. Whoa now! I'm missing a few pieces of this puzzle myself, but hey, that about wraps it up.
A lot of lousy mortgages were handed out to this guy and his drinking buddies. P.J. O’Rourke, always the tutor, takes it from there: "Wall Street looked at the worthless paper and thought, ‘How can we make a buck off this?’ The answer was to wrap it in a bow. Take a wide enough variety of lousy mortgages--some from the East, some from the West, some from the cities, some from the suburbs, some from shacks, some from McMansions–bundle them together and put pressure on the bond rating agencies to do fancy risk management math, and you get a ‘collateralized debt obligation’ with a triple-A rating. Good as cash. Until it wasn't."
So that was a shock of the first order. Indeed, come mid-Dec/08 we find Fed Funds at 0.25%, the 2yr Treasury at 0.92%, the 10 year at 2.10% and the 30 yr at 2.60%; these were collapsed levels. Why? And, we find the dollar in the cellar, one Euro buying $1.4446. But so what? What’s all this mean? What’s "Fed Funds" and what’s the two year? Why should we care? And the Fed was up to something then too. What was it?
Change was compressed into a very brief time frame during this period. This provides a useful lab for us to fetch a notion of the dynamics impacting interest rates, our single purpose in this exercise. Once we do that we can develop a view for the direction of interest rates, the course of least resistance over the near term. Better than a stick in the eye any day.
Robert Craven
Friday, December 11, 2009
Spending
This economy continues to work miracles. Today we received Nov Retail Sales which at + 1.3% were about double expectations. The gains were relatively broad based, led by sales of gasoline and of vehicles, but most spending categories improved.
Whoa! Consumers continue to spend amid high unemployment, relatively stagnant income growth, rising foreclosures, high energy costs and tight credit. In several past blogs, including the last we cautioned that sales would linger along with lingering unemployment. Consumers are not going gang busters for sure but they're a heck of a lot more active than we expected them to be.
Robert Craven
Whoa! Consumers continue to spend amid high unemployment, relatively stagnant income growth, rising foreclosures, high energy costs and tight credit. In several past blogs, including the last we cautioned that sales would linger along with lingering unemployment. Consumers are not going gang busters for sure but they're a heck of a lot more active than we expected them to be.
Robert Craven
Tuesday, December 8, 2009
A Self-Inflicted Wound
We’ve highlighted in past blogs just why this recovery lacks steam, contrasting it unfavorably to others during this country’s recent economic history. Indeed, there are certainly sectors which have shown renewed vigor, past few months; still, that sector most important to income and spending power - employment, the real engine - lags the rest. Let’s take a look.
We received the key Nov employment report on Dec/4. Results were rosier than expected. Jobs fell by the smallest amount of this recession. Also, the prior two months were revised to show much smaller job losses, indicating that there has indeed been improvement, meaning - slower deterioration. Although 7.156MM jobs have been destroyed since the beginning of the recession (Dec/07) the pace of job losses has slowed dramatically over the past 6 months.
Does this mean we have been wrong about jobs as a retardant, and wrong to pin the cause on the obvious - the left’s invasive agenda? Of course not. In other recoveries the jobs sector was much more vigorous. Not this time. Despite the relatively good news Dec/4, the level of employment remains at its lowest level since Mar/04. That is not to say that this economy is not working near-miracles in the act of resuscitation. It is indeed. It will just take a heck of a long time to recover all those lost jobs. Why? Nobody, we mean nobody, is excited to hire.
For example, Dan DiMicco, CEO of steelmaker Nucor Corp, told the WSJ that, "‘Companies large and small are saying, ‘I am not going to do anything until these things - health care, climate legislation - go away or are resolved.’" We also hear from Porta-King CEO Steve Schulte who told USA Today that his company is not investing because, "proposals in Congress to tackle climate change and overhaul health care would raise costs." Fred Lampropoulos, founder and chief of Merit Medical Systems Inc., told Obama that businesses were uncertain about investment because, "there’s such an aggressive legislative agenda that businesspeople don’t really know what they out to do." That uncertainty, he said, "is really holding back jobs."
So you can be a lefty and own a business, just don’t complain when you see your gross off 30%. This is a self-inflicted wound. Your party's footprints are all over Ground Zero, getting us into this mess; now you're making it all the more difficult to get us out. Shameful.
Robert Craven
We received the key Nov employment report on Dec/4. Results were rosier than expected. Jobs fell by the smallest amount of this recession. Also, the prior two months were revised to show much smaller job losses, indicating that there has indeed been improvement, meaning - slower deterioration. Although 7.156MM jobs have been destroyed since the beginning of the recession (Dec/07) the pace of job losses has slowed dramatically over the past 6 months.
Does this mean we have been wrong about jobs as a retardant, and wrong to pin the cause on the obvious - the left’s invasive agenda? Of course not. In other recoveries the jobs sector was much more vigorous. Not this time. Despite the relatively good news Dec/4, the level of employment remains at its lowest level since Mar/04. That is not to say that this economy is not working near-miracles in the act of resuscitation. It is indeed. It will just take a heck of a long time to recover all those lost jobs. Why? Nobody, we mean nobody, is excited to hire.
For example, Dan DiMicco, CEO of steelmaker Nucor Corp, told the WSJ that, "‘Companies large and small are saying, ‘I am not going to do anything until these things - health care, climate legislation - go away or are resolved.’" We also hear from Porta-King CEO Steve Schulte who told USA Today that his company is not investing because, "proposals in Congress to tackle climate change and overhaul health care would raise costs." Fred Lampropoulos, founder and chief of Merit Medical Systems Inc., told Obama that businesses were uncertain about investment because, "there’s such an aggressive legislative agenda that businesspeople don’t really know what they out to do." That uncertainty, he said, "is really holding back jobs."
So you can be a lefty and own a business, just don’t complain when you see your gross off 30%. This is a self-inflicted wound. Your party's footprints are all over Ground Zero, getting us into this mess; now you're making it all the more difficult to get us out. Shameful.
Robert Craven
Friday, November 20, 2009
US Economy - Keep It Simple
We want economics to be friendly, easy on the temperament, not intimidating. We’re all capable of fetching what we need, gathering a little grounding, past the noise and bullets. Only those employed in the business want us to think it’s difficult. Naturally. We don’t need them. Let’s take a look.
Where are we now? We repeat from our sketch of Oct/2, because it remains accurate. Overall, we have an economy that is in a stage of self-correction, although one of a restrained variety. Free enterprise spawns creative destruction and then off we go. This time the threat of a tidal wave of interference rightfully dampens incentive to invest or hire.
There’s been modest improvement. The Fed’s act of flooding the markets with money is responsible for the hog’s share of it (and whether this flooding can be reversed in time is a subject we will visit later). In the meantime, businesses have become lean and mean, with radical cost-cutting of inventories, employment, and hours worked. "If she ain’t critical, shut her down," is the motto nowadays. That’s good for profits and apparently good for stocks, but, you need more if you own a small business, say a nursery, where demand is discretionarily oriented and as a result one finds one’s business on its rump. You need more spendable income in the hands of your (past) customers. But scared employers are making changes that will permanently eliminate job demand, thus spendable income.
We have the current administration to thank for this.
Let’s break, and look at some recent measures of the economy’s mph.
First, retail sales surprised on the up side in Oct., much of this strength due to rebounding vehicle sales. Retail activity isn’t booming naturally; Oct activity was still only a tad above Q3 averages but in fact, consumers are looking to spend a bit, and would spend faster if not for still rising unemployment, stagnant income growth and tight credit.
Next, industrial activity rose in October for the fourth consecutive month. This is impressive. The level is still depressed, sure, with a lot of excess capacity remaining, but a modest recovery is underway in this key sector (mostly due to exports).
Finally, but not so encouraging - housing starts tumbled in Oct. Home construction is still struggling at very low levels. Also of note, mortgage delinquencies rose again in Q3.
So this "recovery" very slowly ratchets ahead, very slowly. In the past, the more severe the recession, the more robust the recovery. This pattern has never failed. Not, that is, until this time. We all know why. The individual culprits preventing a full recovery are in full view. These we detailed in recent past reports.
We know also that there is a general fear in the real sector that the free-market principles of the last half century are being abandoned. One can make the argument that Obama is right, that we need less 1) free enterprise and more 2) government overlay, but if so, one must accept the flip side - a permanently crippled US economic engine which will impact his or her own personal lifestyle.
.
Robert Craven
Where are we now? We repeat from our sketch of Oct/2, because it remains accurate. Overall, we have an economy that is in a stage of self-correction, although one of a restrained variety. Free enterprise spawns creative destruction and then off we go. This time the threat of a tidal wave of interference rightfully dampens incentive to invest or hire.
There’s been modest improvement. The Fed’s act of flooding the markets with money is responsible for the hog’s share of it (and whether this flooding can be reversed in time is a subject we will visit later). In the meantime, businesses have become lean and mean, with radical cost-cutting of inventories, employment, and hours worked. "If she ain’t critical, shut her down," is the motto nowadays. That’s good for profits and apparently good for stocks, but, you need more if you own a small business, say a nursery, where demand is discretionarily oriented and as a result one finds one’s business on its rump. You need more spendable income in the hands of your (past) customers. But scared employers are making changes that will permanently eliminate job demand, thus spendable income.
We have the current administration to thank for this.
Let’s break, and look at some recent measures of the economy’s mph.
First, retail sales surprised on the up side in Oct., much of this strength due to rebounding vehicle sales. Retail activity isn’t booming naturally; Oct activity was still only a tad above Q3 averages but in fact, consumers are looking to spend a bit, and would spend faster if not for still rising unemployment, stagnant income growth and tight credit.
Next, industrial activity rose in October for the fourth consecutive month. This is impressive. The level is still depressed, sure, with a lot of excess capacity remaining, but a modest recovery is underway in this key sector (mostly due to exports).
Finally, but not so encouraging - housing starts tumbled in Oct. Home construction is still struggling at very low levels. Also of note, mortgage delinquencies rose again in Q3.
So this "recovery" very slowly ratchets ahead, very slowly. In the past, the more severe the recession, the more robust the recovery. This pattern has never failed. Not, that is, until this time. We all know why. The individual culprits preventing a full recovery are in full view. These we detailed in recent past reports.
We know also that there is a general fear in the real sector that the free-market principles of the last half century are being abandoned. One can make the argument that Obama is right, that we need less 1) free enterprise and more 2) government overlay, but if so, one must accept the flip side - a permanently crippled US economic engine which will impact his or her own personal lifestyle.
.
Robert Craven
Friday, November 6, 2009
UPDATE
Today’s key jobs report for Oct is in keeping with the economic scenario we have come to expect - a recovery which has assigned the jobs sector to drag (while herding beef in the old days, the unfortunate cowboy assigned to "drag" gathered all the dust). Let’s take a look.
We lost another 190M jobs in October, bringing the number lost this year to 3.8MM. Unemployment is now 10.2% Yet just last week we were to understand that the economy grew at 3.5%! What gives here folks?
From Lee Ohanian, an econ prof at my old alma mater (UCLA), "It's not even a jobless recovery; it's a recovery with more job losses," said UCLA economist Lee Ohanian. "The idea of having essentially no net job creation after a remarkably severe recession is a real pathology for the U.S. economy."
And why? As we have highlighted in past blogs, all other recoveries carried employment right along with them. Why not this time? Answer - Extremists creations from an extremist administration.
Employers are spooked. They’d rather grow more efficient (at significant initial cost) and hope to never have to hire again. This is why so-called Non-farm productivity rose by 9.5% Q3 vs expectations of 6.5%! Productivity is now 4.3% above its year ago level.
No one in his right mind will hire now facing Obamacare and cap & trade, all the rest.
There are answers. One championed by several observers is a proposed tax credit for employers. At a cost of $12,000 per employee, a heck of lot cheaper than the $112,000 reported for the stimulus plan. Or, what we have favored all along - a cut in payroll taxes. Presto - employment. There are others, all sorts of solutions, yet all of them a threat to the far left.
For those of the chattering class who may lament, may complain that business remains poor, look no further than your own party.
Robert Craven
We lost another 190M jobs in October, bringing the number lost this year to 3.8MM. Unemployment is now 10.2% Yet just last week we were to understand that the economy grew at 3.5%! What gives here folks?
From Lee Ohanian, an econ prof at my old alma mater (UCLA), "It's not even a jobless recovery; it's a recovery with more job losses," said UCLA economist Lee Ohanian. "The idea of having essentially no net job creation after a remarkably severe recession is a real pathology for the U.S. economy."
And why? As we have highlighted in past blogs, all other recoveries carried employment right along with them. Why not this time? Answer - Extremists creations from an extremist administration.
Employers are spooked. They’d rather grow more efficient (at significant initial cost) and hope to never have to hire again. This is why so-called Non-farm productivity rose by 9.5% Q3 vs expectations of 6.5%! Productivity is now 4.3% above its year ago level.
No one in his right mind will hire now facing Obamacare and cap & trade, all the rest.
There are answers. One championed by several observers is a proposed tax credit for employers. At a cost of $12,000 per employee, a heck of lot cheaper than the $112,000 reported for the stimulus plan. Or, what we have favored all along - a cut in payroll taxes. Presto - employment. There are others, all sorts of solutions, yet all of them a threat to the far left.
For those of the chattering class who may lament, may complain that business remains poor, look no further than your own party.
Robert Craven
Friday, October 2, 2009
Update
In the last Update we noted that although certain sectors of the economy are showing signs of renewed health (manufacturing for example), the jobs sector continues to provide a major depressant. We also noted then that this recovery will be much slower than that from the last major recession (1982), which only took 6 months. The reason - real or perceived retardants placed on the employer by the current administration. Proposed legislation - cap-and-trade and the potential health care mandate to name just two - discourage any sane employer from hiring. Instead, they will grow more efficient, initiating a ratchet effect of sorts - a permanent reduction in needed payroll.
Let’s see where we are now. We need not be economists to understand recent releases, nor to develop our own view of where we are headed over the intermediate term.
Today we received the key Employment report for Sep activity. Jobs fell more quickly in Sep, and losses were widespread. Since the beginning of the recession, Dec/07, 7.205MM jobs have been destroyed. However, as we highlighted earlier, the pace of job loss has slowed dramatically. The worst of job deterioration is over.
We also learned that the unemployment rate notched up to 9.8% overall, and, 10.3% for males, the highest since the Depression. But key - the rate climbed because job losses overwhelmed a plunge in the labor force. We may go even higher the next month or two. Even though the media and the masses lock onto this rate, its significance is limited.
We learned that despite a weak labor market, hourly earnings are still climbing, albeit slowly. Unfortunately, the work week retreated again.(We had looked for this measure to remain unchanged) Thus the combination of the two - weekly earnings - remains weak. So we know that real consumer spending will remain constrained, and for a long while, since housing no longer provides a spark.
Finally, we learned today that Factory orders fell in Aug for the first time in 5 months. But wait. Despite this month’s decline (due to a sharp drop in orders for civilian aircraft, which soared in July) new orders have been growing over the past 3 and 6 month periods. This sector has stabilized, believe it or not, although at a lower level. The trend to remain positive.
Overall, we have an economy that is in the stage of self- correction, although of a restrained variety. Free enterprise spawns creative destruction; aside from government interference, off we go (1982). This time the threat of a tidal wave of interference rightfully dampens incentive. Any fool can see that. And further, legislation designed to spawn a recovery - the stimulus bill, is at best a wash, perhaps even a retardant. We aired this view early on; others have come to agree with us. The latest is Harvard’s Robert J. Barro. (See "Stimulus Spending Doesn’t Work," 10/01/09 WSJ opinion, by Barro and Charles Redlick.)
The culprits to a full and vigorous recovery are in full view. We have detailed these in several past posts. Anything well help folks. For example, if Congress will reassure the business community of making permanent the Bush tax cuts, this will provide a major propellant; start up costs would shrink. Or, if health and the (ludicrous) cap-and-trade measures fail, are defeated, this too will provide a propellant - the threat of higher labor costs will vaporize overnight. But as long as employers suspect that Obama is dead set on nationalizing productive resources, is pre-programmed to do so, no way they’ll look to hire. Thus, despite modest vigor in other sectors, the jobs sector will dampen, restrain any correction.
Too bad. It didn’t have to happen.
Robert Craven
Let’s see where we are now. We need not be economists to understand recent releases, nor to develop our own view of where we are headed over the intermediate term.
Today we received the key Employment report for Sep activity. Jobs fell more quickly in Sep, and losses were widespread. Since the beginning of the recession, Dec/07, 7.205MM jobs have been destroyed. However, as we highlighted earlier, the pace of job loss has slowed dramatically. The worst of job deterioration is over.
We also learned that the unemployment rate notched up to 9.8% overall, and, 10.3% for males, the highest since the Depression. But key - the rate climbed because job losses overwhelmed a plunge in the labor force. We may go even higher the next month or two. Even though the media and the masses lock onto this rate, its significance is limited.
We learned that despite a weak labor market, hourly earnings are still climbing, albeit slowly. Unfortunately, the work week retreated again.(We had looked for this measure to remain unchanged) Thus the combination of the two - weekly earnings - remains weak. So we know that real consumer spending will remain constrained, and for a long while, since housing no longer provides a spark.
Finally, we learned today that Factory orders fell in Aug for the first time in 5 months. But wait. Despite this month’s decline (due to a sharp drop in orders for civilian aircraft, which soared in July) new orders have been growing over the past 3 and 6 month periods. This sector has stabilized, believe it or not, although at a lower level. The trend to remain positive.
Overall, we have an economy that is in the stage of self- correction, although of a restrained variety. Free enterprise spawns creative destruction; aside from government interference, off we go (1982). This time the threat of a tidal wave of interference rightfully dampens incentive. Any fool can see that. And further, legislation designed to spawn a recovery - the stimulus bill, is at best a wash, perhaps even a retardant. We aired this view early on; others have come to agree with us. The latest is Harvard’s Robert J. Barro. (See "Stimulus Spending Doesn’t Work," 10/01/09 WSJ opinion, by Barro and Charles Redlick.)
The culprits to a full and vigorous recovery are in full view. We have detailed these in several past posts. Anything well help folks. For example, if Congress will reassure the business community of making permanent the Bush tax cuts, this will provide a major propellant; start up costs would shrink. Or, if health and the (ludicrous) cap-and-trade measures fail, are defeated, this too will provide a propellant - the threat of higher labor costs will vaporize overnight. But as long as employers suspect that Obama is dead set on nationalizing productive resources, is pre-programmed to do so, no way they’ll look to hire. Thus, despite modest vigor in other sectors, the jobs sector will dampen, restrain any correction.
Too bad. It didn’t have to happen.
Robert Craven
Sunday, September 6, 2009
Update
We noted earlier that this recovery will not resemble that of past recessions. We also highlighted the reasons why. Let’s freshen up and see where we are now.
Some core sectors are beginning to show signs of life. Last week a well-monitored survey of the manufacturing sector (Institute of Supply Management Index) indicated a recovery in manufacturing. This is a big deal folks. Activity increased in August for the first time in 18 months, and by the largest increment in 2 years. Activity in this key sector is not robust certainly, it is subdued, but it is with the living again. Most observers now believe the recession in manufacturing is over.
Great!. Are we off and running? No. Something is missing. The recovery from the 60's recession was brief, that out of the early 80's recession, rocket-like - only 6 months. What is the problem now? Jobs. Some call this a "jobless recovery".Without jobs there is no personal income, without personal income there is no spending. We’re all hit - a depressant despite vigor in other sectors. So if manufacturers are experiencing higher new orders (which they are) and better export orders (which they are) and expanded order backlogs and lower inventories (which they are) why continue to displace workers?
Let’s take a closer look at jobs. The unemployment rate for Aug jumped to 9.7% (approaching the figure Reagan inherited). Interestingly, there are two surveys - one for major business, and one for households (LLC, S-corp type, etc). The biggest hit was in the smaller survey where 392,000 jobs were lost. This was the source of the rate jump. The establishment survey on the other hand showed the lowest level of job loss in over a year, as larger firms’ earlier drastic measures of cost cutting and inventory reduction pay off. This is what manufacturers are up to. The little guy (household survey) remains in the muck and continues to shed jobs at only a slightly decreased pace while the big guy about has his ship in order. Thus, we have stabilized a tad in the rate of job loss as noted in the last post. But that’s only half the picture.
Again, so why continue to fire? Why not hire if you sense demand? Because employers are scared to death, not of the economy (which they know when left to its own devices, always recovers nicely) but of the government. They know the little details that media types, and most of the masses don’t, and, they know what not to do. They know for example that payroll taxes are not only scheduled to rise, but already have risen. And they know that government-mandated unemployment compensation is funded by employers through an unemployment-compensation payroll tax. As a result, they’re not taking on any full time help. Better to grow more efficient instead. Makes sense. Then there are the tax and regulatory threats related to health care and energy reform. Potential employers would be even crazier to hire given this nonsense.
Thus, unless employers get the sense that Obama’s plans at nationalization are bound for failure, they’ll sit tight. They can make it with fewer employees - a good excuse to grow lean and mean. With this piece of the pie missing, look for the recovery to remain painfully slow.
Robert Craven
Some core sectors are beginning to show signs of life. Last week a well-monitored survey of the manufacturing sector (Institute of Supply Management Index) indicated a recovery in manufacturing. This is a big deal folks. Activity increased in August for the first time in 18 months, and by the largest increment in 2 years. Activity in this key sector is not robust certainly, it is subdued, but it is with the living again. Most observers now believe the recession in manufacturing is over.
Great!. Are we off and running? No. Something is missing. The recovery from the 60's recession was brief, that out of the early 80's recession, rocket-like - only 6 months. What is the problem now? Jobs. Some call this a "jobless recovery".Without jobs there is no personal income, without personal income there is no spending. We’re all hit - a depressant despite vigor in other sectors. So if manufacturers are experiencing higher new orders (which they are) and better export orders (which they are) and expanded order backlogs and lower inventories (which they are) why continue to displace workers?
Let’s take a closer look at jobs. The unemployment rate for Aug jumped to 9.7% (approaching the figure Reagan inherited). Interestingly, there are two surveys - one for major business, and one for households (LLC, S-corp type, etc). The biggest hit was in the smaller survey where 392,000 jobs were lost. This was the source of the rate jump. The establishment survey on the other hand showed the lowest level of job loss in over a year, as larger firms’ earlier drastic measures of cost cutting and inventory reduction pay off. This is what manufacturers are up to. The little guy (household survey) remains in the muck and continues to shed jobs at only a slightly decreased pace while the big guy about has his ship in order. Thus, we have stabilized a tad in the rate of job loss as noted in the last post. But that’s only half the picture.
Again, so why continue to fire? Why not hire if you sense demand? Because employers are scared to death, not of the economy (which they know when left to its own devices, always recovers nicely) but of the government. They know the little details that media types, and most of the masses don’t, and, they know what not to do. They know for example that payroll taxes are not only scheduled to rise, but already have risen. And they know that government-mandated unemployment compensation is funded by employers through an unemployment-compensation payroll tax. As a result, they’re not taking on any full time help. Better to grow more efficient instead. Makes sense. Then there are the tax and regulatory threats related to health care and energy reform. Potential employers would be even crazier to hire given this nonsense.
Thus, unless employers get the sense that Obama’s plans at nationalization are bound for failure, they’ll sit tight. They can make it with fewer employees - a good excuse to grow lean and mean. With this piece of the pie missing, look for the recovery to remain painfully slow.
Robert Craven
Saturday, August 8, 2009
Growth Q3?
We noted in the July/5 sketch that the recovery this time has been retarded due to real and perceived burdens on the private sector, as manufactured in Washington. In other words, why hire? This explains a good part of the prolonged pain. Recoveries from past recessions were much speedier because they were accompanied by real tax cuts, unhampered by massive government programs.
Yet there is no denying that the US economy’s powers of rejuvenation are beginning to show. Last Friday we received the July employment report. The workweek was a tad longer, rising from a record low. This is a good thing. Next, jobs fell in July but by the smallest amount since Aug/08 (just before the free-fall). The recession started Dec/07. Since then 6.6MM jobs have been lost; however, over the last three months the pace of job loss has slowed dramatically. This is a very good thing. The worst of the labor market deterioration is over. Next thing we know there will be talk about positive growth, Q3!
Washington will naturally take credit when the sun rises. Most of us understand that they deserve none, certainly not as a result of the government heist known as the stimulus bill (which we saw as a boondoggle from the start, now having plenty of company). Much credit belongs to the Fed for expanding its monetary base at an average yearly rate of nearly 100% from Dec/08. The rest, to the remarkable tenacity and inventiveness of US free enterprise.
Robert Craven
Yet there is no denying that the US economy’s powers of rejuvenation are beginning to show. Last Friday we received the July employment report. The workweek was a tad longer, rising from a record low. This is a good thing. Next, jobs fell in July but by the smallest amount since Aug/08 (just before the free-fall). The recession started Dec/07. Since then 6.6MM jobs have been lost; however, over the last three months the pace of job loss has slowed dramatically. This is a very good thing. The worst of the labor market deterioration is over. Next thing we know there will be talk about positive growth, Q3!
Washington will naturally take credit when the sun rises. Most of us understand that they deserve none, certainly not as a result of the government heist known as the stimulus bill (which we saw as a boondoggle from the start, now having plenty of company). Much credit belongs to the Fed for expanding its monetary base at an average yearly rate of nearly 100% from Dec/08. The rest, to the remarkable tenacity and inventiveness of US free enterprise.
Robert Craven
Friday, July 31, 2009
Silence From The Left
We have exposed Obama’s health care "reform" for what it really is, recent sketches. The response from the chattering class - silence. Can’t get much better than that.
Even BO’s most ardent supporters have fetched up a gag reflex at having a 1000 page bill rammed down their throats. Why the rush? We know the answer. Fortunately BO’s dash for a legacy has been put on hold by the August recess.
During the breathing spell we hope our friends from the left may reconsider their lemming-like behavior. Is your dear leader everything he’s cracked up to be? Maybe a little bit of a phony? He gets a legacy out of this health deal. What’s in it for you guys?
As we highlighted earlier, there is a provision in the bill which will force us out of private health insurance and into the government controlled plan. Is that a good thing? Do any of our left- leaning friends really believe, as pre-programmed as they may be do to so, that the government can deliver more efficiently, or as efficiently as the private sector? We are not discussing an inter-state highway system, or national security; we are discussing individual choice in one’s matters of health - all to be lost. Most people, the left included, area happy with their insurance. Do Obama’s followers really want to give their medical care over to a "health choice commissioner" - the bureaucrat who will make the decisions for them?
Robert Craven
Even BO’s most ardent supporters have fetched up a gag reflex at having a 1000 page bill rammed down their throats. Why the rush? We know the answer. Fortunately BO’s dash for a legacy has been put on hold by the August recess.
During the breathing spell we hope our friends from the left may reconsider their lemming-like behavior. Is your dear leader everything he’s cracked up to be? Maybe a little bit of a phony? He gets a legacy out of this health deal. What’s in it for you guys?
As we highlighted earlier, there is a provision in the bill which will force us out of private health insurance and into the government controlled plan. Is that a good thing? Do any of our left- leaning friends really believe, as pre-programmed as they may be do to so, that the government can deliver more efficiently, or as efficiently as the private sector? We are not discussing an inter-state highway system, or national security; we are discussing individual choice in one’s matters of health - all to be lost. Most people, the left included, area happy with their insurance. Do Obama’s followers really want to give their medical care over to a "health choice commissioner" - the bureaucrat who will make the decisions for them?
Robert Craven
Thursday, July 30, 2009
The Left - Taken in Again
We have highlighted health care before. There is no crisis. Even if there was, Obama’s plan is not reform. Who among us can argue with that?
A recent poll indicated that ninety-one percent (91%) of Americans have insurance and that eighty four percent (84%) of these are happy as clams with their deal. Is that a bad thing? Most Americans prefer private coverage. BO’s plan is about getting everyone insured the government way. Assume 9% or so have no insurance. One fifth of these are illegals. Three-fifths have plenty of money but just don’t care. Most of the rest are eligible for Medicaid. That leaves maybe 2%. And for this 2% BO wants to emasculate the world’s greatest health care system. Wonder why?
Obama is after his legacy as any fool knows. Other programs can be rolled back. Health care cannot - once socialized it is permanent. He wants to steam roll the deal before the masses come to understand which way is up.
Mencken's observation that, "The urge to save humanity is always a false front for the urge to rule it, " pretty much sums up BO’s tactics.
Robert Craven
A recent poll indicated that ninety-one percent (91%) of Americans have insurance and that eighty four percent (84%) of these are happy as clams with their deal. Is that a bad thing? Most Americans prefer private coverage. BO’s plan is about getting everyone insured the government way. Assume 9% or so have no insurance. One fifth of these are illegals. Three-fifths have plenty of money but just don’t care. Most of the rest are eligible for Medicaid. That leaves maybe 2%. And for this 2% BO wants to emasculate the world’s greatest health care system. Wonder why?
Obama is after his legacy as any fool knows. Other programs can be rolled back. Health care cannot - once socialized it is permanent. He wants to steam roll the deal before the masses come to understand which way is up.
Mencken's observation that, "The urge to save humanity is always a false front for the urge to rule it, " pretty much sums up BO’s tactics.
Robert Craven
Wednesday, July 22, 2009
Idolatry, the Left and Paul Krugman
Our friends on the left have a high priest of the economics sort - Paul Krugman. They are passionate about this guy, bordering on lust in the case of the ladies of the Marin left (and a Macy’s window designer or two). My, my. Fact is we hear endlessly from these types - Krugman says this and Krugman says that. For many, it’s the only economist they ever heard of, and, naturally by the way of the NYT’s. These folk read the NYT’s as a daily ritual, thinking that all wisdom is distilled on those pages. It’s cool carrying a copy to work, even cooler if you hold it just right - pages folded just so. Those pages are about to disappear of course because more and more Americans want the news, not the left’s opinion, but until they do our friends will parrot Krugman in support of Obama’s rush to socialize America.
Krugman is a devotee of Keynes. That means right now this guy wants the government to spend every $ you’ve got (and some you’re yet to get). Our training was at UCLA and that is where we first encountered the wisdom of Ludwig von Mises, the great Austrian economist who did see through all of this nonsense. Von Mises was the first to prove that it was impossible for socialism to undertake "economic calculation," that is, the government will always come in second best in comparison with the creative destruction of free enterprise and the private sector. And pertinent to our current situation, von Mises wrote that, "... a government can spend or invest only what it takes away from its citizens … its additional spending and investment curtails the citizens' spending and investment to the full extent of its quantity." Our point all along.
Krugman supports massive US government spending to spark a recovery. Krugman ignores US economic history at his followers' peril. Past evidence suggest that the impact of government spending programs that are intended to encourage economic growth did nothing of the sort; at best they were a wash. We have touched on this repeatedly in past sketches. Recall that the Japanese government tried this foolishness in the 1990's. Didn’t go too well, did it? Unless of course you call nearly two decades of economic stagnation a success.
We would suggest liberals begin to think out of the box, try a little original insight, or at the very least, maybe open a book or two on US economic history. Painful as if may be, try to decouple from the NYT’s and your (false) messiah Paul Krugman.
Robert Craven
Krugman is a devotee of Keynes. That means right now this guy wants the government to spend every $ you’ve got (and some you’re yet to get). Our training was at UCLA and that is where we first encountered the wisdom of Ludwig von Mises, the great Austrian economist who did see through all of this nonsense. Von Mises was the first to prove that it was impossible for socialism to undertake "economic calculation," that is, the government will always come in second best in comparison with the creative destruction of free enterprise and the private sector. And pertinent to our current situation, von Mises wrote that, "... a government can spend or invest only what it takes away from its citizens … its additional spending and investment curtails the citizens' spending and investment to the full extent of its quantity." Our point all along.
Krugman supports massive US government spending to spark a recovery. Krugman ignores US economic history at his followers' peril. Past evidence suggest that the impact of government spending programs that are intended to encourage economic growth did nothing of the sort; at best they were a wash. We have touched on this repeatedly in past sketches. Recall that the Japanese government tried this foolishness in the 1990's. Didn’t go too well, did it? Unless of course you call nearly two decades of economic stagnation a success.
We would suggest liberals begin to think out of the box, try a little original insight, or at the very least, maybe open a book or two on US economic history. Painful as if may be, try to decouple from the NYT’s and your (false) messiah Paul Krugman.
Robert Craven
Health Care - The Crisis To Come
Obama claims we have a health care crisis. No we don’t. We have a crisis in the making however if this guy’s plans see the light of day.
Recently Obama hosted a conference call with leftist bloggers urging them to pressure Congress to pass his health bill. One blogger referred to the recent claim by the IBD that Section 102 of the House version would outlaw private insurance. He asked Obama is this was true, if he could keep his insurance if HR 3200 is passed. Obama replied, "You know, I have to say that I am not familiar with the provision you are talking about." Whoa now!! BO hasn’t read his own bill yet he’s taking a stick to Congress to pass it?
Obama in fact does understand the legislation, he simply doesn’t want the masses to know, hence the rush to passage. The fact is that the House bill does not outright prohibit private insurance, it just regulates it out of existence. From The Heritage Foundation, "The House bill does allow private insurance to be sold, but only ‘Exchange-participating health benefits plans.’ In order to qualify as an Exchange-participating health benefits plan, all health insurance plans must conform to a slew of new regulations, including community rating and guaranteed issue. These will all send the cost of private individual health insurance skyrocketing. Furthermore, all these new regulations would not apply just to individual insurance plans, but to all insurance plans. So the House bill will also drive up the cost of your existing employer coverage as well."
Best estimates are that yearly premiums for the typical American with private coverage could go up by as much as $460 per privately-insured person, as a result of increased cost-shifting stemming from a public plan modeled on Medicare. That fit’s perfectly with Obama’s objective which is to push all of us into the government-run plan.
Robert Craven
Recently Obama hosted a conference call with leftist bloggers urging them to pressure Congress to pass his health bill. One blogger referred to the recent claim by the IBD that Section 102 of the House version would outlaw private insurance. He asked Obama is this was true, if he could keep his insurance if HR 3200 is passed. Obama replied, "You know, I have to say that I am not familiar with the provision you are talking about." Whoa now!! BO hasn’t read his own bill yet he’s taking a stick to Congress to pass it?
Obama in fact does understand the legislation, he simply doesn’t want the masses to know, hence the rush to passage. The fact is that the House bill does not outright prohibit private insurance, it just regulates it out of existence. From The Heritage Foundation, "The House bill does allow private insurance to be sold, but only ‘Exchange-participating health benefits plans.’ In order to qualify as an Exchange-participating health benefits plan, all health insurance plans must conform to a slew of new regulations, including community rating and guaranteed issue. These will all send the cost of private individual health insurance skyrocketing. Furthermore, all these new regulations would not apply just to individual insurance plans, but to all insurance plans. So the House bill will also drive up the cost of your existing employer coverage as well."
Best estimates are that yearly premiums for the typical American with private coverage could go up by as much as $460 per privately-insured person, as a result of increased cost-shifting stemming from a public plan modeled on Medicare. That fit’s perfectly with Obama’s objective which is to push all of us into the government-run plan.
Robert Craven
Tuesday, July 21, 2009
We Want an Apology
You want an apology from them? We want one from you.
Obama says he sees a lack of humility among bankers. While noting that some of the nation's most powerful banks had repaid federal bailout money, Obama said: "What you haven't seen (in the financial sector) is a change in culture, a certain humility where they kind of step back and say gosh, you know, we really messed things up." What about Ground Zero, what about Frank and Dodd, Clinton and Obama who together are more responsible than anyone else for sinking the US economy (see past posts)? We’ve had an apology from one Democrat, a representative from Arkansas. That’s it. Unfortunately, the masses don’t know enough to demand not only an apology, but their heads. So forget the bankers BO until you come clean, being at one time a major slurper, along with Frank, Dodd, and Clinton at the Fannie/Freddie trough.
Robert Craven
Obama says he sees a lack of humility among bankers. While noting that some of the nation's most powerful banks had repaid federal bailout money, Obama said: "What you haven't seen (in the financial sector) is a change in culture, a certain humility where they kind of step back and say gosh, you know, we really messed things up." What about Ground Zero, what about Frank and Dodd, Clinton and Obama who together are more responsible than anyone else for sinking the US economy (see past posts)? We’ve had an apology from one Democrat, a representative from Arkansas. That’s it. Unfortunately, the masses don’t know enough to demand not only an apology, but their heads. So forget the bankers BO until you come clean, being at one time a major slurper, along with Frank, Dodd, and Clinton at the Fannie/Freddie trough.
Robert Craven
Tuesday, July 14, 2009
Beware of the Anointed
How about being "dissed" by a Cornell econ prof folks? Robert H. Frank (rhymes with crank, no just kidding) is a Cornell University econ professor and (surprise!) a columnist for the NYT’s. Here is what he had to say about those of us who oppose the so-called stimulus package: "The fact that stimulus opponents are far less numerous, have less distinguished academic credentials, on average, and are far less ideologically diverse than their counterparts does not guarantee they're wrong. But these factors should make rational consumers and investors less likely to side with them. And since this is really an argument about expectations, that's probably enough."
Now that hurts, that really hurts.
But thank you Bob. (The reality that 5 Nobel laureates have joined us is merely an inconvenience for Bob. We don’t need them however; we know we’re right anyway.) The fact is that every time "rational consumers and investors" listen to the likes of Bob they shed the rational part. Bob and his kind never saw a tax or levy or program they didn’t like; they never saw an arm of government that wasn’t soft and furry; they never saw a job that wasn’t secure and privileged. Bob and the rest of the sophisticate elite see the real world - how the unwashed are led, fooled and mesmerized - as their flock, in need of constant herding. Sorry Bob, I’ve seen more stupid people in grad school than I ever did working on my father’s cattle ranch, and I’d trust a good ‘ol cowboy any day not to bankrupt this country more than I would you.
The "stimulus" is nothing but a war against producers. It cannot work and will not work (see past sketches). It is a heist by the Democrats; it is a tragedy.
If you care about your kids dear readers, write your Congressman.
Robert Craven
Now that hurts, that really hurts.
But thank you Bob. (The reality that 5 Nobel laureates have joined us is merely an inconvenience for Bob. We don’t need them however; we know we’re right anyway.) The fact is that every time "rational consumers and investors" listen to the likes of Bob they shed the rational part. Bob and his kind never saw a tax or levy or program they didn’t like; they never saw an arm of government that wasn’t soft and furry; they never saw a job that wasn’t secure and privileged. Bob and the rest of the sophisticate elite see the real world - how the unwashed are led, fooled and mesmerized - as their flock, in need of constant herding. Sorry Bob, I’ve seen more stupid people in grad school than I ever did working on my father’s cattle ranch, and I’d trust a good ‘ol cowboy any day not to bankrupt this country more than I would you.
The "stimulus" is nothing but a war against producers. It cannot work and will not work (see past sketches). It is a heist by the Democrats; it is a tragedy.
If you care about your kids dear readers, write your Congressman.
Robert Craven
Sunday, July 12, 2009
Don't Go There
In the last sketch we highlighted just why it is that any economic resuscitation will take longer than expected. Now we hear rumors of a second "stimulus". Such legislation will only further retard a recovery.
Supporters of the stimulus bill, even many of its critics do not understand (or choose to ignore in the case of some politicians) the key issue. Government spending does not spark the economy on a net basis, for the simple reason that it takes away an equal amount from the private sector. There is zero evidence that it ever worked, plenty that it hasn't.
Few of us are foolish enough to think that the government can spend as efficiently as the private sector. If we gave one dollar to the private sector and one dollar to government and instructed both to have at it, all but the willfully blind will acknowledge that the private sector can fetch more bang for the buck. But the stimulus package is not that. It actually robs the private sector of a dollar - taxes, or borrowing, or inflation.
The obvious solution to our problem then (no secret to Kennedy or Reagan) is to enable the private sector; a 6-month tax holiday for example, roughly the equivalent of the $750 billion "stimulus" package, would work. Why won’t it, or something similar, happen? As an ex-UCLA classmate of mine exclaimed the other day - "Are you nuts? How naive can you be? A dollar spent on a new lawnmower at the hardware store does not generate a single vote. A dollar spent on a new job mowing grass along an interstate highway does." That pretty much says it all. Oh, except one more thing. Our friend also reminded us of the infamous Bill Clinton line of Jan/99, when the federal government ran a surplus. Someone asked Clinton that given the surplus, could we have our money back, a tax cut maybe. His response: "We could do that and hope you spend it right...But....if you don’t...here’s what’s going to happen...." Ah, but for the ignorant unwashed masses.
Some of our friends from the left run real businesses. They curse the economy - naturally it's all Bush’s fault. No. They own this crisis.
Robert Craven
Supporters of the stimulus bill, even many of its critics do not understand (or choose to ignore in the case of some politicians) the key issue. Government spending does not spark the economy on a net basis, for the simple reason that it takes away an equal amount from the private sector. There is zero evidence that it ever worked, plenty that it hasn't.
Few of us are foolish enough to think that the government can spend as efficiently as the private sector. If we gave one dollar to the private sector and one dollar to government and instructed both to have at it, all but the willfully blind will acknowledge that the private sector can fetch more bang for the buck. But the stimulus package is not that. It actually robs the private sector of a dollar - taxes, or borrowing, or inflation.
The obvious solution to our problem then (no secret to Kennedy or Reagan) is to enable the private sector; a 6-month tax holiday for example, roughly the equivalent of the $750 billion "stimulus" package, would work. Why won’t it, or something similar, happen? As an ex-UCLA classmate of mine exclaimed the other day - "Are you nuts? How naive can you be? A dollar spent on a new lawnmower at the hardware store does not generate a single vote. A dollar spent on a new job mowing grass along an interstate highway does." That pretty much says it all. Oh, except one more thing. Our friend also reminded us of the infamous Bill Clinton line of Jan/99, when the federal government ran a surplus. Someone asked Clinton that given the surplus, could we have our money back, a tax cut maybe. His response: "We could do that and hope you spend it right...But....if you don’t...here’s what’s going to happen...." Ah, but for the ignorant unwashed masses.
Some of our friends from the left run real businesses. They curse the economy - naturally it's all Bush’s fault. No. They own this crisis.
Robert Craven
Sunday, July 5, 2009
Now What?
How can we as laymen get our arms around the US economic situation, the basics, then acquire some reasonable odds for projecting reality ahead? Most of us are not economists (although the evidence suggests those guys don’t have a leg up in forecasting anyway). But any of us can glance at the data, then take a look at similar patterns/dynamics in recent history and come up with something, perhaps not the Holy Grail, but at least our own reasonable forecast, a handle over the intermediate term.
From the Bureau of Labor Statistics (http://www.bls.gov/) we can see that since the beginning of this recession (12/07) six million jobs have been destroyed. The unemployment rate is high, not quite as high as the peak during the 1982 recession (10.8%), but high enough. It is true that the pace of job loss has slowed recently; in fact the worst of the labor market deterioration is likely over; still, job depletion remains the trend. We can also see that the workweek (33 hours) is now at a record low. Not surprisingly, growth in hourly and weekly earnings has cratered. We don’t need to be a Fed governor to understand that when earnings slow, spending follows suit. Weakened aggregate spending hits all of us.
Finally, consumer and business sentiment, although improved somewhat from the collapse in Feb/09 (lowest in the 41 years data has been collected), remains at recessionary levels, in the tank. There are good reasons for low consumer sentiment: ongoing job losses, further house price declines, climbing foreclosures, tight credit standards and financial market volatility. There are also good reasons for low business sentiment. Renewed job creation requires business confidence about the structure of the economy, free of uncertainty about the future course of governments and politics. There is no reason to be confident, so most aren’t hiring. Of the sectors measured by the BLS, only two did any hiring in June (education & health, & miscl services). Manufacturing, professional and business services, temp services, construction, gov’t, trade, transportation, utilities, financial activities, information, leisure & hospitality - all shed jobs.
When left to its own devices the US economy has always self-corrected, even more briskly when aided by tax cuts. We can witness the Kennedy cuts in the early 60's, the Reagan cuts in the early 80's. Both times it was over quickly; in 1982, in 6 months. Markets then quickly adjusted to changing economic circumstances. Investors began investing, capital spending rose, workers and employees moved on to new jobs, consumers began spending again. The key to these quick employment recoveries was that the markets for investment, employment and consumption were free of political intrusion, subject only to the "unseen hand".
This time around this key is lacking; that is our problem folks and exactly why none of us can look for any significant improvement in this economy, the stock market, our own personal affairs as they may be linked to macro economic developments, for a considerable while. And why? An old maxim - It is not always better to do something rather than nothing. Obama’s administration doesn’t understand that, or doesn’t care, just as long as the masses don’t catch on. Most interventions do more harm than good, including FDR’s stab at it during the Depression. Substituting political agendas for business judgement during periods of panic is bound to fail. It never worked before and it never will.
In past sketches we have critiqued recent forays of just such intervention, a primary culprit among these the so-called stimulus bill. At best, this unsavory piece of legislation will be a wash, at the worst, a retardant. Obama and Pelosi exploited mass hysteria to fulfill a wish list. Robert Lucas, the 1995 Nobel laureate in economics who specializes in macroeconomics and government policy, recently remarked that the promise of large multipliers presented by private macroeconomic consulting firms in support of the stimulus bill was "schlock economics." And as we noted earlier, Bob Barro, candidate for the 03 Nobel, called the legislation, "probably the worst bill that has been put forward since the 1930's." "I think is garbage," he said. So do we.
It is what is coupled with this bill that most worries business and consumer - outrageous debt loads ahead. We taxpayers issue the IOU but get absolutely nothing in return. So now the national debt is growing faster than the GDP. According to the Congressional Budget Office, within 10 years publicly held debt will double to 82 percent of GDP. The CBO predicts that by 2038, our debt will be 200 percent of GDP. Debt siphons off growth for goodness sake. Dollars go to paying it off rather than investing in something productive.
Well, that’s the stimulus package. There is more: 1) Health insurance reform, which scares the pants right off businesses; the cost estimates, from $1 trillion to $3.6 trillion, will be footed much by them. 2) Cap and Trade - massive new taxes, yet this work of genius will not remove an ounce of carbon from the atmosphere for a decade. Even if you think climate change is a huge threat, the bill's own supporters admit its impact on global warming will be trivial. As the IBD put it, "It's nothing but a huge scam that will bankrupt any business that relies heavily on energy, boosting fuel prices by 22 cents a gallon and socking the average family with an $1,800 a year tax hike." Gee. 3) The threat of a stimulus II (are you kidding, BO?!).
So no way the private sector — the real engine of economic growth — is going on a hiring binge anytime soon. Why would it? It's concerned by what it sees coming out of Washington - higher taxes, uncontrolled spending and layer upon layer of new regulation.
Look for a long, hard pull. And the pity is, it didn’t have to be.
Robert Craven
From the Bureau of Labor Statistics (http://www.bls.gov/) we can see that since the beginning of this recession (12/07) six million jobs have been destroyed. The unemployment rate is high, not quite as high as the peak during the 1982 recession (10.8%), but high enough. It is true that the pace of job loss has slowed recently; in fact the worst of the labor market deterioration is likely over; still, job depletion remains the trend. We can also see that the workweek (33 hours) is now at a record low. Not surprisingly, growth in hourly and weekly earnings has cratered. We don’t need to be a Fed governor to understand that when earnings slow, spending follows suit. Weakened aggregate spending hits all of us.
Finally, consumer and business sentiment, although improved somewhat from the collapse in Feb/09 (lowest in the 41 years data has been collected), remains at recessionary levels, in the tank. There are good reasons for low consumer sentiment: ongoing job losses, further house price declines, climbing foreclosures, tight credit standards and financial market volatility. There are also good reasons for low business sentiment. Renewed job creation requires business confidence about the structure of the economy, free of uncertainty about the future course of governments and politics. There is no reason to be confident, so most aren’t hiring. Of the sectors measured by the BLS, only two did any hiring in June (education & health, & miscl services). Manufacturing, professional and business services, temp services, construction, gov’t, trade, transportation, utilities, financial activities, information, leisure & hospitality - all shed jobs.
When left to its own devices the US economy has always self-corrected, even more briskly when aided by tax cuts. We can witness the Kennedy cuts in the early 60's, the Reagan cuts in the early 80's. Both times it was over quickly; in 1982, in 6 months. Markets then quickly adjusted to changing economic circumstances. Investors began investing, capital spending rose, workers and employees moved on to new jobs, consumers began spending again. The key to these quick employment recoveries was that the markets for investment, employment and consumption were free of political intrusion, subject only to the "unseen hand".
This time around this key is lacking; that is our problem folks and exactly why none of us can look for any significant improvement in this economy, the stock market, our own personal affairs as they may be linked to macro economic developments, for a considerable while. And why? An old maxim - It is not always better to do something rather than nothing. Obama’s administration doesn’t understand that, or doesn’t care, just as long as the masses don’t catch on. Most interventions do more harm than good, including FDR’s stab at it during the Depression. Substituting political agendas for business judgement during periods of panic is bound to fail. It never worked before and it never will.
In past sketches we have critiqued recent forays of just such intervention, a primary culprit among these the so-called stimulus bill. At best, this unsavory piece of legislation will be a wash, at the worst, a retardant. Obama and Pelosi exploited mass hysteria to fulfill a wish list. Robert Lucas, the 1995 Nobel laureate in economics who specializes in macroeconomics and government policy, recently remarked that the promise of large multipliers presented by private macroeconomic consulting firms in support of the stimulus bill was "schlock economics." And as we noted earlier, Bob Barro, candidate for the 03 Nobel, called the legislation, "probably the worst bill that has been put forward since the 1930's." "I think is garbage," he said. So do we.
It is what is coupled with this bill that most worries business and consumer - outrageous debt loads ahead. We taxpayers issue the IOU but get absolutely nothing in return. So now the national debt is growing faster than the GDP. According to the Congressional Budget Office, within 10 years publicly held debt will double to 82 percent of GDP. The CBO predicts that by 2038, our debt will be 200 percent of GDP. Debt siphons off growth for goodness sake. Dollars go to paying it off rather than investing in something productive.
Well, that’s the stimulus package. There is more: 1) Health insurance reform, which scares the pants right off businesses; the cost estimates, from $1 trillion to $3.6 trillion, will be footed much by them. 2) Cap and Trade - massive new taxes, yet this work of genius will not remove an ounce of carbon from the atmosphere for a decade. Even if you think climate change is a huge threat, the bill's own supporters admit its impact on global warming will be trivial. As the IBD put it, "It's nothing but a huge scam that will bankrupt any business that relies heavily on energy, boosting fuel prices by 22 cents a gallon and socking the average family with an $1,800 a year tax hike." Gee. 3) The threat of a stimulus II (are you kidding, BO?!).
So no way the private sector — the real engine of economic growth — is going on a hiring binge anytime soon. Why would it? It's concerned by what it sees coming out of Washington - higher taxes, uncontrolled spending and layer upon layer of new regulation.
Look for a long, hard pull. And the pity is, it didn’t have to be.
Robert Craven
Sunday, June 14, 2009
A Tragedy
Our aim is to simplify, then close the pattern ahead, affording a leg up for our readers. In Feb we labeled the American Recovery and Reinvestment Act, the administration’s trillion $ (w/ interest) "stimulus" package as not only superfluous and a complete waste of taxpayers’ money, but an act of deceit by Washington lawmakers as well. Harvard economist Robert Barro, candidate for the 03 Nobel, calls the legislation "probably the worst bill that has been put forward since the 1930s." "I mean it's wasting a tremendous amount of money," he said in an interview with the Atlantic. "I don't think it will expand the economy. . . . I think it's garbage."
The taxpayer has a growing, uneasy sense that we were right, that they’ve been taken. This is not that tough to understand. All of us have the tools at hand to judge this situation for ourselves, drawing from both history and experience. We know for example that the US economy has righted itself after each crisis, to which we will add - in spite of government intervention. Witness the Great Depression. The economy was beginning to recover before Roosevelt took office. From Lee Ohanian, director of macroeconomic research at UCLA, "Industrial production rose more than 60% from its July 1932 low until the National Industrial Recovery Act was passed in June 1933, and the industrial recovery stalled once the NIRA took effect." The problem was Washington. "The government did a lot during the Depression under the auspices of the New Deal," notes Ohanian, "and recent research is showing that some of those programs such as the National Industrial Recovery Act--which fostered cartels and raised wages far above their normal levels--substantially delayed recovery and kept employment much lower than it otherwise would have been."
So "stimulus" didn’t work in the 30's. Won’t take our word for it, doubt Prof Ohanian? Henry Morgenthau, FDR’s Sect of the Treasury testifying before the House Ways and Means Committee in May 1939: "We are spending more money than we have ever spent before and it does not work. I want to see this country prosperous. I want to see people get a job. We have never made good on our promises. I say after eight years of this administration we have just as much unemployment as when we started and an enormous debt to boot."
There is no evidence that $1 spent by the government has any net, multiplier effect for goodness sake vs the private sector. After all, where does that dollar come from? It can come from taxes or inflation or borrowing. Taxes translate to less spending for the private sector. If the Fed inflates, it means less buying power for the private sector. If the government borrows, the private sector is crowded out.
Next, even if government spending did work, providing a kick start, the last CBO study shows that through late May only about $37 billion of the $787 billion package has been spent.. For example, the Departments of Education, Transportation and Energy all have spent 2% or less of their allocations.
Finally, we know that there is ample evidence that the economy has stabilized. And a flood of freshly printed money makes a rebound all but inevitable. The Fed has cut rates to zero. M2 money supply is rising at close to a 10% rate now. Going back to WWII, a 10% rate of money growth has always led to economic growth.
A signature of the Democratic party is to erect layer upon layer of government, in which they believe all wisdom resides. Thus, the severe problems of our economy last year presented the opportunity of a lifetime for Democratic lawmakers. When Emanuel laid out his Rule Number One - "Never let a crisis go to waste," he was being nothing if not candid, exposing his and his boss’s agenda in crystal clear fashion. This is a dream come true for this bunch. Obama and Pelosi, along with their supporters are the types to see this crisis as a "great opportunity" as the president labeled it recently. They are the types, after a long period out of power, to attempt to use that "great opportunity" to push through far-reaching changes in national policy that have only a tangential connection, if at all, to the crisis but effect a weld or lock on US society that can not be undone for several generations.
What has transpired then my friends is in fact the greatest political heist ever witnessed. The bottom line is that the ARRA will leave us with a legacy of substantially rising debt without any commensurate benefit. The CBO notes that federal debt, which was about 40% of GDP at the end of 2008, is expected to rise to more than 80% of GDP in 10 years. And with no change in policy, debt could rise to nearly 100% of GDP before then. Add in the burden of unfunded government liabilities, including social security and government pensions, and the debt burden becomes truly staggering.
We expect a taxpayer revolt. As the IBD editorialized the other day regarding the ARRA, "It's as big a fraud as any perpetrated in recent years, cynically passed to take advantage of Americans during a time of economic panic and fear. Worse, it was falsely sold as stimulus when in fact it was a permanent expansion in government spending. The stimulus hasn't worked, and it won't. It should be killed off. Just throw it in the garbage, and apply the remaining $700 billion or so to cutting the expected $1.8 trillion deficit this year."
Robert Craven
The taxpayer has a growing, uneasy sense that we were right, that they’ve been taken. This is not that tough to understand. All of us have the tools at hand to judge this situation for ourselves, drawing from both history and experience. We know for example that the US economy has righted itself after each crisis, to which we will add - in spite of government intervention. Witness the Great Depression. The economy was beginning to recover before Roosevelt took office. From Lee Ohanian, director of macroeconomic research at UCLA, "Industrial production rose more than 60% from its July 1932 low until the National Industrial Recovery Act was passed in June 1933, and the industrial recovery stalled once the NIRA took effect." The problem was Washington. "The government did a lot during the Depression under the auspices of the New Deal," notes Ohanian, "and recent research is showing that some of those programs such as the National Industrial Recovery Act--which fostered cartels and raised wages far above their normal levels--substantially delayed recovery and kept employment much lower than it otherwise would have been."
So "stimulus" didn’t work in the 30's. Won’t take our word for it, doubt Prof Ohanian? Henry Morgenthau, FDR’s Sect of the Treasury testifying before the House Ways and Means Committee in May 1939: "We are spending more money than we have ever spent before and it does not work. I want to see this country prosperous. I want to see people get a job. We have never made good on our promises. I say after eight years of this administration we have just as much unemployment as when we started and an enormous debt to boot."
There is no evidence that $1 spent by the government has any net, multiplier effect for goodness sake vs the private sector. After all, where does that dollar come from? It can come from taxes or inflation or borrowing. Taxes translate to less spending for the private sector. If the Fed inflates, it means less buying power for the private sector. If the government borrows, the private sector is crowded out.
Next, even if government spending did work, providing a kick start, the last CBO study shows that through late May only about $37 billion of the $787 billion package has been spent.. For example, the Departments of Education, Transportation and Energy all have spent 2% or less of their allocations.
Finally, we know that there is ample evidence that the economy has stabilized. And a flood of freshly printed money makes a rebound all but inevitable. The Fed has cut rates to zero. M2 money supply is rising at close to a 10% rate now. Going back to WWII, a 10% rate of money growth has always led to economic growth.
A signature of the Democratic party is to erect layer upon layer of government, in which they believe all wisdom resides. Thus, the severe problems of our economy last year presented the opportunity of a lifetime for Democratic lawmakers. When Emanuel laid out his Rule Number One - "Never let a crisis go to waste," he was being nothing if not candid, exposing his and his boss’s agenda in crystal clear fashion. This is a dream come true for this bunch. Obama and Pelosi, along with their supporters are the types to see this crisis as a "great opportunity" as the president labeled it recently. They are the types, after a long period out of power, to attempt to use that "great opportunity" to push through far-reaching changes in national policy that have only a tangential connection, if at all, to the crisis but effect a weld or lock on US society that can not be undone for several generations.
What has transpired then my friends is in fact the greatest political heist ever witnessed. The bottom line is that the ARRA will leave us with a legacy of substantially rising debt without any commensurate benefit. The CBO notes that federal debt, which was about 40% of GDP at the end of 2008, is expected to rise to more than 80% of GDP in 10 years. And with no change in policy, debt could rise to nearly 100% of GDP before then. Add in the burden of unfunded government liabilities, including social security and government pensions, and the debt burden becomes truly staggering.
We expect a taxpayer revolt. As the IBD editorialized the other day regarding the ARRA, "It's as big a fraud as any perpetrated in recent years, cynically passed to take advantage of Americans during a time of economic panic and fear. Worse, it was falsely sold as stimulus when in fact it was a permanent expansion in government spending. The stimulus hasn't worked, and it won't. It should be killed off. Just throw it in the garbage, and apply the remaining $700 billion or so to cutting the expected $1.8 trillion deficit this year."
Robert Craven
Wednesday, April 1, 2009
"Put the skeer in them fellas."
After our last sketch some have asserted that we were taken in, duped; that Obama’s seemingly tough stance with Detroit is simply one more cleverly disguised heist, a move for a further gov’t lock on free enterprise. (They remind us that Obama did not really draw the line anyway, but gave them another 60 days, keeping a gov’t handle on the situation.) They may be right; certainly that is the blanket motivation of this administration.
In the case of GM and Chrysler, many of us have understood for a long while that bankruptcy was the ideal. Anything else - simply an extension of the pain, and further corrosion. That was obviously the correct view. Bankruptcy is perfect for these clowns - it is a measured process, it slows things down, looks at all contracts (watch out UAW) and all suppliers, and, all potential buyers of portions or the whole - one or two of which might be in the South, where vehicle production is still profitable. Key is that bankruptcy eliminates the politicians and lobbyists in one swoop, substituting instead the courts. Unfortunately, bankruptcy as most of us know it may not be in the cards; the UAW is too important to Democratic electoral politics. Yet there is some rumbling this am of a "controlled bankruptcy". We’ll see.
But for the moment Obama has done a great service, whether he intended to or not. The key is the message, not only to Detroit but to the rest of the corporate welfare queens, now jostling in line. Maybe the door is closed. Maybe better go home and attempt to straighten things out, or wind it up. Maybe now even the masses have had enough.
Nathan Bedford Forrest was not only the South’s preeminent cavalryman, but most likely the greatest American cavalryman of all time. He terrorized the North, especially Sherman. Forrest was constantly at Sherman’s flanks, putting what he called "the skeer" into every Union soldier’s heart, prompting Uncle Billy to call Forrest, "..the very devil," adding that he would order a force, "..to go out and follow Forrest to the death if it cost 10,000 lives and breaks the Treasury."
Putting "the skeer" in them fellas in Detroit is a good thing, no matter the motivation. The rest are listening.
Robert Craven
In the case of GM and Chrysler, many of us have understood for a long while that bankruptcy was the ideal. Anything else - simply an extension of the pain, and further corrosion. That was obviously the correct view. Bankruptcy is perfect for these clowns - it is a measured process, it slows things down, looks at all contracts (watch out UAW) and all suppliers, and, all potential buyers of portions or the whole - one or two of which might be in the South, where vehicle production is still profitable. Key is that bankruptcy eliminates the politicians and lobbyists in one swoop, substituting instead the courts. Unfortunately, bankruptcy as most of us know it may not be in the cards; the UAW is too important to Democratic electoral politics. Yet there is some rumbling this am of a "controlled bankruptcy". We’ll see.
But for the moment Obama has done a great service, whether he intended to or not. The key is the message, not only to Detroit but to the rest of the corporate welfare queens, now jostling in line. Maybe the door is closed. Maybe better go home and attempt to straighten things out, or wind it up. Maybe now even the masses have had enough.
Nathan Bedford Forrest was not only the South’s preeminent cavalryman, but most likely the greatest American cavalryman of all time. He terrorized the North, especially Sherman. Forrest was constantly at Sherman’s flanks, putting what he called "the skeer" into every Union soldier’s heart, prompting Uncle Billy to call Forrest, "..the very devil," adding that he would order a force, "..to go out and follow Forrest to the death if it cost 10,000 lives and breaks the Treasury."
Putting "the skeer" in them fellas in Detroit is a good thing, no matter the motivation. The rest are listening.
Robert Craven
Monday, March 30, 2009
End of The Road For Corporate Welfare (Maybe)
Winston Churchill once said, "The Americans can always be trusted to do the right thing, once they have exhausted all other possibilities."
Well fine, the administration’s recent message to the vehicle industry, although not our "Drop Dead" of earlier sketches, comes close. The Bush administration caved to these guys; it fell for their swoon song - a melt down if GM goes. What utter nonsense. No body believes that any more; if they do, they’re dupes.
Obama’s message to corporate America - don’t look to get in line. It won’t be there. Very good. Very healthy. The guy has actually done something right.
Robert Craven
Well fine, the administration’s recent message to the vehicle industry, although not our "Drop Dead" of earlier sketches, comes close. The Bush administration caved to these guys; it fell for their swoon song - a melt down if GM goes. What utter nonsense. No body believes that any more; if they do, they’re dupes.
Obama’s message to corporate America - don’t look to get in line. It won’t be there. Very good. Very healthy. The guy has actually done something right.
Robert Craven
Monday, March 23, 2009
ENOUGH
This am we have a program from Treasury that appears to be constructive, and will go a distance in finding a home for the garbage on banks’ balance sheets. Next, to the broader picture.
We are forced to take much on trust. The band aid put in place by the G-20, Q4, prevented a world credit meltdown, or so we are told. We believe that is true. Now we are told that firms like AIG or Citi, or GM are too big to fail. But where do we draw the line, and how? When do we say "No" to further bailouts; when do we resist further government intervention in our marketplace? Or should we? How can we become empowered? How can we acquire a handle?
Two schools of thought come to mind, residing at opposite ends of the spectrum: 1) Socialists avow gov’t ownership of productive resources. Their answer is "Always", the more the better. Most Americans reject that premise. 2) The so-called Austrian School of Economics would answer "Never", not in any circumstance. Leave the economy alone, it is self-correcting. Certainly the process of creative destruction has placed the American free market first in the world; it is that process which Treasury Sect Andrew Mellon once said means, "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. Values will be adjusted, and enterprising people will pick up from less competent people." In other words, once the bust comes, the only cure is to let it run its course; allow the malinvestments to go bankrupt and let the market reallocate the capital to productive uses. Certainly this should apply to most portions of our economy today, our view, including the likes of GM. Anything else - simply a delay of the inevitable.
The glitch unfortunately, something neither Mellon nor the Austrian School’s von Mises nor others of this persuasion could have foreseen - the interlocking of the world’s financial/credit markets. Thus for some of these institutions (as detailed in earlier sketches) we need to bite the bullet, at least for now. But past that it is key that each and every one of us hold our legislators’ feet to the fire and say "Stop", enough is enough. First, turn these deals back to the private market as soon as possible. Next, do not nationalize resources such as medicine, energy and education; stop as soon as possible overriding contracts; above all, stop taking assets from competent people and giving them to incompetent people.
We have a right to be pissed. And we have an anchor in judging just what we will accept, and what we will not. It’s called common sense. We may not all be financial engineers nor have ever encountered a swap but so what? It is our $ being tossed around. We don’t know if we will get any of it back; our future and that of our offspring are at risk; we are darn sure fit to judge. Now is the time to draw the line and understand that it is not always better to do something than nothing, and insist that our elected officials understand likewise. That is, most interventions do more harm than good. A quick glance at economic history shows that substituting political agendas for business judgement during periods of panic is bound to fail. It never worked before and it never will.
But readers need not accept our word. A man who fought for this very thing, who championed the free market after the fall of communism, who never has taken capitalism for granted - Czech President Vaclav Klaus. Klaus said during a recent speech at Columbia Univ that massive gov’t spending in the US and tighter regulation will simply prolong the recession, and urged Obama not to endanger the free market in his response to the crisis. "I am therefore convinced that fighting for freedom and free markets, something we always appreciated here in this country (the United States), remains the task of the day," said Klaus.
Indeed it does.
Robert Craven
We are forced to take much on trust. The band aid put in place by the G-20, Q4, prevented a world credit meltdown, or so we are told. We believe that is true. Now we are told that firms like AIG or Citi, or GM are too big to fail. But where do we draw the line, and how? When do we say "No" to further bailouts; when do we resist further government intervention in our marketplace? Or should we? How can we become empowered? How can we acquire a handle?
Two schools of thought come to mind, residing at opposite ends of the spectrum: 1) Socialists avow gov’t ownership of productive resources. Their answer is "Always", the more the better. Most Americans reject that premise. 2) The so-called Austrian School of Economics would answer "Never", not in any circumstance. Leave the economy alone, it is self-correcting. Certainly the process of creative destruction has placed the American free market first in the world; it is that process which Treasury Sect Andrew Mellon once said means, "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. Values will be adjusted, and enterprising people will pick up from less competent people." In other words, once the bust comes, the only cure is to let it run its course; allow the malinvestments to go bankrupt and let the market reallocate the capital to productive uses. Certainly this should apply to most portions of our economy today, our view, including the likes of GM. Anything else - simply a delay of the inevitable.
The glitch unfortunately, something neither Mellon nor the Austrian School’s von Mises nor others of this persuasion could have foreseen - the interlocking of the world’s financial/credit markets. Thus for some of these institutions (as detailed in earlier sketches) we need to bite the bullet, at least for now. But past that it is key that each and every one of us hold our legislators’ feet to the fire and say "Stop", enough is enough. First, turn these deals back to the private market as soon as possible. Next, do not nationalize resources such as medicine, energy and education; stop as soon as possible overriding contracts; above all, stop taking assets from competent people and giving them to incompetent people.
We have a right to be pissed. And we have an anchor in judging just what we will accept, and what we will not. It’s called common sense. We may not all be financial engineers nor have ever encountered a swap but so what? It is our $ being tossed around. We don’t know if we will get any of it back; our future and that of our offspring are at risk; we are darn sure fit to judge. Now is the time to draw the line and understand that it is not always better to do something than nothing, and insist that our elected officials understand likewise. That is, most interventions do more harm than good. A quick glance at economic history shows that substituting political agendas for business judgement during periods of panic is bound to fail. It never worked before and it never will.
But readers need not accept our word. A man who fought for this very thing, who championed the free market after the fall of communism, who never has taken capitalism for granted - Czech President Vaclav Klaus. Klaus said during a recent speech at Columbia Univ that massive gov’t spending in the US and tighter regulation will simply prolong the recession, and urged Obama not to endanger the free market in his response to the crisis. "I am therefore convinced that fighting for freedom and free markets, something we always appreciated here in this country (the United States), remains the task of the day," said Klaus.
Indeed it does.
Robert Craven
Friday, March 6, 2009
Equity Market - "Outlook"
Free-market pricing is too complex for any one individual to completely understand or predict. Bond market, stock market, the dollar - a galaxy of contradicting or reinforcing factors - an immense stew of input that somehow sculpts a closing price, every day. No one, not even Buffett, understands the process (as he has just learned). Certainly not those pundits on the many networks who offer false comfort every evening, pretending they know - an act of fraud.
What we do know is that the Dow is off 30+% since Obama was elected, 45% since the crisis came to a head. We did not predict the crisis but we have isolated the primary cause. Globalization and contagion compounded errors made initially in the US. Late Q4, major central banks successfully prevented a melt down. It was not a solution, only a band aid.
There are a maze of factors which impact the Dow: Bk of Eng policy, GM’s whining, China’s stimulus package, the weather. And there will always be surprises. In investing, the business of the future is to be dangerous. What we may do however is to stand back, away from the thicket, not expecting to predict a turn or bottom necessarily but to at least corral the odds and bring them into our camp. To be, if not more right, then less wrong.
We can learn to become good listeners. Market reaction, hindsight, has signaled that banks/credit must be addressed first. Because Obama has refused to do that the equity market has suffered significantly. There are many other causes of course, some known and some not. The "stimulus" plan is seen by reasonable observers as at best a wash, the stuff for our political blog but not this one, so likely little market-moving impact there. But the budget is seen by reasonable observers as this: Big Government as the ultimate hero; the private sector at best in a supporting role. Who that does not live under a rock does not understand that to the equity market, this is poison? All of it is corrosive to the economic fabric of this country.
The market has told us part of what it needs, that is, that which will provide sustenance. By listening we may not have the Holy Grail but we’ll have a leg up. Thus, until Obama 1) maps a plan for the banks, 2) quits lying about "investment" vs "spending", and "savings" and 3) shows the world markets that he is not a far-left ideologue, meaning he will not try to transform health care, education and energy as the stock market fears he will, be content to stay close to home.
Robert Craven
What we do know is that the Dow is off 30+% since Obama was elected, 45% since the crisis came to a head. We did not predict the crisis but we have isolated the primary cause. Globalization and contagion compounded errors made initially in the US. Late Q4, major central banks successfully prevented a melt down. It was not a solution, only a band aid.
There are a maze of factors which impact the Dow: Bk of Eng policy, GM’s whining, China’s stimulus package, the weather. And there will always be surprises. In investing, the business of the future is to be dangerous. What we may do however is to stand back, away from the thicket, not expecting to predict a turn or bottom necessarily but to at least corral the odds and bring them into our camp. To be, if not more right, then less wrong.
We can learn to become good listeners. Market reaction, hindsight, has signaled that banks/credit must be addressed first. Because Obama has refused to do that the equity market has suffered significantly. There are many other causes of course, some known and some not. The "stimulus" plan is seen by reasonable observers as at best a wash, the stuff for our political blog but not this one, so likely little market-moving impact there. But the budget is seen by reasonable observers as this: Big Government as the ultimate hero; the private sector at best in a supporting role. Who that does not live under a rock does not understand that to the equity market, this is poison? All of it is corrosive to the economic fabric of this country.
The market has told us part of what it needs, that is, that which will provide sustenance. By listening we may not have the Holy Grail but we’ll have a leg up. Thus, until Obama 1) maps a plan for the banks, 2) quits lying about "investment" vs "spending", and "savings" and 3) shows the world markets that he is not a far-left ideologue, meaning he will not try to transform health care, education and energy as the stock market fears he will, be content to stay close to home.
Robert Craven
Tuesday, March 3, 2009
US Banks, follow up
Simply throwing $ at the likes of Citi or GM is a fool’s errand and we all realize that now. For example, in exchange for the $17+ bln Bush gave GM and Chrysler, they were required to come up with a plan to regain viability. They have. They need another $22 bln! Too much. Scare tactics by the near-deceased bore fruit - "GM dies and we all die". This panicked most of Congress. But taxpayers have seen through that tactic; most Americans have now come to agree with our earlier assessment for the vehicle industry - Drop Dead.
Ideally we want to rely on the time-tested process of creative destruction for all of the economy, the workings of a free market. Should we have done that with the banks, simply stepped away? Was von Mises right? Well, ya, but then we’d all need to know where the grubs are located. So the answer is "No," at least for what we encountered Q4 - the liquidity crisis and contagion.
For banks unfortunately we must compromise, at least for some and at least temporarily. This is because some non-banking parts of banking companies are so large and entwined that their failure will impact all of us. Should have been regulated earlier along with the twins you say? Maybe so but here we are. In our Feb/24 sketch we touched on two methods we think would accomplish this resuscitation, neither necessarily mutually exclusive of the other, and both time tested (in the case of full yet temporary nationalization - Sweden).
Peter Morici, now a prof a the Univ of Maryland Bus School and earlier, chief economist of the US International Trade Comm expands on one of them: "No solution to preserve private banking can be found without halting the free fall in housing prices. That will require an aggregator or bad bank to purchase about $2 trillion in mortgage-backed securities at current mark-to-market values on the banks books. It could be capitalized with $250 billion in TARP funds, $250 billion in share sales to private shares, and $1 trillion in bonds. Banks and others could be paid for securities with 75 percent in cash and 25 percent in aggregator bank shares." He goes on: "Performing triage—leaving alone mortgages that will be repaid, reworking those that could be repaid with some adjustments in principal and interest terms, and foreclosing on the rest—the aggregator banks could fix the number of foreclosures and limit the fall in housing prices. As many mortgages would be saved, the aggregator bank, like its predecessor the Savings and Loan Crisis RTC would likely earn a profit for investors."
Makes sense. Ready Geithner, Obama? The "stress tests" are fine, a good idea. Let’s get to it.
Robert Craven
Ideally we want to rely on the time-tested process of creative destruction for all of the economy, the workings of a free market. Should we have done that with the banks, simply stepped away? Was von Mises right? Well, ya, but then we’d all need to know where the grubs are located. So the answer is "No," at least for what we encountered Q4 - the liquidity crisis and contagion.
For banks unfortunately we must compromise, at least for some and at least temporarily. This is because some non-banking parts of banking companies are so large and entwined that their failure will impact all of us. Should have been regulated earlier along with the twins you say? Maybe so but here we are. In our Feb/24 sketch we touched on two methods we think would accomplish this resuscitation, neither necessarily mutually exclusive of the other, and both time tested (in the case of full yet temporary nationalization - Sweden).
Peter Morici, now a prof a the Univ of Maryland Bus School and earlier, chief economist of the US International Trade Comm expands on one of them: "No solution to preserve private banking can be found without halting the free fall in housing prices. That will require an aggregator or bad bank to purchase about $2 trillion in mortgage-backed securities at current mark-to-market values on the banks books. It could be capitalized with $250 billion in TARP funds, $250 billion in share sales to private shares, and $1 trillion in bonds. Banks and others could be paid for securities with 75 percent in cash and 25 percent in aggregator bank shares." He goes on: "Performing triage—leaving alone mortgages that will be repaid, reworking those that could be repaid with some adjustments in principal and interest terms, and foreclosing on the rest—the aggregator banks could fix the number of foreclosures and limit the fall in housing prices. As many mortgages would be saved, the aggregator bank, like its predecessor the Savings and Loan Crisis RTC would likely earn a profit for investors."
Makes sense. Ready Geithner, Obama? The "stress tests" are fine, a good idea. Let’s get to it.
Robert Craven
Tuesday, February 24, 2009
US Banks
Today Bernanke highlighted that which most of us know already - the health of US banks is THE key to a recovery. So far, all we can really say with accuracy is that measures taken Q4 prevented a melt down. But that’s it.
There are several proposals on the drawing board for the banks. One solution may be to model on past successes: the S&L and banking crisis of the 80's and 90's. Policies implemented then worked. In 1989 Congress provided funds to close insolvent S&L’s and created the RTC to work out remaining troubled assets. Likewise, the FDIC was able to close insolvent banks without direct taxpayer assistance. Both agencies bought capital certificates from problem institutions that the agencies thought viable. (The rest were junked) They paid for the certificates by issuing FSLIC or FDIC senior notes. As the banks recovered, the certificates were redeemed in exchange for the notes. We will see, but our guess is that some variation of this may be adopted.
Or, perhaps outright nationalization for some. Take them over and recapitalize with taxpayer money. Fire current management. Once restructured, taxpayers might actually make a killing. Can the government pull this off, do they have the talent? Not sure, but the FDIC has a pretty darn good history of seizing insolvent institutions.
And for the rest of us? The rest of the economy will heal itself and in spite of the so-called stimulus package. The "stimulus" package amounts to interference and is at best a wash. It is also a fraud. The more government interference in the US real sector, the longer the recovery. Next, voters must tell their respective legislators to stop this and that "bailout" (now the pilots want to line up). These are not bailouts, merely instruments to delay the inevitable. Naturally the auto sector comes to mind. Our initial response was "Drop Dead". We were right. These companies carry a fatal flaw. They will continue to try to panic Congress - if they go, it all goes. But of course. They’re looking out for their own necks.
So should we by denying them theirs.
Robert Craven
There are several proposals on the drawing board for the banks. One solution may be to model on past successes: the S&L and banking crisis of the 80's and 90's. Policies implemented then worked. In 1989 Congress provided funds to close insolvent S&L’s and created the RTC to work out remaining troubled assets. Likewise, the FDIC was able to close insolvent banks without direct taxpayer assistance. Both agencies bought capital certificates from problem institutions that the agencies thought viable. (The rest were junked) They paid for the certificates by issuing FSLIC or FDIC senior notes. As the banks recovered, the certificates were redeemed in exchange for the notes. We will see, but our guess is that some variation of this may be adopted.
Or, perhaps outright nationalization for some. Take them over and recapitalize with taxpayer money. Fire current management. Once restructured, taxpayers might actually make a killing. Can the government pull this off, do they have the talent? Not sure, but the FDIC has a pretty darn good history of seizing insolvent institutions.
And for the rest of us? The rest of the economy will heal itself and in spite of the so-called stimulus package. The "stimulus" package amounts to interference and is at best a wash. It is also a fraud. The more government interference in the US real sector, the longer the recovery. Next, voters must tell their respective legislators to stop this and that "bailout" (now the pilots want to line up). These are not bailouts, merely instruments to delay the inevitable. Naturally the auto sector comes to mind. Our initial response was "Drop Dead". We were right. These companies carry a fatal flaw. They will continue to try to panic Congress - if they go, it all goes. But of course. They’re looking out for their own necks.
So should we by denying them theirs.
Robert Craven
Wednesday, February 18, 2009
Goodbye
With this issue we move on to analyze the administration’s attempt to resuscitate the banking sector. We say goodbye to the "stimulus" package, understanding that we as a nation will receive little spark, little bang for the buck from this bill. Our readers know the details - much of the spending is delayed. Even for near-term spending the largest outlays amount to just writing checks to state governments. Finally, there is no evidence that gov’t spending creates a multiplier anyway, but plenty that it does not. What the bill did accomplish however is something on the order of $30,000 in new debt for every American household.
From Gary Becker, the 1992 Nobel laureate and professor of economics at the University of Chicago: "....political considerations are especially important in a spending package adopted quickly while the economy is reeling, and just after a popular president took office. Many Democrats saw the stimulus bill as a golden opportunity to enact spending items they've long desired. For this reason, various components of the package are unlikely to pass any reasonably stringent cost-benefit test." Indeed.
Despite a genuine emergency this bill is focused on dispensing goodies to Democrat interest groups; it is a fraud. Sen Charles Schumer (D, NY) called it "porky," an understatement if there ever was one. Our last blog under National Politics addressed the Democrat’s process; our title was "Shameful". Decent folk from the left have been betrayed. Their party has betrayed all of us.
Robert Craven
From Gary Becker, the 1992 Nobel laureate and professor of economics at the University of Chicago: "....political considerations are especially important in a spending package adopted quickly while the economy is reeling, and just after a popular president took office. Many Democrats saw the stimulus bill as a golden opportunity to enact spending items they've long desired. For this reason, various components of the package are unlikely to pass any reasonably stringent cost-benefit test." Indeed.
Despite a genuine emergency this bill is focused on dispensing goodies to Democrat interest groups; it is a fraud. Sen Charles Schumer (D, NY) called it "porky," an understatement if there ever was one. Our last blog under National Politics addressed the Democrat’s process; our title was "Shameful". Decent folk from the left have been betrayed. Their party has betrayed all of us.
Robert Craven
Monday, February 16, 2009
Stimulus Plan - An Overview
The administration claims that we might not recover at all if a trillion dollar (w/ interest) package is not passed. World market psychology responds always in the extreme, especially to scare tactics, making the president’s habit of talking down the economy a reckless one. If the credit crisis had not been addressed promptly then indeed we would have experienced a melt down, something we warned about early on. This - the real sector - is something different altogether. Consider that during the 1973-1975 and 1980-1982 periods the unemployment rate almost doubled (4.6-9.0 percent, 5.6-10.8 percent, respectively). Reagan inherited a jobless rate above 10% for goodness sake; we are at 7.6%.
There are many ways listed by us and other observers to spark this economy - cut the payroll tax, cut the corp tax, suspend the cap gains & dividend tax, expand our trade agreements, etc. Substantial tax cuts have obviously worked before (Kennedy - Johnson / Reagan). Yet we are perhaps stuck with the administration’s response. Roughly a third of that are "tax cuts". Most tax cuts aimed at individuals are will not benefit a single taxpayer until their taxes are filed in 2010 -- if there is any benefit at all. Other than a tax credit of $7,500 for families buying a plug-in hybrid vehicle, there is little that is clear, straightforward tax benefit, either for corporate or individual.
That leaves spending. Roughly 25% of this $ is targeted to be spent in fiscal 09, another 45% in 2010. You kidding me? Then 30% in 2011 or later, when even the more pessimistic forecasters expect the economy to be in full recovery.
OK, let’s look at implementation. Take the Energy Department. It will play a key role in the plan. The bill could pump as much as $170 billion into projects such as highways, Internet broadband and public-housing repairs. Of that some $40 billion will go to the Energy dept. The agency would be under the gun to swiftly hand out money to projects for example to modernize the electric grid, build electric cars and make homes and buildings more energy efficient. Yet the Energy dept has had limited experience pulling off big projects. Most of the department's $25 billion budget goes toward maintaining the nation's nuclear stockpile, cleaning up former weapons plants, and doing basic research. "The DOE is going to have to dramatically change how it does business if it hopes to push all this money out the door," says Karen Harbert, a former senior Energy Department official who now directs the U.S. Chamber of Commerce's lobbying efforts on energy issues. "They are going to need more people, more oversight and more freedom to waive regulations." And last month, the Government Accountability Office cited the agency's "inadequate management and oversight of its contractors" when it put the department on its list of agencies at "high risk" for waste, fraud, abuse and mismanagement.
Sound promising? Yet sadly, there are still those who believe that the gov’t can spend more efficiently than private sector. This leads us to the final section of this sketch: Even if implemented, will it work? There is no evidence that it will. It didn't work in Japan in the 1990s as we all know - 10 stimulus packages implemented over an eight year period failed to prevent the "lost decade".
It didn’t work in the US in the 30's. Henry Morgenthau, FDR’s Sect of the Treasury, testifying before the House Ways and Means Committee in May 1939: "We are spending more money than we have ever spent before and it does not work. I want to see this country prosperous. I want to see people get a job. We have never made good on our promises. I say after eight years of this administration we have just as much unemployment as when we started and an enormous debt to boot."
And our view is that it won’t work now. The Congressional Budget Office concludes that the cost of servicing the bill's nearly trillion-dollar debt will shrink the economy within a decade. Harvard economist Robert Barro, candidate for the 03 Nobel, calls the legislation "probably the worst bill that has been put forward since the 1930s." "I mean it's wasting a tremendous amount of money," he said in an interview with the Atlantic. "I don't think it will expand the economy. . . . I think it's garbage." Agreed.
Most disturbing however are the implications this legislation holds for future generations. We will take that up over the near term.
Robert Craven
There are many ways listed by us and other observers to spark this economy - cut the payroll tax, cut the corp tax, suspend the cap gains & dividend tax, expand our trade agreements, etc. Substantial tax cuts have obviously worked before (Kennedy - Johnson / Reagan). Yet we are perhaps stuck with the administration’s response. Roughly a third of that are "tax cuts". Most tax cuts aimed at individuals are will not benefit a single taxpayer until their taxes are filed in 2010 -- if there is any benefit at all. Other than a tax credit of $7,500 for families buying a plug-in hybrid vehicle, there is little that is clear, straightforward tax benefit, either for corporate or individual.
That leaves spending. Roughly 25% of this $ is targeted to be spent in fiscal 09, another 45% in 2010. You kidding me? Then 30% in 2011 or later, when even the more pessimistic forecasters expect the economy to be in full recovery.
OK, let’s look at implementation. Take the Energy Department. It will play a key role in the plan. The bill could pump as much as $170 billion into projects such as highways, Internet broadband and public-housing repairs. Of that some $40 billion will go to the Energy dept. The agency would be under the gun to swiftly hand out money to projects for example to modernize the electric grid, build electric cars and make homes and buildings more energy efficient. Yet the Energy dept has had limited experience pulling off big projects. Most of the department's $25 billion budget goes toward maintaining the nation's nuclear stockpile, cleaning up former weapons plants, and doing basic research. "The DOE is going to have to dramatically change how it does business if it hopes to push all this money out the door," says Karen Harbert, a former senior Energy Department official who now directs the U.S. Chamber of Commerce's lobbying efforts on energy issues. "They are going to need more people, more oversight and more freedom to waive regulations." And last month, the Government Accountability Office cited the agency's "inadequate management and oversight of its contractors" when it put the department on its list of agencies at "high risk" for waste, fraud, abuse and mismanagement.
Sound promising? Yet sadly, there are still those who believe that the gov’t can spend more efficiently than private sector. This leads us to the final section of this sketch: Even if implemented, will it work? There is no evidence that it will. It didn't work in Japan in the 1990s as we all know - 10 stimulus packages implemented over an eight year period failed to prevent the "lost decade".
It didn’t work in the US in the 30's. Henry Morgenthau, FDR’s Sect of the Treasury, testifying before the House Ways and Means Committee in May 1939: "We are spending more money than we have ever spent before and it does not work. I want to see this country prosperous. I want to see people get a job. We have never made good on our promises. I say after eight years of this administration we have just as much unemployment as when we started and an enormous debt to boot."
And our view is that it won’t work now. The Congressional Budget Office concludes that the cost of servicing the bill's nearly trillion-dollar debt will shrink the economy within a decade. Harvard economist Robert Barro, candidate for the 03 Nobel, calls the legislation "probably the worst bill that has been put forward since the 1930s." "I mean it's wasting a tremendous amount of money," he said in an interview with the Atlantic. "I don't think it will expand the economy. . . . I think it's garbage." Agreed.
Most disturbing however are the implications this legislation holds for future generations. We will take that up over the near term.
Robert Craven
Tuesday, February 10, 2009
A Plan?
Geithner jumped the gun. It was a huge mistake. The financial stability "Plan"? Geithner is apparently not acquainted with the dictionary. Webster: plan - to devise procedures for achieving a given objective.
From Larry Kudlow: "Geithner would have been better off not giving a speech until he could put real meat on the bones. What he pulled Tuesday was a classic rookie move that will further erode the public’s trust in his capabilities. Following the controversy over his late payment of taxes, this bank-plan blunder could be another nail in his coffin."
We have provided a background on the "stimulus" package, along with our own REAL stimulus package. We have yet to receive the call that is was accepted. OK. So we waited this am for something of substance from the administration re the bank plan, a plan which is far more key for the near-term health of our economy than any stimulus anyway.
All the market wanted to know today is how the administration will be able to help banks with their so-called toxic assets (the result of the complicity between an accommodating wall st and the left’s refusal to reform F/F mortgage creation - ground zero) while not having taxpayers get ripped off in the process. Instead, Geithner failed 1) to say how much $ will be on offer to invest in the banks themselves and on what terms, and 2) how and on what terms a public-private "bad bank" will work and how it will price these toxic assets it intends to buy.
"Details": This bad bank will be seeded with Treasury capital but largely funded by private equity or hedge funds. Geithner spoke vaguely about what amounts to a public/private investment fund that will use OUR MONEY and provide financing for private investors, who are then supposed to buy toxic assets. These investors then would have to figure out the right value. If they are right, they could get all of the upside. They would also take some (we don’t know how much) of the downside.
As another part of the deal Geithner did note that the Fed’s facility to buy collateralized consumer loans will be expanded. That is a good thing for consumers.
Finally, there was little re the mortgage market aside from a promise of a detailed plan later.
A real problem for us is that the presentation was laced with partisan politics and a misguided ideology to boot. How can any of us respect this individual? He started out by attacking supply siders and the Bush tax cuts, adding that these have only added to our problem, "..only helped lead us to the crisis we face right now." Blaming the Bush tax cuts for the crisis is false, it is a partisan construct and a lie. Naturally our pals from the left, reciting the party line pretend to abhor tax cuts, relying less on scholarship than sound bites fed to them by the DNC. They may not recall, or pretend not to recall the super successful Kennedy-Johnson tax cuts of the 60's nor the successful Reagan tax cuts of the 80s. But Geithner knows better.
Robert Craven
From Larry Kudlow: "Geithner would have been better off not giving a speech until he could put real meat on the bones. What he pulled Tuesday was a classic rookie move that will further erode the public’s trust in his capabilities. Following the controversy over his late payment of taxes, this bank-plan blunder could be another nail in his coffin."
We have provided a background on the "stimulus" package, along with our own REAL stimulus package. We have yet to receive the call that is was accepted. OK. So we waited this am for something of substance from the administration re the bank plan, a plan which is far more key for the near-term health of our economy than any stimulus anyway.
All the market wanted to know today is how the administration will be able to help banks with their so-called toxic assets (the result of the complicity between an accommodating wall st and the left’s refusal to reform F/F mortgage creation - ground zero) while not having taxpayers get ripped off in the process. Instead, Geithner failed 1) to say how much $ will be on offer to invest in the banks themselves and on what terms, and 2) how and on what terms a public-private "bad bank" will work and how it will price these toxic assets it intends to buy.
"Details": This bad bank will be seeded with Treasury capital but largely funded by private equity or hedge funds. Geithner spoke vaguely about what amounts to a public/private investment fund that will use OUR MONEY and provide financing for private investors, who are then supposed to buy toxic assets. These investors then would have to figure out the right value. If they are right, they could get all of the upside. They would also take some (we don’t know how much) of the downside.
As another part of the deal Geithner did note that the Fed’s facility to buy collateralized consumer loans will be expanded. That is a good thing for consumers.
Finally, there was little re the mortgage market aside from a promise of a detailed plan later.
A real problem for us is that the presentation was laced with partisan politics and a misguided ideology to boot. How can any of us respect this individual? He started out by attacking supply siders and the Bush tax cuts, adding that these have only added to our problem, "..only helped lead us to the crisis we face right now." Blaming the Bush tax cuts for the crisis is false, it is a partisan construct and a lie. Naturally our pals from the left, reciting the party line pretend to abhor tax cuts, relying less on scholarship than sound bites fed to them by the DNC. They may not recall, or pretend not to recall the super successful Kennedy-Johnson tax cuts of the 60's nor the successful Reagan tax cuts of the 80s. But Geithner knows better.
Robert Craven
Tuesday, February 3, 2009
The Stimulus Plan - A Background
We have three theaters to monitor: 1) The Fed, 2) the Bank Rescue plan and 3) the Stimulus plan. The Fed runs the only game in town, for now (see earlier sketch). Nothing else is working. The administration’s Rescue plan is to be fleshed out in 10 days or so, armed with roughly half of the original $700 bln. We will follow that over the near term. Below is a guide to the Stimulus plan, taken up by the Senate this week.
There is ample evidence that tax cuts spark economic activity; there is very little that gov’t spending can do the same. Roosevelt’s programs did next to nothing to fetch the economy from the Great Depression. WWII did the trick. Some observers maintain that the government can increase its spending only by reducing private spending equivalently. From Rich Wagner at George Mason Univ, "Whether government finances its added spending by increasing taxes, by borrowing, or by inflating the currency, the added spending will be offset by reduced private spending. Furthermore, private spending is generally more efficient than the government spending that would replace it because people act more carefully when they spend their own money than when they spend other people's money."
Wagner may be correct but this is lost on Congress. Tax cuts amount to only one third (1/3) of the package ($500 credit for individuals/$1000 for couples). The balance is direct gov’t spending, or transfers. The CBO and the Joint Committee on Taxation have calculated that only $170 billion, or about one-fifth of the $816 billion package will be spent in fiscal 2009. An additional $356 billion will be spent in 2010. That leaves $290 billion to be spent when even the most pessimistic forecasters think the economy will be in recovery mode. Some of the longer-term investment projects proposed may be quite worthy; some are not. Either way, they are not stimulus. What the House Democrats have done is write down every single item on their wish list, append dollar amounts next to the items seemingly at random, and call it "stimulus." Nancy Pelosi was on TV recently justifying the "stimulus." "How," asks the reporter from CBS, "does $335 million in STD prevention stimulate the economy?"
Stimulus has to stimulate, right? Yet consider education. Of the $140 billion spending on education, some may move rather quickly, say the $13 billion over two years for Title I schools and for special education under the Individuals With Disabilities Education Act. Maybe. But also included are programs that even under the most optimistic timetable will take longer to complete, like $20 billion for school renovations. These would provide ZERO near-term help for the economy. Similar scrutiny could be trained on health care and especially on alternative energy programs. A large chunk of health care spending would not start until 2012 or later.
How may Congress best provide the spark? Well, try cutting the U.S. corporate tax rate -- at 35%, among the highest of all industrialized nations -- in half. Suspend the capital gains tax for a year to provide the incentive for new investment. Any fool knows this would work. Postponing the scheduled increase in the tax on dividends and capital gains would raise share prices, leading to increased consumer spending and, by lowering the cost of capital, more business investment.
Or, if Congress insists on spending, make it rapid, and, on something that needs to be done. How about including higher defense outlays, including replacing and repairing supplies and equipment, needed after five years of fighting? The military can increase its level of procurement very rapidly. Yet the proposed spending plan includes less than $5 billion for defense, only about one-half of 1 percent of the total package.
Robert Craven
There is ample evidence that tax cuts spark economic activity; there is very little that gov’t spending can do the same. Roosevelt’s programs did next to nothing to fetch the economy from the Great Depression. WWII did the trick. Some observers maintain that the government can increase its spending only by reducing private spending equivalently. From Rich Wagner at George Mason Univ, "Whether government finances its added spending by increasing taxes, by borrowing, or by inflating the currency, the added spending will be offset by reduced private spending. Furthermore, private spending is generally more efficient than the government spending that would replace it because people act more carefully when they spend their own money than when they spend other people's money."
Wagner may be correct but this is lost on Congress. Tax cuts amount to only one third (1/3) of the package ($500 credit for individuals/$1000 for couples). The balance is direct gov’t spending, or transfers. The CBO and the Joint Committee on Taxation have calculated that only $170 billion, or about one-fifth of the $816 billion package will be spent in fiscal 2009. An additional $356 billion will be spent in 2010. That leaves $290 billion to be spent when even the most pessimistic forecasters think the economy will be in recovery mode. Some of the longer-term investment projects proposed may be quite worthy; some are not. Either way, they are not stimulus. What the House Democrats have done is write down every single item on their wish list, append dollar amounts next to the items seemingly at random, and call it "stimulus." Nancy Pelosi was on TV recently justifying the "stimulus." "How," asks the reporter from CBS, "does $335 million in STD prevention stimulate the economy?"
Stimulus has to stimulate, right? Yet consider education. Of the $140 billion spending on education, some may move rather quickly, say the $13 billion over two years for Title I schools and for special education under the Individuals With Disabilities Education Act. Maybe. But also included are programs that even under the most optimistic timetable will take longer to complete, like $20 billion for school renovations. These would provide ZERO near-term help for the economy. Similar scrutiny could be trained on health care and especially on alternative energy programs. A large chunk of health care spending would not start until 2012 or later.
How may Congress best provide the spark? Well, try cutting the U.S. corporate tax rate -- at 35%, among the highest of all industrialized nations -- in half. Suspend the capital gains tax for a year to provide the incentive for new investment. Any fool knows this would work. Postponing the scheduled increase in the tax on dividends and capital gains would raise share prices, leading to increased consumer spending and, by lowering the cost of capital, more business investment.
Or, if Congress insists on spending, make it rapid, and, on something that needs to be done. How about including higher defense outlays, including replacing and repairing supplies and equipment, needed after five years of fighting? The military can increase its level of procurement very rapidly. Yet the proposed spending plan includes less than $5 billion for defense, only about one-half of 1 percent of the total package.
Robert Craven
Thursday, January 15, 2009
We Are Left With The Fed
The new administration’s rescue plan(s) will impact over the longer term, if at all. There will be no near term impact, zero, notwithstanding the mix. We are left with the Fed.
Few of us specialize in central banking. Yet central banks - Fed if American, Bk of Eng if Brit, ECB if European - hold the key to the West’s economic well being. Fed policy now impacts all of us Americans directly, sometimes immediately. Thus, hadn’t we better get a grip? Who are these guys and what are they up to?
We are told that the Fed’s target is near zero. What in the world does this mean? From soph year, Eco & Bkg 101 recall that banks are required to hold a certain % of reserves against loans. Day to day some are flush, some are short. Those that are flush lend o/n to those that are short. The rate they charge is called the Fed Funds rate. This is also the Fed’s target. Here is why. Reserves and currency are base money - the heart of the system. The Fed figures that by manipulating, fine tuning the amount of reserves available it can fan or retard the economic flames. Very true, usually. The FF’s rate simply indicates tension. The Fed can increase or decrease the supply of "non-borrowed" reserves through so-called "open-market operations". No big deal here. It means that the NY desk injects reserves by buying U S securities, usually on a temporary basis, or repo, agreeing to reverse the transaction in a few days. It does the reverse to shrink reserves. In the orchestration it is far more complex; fine, we don’t care as long as we have the thrust of it.
So now, with the FF’s target at near zero banks can fetch all the reserves they want (with which to make loans) at practically nothing. But they’re not. Why? It’s not just that they’re risk adverse - wimps really, but that is for another sketch. It’s that many of their assets are near garbage and even they don’t know what they’re worth, yet. They’d rather see to that first, as soon as they can get a grip, poor things.
Back to the Fed. So orthodox policy is not working. What is next is what Bernanke calls "quantitative easing" or the Bk of Eng "the nuclear option". It’s not nuclear or new, just rarely used. No one at the Fed has much experience with it; yet the Fed as it turns out can buy anything they want, outright (not temporary, not a repo) - a herd of long horn steers / the NY Giants. All the Fed needs is emergency powers and those exist under Article 13 (3) of the code. Where does the Fed get the $? Out of thin air. For a non-special forces approach, assume the U S gov’t cuts taxes, financed by bond issuance. The Fed can buy this US debt outright. The Fed’s balance sheet expands, the $ goes to US citizens.
But the Fed is now working out of its comfort zone, more of a Delta Force approach. Bernanke says he can "expand the menu of assets he buys". Sure enough, the Fed is already fast at it. Have a credit card? Haven’t received a notice that your limit has been reduced? Likely because the Fed is already buying securities collateralized by credit card receivables. Have a mortgage? Terms are easier? Same answer. You’re a corporation with a good credit but can’t sell your commercial paper (short-term IOU’s) anymore? Call the Fed. For three months they have been buying this stuff.
Back to Eco 101. Isn’t this inflationary? Guess not. All observers see are signs of deflation. There is no fear on the part of central bank officials at the moment. They’ll reverse policy at the appropriate time. Maybe.
Robert Craven
Few of us specialize in central banking. Yet central banks - Fed if American, Bk of Eng if Brit, ECB if European - hold the key to the West’s economic well being. Fed policy now impacts all of us Americans directly, sometimes immediately. Thus, hadn’t we better get a grip? Who are these guys and what are they up to?
We are told that the Fed’s target is near zero. What in the world does this mean? From soph year, Eco & Bkg 101 recall that banks are required to hold a certain % of reserves against loans. Day to day some are flush, some are short. Those that are flush lend o/n to those that are short. The rate they charge is called the Fed Funds rate. This is also the Fed’s target. Here is why. Reserves and currency are base money - the heart of the system. The Fed figures that by manipulating, fine tuning the amount of reserves available it can fan or retard the economic flames. Very true, usually. The FF’s rate simply indicates tension. The Fed can increase or decrease the supply of "non-borrowed" reserves through so-called "open-market operations". No big deal here. It means that the NY desk injects reserves by buying U S securities, usually on a temporary basis, or repo, agreeing to reverse the transaction in a few days. It does the reverse to shrink reserves. In the orchestration it is far more complex; fine, we don’t care as long as we have the thrust of it.
So now, with the FF’s target at near zero banks can fetch all the reserves they want (with which to make loans) at practically nothing. But they’re not. Why? It’s not just that they’re risk adverse - wimps really, but that is for another sketch. It’s that many of their assets are near garbage and even they don’t know what they’re worth, yet. They’d rather see to that first, as soon as they can get a grip, poor things.
Back to the Fed. So orthodox policy is not working. What is next is what Bernanke calls "quantitative easing" or the Bk of Eng "the nuclear option". It’s not nuclear or new, just rarely used. No one at the Fed has much experience with it; yet the Fed as it turns out can buy anything they want, outright (not temporary, not a repo) - a herd of long horn steers / the NY Giants. All the Fed needs is emergency powers and those exist under Article 13 (3) of the code. Where does the Fed get the $? Out of thin air. For a non-special forces approach, assume the U S gov’t cuts taxes, financed by bond issuance. The Fed can buy this US debt outright. The Fed’s balance sheet expands, the $ goes to US citizens.
But the Fed is now working out of its comfort zone, more of a Delta Force approach. Bernanke says he can "expand the menu of assets he buys". Sure enough, the Fed is already fast at it. Have a credit card? Haven’t received a notice that your limit has been reduced? Likely because the Fed is already buying securities collateralized by credit card receivables. Have a mortgage? Terms are easier? Same answer. You’re a corporation with a good credit but can’t sell your commercial paper (short-term IOU’s) anymore? Call the Fed. For three months they have been buying this stuff.
Back to Eco 101. Isn’t this inflationary? Guess not. All observers see are signs of deflation. There is no fear on the part of central bank officials at the moment. They’ll reverse policy at the appropriate time. Maybe.
Robert Craven
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