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Politics and Your Money: 8/26/2011
Friday, August 26, 2011
8/26/2011
Hi all,
Today is Friday 8/26/2011, the day hurricane Irene makes its approach to USA mainland. It is expected to come ashore in North Carolina, about 50 -75 miles north of this writer and be a real problem for the Washington to Boston areas. The track as I understand it is reminiscent of Hurricane Hazel in 1954 and Donna in 1960. That was the last significant hurricane to hit the Northeast. Most may not remember it. That will be a problem.
Politically one has to wonder. An earth quake, a hurricane, all focused on Washington. The earth quake cracked the Washington Monument and shook some plaster out of the ceiling in the Capital. Maybe the hurricane will wash away some of the dirt in Washington. I guess we can only hope. Someone once wrote about the audacity of hope. Not sure he was taking about the same hope I have.
In the meantime the economy will take a short term hit if the storm really screws up the works in the northeast but a 10 billion dollar disaster could mean work for a few people. In fact, the winds may cause enough damage to create a mini employment boom for the housing industry.
Looking at the statistics the economy reportedly grew only 1% in the second quarter, with car sales being a bright spot. I, personally think that may wane this next month or two. Consumer debt jumped up more than $15 Billion this past month. What is that about? Did we so soon forget that debt is a real problem? Are we moving back to the habits of the past?
Corporate earnings for the second quarter compared to last year grew 0.0%. That is correct. It has grown 0.0%. Didn’t shrink but didn’t grow either. Of course this time last year they were growing around 50% over the prior year so there isn’t any immanent danger of massive corporate collapse. But there also isn’t any pressure to hire either.
Unemployment first time claims has been stubbornly around 400,000 per week. We get a little below that for a week then we pop back up above. The year to date average of about 411,000 is about 33% higher than the average prior to the financial crisis and subsequent recession. It takes about 100,000 new jobs created each month to absorb the new members of the work force like returning military, kids growing up and others re-entering the work force. To reduce the unemployment rate we need to create additional jobs beyond the 100,000 each and every month. Each .1% decline in the unemployment number requires a about 140,000 new jobs. Remember that is in addition to the 100,000 that we need to absorb the growing workforce. To just reach what President Obama told us would be the cap of 8%, we need to create 1million 600 thousand jobs in addition to the 100,000 per month each month that it takes up to get there. That will require an economic growth of around 8% per year. A very long way from our 1% current rate.
Congress does indeed have a tough job ahead. But it is of their own making. They refused to address problems when they were small now they are stuck with the mess. I liken their position to having failed to stop at a gas station because the price was too high and now we have run out of gas on a cold and snowy night without cell phone service. Not a pleasant situation. Unfortunately it is you and I who will have to walk in the cold dark and wet night until we reach help and I imagine that is going to be a very unpleasant journey.
Isolationists would say close off imports with taxation and duties and open up manufacturing at home. While that could work I suppose, the path is ugly. First you raise tariffs and trading partners do the same. Then your exports drop right now and unemployment rises in those sectors. Spooling up manufacturing in the USA isn’t easy. It will take a while to equip factories long shuttered, hire and train people and then actually produce and ship goods. This also takes an enormous amount of money. So the practical approach is to look at imports and exports and work at making our people/businesses more competitive so that this can happen without the intervention of tariffs and the subsequent dislocation that would bring. Oil being the major import, we need to address energy but going green is going to take decades. Drilling and pipelines are much faster. Not that we shouldn’t be working hard on green alternatives it is just that we have to avoid being bitten by the alligators while we work to drain the swamp. Once the swamp is drained the alligators will leave, we just have to prevail.
More competitive may mean lower business taxes and even corporate welfare where it is justified. Tax incentives for job creation. I remember when utilities were tightly regulated. They were allowed to earn a specified rate of return. The rate setting agencies would look at rate requests, look at costs and investment in infrastructure and calculate the rate that would yield the desired return. While consumer advocates argued that there was no incentive for the companies to be more efficient, I remember that they employed a lot more people and didn’t have to drag them across the country every time mother nature through a fit.
Not sure deregulation has worked to advantage. Not sure that the old method was fault free. Maybe we need to look at a hybrid approach of some sort.
Well, stay safe and dry this weekend. We’ll be back with you next week; the good Lord willing and the creek don’t rise more than usual.
Today is Friday 8/26/2011, the day hurricane Irene makes its approach to USA mainland. It is expected to come ashore in North Carolina, about 50 -75 miles north of this writer and be a real problem for the Washington to Boston areas. The track as I understand it is reminiscent of Hurricane Hazel in 1954 and Donna in 1960. That was the last significant hurricane to hit the Northeast. Most may not remember it. That will be a problem.
Politically one has to wonder. An earth quake, a hurricane, all focused on Washington. The earth quake cracked the Washington Monument and shook some plaster out of the ceiling in the Capital. Maybe the hurricane will wash away some of the dirt in Washington. I guess we can only hope. Someone once wrote about the audacity of hope. Not sure he was taking about the same hope I have.
In the meantime the economy will take a short term hit if the storm really screws up the works in the northeast but a 10 billion dollar disaster could mean work for a few people. In fact, the winds may cause enough damage to create a mini employment boom for the housing industry.
Looking at the statistics the economy reportedly grew only 1% in the second quarter, with car sales being a bright spot. I, personally think that may wane this next month or two. Consumer debt jumped up more than $15 Billion this past month. What is that about? Did we so soon forget that debt is a real problem? Are we moving back to the habits of the past?
Corporate earnings for the second quarter compared to last year grew 0.0%. That is correct. It has grown 0.0%. Didn’t shrink but didn’t grow either. Of course this time last year they were growing around 50% over the prior year so there isn’t any immanent danger of massive corporate collapse. But there also isn’t any pressure to hire either.
Unemployment first time claims has been stubbornly around 400,000 per week. We get a little below that for a week then we pop back up above. The year to date average of about 411,000 is about 33% higher than the average prior to the financial crisis and subsequent recession. It takes about 100,000 new jobs created each month to absorb the new members of the work force like returning military, kids growing up and others re-entering the work force. To reduce the unemployment rate we need to create additional jobs beyond the 100,000 each and every month. Each .1% decline in the unemployment number requires a about 140,000 new jobs. Remember that is in addition to the 100,000 that we need to absorb the growing workforce. To just reach what President Obama told us would be the cap of 8%, we need to create 1million 600 thousand jobs in addition to the 100,000 per month each month that it takes up to get there. That will require an economic growth of around 8% per year. A very long way from our 1% current rate.
Congress does indeed have a tough job ahead. But it is of their own making. They refused to address problems when they were small now they are stuck with the mess. I liken their position to having failed to stop at a gas station because the price was too high and now we have run out of gas on a cold and snowy night without cell phone service. Not a pleasant situation. Unfortunately it is you and I who will have to walk in the cold dark and wet night until we reach help and I imagine that is going to be a very unpleasant journey.
Isolationists would say close off imports with taxation and duties and open up manufacturing at home. While that could work I suppose, the path is ugly. First you raise tariffs and trading partners do the same. Then your exports drop right now and unemployment rises in those sectors. Spooling up manufacturing in the USA isn’t easy. It will take a while to equip factories long shuttered, hire and train people and then actually produce and ship goods. This also takes an enormous amount of money. So the practical approach is to look at imports and exports and work at making our people/businesses more competitive so that this can happen without the intervention of tariffs and the subsequent dislocation that would bring. Oil being the major import, we need to address energy but going green is going to take decades. Drilling and pipelines are much faster. Not that we shouldn’t be working hard on green alternatives it is just that we have to avoid being bitten by the alligators while we work to drain the swamp. Once the swamp is drained the alligators will leave, we just have to prevail.
More competitive may mean lower business taxes and even corporate welfare where it is justified. Tax incentives for job creation. I remember when utilities were tightly regulated. They were allowed to earn a specified rate of return. The rate setting agencies would look at rate requests, look at costs and investment in infrastructure and calculate the rate that would yield the desired return. While consumer advocates argued that there was no incentive for the companies to be more efficient, I remember that they employed a lot more people and didn’t have to drag them across the country every time mother nature through a fit.
Not sure deregulation has worked to advantage. Not sure that the old method was fault free. Maybe we need to look at a hybrid approach of some sort.
Well, stay safe and dry this weekend. We’ll be back with you next week; the good Lord willing and the creek don’t rise more than usual.
Thursday, August 18, 2011
August 18, 2011
Ok, so the world markets are in a tizzy. Congress is on vacation, the President is heading to Martha’s Vineyard with Michelle and the girls. I guess I shouldn’t be too concerned. If there was a real problem they’d all be at work…right?
The market is at it again. Greed is being defeated by Fear. What if Europe has a recession? What if the European Monetary Union collapses? What if our growth slips again and we have a double dip recession? Gold is trading over $1800 per share and the bubble, if there is one, is getting bigger and the bigger bubbles get the more likely they are to burst.
When the government stops trying to “fix” the economy and simply allows the market to wring out it excesses we will get to where we are going anyway, we will just get there faster. If the government wants to help, stop trying to bolster the auto industry with special incentives (cash for clunkers) and the real estate/housing industry (tax incentives for home purchases). They all simply postponed the inevitable. The pricing of these assets has to reach a sustainable point.
A better approach, in this writers mind, would be to assist families that need help (Unemployment insurance, support for COBRA costs and extend the COBRA benefits time window). These things allow the market to work but help protect families. Those whose greed resulted in pain, well that is the risk they knowingly took. I can’t feel sorry for them. Those who went to work every day and did what was asked of them deserve the help of their neighbors. If it takes government to accomplish that due to the scale of it, then so be it.
Just remember “We the People” as the Constitution describes us, is all there is. There is only us. Every dollar spent to assist one family must come from some other family. Those who are fortunate, smart, willing to work hard and are richly rewarded do have a responsibility to help their less fortunate neighbors. That is the way our tax system is designed. The question we face today is how much of the income the richly rewarded get should be taken from them and given to their neighbor.
When it comes to Europe, they are not the United Countries of Europe. They are independent countries which are trying to improve international trade efficiency (between themselves and others) by having a common currency and multilateral trade agreements. Remember, the Euro was only created in 1999. It is barely a dozen years old and this is its first real test. Whether it can endure is open for speculation. If it fails, each country will be impacted, as will the rest of the world as what new currencies will be introduced by each country and what the individual exchange rates might be. That could affect our investments (personal, business and government) that are denominated in the Euro but are placed in various countries.
We can’t avoid the fallout. Some investors want to cut to cash. US dollars are shrinking in purchasing power nearly every day, eaten by inflation domestically and by government monetization of the growing debt. Congressional inability to accomplish anything is making foreigners uncomfortable when it comes to buying our bonds and sooner of later the interest rate demanded for additional debt will rise.
Housing is still in the toilet, jobs remain scarce, the Mall seems to be less busy when I stop in yet retail sales are reportedly 3% + above the prior year. The US is a consumer driven economy with 65 – 70% of our GDP from consumer spending so a 3% up tick should result in about a 2% growth in the GDP. All that has to happen to achieve that is that none of the other aspects of the GDP are negative compared to last year.
2%, anemic by almost everyone’s measure, is still positive and we need 2 quarters of negative growth in a row to be technically in a recession. 2% growth does nothing for unemployment so although it is not a recession, it will feel like one.
I hate to be the voice of doom and gloom so I’ll say it like this. Unemployment is here to stay until 2014 or later. I’m still thinking 2017 which I said in 2008 or 2009. Won’t matter who is elected President in 2012. It could be sooner or later depending on who gets elected to congress in 2012. The more congress members that get returned, who have been there more than one term and are part of the problem rather than part of the solution, the longer it will take for the economy to recover.
We need new blood but it must be quality. Ideologues probably won’t help reach an appropriate consensus. We have a lot of long term ideologues whose my way or the highway attitude got us where we are. We have to find a leader who can set a course to sustainable growth and to lead congress and the country to progress. It will take time. It will cause a lot of change in the way we do things. States will have to stand up and be responsible for the quality of life in their region. The federal government shouldn’t mandate rules to the states…period. The need for “Federal Law” should be minimized and used only where uniformity between the states is really needed. All other law should be State specific reflecting the values of the people who live there and who pay taxes there.
Have a great weekend. The markets are closed so while you may not get richer, you won’t get poorer either. Congress and the White house will be on vacation so your life may not get any better but it likely won’t get any worse either.
The market is at it again. Greed is being defeated by Fear. What if Europe has a recession? What if the European Monetary Union collapses? What if our growth slips again and we have a double dip recession? Gold is trading over $1800 per share and the bubble, if there is one, is getting bigger and the bigger bubbles get the more likely they are to burst.
When the government stops trying to “fix” the economy and simply allows the market to wring out it excesses we will get to where we are going anyway, we will just get there faster. If the government wants to help, stop trying to bolster the auto industry with special incentives (cash for clunkers) and the real estate/housing industry (tax incentives for home purchases). They all simply postponed the inevitable. The pricing of these assets has to reach a sustainable point.
A better approach, in this writers mind, would be to assist families that need help (Unemployment insurance, support for COBRA costs and extend the COBRA benefits time window). These things allow the market to work but help protect families. Those whose greed resulted in pain, well that is the risk they knowingly took. I can’t feel sorry for them. Those who went to work every day and did what was asked of them deserve the help of their neighbors. If it takes government to accomplish that due to the scale of it, then so be it.
Just remember “We the People” as the Constitution describes us, is all there is. There is only us. Every dollar spent to assist one family must come from some other family. Those who are fortunate, smart, willing to work hard and are richly rewarded do have a responsibility to help their less fortunate neighbors. That is the way our tax system is designed. The question we face today is how much of the income the richly rewarded get should be taken from them and given to their neighbor.
When it comes to Europe, they are not the United Countries of Europe. They are independent countries which are trying to improve international trade efficiency (between themselves and others) by having a common currency and multilateral trade agreements. Remember, the Euro was only created in 1999. It is barely a dozen years old and this is its first real test. Whether it can endure is open for speculation. If it fails, each country will be impacted, as will the rest of the world as what new currencies will be introduced by each country and what the individual exchange rates might be. That could affect our investments (personal, business and government) that are denominated in the Euro but are placed in various countries.
We can’t avoid the fallout. Some investors want to cut to cash. US dollars are shrinking in purchasing power nearly every day, eaten by inflation domestically and by government monetization of the growing debt. Congressional inability to accomplish anything is making foreigners uncomfortable when it comes to buying our bonds and sooner of later the interest rate demanded for additional debt will rise.
Housing is still in the toilet, jobs remain scarce, the Mall seems to be less busy when I stop in yet retail sales are reportedly 3% + above the prior year. The US is a consumer driven economy with 65 – 70% of our GDP from consumer spending so a 3% up tick should result in about a 2% growth in the GDP. All that has to happen to achieve that is that none of the other aspects of the GDP are negative compared to last year.
2%, anemic by almost everyone’s measure, is still positive and we need 2 quarters of negative growth in a row to be technically in a recession. 2% growth does nothing for unemployment so although it is not a recession, it will feel like one.
I hate to be the voice of doom and gloom so I’ll say it like this. Unemployment is here to stay until 2014 or later. I’m still thinking 2017 which I said in 2008 or 2009. Won’t matter who is elected President in 2012. It could be sooner or later depending on who gets elected to congress in 2012. The more congress members that get returned, who have been there more than one term and are part of the problem rather than part of the solution, the longer it will take for the economy to recover.
We need new blood but it must be quality. Ideologues probably won’t help reach an appropriate consensus. We have a lot of long term ideologues whose my way or the highway attitude got us where we are. We have to find a leader who can set a course to sustainable growth and to lead congress and the country to progress. It will take time. It will cause a lot of change in the way we do things. States will have to stand up and be responsible for the quality of life in their region. The federal government shouldn’t mandate rules to the states…period. The need for “Federal Law” should be minimized and used only where uniformity between the states is really needed. All other law should be State specific reflecting the values of the people who live there and who pay taxes there.
Have a great weekend. The markets are closed so while you may not get richer, you won’t get poorer either. Congress and the White house will be on vacation so your life may not get any better but it likely won’t get any worse either.
Tuesday, August 9, 2011
August 8-09-11
So what happened today and what does it mean?
The Federal Reserve had an announcement after their regularly scheduled policy meeting today.
First let’s revisit the Federal Reserve. It is not part of the government. It is not owned by the government and it is not run by the government (directly, anyway). Huh?
The Federal Reserve Bank was created by Congress to issue the currency and to manage the banking system free from political influence. The Fed, as it is called, is owned by the member banks that it charters and over sees. There are 12 Federal Reserve Bank Areas or Regions each headed by a President elected by the member banks of the Region. They, along with a Chairman, appointed by the President and confirmed by the Senate make up the management of the “Fed”. The oversight of the “Fed” is the seven members of the Board of Governors, The Chairman, previously mentioned and six others appointed by the President and confirmed by the Senate. Today there are two open positions. The FOMC (Federal Open Market Committee) which meets regularly to determine appropriate strategy for the achievement of the objectives of the “Fed”; that is to keep inflation under control and then to assist the economic growth. The FOMC is made up of the seven members of the Board of Governors and 5 of the 12 Presidents of the Regional Federal Reserve Banks.
That said, the FOMC today said that it anticipated keeping the effective interest rates low for an extended period of time, perhaps until 2013. That is to say the economy is weak and we don’t see any significant growth out there that might be inflationary in nature.
What that means is that mortgage rates are going to stay low for a while, credit card interest rates are going to remain at current levels. HELOC’s typically based on 10 year Treasuries are going to remain at current rates. If you are in the market to refinance, now may be the time to lock in low rates. It also means if you are living off interest on your CD’s, you are not going to have much income.
The bond market liked that statement and bond yields declined as prices rose. The stock market wasn’t certain about it in the hour immediately following the statement, but seemed to decide that it was OK and retraced its declines today returning to substantially positive territory at the end of the day.
For those looking for a job, it is a mixed condition. Businesses now know that the “Fed” understands what we have known for some time. Growth is going to be slow and hard to come by. Competition is going to remain fierce. That isn’t good for job growth. On the other hand, low interest rates mean that additional plant and equipment will be affordable and loans may even be accessible. That could create jobs in other businesses.
The economy is like a bunch of dominoes. If one falls it pushes another and if that one falls it pushes another etc. etc. etc. We need to get the Dominoes to fall. To do that we may have to change our political precepts of taxing businesses on money earned overseas. If US corporations could bring home the money they make overseas without being taxed again (already been taxed where it was earned) then maybe they would spend it here and start the dominoes falling. Wouldn’t that be grand?
Sunday, August 7, 2011
Sunday 8-7-2011
Well last week wasn’t fun. The Congress agreed on a debt ceiling bill which was hailed as a victory by politicians yet the stock market crashed, dropping 700 points in a week. Apparently they weren’t impressed. Neither were the analysts at S&P which downgraded the USA credit rating from Stellar (AAA) to Very Good (AA+). While that move was well telegraphed to the markets and to the Congress, it is a clear signal, that using the same criteria as is used for other governments, we aren’t doing as well as we did in the past at managing our financial affairs.
Politically it gives others like Russia and China the opportunity to chastise us for our profligate ways and rebuke our holier than thou attitude.
What all this means remains to be seen as we have never been there before. What I am sure of is that there will be over reaction and the markets; both equity and credit are going to be volatile and a little chaotic for the next quarter. No one is sure if the 1.3% GDP growth in the second quarter is accurate or if it might be revised downward as was the first quarter. More uncertainty comes when such a modest growth could easily be revised to a negative growth, the first of the requisite two quarters to indicate a new recession.
What do you do when you are uncertain? I stop spending for a while. Until I have reason to feel more confident. That means I don’t hire, I don’t build and I don’t spend on anything I don’t need, I cut debt. None of that is positive for the economy. I am considering buying a car; mostly because both of ours are getting older and I don’t want to need two at the same time. Apparently there is a KIA dealer in town near home that doesn’t believe in economic stimulus as he has window stickers with a $2000+ dealer markup over sticker? You’ve got to wonder if the showroom is a front for a different business. How can you sell cars in these times asking for more than sticker when your competition VW, Toyota, Nissan and even Honda are selling for a discount? Maybe they know something the rest of us don’t.
As for me, I’m playing watch and see but if Monday opens badly I am likely to reduce my exposure to equities and cut to cash. But that is just me. I’m afraid of the herd mentality.
Congress is on summer break and that is good. They can’t make mischief when they are home. If you should happen to see yours, or if you’d care to write to him/her, let them know that cutting spending is important but so is keeping key programs healthy and, as much as I hate it, may take a tax increase (no not a rate increase so much as an increase in what you can deduct). Second home mortgage interest (also applies to boats and RV’s) may have to go away and there are many other base broadening measures that may have to happen. I’m not thrilled but I can live with them if they are tied to a balanced budget law that could only be repealed by a super majority of both houses. That way they can’t spend what they aren’t willing to fund without borrowing. I’m sure we could manage a super majority if there were another Pearl Harbor or 9-11 to allow borrowing when it is a bona-fide crisis and not just to fund operating expenses when Congress members didn’t have the cahones to admit the real cost to their constituents or their incompetence at calculating the real cost.
Until we do that, S&P is not going to reconsider. Moody’s and others are likely to give little time before following suit and downgrading the USA debt in much the same way as S&P.
When your own internal debt rating agencies aren’t supporting your approach, isn’t it time to consider change, real change? In the business world changing corporate culture is one of the most difficult things to do. Often we have to fire the entire top echelon and replace them with new folks who get where we need to go and are willing to do what it takes to get us there. Perhaps we need to do that in Washington. Perhaps every incumbent who has been there more than a few years (one term) should be tossed out and replaced. That makes a level footing for all interests and allows an entirely new culture to be born.
It is a thought. Perhaps you might consider it when voting next year.
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