Sunday, January 26, 2014

Current State Of The Union!

The State of The Union message in a nut shell is more of the same. Many Americans continue to tire of President Obama as his continued promises often fall short and never seem to gel or come to fruition. Promises of gun control, immigration reform, and a healthcare system that works for all of us are just a few examples of where the President and Washington have disappointed America. Cheap tricks used in the past like pointing to a special guest, "an average American" brought to Washington as a "visual prop" as proof that policies are paying off for the masses can only carry us so far. When we inspect the economy of America, huge deficits, a weak recovery, and a questionable future will cast a shadow over all new promises made.

During the last few years the people of America have been spectators to scandal after scandal from the nations capital. The revelation that the NSA was busy taking tens of billions and then more money to spy on each and everyone of us has done little to reestablish faith and trust. Not only are conservatives unhappy but many liberals see any attempt of those in Washington to achieve a grand bargain not as confronting problems but as a "grand betrayal" of promises made to help what they see as societies most vulnerable.

Regardless of whether Obama puts out there a big ball, small ball or no ball expect reality to quickly suck the air and energy out of the room. When it comes to political inaction the Presidents promise for more governing by Presidential edict will stir the blood of those on both sides of the aisle. Unemployment and slow job growth is still a major issue. Washington remains in gridlock and we have failed to resolve problems in and with North Korea, Iran, Egypt, Afghanistan, Pakistan, Syria, and several other countries. Obama loves the spot light and many people will simply tune him out because of over overexposure, he has logged in more camera time then any President in history.

One thing we can expect to see embraced is the call for more infrastructure spending that people are always promoting as the best great idea. How quickly they forget we do not have the infrastructure of a third world country and this kind of spending is not a silver bullet but in many ways opens a pipeline to wasteful spending. Our constant search for an easy and painless answers guarantees we will embrace and line up behind more boondoggle projects that expands governments influence and undercuts free enterprise by competing with it on many levels.

Following the speech supporters will praise it and call it grand as always we hear how a new page has been turned while others will talk about how they are disappointed. In the real world a bigger issue of concern in the strength of America going forward both economically and militarily. With many countries in turmoil and China seen as a rising power a real fear is growing that America may be in decline.  It is fortunate that our political system always allows for ample room for finger pointing and the placement of blame. In short prepare for more of the same.

Sunday, January 12, 2014

Slower Job Growth A Big Red Flag!

The recently released figures showing a strong decline in job formation over recent months may be more than a noisy statistic it may be an omen of danger ahead. This is a reminder that the task before Janet Yellen and the Federal reserve will be getting much more difficult. Not only does this call into question claims the economy has reached escape velocity but lends credence to claims by others like me that QE and artificially low interest rates are not the answer.  These policies and massive government deficit spending can only carry a distorted economy so far. Expect this issue to come front and center in coming months as the Fed will come under increased scrutiny and experience increasing demands to defend their policies.

The surprisingly bad numbers showed that back in December only 74,000 jobs were added to payrolls far less then half of what many analysts had expected. Still the headline unemployment rate was shown to drop to 6.7% a post recession low. Critics of  the central banks action are quick to delve deeper into the jobs data and point out that many of the jobs created over the last several years are low paying and often part-time. Several factors distort the BLS unemployment numbers but by far the one that draws the most concern is that many unemployed workers have dropped out of the labor force because they are discouraged and simply given up on the idea that they will be able to get a job.

In one of my recent posts I wrote about the false idea that a housing shortage exist and how we are doing a disservice to housing by encouraging new construction based solely on artificially low interest rates rather on true demand. We are pushing on a string and calling it demand when someone who can barely pay their rent is encouraged by the government to buy a house they can neither afford or maintain. We have a shortage of "qualified" buyers and renters not housing. Many housing units sit empty across America. What is happening on the micro economic front as we look at families throughout America is not promising and has disconnected  from other trends touted by the media.

As recent data shows auto makers have begun to see the supply of unsold cars stack up on dealer lots I'm again forced to wonder if the momentum from these policies is beginning to wane. Many of the new cars hitting the road are really leases which show up as a sale, and many of them may be motivated because an automobile owner faced with a costly repair may be oping for this alternative verses putting money they do not have into their current vehicle. People in weak financial positions, such as those living on disability or student loans, often choose to kick the can down the road and put themselves into an ego boosting vehicle that they cannot in reality afford, or need. The growing supply of unsold autos bodes poorly for manufacturing and production going forward.

Remember companies in past years have ushered savings from interest paid on their debt into the earning column this has driven up earnings. A major reason inflation remains low is they are sitting on a hoard of cash that has lowered the velocity of money. At the same time many companies have cut cost by reducing workers and turning to automation and technology. The artificially low Fed controlled interest rates have been a massive onetime tailwind that is mainly behind us. When rates can go no lower or reverse the positive effect ebbs and can become a major headwind. The massive government debt in many countries and a weak economy means this headwind has the potential to become devastating. This brings into question the quality of growth based on these policies and if the momentum is sustainable.

We must recognize that all economic growth is not created equal. If you spend money but afterwards have little to show for it you have wasted it, government spending and programs often fall into this category. The right kind of economic growth propels us forward with a purpose, is well directed, and has long lasting benefits. An influx of monetary stimulus has created the illusion of more pent up demand then exist or can be sustained and results in an elevated baseline for comparing year on year growth. In short we have to move forward faster next year just to keep growing. For example, if we manufacture and sell twelve million automobiles this year up from ten million last year because of low interest rates and easy money, we now must sell  the same number for the economy not to contract.

The whole concept of economic growth is based on the idea of an ever growing trend of increased production. At times we see a sector rotation such as computer sales increase when clothing falters, but overall we seek numbers that reflect an upward and onward slope. History shows that such trends falter when they become overdone and unsustainable. When it becomes apparent the economic efficiency of credit is beginning to collapse and the additional money poured into the system coupled with lower rates is no longer effective in driving the economy forward options evaporate. When this happens the extra GDP growth generated by each batch of loans drops and momentum ends this becomes the equivalent of pushing on a string, this sign of exhaustion may soon overwhelm us.

 Footnote; Your comments are welcome and encouraged. If you have time check out the archives for other post that may be of interest. Below is an article that delves into what happens when the momentum of current policies end.

Sunday, January 5, 2014

Iraq Rapidly Falling Into Chaos

While Americans are making every effort to ignore it Iraq is rapidly falling into chaos. Things are beginning to unravel at a rapid pace. Civilian deaths in Iraq, including police casualties, totaled 7,818 last year, surpassing the 6,787 in 2008 this data compiled by the United Nations Assistance Mission for Iraq gives an idea just how dire the situation has become. On top of that figure an additional 17,981 civilians were injured last year.  In cities across Iraq bombs exploding and attacks against civilians have become a daily occurrence. The Iraqi military has seen its capabilities dwindle since American forces left the country after the U.S. failed to secure an agreement that would give troops immunity from prosecution under Iraqi law.

Ryan Crocker, a former U.S. ambassador to Iraq from 2007 to 2009 says “It’s exactly what they had in Afghanistan before 9/11.” Recently the Obama administration increased military assistance to Iraq by providing missiles, helicopters and surveillance drones after Maliki visited the White House in November. Iraq may need more than such military gear, Crocker said. “There has been talk of increased intelligence assets, which is good,” he also suggested that instead of selling U.S. F-16 jet fighters made by Lockheed Martin and Boeing Apache attack helicopters, the U.S. should look into equipping Iraqis with Mi-35 attack helicopters made by Moscow-based Russian Helicopters because Iraqis are more familiar with operating the Russian equipment.

All this paints an ugly picture going forward. In the two years since the last American combat soldier left Iraq we have seen infighting and dysfunction rip the country apart. The Iraqi government is in danger of losing control over two Iraqi cities that were strongholds of Sunni insurgents in the predominantly Sunni Muslim Anbar province during the U.S. occupation. They are battlegrounds once more after al Qaeda militants largely took them over in recent days. After Iraq authorities arrested a senior Sunni politician and dismantled a camp set up to protest against perceived Sunni marginalization tensions in Ramadi  soarded and as a concession, al-Maliki  pulled the military out of Anbar cities turning security duties over to local police as demanded by Sunnis who see the army as a tool of al-Maliki's rule.

The current violence in Falluja, Ramadi and Tarmiya represent a serious escalation in the confrontation between Iraqi Sunni groups and the Shi'ite-led government of Prime Minister Nuri al-Maliki. We have seen al Qaeda militants overrun and burn police stations, driving out security forces, freeing prisoners, and raised the al Qaeda flag over government buildings. They forced all policemen to leave without their weapons if they wanted to live. All of us left, we didn't want to die for nothing," a policeman stationed at one of the three stations told Reuters. The al Qaeda gunmen that swept into Fallujah just over 30 miles west of Baghdad  are seeking to win over the population. A militant commander appeared among worshippers holding Friday prayers in the main city street, proclaiming that his fighters were there to defend Sunnis from the government. 

Washington stops short of declaring that either city has fallen to the insurgents, calling it “a fluid situation,”  The Iraqi government likely has the power to retake these cities. They have the fire power because, among other things, they have America-made tanks. On Thursday, government warplanes fired Hellfire missiles recently supplied by the United States at some militant positions. The danger is that retaking these cities will set off an all-out war between the Shiites and the Sunnis. If al-Qaeda manages to really take hold of western Iraq it will be a pretty substantial base on Arab territory, where they would  have security and a base to extend operations wherever they want.

U.S. officials blame the resurgence of al Qaeda in part on the incompetence of the Maliki government and in part on the spillover effect from the civil war in Syria. “We’ve seen the kind of terrorist violence we’ve seen in Syria, and that’s certainly spilled over into Iraq,” State Department spokeswoman Marie Harf said in a briefing “But we are very concerned about it. That’s why we’re engaged consistently with the Iraqis to help fight it together.” The war to depose Syrian President Bashar al-Assad, pits forces backed by Shiite Iran, which supports Assad, against Sunni rebels supported by Saudi Arabia, the region’s largest Sunni power. U.S. interests would be threatened if Sunni militants backed by our friend Saudi Arabia and aligned with al-Qaeda gain a foothold in western Iraq,

Snni Arabs in Iraq claim they have been targeted and politically marginalised by the Shia-led government of Prime Minister Nouri al-Maliki, a charge the prime minister denies. The prime minister has offered some concessions to Sunni protesters, including proposed reforms to tough anti-terrorism laws, but most Sunni leaders say they will not be enough to appease the demonstrators. This occurs as the Shi'ite premier seeks to consolidate his position before 2014 parliamentary elections by taking a tough stance against hardline Sunni Islamists. Maliki also faces a political protest, with 44 members of Iraq’s parliament resigning because the government used force to dismantle protests in Anbar. Al-Maliki called in military reinforcements and sought the support of Sunni tribal fighters, who oppose al Qaeda though they still mistrust the government.

U.S. military assistance to Iraq may open the door to discussions about sending advisory teams of U.S. special operations forces, and others that can operate armed drones back into the country. While some think the Obama administration may have to step up such engagement with Iraqi and other regional leaders there is little public or political support for renewed military involvement in Iraq. Americans have been left with a bad taste from the costly war where 4,489 Americans were killed and 51,778 wounded in action. The Bush administration invaded the country almost 11years ago to remove dangerous weapons of mass destruction that later were found not to exist..

So far, the violence hasn’t affected Iraq’s major oil fields, the country’s main source of revenue. Oil output increased 100,000 barrels a day to 3.2 million barrels last month, the most since August. The country pumped more crude as it increased links to wells in its predominately Shiite south. Iraq is the second-biggest producer in OPEC after Saudi Arabia. Whenever a few hundred armed men can jump aboard vehicles and drive into a city and totally destabilize it you have a problem. ISIS fighters posted videos of themselves burning government vehicles, setting up checkpoints and issuing challenges to the authority of Mr Maliki. If it begins to effect oil production it may well be "checkmate" on an already fragile government.

Footnote; Your comments are welcome and encouraged. If you have time check out the archives for other post that may be of interest. Below is an article that list the 10 most crucial problems facing the world, if you have time please take a look.

Friday, January 3, 2014

Have We Been Lulled Into Complacency?

Have we been lulled into complacency by the extraordinary actions taken by central banks and governments over the last six years? This is a key question we must face. Have these actions really worked or merely masked over major flaws and problems?  And just for fun, consider that by not demanding the right kind of growth and by throwing money at problems we have only delayed and added to festering issues that face us in the future. In what most of us view as a fast moving world many people have come to think if a financial crisis doesn't occur today or in the next few weeks it is simply not going to happen at all.

Several months ago I penned an article saying that America had been lulled with the rest of the world into complacency as we have kicked the can down the road. I continued that as a nation we have yet to feel much pain from the sequester. Not dealing with what we were told was a massive problem has only reinforced the idea that far too much has been made as to the ramifications of an out of control budget. Remember the horror stories surrounding sequestration and the financial cliff? I recall one Sunday morning talk-show host referring to them as draconian and predicting dire consequences. Sidestepping financial responsibility has been rather painless and reinforces the idea that we can continue down this path.

Thinking that we will be able to grow out of our problems is a bit simplistic and a much overused strategy. The theory of growing your way forward is loved and often viewed as a painless easy solution to problems because growth can mask over hard to address deeper rooted structural flaws that undermine our economic system. We often forget how interesting the times we are living through really are and tend to think after some type of setback the worst is largely behind us. As optimism returns a feeling that we have rounded the corner and the promise of better days ahead can easily overtake us.

Modern Monetary Theory often referred to as MMT to its many believers removes much of the risk ahead and guarantees that we will always be able to muddle forward. MMT also known as neochartalism is a economic theory that details the procedures and consequences of using government-issued tokens and our current units of fiat money.  Newly acquired tools like derivatives and currency swaps  allow us to print and  manipulate away problems. While reading an article about the growth of debt in China's non-financial sector I was forced to reflect on how debt is effected by the interest rates. In Europe the ECB had to step in to halt the economic collapse of Spain, Italy and several other countries that were on the brink. What you pay in interest on debt does matter except in the manipulated land of MMT.

This cure to past woes adds a whole new exciting dimension to economics that eliminates any potential of failure and concern that the sun will not come up tomorrow. However there is a major flaw in the concept  of MMT that not only wounds the theory but it is its Achilles heel. What do you do when it becomes apparent the economic efficiency of credit is beginning to collapse? This means that as more money is poured into the system and lower rates are no longer effective in driving the economy forward options evaporate. As the extra GDP growth generated by each batch of loans drops and momentum ends this become the equivalent of pushing on a string and is a sign of exhaustion.

What I'm seeing develop is an "almost surreal" feeling of indifference towards reality. Companies have already ushered saving from interest paid on debt into the earning column and a major reason inflation remains low is they are sitting on a hoard of cash, this has lowered the velocity of money. We must remember the artificially low FED controlled interest rates are a massive one-off or onetime tailwind that is mainly behind us.  When rates stop going lower or reverse the positive effect will ebb and become a major headwind. With massive government debt in many countries and the economy still weak this headwind has the potential to become devastating. The collision of MMT, social unrest over inequality, and other destabilizing factors have the potential to create the perfect storm.

Footnote; Your comments are welcome and encouraged. If you have time check out the archives for other post that may be of interest. Below is an article that list the 10 most crucial problems facing the world, if you have time please take a look.

Wednesday, January 1, 2014

False Demand Fuels The Wrong Kind Of Growth

We should understand that demand drives investment, confidence is not the real driver. Lack of real growth is about lack of real demand. Much of the demand we see today is driven by artificially low interest rates and a mirage in the markets they distort. By this I mean the distortion and illusion that the economy is healthy tends to cause people to make poor economic choices. Still CEO's are unenthusiastic about investing and banks have little incentive to loan money on half backed ideas for which there is little demand. It is becoming apparent to many the financial system has become dysfunctional.  People are forced to loan their savings to governments and banks with negative interest after adjusting for inflation. Today for other than student and auto loans there is scant demand even at low interest rates.

We must differentiate the kinds of economic growth and understand that all growth is not created equal. If you spend money but afterwards have little to show for it you have wasted it. Sadly, much of the money America "invests in itself" each year through government spending and programs falls into this category. We need the right kind of economic growth to propel us forward. It must be sustainable, with a purpose, well directed, and have long lasting benefits. It should be in harmony with the environment and at the same time make economic sense. An example of failure is that over the years our government has spent a fortune upgrading hospitals and colleges. This has driven up the cost of using both to where many Americans can no longer afford to visit or attend  either.

During times like these when we are experiencing slow economic growth we should take the opportunity to focus on how to develop and direct growth going forward. Projects that repair, upgrade, improve or reduce energy consumption, and extend the life of current assets both private and public are great targets for our efforts. This does not mean we should start a tear-down and replace program or to overbuild at great cost. It means adopting a sensible program to focus on things that have slipped through the cracks, fixing the worse 20% of our problems that generate 80% of our grief. This will make America more competitive long term and is important in that it will generate a real return on savings and investments, remember the old saying "a penny saved is a penny earned".

It makes little sense to invest in constructing new buildings when many currently are sitting empty or buying new machinery when little real demand exist. The idea of economic growth based on low interest rates tends to generate very bad decisions. We build and buy things that we don't really need. The lowering of rates creates a onetime transfer of wealth that is harmful long-term. Those who accept economic risk should be rewarded, and loaning out your savings is a risk. This means government should instead address the structural issues holding back investment and the Federal Reserve should abandon the policy of using artificially low interest rates to drive the economy forward, these have a negative effect on those who have done the right thing and saved.

With each economic pullback or recession following the great depression jobs have returned more slowly then the one before. This seems to be a trend as the world economy continues to change, mature, and become more government centered. This time the job creation is far less as small business the creator of jobs appears under assault from the lobbyist that represent banks, big business and special interest. Over the years these groups have shaped, guided, and crafted regulations that have shifted commerce strongly in their favor. As the stocks of large companies rise many Americans are often oblivious to the names of family and local businesses that cease to exist.

Small business once the backbone of this country is under attack from the unintended consequences of many new laws passed in recent years. Inspections, a plethora of permits, licenses, taxes, insurance requirements, and regulations make it almost impossible for a small business to open and operate legally. With larger businesses having a number of advantages going forward they are eating the lunch of their smaller competition. We must do all we can to level the playing field if we want to save the job creating backbone of America. Remember the small brick and mortar store and local businesses on Main Street pays taxes, trains workers, and supports your community.

Today many people that have saved for years and had planned to retire on the interest from their savings are being forced to receive meager and historically low interest returns on their savings while inflation lowers their buying power. When it comes to the supply and demand dynamics of the economy many people would be surprised as to the flexibility of demand. Americans are so wasteful that often they can reduce consumption with little impact on the quality of life. Sometimes by cutting back people discover that "less is more", and that life is less cluttered. Until we shift to a better model of quality growth true demand will remain elusive and the economy will find it hard to move forward.

FOOTNOTE; As always comments are encouraged. Please take time to scan the archives for other articles that might interest you. This dovetails with two other post concerning the dismal job market and why businesses are not hiring;