Tuesday, January 29, 2013

Amazon Is Not Our Friend

Again after failing to meet expectations on both revenue and sales the market is up big in after hours. As we have seen before Amazon stock plunged when the numbers were announced then immediately did a u-turn. It was as if someone threw a switch, if you were cynical you might even scream foul and suspect manipulation. Few time in history have we seen a stock trade at such high multiples to earning. It is impossible to explain the stock's price except to say it is based of future growth and hope for earning in the distant future, this comes at a time that seven individual states have reached pacts allowing them to start squeezing sales tax out of the online retailer thus removing the crux of its advantage over other retailers.

Even if they sell goods at low prices it is hard to see why Amazon has any fans when you consider how they abuse and exploit the brick and mortar stores that line streets throughout America. These are the stores that employ our family members, support little league teams in the community, and add value to our lives. These stores build or lease space, buy supplies from the other local businesses, and pay both sales and real-estate taxes. With internet shopping posing a mounting threat to bricks-and-mortar stores and U.S. shopping-center owners smarting from high vacancies an effort to level the playing field is being made. Many supporters of local business are now throwing their weight behind federal bills aimed at requiring online retailers to collect sales tax.

How has Amazon managed to dodge paying sales tax in so many states for so long? A 1992 Supreme Court ruling states if a company does not have a physical location in a state it does not have to collect sales tax. But retailers have argued that Internet retailers such as Amazon have an unfair pricing advantage. Even big box retailer Best Buy is suffering from the competition and is being forced to close 50 of its stores. These stores have become showrooms for consumers who then look for cheaper deals online. Amazon’s "no sales tax" advantage can often make a difference with penny-pinching shoppers. When looking for big-ticket items, such as consumer electronics, the absence of sales tax can be more appealing than instant gratification.

How hard core nasty is Amazon? A while back, Amazon shut down its Texas distribution center after the state sent the company a bill for $269 million. That intimidating figure, according to the state, was the total amount of sales tax due between 2005 and 2009. After a series of lengthy talks Amazon reached an agreement where it will be forced to collect sales tax from Texas residents, but managed to avoid paying millions in back-taxes. As part of the deal Amazon agreed to create 2,500 jobs within the state, presumably by reopening its fulfillment operations. But remember by doing this they will be taking them from your state or from other businesses in Texas, Amazon is not a big job creator.

Recently it was announced that Amazon had plans to build a 1 million square-foot distribution facility in Patterson, California – east of the Bay Area – as well as a 950,000 square-foot center east of Los Angeles. The Patterson facility will not be ready until the second quarter of next year. Some people say these moves will significantly step up the company’s ability to provide rapid delivery in the state’s key markets with same-day service possible in some cases. This is an effort to offset the the fact that Amazon must begin collecting sales tax on California purchases. It is questionable as to how this will offset not charging sales tax which had been a huge advantage for Amazon up to this time.

Giant retailer Target stopped selling Amazon's Kindle e-book reader and Kindle-branded products in the spring of 2012. After selling the Kindle at its stores for two years Target will continue to offer a full assortment of e-readers and supporting accessories. They did not give a reason for stopping sales of Kindles, but I would say it had to do with "conflict of interest". At the same time Target and many other retailer have recently beefed up their online websites, lowered prices, and added several new services aimed at derailing Amazon. When you look at the fact that after surging to become the No. 2 tablet vendor late last year, Amazon's  Kindle Fire's share of the tablet market fell sharply from 17% market share to just over 4%, noting this, you have to admit their effort to crimp Amazon may be beginning to bear fruit.

Footnote; around February 19th Amazon fired its security company in Germany after criticism of  being "heavy handed" in how they treated their employees. It was reported that they used "thug like" and Nazi like tactics, it will be interesting to see if this story gains traction.

 An Additional Footnote; Three more signs that Amazon is not your friend occurred in October 2013. First Labor problems continue in Germany. The other two highlighted with a positive spin in a press conference where Bezos talked about 1,382 newly deployed Kiva robots, in Amazon’s warehouses a sign of future intentions to limit "job creation"? Add to this Bezos referring to Amazon's victory over IBM in a  legal battle to service the cloud computing needs of the Central Intelligence Agency. We can only assume this has to be in relationship to collecting more data and spying on the American people.

Sunday, January 27, 2013

Surprising Facts about inflation

I recently read a comment where the writer challenged the curious to "bing" or look up the term "Weimar Inflation", some of what I discovered was surprising. Germany had come out of the first World War with most of its industrial power intact, the speed at which inflation suddenly destroyed the currency dovetails with some of my thoughts on currency trading today. It is possible that inflation "could stem from the lack of faith in a currency, or all currencies, rather than from a lack of available goods". It was amazing how quickly inflation took root in Germany during the 1920s, we must consider how fast it could happen now that we live in an age of instant communication.

The German currency was relatively stable at about 60 Marks per US Dollar during the first half of 1921. But the demands in May 1921 for reparations in gold or foreign currency to be paid in annual installments of 2 billion gold-marks plus 26 percent of the value of Germany's exports was crushing. The first payment was paid when due in June 1921. That was the beginning of an increasingly rapid devaluation of the Mark which fell by November 1921 to approx. 330 Marks per US Dollar. The total reparations demanded was 132 billion gold-marks which were far more than the total German gold and foreign exchange.

In August 1921, Germany began to buy foreign currency with Marks, this increased the decline, the lower the mark sank in international markets, the more marks were required to buy the foreign currency demanded by the Reparations Commission. During the first half of 1922, the Mark stabilized at about 320 Marks per Dollar because of international reparations conferences, including one organized by U.S. investment banker J. P. Morgan. After these meetings produced no workable solution, the inflation shifted to hyperinflation and the Mark fell to 8000 Marks per Dollar by December 1922. The cost of living index increased more than 15 times in just six months.

In the world today people have developed a "false' belief in financial security because of "controlled"  inflation. When people look at how much more they are earning now than in the past they realize that if they go into debt it will be easier to pay it off with inflated income.  For decades people have been given pay raises to keep up with inflation meaning the vast majority of pay raises have nothing to do with either a person's work or performance. Many people essentially perform the same functions for 30 years; however, their pay grows much greater as time move on.

The best definition or rule about inflation, its effect on the economy, and on savings came to me so long ago that I do not even recall who presented it to me. It goes like this, "Inflation is a thief that robs those who are improperly invested, and gives the money to those improperly invested."  This would, of course, be referring to those who had the foresight to positioned their investments for its emergence. The same can be said about deflation, it mimics in reverse the process, also acting as a way to transfer wealth between parties. The problem is to time and recognize the approach of these two strong economic forces.

The mindset of investors and of the "money people" often shifts into overdrive when opportunities for speculation arise. The distortion caused by easy money from Federal Reserve policy coupled with political and social compassion for affordable housing, medical care, has obvious implications as debt and promises continue to rise. Most agree the Central Banks are not in a position to tighten the money supply at this time. Remember, so many of the things we invest in are merely promises and such, hard assets are rare. A word of caution, while hyperinflation does not occur that often when it hits, and the speed at which it hits is a game changer.

On November 18th of last year, I posed the following question, What Is Something Worth?;

Saturday, January 26, 2013

FLASH CRASH on Steroids!

Most investors think that even if things go downhill fast that they will be smart enough to get out of the markets. After the debacle in 2008 where they saw the market do nasty and violent swings they learned a few things, this time they figure they will make the right moves before it is to late. But what if it hits like the flash crash on steroids? We know that can't happen because circuit breakers have been put in place to arrest panic style moves, but imagine a market that falls, trade is halted, and the market simply does not reopen for days, or even weeks.

For a long time I have been trying to develop a scenario for a market "super crash" and a reasonable map that would arrive at such a situation. To say I'm negative about this economy is a gross understatement. I saw the last housing bubble coming and predicted the crash in my book Advancing Time. We have never recovered from the Great Recession. By printing money, imploding interest rates, and exploding the Federal Governments deficit we have only delayed the "big one".

I recently came upon these two quotes on macroeconomic stabilization and crisis. First, from Macresilience;
"As Minsky has documented, the history of macroeconomic interventions post-WW2 has been the history of prevention of even the smallest snap-backs that are inherent to the process of creative destruction. The result is our current financial system which is as taut as it can be, in a state of fragility where any snap-back will be catastrophic."
And next from Nassim Taleb (author of The Black Swan);
"Complex systems that have artificially suppressed volatility tend to become extremely fragile, while at the same time exhibiting no visible risks. In fact, they tend to be too calm and exhibit minimal variability as silent risks accumulate beneath the surface. Although the stated intention of political leaders and economic policymakers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite."
These quotes suggest an analogy with ideas about forest management when natural fires are suppressed. If random fires do not periodically clear away forest underbrush, we see a build-up of flammable material sufficient to power a massive conflagration. I certainly think an equivalent truth applies to financial markets. The longer it has been since a painful collapse, the greater the willingness to pile on leverage and complexity, such that the next crisis becomes unmanageably awful. The "Too Big To Fail" and other policies implemented since 2008 have laid the groundwork for "The Big One", or what we will someday look back on as the mother of all sell-offs.

By not taking steps to correct many of our ills in a way we have made things worse. We have not made the structural changes necessary for our economy to become sustainable. We have put band-aid upon band-aid, upon band-aid while what was necessary was the amputation of a diseased limb. After all the threats that this market has avoided, and sidestepped, it is possible that many now think of it as invincible. This market has overcome the death of the euro, the financial cliff, and the end of Greece as we knew it. My studies in micro-economics, and observations in the current real-estate market, both as a owner and hands on landlord allows me to predict, we ain't seen nothing yet!

Footnote; These low interest rates come at a price, a dark side exist, in the long run the benefits they bring may be out weighed by  the distortions they cause. For more on the subject please see the post below. I have also listed two other more recent articles that may be of interest. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged,


Trade May No Longer Be The Great Job Creator

Free Trade Is Not Always Fair Trade
It is not rational to think that increased trade creates a lot more jobs. While it expands ones market allowing a company to grow, the area where the goods are shipped does not enjoy the creation of jobs for making that product. Granted expanding trade can encourage and enable faster growth but the glory of trade is its ability to maximize production, while expanding  choice, and lower cost, but we must recognize the limits of this benefit. A delicate balance exist, the goal should be to optimize these benefits. 

A more modern or up to date way to better describe the effects of trade on jobs is to say it "shifts" jobs from one area to another. Maximizing efficiency might be a better way to enjoy the same benefits expanded trade often brings. While jobs are created in shipping and transportation this is sometimes a double edged sword and can be harmful to the environment. Goods made or grown at home often leave a far smaller "footprint" on the earths resources then one shipped across the world.

No country should view free trade as a simple answer to its problems. How "free trade" feeds into job creation is critical to the future economic health of a country. Underneath the politician's motivation and a slew of promises is an undercurrent of questionable economic predictions as to how great the future payoffs will be. Many hidden cost lurk in the corners of agreements and how they are implemented. Many people fail to see the huge number of support jobs and the ramifications that flow from giving up control of our supply chain. In some ways as the world becomes more complex and intertwined we lessen both our security and future options.

The misconception of trade as the big "job creator" has been promoted by those wanting to expand their markets. It is often based on a lopsided blueprint where an exporter often dominates a relationship, garnering massive benefits. This relationship tends to exploit one party at the expense of the other and is unsustainable in the long term. Today we live in a much smaller world where jobs are highly sought and valuable, with the improvements in communication over the last twenty years it is becoming harder to hide the imbalances such policies promote.

Footnote, creating real jobs is no easy task. Another post goes deeper into this important subject;

Creating "Real" Jobs In a Mature Market

Creating jobs in a mature market should be required to pass a certain "taste" test. It should be pointed out that while America is creating jobs it is costing a huge amount. I'm referring to the massive government deficit which I feel is the fuel driving our still rather weak growth. Is it sustainable, and just as important are these the right kind of jobs and will they last? When a job that falls outside the description of government worker fails to make economic sense it becomes a form of working welfare with the taxpayer picking up the tab. We as a country and as a society have paid dearly for each unsustainable job created through government incentives and partnerships, because of the nature of many of these jobs we might even call them temporary.

A great weakness in government generated jobs is after a huge outlay to set up, or put them into action, they often do not create or contribute to production. If these jobs are not asked to continually justify their cost, and they often are not, they merely become another burdensome cost to society. The feeble efforts to think through and link a job to a sustainable economic base that creates a needed product or generates real value is a major flaw in most government aided ventures. Once started government sponsored ventures are often slow to react or adjust to economic reality, this can be seen in the Postal Service and its inability to drop Saturday delivery.

Two examples of government over involvement come to mind from the city in which I live, the first I will call Kitty Hawk. In Fort Wayne, Indiana years ago the city aggressively backed a bond and the loan to build a massive hanger at the airport for an air-freight company named Kitty Hawk. The city lured the company to the area because it promised a slew of new jobs where they located their hub, the company is now bankrupt and the jobs are gone. The taxpayers of Fort Wayne are now paying for an empty hanger that they are trying to lease at a "aggressively" low price. This hurts those private investors and property owners that lease building space as they are now forced to compete against the government to which they are forced to pay taxes.

The other mind boggling, and hard to defend venture is Fort Wayne's pathetically under used money losing bus system, Citilink. Every day buses running their predetermined routes crisscross the landscape of the city completely empty, it is more uncommon to see a rider then not. Funded by Federal monies as well as local real-estate taxes, most people give little thought to this economic failure. One could site that the poor or those without transportation need this service, but the cost of this inefficient system is huge. Burning through fuel and polluting the air as they transport so very few riders, it is hard to argue that they make the city green or that the jobs are economically sustainable.

Another place that governments hurt local businesses is to invite a company like Amazon into their community by offering tax incentives to construct a distribution center, as a way to encourage investment, or get new jobs. This often puts a dagger into the hearts of existing businesses. Anything that gives one company an unfair advantage over another tends to lessen the ability of the other to remain competitive, this often results in the destruction of real jobs. Solyndra, the solar panel company that got a $535 million government-backed loan then went belly-up should be placed in the dictionary and used as a definition as to what happens when politicians and bureaucrats and businessman play with taxpayer money. 

As I complete this post I'm forced to recall a prior post about electric cars and Think Auto, another over-hyped government folly {see link below}

Thursday, January 24, 2013

Payroll And Healthcare Taxes To Impact Spending

Do not underestimate the coming impact of higher payroll taxes to workers and employers as well as the new cost of providing healthcare and its 3.8% tax on many types of income. Part of the tax increase came when Congress decided not to renew a temporary payroll tax reduction as part of the fiscal cliff negotiations, the part related to healthcare, was part of prior legislation being phased in. The profound effect on discretionary spending will be a shock to our fragile economy. While the government has no intention of living within its budget these two taxes will bring a cold and harsh reality to the spending habits of millions of Americans.

The payroll tax increase of 2 percentage points has hit workers who have now received their first paychecks of the year, it goes right to the heart of discretionary spending which is the part of a persons income not already committed to a fixed monthly payment such as rent. Since only about half our income is discretionary, the tax will have about twice the drag most people expect. Already many people are determining how they will cut back in 2013.  While many economist say it is not likely have a significant impact overall on the economy, it will effect buying habits and where people choose to shop, especially those in lower-income households. While these taxes have been talked about, many workers are suffering both surprise and shock.

Nearly a third of store managers say shoppers are cutting back on spending due to the payroll tax increase according to a survey of store managers in malls across the country. These taxes may also have an instant and noticeable impact on the cost of goods and services as businesses try to push on to consumers through higher prices part of their pain. Up to now little attention is being paid to the potential impact of these two taxes that burden those working to make a living. Recently the stock market has been on fire, rising day after day,  but mark my words, the impact of these two taxes may soon become apparent through slowing economic activity.

Footnote; The economy has been pushed foreword by demand being created by unsustainable deficit spending. What happens when the momentum ends?  I try to address this issue in another post;


Tuesday, January 22, 2013

Euro not yet saved

While Mario Draghi is busy putting supports under the Euro and Germany is seen as the country that will have the final say, efforts to shore up the euro might be scotched not in Berlin but in Helsinki. It appears that austerity-minded Finland might have the most to lose from a pooling of sovereign debts. Figures show that the combined gross debt of euro-area countries will peak at 91% of GDP next year, when the ratio in Finland will be just 53%, the lowest of any euro-zone country other then Estonia and Luxembourg. After Japan and Italy, Finland has the most rapidly aging population among rich countries, so it is wary of adding to its debts.

Having recovered from a nasty banking crisis in the 1990s through their own efforts, the Finns are hostile to bail-outs. Finland might also have least to gain from keeping the euro. Its banks unlike those of France and Germany have little direct exposure to the euro zone’s troubled periphery. Its economy is less integrated into the euro zone than those of other northern countries such as the Netherlands. Only 31% of Finnish exports go to other euro-zone countries. Five of Finland’s seven biggest foreign markets lie outside the euro zone. Its biggest supplier is Russia and its largest single customer is Sweden, whose economy is growing more quickly than Finland’s, another neighbor, Norway is also doing well.

The Finns while fed up with being asked to suppoert Greece and the rest cannot have missed the fact that their nearest neighbors seem to be thriving outside the euro. This being said, the Finns could still be dragged by the export dependent Germans into some form of grand bargain that involves pooling debts. Public opinion is still in favor of staying in the euro, because an export driven economy always needs outside markets. Exports make up 50% of Germany's GDP, this makes Germany very vulnerable to events outside its borders like a sudden property bubble bust in China. Germany is at the mercy of its markets, and that is never a good place to be.

Finland’s finance minister, has said that her country would “not hang itself to the euro at any cost” and that it would not be prepared to shoulder the debts of other states. More recently Finland's foreign minister revealed that the country had made contingency plans for the break-up of the euro. If a grand bargain on the sharing or shouldering the debts of indebted partners  is ultimately required to keep the euro together, the Finns could block it. Some think a Finnish exit from the euro is more likely than that of Greece, this would just put more pressure on other members of this "difficult" alliance. In reality Finland is not the only country that might feel the cost of paying for the failures of their neighbors sins, a burden to great.

Footnote; Below is a more recent post on other problems concerning the future of this troubled currency.


Sunday, January 20, 2013

Currencies Games In Danger Zone

The games central bankers are playing in supporting their and other currencies has reached a dangerous level, we may be in the "red zone". Currencies are important chips in the commerce of government and the business of running a country. History has shown that in the past both leaders and governments have fallen with the demise of their coin. The volume of trades, the sheer magnitude of monies flowing back and forth across borders has become staggering. This area of finance has become the worlds largest casino, where players have the potential to quickly suffer staggering losses.

The British pound, U.S. dollar, and European euro are just a few of the many currencies that are traded. The foreign exchange market is the most liquid financial market in the world. Traders include large banks, central banks, institutions, speculators, corporations, governments , businesses, and retail investors. The average daily turnover in the global foreign exchange and related markets is continuously growing. According to the 2010 survey, coordinated by the Bank for International Settlements, average daily turnover was $3.98 trillion in April 2010, of this $3.98 trillion, $1.5 trillion was spot transactions and $2.5 trillion was traded in outright forwards, swaps and other derivatives.

Recently trading in the UK accounted for 36.7% of the total, making it by far the most important center for foreign exchange trading. National central banks play an important role in the foreign exchange markets as they control the money supply, inflation, and/or interest rates. They can use their often substantial foreign exchange reserves and currency swaps to stabilize the market. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful and questionable in the long term. While central banks do not go bankrupt if they make large losses, there is no convincing evidence that they do make a profit trading.

Figures show that about 70% to 90% of the foreign exchange transactions are speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency but they were solely speculating on the movement of that particular currency. Hedge funds have become a huge player and have gained a reputation for aggressive currency speculation often using borrowed money. They may even overwhelm intervention by central banks to support a currency if the economic fundamentals and prospects are extremely weak. Individual Retail speculative traders constitute a growing segment of this market.

Back to the idea that we may now have entered "the danger zone". In a silly movie promoted as a political and financial thriller  named "Rollover"  the stars played by Kris Kristofferson and Jane Fonda watch the world collapse and crash. Things have progressed since the film was made back in 1981. In the past currencies were part of a self regulating self adjusting system that was suppose to punish those guilty of economic mis-steps. Today it is questionable how well that mechanism functions, an argument could be made that it is becoming less effective due to manipulation from both central bankers and politicians alike. A word of caution, actions have consequences, and countries can still be punished through their currency.    

More and more often we see Central Bankers pulling rabbits out of their hats. Last summer Mario Draghi, president of the European Central Bank gave a speech, now many people say that "he saved Europe."  Intervention and manipulation seems to be the flavor of the day,  making real value an outdated concept. A falling currency is a double edged sword, while it increases exports by making them less expensive it makes everything imported into a country more expensive. Like in the silly film first viewed decades ago, if people lose faith in the system it could just come crashing down around our ears. At a time when billions of dollars can be traded in just the blink of an eye imagine how fast things could go to hell.

Footnote, this is all a continuation down a murky path, please see the following post. One deals with how this has detached from reality and other looks at how if a meltdown occurs many people will use it as a reason to adopt a new "world currency"


Footnote#2, A few more recent post concerning currencies can be found below

Thursday, January 17, 2013

Reflections Of 2007 In Stock Market Rally

As the markets rally his morning I feel a bit of deja ve, we have seen this all before. Way back in 2007 we saw all stocks moving in unison, always upward, often ignoring both the news and reality, note, it is happening again. This is a reason for caution! When these trends start they can go on for quite some time, as this one has. While it is hard to predict when this will end by historical standards this bull market is getting a little long in the tooth. This article was written earlier in the year when the news coming out was weak, for an example see the news blip below,

WASHINGTON (MarketWatch) -- The Philadelphia Fed's manufacturing index went negative in January, slipping to -5.8 in January from +4.6 in December. Economists polled by MarketWatch expected a 5.0 reading. The new-orders index fell to -4.3 from 4.9 in December, and the employment index fell to -5.2 from -0.2 in December.

A Gallup survey on jobs released recently showed that the percentage of workers working part time but wanting full-time work was 10.1% in February, an increase from 9.6% in January and the highest rate measured since January 2012. Gallup notes "Although fewer people are unemployed now than a year ago, they are not migrating to full-time jobs for an employer. In fact, fewer Americans are working full-time for an employer than were doing so a year ago, and more Americans are working part time, all indications are that this is not by choice.

The disconnect between the market and Main Street has grown huge, considering the new records being set few people would think America and much of the world was locked in slow growth and running massive government deficits. I contend all is not as rosy as the media is reporting. It seems that optimistic souls have embraced the new normal and that anything other then horrible news is reason to take the market ever higher. Money is rushing into risky investments in search of higher returns, this is not healthy and cannot go on forever, can you say bubble?

Footnote, I added a new post that explores the possibility of a major decline in stock prices;

Goldman Sachs Earnings A Rigged Game?

The "knock the cover off the ball" earning release by Goldman Sachs require me to again repeat assertions and claims made in a prior post written in the later part of last year, it is titled;

                        The Financial-Political Complex


The authorities are acting primarily to prop up governments as well as the economy by saving the financial system. But don't forget these authorities are politicians, they want increased power and influence, and guess what, they may have hit the jackpot by joining with the banks to create the "Financial-Political Complex" that promotes the current financial policy and supports banks that are "to big to fail". Many people say that the way out of the housing crisis is to let everyone fix their mortgage debt at super low fixed rates, then inflate, inflate, inflate? Well perhaps the government's way out of its own debt is to secure low fixed rates for itself then inflate away when it becomes necessary.It should not bring comfort to the average man that these to unholy forces have joined together in such a union.

Who is the principal borrower at today's rates? The banks don't seem to be using the cheap money for their traditional business of lending, but it is the government that is doing the borrowing, and getting away with amazingly low rates for long term debt. I wouldn't buy a 10 year Treasury at today's rates - I have no idea why others are doing it - unless it's the Chinese exporters who figure they still benefit. I bet the politicians can't believe their luck at being able to borrow and spend at these rates, the printing press is being used to keep the game going. As unstabilizing as the military and war can be to our lives, financial disruptions can also have devastating effects.

Banks have been big buyers of government bonds in the past couple of years because of the “carry trade,” this allows them to borrow money from the central banks at low rates and lend it back to the government at a higher yield. In effect, this is a subsidy to the banking sector. Banks may buy even more government bonds in future because international regulations assign a low capital charge to government debt and because banks will be required to hold a store of liquid assets, of which bonds will be a big part. So the government stands behind the banking system, and in turn the banks are big buyers of government debt. This financial-political complex is reinforced by the general unwillingness of governments to let banks go bust. Better to intervene so heavily in markets, the argument runs, than do nothing and repeat the mistake of the Depression.

The cumulative effect of steps taken by the authorities over the past five years designed to prop up the economy and save the financial system have resulted in the creeping nationalization of markets. Central banks are the biggest players in many rich-world government-bond markets. Equity markets seem to perk up only when central banks are expanding the money supply. Banks exist to channel funds from savers to borrowers, traditionally from the household sector to companies. But modern banks raise funds not just from retail deposits, but also from the markets. Until 2007, European banks were able to borrow more cheaply from the markets than the better corporate borrowers. But for the past five years banks’ borrowing costs have been consistently higher than those of non-financial firms. This raises huge question-marks over the banks’ role as intermediaries.

 Loans from the official sector are being used to reduce the impact of private-sector capital flight. Huge amounts of money have left Spain and Italy, largely as foreigners withdrew bank deposits or sold government bonds. The net effect is that several countries are substantial debtors of the ECB, while Germany, Finland and Luxembourg are net creditors. Money is flowing across borders at record rates. Funding pressures have been relieved by massive amounts of liquidity from central banks. Private-sector funding has been replaced with official lending. Central banks have been “lenders of last resort” for banks since the mid-19th century making short-term loans made at moments of panic. This time the ECB has lent a staggering €1 trillion ($1.3 trillion) on a three-year basis. The hope is that these loans can be refinanced via the private sector in 2014 or 2015. But this may be too sanguine. The funding woes of banks are already almost five years old.

The bond market has never been fully free of central-bank influence: expectations about the future level of short-term rates have always influenced yields. But the Federal Reserve has said that it will keep rates at current low levels until late 2014, an unprecedented commitment. Central banks have been putting downward pressure on yields through substantial quantitative easing (QE) programs. The Bank of England owns almost a third of the gilt market, this means that yields are not set solely by the balance of supply and private-sector demand.

Nor is this the only rigged market. Many countries are following policies that are designed to drive the value of their currencies down. And the authorities are helping to prop up share prices: Ben Bernanke, chairman of the Fed, has welcomed a higher stock-market as a side-effect of QE. As a result it is difficult to say what message the markets are sending. Do low bond yields show that investors are endorsing Britain’s deficit-reduction program, for example? Or do they mean that the government has plenty of room to ease fiscal policy and borrow more? Thanks to QE, it is hard to be sure.

History suggests that once governments get involved in a sector, they find it hard to withdraw. Given the weak outlook, it is hard to imagine the circumstances in which liquidity support for the banks will be withdrawn, or the policy of low interest rates abandoned. This is a new financial and economic era. QE and ZiRP haven't forced investment but rather sent people running for cover. More of the same is not a resolution to deep rooted problems but does represent the evil character of finance for the moment.

I predict a financial washing machine in the near future that will repeatedly agitate, rinse, spin, and strip away the wealth and savings of most citizens. It seems to me there is every chance that in time the people and the market will regain control of money from big banks and governments, after all banks only exist to distribute money, and for this minor service they are paid exorbitantly well. The character of money is changing with technology, that determines who can raise it, and how it is exchanged.  It will take time as our cultural changes but technically we no longer need banks or even the government for this. We should be afraid of the "Financial-Political Complex" and the current policies, both have disaster written all over them.

Thanks for reading this post, as you can tell I'm not a big fan of Goldman Sachs, this is a company with no moral compass. I feel the moment they have everyone in and long they will throw everyone under the bus and clean up shorting the market. If you haven't had enough or can stomach a bit more;


Wednesday, January 16, 2013

Encourage Your Children To Become Politicians

Mommas in America were discouraged in a song many years ago from letting their children grow up to be cowboys, it appears to have been a reasonable decision. Today after viewing the lifestyles associated with many career paths, politics and the route of so-called "public service" seems to offer much potential. A career in politics can grant you a lifestyle where you, and oftentimes your family will get to rub elbows with the ultra wealthy and the country's most powerful titans of business and industry.

Politicians Are The New Elite
This career choice also has the benefit of sheltering you and extending legal protection that covers you from the responsibilities of your actions. Flying about in private planes politicians are rewarded with generous pensions and superior healthcare benefits far outside the reach of the average citizen. Imagine enjoying an expense account, retreats at lavish resorts, elegant dinners, tantalizing perks, and a pension, this is followed by lucrative connections that will serve you after you later move into consulting or the private sector.

Stay at the best five-star hotels with your beverage of choice waiting in your suite. During your time in government, you will carry an aura of power setting you above the common man, like a rock star, you will arrive in style, chauffeured about in limousines at the tax payers expense, and experience tours of important sites while security closes them to the masses. Even private concerts in your home by the world's most famous entertainers are not out of question. 

For example, recently Obama, his family, and some close friends recently flew to Hawaii on Air Force One to enjoy a marvelous two-week vacation. During their stay, the adjoining beachfront property was blocked off from all users including the neighbors in adjacent homes. If you ever hope to be shuttled to an event in a traffic-stopping motorcade, becoming a politician may be your best chance. The potential to experience a lavish existence may best be played out by assuming the role of a selfless "public servant".

If you have time please read my prior post; http://brucewilds.blogspot.com/2012/04/public-servant-or-new-elite.html

Sunday, January 13, 2013

Drones, Morals, Ethics, Possibilities

The invention and implementation of drones in warfare and for surveillance moves civilization and mankind's relationship with machines to a new and level. Society is now just becoming aware of the many ways drones can be misused. During the next few years, mankind will have to deal with the expanding capabilities and frightening possibilities that exist in how these man-made "robot-creatures" can impact the way we live and conduct our lives.

Killer Drones Bring New Ethical Issues To Table 
After Iraq and Afghanistan, Americans do not want to spend blood and treasure in fighting big insurgencies on the ground. This makes drones that are far less expensive than other weapons a choice tool. Drones can loiter over potential targets for hours before firing their missiles, they are more discriminating than either fast jets or helicopter-borne special forces and their pilots and crew are not put in harm’s way.

Drone strikes seem certain to remain an important tool in counter-terrorism efforts for many years to come. America will invest $1.4 billion on new construction at Camp Lemonnier alone. Enlarging the scope of drone operations has been politically useful for Mr. Obama. The ruthlessness of the drone campaign, plus the killing of  Bin Laden, blunted Republican charges that he is soft on national security.

So what is the future for this fast growth sector of our economy? Do not expect it to be a large job creator. The use of drones could actually become a drag on the economy by replacing workers, it seems that drones can do many jobs from the air far more efficiently than workers tethered to the ground. Another issue that troubles those concerned about freedom and civil rights is that more and more local governments are looking into using drones, often for law enforcement surveillance. But what does this do to your privacy?

Like something out of a futuristic Sci-fi movie, imagine a bee-size drone that could fly into your room through an opening door, hide in a quiet spot, and monitor your conversations. A drone could even slip through an open window, drop into your bed as you sleep, and explode by your head, an assassin's dream. When coupled with drones overhead equipped with night vision and the monitoring of cell phones as well as computers you have nowhere to hide. Expect the use of more drones to watch our movements and the expansion of their capabilities. The only thing that should make the average citizen feel better is that they are not worth watching.

Footnote;  It should be noted this post was written well before the mid-year revelations by Edward Snowden about the NSA. This should give us pause, more below.

Footnote #2; This article was written more recently and delves deeper into how drones and robots are being tested by the military as killing machines.

Has Housing Bottomed?

When you ask where housing prices are going my answer would have to be, I don't know, and neither do they. However I can state several things without reservation. Calling the home buying we have seen in both the new and existing markets "pent up demand" may be a stretch. Many houses still remain empty or under leased, this means the occupants are not fulfilling their obligations. With population growth slowing, values changing, and slightly more occupants per home, less houses will be needed. Much of  what we are currently witnessing has been a repositioning and refinancing at historically low rates. In coming quarters do not expect housing to lift the GDP as much as it has recently in coming quarters.

Figures are based on a year over year performance and the home-builders have harvested the low hanging fruit. The bounce from depression levels may be behind us, the effect of low interest rates and new home buyer programs that have brought us to this point may be running out of steam. You need a job or income to buy and properly maintain a home. The government must sooner or later face up to the fact that their current deficit spending is unsustainable and reduce the money flowing to low income people. The demographics of the baby boomers cutting back on spending and downsizing will also effect the number of new units going forward. This will extend to the style and size of new homes being built, expect smaller to become the norm.

So as the market churns and job creation remains tepid, where could are all these new buyers we keep hearing about be coming from? Currently the Obama administration is engaged in a full court press to make more home loans available to people with weak credit. Officials say this effort will help power the economic recovery. Obama's economic advisers and outside experts say the nation's much celebrated housing rebound is leaving to many people behind, including young people looking to buy their first homes and individuals with poor credit records.

Administration officials are working to get banks and lenders to take advantage of taxpayer-backed programs offered by the Federal Housing Administration that insure home loans against default. They are also urging the Justice Department to provide assurances to banks that they will not face legal or financial recriminations if they make loans to riskier borrowers who meet government standards but later default. While supportive to prices near term this spells trouble in the years ahead, we are indeed building a recovery in housing on a foundation of sand.

Footnote; When you look back over history you quickly realize that just a few years back in your grandparents day the world was a far different place. Today the time and skills to maintain a home do not exist with many American homeowners. Owning a house is not for everyone and it is not in the interest of society to "over promote" this idea. Houses have mortgages and obligations that often outlast the poorly constructed and maintenance heavy buildings of today, expect these problems to be around for some time.


Friday, January 11, 2013

History Is Important To Our Culture

Famous Chicago Theater
Continuity and history is moving to the forefront of cultural values . Modern values have been measured and often found lacking. People have the need to feel more connected and anchored to the places they grew up, being able to say “I played under that tree” or “we use to swim in that fountain” fills an important emotional need. The cities of Europe and many other parts of the world fill that need in a special way.

As American cities renovate they have a tendency to do so with a heavy hand. Often little on none of the original structures remain standing after the architects and planners have their way. This confirms our status as a throw away society. Strong and growing government intervention, ADA requirements and ever changing building codes add substantially to the cost of remodeling but add little or often detracts from the utility value of the end product. Sadly this tends to make buildings prematurely obsolete.

This effort to embrace our history in recent years has spurred cities all over the world to tear out and replace asphalt streets and concrete walks with stone. Monuments that had been dismantled and chucked into corners somewhere during changing political climates are being dusted off, restored and returned to where they had once stood. A new appreciation of our history is growing. In place of contemporary lighting, “antique style” fixtures are back in vogue, wrought iron is again replacing stainless steel. Nowhere is this more obvious then in the heart and core of the worlds oldest cities.

 Today much of the new residential construction in America is of the cookie-cutter urban sprawl variety. A great deal of this is driven by what is in the interest of big developers and not the buyer or society. Remember developers often seek a clear canvas and cheap land on which to build. Builders garner savings from mass production factory like building methods with sites that are in close proximity that reduces travel time for workers. They also love to transfer the cost of upgrading the infrastructure to access the new community to the government. All this skews the direction of growth as business rushes to locate near these new opportunities gutting areas developed only decades ago.

It is important to realize much can be learned about man and his history if we look at how these early cities developed and why. When you travel it is often possible to break down into several categories what you will be seeing, old cities, new cities, and natural wonders and beauty. America needs to adjust codes and policies to help preserve historic structures and allow them to be financially competitive. Enough of  our cookie cutter cities that all look alike, with the same stores, restaurants, and shops. Make sure you do not underestimate the lessons our older cities have to offer.

Wednesday, January 9, 2013

They Sometimes Eat Their Young!

I recently watched a wildlife documentary  were they showed animals sometimes eat their young. Most adult humans would find such an act unthinkable, to most of us our children are our future. However, it might be it is because we don't realize how yummy they can taste. All joking aside, a point does exist to this post that has started in a rather bizarre way, but it exist at the other end of our lifespan. This is just a reminder that over mans history atrocities have occurred.

As society continues to kick the can down the road, it passes the obligation of paying for our excesses on to the young and future generations, a time may come where they simply say, No More! If and when such a time does come a harsh reality may descend on our elderly and those least able to care for themselves. While it is hard for many to conceive such an occurrence, unimaginable, stranger and more bizarre events have taken place during mans time on earth. 

As our culture continues to develop, we face many changes and many challenges. In my book "Advancing Time" I write about how mankind and the fabric of society has never had to adjust so quickly to change and  technology. The most dramatic change has taken place in the last two hundred years. The average person today seems oblivious to this and acts like this is business as usual, it is not. Each day we become more dependent on technology and a supply line of parts that if disrupted would plunge society into chaos.

With human connections increasingly taking place online, it is possible that face to face connections will drop in value. Will we become even more self-centered? Will this break the bonds that glue us together as a species? We must also factor in the people and agendas of those that pull the strings and grease the wheels that make things work. If the one percent decides that a less populated world would be better then watch out. Things could get icky fast as populations and obligations grow on the ever more crowded plant named Earth. We can only hope that this is not the case.

As a foot note; When one or more of the thousands upon thousands of nuclear bombs that exist throughout the world is used to kill a large number of innocent people, and it will happen, we will be shocked and surprised. We will then ask why did we let this happen. Below is another post that takes us down the same road,

Tuesday, January 8, 2013

Ugly Math Made Simple

Making the ugly math simple to understand is no easy task, but let us have a go at it. Not lying about the numbers to arrive at a clear picture of reality is important.

To make things easy lets us do a bit of rounding off and work with easier to manage numbers. We will start by placing the population of the United States at 333 million people, that is reasonably close. This means every man women and child, what is important it that this includes infants, children, teenagers, the nonworking, both those self-sufficient and those on government assistance, the retired, and the elderly in nursing homes. How marvelously simple and convenient that this number goes into 1 Billion dollars 3 times.

This means that every 1 billion dollars spent by our government represents roughly $3 for every person in America!

Taking the number of people and placing them into other groups is more challenging. Those groups can include; households or families--- for ease we will call the average household  3.4 people. When we look at "workers" we are looking at according to government figures in 2008, 120 million people were employed out of an estimated 330 million citizens. However, unemployment increased after that date. Last but not least how many taxpayers exist in America? This becomes rather complicated because many taxpayers get back more then they pay in and there are huge differences in the amount people pay, also do we consider a joint return as two payers? Bottom line, whatever it means, nearly half of households do not pay taxes.

Back to simplicity: So $100 billion represents or equals $300 per person and $1,020 per family, unfortunately, we are not talking about only $100 billion. The American government has been running one and a half trillion dollar budget deficits the last several years. One and a half trillion dollars is fifteen times the $100 billion multiplied out above.

That would represent a staggering $4,500 per person and $15,300 per family being spent each year, year after year, it adds up very fast!

Sadly this massive deficit is what is propelling the economy forward, and it is not sustainable. Please note; Massively compounding the problem is the realization that most people like infants, children, the disabled or unemployed could not pay their share if their life depended on it, this transfers the burden to the remainder of society.

Sunday, January 6, 2013

Zuckerman Says Debt An Avalanche

In a recent op-ed titled "Brace For an Avalanche of Unfunded Debt" Mort Zuckerman, the editor of U.S. News & World Report and the publisher of the New York Daily News warned that America is facing a crisis. To give you a general idea of his thoughts, excerpts from the four-page article can be found below the sub-tile of his piece;

The fiscal cliff isn't as scary as the looming deficit and debt crisis about to swamp the country

All eyes have been on the clear and present danger of the fiscal cliff—understandably—but there's a sound in the mountain range that's even scarier than the cliff. It's the sound made by an avalanche, the trillions of dollars of debt that's heading our way, gathering speed and mass. For most people, it's out of earshot now, and that's the way our government prefers to play it in its financial statements. Liabilities are not set out there in accordance with the well-established norms of the private sector, where this overhang of liabilities would set off alarm bells in the markets, with boards of directors in emergency sessions.

We are on a trajectory of cumulative fiscal deficits that cannot possibly be sustained. We have gone from being the world's largest creditor nation, with no foreign debt at the end of World War II, to the world's largest debtor, with roughly half of our public debt held by foreign lenders. Over the last four years, our national debt has grown by more than $5 trillion to over $16 trillion. We have to service that debt. The Federal Reserve is keeping rates historically low but here's the cost of paying interest on the debt for fiscal 2012: $359,796,008,919.49 What do you get for that? Nothing.

The greatest fiscal challenge to the U.S. government is not just its annual deficit but its total liabilities. Our federal balance sheet does not include the unfunded social insurance obligations of Medicare, Social Security, and the future retirement benefits of federal employees. Only in the small print of the financial statements do you get some idea of the enormous size of the unfunded commitments. Today the estimated unfunded total is more than $87 trillion, or 550 percent of our GDP. And the debt per household is more than 10 times the median family income.

The full article is four pages are well worth reading and can be found at the address below.........


What Happens After The Momentum Ends?

Much of the economic landscape is beginning to look like something out of  "Alice And The Looking Glass" A bizarre  and unrecognizable land, a land that is distorted and papered over by ream after ream of paper. This paper has been rolling off the printing presses of central banks all across the world in an attempt to mask reality. Peter Schiff says, printing money is to the economy what taking drugs is to a drug addict. In the short term it makes the economy feel good, but in the long run it is much worse off. What was once the "long run" or "distant future" may be getting much closer.

We must remember the influx of monetary stimulus from QE and massive government deficit spending has created the illusion of more pent up demand then exist or can be substantiated. This 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 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 an ever growing trend of year over year increased production. At times we see a sector rotation such as computer sales increase when clothing falls, but overall we seek numbers that reflect an upward and onward slope. History shows that such trends falter when they become overdone and unsustainable. Economist often talk of headwinds and tailwinds, much of what has been done in recent years has acted as a "artificial tailwind" but this is not a normal state and cannot be sustained.
So the question is, what happens after the momentum ends? After QE can no longer increase demand. After most or all of this easy money has flowed into the investment "of the day," what happens when it begins to flow out? The problem is that this recovery has been constructed on the unstable base of false demand. It seems that we always think that we will see "it coming," we always think we will have ample time to react if it becomes apparent the markets are about to crash but the speed at which events can occur is often a surprise.

For a fun read glance at my post of November 18th; What Is Something Worth?

Saturday, January 5, 2013

Trillion Dollar Coin, Making The Debt Ceiling Vanish

A trial balloon is being floated by some liberals willing to do "anything" in order to avoid hitting the debt ceiling. A couple of articles have appeared reporting that both Senate Majority Harry Reid and House Minority Leader Nancy Pelosi have signaled President Obama that they will support him if he decides to remain true to his promise not to negotiate with Republicans over the debt-ceiling. Reid  has privately told some Democrats, including President Obama, that if the administration used its constitutional and executive authority to continue paying its debts in the face of House Republican opposition, he would support the approach.

Last month, White House spokesman Jay Carney told reporters that "[t]his administration does not believe that the 14th Amendment gives the president the power to ignore the debt ceiling -- period." The amendment states, “The validity of the public debt of the United States…shall not be questioned.” Some suggest that the simplest escape route out of the debt ceiling impasse is for the president to direct the Treasury to find a legal way to pay its debts, they say the Treasury has a variety of options. One gaining particular attention relies on a law that allows the Treasury to mint a coin worth enough to cover debts for some time and deposit it with the Federal Reserve. Those funds could then be used legally to pay debts. 

If the president went the route of the so-called "platinum coin," and used the cover of the 14th Amendment to tell Congress that the constitution gives him no choice but to find all legal ways to honor the "validity of the public debt." The funds would not be used for spending that isn't authorized and appropriated by Congress, but only to pay debts. The president, therefore, would not be 'technically" ignoring the debt ceiling, because there would be no new debt subject to the limit. Nancy Pelosi said Friday that she would raise the debt limit unilaterally “in a second” if she were president of the United States. With Pelosi and other Democrats suggesting that the president could bypass Congress and unilaterally raise the debt ceiling by invoking this amendment we would be taking a step down a very slippery slope. This would be a major step towards an "Imperial" presidency and an aggress overreach of executive powers.

A Follow Up Note; It appears the trial balloon floats, today Jan 6th on Face The Nation Pelosi again repeated her statement citing the 14th amendment. Now others are already lining up behind this bad idea, when one branch of our government usurps another, "Houston, we have a Problem", it is game on!.

Foreign Car Sales Surge In America

A Weak Yen Brings More Cars To America
Foreign car sales are surging in America while domestic auto makers have seen only moderate sales gains. The share of the market enjoyed by US makers continues to shrink. What is the meaning of this data? It might be interpreted that after all the chest thumping by Obama and those behind the bailout of the auto industry that the American public is less enthusiastic about the industries new products then initially hoped.

When Americans choose to purchase an automobile made in a foreign country they rob jobs from Americans and send our dollars abroad. When they use money printed by the Fed and scattered about by artificially low interest rates they add insult to injury. Yes, we continue to shoot ourselves in the foot by running both massive government and trade deficits at the same time. Considering that the industry still has far more capacity then necessary expect a bone crushing and competitive market going forward.

So what is at the root of this phenomena, is there a perception that foreign cars are just better, or are we just stupid?  Products made in America should be of competitive quality, yet the growth in sales does not support this notion. One theory is that we have not forgiven American car companies for abusing us, year after year, after year, with cars that were substandard. It is possible that I'm simply misinterpreting the data as I struggle to get my defective seat-belt to retract in my American vehicle.

I recent article in the Financial Times, Niall Furguson specks to currency wars and the huge drop in the value of the Japanese yen. Furguson presents a chart that surprised me, it shows a massive surge in the yen in 2007, this would of slowed their auto sales after that time. Now expect sales of Japanese brands to again pick up. This will put pressure on America auto makers, killing their margins as well as sales, the complaints are already flowing. Sales without profits is what got the "Big Three" into trouble, that situation will soon return.

Delayed "Sandy Aid Bill" is A Porker

Much like the big mouthed Governor of New Jersey, the aid bill coming out of the Senate was massive. Claims by the media that Chris Christie's criticism of Congress for delaying a pork filled bill resonated with voters may have been over blown. Super-sized are the claims that Republicans are still engaged in a media stimulated love fest with Christie. He is just another flawed politician that the media has tried to paint as the "savior" of the Republican party, in this case by honing in on his plan spoken style and tendency to call it "as he sees it"

The Governor said it was "disappointing and disgusting" to watch Congress postpone Sandy relief legislation. "There's only one group to blame for the continued suffering of these innocent victims, the House majority and their speaker, John Boehner." Christie said he called Boehner four times on Wednesday night to urge action, but the call wasn't picked up. He went on to say "National disasters happen in red states and blue states." he claimed history shows that "We respond to innocent victims of natural disasters, not as Republicans or Democrats but as Americans – or at least we did until last night."  Christie should acknowledge that much of the problem is because House Republicans have proposed a bill of only $27 billion in aid rather than the $60 billion plus bill passed in the Democratically controlled Senate.

Many Republicans in Congress said that the Sandy aid bill contained billions of dollars in spending on projects unrelated to damage caused by the storm or for long-term infrastructure improvements that should compete with other discretionary spending. Among expenditures criticized was $150 million to rebuild fisheries, including those in the Gulf Coast and even in Alaska, thousands of miles from Sandy's devastation, and $2 million to repair roof damage that pre-dates the storm on Smithsonian Institution buildings in Washington. As usual, there are few details on which expenditures must be considered immediate disaster needs and addressed. Senate Republicans tried to shrink the $60.4 billion package to $24 billion for near-term projects, but this was defeated in the Democratic-controlled chamber.

The problem is the bill brought before the House was a porker, full of fat gifts that America cannot afford. At a time that America is sporting a deficit of close to 1.5 trillion dollars, we don't need this. Simple math shows that the 60 billion dollar price tag on this legislation means 180 dollars for every man, woman, and child in America. For a family of four that comes to 720 dollars. We all know that the 47 million Americans on food stamps will find coming up with the money to pay their share as somewhat daunting. Our lawmakers in Washington and Gov. Christie should do the math, while a small part of the overall budget, yes every 60 billion dollars does matter!

A FOOTNOTE: this article was originally written right after Congress had rolled over and passed a pork filled permanent tax relief package. At the time I expected that they would draw a line in the sand concerning this wasteful bill. Now the big ugly $60 billion pig has been passed. This only proves that even as America suffers under the weight of a massive deficit the only thing you can count on is for our Congress to do the wrong thing, and spend more. Nothing is different.

Friday, January 4, 2013

Tax Relief Bill Was Packed With Pork

The Democratic National Committee, called the deal "a big gift-wrapped present of certainty to the middle class." But a closer inspection reveals that the tax relief bill was packed with "more pork" for special interest. The agreement came loaded with extensions of separate existing tax breaks for businesses and industries that had expired in the past year, the Joint Committee on Taxation tabulated the cost to be about $67.9 billion worth this year. The extensions will actually cost much more because some were made retroactive to cover 2012, but even more damaging some of the breaks and credits will last up to ten years.

A peek inside the bill that was passed shows what happens when Washington moves quickly and crafts legislation late into the night. They create a bill packed full of pork. Not only did they extend tax breaks for NASCAR racing moguls, the legislation also extended; tax credit for construction of renewable energy projects, like wind turbines and biomass, geothermal and hydropower generation, for one year, it's projected to cost about $116 million, the committee said. That may seem like a drop in the bucket, but here's the kicker: While the extension to qualify for new projects covers only 2013, the actual tax credit itself is good for 10 years. That means new projects that break ground in 2013 will be able to claim the credit for the next decade, at an overall price tag the committee put at slightly less than $12.2 billion. Below are a few more bonus deals for special interest;

• An obscure and arcane provision of corporate tax law, called active financing income, that lets U.S. corporations defer taxes on some income they earn from their overseas subsidiaries. That provision will cost the U.S. Treasury more than $9 billion this year and $1.8 billion next year.
• Tax breaks for Hollywood producers who shoot their movies and TV shows in the U.S., at a cost of about $430 million through 2014.
• A program that sends most federal taxes collected on rum produced in Puerto Rico and the U.S. Virgin Islands back to those territories to subsidize domestic production. Bar tab: $222 million over two years.
• A tax break worth about $15 million a year for asparagus growers hit hard by cheap asparagus imported from Peru.
• $4 million in tax breaks over the next two years for people who buy "2- or 3-wheeled plug-in electric vehicles" — in other words, electric scooters, Segways and the like.

Lawmakers did the easy work, again they avoided the hard choices, but it must be added, if  you look at the quantity of pork packed into this bill, that they, with the help of Vice President Biden, did the job very poorly. While Biden takes a victory lap and garners the praise of both the media and the poorly informed public please note; he and those who voted for this pork filled package should be ashamed.

Thursday, January 3, 2013

Permanent Tax Cut, Define Permanent

To call the recent tax cut permanent requires that we redefine the term permanent. If we take a rational and non-bias look at how politicians develop both tax tables, and policies, we must concede they are never carved in stone. Regardless of the media spin, you should not believe everything you hear.

While we can blindly cling to the notion they they are permanent it merely means that they do not have an expiration date. In reality they are permanent only till they are changed, if changed they will most likely be moved higher because of the continuing massive deficits. This only gives me temporary comfort.

Tuesday, January 1, 2013

Fiscal Cliff Nothing Compared To Derivatives

With all the concern America had about the fiscal cliff a much larger problem lurks out of sight and under the radar. The Derivatives Tsunami and the bond and dollar bubbles are of a much greater magnitude. To many avoiding the fiscal cliff requires that the federal government cut spending by as little as $1.2 trillion over ten years. That  means the federal deficit has to be reduced just over 100 billion dollars a  year or 3 percent of the current budget. This reduction in spending can be done by simply cleaning out government waste and putting Washington on a diet, but even with the cliff avoided expect the debate to continue  about the sustainability of entitlement programs

Now lets take a look at the far greater problem of derivatives. According to the Office of the Comptroller of the Currency’s fourth quarter report for 2011, about 95% of the $230 trillion in US derivative exposure is held by four US financial institutions: JP Morgan Chase Bank, Bank of America, Citibank, and Goldman Sachs. The Derivatives Tsunami is the result of the handful of fools and corrupt public officials who deregulated the US financial system. Today these four US banks have derivative exposure equal to 3.3 times world Gross Domestic Product.  This is something beyond science fiction or anything that can be comprehended.

Hopefully, much of the derivative exposure somehow nets out so that the real exposure is far less then the hundreds of trillions of dollars on the books. Still, the situation is so worrying to the Federal Reserve that after announcing a third round of quantitative easing which includes printing money to buy bonds (both US Treasuries and the banks’ bad assets) the Fed recently announced that it was doubling its QE 3 purchases. In other words, the entire economic policy of the United States is dedicated to saving four banks that are too large to fail. The banks are too large to fail only because deregulation permitted financial concentration, as if the Anti-Trust Act did not exist.

The purpose of QE is to keep the prices of debt, which supports the banks’ bets, high. The Federal Reserve claims that the purpose of its massive monetization of debt is to help the economy with low interest rates and increased home sales.  But the Fed’s policy is already hurting and distorting the economy by depriving savers, especially the retired, of interest income, forcing them to draw down their savings.  Real interest rates paid on CDs, money market funds, and bonds are lower than the rate of inflation. Moreover, the money that the Fed is creating in order to bail out the four banks is making holders of dollars, both at home and abroad, nervous.

If investors desert the dollar and its exchange value falls, the price of the financial instruments that the Fed is supporting will also fall. The only way the Fed could support the dollar would be to raise interest rates. In that event, bond holders would be wiped out, and the interest charges on the government’s debt would explode. With such a catastrophe following the previous stock and real estate collapses, the remains of people’s wealth would be wiped out. Investors have been deserting savings accounts for equities and “safe” US Treasuries. This is why the Fed can keep bond prices so high that the real interest rate is negative, but for how long can this continue?

The hyped threat of the fiscal cliff is immaterial compared to the threat of the derivatives overhang and the threat to the US dollar and bond market because of the Federal Reserve’s commitment to save four US banks. Once again, the media and its master, the US government, hide the real issues behind a fake one.  The fiscal cliff, is a false issue, while it represents to many  a way for the Republicans to save the country from bankruptcy by destroying the social safety net put in place during the 1930s then supplemented by Lyndon Johnson’s “Great Society,” it does not reach the crux of the problem.

We have seen expanded and ever growing government during the last several decades. Now that there are no jobs, now that real family incomes have been stagnant or declining for decades, and now that wealth and income have been concentrated in few hands, this is the time, Republicans say, to destroy the social safety net so that we don’t fall over the fiscal cliff. In human history, such a policy usually produces revolt and revolution, which many people claim is what the US so desperately needs, to them perhaps our stupid and corrupt policymakers are doing us a favor after all.

Footnote; Most people have no concept at how large the government deficit spending is here in America. In the post below I break down the math and try to make it easy to understand, the article is titled,"Ugly Math Made Simple"

Why No Outrage?

When it comes to interesting comments on how society is changing. In mid July of 2008 an article by James Grant appeared in the Wall Street Journal titled "Why No Outrage?". In the article Grant writes about how the turmoil and problems in the financial sector would in the past created a huge outpouring of anger from the public. Now it seems that we are numb and powerless to respond, words like stupid and lazy come to mind. Silent and safe within the the huddled mass it is more comfortable to move with the crowd.

Today we might ask the same about not only the lingering problems in the financial sector but also in regard to all the scandals in Washington. It may be we are to busy dealing with all the new daily distractions of life to stay informed or react. Many blame the education system as having failed in its role and the "dumbing down" of America, we have become an under and misinformed lot. Another possibility is that in difficult times, be they financial or dealing with security issues, no one wants to be the person that resist action and is later  held responsible for being the force that caused nothing to be done.

When commentators, news people, and politicians speak about money they often mix up whether they are talking about "millions or billions" of dollars. I have seen this time and time again, and we accept or don't even notice these massive verbal blunders, little wonder we are confused. Yet, the most we can muster is a little bickering and mumbling under our breath. The laws and legislation hastily crafted in these times and passed by general consensus often mark the low point in our history. So I say, it is interesting to ponder during these challenging times facing America and much of the world "Why No Outrage?".

Footnote; Just over a year ago I stumbled upon a blog on WordPress .com written by Gerry Spence who   has spent his lifetime representing and protecting victims of the legal system from what he calls The New Slave Master: big corporations and big government. The post below explores his idea that we have all become slaves.

Unemployment and its effect on culture

A recent article in the Economist talked about some of the negative realities surrounding France just after the countries debt rating was cut. Public spending accounts for almost 57% of national output, the public debt stands at over 90% of GDP and is rising. The country seems to be running a near-permanent budget deficit. It is no surprise that last January France lost its AAA grade from the Standard & Poor’s rating agency. Wealth, profits and high incomes are heavily taxed, the rich are routinely abused and people are instinctively hostile to capitalism.

As its public-spending numbers suggest, France is also more attached to a big role for the state than any other European country. Everything from the labor market to pharmacies to taxis heavily regulated it is understandable that would-be entrepreneurs feel discouraged. No entirely new company has entered the CAC-40 stock-market index since it started in 1987. France is a country where redundancies can lead to endless court proceedings; and trade unions and protesters tend to take to the streets at the first hint of reform. It adds up to a deeply anti-business culture.

Like many places throughout the world unemployment in France has recently risen. When the general population sees over 10% unemployment often unemployment in young people is closer to 25%, or higher. This is often in the areas around big cities where ethnic minorities are mainly concentrated. What struck me was a chart I recently saw that showed how many countries have had a substantial increase in unemployment after the world financial crisis of 2007 and never recovered. Unemployment is a trap people fall into, but can't fall out of. Indeed, the rate of new unemployment has stabilized at a terrible, but not quite-as-terrible, level, but long term this is a cancer on our culture, that will create a "permanent underclass" without hope.

Unemployment is a world wide problem. In developed countries it appears to be structural and caused by a lack of demand. Bad tax policies and government interference in the economy often favoring large businesses have added to the problem. Unemployment tears at the fabric of society as many of the unemployed become disheartened. Overtime their skills tend to become "rusty" and obsolete. This often leads to  problems with debt and homelessness that can cause the unemployed to fall into the vicious circle of poverty. This means that when the economy recovers these individuals may not fit the job vacancies that are created. My concern is the cultural damage this reeks.

Because of things like the minimum wage laws, across the world we are seeing gateway jobs vanish. These are jobs where young people learn to work and gain skills that will last throughout their life. We cannot underestimate how important it is to get young people started down this path. Long-term unemployment is a cancer on society, it robs us of our vitality. Young people and those who drift out of the workforce often move away from their responsibilities and are a financial drag on society. If big government, like that of France is part of the cause of this curse, then the "nanny state" is clearly not the answer. Sadly the trend towards bigger government is on track here in America and in many countries across the world.

Footnote; Creating real jobs is not an easy task, the post below comments on the issue,