Sunday, May 26, 2013

Bernanke's Best QE Exit Strategy!

After much thought I have arrived at an exit strategy that will work for the Fed Chairman. It will both preserve his legacy in history as well as help insulate him from criticism. All the recent speculation over the President's second term and how he will be remembered has called attention to the importance of "legacy" to many in high office and people filled with feelings of self-importance. So what becomes the logical way forward? As Bernanke nears the end of his term, this would be a "crazy good time" to leave. I would suggest he continues for the last several months with more of the same, supporting the market that has supported him, right or wrong.

If the goal is to continue until the unemployment problem abates, the Fed will never stop or dial back on QE, the economy is totally dependent on the props and cheap easy money that flows from the Fed. Thus the only way out of the trap he has built is to hand off the office and program to someone else. The second part of this exit strategy is to run or distance himself from the blow-back and negative implications of his disastrous policies and let the blame fall on those that follow. After years of market manipulation he and the group that have learned to control the direction of the market are masters, even if dark storms begin to gather, a few more days or weeks of keeping the balls in the air while difficult should not be impossible.

Future downturns can be blamed on any of the many forces and headwind that lay before us. Even Bernanke has called the recovery fragile. Remember this is the same Fed Chairman that totally missed all the signs of a forming housing bubble in 2006. While his image is still intact and he is bathing in the spotlight as a hero and savior of the world economy his ego has grown even larger then the quantities of money he has added to the Fed's balance sheet, now by declaring "mission accomplished" and taking a fast victory lap he can remain in history and in the eyes of the public as the man who got us through these tough economic times. This can be topped off with a lucrative book deal, being paid to speck at economic forums, giving commence speeches at Ivy League colleges and all the other benefits of his connections.  Like those before him we need not worry about his economic future.

Several long time and well respected investors like Pimco’s Bill Gross agree with Jermey Grantham’s long-term macro prediction that bond investors should be expecting 2% to 3% returns over the future years, lower than expected. Moreover, a big spike in interest rates  wouldn’t be friendly for stocks either. Grantham warns that from the late 1900s until the early 1980s “the trend for U.S. GDP growth was up ... remarkable ... 3.4% a year for a full hundred years,” powering the American Dream. But after 1980, under Reaganomics and the new conservative capitalism, “the trend began to slip”. After a century of high-growth prosperity, our GDP growth dropped “by over 1.5% from its peak in the 1960s and nearly 1% from the average of the last 30 years.”

And looking ahead at long-term macro-trends: “The US GDP growth rate that we have become accustomed to for over a hundred years” is “not going back to the glory days of the US GDP growth,” no matter how much wishful thinking the media quotes from in-house economists at UBS and Wall Street banks. It is gone forever, we are in denial about the amount of future growth we can expect, the stock market is involved in a bout of “irrational enthusiasm”. Most business people, bank economists, and the Fed assume that economic growth will recover to its old rates, but demographics would indicate otherwise. Looking ahead to 2050, Grantham warns: “GDP growth for the U.S. is likely to be about only 1.4% a year, and adjusted growth about 0.9%.” If  fellas like Gross and Grantham are correct it will be tough sledding ahead.

Footnote;  For more on this subject please view the post below,


Tesla Motors and Elon Musk

When talking about the CEO of Tesla Motors, Bloomberg News almost always says "Billionaire Elon Musk", this happens so often that many people probably think his first name is "Billionaire". The recent news about high-flying Elon Musk is that he has paid back $465 million in low interest-bearing loans from the US Government that the company received in June 2009. The low-interest loans are not related to the "bailout" funds that GM and Chrysler received or to the economic stimulus package but part of a program created in 2007 during the George Bush administration in order to get more fuel-efficient vehicle options to consumers and to decrease the country's dependence on foreign oil. The funding, for advanced vehicle technologies, was to support engineering and production of the Model S sedan, as well as the development of power-train technology that Tesla planned to sell to other automakers.

Much of the aura that surrounds Musk comes from his success at PayPal. Musk co-founded X com., an online financial services, and e-mail payment company, in March 1999. One year later, in a 50/50 merger, joined PayPal a company that operated an auction payment system similar in size to Musk was instrumental in organizing this deal due to his belief in emerging online transfer technology. The combined company at first adopted as the corporate name, but in February 2001 changed its legal name to PayPal Inc. Musk is credited in driving the new PayPal to expand and focus on a global payment system, in October 2002, PayPal was acquired by eBay for $1.5 billion in stock, Musk, the company's largest shareholder, owned 11.7% of PayPal's shares.

Tesla Motors announced in early August 2009 that it had achieved overall corporate profitability for the month of July 2009. The company said it earned approximately $1 million on revenue of $20 million. Profitability arose primarily from improved gross margin on the 2010 Roadster, Tesla’s award-winning sports car. Tesla is known for its designs and "very sexy lines", some have been on the drawing boards for years but were impractical because of the internal combustion motor and all the mechanical junk required to support it. Tesla, which like all automakers records revenue when products are delivered, shipped a record 109 vehicles at the time and reported a surge in new Roadster purchases. Please take note of how insignificant these numbers really are, even to date the numbers remain small and are often guarded and hard to confirm.

The Tesla Motors CEO said his realization the electric-car maker could retire its US loan nine years early didn’t arise until Tesla shares unexpectedly surged early this month. Repayment funds were raised from a $1 billion share and debt sale, far more than the $300 million the company initially thought it could get. Fortunes recently changed for Tesla following reports that it made its first quarterly profit and it raised its production goal for the year. Its market value soared to more than $10 billion, the shares are up 65 percent from the May 8th close. Musk said, “I thought it would be quite difficult to raise the capital for Tesla.” A large part of the increase in the stock price occurred when people that had short positions in the stock were caught in a short squeeze and forced to buy back their stock.

Tesla stands as the first car company to have fully repaid the government, while Ford, Nissan, and Fisker have not. In fact, the loan to Fisker has turned into an embarrassment for Team Obama and verges on the border of being a scandal. With incredibly good looking cars and Musk pasting his name all over Tesla, no effort has been spared to spin this as a finished success, of course, the "proof will be in the pudding" when we look back years from now. Time will most likely determine whether Musk is viewed as an unabashed promoter or a serious visionary. Using government programs and loans as well as money from investors Musk has built a pulpit from which to position himself for praise. Regardless if it is a financial success or not, Tesla Motors has put front and center the electric car and moved forward the idea that not only has its time arrived but that you can be cool driving one.

As for the stock which is trading at incredibly high multiples, much of that can be contributed to the historically low-interest rates and the luck of being in the "QE moment" rather than the company's financial success. Bears and those that doubted if the company could hold together ironically have pushed up the stock, this adds to the image that Musk lives a charmed life. Remember the company had received a huge government low-interest loan to kick start its existence, also note that it has no legacy cost or issues that plagued so many of its competitors. Now thanks to the gobs of money looking for any kind of return, Tesla can borrow cheaply. Like several other high flyers lead by self-promoters and propelled forward by media hype, Tesla in in the news far more than such a small and rather insignificant company would merit. Musk is a master of  getting press coverage, most of it "free" and positive advertisement.

When all the hoopla ends, the question is whether larger competitors will simply overwhelm and crush Tesla, or will Tesla instead position itself to grow and maybe take over a competitor to help propel it forward. Remember this is a field where many have failed, one great example was the Delorean. I have become predisposed to discount, and have actually grown a massive aversion to "media hype", this is one reason you should color me skeptical. The city where I live, like other cities across the world, have a long list of  bold men herald and declared to be "gods gift to business,"  many in the end flew too close to the sun only to crash and burn. In any case, what is happening at Tesla Motors and to Elon Musk's other ventures might just be adding new meaning to the phrase, "I would rather be lucky than good!"

Footnote; Another company that saw its fortunes fall was Fisker Automotive, for more on this folly read the post below. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged,

Footnote #2; Oct.27,2013 As of today the stock of Tesla Motors gives the company a market cap of slightly over 20 billion dollars. By comparison Ford has a market cap of around 69 billion. As of today I have never seen a Tesla car in the "flesh" this means in a display or on the street.

Footnote #3; Up-date as of Sept. 2014 the market cap has soared to around 35 billion dollar. my take on the company remains the same.

Thursday, May 23, 2013

The Bernanke Box

Ben Bernanke is painting both himself and the Federal Reserve in a corner. With a policy of loose and cheap money  and an inflation target of just 2% the Federal Reserve  continues to please those gambling that not fighting the Fed guarantees profits. As many Americans are forced to pay higher food, gasoline, and health insurance premiums, I wish someone would let the Fed Chairman know we are already there. Any thought that inflation is not higher has to be from the false illusion brought from falling rents and mortgage payments, this is a one off and will not continue.

With reports of 20% pay raises for many factory workers in China over the last year, we can expect the cost of consumer goods imported from China to rise. America imports around five hundred billion dollars worth of goods from other countries every year then they export. We have a giant trade deficit, add to that our massive government deficit and it is easy to see that we are living far beyond our means. This means that Bernanke and the Fed  must soon begin to ponder the exit strategy and how they can remove the massive stimulus that the economy has come to expect.

Sadly little has been done to address our structural problems and make America more competitive, growth will be thwarted unless these and other issues are dealt with. The Fed Chairman has failed to take serious efforts in pushing the government to take the necessary reforms needed to move the economy forward.  What started as a program to support and prop up the economy has morphed into the main driver of economic data. Between the low interest rates that are forcing investors into high risk assets in search of a positive return on their money, and money being pumped into the system, the markets have become distorted and disconnected from the economy. The idea that the money will continue to be forced into the sky high equity market is flawed

The Fed is in a corner, with higher interest, mortgage rates will rise. The low interest rates that have discouraged savings and encouraged people to take high risks has also dampening bank lending. This does not lead to a healthy economy, but rather a story that will end in tears and regrets. When interest rates rise, as they will have to do at some point, the value of these risky investments will decline, and these investors will be hurt. Also as a double whammy, interest payments on the public debt will rise, increasing the budget deficit, which has been a trillion dollars a year for the past four years

If all the money dumped into the economy would suddenly change direction and rush into hard assets, the shift would be devastating to our struggling economy. This thought also raises other questions, what can we define as a hard asset, what is really available, and in what quantities? This may be where inflation raises its ugly head. A unknown and surprising fact about inflation is how fast it can take root. With such a shift, interest rates would move higher and investor would flee government bonds. The crash of the bond market and what many have called a Bond Bubble will become a reality. Coming up with a plausible exit strategy and making it work are two different things.

Footnote; This post dovetails with many of my recent writings, for more I might suggest reading the article below. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged,

Sunday, May 19, 2013

Obamagate Meets Watergate

The coverage of "Watergate 40 years after" that aired on PBS got me thinking about how President Nixon did not resign right away after five men were arrested for trying to break into the offices of the Democratic National Committee at the Watergate hotel and office complex. It took a long time for the dots to be connected and the temperature to rise. A comparison of the times, 1972 and 2012, and how society has changed leads me to ponder some of the issues that brought about his demise. I can state without a doubt that a President would no longer have to hire "burglars" to break into an opponent's headquarters, the technology of today is far more sophisticated.

Today a President with his own White House propaganda machine, and a few well placed lies or misleading information placed out on Sunday talk shows could have the same effect on an election that skullduggery would of had in the past. Media is a powerful tool. With a little help from agencies like the IRS, leaning on the press, a few wiretaps, and some general, but subtle intimidation spread with a wide brush, it could happen. All this might come together in a way that would defined, and darkened, in effect "tainting" his opponent's image even before the presidential campaign began in earnest. Add to this the governments ability to move around spending in a way that gives the illusion that the economy is better then it really is and you have real power.

Watergate was not a flash flood, instead it lasted forever and a day. It would come out one drip at a time , then something big would every now and then come out that changed everything. Below is part of the timeline of events, but only the key issues that I feel necessary to make my point.

June 17, 1972: Five men, one of whom says he used to work for the CIA, are arrested at 2:30 a.m. trying to bug the offices of the Democratic National Committee at the Watergate hotel and office complex. 
 November 11, 1972: Nixon is reelected in one of the largest landslides in American political history, taking more than 60 percent of the vote and crushing the Democratic nominee, Sen. George McGovern of South Dakota. 
May 18, 1973: The Senate Watergate committee begins its nationally televised hearings. Attorney General-designate Elliot Richardson taps former solicitor general Archibald Cox as the Justice Department’s special prosecutor for Watergate.
June 3, 1973: John Dean has told Watergate investigators that he discussed the Watergate cover-up with President Nixon at least 35 times, The Post reports. 
July 13, 1973: Alexander Butterfield, former presidential appointments secretary, reveals in congressional testimony that since 1971 Nixon had recorded all conversations and telephone calls in his offices. 
November 17, 1973: Nixon declares, “I’m not a crook,” maintaining his innocence in the Watergate case. 
April 30, 1974: The White House releases more than 1,200 pages of edited transcripts of the Nixon tapes to the House Judiciary Committee, but the committee insists that the tapes themselves must be turned over. 
July 24, 1974: The Supreme Court rules unanimously that Nixon must turn over the tape recordings of 64 White House conversations, rejecting the president’s claims of executive privilege. 
August 8, 1974: Impeachment efforts get to the point where Richard Nixon becomes the first U.S. president to resign. Vice President Gerald R. Ford assumes the country’s highest office. He will later pardon Nixon of all charges related to the Watergate case.

It would be silly to think anything like what Nixon pulled back then could ever happen today. Remember that Eric Halterman testified that the President had no knowledge of what was going on, before it was proven that Nixon had his finger prints all over the scandal. In all honesty a wiser and more sinister Richard Nixon would of destroyed the tapes early on, he would of "buried them, then buried the shovel". But today a President and his top people wanting to hold on to power could never bend the rules and push the ethical lines to that degree. That could never happen today, could it?

Recently an article drew some comparisons between Nixon and Obama, how odd, for they appear to be complete opposites. We do indeed live in a strange world. Wouldn't it be surprising if some day Obama is heard saying at one of his several daily news conferences those famous words, "I'm not a crook".  If any of the many scandals floating around have legs that form a trail leading ever higher, no body in their right mind would think that the trail would reach to the very top. The degree of incompetence that would let something like that occur could only take place in government.

Footnote; This dovetails with two previous post. One concerning using the White House staff to promote certain messages, and questioning when those messages turned into propaganda in our very polarized environment, the other about the constant barrage of scandal after scandal after scandal,


Saturday, May 18, 2013

Scandal, upon scandal, upon scandal!

To say we are awash in scandals is an understatement. It is fortunate that the American people have the attention span of a gnat, this will help them through these troubled times. It is almost guaranteed that  all the scandals and all the revelations that emerge from the nation's capital  will come to naught. A polarized America has become unable to react  with any real outrage. It appears that in its current form our Government has simply become too big to obtain the degree of over-site necessary to keep its agencies in line. These scandals are becoming too many to count, but too small to have much meaning to many people. Even when the law is broken the Presidents supporters often try to argue it away as political nitpicking.

We can go back to the many, big and small blips, such as the fast and furious operation that sent guns into the hands of drug gangs in Mexico, the GSA Las Vegas spending spree, recent revelations of a large number of sexual assaults occurring in the military,  Solyndra which should be placed in the dictionary and defined as "what happens when politicians and bureaucrats play businessman with taxpayer money", the CIA prostitutes fiasco in South America, the recent Fisker Automotive failure that reeks of government cronyism and waste, and the 9-11 Benghazi coverup (this includes the way it was handled in the second presidential debate). Now we add to this the DOJ doing an over the top wiretap at the Associated Press.  It is no wonder or surprising that Washington is now abuzz with hearings. 

With the recent overstep of the IRS, when it targeted conservative groups, and worries about "big brother" infringing on our privacy, those not filing tax forms or paying no taxes seldom have any fear. With, until recently, Timothy Geithner, a tax cheat, in charge of the IRS, what did we expect? A bureaucracy often gets its cues from those at the top, we now face a barrage of expensive hearings, with long-winded politicians, all filled with feelings of self-importance, always asking, who knew what, and when? It seems that with so many Americans glued to their favorite television programs or playing video games, while unable to name the Senators from their home state, it appears that America finally has the government in Washington that it deserves. 

Footnote;  A couple of links to three of the scandals mentioned above are below for your convenience. The first, Fiskers Automotive, this little blip was interesting and should raise an eyebrow but had little staying power.  The second, the GSA Las Vegas  spending spree, not government at its best. Last but not least, Solyndra, an oldie but goodie, but it is now viewed only in the rear-view mirror, it has been lost to the past.

Tuesday, May 14, 2013

EU Banking Union, In Several Years, Maybe!

During a recent trip to the UK, head of the International Monetary Fund, Christine Lagarde endorsed talks to move forward on a EU Banking Union. In Brussels the president of the euro zone’s group of finance ministers, Dutch Finance Minister Jeroen Dijsselbloem, said it would be “dangerous” to delay moving ahead with a banking union and that some of the bloc’s biggest banks could reveal new vulnerabilities as their accounts come under scrutiny in the next few months as part of a new round of so-called stress-test audits are conducted. Last month Germany's, Mr. Schäuble conceded that a banking union could go forward under current E.U. law, but he still insisted then that treaty change would eventually be needed for a new single banking supervisor, under the aegis of the E.C.B., Germany has considerable clout in the banking union debate because of its role as the strongest economically. 

E.U. leaders agreed last year to create a banking union as a way of breaking the so-called doom loop. This is the vicious circle in which states go so deeply into debt to support failing banks, that it forces a country to seek a bailout or risk causing it to leave the euro zone. The agreement of creating a banking union in principle has been hard to put into practice, a standard process for winding down troubled banks would be a key component the union. The effect of huge bank debt on state finances almost forced Ireland and Cyprus to leave the euro zone before they received bailouts. And is now a major concern for Spain, which has received banking bailout money from the euro zone, and Slovenia, which is scrambling to avoid asking for a bailout. 

Talk, talk, talk, yes more talks are planned soon as the euro zone finance ministers are to again gather in Brussels for a monthly meeting overseen by Mr. Dijsselbloem. He is expected to lead talks to make progress on a rule book for directly injecting funds from the European bailout fund into troubled banks. Then finance ministers from across the bloc will join the meeting for discussions expected to focus on rules for dealing with creditors in order to shut down banks without putting the burden on taxpayers. National representatives meeting in Brussels this week are trying to resolve differences about which bank depositors should be forced to bear losses.

Do not be deceived that this addresses the crux of the problem, which is one country ponying up money to bail out another, or its banks. The solvent and rich countries are not in any way committing to a transfer of wealth. The proposal, which could become law in the European Union in three years, requires banks to shoulder the administrative burden when clients switch accounts, such as transferring direct debits. The draft law will also demand that banks spell out their charges in a standardized way, making it easier for customers to compare. Efforts to cajole banks into better self-regulation has not worked. The Commission will also suggest giving citizens the legal entitlement to open an account, it wants at least one bank in each country to offer a basic account, this would allow people currently outside the banking system to deposit cash and pay bills.

Common deposit guarantees will be necessary to complete the European banking union project, “That will be the final building block of the banking union, a necessary block,” Dijsselbloem, said. Precursors include new rules on bank resolution, common standards for national deposit guarantees and a European bank resolution scheme that is due to be proposed in June, he said. European Union leaders began work on a banking union last year to break the cycle of contagion between nations and their banks that has plagued the euro area in the past three years. Leaders started by giving the European Central Bank bank supervision powers throughout the euro area.

Dijsselbloem initially said the Cypriot rescue would become the new template for the euro zone, but later recanted. European officials have since moved to speed up implementation of new rules, even ECB President Mario Draghi said on April 4 that the rules need to go into effect as early as 2015 and not be delayed until 2018 as originally planned. Still these talks have not ruled out depositors being included in a bail-in. If that model is used in troubled Slovenia, depositors could be forced to share the costs. Draghi has said he favors modifying the proposal to elevate all depositors above other creditors. The shift from blanket protection of almost all bank creditors to demanding they share restructuring costs has contributed to higher borrowing costs for the financial institutions in the weaker countries,

With all this endless talk about what they will do, or might do, down the road, the ECB keeps banging away at Germany to do more, and sooner rather then later, but that may never happen. Mervyn King once said it was not rational to start a bank run but rational to participate in one once it has started. The governor of the Bank of England was right, of course. With the agreement on a depositor haircut for Cyprus the eurozone has effectively defaulted on a deposit insurance guarantee for bank deposits. With this action, the finance ministers of the eurozone may well have started a bank run, if you do not protect depositors they will simply run away, flee to safer areas, and that is a fact that you can take to the bank!

Footnote; Money is already moving around the nervous euro zone region, and out of the euro and into other parts of the world. While few are talking about it this may be causing a bubble in Germany and its stock market, for more on the subject please read the post below,


Saturday, May 11, 2013

Slovenia Banks, the next to fall

The last time I strolled across the Dragon Bridge in the heart of Slovenia's capital I never envisioned that I would be writing this article. After what happened in Cyprus only a fool or a moron would leave their money in a Slovenian bank. Rising loan losses resulting from a housing bust and a second recession in two years have left a hole of about 7.5 billion euros ($9.9 billion) at Slovenia-based lenders is one estimate. That’s a lot for a 35 billion-euro economy: A bank bailout would push government debt above 70 percent of economic output. The three biggest banks are government-owned or controlled and make up almost half the financial system. It’s not impossible, but it’s very unlikely that Slovenia can manage to pull off the bank restructuring without any EU money.

Slovenia may need assistance from the European Union, and holders of bank bonds, including the most senior creditors, could be forced to take losses, according to Raoul Ruparel, head of research at London-based Open Europe. This would be the second such "bail-in" to take place in the euro zone, after Cyprus and risks deepening the divergence in the monetary union by keeping borrowing costs higher in economically weak nations. Slovenia is trying to avoid following Cyprus as the sixth country using the euro to require a bailout. The cost of cleaning up its banks may force Slovenia to join Ireland, Spain and Greece in seeking aid, government debt has more than doubled since 2008, partly because of the cash injections to keep banks alive. Those reciprocal money flows have reinforced the link between sovereign indebtedness and bank solvency that euro-zone leaders vowed last year to break.

The country's current government, in power for less than two months, has pledged to carry out the previous administration’s bank- restructuring plans, this includes creating a so-called bad bank to move as much as 4 billion euros of nonperforming debt out of the lenders and recapitalize them. A big problem is soured debt, delinquencies account for 20 percent of total loans, and that could rise to 27 percent. As much as 90 percent of the soured debt is held by locally owned banks whose bad-loan ratio could soar to 34 percent, according to some estimates. That would amount to 5 billion euros for the three biggest lenders, Slovenia, a nation of 2 million people that accounts for 4 percent of the euro-zone’s economic output. They joined the monetary union in 2007, now its membership may require it to impose losses on senior bank creditors.

Germany leads a chorus of monetary union countries advocating such burden-sharing in restructuring costs. Banks in weaker euro-zone countries already pay more interest for deposits, ranging from 2.5 percent to 4.5 percent, while German or Finnish counterparts pay as little as 0.5 percent, and it would be far worse without the direct intervention of the ECB. This translates to higher lending rates for companies in countries from Slovenia to Spain, hurting efforts to improve their competitiveness with German counterparts. Non-financial corporations in Spain, Ireland, Greece, Italy, Portugal, Slovenia and Cyprus pay an average of 5.4 percent for new loans maturing in one-to-five years, according to European Central Bank data. Companies in Austria, Belgium, Germany, Finland, France and the Netherlands pay 3.3 percent.

Slovenia joins a growing list of euro-zone countries whose banks have pushed them to the brink of collapse, again nations have blurred the line between bank and sovereign debt. Ireland was shut out of bond markets in 2010, when it tried to prop up its domestic banks, whose assets had peaked at four times the nation’s gross domestic product. It agreed to a 68 billion-euro aid package that year. Spain’s borrowing costs surged to as high as 7.5 percent last year as the government delayed recapitalizing savings banks. The country reached an accord for 100 billion euros of assistance and has so far tapped about half of that. “Germany now says taxpayers shouldn’t bear the costs of bank restructuring, but what it really means is German taxpayers shouldn’t. Slovenian or Cypriot people are stuck with the costs since German bankers are gone.”

Slovenian taxpayers may wind up better off than their Cypriot counterparts because their banking industry is smaller, but the government needs to move fast to detail its restructuring plans and seal a deal with the EU to keep those costs under control. “It’s all manageable unless there’s a run on the bank,” said Ash, who’s based in London. “The longer you mess around, the higher possibility for such a run to happen. They need to get serious soon. If they wait too long, they’ll be toast.” Unlike Cyprus there is no foreign money from rich Russians to steal, this pain will have to be borne by the people of Slovenia. The ugly math by my calculations show, that the share, or bill to every Slovenian man, woman, and child, for this alone, and nothing else, will run about 3,750 euros or close to 5,000 dollars.

Footnote; For more on the dire situation in Europe the posts below go deeper into the subject, the first is about how things are not getting better, the second contends that Germany stocks are not surging because the country is doing so well, rather as a result of cross border money flows as wealth seeks a safer haven.


Cyber Warfare And Attacks

If cyber warfare and cyber-attacks are not on your list of modern worries, it is time you put them on. Either could make your life much more difficult or in a worse case scenario end it. A series of high-profile events since 2010 has highlighted the increasing and multifaceted threat of cyber-attacks. These include espionage hacks on Google and Western energy companies, the Stuxnet infiltration of Iranian nuclear sites, and the targeting of government networks.  U.S. cyber-security policy continues to evolve to meet these challenges, but critical gaps remain, including the incomplete protection of digital infrastructure vital to national security, such as power grids and financial networks. On a personal level having your accounts hacked, or having someone steal your identity can turn your life upside down.

Recently a $45 million bloodless bank heist that made the news has left even cybercrime experts impressed by the technical sophistication, if not the virtue, of the con artists who pulled off a remarkable internationally organized attack. "It was pretty ingenious," Pace University computer science professor Darren Hayes said Friday. A small team of highly skilled hackers penetrated bank systems, erased withdrawal limits on prepaid debit cards and stole account numbers. Then criminals used handheld devices to change the information on the magnetic strips of old hotel key cards, used credit cards and depleted debit cards, the network carried out thefts at ATMs in 27 countries. Law enforcement agencies from more than a dozen nations were involved in the investigation.

Now come allegations that Chinese hackers gained access to more than two dozen of America's most advanced weapons systems. A classified report by a group of civilian and government specialists who advise the Pentagon on military developments, says advanced weapons systems compromised by hackers include missiles, fighter jets, helicopters and naval ships. A leaked copy was recently published by the Washington Post. The Chinese government denies any involvement in the attacks that are the most serious of a series of issues creating friction between the US and China. Military analysts described the scale of the alleged attacks as breathtaking. Access to the designs would allow China to catch up on years of military development and save it billions of dollars at the same time it would also make it easier for China to develop weapons to counter US systems.

Cyber warfare generally refers to politically motivated hacking to conduct sabotage and espionage.  It is a form of information warfare sometimes seen as analogous to conventional warfare and in 2013 was, for the first time, considered a larger threat than Al Qaeda or terrorism, by many US intelligence officials.  US government security expert Richard Clarke, in his book Cyber War, defines "cyber warfare" as "actions by a nation-state to penetrate another nation's computers or networks for the purposes of causing damage or disruption". This would include financial markets. William Lynn, US Deputy Secretary of Defense states that as a doctrinal matter, the Pentagon has formally recognized cyberspace as a new domain in warfare, they now feel it has become just as critical to military operations as land, sea, air and space. This is the kind of thing that movies have and will continue to be make about.

Be it from a form of warfare or crime, imagine a massive failure of the technology system, or the internet being corrupted and rendered useless, the effects would be devastating. Equipment could stop working over large areas and information would be lost or could not be retrieved. Just as bad would be the effect on society is if information was no longer correct and could no longer be trusted. The massive use of computers and technology is fairly new to mankind and has not stood the test of time that will prove it is built on a rock solid foundation that cannot be corrupted. The land of technology  has become a place where we currently place our most precious secrets, trusting them to be safe.  Just remember, even as efforts are made to lessen the risk, we remain vulnerable and hoards of attackers continue to amass. 

Footnote; You could put this in my "we live in a dangerous world" series, it is best never to feel to safe. The below post continues on that theme, 

Tuesday, May 7, 2013

Fairness Of Tax On Internet Sales

Bloomberg had on the screen last night for all the world to read a statement about how smaller companies selling on the internet with under one billion dollars in sales would be exempt from collecting sales tax, of course it is "one million" in sales not one billion. It is little wonder Americans don't understand the real value of money when financial shows specializing in such things make such incredibly stupid mistakes. The important issue is that congress is finally about to level the playing field and take away one of the biggest advantages enjoyed by companies selling over the internet, that is not charging sales tax.

For years Amazon and companies like it have savaged brick and mortar stores in are communities, and a lot of the reason is because of this advantage.Internet and mail order buyers have always owed taxes on their purchases. Such buyers have generally been unaware of or have ignored their obligation to pay taxes on their purchases from out-of-state sellers. The Marketplace Fairness Act would put buyers from mail order and electronic sellers in the same position as persons who purchase from in-state brick-and-mortar stores. Some shoppers have in the past visited local stores, viewed an item, talked with a clerk getting their questions answered, then bought online to save a few dollars, including the sales tax.

The Act would only permit states to impose sales tax collection responsibility on internet and mail order firms with at least one million dollars in out-of-state sales. Truly small businesses would, still enjoy immunity from tax collection responsibilities on their out-of-state sales as long as they have no physical presence in the taxing state.The bill would permit states to collect sales tax due from its residents on Internet and mail catalog sales of goods. It is not an increase in taxes, just a way of collecting sales tax already owed by residents who order from catalogs by mail or Internet. Some states will use the revenues they collect under the Act to balance their budgets, others may use those revenues to lower their respective sales tax rates.

The Marketplace Fairness Act is long overdue. It is neither fair nor efficient to require brick-and-mortar sellers to collect sales taxes while their on-line and mail order competitors effectively sell "sales tax-free". NFR President and CEO Matthew Shay today called the Senate's action “a significant step for sales tax fairness” and lauded the bill's sponsors for carrying the day “despite a highly-funded misinformation campaign by the legislation's opposition.”  NRF Chairman Stephen Sadove, CEO of Saks Inc., added that “retailers compete for customers on many different levels … but they cannot compete on sales tax. Congress needs to address this sales tax disparity and allow retailers to compete freely and fairly.” As the owner of a small business I salute this bill.

80--20 rule makes perfection very costly

In business, the 80-20 rule, also known as the "Pareto principle", the "principle of factor sparsity" and the "law of the vital few." It is used to help managers identify problems and determine which operating factors are most important and should receive the most attention based on an efficient use of resources. As a rule of thumb it that states that 80% of outcomes can be attributed to 20% of the causes for a given event. Resources should be allocated to addressing the input factors that have the most effect on a company's final results. 

 I often urge those working under me to make an effort to view the world through the 80-20 rule. It was explained to me years ago that most of a company's sales were generated from an important 20 percent of it's customers. From those customers often flow 80 percent of the profits. I have found that as a rule of thumb, while not always accurate, it is a reasonably good guide line and extends into other things. In my mind the power of this rule can be applied to a massive number of under takings, situations, and projects. It applies to our personal lives, business, and government.

For example in business it seems that 80 percent of your problems come from a small percentage of your accounts, say 20 percent. This might lead someone to speculate that beyond a certain point efforts to reach a higher level of achievement will begin to require much more effort, sometimes more then worth investing. The government should look at this rule and take away the idea that the first few dollars spent to correct any ill are the most effective, after that the impact of your spending diminishes rapidly, and much of it turns to waste. Government not as constrained by cost as business often forgets this very important fact, and squanders away our money.

The return on investment necessary to achieve perfection, or get it all, may take substantially more effort and come at a tremendous cost then just reaching an acceptable level. Robert Ringer, author of Looking Out For #1 , and a man who preaches the principles of practical living, sees "perfection as the enemy of good". Yes, this means what you think it does, if someone demands perfection they often become frozen in place unable to accomplish anything, think of the artist that constantly destroys their work because they see it as flawed. The amount of effort to achieve perfection after a certain point becomes pure folly and a exercise in futility. Caution should be preached to those going down this path for the destination tends to be a mirage.

A woman I knew was always waiting for the right guy to come along, she said that only then would she begin to take vacations, or go out and do this or that, in effect her life was on hold. Sadly if we wait for all the stars to become perfectly alined before moving forward, we often will find that we are stuck in place. Other destructive methods exist for us to deal with the reality that life does not always dole out to us what we want, some people give up and go through life not even trying. Addicts often go on a binge when they fail to stay on the straight and narrow, this tends to reinforce their inability to control their behavior.      

Back in the day when I was a residential contractor working with different materials was not easy, it seemed that they often contained flaws. Wood tends to have crowns and bows, sometimes to where a piece is unusable. When my work got me down and failed to meet my expectations, I found that driving over to a competitors much more expensive house, and viewing a few flaws, was what it took to set me straight. Life is a learning process. One of the lessons many of us learn and forget many times is that we live in an imperfect world. When we do obtain  perfection we often find it has a very short shelf life in our changing world, this means that many times is not worth the price.

Monday, May 6, 2013

Healthcare Going Forward

Many are finding the new healthcare legislation more expensive and harder to implement then first thought. When it comes to healthcare people wonder what we are facing in both care and cost, what I see as the crux of the issue is who will be paying these bills. We must look at how we can cut healthcare cost so we get more and better coverage for the money spent. Extending medicare to give the most "basic coverage" to everyone would require some rationing of service to contain cost, but this is already being done. It would allow us to discontinue Medicaid while meeting our goal of basic healthcare for all citizens. Other wise let us be honest and made it lawful to turn the uninsured and poor away from the emergency rooms of our nations hospitals untreated.

Healthcare is ridiculously expensive because many people have convinced themselves of  three things: The answers for good health outcomes rest with pills and procedures rather than good diet and exercise. Death at late stages of life is some strange, recent development in human history which justifies and necessitates extreme, exorbitant payouts to delay it for every possible last second.  And last but not least, thinking that mixing all the myriad of "health care" transactions that result from the just mentioned concepts with health insurance as originally conceived to protect a person from unforeseeable, catastrophic events like an accident is a good idea. Just because we can does not mean we should, healthcare is like a tape worm ever ready and always wanting to grow larger.

Healthcare is the Achilles heel of American competitiveness, our healthcare problems are not for lack of spending, Americans spend more on healthcare then people in other developed countries, but with very poor results. Our system allows insurance companies to stick their nose into every interaction you have with a health care provider, they get to take a large cut as well. It has become virtually impossible to find a modestly-priced traditional insurance plan that protects a person from unforeseeable catastrophic accidents while letting them own responsibility for the accumulation of their lifestyle choices over time, thus differentiating the healthy  70-something marathon runners from a fat slob suffering from self induced diabetes.

After the Supreme Court  decided that Obamacare is here to stay, I heard one supporter say "I think it rather tragic that a five/four Supreme Court decision could have overturned the wishes of  Congress." Another joked, "I guess we could just let people die in the streets but then the conservatives would probably complain about the cost of collecting the corpses." This is the kind of noise that makes it difficult to stay focused on the important issues. Surely there is a legitimate and rational place for government in ensuring access to basic levels of care, but we've lost our bearings about what "basic levels of care" should mean, and we know what happens to costs when free government money flows into a system, hello college tuition! Indeed, healthcare and hospitals have become a quasi government entity.

Another interesting objection to Obamacare is that it is a boondoggle to increase the profits of private companies and their owners and that it should not have been adopted in preference to a single-payer system covering "basic healthcare." A single-payer system could achieve many of the goals of the healthcare bill by cutting cost through eliminating wasteful duplication, bureaucracies, and paperwork. The idea wouldn't eliminate insurance or pharmaceutical companies, they would continue to sell extensive types of "optional" coverage. A single payer program would appear constitutional. Many argue there are "better" solutions than Obamacare, but that is not the legal standard for what is constitutional. Deciding the better, or the workable, is the job of the legislature.

We all know that there is no escaping the grim reaper, and little to no way to collect against the dead if they have no assets to pay for burial, cremation, etc. Therefore, mandating people buy burial insurance makes sense. Consider the fabled broccoli, gym, and junk food examples, if you are out of shape you increase your chances of getting a major disease and forcing costs on the system. Once Congress has the power to regulate in an area it is more or less unfettered what is to prevent them from mandating you eat broccoli, go to the gym and banning junk food? When all is said and done the crux of the issue is how can America cut healthcare cost and get more and better coverage for the money spent.

Footnote; Other related articles may be found in my blog archive, thanks for reading and comments are encouraged,

Sunday, May 5, 2013

You Break It-You Buy It, a limiting idea!

The saying "if you break it you buy it" can be misleading. It is often unenforceable, in some cases it is not even practical. In the case of foreign policy, accepting such a notion can cause America to be far less likely to step in where needed, or cause us to undertake the costly and unrealistic job of nation building.  In real life such rules often do not hold true, in fact the real Pottery Barn has no such rule, and in fact it's a bit weary of being associated with the remark that is often quoted and attributed to them in newspaper and television reports. "This is very, very far from a policy of ours," said Leigh Oshirak, public relations director for the brand, owned by Williams-Sonoma Inc. of San Francisco. "In the rare instance that something is broken in the store, it's written off as a loss."

Even if it were the rule, should invading Iraq or getting involved in the internal strife of a country like Syria really have anything in common with sending a wine glass crashing to the floor while browsing at Pottery Barn? Absolutely not, say the folks at Pottery Barn, who are miffed by a metaphor attributed to Secretary of State Colin Powell. In 2004 U.S. Secretary of State Colin Powell was quoted in "Plan of Attack" as cautioning President George Bush before the war that he would "own" Iraq and all its problems, after military victory. That was based on what Powell and his deputy Richard Armitage called "the Pottery Barn rule" of "you break it, you own it."

This means this rule or ones like it should not be carved in stone or used as a mandate in how to develop and conduct foreign policy. Other over simplifications must also be questioned, such as having  a clear exit strategy, and the need for overwhelming force to be in place before dipping your foot in the water. These and other ideas, like if a any Americans are captured and executed the price is "far to high," acts to limit our options. An expanded concept of what is acceptable does not mean we should jump into every problem or try to shape every event. Intervention should be the exception rather then the rule, and if we do get involved it does not mean we have to go "full in". The most effective returns on our actions comes when a little help or risk can be the game changer that produces something good.

We must pick our battles carefully and only intervene in fights where we think we can make a positive difference. In a complicated world simplifying what you interpret as reality may just gum up the works or create blow-back rather then guarantee the outcome you desire. In the smoke of war, and many other situations, our vision is blurred by emotions, lies, misinformation, hidden agendas, and more, sometimes we must just do the best we can and try to limit the downside and minimize any loss. In a situation like Syria little question exist that broken best describes the Assad government. A limited involvement and effort to reduce the loss of life now, and in the future, including trying to influence who controls the large stash of chemical weapons outweighs the option of doing nothing.

Footnote; This relates to what America should do in Syria, see the artical below,

Cheap Money, more, and more, and more

An Ocean Of Cash
Money has become so cheap to borrow that many people are now arguing that you must take it even if you don't know what to do with it. It is hard to imagine how much this is distorting the economy, markets, and reality in general. A total disconnect between life on main street and the financial world is occurring and it is putting the economy in a very dangerous place. It is often hard to determine what is true, but a report on Bloomberg that 32 Trillion dollars in funds were held in offshore accounts around the world made me shutter. How safe is this money, and what exactly is it doing? Can you say Cyprus?

Take for instance that cash rich Apple just floated a massive bond. It was recently reported that Apple Inc. sold the largest corporate-bond deal in history with a $17 billion offering that investors hungrily gobbled up. Apple said earlier this month it would borrow cash as part of a plan to return $100 billion to shareholders by the end of 2015. Apple has a huge cash stockpile, but much of its money is overseas. Raising cash at super low rates in the bond market helps Apple avoid the big tax bill that would hit if the company brought its cash back to the U.S., executives said last week.

If this is about buying back stock, then it is less about their business model, or producing and selling products, but more about some weird investment scheme devised on their faith that they can take advantage of the low  interest rates and benefit from tax games. Sadly many businesses and individuals are becoming more involved in these types of activities, another word often used to describe such action is speculation. When people look back at Japan and how it has preformed over the last several decades they see little growth, this is a result of overdoing things and the bursting of a unsustainable bubble.

The velocity of money is a term in reference as to how fast it moves about, recently velocity has been slowing. If it suddenly takes off watch out, it could herald a massive wave of new inflation and rampant speculation.. Just as important is where this money goes or flows. It would be wise to look forward and take a more practical long term approach to making the economy work, band-aid upon band-aid is not a solution. Debt and the faith people have in their currency and their future does matter. At some point the present and the future intersect, it is not just about the deficits of today but the promises you make coming due and how they effect the financial landscape.

Footnote; Much has been made about the "good job numbers', but they really are not that great,


Friday, May 3, 2013

Europe has not rounded the corner

The long awaited recent move by the ECB was described by a writer on the BBC as "opening the window on a convertible", such a minor drop in interest rates from .75 percent to .50 percent will not have much effect on the economy and certainly is no game changer. The term "lulled into complacency" is gaining new meaning and it should be included in every article written in these troubled times. Anyone seriously thinking that after all the quantitative easing and expansion of central bank balance sheets across the world this minor drop in the ECB rates will make much of a difference is living in a fantasy land

A few paragraphs near the end of a recent story about European and Italian politics hit on a far more important part of reality. In Cyprus, the newly elected President Nicos Anastasiades was rocked in his first month in office by a banking crisis that brought the euro zone to the brink. He has been forced to shepherd a new bailout agreement through a skittish Parliament that rejected the first one. In Greece, the coalition government of Prime Minister Antonis Samaras, still less than a year old, is boasting that his country is now projected to turn the corner on debt next year in spite of the fact that these projections have never been accurate in Greece or anywhere else in Europe, the economy continues to sink.

In France, President François Hollande, who will mark his first year in office next month, has been told by International Monetary Fund forecasters that France will join Spain, Italy, Portugal, and Greece in recession this year despite his pledge to boost growth. Given the economic downturn, France will have trouble meeting its deficit targets even if the EU agrees to ease them somewhat. And in the Netherlands, Prime Minister Mark Rutte, the conservative leader who was re-elected last September, announced earlier this month that he was breaking with Germany’s hard line on austerity and suspending planned budget cuts in an effort to restore confidence in the economy.

Back in Germany none of this will deter Merkel in her current campaign, because winning elections is a politician’s reason to exist, but even Merkel is well aware it won’t be easy with the economic headwinds faced by Germany. It's hard to see anything resembling a case for optimism anywhere on the continent. Even though the Spanish government's borrowing costs have fallen since the ECB introduced its backstop. Even after this action unemployment has reached new highs in both Spain and across the Euro-zone. In Spain small and medium-sized enterprises can't get capital except on prohibitively expensive terms.Again I'm forced to say the structural problems facing Europe remain mostly unaddressed.

Footnote; I have written several articles about the problems in Europe, a few of the other recent post can be found below,

Wednesday, May 1, 2013

Syria Going Forward

Syria is again back on the radar, it never really went away even though many people hoped that it would resolve its self. Still interest in the Syrian conflict has waned, only 39 percent of those surveyed say they are following the violence closely, a 15-percentage-point drop since a CBS News poll conducted in March. Sixty-two percent of the public say the United States has no responsibility to do something about the fighting in Syria between government forces and anti-government groups, while just one-quarter disagree. All options have grown increasingly complex in recent weeks as the Syrian regime has moved chemical stockpiles around the country. We have to now assume they are going to continue to do so, the Joint Chiefs Chairman Gen. Martin Dempsey recently told Congress the military could not secure the entire chemical stockpile because it does not know where it's all located.

Currently I find myself weighing in on the side of doing more, not because it is our responsibility but because it may be in our best interest. I think we should do more but that does not mean we should jump in with both feet. This does not mean putting troops on the ground but establishing at least a partial no fly zone. It seems to be a case of you are damned if you do and damned if you don't, but this does not mean you should not try to do the best thing or the right thing. I advocate that we join a group of  Nations to knock down a few Syrian jets and helicopters, we would do this only after a very brief notice, meaning just a few hours. At the same time we put Assad on notice, we would have to make it perfectly clear that we were prepared to unleash more pain if they are stupid enough to retaliate. Smart missiles and drones should be enough to let Assad know this must come to an end.

Defense Secretary Chuck Hagel and other senior civilian officials at the Pentagon have sought updated military options in the last few weeks as suspicions and intelligence grew that the Syrian regime had used sarin gas on its own people. There are also specific new discussions with Israel, Turkey and Jordan about the "realities of the conflict." These discussions center around what to do if chemical weapons become a risk to their populations and also what immediate actions would have to be taken if the regime of Syrian President Bashar al-Assad were to suddenly fall. Many people feel that the real dangers in Syria today come less from Assad, or even Iran, and much more from increasingly potent Sunni extremist fighters. If the “rebels” win, as matters now stand, these people think that the jihadis  would be the real victors. U.S. strategy must focus on building this common ground, it is important that neither its European nor its regional allies give arms to groups suspected of being even slightly jihadi in nature.

Fears are growing that they’d swiftly create a terrorist state to menace Turkey, Lebanon, Jordan, and Israel. Stopping jihadis from taking over Syria could represent the only common goal between Syria’s ruling Alawites and the secular Sunni rebels. Shiite-related Alawites rightly fear an al Qaeda–like triumph in Syria as the worst possible outcome, with the mass killing of Alawites their No. 1 priority. The secular leaders of the Syrian rebels, clustered in the exile group known as the Syrian National Council, also must worry about the extremist threat they themselves would face if the Assad government fell now. Remember, most Syrian Sunnis don’t have a history of religious radicalism. They don’t want rule by Sharia any more than the Alawites do. It is important that our Arab friends already sending arms err on the side of great caution, such restraint would show the Alawites we care about their safety, a critical signal.

Currently much of the concern focuses on these chemical weapons rather than the 80,000 or more people that have died and the millions displaced and forced to flee, their lives ruined or disrupted. As the Pentagon has in recent days stepped up planning for potential military intervention in the Syrian civil war, it is important that we do not make thing worse. This means a focus on saving lives both over the short term as well as the long term. This means leaving open possibilities like negotiation. Assad can negotiate to fall back to his stronghold area and release the rest of the country to a peaceful existence. We might even go so far as to offer an award or to buy stores of chemical weapons, from any party that has them, but only in a way to promote peace and not as a sign of blackmail, this might mean in exchange for food or peacetime goods. One thing is clear, Assad can not remain in power in his current form.

Footnote; This is my second post on Syria, I first wrote about the conflict way back in February of 2012. I should note that while it appears North Korea has gone silent, do not be surprised if they again make a bid for attention or take advantage of the "Syria distraction"