Wednesday, October 28, 2015

Complacency In The Face Of A Slowing Economy

At Some Point It Gets To Hot!
It is time to revisit the issue of complacency and whether we have been lulled into such a state by the extraordinary actions central banks and governments have taken since 2008. This is a key question facing all of us as we again hear cries that Central Banks should embark on a new round of monetary easing. This brings forth some very serious issues concerning how we now tackle an economy where growth is again clearly slowing. Low interest rates have punished savers, distorted markets, and caused capital to be allocated in nonproductive ways. By not demanding the right kind of growth and simply throwing money at problems we have only delayed and are adding to a much larger crisis lurking in the future. 

In our fast moving world many people have come to think if a financial crisis doesn't occur today or in the next few weeks it is simply not going to happen at all. Over the years I have penned several articles claiming that America had been lulled with the rest of the world into merely kicking the can down the road. Each day that passes without the arrival of a massive economic Armageddon only reinforces the idea that far too much has been made as to the ramifications of growing debt in America and throughout the world. Looking back at the horror stories surrounding sequestration and the financial cliff I recall how on one Sunday morning talk-show the host referred to the proposed spending cuts as draconian and predicted dire consequences. Just days ago a budget was endorsed that rolls back many of these cuts, so far the message is that sidestepping financial responsibility has been rather painless and this only reinforces the idea that we can continue down this path.

The much loved theory that we will be able to grow our way out of our difficulties and muddle through is a bit simplistic and much overused. This strategy is often viewed as a painless easy solution to problems because growth has a way of obscuring hard to address deeper rooted structural flaws that undermine our economic system. Many people forget we are living in very unusual times and that no historic parallels exist to guide us forward. Hoping that after some type of economic setback the worst is largely behind us is a poor strategy to embrace in confronting the challenges of tomorrow. A feeling that we have rounded the corner and the promise of better days ahead have a way of easily overtaking us and much of this optimism is rooted in the faith people have in Modern Monetary Theory, which is often referred to as MMT.

MMT also known as neochartalism is a economic theory that details the procedures and consequences of using government-issued tokens and our current units of fiat money.  Newly acquired tools like derivatives and currency swaps  allow us to print and  manipulate away problems. MMT promotes debt. While reading an article about the growth of debt in China's non-financial sector I was forced to reflect on how debt is encouraged to grow in a MMT system. Currently China is the poster-child of how easy money distorts growth and ushers demand forward. In Europe the ECB had to step in to halt the economic collapse of Spain, Italy and several other debt laden countries that were on the brink of economic collapse. MMT allows those making the rules to break the ties between debt and interest by manipulating away prior standards.

This has added a whole new dimension to economics that seeks to eliminate the potential of failure and economic collapse. However, there is a central  flaw in the concept  of MMT that will prove to be its Achilles heel, and that is as more money is poured into the system lower interest rates at some point are no longer effective in driving the economy forward. As the extra GDP growth generated by each batch of loans drops and momentum ends MMT becomes the equivalent of pushing on a string. When the economic efficiency of credit collapses many of the central bank's options quickly evaporate. Artificially low FED controlled interest rates are a massive "one-off" or onetime tailwind that should be considered mainly behind us and are destined to bring diminishing returns. The "almost surreal" feeling of indifference towards reality that has developed as to the limits of what central banks can do is very troubling.

The fact is companies have already ushered all the savings from interest paid on debt into the earning column and a major reason inflation remains low is that money has flowed into paper assets instead of tangibles. Many companies are sitting on a hoard of cash, this has lowered the velocity of money, others exist on a mountain of debt. A strong shift could develop at any time and disturb this unnatural balance. When rates stop going lower or reverse the positive effect garnered from these policies will ebb and become a major headwind. With massive government debt in many countries and our economy still weak this headwind has the potential to become devastating. The collision of MMT, social unrest over inequality, and other destabilizing factors have the potential to create the perfect storm that will remind the world that dept does matters.

Tuesday, October 20, 2015

Sex-bots Could Make Spouse Obsolete

Can Money Buy You Love?
Caution; This article may not be suitable for all audiences!

We should all try to be grownups and face the fact that robots can be used for things other than moving items around the factory floor. This means Sex-bots could make our human spouses obsolete, someone had to say it. Robots are being looked at to fulfill a variety of needs, some of these uses are less distasteful than the killing machines the military seeks, and some are destined to become rather controversial. Many articles have been written about how robots are being groomed to help and assist in the care of the elderly, but it is clear that they have the potential to fulfill many of our other needs as well. The integration of robots into our culture will bring about massive changes in society.

For as long as I can remember people have tried to infuse human qualities on inanimate objects. Everything from pet rocks to automobiles have been referred to by their owners as "she's a beauty" might be viewed as proof that many people show a desire for objects to reflect something beyond what the world originally granted these objects the ability to muster. Most of us harbor the desire to be liked, loved, cherished, exist in an environment free of criticism, physical closeness or contact often is a part of this. My experience leads me to believe a good percentage of humans are a bit strange, weird, or off and becoming more so every day, in many cases, we might be surprised how many people could shift their feelings of companionship to a well-designed robot. We do not live on bread alone, but again, even a good home-cooked meal is something a "love reflecting" sex-bot could provide, and in many cases, their cooking might be far better than the spouse many of us might choose, or get stuck with.

The term fem-bots was used in several "wacky" Austin Powers' movies when robots were cast resembling the female form and took on a sexual persona. The giant screen has on several occasions explored some of these futuristic issues mankind might someday face. A peek into what it would be like to clone yourself was explored by a character Michael Keaton played in the 1996 American science fiction comedy, Multiplicity. The movie about a man who never has enough time for the things he wants to do is offered the opportunity to have himself duplicated, also starred Andie MacDowell, the movie revealed how easy answers sometimes prove to have unforeseen complications. Returning to the subject of this post, even virtual reality, and the idea of moving towards living an artificial existence in a virtual world does not seem to have the potential that having a sex-bot holds.

While a huge difference exists between robots and dolls a look into advancements taking place within other industries often holds a glance into what lays before us. A Japanese company claims to have taken its product a genuine-looking sex doll to the next level. A Daily article tells of the doll's realistic feeling skin and authentic-looking eyes. The manufacturer, Orient Industries says the dolls are made from high-quality silicone and are so realistic that at first glance there is little to distinguish them from a real girlfriend. The noninflatable doll is sold under the name "Dutch Wives" which is a Japanese term for a sex doll, and it is advertised in the media that anyone who buys one will never want a real girlfriend again. The doll cost just north of six thousand dollars. I discovered this information during a "bing" search, which again proves how necessary the internet can be. In the title of the story, the writer uses the word "creepy" when referring to the industry, but it is difficult to deny that over seven hundred comments show a large level of interest in such things, you will find the link below.

A few final thoughts about what a future might look like if mankind gracefully integrates robots into our lives and culture. The economics of such a mate also is at an acceptable level for many people. One thing is certain, and that is the rich will have access to the best and most advanced units. With a good warranty and little maintenance, a sex-bot purchased on payments might render the purchaser large savings when compared to a high maintenance spouse. A huge benefit is the amount of time devoted to maintaining a relationship could be substantially reduced if an inactive or dormant mode was utilized, couple this with savings on medical insurance and an expensive clothing budget. To ice the cake you can just imagine the money saved by avoiding a costly divorce that means you lose half your wealth or have to start over. If an owner was inclined they might even leverage their investment by sharing, renting out, or swapping their sex-bot with others.

She Found X-217 Less Cold Than Many Men
A word of caution, men should not get too smug about their place in society. Many women don't think we are all that we are cracked up to be or show all the qualities they might desire in a mate. More than one woman has said the words, "I don't know why I put up with him" and often more than once. Yes, fellas, the fact is many of us are not as cherished as we might hope. When you factor in the fact that the X-217 pictured directly to the left can fix the dripping kitchen faucet, seems to enjoy romantic girly movies, fully understands the female anatomy, is emotionally supportive, and never raises its voice it becomes crystal clear the bar is being raised to a level where it is difficult to compete.

As to the question of whether it would be "cheating" for a spouse to have sex with a sex-bot I would defer this to someone with more experience in this area, such as Bill Clinton. In a defining moment during his White House sex scandal Clinton's rationalization to the grand jury about why he wasn't lying when he said to his top aides that with respect to Monica Lewinsky, "there's nothing going on between us."  remains a classic.  Here's what Clinton told the grand jury (according to footnote 1,128 in Starr's report): "It depends on what the meaning of the word 'is' is. If the--if he--if 'is' means is and never has been, that is not--that is one thing. If it means there is none, that was a completely true statement....Now, if someone had asked me on that day, are you having any kind of sexual relations with Ms. Lewinsky, that is, asked me a question in the present tense, I would have said no. And it would have been completely true." Bill Clinton really is a guy who's willing to think carefully about "what the meaning of the word 'is' is."

All in all, it will be very interesting to see how society embraces robots to fulfill different roles in our lives as technology moves forward. For the record, the term Dutch wife originally referred to a large sack stuffed with canvas (sails). Sailors used these to wedge themselves in their bunks during rough weather so they wouldn't roll about. In the time this term was coined dutch women presumably had a reputation for being unresponsive and apathetic in bed. (Things on this front have improved markedly, however.) So says the Urban Dictionary. Please consider this piece a social commentary on what we have become, or where we might be heading. If nothing else it should help bring into focus the fact that in our fast-changing world we have a slew of decisions to make concerning the boundaries we place on society. In a future post I may explore what might happen if a sex-bot dysfunctions or in human terms "goes mad." even worse that it decides it "deserves" then demands respect. Of course, that is for another time, for now, I will let you ponder what you have just read.

 Footnote; This post dovetails with many of my recent writings, for more on the ramifications robots might have on society see the articles below. Please feel free to search the archives for articles on a range of topics, thanks for reading, your comments are encouraged.

Sunday, October 18, 2015

TPP And Fair Trade

Walmart Container Ship Is Poster-child Of Bad Policy
The recent signing of the Trans-Pacific Partnership (TPP) brings together 12 nations that account for about 40% of the global economy and would mark the biggest liberalization of world trade in more than a decade. As things stand Congress will only be able to vote up or down on ratifying the final negotiated agreement and will not be able to amend it. Rejection of this agreement would be seen as marking the upper limit in the decades of steady trade liberalization that has fueled globalization. Many critics exist because these trade deals over the years have been blamed for environmental problems and exacerbating economic inequality within many developed economies as manufacturing jobs have been outsourced to low-wage countries. Internet activists also claim the deal would curb freedom of speech, other detractors even charge it would enshrine currency manipulation.

Americans should expect the politically heated debate over the new trade agreement to continue. To clarify, what we are looking at are two separate agreements, the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). As we view the global economy we must ponder how much of this is about individual governments giving up control and becoming subservient to corporate “efficiency” and the desire of companies to both develop and control future rules. Many people see the global economy as currently being run as an ill-regulated business model tilted to favor big business. With this agreement is the promise it will create new jobs, we would be wise to expect that will turn out to be largely a myth.

The more controversial of the two agreements is the TPP and it is most front and center in the news. This agreement is a new U.S. led Pacific trade pact that pointedly excludes China, many of those promoting it hope it could cause China to lose influence and key export markets, but observers say the web of bilateral deals Beijing has forged is enough to maintain its global clout. At issue is the exact language and details of the agreement, summaries indicate the agreement will affect tariffs, workers' wages, intellectual property, and environmental regulations in the U.S. and 11 Asia-Pacific countries. Some people view the Trans-Pacific Partnership (TPP), currently being pushed by the Obama administration and its corporate allies as a blatant attack on labor, farmers, food safety, public health and even national sovereignty.

Details of the agreement which will have broad implications have been kept largely secret so most of us have little knowledge of its contents. While being negotiated even members of Congress didn't know much of its details because it is mostly the product of corporate lawyers. Making the agreement even more controversial is the belief held by many Americans that bad trade deals with low-wage countries have contributed to our current economic woes. When Massachusetts Senator Elizabeth Warren, came out strongly against these agreements Obama said the Massachusetts senator was “absolutely wrong” and accused her of speculating about the contents of the emerging 12-nation trade deal for personal gain. Many people see Obama's criticism of Elizabeth Warren as not only disrespectful but as disingenuous. His statement did little to quell the controversy, instead, it seemed to throw fuel on the fire.

It should be pointed out that just because the President says someone is wrong on an issue does not make it true. Former Labor Secretary Robert Reich called the TPP “NAFTA on steroids”  Senator Warren and those concerned that a trade agreement with low wage nations will not be a great job creator for America have history on their side. Economist Dean Baker said, “This really is a deal that’s being negotiated by corporations for corporations, and any benefit it provides to the bulk of the population of this country will be purely incidental.” It is difficult to say why Obama sees this as a big plus, but it’s worth noting that in 2008, as a presidential candidate, he said, “I voted against CAFTA, never supported NAFTA, and will not support NAFTA-style trade agreements in the future.”

Historically, trade laws are geared to enrich the “mother” country and was often used to build a nation. Following World War II free trade arguably benefited the economies of the countries involved. But the new laws, starting with 1994’s North American Free Trade Agreement (NAFTA), recognized that capital is now mobile, it moves about the world and owes allegiance to shareholders rather than loyalty to any one country. With the old saying that "all politics are local" in mind, politicians remain mixed on these plans. Those supporting the TPP, claim it will be a boon for America when it reduces tariff barriers to vast Asian markets and strengthens protection for intellectual property a strong plus for America.  Moreover, the overall gain is more than just economics. In our competition with China for influence in the region, they reason it would anchor our relations with Pacific Rim nations keeping them out of China's orbit.

In heralding the agreement which he touted as historic, U.S. President Barack Obama said: “We can’t let countries like China write the rules of the global economy” and implied without it America will be left dangling in the wind with American businesses and American agriculture suffering in ways that will cost the U.S. jobs. While all signatories championed the benefits TPP will bring in kick-starting sluggish global growth, much of America's political motivation revolves around the idea it provides a strategic bulwark to China’s growing  economic and military power. Ironically, it is a Republican controlled Senate that is most inclined to give the administration the approval it wants while job protecting Democrats backed by unions rile at the deal. We should also remember that other countries might still hesitate to fall in line and embrace TPP as they realize they gain little by changing the status quo.

Politicians and trade negotiators in every country have their own issues and are facing domestic constraints, it is only prudent that we question the merit of these agreements. Free trade is often credited for creating more jobs than it does and the TPP in some ways is more objectionable than NAFTA. At least NAFTA was intended to improve our neighborhood, it was thought that when Mexico and Canada benefited, America would gain some degree of "safer borders" and a mutual interest would be served. NAFTA is the paradigm of what are most accurately called deregulation deals. It promised better jobs in both the United States and Mexico. Instead, as well-paid workers in the United States were losing jobs to low-paid workers in Mexico, badly paid Mexican workers were losing jobs to those in China who would work for even less. This, in turn, places more pressure on workers in the United States.

We should not lose sight of the fact that while free trade is important, fair trade is far more so and should be the main issue. Developing a long-term sustainable economic system that is balanced would contribute to both global cohesion and the world economy. Nationalistic exploitation of trade agreements has occurred throughout history and it is naive to think such schemes will suddenly end. The changes brought about by the development of the global economy have been hard for many. Promises of widespread prosperity have fallen short and we have seen the benefits flow to only a few. Considering this, it is little wonder trade has become such a heated issue. I see no quick fix nor can I be optimistic the proposed agreements will bring about anything other than another system and legal framework for long drawn out arbitration that dispenses solutions that neither thrill or satisfy.

Saturday, October 17, 2015

Where Is The Dow And S&P Heading Next?

The Markets Have Proven To Be Both fickle And Baffling
Recently a slew of predictions have been made as to both the short-term and long-term direction of market indexes based on everything from historic comparisons, technical data, chart cycles, and even economic fundamentals. Using the Dow and S&P as generic terms that refer to the markets in general is something many people have done for years.  I think it is fair to say nobody has the insight to predict the market or true direction of the economy simply because too many uncontrollable variables exist. This is even before factoring in market manipulation and the crazy swings caused by computers hell bent on generating profits from the market going nowhere fast.

Indeed the markets have proven to be both fickle and baffling making at times extraordinary price moves that can only be explained in hindsight by the influence of a combination of outside forces such as cross border money flows, the carry trade, computer trading, and much more. True value and price discover is absent when factors like a short squeeze or manipulation corrupts a market. Market pricing does not always derive a fair price and the distortions can last for long periods, this means a market can remain irrational far longer than we think. Recent wild fluctuations in the markets based solely on the idea the Fed was ready to raise or delay raising interest rates has been way overdone because anyone in their right mind knows unless inflation soars any increase will be very minor. Until the Fed is actually forced to raise interest rates by some unforeseen event or a great jump in demand that spurs economic growth it is difficult to envision rates returning to what most people would consider normal by historic standards.

With so much of Americans wealth held hostage by market forces, market direction is an important issue. Like many economy watchers and investors I'm forced to ask, when will all the nonsense end? When will bad news again cause Markets to fall? As of late a barrage of bad news has flowed out of all sectors of the global economy. Volley after volley has bombarded the markets only to reinforce fears of going from zero interest rates to negative rates. This has caused even more people to think that "we are saved" because interest rates can not soon be raised or as many claim, never be raised. One place we get general agreement is that the financial area of the economy and stock markets have fared better than the economy as a whole since 2008 based on a large increase in the monetary base. This coupled with artificially low interest rates causing investors to take on more risk in order to get some kind of return on their money has fueled high equity prices.

Ben Bernanke in a recent interview where the former Fed Chairman was busy pumping sales of his new book conceded, that Fed policy has not cured all our problems concerning issues such as the too big to fail when he said, "I wouldn’t say the problem is solved, by any means, but it’s being paid attention to and progress is being made there." He also conceded the middle class has gone nowhere when he said, "obviously, a lot of the benefit of the growth and recovery has gone to the more upper-income class." As expected Bernanke's new book, “The Courage to Act: A Memoir of a Crisis and Its Aftermath.” a title he claims refers to policy-makers around the world is an effort to take credit for the best, distance himself from the worse. Bernanke uses the worn defense that consequences would have been far more dire if he had not acted, he paints a rather positive picture of himself while casting the blame for our woes onto others.

In all honesty the average consumer will see little effect from an interest rate increase of a quarter or a half percent. Today even in a zero interest rate environment it is not uncommon to find many Americans with poor credit paying interest rates in the teens or in the area of twenty percent. These consumers will likely see no real difference in their rates and savers will continue to pay a high price for these policies. This does not mean all is well, many of us see major difficulties ahead for the economy and contend any claim of a recovery is built on a very weak foundation. It does however raise the question as to whether markets should be overly concerned as to when rates are adjusted upward in the most minor way. The crux of our economic problems are far larger and the system far more fragile and open to contagion based on leverage and promises that cannot be kept than most people care to admit.

Several well respected investors like Pimco’s Bill Gross agree with Jeremy Grantham’s long-term prediction that bond investors should be expecting 2% to 3% returns over the future years, this is lower than many expect based on slow growth. 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. Looking ahead at long-term macro-trends: “The U.S. GDP growth rate that we have become accustomed to for over a hundred years” is “not going back to the glory days of the U.S. GDP growth,” no matter how much wishful thinking the media quotes from many economists and Wall Street banks. If it is true we are in denial about the amount of future growth we can expect the stock market is involved in a bout of “irrational enthusiasm” that will not end well.

Most business people, bank economists, and the Fed assume that economic growth will recover to its old rates, but demographics would indicate otherwise. A big spike in interest rates wouldn’t be friendly for stocks, this means we are in a bit of a trap. The American dollar is the worlds reserve currency. Changes in the value of the dollar are thus magnified in importance and do not just effect America but the whole world. All the people and countries that hold dollars can at anytime greatly effect our ability to do business as usual. The central reason the dollar remains strong is that the economies of the other three major currencies are in worse shape than ours and have also pursued QE policies. Bernanke set the bailout and money printing machines on high and flooding America and the world with QE, and by selling other central bankers on this solution he has taken the lead in an experiment that is losing traction.

Japan remains the poster child and living proof that low interest rates do not guarantee economic growth and prosperity. As we measure the results of the Bernanke policy it seems they may not be much different from those achieved by Japan over the last few decades. The Fed has placed us on a path that avoids real reform bailing out the very people that caused many of our problems, and lurking in the shadows is the possibility of an economic meltdown of our faith-based system. Real economic momentum seems to ebb shortly after each new wave of stimulus and another fix seems to be constantly needed, it is becoming harder to ignore that each fix adds to the distortions that already exist.  This is akin to a doctor telling a patient to double or triple his dosage when the medicine does not work. We have stepped onto a very slippery slope filled with danger.

Tuesday, October 13, 2015

Bernanke's Folly, Something We Should Not Buy!

Bernanke  Is Not A Hero
If you want to appear as a hero or saint paint a picture for the world then present it in a book. This is exactly what Ben Bernanke the former Fed Chairman turned author has done in his new book “The Courage to Act: A Memoir of a Crisis and Its Aftermath.” a title he claims refers to policy-makers around the world. As expected Bernanke's creation is an effort to take credit for the best aspects of Fed Policy under his rule while distancing himself from the worst. Bernanke appears to be in the "sweet spot" as he is busy having fun and making money with his lucrative book deal. This victory lap is designed to help galvanize his place in history and in the eyes of the public as the man who got us through these tough economic times.

In an interview on the PBS Newshour, Judy Woodruff, did a softball interview that started off elevating Bernanke from the start when she said, "So, you write in this remarkable book that takes us inside not only your life, inside the Fed, a place we don’t hear about very often, that if you and your colleagues had not acted as you did in 2008, that we could have seen something like 1929 again. Do you really believe that might have happened?" Bernanke was able to hit this easy pitch out of the ballpark by responding, "Well, nobody can know for sure, but, as an academic, I studied the Great Depression. I studied how financial panics affect the economy. And I was very concerned about that, you know, even before Lehman Brothers, even before the financial panic hit its peak."

Yes, he did remind us he was an "academic" and as such reassured us he had all the right answers. Bernanke then followed with the well worn defense that consequences would have been far more dire if he had not acted and paints a rather positive picture of himself while casting the blame for our economic woes onto others. Years ago before the "Bernanke has all the answers" era, I would like to state that Japan faced major criticism for failing to face dealing with its problems. Many people, economist included, thought Japan should own up to the mess it had created and do the right thing. Broadly accepted was the idea that only by letting its zombie banks and industries fail could Japan clean out the system and move forward. Instead the Government of Japan ran huge deficits and built up a massive deficit. For decades Japan has languished and avoided disaster only by the fact that it enjoyed a large trade surplus.

Japan remains the poster child and living proof that low interest rates do not guarantee economic growth and prosperity. While they claim otherwise, in many ways Bernanke and the Fed have put America on a path that mirrors the same unsuccessful path taken by Japan. A path that avoids real reform and bails out the very people that caused many of our problems. Bernanke has upped the ante by setting the bailout and money printing machines on high and flooding America and the world with QE. By selling other central bankers on this solution he has taken the lead in an experiment that is losing traction. Real momentum seems to ebb shortly after each new wave of stimulus and another fix seems to constantly be needed. What started as a program to support and prop up the economy has morphed into the main driver of economic data and distorted financial markets across the world.

Remember this is the same Fed Chairman that totally missed all the signs of a forming housing bubble in 2006. Bernanke did concede that Fed policy has not cured all our problems concerning issues such as the "too big to fail" when he said, "I wouldn’t say the problem is solved, by any means, but it’s very much under the radar, and it’s being paid attention to and progress is being made there."  He then went on to say "obviously, a lot of the benefit of the growth and recovery has gone to the upper, more upper-income class." He then sidestepped and placed the blame for financial executives not going to jail on the Department of Justice saying the "Fed is not an enforcement agency". With his uncle like appearance and his thoughtful demeanor it seems Bernanke has a way of getting by while saying little, or by simply reassuring us.

Once again we find Bernanke bathing in the spotlight, like a rock-star, a hero, and savior of the world economy. It seems his ego has grown even larger then the quantities of money he added to the Fed's balance sheet. If he was a little more honest, and less arrogant Bernanke would of taken this opportunity to talk about how the Fed policies hurt those that did the right thing and saved. These Americans are now seeing their wealth and savings decimated by inflation. He would have told how the impact of his policies are toxic, and how we are now seeing years of hard work and savings being washed away. Be assured Bernanke will not look back upon the many people that have suffered because of his policies as he is paid to speak at economic forums and give commencement speeches at Ivy League colleges.  We need not worry about the economic future of Ben Bernanke as he is now positioned to revel in all the benefits derived from his stint as a public servant. 

Monday, October 5, 2015

Consumers And Shifting Buying Patterns

A big shift has occurred in recent years in the buying patterns of American consumers, much of this comes as a result of the government mandate on healthcare and the low interest rate policy of the Fed trickling down to the street. The fact that certain sectors have been outperforming the economy does not guarantee they will continue to do so. This spending shift tends to mask certain issues that will have a great deal of input into the nations long-term economic well-being. When we are told that both the sale of products online as well as auto sales are roaring at the same time healthcare spending has increased it is only fair to assume small business and someone else is getting their ass kicked. Interestingly, this is all occurring as the government continues to pour out billions of dollars each month in student loans, many of these loans will never be repaid.

This Is A Huge Driver Of Auto Sales
Many of the new cars hitting the road are really leases which show up as a sale, and many of these may be motivated because an automobile owner faced with a costly repair doesn't have money to put into their current vehicle. This allows someone in a weak financial position, such as those living on disability or student loans, to put themselves into an ego boosting vehicle they don't need and cannot afford. I contend that super low artificial interest rates have been the catalyst making much of this possible. The idea that auto sales have exploded due to so called "pent up demand" may be secondary to the notion that our nation is on a binge of feel good self gratification. The low cost loans that have brought forward and spurred auto sales could be viewed as a "stimulus" package for the auto industry and manufacturing or as more proof we are on the wrong path. In coming months this sector will see margins squeezed as used car prices fall when millions of cars flood the market at the end of their lease program.

Spending has also soared on healthcare starting in fourth quarter of 2013 as consumers rushed to beat projected increases in co-pays and premiums spurred on by Obamacare. Millions of people have gained insurance because of the Affordable Care Act, but this has come at a cost, and while it has unleashed pent-up demand for medical procedures that have been delayed sometimes for years and boosting out-of-pocket household spending on co-payments and prescriptions has soared. Many people have seen large increases in their health insurance payments as a result of  Obamacare requirements. As it created a boom in the healthcare sector it has siphoned money away from other areas of the economy.   This represents a shift in spending and because wages and incomes are not rising as fast as spending in healthcare it is leaving many consumers strapped.

Incomes Are Relatively Flat, This Is a Shift In Spending
This means sales have been mediocre at stores such as Walmart and Target as middle-income households have been forced to spend more on co-pays and deductibles. The spending of low income earners has been less affected as they benefit from Medicaid expansion and tax credits. Still it is important to recognize this shift for what it is as the country continues to integrate the ACA into the economy. A big question looms concerning how many people that currently are signed up for government subsidized healthcare will stick with the program after they have taken care of long delayed medical problems or when rates rise.

I would be amiss not to mention or recognize the growth in a sector I personally find very troubling and that is in what I will call the "online sector" that encompasses both the selling of wireless phones and services as well as internet-sales. In my defense to those who might think me backward or resistant to change, I was one of the first people to embrace the break with landlines by getting one of the first car-phones available and looked into computers back in 1980 when IBM was promoting its new 16k machine. My problem with the current internet craze is two fold and is rooted in concerns over the future well-being of our society as well as who holds power over this and are reaping the benefits. I concede that phone sales have been through the roof and feel this is altering our values and changing the way people interact, and not always in a good way. I'm afraid many people are losing the skill to communicate and relate to each other one on one. The second issue has to do with sales over the internet and how companies like Amazon are major job killers that wreck havoc when allowed to exploit the brick and mortar stores that line our streets and give our communities purpose.

What is being bought, and where the money comes from greatly influences the economy, and that brings us to the issue of the "helicopter money" known as student loans. We are seeing money showered into this sector of the economy at a rate never before witnessed. While a student loan is designed to help students pay for university tuition, books, and living expenses it is being used for far more. Many students are borrowing against their future at an almost unimaginable pace and using their student loan money for things other then education. Too many young people and others taking student loans "living expenses" have expanded to include cars, trips, vacations and more. All of this has a very dark side that will effect the lives of these borrowers going forward. With this easy money society is encouraging young people to take on this debt and to hock their futures. This has been done with several politicians alluding to the idea that at some point in the future government might simply wave repayment making those who have participated in these programs big winners.

All of the above facts point to an economy mired in the kind of growth that is unhealthy and akin to the, "I will gladly pay you Tuesday for a hamburger today" way of thinking. Last year a story on the PBS Newshour told of how many of those newly enrolled in the ACA were people being released from prison. The story told how this will be a big help for the ex-cons who often can't afford and go without healthcare. This means we are now paying for their healthcare and also much of the cost to employ thousands of people to encourage and sign them up for program. While this appears as economic growth in the GDP it is not the stuff of a vibrant economy. It is important to understand that what people are buying and even more important where they get the money from has a direct bearing on the quality of the underlying  economy. Much of the spending we see is driven by a huge and growing national deficit and this is a big problem going forward.

Sunday, October 4, 2015

Quality Of Growth A Growing Concern

Quality Problems Can Often Lurk Below The Surface
Anyone with a knowledge of economics will concede that quality is a major factor when it comes to the issue of growth. All economic growth is not created equal. Often when you spend money and afterwards have little to show for it you have simply wasted your money. Sadly, much of the money America claims to invest in itself each year falls directly into this category. True economic growth is well directed and focused in a way that is both sustainable and yields long lasting benefits. Proper planning often means improving and rebuilding rather than replacing and destroying everything currently on the ground. We need growth that makes economic sense and is at the same time in harmony with the environment.

Much of our poorly directed growth can be directly blamed on poorly crafted laws and government programs that create or place investment incentives that interfere with the laws of free markets. One example was the "Cash For Clunkers" program that destroyed many fine cars because they qualified as a trade in. Another massive program that should be called a disaster was how America handled the switch from analog to digital television that causes the premature death of literally hundreds of millions of functional television sets. Most of these hit the curb for trash pickup and found their way into the nations landfills. Little effort was made to collect and recycle these units. To make the situation even more harmful to America was that so few of the replacement sets were made in this country. This means the money Americans spent on replacement units quickly left our shores and added to our massive trade deficit while providing few jobs for Americans.

At times it seems our government has excelled in promoting poorly directed growth. Government programs have poured money into hospitals and colleges that many Americans can no longer afford to visit or attend. While these are totally different institutions what they have in common is that both have been propelled into the future using tax dollars that has influenced where and how they are built as well as their design. Colleges have spent billions on theater style classrooms, massive parking garages, spacious student union buildings, and student housing that competes with the private sector. Hospitals often flee the city and construct entire communities on the edge of town leaving a hole in the neighborhood they left, this often results in the closing of long time local businesses and urban blight.

Growth need not be ugly and destructive, but when using huge amounts of other peoples money common sense is often the first thing to go as planners seek to create a clean slate where those in power can construct a monument onto themselves. Historically government has a poor track record when it comes to spending our money well, it seems those making the decisions are easily swayed by self interest or because they have no "skin in the game." Often this results in their failure to demand a fair return on the money spent. This is the main reason many tax payers remain skeptical about claims that infrastructure spending is the silver bullet that will be able to move us forward.

Quantitative easing and artificially low interest rates have acted as a false tailwind pushing the economy along but comes at a huge price and should have ended long ago. We currently live in an abnormal monetary environment that pulls demand forward encouraging consumers to increase debt at the same time it robs and punishes savers of reasonable interest on their savings that play such an important role in our economy. All this feeds into distorting values of goods and markets while encouraging risk and leverage. We have been presented with a "get out of jail" card that is far from free, money by its nature is not free and the withdrawal of this program by its design will create its own headwind.

Governments across the world have further muddied the water by making minor changes in how they measure economic growth by revising how they calculate their GDP. This has given the false illusion of the existence of more growth than really exist and has lowered GDP to national debt ratio thus making government debt appear less dramatic and crushing. Some countries have even gone as far as to including things like prostitution and other illegal activities in a way to boost GDP and in effect lower their ratio of GDP to government debt. This number as with most numbers once put out there is subject to full blown manipulation and spin. We must never forget that money issued to people in the way of such things as food stamp vouchers loop back into retail sales and appear in the figures issued by companies like Wal-Mart. Obamacare has perpetuated the same effect in healthcare.

Quality Directly Effects Value
This means the GDP number we are spoon fed and await with such glee has little to do with real growth but more likely mirrors, or can be nothing more than a reflection of monetary pumping. This number fails to highlight a slew of important factors that feed directly into our standard of living and the health of our economy. In 2013 in advice to their government the UK's Natural Capital Committee highlighted some of the failures of GDP when they pointed out its focus on flows can allow an economy to run down its assets while recording high levels of GDP growth until a point is reached where this begins to impact future growth. They went on to make it clear the recorded GDP growth rate is prone to overstate the sustainable growth rate.

The quality of growth directly effects its value to both the economy and eventually society, but sadly government shows little interest in a more honest reflection of economic growth. Absent in almost all government numbers is a reflection of how bankruptcies and the fact many debts don't get paid off but are simply written off effects the economy. In a post a while back I wrote about how new business start-ups propel the economy forward when created but often leave a wake of destruction behind that last for years when they fail after a very short life. In the recent decades following each recession jobs have returned more slowly than in the one before, this trend should be considered a troubling sign that should not be tied to just the changing world economy, but also to government actions. Small business in many ways responsible for creation of most jobs is under assault.

Today many regulations are tilted in the direction of favoring big business and weigh far heavier upon small firms. To make the playing field even more difficult big business has a slew of options in regard to raising money that are not available to the small entrepreneur. When small  firms fail and their customer base shifts to their larger competitors, this shift is not the creation of "real growth" it is merely a shift, this is one of the main reasons this recovery is so weak. Those who claim lower interest rates as the answer should never use as a comparison the recession America experienced in 1982 to our current woes. That recession was self induced when Fed Chairman Paul Volcker raised interest rates to curb inflation. The reason behind that recession is far different than what we face today making invalid any claims of similarity, and that is why back then dropping rates did indeed bring back a surge of activity.

Footnote; Your comments are welcome and encouraged. If you have time please check out the archives for other post that may be of interest to you. The post below are related to this article.

Thursday, October 1, 2015

Rand Paul The Forgotten Canidate!

Rand Paul The Forgotten Candidate
When talking about the candidates the media often seems to forget the name Rand Paul. The fact that on a recent weekend Paul was absent from Iowa could be interpreted by some to mean he doesn't have the right-stuff or is not prepared to work for the job. Little noticed by many Americans was a Washington Post piece titled, “Rand Paul Leaves the Campaign Trail for Eye Surgeries in Haiti” that stated “This weekend, while the political world descends on Iowa's state fairgrounds, Sen. Rand Paul (R-Ky.) will be fixing cataracts 2000 miles away. As he's done every summer recess since joining the Senate, Paul's performing pro bono eye surgery. This year's mission, run and sponsored by the Moran Eye Center from the University of Utah, will take Paul to Haiti, the poorest nation in the Western Hemisphere.” If character played a bigger role in deciding who should leads America forward Paul wins hands down. 

After not hearing his name mentioned even once on last Sunday morning talk shows I thought an update of an article I wrote in March of this year was in order. At the time in a piece titled "Rand Paul Ignored By The Media, Again" I wrote that it would not be difficult to image during the middle of a political story a journalist refer to Paul as an "unnamed Senator from Kentucky" in order to avoid using the name that seems to be forgotten or at the least sticks in the throat of anyone covering Republican politics. The bobbing heads of the media are often in a rush to put someone like Herman Cane, a former "flash in the pan" presidential candidate during the last Presidential election, in the position of front runner. The political pundits now labor hard to forget how Paul received the most votes at CPAC and try not to ponder how odd it is that this conservative group would shower praise upon a man who has many friends on the far side of the political spectrum among liberals and students.

Following the second Republican debate the media quickly tried to make Carly Fiornia the new "flavor of the day" with some saying she had even displaced Ben Carson. Within a week we find commentators doing a "flipflop" between saying she is on the way up and telling us how her time as CEO of Hewlett-Packard and a casual relationship with the truth has made her damaged goods.The fact is America should be concerned by an electorate that swings so wildly over their preference for a candidate based on a single debate appearance or one comment often taken out of context. During all this the media has made the primary voter appear to be a fickle bunch of reactionaries, a recent poll from Iowa that made its way around the Sunday morning talk shows had at one time elevated Scott Walker to the front of pack, but that was before he "suspended" his campaign.

As usual the media is busy going about the task of thinning, shaping the field, and forming our opinions as they see fit. At times we must ask if those in the media are guided by some secret agenda as they "help us" narrow the field and approach the long and bothersome task of holding an election. Today Republicans are faced with a massive group of candidates, many with high aspirations, and many of those interested in garnering our attention are busy edging their way forward and upping their game by elbowing other candidates off the stage and out of the spotlight. If it would get our attention some of these clowns might even go so far as to set themselves on fire. Nothing is as sad as watching this group of wannabees marching in their one person parades. If you think that I'm being harsh using the term clowns remember even fellas like Rick Perry who took a very hard fall from grace four years ago was briefly in this group.

Returning to the focus of this piece a story in USA Today on September 21, reported that Sen. Rand Paul of Kentucky has won the presidential straw poll at the Mackinac Republican Leadership Conference taking place on Mackinac Island, Michigan. Paul received 22% support in the poll of more than 2,200 conference attendees, according to the poll conducted by the Lansing political newsletter MIRS and The Detroit News. The article garnered little attention, but was sure to note that businesswoman Carly Fiorina, buoyed from the momentum of what was seen as a strong debate performance finished second. It should be noted that in a field of neocon war mongers busy trying to outdo each other by being the strongest on defense and promising to build the military into an even more powerful force, that Rand Paul who does not advocate bombing to smithereens anyone who disagrees with America stands out as a reasonable alternative.

Many political pundits see his non-fiscal views as the primary reason Paul is constantly pushed off the stage and shown so little respect within the Republican party, but it is more likely because Rand Paul thinks that government spends far too much to accomplish so little, we have found that even Republicans find it easier to talk about cuts than to actually make them. Another big issue is that not all financially conservative voters are as conservative when it comes to social issues. Like many people I find myself cringing and put off by a Republican party locked away in a small tent busy spouting restrictive social mores. Bringing together people from different factions is no easy task, but Paul is one of the few candidates I have found capable of achieving this. A few months ago during one of the Sunday morning talk shows Rand Paul was referred to as a "high trust candidate" this trait is very important. Even the limited face-time I have spent with Rand Paul has left me with the feeling he is rock solid. 

Paul's conservative financial ideas mixed with less government moves him in the direction of being a strong supporter of personal freedom. When sprinkled with a less confining social mantra this becomes something many voters seek. The way Paul is treated by the mainstream media should viewed as an overt effort by them to dilute, undermine, and lessen both his message and the viability of Rand Paul as a candidate. Bottom-line is character does matter and in the end his support is stronger and deeper than those in power want us to think. No matter how much he is ignored the media should not expect Rand Paul to slowly and quietly ride into the night. The message he brings forth has substance and efforts to paint him with silly colors or just paint him out of the picture have failed before and will fail again. We are still early in this game, but if Paul decides to push hard he still has the potential to become a major force.

Farmer Income Will Take A Hit

Another problem we can add to America's list of woes is that low grain prices will make things a little more difficult for America's heartland this year. While the number of people employed on farms has declined over the decades farming is still a big business and has a huge impact on many communities. The money flowing into local businesses as farmers sell their crops is evident in everything from truck sales to the little things common in everyday life such as dining out or getting a haircut. Because of several years of record harvests across the world a haircut in farm income is what farmers will see this year. Farm income in the U.S. is expected to drop by as much as 36 percent this year. The decline in U.S. farm income in 2015 looks like it will be worse than originally projected.

Farm Income Will See A Major Decline
"Both net cash and net farm income for farms are forecast to decline for the second consecutive year after reaching recent historic highs in 2013," said the U.S. Department of Agriculture. Both net cash and net farm income will drop to a point representing the lowest farm income since 2006, According to USDA, net farm income is forecast to be $58.3 billion in 2015, down 36% from 2014's estimate of $91.1 billion. That's far worse than the government's February outlook, which had projected 2015's farm income would be $73.6 billion, or down nearly 32% year-over-year.

In a research note J.P. Morgan analyst Ann Duignan said, "Overall, the data confirms the deteriorating fundamentals in the farm economy." She went on to say "After several years of improvement, farm financial risk indicators such as the debt-to-asset ratio are expected to increase in 2015, indicating increasing financial pressure on the sector." While people are busy to note the government said the 2015 forecast for farm income would be the lowest since 2006 in inflation-adjusted terms it would be the lowest since 2002. This represents a drop of nearly 53 percent from the record high of $123.7 billion achieved in 2013. USDA forecast crop receipts will decline 6% to $12.9 billion for the year, led by a projected $7.1 billion drop in corn receipts. It forecast livestock receipts will fall by 9% to $19.4 billion, largely due to lower milk and hog prices.

A disparity always exist between the net cash income and farm income based on what numbers are used and whether you are working from production numbers or the price received when the farmer sells if he puts his crops in storage. This means declines are also being reflected in the sale of carryover stocks. The USDA's net farm income projections include only earnings from production that occurred in calendar 2015. UBS Securities analyst Steven Fisher noted the "close relationship between cash receipts and high-horsepower equipment sales." Using the government's forecast, he said it "suggests high-horsepower retail sales may decline 15.1 percent in 2015."  He added, "That said, the strength in the cycle in recent years may cause the high-horsepower decline to be worse than the correlation suggests, and equipment declines have been more than twice as steep as the declines in cash receipts in 3 of the past 4 downturns. We expect double-digit declines in ag equipment sales over the next 12 months."

The USDA's farm income forecasts are released three times a year. The next forecast is scheduled to be released November 24. While little noticed by the average person living on the coast or in one of our many large cities this is a big deal, as mentioned earlier in this article farm income is not contained in a closed loop but spills into other parts of the economy. We have known for years America exports grain all over the world. This means low grain prices coupled with a strong dollar will contribute to America's economic headwind and most likely add to our massive trade deficit. Many areas in the heartland of America have not experienced the benefits showered upon Wall Street, because of this we should not be surprised if the gloom covering many areas of the country does not lift anytime soon.