Wednesday, February 27, 2019

Generational Conflict Is Posed To Dramatically Increase

Most People Don't Save Enough (click to enlarge)
Chalk the situation before us up to poor planning, greed, or simply a case of governments promising far more than they can provide, this means conflicts between the generations are set to explode. We should expect the stress and tensions between today's youth and those of older citizens to increase as demands for government help grow larger from both groups. In short, this translates into a fight over where entitlement money is spent. The needs of these two groups are very different and real so it is only logical that conflict will arise but society may be surprised at the potential size of the collision these special interest pose and should prepare for a major clash in the near future when reality hits.

Different generations sport a completely different set of priorities with the younger generation concerned about getting help starting out, paying on their student loans, raising children, and in finding a nice place to live. Those nearing retirement, the so-called, "baby boomers" and older Americans that have already retired or are looking forward to kicking back, often with little in the way of savings this group wants to know the government will be there to help make them comfortable and take care of them in coming years. The myth that funds have been set aside to provide for the social security payments and the medical needs of older Americans will soon be laid bare and the bill for such things is about to be laid at the feet of today's youth. Call them what you want but Generation X, the Millennials and their younger "Generation Z" counterparts are in for a rude awakening when handed the bill for all that has been promised.

The siblings of “Generation Z” owe a great deal of their generational identity to Generation X. Born between 1960 and 1980 in the United States the Generation X is now between the ages of 34 and 54 years old. These are the people who laid the political, intellectual, social, creative and personal ground upon which the youth of today walk, talk and text. Sadly. they also did little to promote an environment of political reality by halting baby boomers from leveraging their clout into favorable policy that they will enjoy in later life. In fact, in the 1980s our government slashed tax rates to revitalize the flagging economy just as boomers approached their prime earning years. The average federal tax rate for a median American household, including income and payroll taxes, dropped from more than 18% in 1981 to just over 11% in 2011.

The Sad Truth Is Many Older Americans Are Broke!
This means nothing was set aside to pay out the generous benefits boomers have bestowed upon themselves, programs like a prescription drug benefit paired with inadequate premiums are set to cause deficits to explode in coming years. Today an American born in 1945 is receiving nearly $2.2m in lifetime net transfers from the "state" far more than they pay in, and far more than any previous group. A study by the International Monetary Fund in 2011 compared the tax bills of what different age citizens pay over their lifetime with the value of the benefits they are forecast to receive and found the boomers are leaving a huge bill. Those aged 65 in 2010 may receive $333 billion more in benefits than they pay in taxes. This is a huge obligation the government must meet and will be a heavy burden placed upon the shoulders of our youth.

For over 35 years, the Administration on Aging (AOA) has provided home and community-based services to millions of older persons through the programs funded under the Older Americans Act (OAA). These include but are not limited to transportation, adult day care, caregiver supports, and health promotion programs. The Office of Nutrition and Health Promotion Programs manages health, prevention, and wellness programs for older adults. This includes behavioral health information, chronic disease self-management education programs; diabetes self-management, disease prevention, and health promotion services ( “Title IIID”), falls prevention programs; HIV/AIDS education, nutrition services, and oral health promotion. All this cost money and this is only the tip of the iceberg when it comes to money being thrown at making the lives of older Americans better.

The Number Of Older Americans Is Growing
As senior citizens make up an ever-greater proportion of the U.S. population, a range of economic and social shifts will change American society. For example, total health care spending will rise significantly: In 2010 those 65 and older spent about $18,424 per person on personal health care, about three times more than the average working-age adult and about five times more than the average child. The cost of caring for elderly persons with dementia is also predicted to grow substantially in the coming decades, Alzheimer’s care alone may exceed $1 trillion annually. A report titled, 65+ in the United States paints a detailed picture of the over-65 demographic in the United States and this group is central to recent policy debates on the Affordable Care Act and even extending into the area of physician-assisted suicide.

It is predicted that as people age the cost of caring for them will dramatically increase and this will create real problems for our budget. Sadly, the arithmetic leaves few ways out of the mess, the numbers are ugly and much of it is only now becoming visible in our soaring National Debt. Faster growth would help, but the debt left by the boomers adds to the drag of slower labor-force growth. Carmen Reinhart and Kenneth Rogoff, two Harvard economists, estimate that public debt above 90% of GDP can reduce average growth rates by more than 1%. Meanwhile, the boomer era has seen falling levels of public investment in America. Annual spending on infrastructure as a share of GDP dropped from more than 3% in the early 1960s to roughly 1% in 2007.

Austerity is another option, but the consolidation needed would be large. A report from the IMF estimates that fixing America’s fiscal imbalance would require a 35% cut in all transfer payments and a 35% rise in all taxes. This is clearly too big a pill for our creaky political system to swallow. Fiscal imbalances rise with the share of the population over 65 growing and with partisan gridlock, this is troubling news for America, where the over-65 share of the voting-age population will rise from 17% now to 26% in 2030. As this voting block grows and strengthens it is unlikely they will loosen the noose.

This leaves the third possibility: inflation. A few years of 5% price rises could help households reduce their debts faster. Other economists, including two members of the Federal Reserve’s policy-making committee, now argue that with interest rates near zero, the Fed should tolerate a higher rate of inflation and try to speed up recovery. The generational divide makes this plan a hard sell. Younger workers are typically debtors, who benefit from inflation reducing real interest rates, older people with large savings dislike it for the same reason. A paper by the Federal Reserve Bank of St Louis suggests that as a country ages, its tolerance for inflation falls.  

At a time when robots and automation are eliminating jobs, it could be argued that younger people are facing a difficult labor market when it comes to wages. This means that people are having to price themselves into jobs and that there continues to be a cut in the "real value" of pay as inflation remains higher than pay increases. Youth unemployment is weak, many jobs are only part-time, and workforce participation has dropped. In 2013 the Congressional Budget Office reviewed the implications of providing long-term services and support for older Americans, while the Pew Research Center looked at trends in caregiving, with an emphasis on the “sandwich generation” that is assisting both older children and aging parents. After a review of these reports, it is easy to arrive at the conclusion that the squeeze is just beginning.

Monday, February 25, 2019

History Should Be Growing More Important To Our Culture

Historic Chicago Theater - A Link To The Past
With the world changing so rapidly, continuity and history should be moving to the forefront of cultural values. Modern values when measured are often found lacking and that is why history is proving so important in its ability to link us to our roots. Sadly, this is not happening fast enough to save many of the fine buildings our ancestors have built over the years. People have the need to feel more connected and anchored to the places where they grew up, being able to say “I played under that tree” or “we use to swim in that fountain” fills an important emotional need. The cities of Europe and many other parts of the world fill that need in a special way that many American cities can't.

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

The Shambles In York England
This effort to embrace our history in recent years has spurred cities all over the world to tear out and replace asphalt streets and concrete walks with stone. Monuments that had been dismantled and chucked into corners somewhere during changing political climates are being dusted off, restored and returned to where they had once stood. A new appreciation of our history is growing, for without our links to the past, we are adrift in a sea of meaningless change. This often means that in place of contemporary lighting, “antique style” fixtures are back in vogue, wrought iron is again replacing stainless steel. Nowhere is this more obvious than in the heart and core of the worlds oldest cities where people flock to experience the bonds to our past.

Here in America, a trend has begun to take hold where those who value our cultural ties to the past and history have started to move back into the grand old urban neighborhoods that have deteriorated over time. This process of renovating old and tired neighborhoods by introducing an influx of more affluent residents is referred to as gentrification. Some people see this as a controversial topic in politics and in urban planning but if gentrification can improve the material quality of a neighborhood and save many of the structures from the wreaking-ball the fact some residents and businesses might find they are forced to relocate because of rising rents is a small price to pay.

In a country where much of the new residential construction is built in the cookie-cutter urban sprawl variety, it is easy to understand why unique hand-built older homes are becoming more valued. In our modern era, a great deal of new building is driven by what is in the interest of big developers and not the buyer or society. Developers generally seek a clear canvas and cheap land on the edge of town on which to build. Builders garner savings from mass production factory-like building methods with sites that are in close proximity that reduces travel time for workers. They also love to transfer the cost of upgrading the infrastructure to access the new community to the government. All this skews the direction of growth as business rushes to locate near these new opportunities gutting areas developed only decades ago.

In the Beginning, Everything Is New
In the beginning, a great deal of money is spent on building the infrastructure necessary for communities, this includes roads, bridges, utility lines, and moving dirt. All this may go on for many years as homes and commercial buildings are constructed, all this creates jobs and new investment opportunities. Still, at a certain stage of development logic dictates that a "natural progression" should take place as an economy matures and we reach a tipping point where the nature of how we spend our resources change. Over time, as developments mature a greater percentage of outlays should be spent on things like maintenance, updating, and upgrading existing buildings and infrastructure as needed. Rather than pouring money into strictly new construction, replacing windows and roofs weathered by nature and repaving and resealing parking lots becomes the sensible way to proceed. 

As an economy matures its rhythm changes, this means the focus of society should transition into sustaining and maximizing what has been created by extending its use. With all this in mind, it is important to realize much can be learned about man and his history if we look at how these early cities developed and why. When you travel it is often possible to break down into several categories what you will be seeing, old cities, new cities, and natural wonders and beauty. America needs to adjust codes and policies to help preserve historic structures and allow them to be financially competitive. Thoughtful individuals that appreciate diversity are voting that they have seen enough of our cookie cutter cities that all look alike, with the same stores, restaurants, and shops. With that in mind, we should make sure we do not underestimate the lessons our older cities have to offer.

Saturday, February 23, 2019

Unbridled Market Euphoria Rooted In Optimism And Hope

A Trade Agreement Is Not A Silver Bullet
After a terrible December stock markets have soared with renewed vigor tearing the faces off bears that thought their time had come. A great deal of the market advance has been based on optimism a new trade deal will occur between America and China paving the way for future growth even while data continues to emerge confirming economies across the world continue to slow. It seems much of the current market fervor based on optimism and hope could fall into the category of "irrational exuberance" a term that Allen Greenspan has in the past used to describe unbridled enthusiasm.

Since reaching a trade agreement with China is not guaranteed or a silver bullet to our economic woes, it is likely that many of those bullish on stocks and predicting markets are about to move into new record high territory have allowed their projections to be influenced by the fact China unleashed a huge amount of new credit into the market. In January, Beijing injected a staggering $685 billion in new credit into its financial system and this money continues to leak out of China causing assets to rise across the globe. Simply put, bulls surmise that since this form of QE has worked in the past it will continue to work in the future. Whether they want to admit it or not this again puts China front and center in their future growth scenario.

China's Economy Is Dependent On Stimulus
Over the year many people have come to see China's economy as invincible, however, that myth may soon be tested. Today China continues to prop up what many China watchers, economists, and investors see as the unpropable, and yes, while no such word exists, when it comes to China's economy it should, for "unpropable" describes the financial collapse that can only be postponed but not stopped. For years, battle-lines have been forming as to whether China's economic growth is sustainable and its future role as a global player. The previous article on this website titled; "China Continues To Prop Up Its "Unpropable" Economy" argued it is not.

As the efficiency of credit has continued to wane across the globe, new money and stimulus pumped into the system has resulted in ever diminishing returns. In short, each new wave of money has resulted in shorter bouts of prosperity. During this long bull market we have witnessed huge numbers of investors adopt the mantra of "buy the dip" and the "fear of missing out" has replaced prudence. While most people work hard for their money and even harder to save a bit of it they are often lulled into complacency when it comes to protecting it and that appears to be where we are today. The big question is how long it will take for this current bout of glee to play out and for us to return our focus to a rise in late cycle indicators, moderating growth, tightening credit, declining earnings, and sliding consumer confidence as inflation continues to rise. 

Currently, it is only massive and unsustainable deficit spending that continues driving our economy forward. We are in the midst of a "false economy" and it is only by the grace of this huge deficit spending that we are not languishing at the bottom of a deep economic pit. Deficit spending has never proved to be a silver bullet without consequences and with each step forward we get closer to the end of the road. This is why investors would be wise not to accept America's recent GDP as verification the economy is hitting on all cylinders. History has proven that while government spending can supplement the economy, such action combined with central banks pouring new credit into markets are poor substitutes for the free market in allocating capital to where it is most effective. Activities driven by deficit spending often do not reflect true economic growth but simply a method of borrowing from the future.

Debt Does Not Create A Strong Economy
Much of what we see today as investors enthusiastically dive into the market is rooted in the so-called "everything bubble" caused by massively expanding credit and debt, we have allowed loans to be stacked upon other loans which has until now floated all boats. It would seem prudent to ask whether we have started a major reset of asset valuations, and if not, when we finally will as well as how such an event might unfold. Following a dismal Philly Fed and a disappointing durable goods number, the PMI recently missed expectations hitting its lowest reading in 17 months. This indicates the recent rebound in manufacturing won't last. So far, while the market at times seems concerned we are seeing nothing resembling panic but as it becomes evident that we are approaching the end of an era, watch out below.

When optimism and hope finally collide with reality a few of the .01% will take a hit but even after losing a great deal of wealth most will remain wealthy and basically unscathed while the average man or woman is decimated. If you view the economy as an economic battlefield the rich and powerful are carrying M16s while the rest of us are armed with only sticks. A total lack of investment options will leave the majority of us extremely vulnerable when an economic crisis does occur. Because we have continually underestimated both the breadth and size of the global intervention from central banks and governments those of us who have repeatedly predicted the collapse of this so-called recovery have remained wrong. Timing such an event is difficult but as sure as the moon follows the day it will occur.

                                                                                  This blog is not written for money
                                                                                 or profit but as a way to share ideas
                                                                                 and thoughts. If you liked this post
                                                                                 feel free  to E-mail it to a friend
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Sunday, February 17, 2019

China Continues To Prop Up Its "Unpropable" Economy

China's Debt Soared After 2008 (click to enlarge)
Near the end of 2017, Zhou Xiaochuan, the governor of the People’s Bank (PBOC), spoke of “fierce market reactions” and a possible Minsky Moment, the tipping point when credit cycles break and euphoric booms collapse under their own weight. Mr. Zhou told China Daily that asset speculation and property bubbles could pose a “systemic financial risk” made worse by the plethora of wealth management products, trusts, and off-books lending taking place throughout the country. Today China continues to prop up the unpropable, and yes, while no such word exists, when it comes to China's economy it should, for "unpropable" describes the financial collapse that can only be postponed but not stopped.

A recent article published by ZeroHedge contends that in the brief period since the financial crisis Chinese bank assets, and by implication liabilities, have exploded by an astounding $15 trillion, bringing the total to over $24 trillion. In other words, China has expanded its financial balance sheet by 50% more than the assets of all global central banks combined and that today China's debt has become the biggest wildcard for the stability of the global financial system. Continuing along this "one-way path," in January, Beijing injected a staggering $685 billion in new credit into its financial system, greater than the GDP of the 21st largest country, Taiwan.

Many of us are drawn to a good illusion and in some ways, it could be said that our culture has become obsessed with avoiding what is real. With this in mind, we must remember that politicians and those in power tend to go to extreme efforts to avoid taking responsibility for the problems they create. History shows that one way a country can kick their gross domestic product higher is to build a false economy based on infrastructure or war. China's version of this is apparent in its "ghost cities" but when a country gorges at the trough of deficit spending that generates a big temporary boost in its GDP it also quickly creates a wall of debt. One of the best examples of building an economy on a foundation of military might or a massive move to militarization was demonstrated by how Germany was turned into a war machine during the 1930s.

China watchers, economists, and investors have been forming battle-lines for years as they debate the true strength and sustainability of China's economy and its role as a global player. Those of us that paint a picture of future collapse and a day of reckoning are often accused of spreading "doom-porn" when we claim that the Chinese have masked over their dire situation by continually expanding credit. It is important to note that over the years each new wave of money has begun to lose its impact as the efficiency of stimulus waned and more and more of the credit was absorbed in supporting existing debt. The fact is few good investment opportunities currently exist in China which has caused more and more money to leak across the border inflating asset bubbles in other countries.

 China Is A Small Player (click to enlarge)
Much of what is occurring in global currency markets is getting scrubbed away by our complex financial system that tends to soften the edges of any harsh move until it can no longer be hidden. This may seem wildly unlikely to many people that think such things move and unfold in a logical way but viewing the currency market as a manipulated scheme by central banks to create the illusion of stability makes sense. For a long time, I have maintained the view that currencies are trading in a false paradigm created by the coordinated collusion of the major central banks which busy themselves sheltering currencies from a storm of volatility. The central banks know a strong hint of weakness in any of the world's four major reserve currencies could destroy the myth that major currencies are immune to the same fate that has haunted so many currencies throughout history.

It is important to understand that in our modern world wealth is mostly contained within a rather closed system.system of fiat money which includes laws and rules that by their nature discourage freedom of movement into tangible assets. History shows that when the nations granting a currency have proven unable to control their budgets and are crushed under the weight of debt bad things happen. The rubber will meet the road as more countries that export to China begin to solidly question the value of the Chinese currency and demand payment in another form. The rumors we hear of central banks and countries buying gold may be the canary in the coal mine and a warning that investors should get ready for a rude awakening because we are about to see a huge shift in wealth due to changes in currency values.

                                                                                  This blog is not written for money
                                                                                 or profit but as a way to share ideas
                                                                                 and thoughts. If you liked this post
                                                                                 feel free  to E-mail it to a friend
                                                                                 using this link. E-mail to a friend

Saturday, February 16, 2019

Washington Has Again Diverted Our Eyes From Deficit

The Ugly Reality Of Our Spending
By linking recent budget talks to the controversy over building a wall Washington has again diverted the eyes of our nation away from the wild deficit spending taking place. After telling reporters that he was "not happy" with the compromise border-security bill which reportedly included only a small amount of the funding he requested for "a barrier," President Trump set aside his dissatisfaction and stated he would sign the bill anyway in order to avert another shutdown. Then, in rapid fashion, Congress passed and the president signed the pork packed deal by the Friday deadline so all the players could take their victory laps and claim democracy works.

The bipartisan agreement puts less money towards border security than Trump requested but, sadly, added to most other line items in the budget. The new appropriations package which combines seven different spending bills allocates $328.6 billion in discretionary spending a huge $54 billion increase from the White House's 2019 budget request. While some conservative members of Congress think the agreement spends too much the spending package which will fund the government through September 30th is nevertheless expected to be passed with overwhelming support from both Republicans and Democrats.

Remember in the overall scheme of things and the amount America spends each year the 5.7 billion Trump requested for wall construction is peanuts also it is fairly easy to make a case that America will get a good economic return on money spent on a barrier that will work 24/7 year after year. Most taxpayers, if asked, would see this as a far better investment than paying government workers to stay home week after week as we did during the recent partial government shutdown. 

While the president demanded $5.7 billion for his border wall, the deal reached includes just $1.375 billion for the wall, this means the President will carry through with his threat, or promise, depending on how you feel about the wall, of declaring a national emergency and pulling money from different areas of the budget. Speaker Nancy Pelosi has already warned this will prompt a lengthy legal challenge. This will cost the taxpayer even more money and continue to divert eyes and time from far more important issues and problems facing our nation.

Senator Rand Paul one of the very few politicians in Washington concerned about wild government spending and things such as border security wrote;  

    I’m disappointed with both the massive, bloated, secretive bill that just passed and with the president’s intention to declare an emergency to build a wall.
    I, too, want stronger border security, including a wall in some areas. But how we do things matters. Over 1,000 pages dropped in the middle of the night and extraconstitutional executive actions are wrong, no matter which party does them. 

The fact is the wall issue has taken our eyes off the deeper immigration problem of fixing a costly inefficient immigration system that the American Action Forum (AAF) found cost American business close to $30 billion in annual regulatory compliance costs, it has also pulled our eyes away from a soaring budget deficit. these and many other important matters are busy cutting away at the future of our youth. The bottom-line is that Washington has become a hostile and unfriendly environment for those interested in good governance.

Sadly, it is only massive this massive unsustainable deficit spending that is driving our economy forward. We are in the midst of a "false economy" and it is only by the grace of this huge deficit spending that we are not languishing at the bottom of a deep economic pit. The budget deficit is set to widen significantly in the next few years and in 2020, is expected to top $1 trillion even with healthy economic growth, according to new projections from the nonpartisan Congressional Budget Office. This means the national debt of around $22 trillion will soar to more than $33 trillion in 2028.

A trillion dollar deficit translates into America spending $3,333 more than it takes in for every man, woman, and child in the country. To clarify, this is each year and every year but also fails to include State and local deficits as well as a slew of "off book" promises and spending that are also being made. This spells big problems going forward if we do not begin to face up to reality and get in front of our problems we will soon find ourselves solidly behind the eight-ball. Today late cycle indicators are on the rise, moderating growth, tightening credit, declining earnings, the peak of consumer confidence, rising inflation and more. 

History shows government spending is a poor substitute for the free market when it comes to allocating capital to where it is most effective and it is not economic growth but simply a method of creating a false economy by borrowing from the future. Deficit spending is not a silver bullet without consequences and with each step forward we get closer to the end of the road. Does this mean we should be thankful for a dysfunctional government in Washington? I think not.    

Wednesday, February 13, 2019

Tesla Is Rapidly losing Its "Cool Factor"

While Tesla's stock price continues to hang on what seems to be continuing signs of the company's demise continue to leak out. The company already slashed its Model 3 price twice this year to stimulate demand but it is still too high compared with models being produced by its competitors. The $35,000 Model 3 that CEO Elon Musk promised in 2016 remains only a promise with the least expensive Model 3 still sporting a price tag of $42,900. This, when coupled with the federal tax credit of $7,500 being cut in half to $3,750 at the beginning of the year after Tesla’s EV sales rose past the 200,000-threshold in 2018 has cut into sales.

It is estimated that over 100 different electric cars are expected to hit markets by 2025. This translates into the fact that the problems before Tesla are about to become overwhelming. Many of these "Tesla crushers" are months away from hitting showrooms. These new introductions into the rather small electric car market add to the long list of the problems nibbling away at Tesla's credibility and affecting future sales. An article published by Reuters tells of how when Tesla Inc announced last month a second round of job cuts to rein in costs, the automaker more than halved the division that delivers its electric vehicles to North American customers. Some 150 employees out of a team of about 230 were let go in January at the Las Vegas facility that delivers Model 3s into the hands of U.S. and Canadian buyers, this could be a sign the company expects deliveries to significantly slow in the near term.

Two sources, from among those let go, claim that deliveries that have plunged from the pace in the fourth quarter last year. This does not come as a surprise to many Tesla skeptics that claim the company is skating on thin ice and cite issues such as numerous software updates and fixes in response to a number of accidents involving Autopilot, it now appears that the software may not be as innovative, safe or autonomous as Elon Musk has led them to believe. One such example occurred on Monday when a driver in North Brunswick, New Jersey wrecked his Tesla on a highway while the vehicle was in Autopilot mode. According to a report published by News 12 New Jersey, the driver said that the vehicle "got confused due to the lane markings" at a point where the driver could have stayed on the highway or taken an exit. The driver claims that Autopilot split the difference and went down "the middle", between the exit and staying on the highway.

Tesla Crashes Have Drawn Much Media Attention
Tesla naysayers say they have had enough about Tesla being valued at worth more than Ford and all the other automobile producers that have many times its market share. Current supporters of its value even go so far as to claim it is really a tech company masquerading as an automobile company.  As far as the Model 3, Tesla has repeatedly tried to lower expectations and reiterated that it is a downgrade from the model S but many of those buying the car seem to not fully comprehend exactly what this means.

Do not rule out the possibility that once the aura surrounding Tesla leaves, reality may wash over those so eagerly awaiting their new toys and a main driver of sales vanish. Nothing tarnishes a brand faster than producing a lemon or product that becomes synonymous with failure. I hate to tell Tesla lovers that owning a Tesla could rapidly become uncool as the Model 3 fails to live up to the high expectations many of those placing orders have for the car. In a world where few cars sporting the Tesla nameplate exist the car remains a novelty that garners the owner a bit of notoriety. So far the attention gained has been positive, however, if it were suddenly to turn negative not only would many owners lose a bit of bounce in their step but the value of their cars could drop like a stone.

Model 3 Has Left Many Buyers Underwhelmed
As the actual car fails to tantalize buyers and leaves them underwhelmed we are moving to a place where it could be all over. There's a sucker born every minute" is a phrase closely associated with P. T. Barnum, Buying stock in Tesla or one of its cars is the same as going to a casino, it will end with the buyer most likely being a goat rather than a hero. In the back of our minds it would be wise to remember the companies Musk is involved with have been on the government dole and that usually is not a sign of vitality.

Like many high-flyers before him, Elon Musk has a history of promising more than he can deliver which investors and the market has chosen to ignore. I have written several articles about Musk and Tesla not because I'm wowed by either but because they are both poster children of a market which I feel has decoupled from reality. Do not be surprised if looking back someday in the future we view Tesla's stock which continues trading at incredibly high multiples as a reflection of our 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 adding to the image that Musk lives a charmed life.

In the past, I and many others have pointed out the uphill battle Tesla is fighting and the many obstacles that could derail its success. In May of 2015 David Stockman wrote; In a world saturated with excess automotive capacity and dominated by some of the most formidable engineering, manufacturing and marketing organizations on the planet—Toyota, BMW and Ford, to name just three–There is no way that an amateurish circus barker like Elon Musk will ever make a profit selling electric vanity cars to the 1%. Stockman went on to state, You might describe Tesla as $30 billion of capitalized hopium, but that would be too generous. In an honest free market, Tesla would have long ago been carted off to the chapter 11 junk shredder.

As a reminder of how sweet and challenging the auto industry is, and how like a fickle mistress it has those in its grasp always on their toes or they will suddenly find themselves crushed by their overconfidence I present the marvelous example of how Ford in the 1950s ambitiously rolled out the car everyone was waiting for. Unfortunately, their ambition gave birth to the Edsel, whose name became synonymous with abject corporate failure and while the nascent brand was killed in 1959, its legacy lives on. The Edsel's short history makes a fascinating cautionary tale for anyone in business–not just the car industry. In the end, the name of Elon Musk may be added to a long list of bold men herald and declared to be "gods gift to business," only to find they flew too close to the sun only to crash and burn.

Footnote; The link below is a recently updated article written since Musk started talking about taking Tesla private and an overview of Elon Musk and Tesla Motors. It gives some of the background stories behind their rise to prominence.

Sunday, February 10, 2019

Inequality Is A Growing Pox Upon Our Economic System!

A More Recent Chart Hard To Find! (Click To Enlarge)
Unfortunately considering current trends we should not expect improvement in economic equality. In America, wealth inequality has soared in recent years and now stands at the worst it has been during the entire U.S. post-war period. Studies show that the U.S. middle class has been “hollowed out” more than originally thought. In terms of income "by manufacturing jobs" it appears any gains made by the lower-middle class were sharply reversed after 2007. Using certain data we get the picture that racial economic-equality disparities are as bad as they were before the civil rights era. The fact is, driving a decent car doesn't make a person middle-class or economically equal, especially if they are up to their eyeballs in debt to do so. 

Economic inequality is not only a profound social and economic issue but flows into forces that affect financial-market stability. The saying "Talk Is Cheap" comes to mind when we search efforts to address the growing level of income polarization. While many people voice concern about this thorny emotional problem is neither easy to solve or correct. A huge part of the problem is that those who really wield the power to bring about change, in reality, are often sheltered from the pain it causes and out of touch with what many people are forced to go through every day. Because of this, in truth, they see it as a low priority and consider other matters as always being more important. It is very possible they simply do not understand the nature of this beast and this is why it remains a back-burner issue.
In a piece titled; "The Morass That Swallowed the Middle Class" Matthew Shaw delves into how much of the inequality debate focuses on the gains of “the 1%,” and less attention has been paid to the economic well-being of what is broadly termed the middle class, which is all too often just lumped into the other “99%.” Of course, much of this centers around just how out of touch our "professional elite" are with the population and this spills over into the economy. By our professional elite, I refer to those who make the rules and their minions, their aids, the academics, the financial institutions, economists and the media, all of which have tied their wagon to the status quo. Conflict and corruption also enter into this picture as we often find that even those setting the rules also tend to want a bigger piece of the pie.

Controversial "To Say The Least"
The danger we as a society face, is that many voters encouraged by a bias media tend to reach for an easy answer to cure our economic ills and inequality. These are often proposed by those labeled, progressives, liberals, or simply left of center. To this point, fiery class-war populists, such as Elizabeth Warren, Bernie Sanders, and rising Democratic star Alexandria Ocasio-Cortez are making it exceedingly clear that they are socialist and promising voters a bigger piece of the economic pie. This is quite frightening considering the cost of these programs are unaffordable and any one of these people could, at some point, become our next president. If not one of them it will be a new media creation sporting a charismatic persona and claiming a "clear" path forward. 

The problem with socialism is that it doesn't work, all countries that have attempted to institute it have miserably failed leaving their economy's in ruins. Still, a great weakness in the democratic system is that even a motivated minority can overwhelm an unmotivated majority, and promises of generous programs have proven to be a great motivator. ABC 7 Chicago recently reported that a select number of Chicago families could start collecting a $1,000 check every month with no strings attached, according to a new proposal from a task force created by Mayor Emanuel. The pilot program proposed by the "Chicago Resilient Families Task Force", which is the latest incarnation of the "basic income and helicopter money" utopia that has gripped America's left in recent months is another example of our search for easy answers and completely ignores the already devastating financial Armageddon facing Chicago and the state of Illinois.   

While supporters of the program say by giving 1,000 struggling Chicagoan's $1,000 a cover unexpected emergencies, increase their savings and improve their health. Experiments in several countries have demonstrated that basic income simply does not work to boost overall living standards or break the cycle of poverty, however, do not expect the argument to end here. Much of the misery the poor and even the 99% suffer is often self-inflicted or as a result of bad government policy gone astray. This is very evident in housing where government housing cherry-picks the best of the low-income renters providing them with very low rents and nice apartments while dumping the rest on the private sector. This drives up rental prices on everyone else. 

If the predictions of a set back in the economy unfold as many economists predict we may well see inequality surge because during such times it is the masses that suffer most during a financial collapse because they have little in the way financial reserves. History shows that a few of what we know as the .01% will take a hit but even after losing a great deal of wealth most will remain wealthy and basically unscathed while the same cannot be said of the average man or woman on the street. This is because if you view the economy as an economic battlefield, the rich and powerful carry an M16 while most of us are armed with only a stick. This translates into how the lack of investment options that many people have leaves them extremely vulnerable when an economic crisis does occur. 

Another factor still ready to upset the apple cart is the effects of robots displacing humans in the workforce. Robots are here and more are being deployed each day, soon this will prove to be a big deal. The topic of our future and culture always circles back and is directly linked to the issue of jobs vanishing as automation and an army of robots march into our workplace. Rest assured when push comes to shove those displaced from the job market will find they are only given enough to scrape by and ensure they remain docile and behave. If and when this becomes an issue conflict and violence will arise it is possible that someday they will be brought to heel by an army of robots designed to keep them under control. 

The reality that a vast majority of people face diminishing prospects is a concerning trend which was recently highlighted by the IMF in a report focused on data showing how middle-income households have continued moving down, rather than up, as income distribution in the United States has shifted since the 1970s. Part of the problem is that this trend of income inequality is also growing across the globe and no magic or silver bullet exists to address the conundrum brought about by the concentration of power and wealth. One thing is certain and those opposed to such solutions will rapidly testify that whatever actions society takes, those on the receiving end will complain that "It ain't enough."
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Footnote; This is one of several articles planned that argues, "Socialism would be great but it doesn't work." While we can embrace the idea of sharing more freely the simple fact is that many people are more willing to err on the side of receiving than giving and this makes it is incompatible with human nature. Man is often motivated by the fruit of his labor and the vision of creating something good.

Sunday, February 3, 2019

Deficit Spending Main Driver Of American Economy!

Deficit Spending Main Driver Of Economy!
Wake up America! It is only massive and unsustainable deficit spending that continues driving our economy forward. This is why the President's fixation on the stock market and not the real economy represented by Main Street does a great disservice to Americans. While Trump may have been correct in pinpointing many of America's economic ills his prescriptions for a cure leave much to be desired. How we react to money and the economy is often rooted in our past experience and Trump has never shown himself to be shy to taking on debt to propel himself forward. This is why when the stock market started to wobble months ago President Trump increasingly ratcheted up his attacks on Fed Chairman Jerome Powell for"ruining the party."

The budget deficit is set to widen significantly in the next few years and in 2020, is expected to top $1 trillion even with healthy economic growth, according to new projections from the nonpartisan Congressional Budget Office. This means the national debt of around $22 trillion will soar to more than $33 trillion in 2028. A trillion dollar deficit translates into America spending $3,333 more than it takes in for every man, woman, and child in the country. This is "each year" and does not include State and local deficits or a slew of "off book" promises and spending that are also being made. This money "percolates" several times through every part of the economy as food stamp recipients buy groceries and government agencies pay their workers and buy new equipment. 

The bottom-line is that we are in the midst of a "false economy" and it is only by the grace of this massive deficit spending that we are not languishing at the bottom of a deep economic pit. When a country gorges at the trough of deficit spending it can easily manipulate a big temporary boost in its GDP.  In the past I have written about how a country can kick their gross domestic product higher and build a false economy based on infrastructure or war, both these methods of producing economic growth are the result of deficit spending. Ever since the 2008 financial crisis deficit spending has been on a torrid pace that has created the longest bull market in history but no matter what, the economic cycle will end as we are forced to face the massive debt we have created and a slew of bad investments brought upon us because money has been so cheap.

Investors would be wise not to accept America's recent GDP as verification the economy is hitting on all cylinders. In 1962 Kuznets, the father of the GDP formula emphasized that we must keep in mind the difference between quantity and the quality of growth. While economic growth appears robust and a solid GDP number can result in a feel-good moment building consumer confidence it can also mask growing weakness in various parts of the economy. Quantity simply does not make up for poor quality, we are talking about two totally different animals. The false narrative that simply growing the size of an economy by adding more people into the mix or using deficit spending undercuts the importance of a solid economic and the long-term stability of the financial system.

It is important to note that countries all over the world are playing the same game and spending like drunken sailors and the money being created and poured into the economy has to go somewhere. Often it flows to paying interest on debt already in force or to fill in the hole resulting from endless defaults that occur each day. Needless to say, government debt is building up in many forms including promises that will never be fulfilled but with politicians excelling in perpetuating a short-sighted view of the future and the ability to continually kick the can down the road it is not surprising to see them being complicit or even encouraging central backs to continue down this treacherous path. 

Much of what we see today is the result of the so-called "everything bubble" which has allowed loans to be stacked upon other loans because rising water floats all boats. Whether it is intentional misdirection, a case of economic fraud or people simply getting caught up in wishful thinking and euphoria, history shows this is often the forerunner of disappointment and generally results in a hard landing. The fact is, the money we have created and poured into the economy had to go somewhere and we find that it has not only inflated asset prices but it has also inflated promises that tomorrow will be left unfulfilled. These "promises" will prove even far more sinister than the former in that they represent the most pain but are well hidden away in times yet to come. 

While we were told tax reform would mark a major shift in companies deciding whether to keep jobs here or even bring them back to America that may not happen. This narrative that helped to win passage of the legislation and the many assertions made by politicians and their allies in the world of economics will not in itself lead to more investment. Several reasons exist for jobs not to come rushing back to America. The structural issues that haunt America's competitiveness far outweigh the benefits brought forth from Trump's tax bill and lower taxes. The ugly truth is American companies have little reason to bring jobs home, the logic that lowering corporate income tax will create a massive flow of jobs to our shore is flawed. 

Corporate investment decisions are based upon the cost of capital and the prospective equity returns that new investment can generate, not how much capital is available and in our current cheap and easy money, environment capital is basically free. The problem is not funding new investments, but finding endeavors in which to deploy this capital. The economists who largely control the major central banks in the industrialized nations may be able to manipulate markets and cancel excessive debt through open market operations, but they cannot manufacture attractive investments. Sadly for several reasons stock buybacks has been moved to the front the list of corporate priorities joining other investments that are not productive investments.

Click Here To Visit The Active Debt Clock
The deficit spending propping up our economy has gone far past anything we might have envisioned just a decade ago and now the path forward appears even more difficult as auto sales fall and companies admit they will no-longer manufacture cars in North America. Housing also is a problem with much of the construction now flowing into high-end apartments rather than affordable units. This is the result of government policy and laws that discourage anyone from wanting to invest or deal with housing for the poor. These are two big sectors of our economy but even they have become tired.

Indirectly this deficit spending by our government also fuels our trade deficit, an area in which we have miserably failed in recent years, this is not only evident by our massive trade deficit with Asia but the United States huge trade deficit with Mexico which becomes even more disturbing when you begin to understand even that money quickly passes through Mexico and flows to Asia. It could be argued that when all is said and done we are still transferring our wealth to the far east only by the scenic route. The idea we will reach a quick fix to the trade problems facing America and is a myth and oversimplifies the problems before us in achieving a sustainable trade balance. Reaching a reasonable solution posses a major difficulty in that China is so entrenched in its ideology it most likely will refuse any change that will throttle back its plans of domination.

History has proven that while government spending can supplement the economy, over the long run government spending is a poor substitute for the free market in allocating capital to where it is most effective. Deficit spending is not economic growth but borrowing from the future. Today late cycle indicators are on the rise, moderating growth, tightening credit, declining earnings, higher interest rates, the peak of consumer confidence, rising inflation and more. The crux of this post is to point out deficit spending is not a silver bullet without consequences and with each step forward we get closer to the end of the road. While those embracing Modern Monetary Theory may argue otherwise Econ 101 teaches that such actions as we have seen always lead to a very bad place.   

                                                                                 This blog is not written for money
                                                                                 or profit but as a way to share ideas
                                                                                 and thoughts. If you liked this post
                                                                                 feel free  to E-mail it to a friend
                                                                                 using this link. E-mail to a friend

Footnote; Please note the slightly shaded areas in the above post. They are links to previous related articles or research papers.