Thursday, May 31, 2012

The Skinny on Shiny Metal

Historically, gold has been the asset to own during a financial crisis or inflation.  Since there is a crisis in Europe, the price of gold should be increasing.  The huge increases in money supply should eventually increase the value of gold.  Instead, it has been crushed!  Why?

As the crisis in Europe has mounted, European investors have been liquidating their gold holdings to pay for other things.  This increases the supply of gold and drives down the market price.

Also, as fear has increased in Europe, investors don't want to own government bonds in Euros.  They want the safety of dollars.  So, they're selling Euro-denominated bonds, which increases the supply of those bonds, which decreases the price, and drives up the borrowing costs of European governments.

What are they buying?  They're buying U.S. Treasuries instead, regardless of whatever the ratings agencies think.  As demand for our dollar-denominated bonds increases, they bid up the price, which drives down our borrowing costs.  The interest cost on our 10-year bonds dropped below 1.6% today, a historical low.

However, you cannot buy U.S. Treasury bonds with Euros.  You need dollars.  So they sell their Euros.  This increases the supply of Euros, which drives down the price.  When they bid to buy dollars, they drive up the price of the dollar, which has appreciated greatly this year.

What does that have to do with gold?  When the dollar appreciates, the value of gold depreciates in terms of dollars.  When the Euro depreciates, as it has, the value of gold appreciates in terms of Euro.  The Europeans think gold has been a great investment this year, because it takes a lot more Euros to buy gold today than it did a few months ago.

What is going to happen?  "Reversion to the mean" is a term explaining that all things will eventually return to normal.  While I have lots of disagreement with that argument, I'm confident the world will eventually return to normal.  Europe will not fall into the ocean.  They will eventually sell dollars to buy Euros again, which will drive up gold to us.  More importantly, the money supply has never increased so rapidly without producing inflation.  I expect that relationship to return to normal as well.  When either or both of those things happen, gold will appreciate or go up in value.

When will that happen?  Nobody is smart enough to know that, but I do have respect for the Commodity King, Jim Rogers, who predicted gold will bottom out around $1,450 per ounce.  If he's right, we can expect another drop of about $110 per ounce.

Tired of Being Europe's Tail

The U.S. stock market is extremely sensitive to the monthly Jobs Report, which will be released tomorrow morning. In addition, the giant payroll company, ADP, always releases their estimate of private sector job growth the day before, which gives the market some expectation about the Jobs Report, along with the usual weekly unemployment claims that comes out every Thursday.

This morning, ADP disappointed the market by estimating there were only 133 thousand jobs produced in May.  (This ignores changes in government jobs, which has usually been negative since 2009.  It is hard to believe there are still 600 thousand fewer government jobs now than in 2008.)  This suggests tomorrow's all-important Jobs Report will only be around 120 thousand.  The bad news is that the market is expecting 155 thousand tomorrow.  Normally, that would suggest a strong sell-off.

Then, the weekly unemployment claims came in higher than expected, more bad news.

Then, first quarter GDP growth disappointed at only 1.9%, but the market was expecting 2.2%.  The miss was  largely because government spending was reduced more than expected.

That's a lot of bad news in only an hour.  But, it is interesting to me that the futures fell by only 20 points.  I would have expected a much bigger drop.  This suggests less sensitivity to the U.S. economy and more sensitivity to something else.

It is not news that the U.S. stock market has become the tail wagged by Europe, but that is the wrong lesson to learn.  There are normal declines in the economy and abnormal declines.  A decline in the stock market from a garden-variety  recession is normal.  A decline from a financial crisis is abnormal . . . and terrifying.

The lesson is that normal economics are always over-whelmed by a financial crisis.  They are very different problems.   A financial system is the lubricant for the economy.  Without it, the economy quickly grinds to a halt.  Of course, the stock market knows this and will continue to over-react to European headlines -- or even European rumors -- darn it!

Monday, May 28, 2012

A Thank You Note

One of the most defining characteristics of existentialists is a certain contempt or ridicule for death, considering the disadvantages of death being over-rated and the advantages of death being under-rated.  For example, the disadvantage of death is missing life, which is over-rated . . . while the end of suffering is under-rated.  That fairly describes my belief . . . 364 days each year.

Somehow, that doesn't apply on Memorial Day.  At some point today, I will have a tear in my eye.  It may happen at a ceremony in memory of those who died for us.  It may happen when I simply look at the flag.  It will certainly happen when I remember some of my Army buddies who paid the price for my great life, and I will speak their names one more time.

A reverence for those who pay the ultimate price is not new in history.  The ancient Aztecs believed there were seven levels in Heaven, with the highest level reserved solely for women who died in childbirth and men who died in battle.  (I don't know what happened after the Vietnam War, when we somehow forgot to remember?)

To those who died, I try to remember that the only advantage of your death was to pay the cost of freedom for the rest of us.  Thank you.  I will never forget you.

Wednesday, May 23, 2012

From Pessimism to Fear

Last December, the editor of Inside Business called me, asking for the one thing economists fear the most . . . an economic forecast.  It was published January 15th of this year, when I predicted "2012 will be an emotional roller-coaster."  Last month, Wall Street was bullish, before turning bearish early this month.  When I watched the European markets open early this morning, I could tell the attitude had changed from pessimism to fear.

I also predicted the U.S. would not enter a recession, unless Europe pulls us into one.  I still believe that!

I predicted the European Central Bank would have to deal with their problem by mid-year.  As I write this, there is a dinner meeting with the leaders of 27 nations to resolve the European debt crisis.  While the best solution would be for the EU to issue Euro-bonds, it will not happen, and even if it did, it would take too long.  The best plausible outcome is authority to invest capital directly into banks, like the U.S. did with TARP.  We'll see . . . I just hope we see something soon!

Another prediction was that the Dow would approach 10,000 but not fall below that level.  I still believe that is possible, if the EU doesn't resolve their crisis.  If that is the case, why wouldn't I sell everything right now and buy them back at the bottom?  One, market timing is almost impossible and extremely risky.  Contrary to popular belief, the stock market is very emotional (read:  irrational).  It is always difficult for rational people to predict irrational events.  Two, the U.S. is spring-loaded for growth and could move up suddenly.  If Europe finds a way to put capital into banks tonight, the Dow could easily rise 300 points tomorrow.  

The Dow really wants to rise!

However, if you believe the leaders of the European Union are too irrational to resolve their crisis, you also probably believe the leaders of the United States are too irrational to keep our economy from going over the Fiscal Cliff at year-end;  when the Bush tax cuts and payroll tax cuts expire, plus sequestration of Federal spending begins.  Some analysts predict that will cause a 4% minimum drop in our GDP growth rate, which is only 2%.  I suspect the drop will be more than 4%.

If Europe gets its act together, if Congress gets their act together, and when we get past the Presidential election (no matter who wins), uncertainty will be vastly reduced, which will drive the stock market way up, at least a thousand points, I expect.

Greece can still generate fear, but it cannot do the damage it could have done a year ago,   The market has adjusted to the possibility of Greek default and removal from the EU.  This will not be a "Lehman" moment, when the financial dam broke in September of 2008.  If we go off the Fiscal Cliff and our GDP growth rate drops 4%, that is still less than the 6% drop we suffered in 2008-9.

My point is this -- even though fear is the predominant emotion on Wall Street right now, capitalism will still survive, and, by the way, so will the United States of America!

Monday, May 21, 2012

An Economic Forecast + $1 = $1

Every quarter, the National Association of Business Economics (NABE) conducts a random sample survey of its members.  Despite the fact that I've never been one of the 50 economists called to participate, I still enjoy reading their quarterly predictions, which were released today.

Job growth averaged 254 thousand new jobs each month from December thru February but fell to an average of 134,500 for March and April.  They predict the average for 2012 will be 200 thousand new jobs per month or 2.4 million jobs all year, which would be a fairly decent year.  Still, they don't expect the unemployment rate to drop below 8.1% before year-end but dropping to 7.6% by the end of 2013.

Their estimate of GDP remained unchanged at 2.3% this year and 2.7% next year.  Despite the flare-up in Europe, this estimate was not changed, which surprises me.

The most surprising prediction was that home prices would got UP(?) this year, by a tiny 0.5% but still UP!  The residential real estate market has been a huge drag on the economy.  Any improvement there will help the rest of the economy.

Maybe, they'll call me for the next quarterly survey, and I will probably pull the averages down.

Sunday, May 20, 2012

Advice for the Tea Party

Everybody has had the sad experience of watching doctors, nurses, and ministers make a valiant but futile effort  to delay the inevitable death of a loved one.  Could we be watching the inevitable death of democracy?

Thomas Babington Macaulay was a famous British historian and Secretary of War.  Before his death in 1859, he once said:

A democracy cannot survive as a permanent form of government.  It can last only until its citizens discover that they can vote themselves largesse from the pubic treasury.  From that moment on, the majority (who vote) will vote for those candidates promising the greatest benefits from the public purse, with the result that a democracy will always collapse from loose fiscal policies.

Assuming that democracy can have a fatal flaw, like everything else in life, and assuming this is the fatal flaw of democracy, it begs several questions:

1.  How do we manage the risk of excessive "largesse"?  That requires admitting there is a potential problem, honestly assessing the real costs, and then paying for it -- really paying for it, without relying on some accounting trick or economic hope.
2.  How do we measure our success . . . or failure . . . in managing the risk?  The fiscal debt or structural debt?
3.  When will we admit we have failed to manage that risk?  What has to happen first?
4.  What replaces the greatest political system in history and who decides?
5.  Does democracy "self-renew"?   If so, how?
6.  Can we have a fiscal revolution without a physical revolution?

It takes endless vigilance to protect our democracy from this fatal flaw.  Fortunately, we have been blessed by effective elected officials who have protected the purse . . . and therefore our democracy.  Ronald Reagan comes to mind.

However, I know of no intransigent elected officials who have effectively protected the purse or our democracy.  Ronald Reagan again comes to mind, with his 80/20 rule -- to give up 20% in order to get 80% of what he wanted.

Watching the Tea Party trying to protect our purse and our democracy is like watching a good doctor yelling at a dying patient to stop being sick.  The doctor's intentions are honorable, but his actions are ineffective.

I hope the Tea Party gets 80% of what they want . . . and learns how to legislate effectively!

Friday, May 18, 2012

99% Agreement Is Not Good Enough?

Now, tell me one more time, why is it that Republicans and Democrats cannot work together:

You may need to copy & paste this URL, but it is worth it, I promise!

Facebook Fatigue

Normally, I get up each day about 4:30AM, to see how the Asian markets are doing and to watch the opening of the European markets, switching between CNBC and Bloomberg TV.

But, not today!  Oh, I was up at the normal time, but those channels were just "un-watchable."

Today is the Initial Public Offering (IPO) for Facebook, and the media coverage is both intense and continuous.  The U.S. market is absolutely giddy over it, shrugging off the bad night in the Asia stock market and weak morning in Europe as well.  Global stock markets have collectively lost over a trillion dollars in the past month, but you wouldn't know it on Wall Street.  Facebook has changed the mood on the street, albeit temporarily.

No, I'm not buying Facebook.  To me, it is a company that shreds the privacy of its users, loathes its own advertisers/clients, and has a CEO who, to be kind, is not often called a nice guy.  Warren Buffett won't touch the stock, and neither will I.

Maybe, CNBC and Bloomberg TV need a Facebook detox program to end the non-stop coverage.  Today, I will watch the market online, while the TV is on . . . The Golf Channel.

Thursday, May 17, 2012

The Proper Role of Greece?

Late Tuesday afternoon, my anxiety level with the market rose markedly.  That was when the Greek president announced that almost $900 billion of bank deposits left the country that DAY.

While not always true, a run-on-the-bank is a very strong indicator that big trouble is imminent.  Since January of 2010, total bank deposits in Greece are down a whopping 29%.  Some of that decrease is certainly that the people of Greece are consuming their savings, but the majority is people getting their cash outside of Greece.

If you are a Greek citizens and if you have your Euros in a Greek bank and if Greece is tossed out of the Euro Zone, you will no longer own Euros but will own Drachmas instead.  If you had enough Euros to cover a month's worth of living expenses before, you might now only have enough Drachmas to live a week, for example.  I've seen one computer simulation suggesting the price of gas in Greece will rise to $28 per liter, a crushing "tax" on any economy.  The Greeks are already suffering now, but it will get much worse when they are tossed out.  I feel sorry for them!  They don't even know how bad it will be.

It was a mistake for the Greek president to make that statement on Tuesday.  On Wednesday, he was careful to say no bank deposits left the country that day, but nobody believes him.  It is a good reminder to keep a finger close to the SELL button.

Of course, the greatest fear is contagion, i.e., that the same sad fate of Greece awaits Spain and Italy.  With political paralysis in Europe (as in the U.S.),  the only hope for Europe is that the European Central Bank (ECB) does for Europe what the Fed has done for America.  Central bankers around the world will be begging the ECB to issue Euro bonds (something Germany opposes strongly) and then engage in quantitative easing.  Euro bonds would backstop the bonds of Spain and Italy, reducing their borrowing costs.

Sometimes, you have to make an example of somebody.  It is time for Europe in general and the ECB in particular to make an example of Greece.  They will not accept austerity.  They will not cut their entitlement programs.  They will not increase taxes.  They will not reduce their regulatory restrictions.  Let them go, sadly let them suffer, but let them terrify the remaining Europeans into accepting greater austerity. 

Monday, May 14, 2012

JP Morgan Trade 101

Although all the details are not known yet and likely won't be known for a very long time, I have seen the basic idea of their horrible trade-gone-wild, and it simply reinforces why I've been so bearish on financial stocks.

As a large commercial bank, they have a large portfolio of loans they have made.  As the economy gets stronger, the risk of those loans defaulting decreases and, therefore, the quality of those loans increases, which increases the value of those loans, just like bonds increase in value when the quality increases.  After all, wouldn't you pay more to buy a good bond or loan than you would pay to buy a bad bond or loan?

The loans that banks make are carried as assets on their balance sheets.  Like any company, banks want to protect the value of those assets.  JP Morgan believed the U.S. economy was improving nicely, which means the value of their loans-made or assets would also be improving nicely.  However, what if they are wrong?

To protect themselves from the downside risk of being wrong, they hedged their bet.  To do this, they bought credit default swaps (CDS) on a popular index of commercial loans. Think of CDS as repayment insurance.  The bank paid a fee to some third-party to insure the index would not lose value.  If the economy got worse and the value of loans made went down, the value of the index would go down, which means the third-party would have to make the bank whole.  They hedged their bet.

Up to this point, it is a normal hedging procedure.  In case JP Morgan was wrong that the economy was improving nicely, they bought some protection, which is prudent.

Apparently, they bought so much of the available CDS, the value rose and prices to buy CDS rose.  They had "moved the market."  JP Morgan was finding the cost of buying the protection was increasing.  At some point, they decided to start selling CDS or protection for the easy fees.  Since they believed the economy was improving nicely, why shouldn't they accept fees for insuring against something they didn't think would happen anyway?

While there is a high probability that there are facts I don't know yet, it was at this point, when they started selling insurance, that I believe JP Morgan jumped the rails.  When the economy stumbled recently, the value of the CDS which they had sold lost billions in value, because they would have to make others whole on losses in the index.

In other words, when they stopped paying out fees to be insured and started receiving fees to insure others, I think they crossed the line of investing their own money and starting gambling with taxpayer-guaranteed-money.

Friday, May 11, 2012

JP Morgan's Stunning Announcement

After the market closed yesterday, JP Morgan announced a huge trading loss, with estimates ranging from $2 billion to $4.2 billion.  While the Wall Street bank can certainly handle the loss, it is important to note the loss occurred in their "synthetic credit portfolio" (Read:  derivatives portfolio).

The derivatives market is a vast, thinly-regulated set of largely private contracts that worries me.  The market is so lightly regulated, nobody knows just how large it is, although it must be in trillions of dollars.  I have often said it is time to sell as soon as you hear of the first derivatives blow-up, i.e., the first time a counter-party to a derivatives contract reneges.

This is NOT such a situation!  While my trigger-finger got itchy last night to hit the SELL button, it is not the correct time for a panic sell.  JP Morgan can easily handle their obligations on these derivatives.

The more important result from this announcement by JP Morgan is that passage of the Volcker Rule now seems more likely; a rule that JP Morgan has fought bitterly.  Because some banks really are too big to fail, they have the ability to take huge losses, which the taxpayers will pay.  If they make huge profits instead, the banks keep all the money.  In other words, heads I win, tails you lose.  The profits are privatized, while the losses are socialized.  That is simply unfair to taxpayers!

Maybe, JP Morgan did America a big favor ??

Thursday, May 10, 2012

A Glum View From a Good Guy

Among economists, the University of Chicago has the reputation for being the home of "conservative" economics.  Famed Nobel-winning economist Milton Friedman, who was the father of the Monetarist philosophy, worked here for decades.  Yesterday, I attended a lecture by a current professor there, Austan Goolsbee, who is a Yale graduate and earned a Ph.D. from M.I.T.  He was also Chairman of the Council of Economic Advisors under President Obama.

He began with a spirited defense of the TARP program during the Bush administration and the Stimulus program during the Obama administration.  TARP was particularly successful because it re-capitalized the banks, he said.

Looking at Europe, he is concerned about their refusal to directly re-capitalize their banks.  In fairness, the ECB has instructed European banks to increase their capital base, but the banks cannot find investors.  That's why the ECB should imitate TARP, according to Goolsbee, and I think he's right.

He agreed that the U.S. recovery has been very slow, indeed.  I have long argued that is because a recovery  from a financial crisis is very different than a recovery from a normal recession, as it takes time to de-leverage.  However, he argues the slowness is due to a lack of construction, which traditionally accounts for one-third of the rate of recovery.  His argument provides economic cover for another stimulus program aimed at "shovel-ready" construction.

Far more disturbing to me was his bleak assessment of the political environment -- everywhere.  He doesn't expect a good outcome for the ongoing Greek negotiations.  More importantly, he doesn't expect a good outcome for the U.S. negotiations on the year-end fiscal cliff, when the Bush tax cuts expire, the payroll tax cut expires, and sequestration kicks in -- no matter who wins the Presidency.

Goolsbee enjoys a reputation as being a genuinely nice guy.  Having heard him three times, I am not surprised.  He recalled a humorous lunch during his government service.  It is customary for the Chairman of the Council of Economic Advisors and the Chairman of the Federal Reserve System to have lunch one day each month.  One day, Bernanke was late, apologizing that he got stuck wrapping up the Watergate report.  Confused, Goolsbee asked what was the Watergate report?  Bernanke explained that the security guard who discovered the break-in of Democratic headquarters one night in 1968 was also a security guard for the Federal Reserve Bank during the day.  Ron Paul initiated an investigation of whether the Fed was the conspirator behind the Watergate break-in.  This political vendetta against the Fed is petty and silly, but it seems emblematic of our current political culture.

My take-away is to re-think the "Taxageddon" scenario at year-end . . .

Wednesday, May 9, 2012

Throwing Out the Baby . . .

I attended a fascinating lecture late yesterday by Carolyn McClanahan, who is both a physician and a financial planner.  She has actually read the entire bill on ObamaCare and has become one of the leading experts on the subject.

When she wears her hat as a financial planner, she doesn't like the individual mandate.  However, when she wears her hat as a physician, she lists the many things she does like about the bill.

Both humorously and sadly, but before saying something good about ObamaCare, she felt it necessary to show her Republican credentials and showed a photograph of her and Mitt Romney sitting together on a plane.  Nonetheless, several financial planners did get up and walk out when she defended the medicine behind ObamaCare.  Has the subject really become something one doesn't discuss in polite company?

Anyway, her point was that the Supreme Court should not "throw the baby out with the bathwater."  I was surprised to learn how much has been done already.  Billions of dollars of work has already been done, and billions more would have to be spent if the Court trashes the entire bill.

She pointed out that, under ObamaCare, insurance companies now have limits on the amount of overhead they can charge.  For example, large insurance policies must spend 85% of dollars on healthcare, with only 15% on overheard.  The industry standard has been 25-30%.  In England and France, it averages only 5%.  Germany's average overhead is 10%.  Interestingly, Germany has the model she likes the best.

In Germany, there is a basic health package that everybody gets and is more oriented toward prevention than treatment.  That part is "socialized."  However, if you want insurance coverage for medical expenses above the basic package, you are free to buy a policy on the open market.  At first blush, that seems to capture the advantages of both systems.  Their annual healthcare costs per person (governmental plus individual costs) is only about one-third as much as ours.

Several times, she railed about the cost of obesity in America, which is estimated at $160 billion every year.  She doesn't think it is a laughing matter, when that money could be used for people who better control their diets.  (FYI -- McDonalds was the best performing stock on the New York Stock Exchange last year.)

She also talked about the waste of end-of-life expenses, pointing out a 3-month stay in ICU by a Medicaid patient costs taxpayers a cool million bucks.  But, don't focus on the Medicaid aspect.  Do you really want to spend a million dollars to keep youself alive and miserable for three months, whether it is paid with taxpayer money, insurance money, and your money?

There was much discussion whether financial planners have a responsibility, to discuss this problem of end-of-life healthcare costs, with their clients.  I expect that will become another "best practice" in the near future.  If so, there will certainly be a form for the clients to sign.

Finally, I have found a real expert, who doesn't have a political ax to swing at the politically incorrect.  I will be reading her blog at -- --  and will recommend it to everybody  else as required reading.

Monday, May 7, 2012

The Day After the European Elections

Mainstream economics is similar to mainstream religion.  There is near-universal agreement that long-term sustainable economic growth is the goal.  Also, there are many "denominations" or schools of thoughts about how to achieve that goal.

As discussed here before, there are three mainstream economic denominations in the U.S. today.  The oldest denomination is the Austrian school, which calls for tough love or austerity to reach that goal of sustainable long-term economic growth.  The second denomination is the Keynesian school, which calls for deficit spending to increase demand, thereby jump-starting the economy.  The newest denomination is the Laffer school or Supply-Side, which calls for tax cuts to increase demand, thereby jump-starting the economy.  (Truth-in-blogging requires I confess to being a closet-Austrian economist.)

The elections in France and Greece this weekend highlight the limits of economics.  The Austrian approach of more and more austerity ran into the brick wall of politics.  Increasing austerity is a workable concept in a university classroom of well-fed students, but it doesn't work well with scared voters.  The voters in France and Greece have strongly rejected the pure Austrian approach of austerity.

Asian markets dropped markedly in response to the European elections.  I guess they have not been paying attention, because the European markets were much more sanguine about the elections.  The U.S. markets were also calm.  This is because the elections were already factored into the market.

But, what happens next?  Like politicians everywhere, the new president of France will move to the center to deal with their problems.  Greece, however, is a very different story.  It does not have the ability to borrow anymore.  They can start defaulting and begging for charity . . . or, they can continue on their austerity path and get the agreed-upon assistance from the European Union.

I do sense a certain emotional fatigue to all this, i.e., more people are ready to throw Greece out of the E.U. That would really be bad for Greece.  But, it is such a small part of the Euro-economy.  Greece and Portugal together are only 5% of Euro-GDP.  However, the details of throwing them out of the E.U. is more difficult than most people realize.

Of course, we have long argued that a two-fisted approach of austerity plus growth will be the salvation of Europe.  But, growth doesn't necessarily cost money.  Growth can also be created by removing structural obstacles.  Did you know you cannot fire an employee in France without permission from a judge?  Several nations require prior approval to closing or re-locating a business.  And, don't mess with the labor guilds!

Still, uncertainty has increased, which means the stocks markets will decrease . . . but only for awhile.

Spousal Bucket List

I suppose every married person has a list of things or experiences they want to share with their spouse before they die.  Unfortunately, one of the things on my wife's list was a trip to the Rock-&-Roll Hall of Fame in Cleveland, which we toured Sunday.  Because I care little and know even less about music, it was not time well spent for me.  However, during those agonizing 5 hours, I did learn that the beautiful I.M. Pei structure, housing the impressive museum on the lakefront, was a "public-private partnership."  I then spent the time wondering about such arrangements.

Virginia is a "Dillon-Rule" state, which means ALL power resides with the state legislature in Richmond, except whatever crumbs they delegate to the local areas.  Years ago, when we actually enjoyed forward-thinking legislators, they foresaw the approaching impotency of all things governmental and permitted something called public-private partnerships.  This allows progress to continue, by marginalizing any commitment by government -- but not eliminating it.

An example in my hometown of Virginia Beach is the immensely successful Town Center project.  The City issued bonds to pay for an essential infrastructure project, i.e., the central parking garage.  Of course, this requires a certain amount of debt service each year.  The City then increased the real estate taxes on other properties benefiting from a parking structure in their district.  Taxes were not raised on the rest of the city or its taxpayers.  Only the local property owners paid more in taxes.  That means there was no out-of-pocket cost to the City, as the increased tax revenue easily covered the increased debt service.

Suppose I lease a car for $300 monthly and then re-lease it to you for $400 monthly.  My obligations have increased but my revenue has increased even more.  My recollection is that the City of Virginia is actually making about $2 million yearly on this arrangement.  The trade-off is that the City used a small portion of its  finite capacity to sell bonds, a minor trade indeed.

Frankly, I have been struggling to understand the bitter vitriolic attacks on future public-private partnerships.  At first, I assumed people just didn't understand.  Now, I think some people are opposed to everything; whether it is called waste or progress -- it doesn't matter.  They're opposed to it!

Of course, a more recent public-private partnership to sell a local tunnel and greatly increase the tolls has met with great opposition.  Unfortunately, this has smeared the name of all public-private partnerships.

My wife wonders why some people don't like Rock & Roll music.  I wonder why some people are opposed to public-private partnerships.  Still, I'm glad I crossed-off one of those things from my wife's bucket list.  The bad news is that the next thing on her list is a visit to Kangaroo Island on the southern coast of Australia.  Fortunately, I go nowhere without access to the internet and the cloud.  Therefore, we're not going . . . whew . . . at least, not anytime soon!

Saturday, May 5, 2012

Wasting a Perfectly Good Sunrise

This morning, I enjoyed my coffee sitting on our patio, overlooking the dewy 18th green at the famed Firestone Country Club in Akron, Ohio.  But, as I watched a Momma-goose and her five little gooslings waddle across the manicured green, I was thinking about the highest marginal tax rate on Federal income taxes.

There has been much recent discussion that it is time to raise that rate, at least temporarily, to help deal with the terrifying deficit.  One of the most compelling arguments is that we should think longer-term.  After all, the highest rate was 91% in 1955 and is much lower today.  Also, the highest 11% paid 100% of the income taxes in 1940, while the highest 10% pay "only" 70% now.  There has been substantial progress made already.

I'm not arguing that taxes should not rise, but I am arguing that the economic consequence of tax changes should be considered.  According to Supply-side economics, any increase in the highest marginal tax rate creates a significant loss in motivation by the most talented of our citizens.  I do think there is truth to this argument, but the significant loss in motivation is not immediate.  Theoretically, the economy would be improved by the time they act on that loss in motivation.  (It might also induce some high-income workers to retire early, but that opens the door for the frustrated younger workers, who are tired of us gray-haired baby boomers anyway.)

In addition, it is argued that raising the highest marginal income tax rates would decrease the flow of capital into productive purposes, while increasing the flow into government purposes.  Doesn't that assume high income workers are putting money into productive purposes now?  Instead, we see retail investors sitting on too much cash, avoiding the stock market.  With some exceptions, cash sitting idly in bank accounts is not being put to productive use, especially since banks are making relatively few loans, compared to their normal lending practices.

At year-end, the "Bush tax cuts" will expire, and the highest marginal tax rates will return to the Clinton-era levels.  That will be good for the budget deficit and bad for the economy in the short-run but good for our credit rating in the long-run.

Maybe, if the highest marginal tax rate for my Federal taxes goes back up, I'll spend more time watching geese soil a perfect putting surface and less time pondering tax policy . . . but, I doubt it!

Thursday, May 3, 2012

The Over-Hyped Monthly Jobs Report

Like drinking from a fire hydrant, investors have trouble consuming economic data.  There is just so much of it. If economists are good for nothing else, they do produce a flood of data.  While there is honest disagreement about which economic report is the most important, it is clear that the investment markets are most quickly affected by the monthly Jobs Report from the Bureau of Labor Statistics.

That report gives us the percentage and number of workers unemployed, the percentage and number of workers under-employed, the number of people joining/leaving the workforce, etc.  The one number that gets the most attention from Wall Street is jobs created by the private sector.  That report is issued on the first Friday of each month . . . tomorrow.

Last month, the market was stunned when it learned only 120 thousand jobs were created in March.  A survey of economists expects the number tomorrow to be about 170 thousand.  If tomorrow's report is below 150 thousand, I expect it will be a cloudy day on Wall Street.  If it is approaches 200 thousand, it will be a sunny day on Wall Street.

It is an unhappy coincidence that the report is issued on Fridays, which also happens to be the most volatile day of the trading week.  Adding to the drama, every Wednesday before the Jobs Report, the huge payroll-processing company of ADP issues their estimate.  This week, they estimated private payrolls increased only 119 thousand, well below economists' expectation and a 7-month low . . . a strong negative hint of Friday's report.

Every Thursday, the Department of Labor releases their new claims for unemployment benefits.  This morning, it was announced that new claims dropped 27 thousand, to the lowest level in the 12-months . . . a positive hint of Friday's report.

As an investment manager, I care a great deal about Friday's Jobs Report.  As an economist, I frankly don't care at all.  First, it is almost always adjusted the following month, as the seasonal adjustments seem to change every season.  Second, it is backward-looking and tells me little about the future.  The trend is much more meaningful.  Third, it may be measuring the wrong things anyway.  There is a closer relationship between job turnover and the future, because workers don't change jobs unless they are very confident of getting another job quickly.

So, no matter what the number is tomorrow -- maintain an existential sense of humor, wear a wry smile, and try to gauge how much the market over-reacts, which is what the market does best.

Tuesday, May 1, 2012

Have You No Decency . . . Google?

The U.S. Senate held the infamous Army-McCarthy hearings in 1954 for the purpose of finding any communists in the government.  During that process, Senator McCarthy trashed the reputation of many good and decent people.  Finally, one of the lawyers, Joe Welch, could no longer tolerate the abuse and confronted the Senator with "Have you no sense of decency?"

That's the way I think about Google!  Do they have any sense of decency at all?

You may recall a few years ago that Google set out to map every block in America photographically.  It was called "Street View."  They used especially equipped vehicles like this:

Driving to the gym one day, I saw the vehicle mapping my neighborhood and marveled at the technology it must have contained.  Unlike some people, I was not bothered by the fact a person/stalker could know what your house looked like before he got there.

Now, we learn those vehicles may have contained devices that accessed unsecured wifi.  This allowed Google to know such things as whether the residents were writing emails to lovers, looking up personal medical questions, balancing their checkbooks, managing their retirement portfolios, or even their all-important passwords and past browsing history.  Google has assured us that this information was not used.  Doesn't that make you feel better?

Google has apologized, calling it accidental eavesdropping, and alleges it was not illegal.  A 25-page report by the FCC,  released April 13th, agreed.  My first question is why wasn't it illegal?  My second question  is don't ethics matter?

Further investigation into this is obstructed by the fact that the Google engineer in charge of this project has taken the fifth amendment to protect himself.  Emails seem to indicate that at least one senior manager knew about this data-mining of ordinary citizens for two years.  

There are even unconfirmed rumors that Google is working on ways to both see and hear inside homes by use of the webcam and webmic on most home computers.  Would Google actually go that far, to gather information on you for their advertisers?  Why wouldn't they?

In answer to my own question about Google's decency, I expect they have as much decency as you have privacy.

This weekend, a friend sent me an interesting article that Google was so worried about the highly-competitive and highly-stressful working conditions in the company that it was holding a series of "mindfulness stress reduction" classes.

Maybe, they could decrease their stress by increasing their decency?