October 8, 2013

Nevada must join ranks of business-savvy states 10.07.2013

Posted in government, Robert Barone, Uncategorized tagged , at 4:37 PM by Robert Barone

I was quite surprised when I got up last Tuesday to find that all of my utilities were working, including TV; my trash had been picked up; and, when I drove to work, the traffic lights were operating, the schools were open and I even spotted a couple of local police patrol cars.

It appeared to be a normal Tuesday morning.Well, I wasn’t really surprised. But I would have been if I believed the media’s vision, which had built to a crescendo on Monday, that the so-called “shutdown” was going to be an unmitigated disaster.

By Wednesday, as far as I could tell, the national parks had closed, as had some museums and monuments in Washington, D.C. I am also informed that some data releases (like September’s unemployment rate) will be delayed. But, all in all, there hasn’t been much impact on my daily life and probably not on yours, either.

Now, I am not making light of the issue, as it will definitely have an impact if prolonged. (Actually, the upcoming debt ceiling issue has much more potential to do damage.) But the fact that there was no real immediate impact on most Americans’ lives makes one realize that state and local government services play a much larger role in our daily lives than federal government services do.

Government approaches

Since the financial crisis, governments at all levels have struggled either because they cannot control spending or, more likely, have made future commitments that they simply cannot meet.

During such times of financial stress, state and local governments typically take one of two approaches, or even a combination:

• The preferred approach is for government to work with the private sector to promote business and employment growth. In the long run, a healthy and growing private sector generates more tax revenue. You don’t have to raise the rates to accomplish this.

• The second way, which is simply wrongheaded, is to increase taxes and fees on the current citizenry. In the long run, this drives business away and the revenue issues remain or even get worse.

CNBC survey

Every year, CNBC and others such as Forbes do surveys of which states are best for private-sector businesses.The accompanying table shows the results of the 2013 CNBC survey for the Western states with which Nevada competes for business relocations (Arizona, Utah, Texas). I also threw in California because many relocations originate there. Nevada’s overall ranking is 46th out of 50. Nevada has been ranked between 45 and 47 at least since ’08.

Looking at the table, Nevada generally ranks poorly in every category, most notably economy, education, quality of life and technology and innovation.

Nevada

Nevada’s lackluster record

To its credit, the governor and the Nevada Legislature approved a $10 million fund that targets cutting-edge technologies, modeled after a similar and successful effort in Utah.

But state and local governments can do much more. Economic growth in the state would improve if officials reduced the cost of being in business and improved business friendliness via a reduction in fees and regulations. I estimate that if such improvements were made, the state could move up significantly in the CNBC survey.

Some would think this impossible. Not so. Despite the Detroit bankruptcy, over the last four years, state and local governments in Michigan have moved that state from a rank of 41st (’09) to a rank of 29th in the latest survey. There, governments aggressively go after business relocations and become partners, not antagonists.

The record in Nevada is not good. Except for the cutting-edge technology fund, state and local legislators have opted for raising fees and taxes. Here are some examples:

• Since the financial crisis, the state has doubled the business license fee, and most of the local governments have followed suit.

• Assembly Bill 46, passed by the recent “no new taxes” Legislature, permits the local governments to raise taxes without the constitutional requirement of a two-thirds vote of the Legislature. While its constitutionality has yet to be tested, AB46 is an example of how government works today — by sleight of hand.

• In Reno, it costs more than $50,000 in permit fees to build a 3,000-square-foot building.

• Anyone who owns a small business in Northern Nevada can attest to the significant increase in fees and regulations since the crisis.

Conclusion

We are lucky that California is our neighbor, as it ranks last in the cost of doing business, is 48th out of 50 in business friendliness and 45th in cost of living. Overall, it is ranked 47th, one place lower than Nevada. And, while businesses are leaving California in droves and some are relocating to Nevada, the state could be getting a much larger share if it was more business-friendly.

Robert Barone (Ph.D., economics, Georgetown University) is a principal of Universal Value Advisors, Reno, a registered investment adviser. Barone is a former director of the Federal Home Loan Bank of San Francisco and is currently a director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Co., where he chairs the investment committee. Barone or the professionals at UVA (Joshua Barone, Andrea Knapp, Matt Marcewicz and Marvin Grulli) are available to discuss client investment needs.

Call them at 775-284-7778.

Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.

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September 23, 2013

The Fed Has Lost Its Cred 09.23.2013

Posted in Federal Reserve, Markets, Robert Barone, Uncategorized tagged , at 7:59 PM by Robert Barone

NEW YORK (TheStreet) — After nearly eight years of trying to make the Federal Reserve more transparent, in one stroke Chairman Ben Bernanke has undone much of that effort.
In May, he telegraphed the “taper” of the Fed’s “Large Scale Asset Purchase” program (known as LSAP to Fed economists and quantitative easing, or QE, to Wall Street) based on a strengthening economy and labor market.

The market reacted by pushing 10-year Treasury yields to nearly 3% from 1.6%, one of the most rapid backups in yields on record. Then, in the face of that strengthening economy and labor markets, last Wednesday, Bernanke pulled the rug out.

The Data: Except for the Bureau of Labor Statistics’ (BLS) August unemployment report, almost all of the underlying data underscore a strengthening economy. Both ISM manufacturing and non-manufacturing indexes for August were strong, with the non-manufacturing index setting a record high. The employment sub-indexes were no exceptions. Initial unemployment claims have been in a steady and steep downtrend since 2010.

The week of Sept. 7 saw this number at 294,000, a number not seen since April 2006. The four-week moving average, considered more reliable, at 314,750, hasn’t been this low since October 2007. The Fed’s own economists have indicated that concerns over “structural” employment issues (i.e., labor force drop-outs) have been overdone. Job openings in the private sector are higher than at any time since 2008, and employers complain they cannot find qualified candidates.

Thus, based on labor market conditions, which Bernanke indicated was key, in conjunction with the lack of success of the LSAP programs in stimulating economic growth (also according to the Fed’s own economists), the “taper” should have occurred.

After months of “taper” talk and years of trying to promote transparency, last Wednesday, something else happened. We don’t know what it was — yet. Maybe we will find out soon, or maybe we will have to wait for Bernanke’s memoirs.

Here are some possibilities:
•The Fed misread the August employment report. This doesn’t seem possible. As outlined above, all of the underlying employment data are much stronger, not weaker than last spring. Also, the Fed knows that the BLS heavily massages the employment releases.
The concurrent seasonal adjustment process used by the BLS, where each month the entire year’s series is recalculated but not released to the public, makes it not only possible but highly probable that the weaker August release simply reflected catch-up from the frail first and second quarters. So, while the August BLS numbers could be used as an excuse, they surely cannot be the underlying reason.

•The market reaction to the May “taper” announcement was more than the Fed anticipated and interest rates backed up too fast. The Fed may be concerned over the impact of higher rates on the nascent housing recovery. After all, the QEs seem to be aimed squarely at housing (the purchase of Mortgage Backed Securities in QE3) and the equity markets. But if this were the case, the Fed could easily jawbone rates lower, even in the face of the initial taper. In fact, many market pundits thought that rates would fall if the “taper” amount was as anticipated ($10 billion to $15 billion).
•There is a third possibility, one that is purely speculative on my part: Bernanke has decided that he wants another four-year term as chairman. Of course, that requires a White House nomination. Recognizing that nothing happens in Washington that isn’t manipulated or controlled, the events of the past 10 days surrounding the Fed seem too coincidental not to be related.
It is clear that while the markets want Janet Yellen to be the next Fed chair, the White House is not keen on her. Perhaps the “no-tapering” announcement was the quid pro quo between Bernanke and the White House and that Lawrence Summers’ formal withdrawal of his name from consideration (quite unusual, since there was no formally announced candidate list) was part and parcel. After all, a rising stock market is always desirable for the White House’s occupant.

Conclusion: History will eventually sort all of this out. Meanwhile, one thing is clear: The eight years of effort to make the Fed more transparent and credible have been dealt a serious blow. Last Wednesday, with the “no-taper” announcement, the Dow Jones Industrial Average rose 147 points. Since then, it has fallen 226 points, with a loss of 185 on Friday, as the markets have begun to rethink the implications.

In the end, without Fed credibility, markets will be more uncertain and, therefore, more volatile.

Robert Barone (Ph.D., economics, Georgetown University) is a principal of Universal Value Advisors, Reno, a registered investment adviser. Barone is a former director of the Federal Home Loan Bank of San Francisco and is currently a director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Co., where he chairs the investment committee. Barone or the professionals at UVA (Joshua Barone, Andrea Knapp, Matt Marcewicz and Marvin Grulli) are available to discuss client investment needs.

Call them at 775-284-7778.

Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.