February 22, 2012

Dr. Robert Barone Interview with Face the State on KTVN News Ch2

Posted in Banking, Big Banks, Business Friendly, Economy, Education, Finance, Foreclosure, Gaming, government, Housing Market, investment advisor, Las Vegas, Nevada, taxes, Unemployment tagged , , , , , , , , , , , , , , , , , , , , , , , , , , at 4:15 PM by Robert Barone

If you missed the televised interview with Robert Barone on February 16th, 2012 with Face the State on Ch.2 News, you can watch the video by clicking the link below.

Dr. Robert Barone Interview with Face the State on KTVN Ch. 2 News

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February 8, 2012

Avoiding The Austerity Death Spiral

Posted in bail out, Banking, Bankruptcy, Ben Bernanke, Big Banks, Economy, Federal Reserve, Finance, government, investment advisor, investment banking, investments, Senate Banking Committee, taxes, Unemployment tagged , , , , , , , , , , , , , , , , , at 8:19 PM by Robert Barone

Over the past four years, the slow creep of government into the private sector has become a gallop.  Unfortunately, a high level of structural unemployment is the unintended consequence of social engineering, picking winners, over-taxing and over-regulating every aspect of the business process.

The conventional wisdom is that a balanced budget will be a magic solution to the sluggish economy and the employment situation, but if it is done with just austerity and tax hikes but without relief from an overbearing set of governments on the business sector, what we will get is an “austerity death spiral.”  Federal Reserve Chairman Ben Bernanke said as much to the Senate Banking Committee on Tuesday.

Intervention is the Norm

We now live in a world where government intervention in the business process is expected.  When any sort of economic issue arises, government is now expected to fix it.

  • Financial institutions in trouble?  No problem – the taxpayers, via the government are expected to bail them out!
  • Domestic auto companies historically made awful decisions around retiree medical and pension issues and, as a result, can’t compete and are staggering toward bankruptcy.  Again, no problem.  Ask the government to shore them up, even if it means trampling on bondholder contract rights like in the General Motors case.
  • Some homeowners can’t, and others don’t want to make their mortgage payments.  That’s easy.  Ask the government to intervene, stop or slow the foreclosure process, and, perhaps, even require the lenders to reduce principal balances! This deal is in the works now with the government prepared to offer big lenders like Citigroup, Bank of America, Wells Fargo and JPMorgan Chase money to offset losses on short sales.

The markets now expect intervention.  When the government intervenes in an economic issue, the markets rise.  If the government doesn’t, it falls precipitously. On September 29, 2008, the Dow Jones Industrial Average (DJIA) fell 778 points when Congress failed to pass the initial TARP legislation; From the time QE1 began in November, 2008 until it ended in March, 2010, the DJIA rose 28% or  2,378 points.

QE2 elicited a similar market response, 1,199 points (10.7%) from November, 2010 to June, 2011, even more if you go back to August when Bernanke articulated the strategy in Jackson Hole, Wyo.

In late November, 2011, on the day when the Fed gave unlimited swap lines to the European Central Bank (ECB), the DJIA rose 490 points; it rose 337 points just before Christmas when the ECB opened its lending facility to 540+ European banks.

I suspect we will see similar market reaction if the Fed goes through with its hinted at QE3.

Unintended Consequences

Unfortunately, nearly every government intervention carries with it unintended consequences, and, if such interventions interfere with the free market processes, they have long-term negative implications on economic growth. Recent examples in the U.S. include the Keystone Pipeline and the National Labor Relations Board’s attempt to block Boeing from opening a plant in South Carolina.

Nearly every economic malady that exists today is directly traceable to the unintended consequences of government interference in the economic process or via its attempt at social engineering:

  • Sub-prime and housing crisis:  It is widely recognized that this was caused by three concurrent factors: 1) an extended period of low interest rates engineered by Greenspan’s and Bernanke’s Fed; 2) the social engineering goals of the Community Reinvestment Act (CRA); 3) the political and monetary aspirations of Fannie Mae and Freddie Mac executives and sponsors;
  • Social Security and Medicare unfunded liabilities: As the baby boomer generation reaches retirement age, unfunded liabilities will increase by more than $3.5 trillion each year.  To show how absurd this is, the payroll tax reduction, in effect since January 1, 2011, and currently an issue in the Congress, simply puts the Social Security system ever deeper into debt that cannot be repaid without hugely inflated dollars;
  • Unfunded pension liabilities:  While some private sector corporations have unfunded pension liability issues, the bulk of the problem lies at the local, state and federal levels;
  • High structural unemployment: As alluded to earlier, impediments to business from all levels of government, but especially from the federal government, are a huge issue.  Recent legislation, including Sarbanes-Oxley, Dodd-Frank, and Obamacare, is crushing small business.  In addition, business must be confident that the future environment will be friendly.  So, the notion of a “temporary” tax reduction doesn’t reduce business uncertainty, as businesses invest for the long-term.

This last item is particularly poignant.  In a three part op-ed series published by Bloomberg in mid-January, Carl Pope, former chairman of the Sierra Club, bemoans America’s loss of manufacturing jobs.  “It’s not the wages, stupid!”, he says.  If wages were key, how is it that Germany, where wages are higher and unions stronger, enjoys a growing manufacturing base?

For the auto industry, which in 1998 had over 70% of the U.S. domestic auto market but now has 44%, it was the health care and pension costs of its retirees that caused the industry’s economic crisis, he says.  Since the turn of the century, America’s manufacturing base has shrunk by one-third, not because of wages, which are similar to wages paid in the rest of the world, but the lack of support or even outright hostility on the part of government.  (When even the Sierra Club recognizes that government is choking free enterprise, the issue must be terribly obvious!)

November 10, 2009

Is the Recession Really Over?

Posted in Banking, Finance, investments, Uncategorized tagged , , , , , , , , , , , , , , , , , at 9:41 PM by Robert Barone

News pundits are hailing the end of the Great Recession.  The numbers have come out, and the American economy has grown again.  What does this mean for our friends and our families?

The metric the Government uses to measure the economy is called Gross Domestic Product, or GDP for short.  GDP is defined as the market value of all final goods and services that a country makes in a given year.  By tracking this number, Government statisticians can figure out whether or not the economy grew in any given period. 

There are a few basic problems with GDP that should preclude us from taking the number at face value. 

First, it is a complex calculation, and is most often revised after it is originally released to the press. What may be a positive number, upon release, may be a negative number three months later.

Second, the inputs of the GDP

(Consumption + Investment + Government Spending + Net Exports = GDP)

make it a number that is easy to manipulate.  Retail sales and investment (excellent measures of “business”) may fall off a cliff, but GDP may go up. By taking on debt and spending money, the Government can easily manipulate the number higher.  For example, the most recent GDP number would have been much lower if it hadn’t been for the new home buyer subsidies and cash for clunkers program.  Keep in mind, both of these stimulus programs were funded with debt (and/or printed money), and will have to be repaid in the future through higher taxes and/or inflation. 

Third, I can’t pay my bills with GDP growth.  As stated above, GDP may reflect the Government taking on debt and handing out money, as opposed to real business activity.  The cost of this debt will be a future drag on profits, incomes, and growth.  It is important to remember that the Government does not make and sell things for a profit.  The Government’s income is derived by taxing business, taxing incomes, and taxing transactions (i.e. capital gains, sales tax). Therefore, a bigger GDP number obtained by increased Government spending may mean less income for you and me in the future. 

Since most of us get our paychecks by working at or owning a business, why don’t we look at measures of business activity instead of GDP?  If business does well, people are hired and paid.  Tax collection goes up as well, as profits are taxed and people have more money to spend on goods and services.  If business declines, people make less money and get laid off.  Obviously, tax collection also suffers under these circumstances.

For a quick and dirty look at business activity, we decided to review the sales results of a handful of companies in the shipping industry.  Most of us buy and consume products that are made somewhere else.  Whether we buy things at a store, or online, shipping is involved in the process of bringing producers and buyers together.  If business is up, then sales of a diverse group of shippers should rise as well. 

We chose to look at the following companies’ sales growth in 2009, as reported in their SEC filings and/or press releases:

Overseas Shipholding Group:  – 35.11 %   

Expeditors International:  – 34.23 %

UPS:  -15.22 %

Burlington Northern:  – 24.26 %

Using our quick and dirty shipment method, we can see that sales are down significantly from 2008 levels.  This means that business activity is down, and therefore incomes must be down. 

Now lets look at GDP growth for the first nine months of 2009, and compare it to the first nine months of 2008, using numbers from www.bea.gov:

GDP Growth: 2009 (through third quarter):  -2.38%

What we can tell from our little exercise is that movement of things has slowed down a lot more than GDP. Since most incomes (personal and Government) ultimately come from business revenues, and not GDP, we can see that things are quite a bit worse than they were a year ago.  Given that businesses are still announcing significant job cuts, I’d expect that spending won’t come rocketing back in the near term.  We will ultimately reach a bottom in the Great Recession, but as investors, we need to focus on the fundamentals, not Government hype.

Matt Marcewicz

November 6, 2009

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