Thursday, April 30, 2009

Obama and the Land of Enchantment

Yesterday at the President's 100 day lovefest press conference a NY Times writer asked what was most enchanting about the presidency? If I were Obama I would have answered:

"Perhaps what's most enchanting is how the press, such as you my fine sycophantic friend, roll over at these press conferences. Rather than ask me about today's news that GDP contracted at 6% or why I will finally allow Chrysler to file for bankruptcy after I wasted several billions 'bailing them out' since about December or why I apologize for America at every opportunity I have, you ask me questions such as these. Yes, I'd say you my friends are what I am enchanted by the most."

New Jobless Claims Drop

It's fascinating to me how the media covers economic news. It was reported today that 631K new jobless claims were filed this month. At some point the rate of new jobless claims has to drop. 631K a month translates to almost 8M new claims a year. That simply is not a sustainable rate unless this becomes a massive catastrophe. A year of that, assuming flat or no new job creation to offset it, essentially increases the total number receiving jobless benefits from 6.3M to over 14M. If it gets to that point, we're in 1930's depression territory. If we have several more months of even "just" 500K new jobless claims a month were in trouble. The key question is when, after the numbers have stabilized at some point, will we start to see positive job growth and a rise in employment? Ultimately, that's what matters.

What Republicans Need to do for the Economy

I find I get so caught up in the specifics of Obama’s proposals that I have not been offering alternatives. That seems to be the Republican way. Republican positions boil down to “we don’t like anything Obama proposes and have we said we like tax cuts?”

One of the most detrimental things about Obama is his lack of clarity. The unique communications skills he has that enable him to be all things to all people where people see and hear what they want from him does not serve him well as he devises economic policy. In economics and business, it is essential that entrepreneurs and corporate decision-makers know what the rules are ahead of time. The rules with regard to taxation, costs related to employees, regulations particular to their industry need to be transparent. These stakeholders also need to feel the rules won’t change in mid-stream. With Obama, I don’t see how anything is transparent given that his policies from energy, healthcare, regulation, and in other areas have huge ramifications that he and his advisors have still not fully thought out. What the consequences of all this are for job creators is unclear. But it does make it hard to when thinking about strategic business decisions. Here are some specifics that Republicans should begin to think about:

1) Republicans need to emphasize the problems that a herky-jerky president who deliberates and says "uh" a lot causes. People need to be convinced that Obama is hurting their ability to make plans that might enable them to start employing people. He is a one man wrecking crew. To do this Republicans should cultivate and mobilize a small business and entrepreneur constituency. Start interviewing small business owners. Show what the impact of higher energy costs or healthcare regulations or tax code changes that phase-out deductions or an increase in the marginal corporate tax rate would be in their hiring practices. Let the guy cry as he explains how he had to lay off his best bud. If it works in soap operas and with independents who voted for Obama, than go for the emotional blather.

2) Republicans need to be budget hawks. This is what they failed at so miserably during the last 8 years. But they need to embrace fiscal restraint on spending and not just on domestic spending but also on defense. Republicans need to emphasize the cost to each and every American of the debt that the leader has gotten us into. The Congressional Budget Office (CBO) estimates that we may incur $10 Trillion in NEW debt over the next 10 years. That is basically the equivalent of giving 100 million Americans $100,000 each. There are about 135 million taxpayers in America with a widely varying distribution. Give about 75% a $100K refund over the next 10 years. There is a caveat, because their children will have to pay this amount back, with interest, in about 20 years. In addition, their children will have to pay for their Social Security and Medicare benefits as those two entitlements explode. Obama hasn’t really done anything more than to literally rob from my 3 kids.

3) Republicans need to move beyond just proposing tax cuts as the cornerstone of everything economy-related. It’s a part of what needs to be done, but it can’t be all there is. Republicans don’t fully appreciate that what Obama is doing is spending so much that Republicans can’t look responsible if the only thing they propose is tax cuts.

4) Republicans need to respect the legacy of Reagan but realize it's been over 20 years since he's been president. Republicans need to propose transparency, offer detailed specifics on healthcare, financial regulations, energy, education and respect voters. They can’t always resort to “What Would Reagan Do” at every turn.

Ultimately, Obama is going to sink the ship. But that doesn’t mean he will be blamed for it or that Republicans will swoop in and take over. As the Tories in Britain can probably tell you, it doesn’t work like that. Republicans still have to do the hard work of addressing these issues in a thoughtful way. Obama’s giving them every opportunity with his condescension when he makes remarks such as “they bicker” about spending trillions, as though opposition to that is just bickering! Or, “if they want to have a serious discussion about healthcare”, as though the only “serious” option is government managed healthcare.

Obama, via many a policy that is inevitably going to fail, is in the early stages of preparing a gift that he will deliver soon. Hopefully, Republicans will accept it.

Wednesday, April 29, 2009

Obama and Second Mortgages

I can probably go on and on with my criticisms of Obama's proposals and this is yet another one. We got into the housing mess in large part because borrowers borrowed more than they could afford and lenders gave it it to them. By having the government require banks to issue lower mortgage rates on second mortgages, which is known as PMI Insurance for lenders who can't put at least 10% to 20% down on what they're purchasing, you simply demonstrate you haven't learned the lesson. Borrowers shouldn't put no money down on a new home. If you can't purchase a home with 10% or 20% down you shouldn't purchase it. Yes, this will result in a decline in houses sold and home values in the near term as less buyers get financing. But this should happen. It's the only way the housing market can stablize. In fact, it will happen eventually anyway because there is an underlying, fundamental relationship between income and mortgage payments. If you make $75K you can't reasonably make a mortgage payment on a $400K home. Eventually reality comes in no matter how a temporary government fix postpones it.

Yet another Obama policy that sounds easy and straightforward but results in bad consequences down the road. Another day, another reason to postpone an investment if you're able and inclined to do so. I am beginning to believe that his policies are in fact deliberately intended to stop investment so government grows as the crisis these policies casues grow. I am not a conspiracy theorist yet but I am beginning to feel this can't be accidental.

Me and the Moody Economist Guy: It's On!

This morning I was listening to a chief financial economist with Moody Capital predict that GDP will grow starting in the second quarter of this year and from there on out. He also mentioned that unemployment rates would start to turn around.

It piqued my interest because I am predicting further doom and gloom in the economy. It's not that I am necessary a fan of personal angst and joblessness. I wouldn't prefer it. But on the other hand I believe in personal responsibility and consequences. Since America voted for Obama and so many seem to revere him in a really disgusting sort of way, I see it as fair that we suffer because of it. It's justice. You can't vote for a leftist guy like this with literally no serious executive experience. Others have decided that community organizing, teaching a law course once a semester, sitting as a relatively non-accomplished Illinois state senator, and writing books about yourself has prepared him for the presidency. Despite this he sure comes across as self-assured. Anyway, America is getting what we deserve.

I'll go on record again about the following predictions of how the economy will look on Dec. 31, 2010:
1. Unemployment will reach 10% to 12%
2. Interest rates will reach between 8% to 10%
3. Inflation rates will be between 5% and 7%

I am very confident about the unemployment prediction, pretty confident about interest rates and I could see a case for inflation rates not going that high. But at the end of the day, you can't borrow, literally, trillions of dollars and not see interest rates go up eventually. China will emerge as the biggest borrower and as their economy recovers, they will be an attractive place to invest. The competition for their limited investment money will ultimately require the U.S. Treasury to raise interest rates to make purchasing them, to finance our debt, more attractive. China is pursuing sound economic growth policies. I think as industries continue to consolidate and this horrendous monetary policy and all the money that's been printed will work its way through it can't help but reduce competition overall and allow retailers, who are barely surviving right now, to raise prices. In conjunction with the "just print money" policy this is why inflation will increase. I realize this doesn't look like it will happen given that there is deflation and some serious people such as G. Mankiw are actually arguing for negative fed rates.

Overall, as I listen to policy makers, people in the beltway, and other economists, I see a massive disconnect from reality. I've never seen it this bad. And it might be that it has been it's just that I didn't have enough work and life experience to realize it. The economists rely on data, run their models, and seem to think it's fairly straight forward if you just pay attention to things like the makeup of durable goods or inventory holdings or consumer confidence measures, etc.

The fundamental problem is that they don't seem to understand psychology and what makes investors invest. They also don't seem to understand the notion of rational expectations and they don't seem to respect the forward looking nature of investors. I don't see how an investor could make serious 1, 3, and 5 year business cases given the herky jerky nature of the Obama administration. Is he going to nationalize banks? What is national healthcare going to do? What are my energy costs going to be as American makes an "investment" in green technology given that the investment cost of this is going to be, has to be, funded by taxes on current energy? What about unionization in industries where it's not clearly needed? What about veiled references to protectionism? Are we for free trade or aren't we?

All in all, time will tell if my prediction is right.

Tuesday, April 28, 2009

Why People Hate Politicians

The word "politician" has become like calling someone a leper, doufus, Schmo... You can probably go on and on.

Senator Arlen Specter of PA announced that he was switching from a Republican to a Democrat. Why? Well, Sen. Specter discovered in a recent poll that he was trailing a primary opponent by over 20 points. He calculated that he was going to lose his seat, which he probably would have. As he said himself, his chance of winning was bleak. So, why not be a Democrat? It's just that easy.

What happened to Sen Specter's principles? Has he not really believed in Republican ideals during the almost 30 years he's served as a U.S. Senator? Just now he's come to the light because his party has gone too far right. I guess Reagan, Gingrich, and others who have served in his party were moderates?

Who needs principles when you're a 79 year old man and you got a valuable seat to protect with all the rights, privileges and honors that come with being a U.S. Senator? Politics as a profession is a bad idea. It would be wise if Congress passed a law that members had to work in a non-political job, whether in business, education, construction, whatever... before they could enter into public service. They might learn a little bit from spending a season of life in the same way as the people they represent. Til then, the word politician is indeed a dirty word. Well done Senator Specter, our faithful servant.

Monday, April 27, 2009

Religious Drift...

There was an interesting article today in the Washington Post about how people's religious views change over time.

The general opinion of "the elites" is that people migrate on a path from religious belief in childhood to adopting enlightened secularism as they evolve. I thought the conclusion about how people tend to gradually drift from their faith is more easily reconciled with my experience. And just as they drift out they often drift back in, as God moves I suppose.

I can sort of relate to that on a personal level because I know my fervor is not what it once was. I think it's more due to the routine of fatherhood, being a provider and bill payer, house fixer, and raising 3 kids each under the age of 7. But I also think a person's connection to their local church is crucial. I was at a church where my gifts were encouraged and cultivated. I am now at a church where people have little use for what I can offer. I realized just recently that it is impossible for me to change the entrenched situation. The church's focus and communication isn't done in a way that relates to me or really piques my interest. I am not really angry about it but I'm also not naive about thinking I can change something that I cannot. Maybe when I was younger I would have been hurt. But I think that my feeling about life is that there are good things and bad things and you have to accept less than ideal situations if you are to be true to your responsibilities and your relationships, especially with those you love.

My current church is essentially dead in areas where I have gifts. It's akin to a team with a home run hitter who only bunts and runs. So they just ask the home run hitter to bunt. Or it could be like a football team with a wide receiver who can make plays but all the team management wants to and can do is run the football up the middle and play middling defense. It's not that bunt and run or running the football all day are bad strategies or don't serve a potentially great purpose, especially if your a bunter rather than a home run hitter. But the ideal situation would be for the home run hitter to leave the team but he can't because his wife and kids enjoy the city. How's that for thinly veiled analogies! Of course I am the home run hitter as well rather than the hapless, balding guy, who is lucky if he hits .250 in a season. But, when you write the fantasy, you get to be whoever you want to be :-)

I do have sincere faith in Jesus Christ as my Savior. It's just that how that looks is much different compared with how it used to look. But it scares me to think what 10 or 20 more years in a somewhat dead place can do.

Wednesday, April 22, 2009

Another Radical Proposal Coming: Hello Protectionism!

I’ve got to give it to Obama and his administration on one point, with them there’s never a shortage of news and radical new proposals. The barrage occurs on a daily basis at break-neck speed.

Today’s news came from a statement from Tim Geithner. He is quoted as saying “We must set ourselves on a path so that one country, or group of countries, does not consume in excess while another set of countries produces in excess.”

First of all the statement is not quite right. What does it mean to "consume in excess". What he's getting at is the trade deficit we have. Second, even if we do have a trade deficit, that's not necessarily a bad thing because it reflects brisk demands for a wide array of goods for the import nation's consumers. It keeps the overall price level down as well. What he's probably referring to is nations such as China, Japan, and others who have an export driven approach to economic growth.

Anyway, with that statement Geithner is now attacking the very core concept of free trade and the time-tested theory of comparative advantage first advanced almost 200 hundreds years ago by the great economist David Ricardo. The theory was generally accepted and embraced when I was in graduate school. Seems another timeless lesson contributing to the growth of nations and the people's economic welfare is about to be thrown off the boat as we enter in the new utopia.

The benefit of free trade is that it allows one nation to produce goods and items in which it has a comparative advantage over another nation. Overall, it allows a nation’s citizens to obtain items more cheaply than would be the case under a closed system. This expands choices, general welfare, allows more people to be employed, and allows people to purchase more of the goods they freely choose to purchase. This theory has been espoused for so long because it is so clearly beneficial to the nation and to the world. That’s not to say there aren’t specific losers in such a scenario. There are, such as manufacturing in America. But overall, it is undeniably beneficial by almost every objective measure. The winners far outweigh the losers. Unfortunately, the losers from free trade have such clout in the Obama administration that it doesn’t matter.

This is significant. I see this as a veiled indication that America is about to go protectionist and usher in a new era of reduced world trade. Only time will tell.

So this is the change that millions of Americans voted for. America is getting what we deserve as a result of electing this man. But it sure sucks if you’re one of the growing numbers of Americans who needs a new job.

Tuesday, April 21, 2009

Obama and His Credit Card

Obama's policy to spur economic demand is akin to asking every American to plunk down about 1/3rd of whatever their annual income is on a credit card. So if you make $75K, go out and spend about $25K on whatever you need. Maybe you can pay it later. And if you can't don't worry about it, I guess.

The chart above from the latest CBO budget and economic outlook is eye-opening. There you can read in detail how Obama is paving the way for a future bankruptcy by resurrecting old and defunct Keynesian ideas. I think the chart speaks for itself in terms of what Obama's policies are. the interesting thing is the spike in the lines. It's up for revenue and down for spending. I especially love the spike down in the line for spending. Yep, Obama's a tightwad on government spending, starting in 2011 of course. The upward lines in revenue presume economic growth.
My prediction is that growth will be flat and the overall revenue line will, therefore, be flat. I also see no way the outlays will go down. Government spending is virtually guaranteed because it will not decrease significantly. We haven't gotten into his massive new "investments" as he builds our new utopian economy. Spending may spike down a little if they cease the bailouts but it will stay at an ongoing high level in the outyears.
Sometimes a picture tells a thousand words.

Thursday, April 2, 2009

The Bottom of a Recession

I saw a Yahoo article today that stated that there are new signs that the recession may be near its bottom.

First, I don’t think that’s true. The key to a recovery lies with the housing market and the unemployment situation. The article cited an increase in factory orders. Upon closer inspection though, the increase was due to a spike in defense-related orders. Taking that out, there was actually a decline in factory orders. Defense procurement goes in fits and starts, so it’s not a cause for jubilee. They also identified a jump in home sales. That may be due to the recent tumble in the form of lower interest rates. But that too may just be a blip.

Second, even if the recession is near its bottom, this doesn’t imply a roaring comeback anytime soon. The fact is that until employment numbers change and people start hiring, there is no way we can see an upturn. a straight-line plateau is more likely than a rebound. It’s actually very simple. If people don’t have a job or good prospects for a job, they’re not going to spend or invest money.

Finally, the activities and incentives that motivate individuals and businesses to invest in things that will employ people are not present with our current president and congress. This is a terrible time to invest in a business, all things considered. They say that necessity is the mother of invention. It will have to be in this environment. People without jobs may have no other option but to try and start their own business. However, they will likely run up against the roadblock of a lack of savings to do so. Those who have savings and have the options of either keeping their current salaried job or starting a new business may find it more appealing to simply keep being a salaried employee. With a salary you have leisure and with this president’s tax policies you have a disincentive to make over $250K. Anyway, why work so hard and venture into an uncertain future when you’re country is becoming socialist?

Personally, I am at this time content with rounding up the wagons and enjoying what I have. So, I won’t be investing or employing anybody anytime soon... though it would be nice to take a risk and turn a vision into a successful enterprise. Maybe in the distant future, times will change and I’ll do so. There is a season for everything and this is just not one of those seasons.