Friday, August 31, 2012

Let's Pretend

In order to survive the onslaught of political ads from presidential candidates and the SuperPacs with which they never coordinate, let's pretend that we're those few undecided voters that they're spending squillions of dollars to sway.  That way, we'll be far less apt to throw our television, computer, iPad, iPhone, or other device on which we're being tortured with political ads, against a brick wall with the craziness of Clint Eastwood and his imaginary chair friend.
Let's see what we've got so far.  Two nights ago, Paul Ryan carefully laid out spending cuts without a word about growing the economy.  We're seeing the wonderful results of that very tactic with Greece.  Draconian spending cuts with declining economic growth is making things worse.  Ask Angela Merkel.
At some point, revenues have to improve.  The supply side economic theory that posits that more money for high earners through tax savings will result in job creation was never mentioned once, even through the "Jobs, jobs, jobs" theme has been hammered on by both parties.
Last night, Mitt Romney, followed up by remaining silent as to how the 20% across the board individual and and 28%+ corporate tax cuts will prevent deficits from rising.  That is, as we all know, going to decrease revenues.  As to the goal of major deficit reduction or entitlement program reform, both of which will require trillions of spending cuts to prevent rising deficits, we have no details.
I heard the arguments that candidate speeches are broad-brush, platform related, goal oriented statements made to secure their base, but as a completely undecided person, am I being told to wait for details that will have an enormous effect on my life?
At what point will I learn from where the trillions will be cut?
At what point will I learn the methodology of the implementation of such cuts?
From the rhetoric last night, it appears that the defense budget is safe. 
If so, what isn't?
Here's an interesting exercise.  On this site,  all of us undecided voters can try to balance the budget ourselves.  See how it works out yourself by cutting no defense spending.
Remember, too, that we're cutting current Federal revenues by 20% as well.
I, the undecided voter for whom both parties are spending enormous amounts of money to secure my vote, need more information.
When can we expect to get it?

Thursday, August 30, 2012

The Other Side of the Story: Ryan's Speech

People who balance their checkbook know it.
People who are bookkeepers and accountants know it.
Business owners and their finance people know it.
 But, apparently Ryan does not know it.

There are two sides to economic equation:  Debits and credits.

Last night, Paul Ryan talked exclusively about debits.  He's going to abolish "Obamacare."  He's going to decrease the rising cost of the Medicare program by raising the eligibility age to 67 and phasing in a voucher system.

This is not a discussion on the advisability of cutting or reforming these programs.  This is an observation that these represent what the government calls "spending cuts" and you and I call "less of an increase."

In a time when both parties seem to be emphasizing "Jobs, jobs, jobs,"wouldn't it be advisable to talk about pro growth measures, too?

What about the Romney Plan tax cuts?  His administration would propose a 20% reduction in marginal tax rates, and a 28%+ reduction in corporate tax rates. These supply-side, pro-growth measures are part of his plan and are aimed specifically to create jobs.

Are cuts more important that growth?

Every reputable economist agrees that the coming "fiscal cliff," where automatic draconian spending cuts coupled with tax increases will very likely result in a recession.  This is an area where Republicans, Democrats and Independents agree.  The strategy of cutting spending and raising taxes is unwise because it will depress growth.

Economic growth is the engine of job creation.  We all agree about that.

Why did Ryan fail to discuss the "credit" part of his pro-growth plan?

I'm puzzled.

Monday, August 27, 2012

The End is Near

A very smart woman I know asked me to review an article titled "Economist Caution:  Prepare for Wealth Destruction."  Most of the time, my smart friends' questions are more interesting than mine.  Let's see what this article says, and whether the purveyors of doom are correct in their assessment.
First of all, I get most of my information from the Wall St. Journal, Barron's and academic papers from the University of Chicago and Wharton.  Each of these sources has been reliable, unbiased (mostly) and seem to attract the best economic minds.  I know that Rupert Murdoch owns the WSJ and Barron's, but I also have followed and been in contact with high level contributors who have said that they have received no pressure to do anything other than outstanding reporting.  I've read these papers long before Murdoch bought them and agree that the reporting has been consistent over time.
It goes without saying that economic publications tend to take a conservative bent, if not politically, then definitely economically.  Newsmax, Inc., the publisher of the article that my friend ask be reviewed, actually characterizes itself as a "conservative publication."  Right off the bat, that takes the article from fact-based, to potentially biased.  Economic reporting should not be "conservative" or "liberal."
It should be accurate.
Next, I look at which economists are warning the rich that they're about to lose half their wealth.  The first is Marc Faber.  I am very familiar with him through CNBC and his participation on various "round table" financial discussions.  His nickname is "Doctor Doom."
As a writer of weekly financial articles, I find myself characterized as a "capitalist pig" about half the time.  The other half, I'm a "bleeding heart liberal."  In reality, I go where the data lead me.  I don't solve for a particular answer.  As long as this country is closely split politically and I make half my readers angry all the time, I feel that I'm doing my job.
Back to Marc Faber.  His nickname is "Doctor Doom" for a reason.  As a "contrarian" investor, or one who goes against the herd, some negative bias is understandable.  The market is up more than it's down.  But, to predictably land in a negative outlook makes his reasoning suspect.
Peter Schiff, another economist that agrees with Faber, is a strategist for a mutual fund.  His economic training is from the "Austrian" school of economic thought.   The financial aspect of Ron Paul's libertarian platform would be closest to describing this point of view.  We'll leave it at that, to ensure you will stay awake.
Robert Wiedmer manages a fund for investors with $200 million or more in assets, and accurately predicted the 2006 economic downturn.  He disagrees with Bernanke's handling of the economic crisis, and has been predicting a further, serious recession in his book "Aftershock."
And, finally, Donald Trump chimes in.  Donald is not an economist.  I'm not sure what Donald is, but I find myself almost never agreeing with anything he says.  Over time, that has worked out well for me.
So, four gloomy guys think the sky is falling.
Let's see if their reasoning holds up.
According to Faber, "somewhere down the line" we'll have massive wealth destruction where "well to do" people will lose 50% of their wealth.  I guess if you think that no one is going to do anything about deficit spending growth, the economy does not recover, the European Union dissolves and rattles the global financial markets and China's growth continues to fall precipitously, that is a reasonable assumption, but he places the odds at 100%.
I am not 100% sure the sun will come up in the east tomorrow.  I don't take people seriously when they present their probabilities as absolute fact.
Peter Schiff, says the crash we just had was not the real crash.  The real crash is coming. He bases his conclusion on the same data as Marc Faber.  We'll take absolutely no action on growing deficit spending, our economy is permanently stalled, and we won't reform Social Security or Medicare.  If you agree with the fact that we will take no action, he's probably right.
Robert Wiedmer, hawking his book "Aftershock," says “The data is clear, 50 percent unemployment, a 90 percent stock market drop, and 100 percent annual inflation… starting in 2013.”
Okay.  First of all, the data "are" clear.  Data is plural, unless he's only looking at one thing.
I look at 26 things.  From capacity utilization to durable goods orders to sentiment to valuation, I study the trends for a wide variety of economic indicators.  Nowhere do I see 50% unemployment, a 90% stock market drop and 100% annual inflation, much less next year.  I think this guy is trying to sell his book.
And the Donald.  Please don't ask me to respond to the Donald.  He's ridiculous.
So there you have it, Maggie.  Things aren't great, but the sky is not falling.
I'm in the camp that says the US will take proper action - once we've done everything else.

Friday, August 10, 2012

To the Surprise of No One, SEC Declines to Prosecute Goldman Sachs

You're steaming mad at those damned banks.  They caused this whole financial mess, and it seems like nobody's getting in trouble.  You'd have to be crazy to take their side of this argument.
Call me crazy.  I agree.  It's not the banks.
It's the ratings agencies and Congress.
Read on.
Back in April of 2010, I outlined the case against Goldman.  For those of you who may have missed it, here is the annotated version:
1.  Paulson & Co., Inc., a well known hedge fund, provided a list of residential mortgage securities to Goldman Sachs.  Paulson had a "short" position against these securities.  That means they thought the value would decrease.
2.  A Goldman employee asked ACA, Ltd. to rate the securities.
3.  That Goldman employee allegedly told ACA that he got the list of securities from Paulson. 
4.  ACA rated the investment as "investment grade."
5.  The derivative securities were sold to "sophisticated investors," like banks, pension funds and very wealthy people.
6.  The "sophisticated investors" (and Goldman, by the way) lost money.
Goldman was sued by the SEC.
Goldman lost that case.
I disagreed with the decision then, and continue to disagree with it now.
Here is a completely fictitious made-up story that may illustrate why.

Warren Buffett:  A well known investor who has a history of making a lot of money
Kitty O'Keefe & Co., Inc.:  An investment banker
Standard & Poor's:  A rater of securities
You:  A "sophisticated investor."   You are an nvestor who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity.  You have either a net worth of $2.5 million or have earned more than $250,000 in the past two years.

Dingy little coffee shop in Omaha, NE
Buffett:  Here's a list of companies I think are ridiculously overpriced.  I want to make money when they go down.
O'Keefe:  Okay.  I'll see if I can get someone to buy them and you can borrow them at today's price and buy them back when they go down.
Fancy coffee shop in Beverly Hills, CA
O'Keefe:  I got this list of securities from Buffett.  Will you rate them for me?
Standard and Poor's guy:  Sure!
Conference room at Standard & Poor's
Standard and Poor's guy and his bosses:  We LOVE these securities.  These are fabulous!  We rated them A-OK!  What's Warren Buffett like?  Do you think we could meet him?
On the phone with you
O'Keefe:  We have a group of securities obtained from a well known investor from Omaha that are rated A-OK by Standard and Poor's.  Want to take a look?
You:  Sure!  Are you buying them?
O'Keefe:  Yes.
Dingy little coffee shop in Omaha, NE
Buffett:  Thanks!  I made a bundle.
O'Keefe:  sigh.  I lost a lot.

Standard & Poor's should not have paid a bit of attention to where the securities came from.  A ratings agency is a ratings agency.  Rating securities has nothing to do with "star power."  It has to do with analyzing balance sheets and cash flow statements, which were provided to them.
Kitty O'Keefe & Co., Inc. made $15 million in fees for putting the deal together, but lost $95 million in investing in it.  She should have known better.  She's an investment banker. 
You are a sophisticated investor.  You are eligible to buy into investments like pre-IPO securities, that are considered "non-disclosure" or "non-prospectus" issues because you know what you're doing and have a lot of money.  Shame on you.  Do your research.

The "bad guys" here are the ratings agencies that didn't do their homework and were paid by the companies whose securities they rated.  SHAME!
Also, blame the politicians who encouraged home ownership for people who had no business owning a home.  They did this by pressuring Government Sponsored Entities Fannie Mae and Freddie Mac to purchase mortgages with increasing lax review of income and property values.  The mortgages were badly underwritten and sure to collapse.  SHAME!

Now you know.
Please confine your responses to hateful words - and refrain from physical violence.