Daily Archives: September 30, 2011
This week seems to be the week for the more leftward-leaning members of the political elite to try to sneak past a unilateral revision to the "social contract". Bruce pointed out one example from Paul Krugman, and now I want to address another one, from Elizabeth Warren, formerly of the Obama Administration and now candidate for U.S. Senate in Massachusetts. Ms. Warren opined:
“I hear all this, you know, ‘Well, this is class warfare, this is whatever. No. There is nobody in this country who got rich on his own — nobody.
“You built a factory out there? Good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police-forces and fire-forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory — and hire someone to protect against this — because of the work the rest of us did.
“Now look, you built a factory and it turned into something terrific, or a great idea. God bless — keep a big hunk of it. But part of the underlying social contract is, you take a hunk of that and pay forward for the next kid who comes along.”
Let’s unpack this idiocy a little bit, shall we?
There is nobody in this country who got rich on his own — nobody.
This is a meme the Left has been pushing in recent years. The trouble is that it’s not just wrong, but it’s self-evidently wrong. It wasn’t "society" that gave Mark Zuckerberg the idea for Facebook, any more than it it gave Dale Carnegie the idea of teaching public speaking, or turned Bob Williamson from an alcoholic, drug-addicted homeless drifter to the Founder and CEO of WASCO and Horizon Software. Nor did society have to do much with Steve Jobs and Steve Wozniak selling homemade computers out of Woz’s garage. There are any number of lists of people who started with little or nothing, and who became extraordinarily wealthy due to their drive, entrepreneurship, and talent.
"Ah," say the Lefties, "but without society, none of this would have been possible!"
Now, this is perfectly true, I suppose, but not in any way helpful to their argument. Without society, half of children would die in infancy, life expectancy would be somewhere in the low 40s, a significant number of people would be eaten by wild animals. Pretty much everybody else would be carried away at a young age by disease, infection, injury, or roving bands of sadistic steppe horsemen. So, sure, society helps, in the sense that the Zuckerberg/Winklevoss dispute wasn’t ended when their craniums ended up a pile of skulls deposited by a detachment of Genghis Khan’s hordes after razing their small farming village, but in courts of law to which everyone has access.
But the Progressive argument about the usefulness of society is different, and silly.
You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police-forces and fire-forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory — and hire someone to protect against this — because of the work the rest of us did.
But, of course, those roads didn’t get built, and those workers didn’t get educated so that capitalists could oppress the proletariat. That stuff got built because they were universally seen as a positive good in and of themselves. Millionaires aren’t taking advantage of roads, everyone is. For instance, it’s how the millionaires get all that food delivered to our supermarkets, and iPods to our electronics stores. We benefit from the millionaire using the roads in delivering stuff we want to us. The only reason millionaire is using our roads because we want the stuff he makes and that’s how he delivers it to us.
Everyone uses the roads. Everyone benefits from education. Everyone benefits from fire and police protection. We have those things not because they are a positive good—though they are—but because they comprise the minimal requirements for maintaining a civilization that we all derive benefits from.
So, not only do the millionaires not derive some additional benefit from their existence, we would still want them even if millionaires didn’t use them at all. And we’d still pay for them, because we all derive an equal benefit from having them. They provide no special advantage to the millionaire that the rest of us don’t enjoy.
What the millionaire does—the only reason he’s even a millionaire—is to provide us with goods and services we willingly purchase. If we didn’t buy his product, he wouldn’t be a millionaire. Whatever advantages he accrues comes not from some benefit he derives from our roads, or teachers or our police. He accrues them because of our desire to give him money for his product. We are the beneficiaries, because we put a higher value on his product than we do on our money, or on someone else’s products. We choose to make him a millionaire, because we value his product more highly than other things. He doesn’t send hulking thugs to our door demanding our money. We go out and buy his product intentionally.
And let’s dispense that the millionaires are using services "the rest of us" paid for. The millionaire is using services that he paid for along with us. And he probably paid more for them, in absolute terms, than most other people. He also indirectly pays for maintaining society through the salaries for all those "workers the rest of us paid to educate". The payments those workers provide to maintain society only exist because the millionaire’s business provided their jobs. Without those jobs, society’s overall wealth would be smaller, and our ability to maintain that society would be proportionally lessened.
Now look, you built a factory and it turned into something terrific, or a great idea. God bless — keep a big hunk of it. But part of the underlying social contract is, you take a hunk of that and pay forward for the next kid who comes along.
That’s not the social contract. The social contract is "We maintain civilization because we all benefit from it. And we all have a responsibility to pay for it." Ms. Warren’s version of the social contract boils down to, "You have to pay more for maintaining our society because you can, and we outnumber you, and can force you to do so." That’s not a contract. That’s just extortion by majority. The millionaire’s responsibility is not to "pay forward" any more than any of the rest of us, because he doesn’t benefit any more than the rest of us.
To the extent that a "social contract" even exists, it is to provide the minimal necessary public infrastructure—physical and legal—for society to maintain itself. Ms. Warren’s concept of the social contract is that the millionaire derives some special benefit from society, so he should make special payments. But, since no special benefit actually exists, there is no excuse for extraordinary payment.
But, even so, the millionaire does make an extraordinary payment. As we’ve harped about endlessly here, the top 20% of income earners, with an average income of $264,700 per year, pay 69.3% of all federal income taxes. The "rich" are already covering 70% of the cost of "society"—loosely defined—at the federal level.
But Elizabeth Warren thinks they’re too stingy, and the "rest of us" deserve more.
The left’s operating concept for government can be found in the words of Valarie Jarrett, President Obama’s senior advisor. In her words are the very reasons why the left mostly fails when it comes to very basic things like job creation and relieving unemployment. It is all to be found in the way they envision the role of government. They don’t see government as an enabler – a role it does and should play – but instead as a provider. And that was never a part of the vision of our founders.
This is what Jarrett said to a lay Episcopal group in Washington D.C. on September 21, 2011 about the Obama jobs bill and the role of government.
JARRETT: He has a vision for our country, and I think his America Jobs Act’s a very positive signal about what we could do instantly to create some jobs because we know that’s the backbone of our community. We have to give people a livelihood so that they can provide for their families.
JARRETT: And its a vision, I think his is a moral vision, it’s a deeply it’s a vision based based very deeply in values. And taking care of the least of these, and making sure that we are creating a country that is a country for everybody not just for the very very wealthy. We are working hard to lift people out of poverty and give them a better life, and a footing, and that’s what government is suppose to do.
JARRETT: What he has said is that he is not willing to balance our budget on backs of the least of these, those who are most vulnerable those who depend so steeply on the safety net programs that our country….that is like a rock and foundation of our country. He says I am not willing to [inaudible] Medicare [inaudible], I’m not willing to hurt Social Security, I am not willing to make those choices while the very wealthy and the corporations and the most profitable are not paying their fair share.
There are many things to talk about in those three paragraphs. The first, of course, is no government program will “instantly create some jobs”. At least not in the sense of permanent jobs. Oh it may be able to gin up some make work jobs – eventually. But those aren’t the productive permanent private economy jobs that we so desperately need. Government jobs are rarely productive economy building jobs. They’re also rarely permanent. Creating a few hundred thousand temporary construction jobs weather stripping schools is not going to pull us out of the economic crisis. And most likely those jobs will end up costing more than they’re worth and doing little to address the real fundamental problems the economy faces.
But the real problem here is one of philosophy. The line that bothers me most is the one which ends with “that’s what government is supposed to do”. No. It’s not what government is supposed to do. Or at least that wasn’t the design laid out in the Constitution of the United States. What was laid out there was a mechanism to enable private individuals to do those things necessary to improve their lives and productivity without using force or fraud to do it. What Jarret is pushing the left’s vision of government’s role.
Government, as created by the founders, is there to enable and protect. But it isn’t there to “do” what is claimed by Jarrett. Because the founders knew that in order to “do” what Jarrett claims it would need much broader and intrusive powers. And they knew that a government with broad and intrusive powers would continue to grant itself even more broad and intrusive powers while the citizens of the country were slowly bled of their power and rights. Look around you – that’s precisely what has happened.
As brutal is this may sound, the beginning of this decline in freedom began with the institution of public safety nets and the dependency on government they brought. Callus? No, truthful. Once a dependent class was created and justified (and could be relied upon to vote for the continuation of the welfare state), the current situation was assured – it wasn’t a matter of “if” we’d eventually find ourselves in the plight we find ourselves now, but “when”.
When is now. Government dependency, which has precipitated its continued growth, has put us in the position of ruin. Those who’ve whole heartedly helped us on the way and buy into this charade completely are now trying to sell the myth that our dire shape isn’t because of their well-intentioned but ruinous profligacy in the name of social justice, but the very wealthy and corporations – the very engine that has allowed them to keep this model alive for as long as they have – is the problem. They’re not paying their “fair share”. And the implication, of course, is if they would, all would be sunshine and roses. That it is, in fact, because of them, and not the unsustainable welfare state these people have built, that we’re on the edge of the cliff.
Of course any rational person who has taken the time to look into what our politicians have done over the years and how unsustainable it is knows better than to buy into this line of pure and unadulterated nonsense.
Yet the shills and snake oil salesmen still push the myth and try to shift the blame to keep the belief that this situation is viable if only those filthy rich and corporations would finally pay their “fair share”.
It is personally frustrating for me to see people like Jarrett talk about “moral visions” when what she is pushing is a deeply immoral concept.
Their model has failed the world over in many, many forms, caused true misery and yet there are true believers who simply refuse to accept that reality and feel the only reason that it hasn’t worked yet is because they weren’t in charge.
And when they finally do get their chance, this is the inevitable result.
Do we have a moral obligation to help others less fortunate than ourselves? That’s for each of us to decide, not some nameless, faceless bureaucrat or leviathan government. Should we provide for them? Again, that’s something we should decide and if we decide to do so, find a means of doing it. But should government be in the business of redistributing the income of some to others. I find nothing “moral” about that and, in fact, find it to be very immoral, because it eliminates my choice, overrides my priorities and essentially promises violence from the state if I don’t comply.
That is neither freedom or liberty. And last time I checked, those were the concepts this nation was founded upon.
Today’s economic statistical releases:
Personal income unexpectedly declined by -0.1% in August, while personal spending rose by 0.2%. The report also indicates that overall prices are 2.9% higher than the same period last year.
The Reuter’s/University of Michigan’s consumer sentiment index rose to 59.4 from 57.8. Consumer assessment of both current and future conditions improved.
The ISM Chicago Index rose to 60.4 on a sharp increase in new orders at firms in the Chicago area. A reading above 50 generally indicates an expansion. This report is always reviewed for indications of what the national ISM report will be. The national ISM Index will be released on Monday.
As I pointed out yesterday, taken singly, polls indicate a snapshot in time. Taken collectively and analyzed, they provide trends. And those trends combined with the trends in other polls can mean good news or big trouble for incumbent politicians.
In the case of Barack Obama, they’ve repeatedly promised trouble. The latest? Public opinion on the state of the economy.
Three years after a financial crisis pushed the country deep into recession, an overwhelming number of Americans – 90% – say that economic conditions remain poor.
The number, reported Friday in a new CNN/ORC International Poll, is the highest of Barack Obama’s presidency and a significant increase from the 81% who said conditions were poor in June.
Of course when politicians see polls like this they look for whatever good news they can find:
For a White House now fully engaged in re-election efforts, there is one shred of good news: More than two and half years after inauguration day, Americans are still more likely to blame former President George W. Bush for current economic conditions.
The public has a bit of a incorrect view of the matter but such is life:
Asked which administration is to blame, 52% of Americans blame the previous Republican regime, while only 32% point a finger at Obama and Democrats.
There wasn’t a “Republican regime”. There was a Democratic Congress for the final two years of the Bush presidency. And, of course, while 52% may still blame Bush, didn’t they hire Obama to fix the economy?
Meanwhile, enter Joe Biden, the Vice President of the United States, with his usual wonderful timing, blurts out the political truth:
“There’s a lot of people in Florida that have good reason to be upset because they’ve lost jobs. Even though 50 some percent of the American people think the economy tanked because of the last administration, that’s not relevant,” Biden told WLRN’s Phil Latzman.
“What’s relevant is, we’re in charge. And right now, we are the ones in charge, and it’s gotten better but it hasn’t gotten good enough. And in states like Florida it’s even been more stagnant because of the real estate market. I don’t blame them for being mad. We’re in charge, and they’re angry.”
That’s right – three years in, for better or worse, it’s their economy. Biden finally has one right. Now it’s up to the GOP to push that point home. And 3 years of pitiful performance is going to see the “Bush’s fault” excuse wear thin.
Of course the final poll comes in November of 2012. That’s the time this administration has to change the direction of the economy and the growing perception of poor leadership and a lack of viable solutions. The economy is indeed theirs, and political opponents will make sure that everyone knows they’ve been in charge (2 years with a Democratic Congress at the most critical juncture) while the economy has performed so dismally.
It’s all there in the record.
(Cross posted at Risk and Return)
Okay, I have been sitting on this since Monday, but last week ECRI changed their call from a severe global slowdown to an actual recession here in the US. It was just announced on Bloomberg radio:
He told Tom Keene that a recession is the “overwhelming message coming out of our forward-looking indicators.”
And more ominously: “It is not reversible.”
“The U.S. economy is tipping into a new recession,” he said, adding, “We don’t make these calls lightly.”
He cites “dozens of leading indexes for the U.S.” and “contagion in what is going on among those leading indicators. It’s wildfire, it’s recessionary, it is not reversible.”
The ECRI has been saying since June that a lasting and persistent global slowdown was inevitable and the view has been turning more and more negative. You can see video of Lakshman Achuthan discuss their conclusion in June here, and at the end of August here.
Last Wednesday, the Economic Cycle Research Institute issued its U.S. cyclical outlook, summarized with “Economy on Recession Track – The jury is in, and the verdict is recession.” We look at a lot of things in setting our own expectations, but we’ve found the ECRI to be very useful in confirming or questioning our own conclusions. While the ECRI’s weekly leading index went through a worrisome deterioration in 2010 and concerned us a great deal, ECRI itself never issued a recession warning. Last week, they did.
“Today, we must sound the alarm bells loud and clear. ECRI’s leading indices of U.S. economic activity have turned down in a textbook sequence – first the U.S. Long Leading Index, then the Weekly Leading Index, and finally the U.S. Short Leading Index. Their growth rates are also in cyclical downswings, as are the growth rates of every one of ECRI’s sector-specific leading indexes. Under the circumstances, there is no indication that a reacceleration in economic growth is near at hand.
“In the process of scrutinizing the evidence, we examined every one of these leading indexes to check whether they are in pronounced, pervasive and persistent (three P’s) downturns consistent with a ‘hard landing,’ namely, a recession, rather than a non-recessionary slowdown. After examining the three P’s for all of these leading indexes, we found that the overwhelming majority of their trajectories are currently in recessionary configurations. In practice, such a finding is sufficient to justify a recession call.
“A useful way to summarize the evidence we see pointing to recession is to examine the spread of weakness among the components of ECRI’s U.S. leading indexes of economic activity… In that context, the recessionary decline in a summary measure of numerous reliable leading indicators, coupled with an ominous drop in a broad measure of current economic activity representing facts, not forecasts, constitutes a compelling recession signal.”
We have felt that the chances of a recession were much higher than most not only for now, but as a general feature of the post 2008 crisis US and global economy. At this point we are scratching our heads as to why anyone would assume a recession will not occur in the US and in much of the world economy. While nothing is certain, we believe investors should at minimum consider carefully how much they are willing to see their portfolio decline and make sure their portfolio can stay above that mark should a recession occur.
Update: You can hear the entire interview on Bloomberg Radio here.
Update II: Here is the discussion on CNBC
Abnormal Returns has more thoughts on the call and what it might mean for markets. I think the downside is much further than the average of past recessions due to how far off earnings estimates will be given how stretched profit margins have been.
Here is the official statement from ECRI:
U.S. Economy Tipping into Recession
An introduction to the linguistic peculiarities of the professional kitchen.
Should Larry Ellison and Oracle be running scared?
We are seeing that fewer and fewer companies are deciding to go public. Professor Bainbridge looks into why.
We keep hearing that Bank Of America can get past its legal troubles over mortgages, and it may well. However, shareholders are still pushing a $50 billion lawsuit over the purchase of Merrill Lynch.
Tales of the Cocktail has a great new site. Yes, I’ll be there again next Summer. I say we arrange a meeting at the French 75.
Albert McMurry gives us the last part of his series on his frist trip to New Orleans for Tales:
It’s said that if you look at New Orleans’ history — founded by the French, occupied briefly by the Spanish and sold to the Americans— that there’s a real sense that we’re simply the latest landlord to sit in the chair, and well after we’re gone, this city will remain New Orleans. JT rightly stated that it is the type of city where you rest when you’re tired, eat when you’re hungry and drink when you’re sober.
That was one of the things I enjoyed about Tales, all the people who had never been to New Orleans, which for some reason surprised me. Thanks for coming Albert. Hope to see you come back soon.
The bubbles in China are showing the classic signs of a top. If “Ghost Cities” are not enough, Ponzi schemes associated with investment in them should be. Even more so in that it bubbled up in the shadow banking system.
Of course, that doesn’t mean we can’t get excited at opportunities popping up. Russia is getting very cheap!
Willem De Kooning appreciated as an artist and a cultural phenomena
Calpers wonders if it can hit their return target of 7.75% long term. I am dubious without more inflation they can do so.
China may be slowing, but our economy has hit stall speed. Our economy has never slowed to this level and not gone into recession within a year:
As the chart illustrates, the latest YoY real GDP, at 1.6% (revised upward from 1.5% in last month’s GDP estimate), is below the level at the onset of all the recessions since the first quarterly GDP was calculated — with one exception: The six-month recession in 1980 started in a quarter with lower YoY GDP (1.4% versus today’s 1.6%). And only on one occasion (Q1 2007) has YoY GDP dropped below 1.6% without a recession starting in same quarter. In that case the recession began three quarters later in December 2007.
In his 2011 Jackson Hole speech, Chairman Bernanke observed that “growth in the second half looks likely to improve.” Our look at YoY GDP percent change suggests that we must indeed see stronger second half growth to avoid the recession that now appears to be a definite risk. If Q3 real GDP shows a continuation of the current trend, the NBER will likely pick a month in Q2 as the beginning of a new recession.
While overseas stocks are looking cheap there is nothing to suggest that they are not risking going lower. Many countries, including the US, are at risk of recession or severe slowdowns. All are well below trend from a long and intermediate term trend following standpoint. Dow Theory says stay away and the behavior of leading stock indicators, is bad. The Shanghai is still leading on the way down and High Yield funds are breaking support.
The Dow Jones and the S&P 500 joining hands?
I am not sure how I missed it, but did you know there is a controversy at the University Wisconsin-Stout over a Firefly poster?
Albert Edwards is still maintaining his long held projected bottom of 400 on the S&P500. Now that is even lower than I have ultimately expected. But hear him out! He also has held since 1996 that ultimately the 10 year treasury would end up at 1 1/2%. That was, and until this year, had seemed even more outlandish, but here we are:
Jeremy Grantham of GMO says this is “no market for young men”. Maybe now I am over 50 it is my time! Yet my forecast of the S&P bottoming at 400 is still met with utter derision. I have been underweight global equities since the end of 1996 and overweight government bonds. Meanwhile US 10y bond yields have fallen from 7% to 1¾%, a hair’s breadth from our longstanding 1½% target. Similarly, in my very humble opinion, S&P at 400 is almost inevitable.
I suggest reading the rest (it is short) but there is good news. The long standing bear promises to be a bull when that happens.
On the other hand Cullen Roche is more optimistic:
- This is a household balance sheet recession in the USA and not a corporate balance sheet recession as was experienced in Japan. Because their corporations were so excessively indebted their equity market remained weak for many decades as companies paid down debts rather than focusing on profit maximization.
- US corporations remain incredibly diverse and their broad global footprint has allowed them to remain profitable even during this historic downturn.
- US corporations have cut costs massively and are already experiencing close to no growth in domestic revenues. Without a massive collapse in foreign revenues corporate profits are unlikely to experience a decline that would warren stock prices at the 600 level as the Japan comparison might imply.
In short, without some sort of unforeseen catastrophic event in China or Europe I find it hard to believe that stock prices in the USA will follow the Japan story down to the 600 levels…..
I tend to be in the middle of them on this, between 600 and 700 (or its inflation adjusted equivalent) sometime in the next five to seven years, but I’ll adjust my expectations as needed. Either way, the risks are high.
Josh Brown has a great interview with Jeffrey Gundlach. I especially like this:
On Stock Dividends Being “Higher than the Yield on a Ten-Year Treasury”: he says this is nonsense because there is no risk parity between a stock and a Treasury bond, he says you have to look at this comparison on a volatility-adjusted basis or not at all. For example, If the yield on the ten-year bond doubles overnight from 3 to 6%., you’ve lost about 20% of your principle – but if Microsoft’s yield doubles from 3 to 6% overnight, you’ve probably lost 50% of your principle. Apples and oranges.
We will just repeat ourselves, those using the yield versus treasury argument to tell you stocks are cheap are dangerous to your wealth.
They are still trying to ban shorting, and banks are still declining.
Tyler Cowen on leveraging the EFSF has some of the same issues as I do:
I’ll repeat this link for background. I would feel better about the idea if the context were: “We can always go back to the trough, but leveraging the fund is the easiest way for us to strike quickly and decisively.” Instead I see too much of: “We can’t get any more from our taxpayers, so we’d better stretch this one as far as we can.” That’s just inviting the speculators to set up camp against you.
Who will fund the leverage? BRICS? American investors? Ultimately other Europeans? All of those parties already can construct their own leveraged positions in Italian government debt, if they wish. So presumably the leverage will be a hidden subsidy to the financiers, one way or another, to get them to participate. Subsidizing the debt buyers, rather than guaranteeing the debt (admittedly that may be impossible and undesirable for Germany), hardly seems like the way to go. You bear the costs of the bailout without any assurance it will work.
This German-language video suggests many of the German representatives do not know what they just voted for.
“Germany voted for the EFSF extension. Greece celebrated by going on strike.”
Of course, we don’t know if Slovakia will even approve the EFSF. Yep, the grand dreams of Euro stability hinge for the moment on Slovakia.