Sunday, March 31, 2013

What Seems So Clear On A Personal Level

Each of us if left to solve the world’s problems would have the job done in weeks or maybe a few months at most. The trouble is our solutions are not the same as what your neighbor might offer. What we have in Congress are a bunch of “do gooders” who want to solve world hunger and give everyone Democracy. Each solution to a problem creates new problems.

On a world level, providing food for everyone is a noble gesture, with unexpected results. World population would increase as a result and the demand for resources would be taxed even more. Feed the world now, only to have many more hungry people in the future willing to die for the resources we were willing to share with them in the past (Japan entered WWII in a quest for resources). Of course another problem of not feeding these future starving masses is that they become incubators for diseases not even in existence yet.

Take Obama- care is it really total health care? Is there any mention of dental work, hearing aids and eye glasses? How about rest homes for the elderly? No, we are only covering health care from age 0 to age 65. What is covered right now is pretty straight forward. You get shot by the police, you have no medical bills to pay. New cancer treatment drugs are $2,000 per day (what if you need the drug in order to live another 5 years?). What happens if some new miracle drug extends life another 20 years? The plan in place has no adjustment to what entitlements each individual in his or her life is entitled to over their lifetime.

Social Security was supposed to solve the problem of old people dying destitute. They didn’t have to depend on their kids for support. Of course where does the government get the money from to pay retirement benefits? You guessed it, your kids. Social Security coupled with health care along with advances in health care has created a new problem; old people living past their retirement savings. This is an individual issue. The real group issue that seems far removed from the problem is that these social programs are spending our government into the poor house.

Then there is government thinking verses the group think of providing services to all in need. The government created Social Security in order to be able to tax people through their employers. The initial payouts were small but the taxes raised were huge. Seriously, folks, do you honestly think that employers pay half of your Social Security and offer free health care? If you are self-employed, you know the answer both questions. Obama care wasn’t made to provide health care, it was designed to pay for the health care already in place being paid for by government. In essence, the age group from 18 to 45 will be taxed to cover this new “benefit.” Notice the individual envisions a health care plan, whereas to the government, this is a tax based revenue stream. Remember Social Security and Obama Care are not entitlements, only a promise of future benefits. The Supreme Court has ruled both are taxes.

What we all need to realize, when we talk on an issue of government spending or health care, we are all on a different page, the topic joins us together as a group. Our mental vision of the plan fails us only when our individual expectations are not met. And that’s what happens in a Democracy. The problem is, when you redefine it and make it even fairer, you are now defining socialism.

We know that we are headed off the cliff and each and every one of us has a solution that could stop that from happening. The trouble is, the group solution is to use the processes already in place. It kind of like buying a car with 5 other people; you want a sun roof and someone else wants ashtrays and cup holder for his beer. The car you end up “buying” isn’t the one you had envisioned—in fact, it is far from it.

In a Democracy, we need to define the government’s contract to each individual on an equal personal basis. If we define the contract on need for the individual and consider it a blank check, there is unlimited liability for the government and this smacks of socialism.

To sum it all up, we are leaning to live with inflation and the new government programs. Ask yourself one question, “Are they going to make a larger bill for currency, like a $1,000 dollar bill. The gas pumps still won’t take $50 or $100 bills, maybe it is time for reality to kick in. Where can you go on a twenty dollar bill? What's really intensely clear on a personal level, the advent of a $1,000 dollar bill would confirm our suspicions about what Congress has been doing to us. Of course, forgive me, it's just my imagination running wild again.

Monday, March 25, 2013

Recession What Recession?

The City of Stockton is headed to bankruptcy court. The real question arises, is the State of California responsible for debts or long term contracts entered into by the cities? Retirement benefits come to mind.

Chicago is closing 54 schools in face of a 1 billion dollar deficit. Is the money saved going to be spent on students in other schools as has been suggested? (Insert howling laughter here) On top of that, the state of Illinois is broke; their retirement fund is 100 billion underfunded. A state can’t file for bankruptcy, but that is no big deal. You can’t sue them to get your money either. So if (more likely when) Illinois reneges on its debts, it’s the note holder that has the problem. You’ll probably get your money given time, lots of it. Mississippi discharged a 100 year old debt a few years back.

Detroit is on the verge of Bankruptcy with no solution in sight. Obama claims the recession ended two years ago. He saved the auto industry, but it couldn’t have been in Detroit. Being successful in that city is measured by how many bags of recyclable cans you have tied to your shopping cart. Of course a municipal-bankruptcy filing by Detroit would be the largest such filing in U.S. history.

These three cities also have other problems. Major city infrastructure funding has been cut drastically. Police, fire and other government services have been cut to the bone. Downsizing the labor force will not cut fixed costs. The cities are committed to future fixed cost spending as far as 20 years out. And a lot of it is funding for retirement. When a city implements draconian measures to cut costs, the inhabitants start voting with their feet.

The recession is over and things are getting better? When’s the last time we had 3 cities on the verge of bankruptcy? (Hint: not in my lifetime) These problems are serious and are being swept under the rug. You must admit the phrase “We’re not out of the woods yet,” sounds a tad better than “We’re in the grips of a Great Depression.” No need to panic the sheeple feeding on Ben's freshly printed green dollars.

Sunday, March 17, 2013

Muddled Thinking

A lot of what we are currently experiencing has to do with solutions to problems that are not well thought out or the solution has unintended consequences or ridiculous expectations.

You read the paper and find out that home ownership is down. Or that money is on the sideline in the stock market waiting to jump in. Let’s examine it another way. Every home in America is owned by someone, and not everyone is responsible enough to be a home owner. Every stock or bond in existence is owned by someone, just like every ounce of platinum, gold, and silver. The idea that people are buying means little unless they are selling a lot of something else or borrowing to do it. If there is too much supply, prices go down. And vice versa, if there is too little supply, prices tend to go up.

In real estate in California, the supply is drying up in the rich areas. The house that you paid one million for in 2008 is now selling for 700k and you aren’t about to put it on the market at a loss. The current very low interest rates will sustain the 700k price, but not the one million dollar one. Plus, houses are not really appreciating. The current low rate implies higher rates in the future (especially if government funding of home loans stops). This could in turn affect the amount of house one could afford buy. The max monthly payment in relation to household earnings determines housing prices. This isn’t 2007 where people were lined up to buy a home with “liar loans.” Housing prices are not jumping through the roof, just a gentle trickle of people that feel the need for home ownership (the nesting instinct). Question, what makes this real estate market different from that of 2007. Answer government financing.

The phrase “tax the rich,” got some real meaning this week. Cypress is about to tax savings in the bank. 9.9 percent of funds over 100K and 6.7 for funds under that. It raises the question, “Is holding currency a better bet than money in the bank?” And of course the answer is yes. Look for Spain and Italy to have a run on the banks. I would expect people to convert the currency to gold; rats love to make nests out of paper, which could be worse than any tax. Printing currency has the same effect as a tax, but takes a couple of years to take full effect; this is faster and prevents flight or conversion of bank held dollars.

In our country, the Federal Reserve printed currency to cover bank losses. Cypress has no central bank that can print currency to guarantee their banks. The European Central bank could be considered the lender of last resort, but they are not a bottomless money pit. Reality sets in for them next Tuesday. Their two biggest banks fail or they rip off the retirees. This taxing ploy is a little like using a lit match to find a gas leak. You’ll find the leak, and also make the nightly news.

Congress wants us to grow corn and turn it into ethanol to put into our cars. We use to be the top of the food chain, and now automobiles are? Talk about worthless legislation. The Federal tax subsidies insure that this program will continue. One problem, the gasoline producers don’t have to sell their product here, they can sell it overseas without adding ethanol. Do the math, jump through hoops or sell to a straight shooter like Europe.

There are motions afoot to link gasoline taxes to inflation. The state instead of charging “X” tax per gallon, wants to charge according to the sales price charged for a gallon of gas. If our government is going to print dollars, don’t expect city and state to sit idly by and watch their purchasing power from tax revenues decrease.

What can we deduce from all of this? Legislative controls only change our approach to the problem; the issues that caused it have not gone away.

Cypress will be an interesting event to watch unfold. How can Cypress socialize the banks and penalize the people who saved all of their life? If it teaches only one lesson, gold and silver have no government to answer to; financial freedom is money in the bank only as long as the government says so. Where too from here? Good question.

Sunday, March 10, 2013

The Federal Reserve’s Conundrum

The commodities markets have just about played out and the bond market can’t go much lower. Real estate is no buy, unless you want to finance it with nothing down. It looks like stocks market is the last gambling parlor with any real action.

The Federal Reserve is buying bonds to prop up the real estate market. This has in effect kept interest rates very low and it’s doing a very good job of goosing the housing market even with the baby boomers selling and downsizing. The trouble is, people are starting to sell bonds and buy stocks. Interest rates can only remain this low if the Fed buys all bonds presented at par. This is not a bad deal for bond sellers. A buy and sell price that are different implies risk in the market. With a locked interest rate, the buyer is guaranteed the same price when he sells. You have to marvel at the liquidity of bonds, there is no risk.

There is one problem. The bond market is 10 times bigger than the stock market. What happens when a large majority of people make the decision to sell bonds and buy stocks? It’s a little like the passenger ferry many years back in India where two star-crossed lovers decided to commit suicide--their parents wouldn’t let them marry. All the passengers rushed to one side of the boat to watch them jump. The ferry rolled over and drowned hundreds of people. Kind of gives new meaning to the phrase “Misery loves company.”

Ben Bernanke faces a similar situation. Does he buy all bonds presented and trash the currency or let the rising interest rates trash the bond and the real estate market? The stock brokerage houses loan money at prime plus 1 ½ percent. And they don’t care who they borrow it from. Ben’s dollars are as good as anyone else’s. And if stocks are going up, the interest paid by the “investor” is a cost of doing business. All it would take, to start the ball rolling, is for Google to jump up a couple of hundred dollars a share. The Internet is this new frontier with values expanding geometrically. It’s an opiated dream of possible future returns; hold on for a wild ride —the South Sea bubble comes to mind.

We know one thing for sure, the baby boomers, with cash in the bank, ready for retirement, are sick and tired of ¼ of 1 percent interest on their savings. This investment “ferry” is going to rock and roll --—over.

What can Bernanke do? Will he allow rates to rise or endeavor to keep them fixed? The Bernanke conundrum. Remember one thing; an economist can’t predict the future they can only explain, the why of what happened--after the fact.

Welcome to Wall Street, "Faites vos jeux." Let's give the dice a roll. I get the feeling that we've been here before---maybe in a previous life.

Sunday, March 03, 2013

The Misallocation of Resources

This news release the other day leaves room for thought.
Bernanke said the Fed's policies mirror what other central banks around the world are doing.
"Long-term interest rates in the major industrial countries are low for a good reason: Inflation is low and stable and, given expectations of weak growth, expected real short rates are low," he said.
Interest rates are usually an expression of future risk. The more risk, the higher the rate charged. Interest rates are also a function of “you want it now" (three dollars now for five dollars on pay day). You either save up and pay cash or you borrow funds at some cost, to reward those who saved the money you are borrowing. The present rates are low only because of government intervention in the markets.

Bernanke claims to have studied the Great Depression at length, and so have I. His method for our recovery is not one I agree with. We survived the Great Depression. The major cause was a misallocation of resources. One sector of the economy took off and everyone piled on trying to get rich. And then it collapsed. It took quite a while for the economy to return to normal.

In Africa 40 years ago there was a cattle boom. The more cattle you owned the wealthier you were perceived to be. As the cattle population increased over time, more and more resources were devoted to feeding them. All it took was a drought and, the cost of hay skyrocketed. Most farmers found that they could no longer afford to feed their herds, let alone sell them to someone else. The cattle market collapsed. A lot of the livestock died from starvation. From there, families starved to death. Notice, it wasn’t a shortage of food that killed the people, it was a misallocation of resources. Their apparent cattle wealth disappeared, and they had little if any savings to buy food with.

We are trying to recover from a misallocation of resources in the real estate market. Guess what--- the government is not going to let the market collapse, just because people spent too much money on it ---they are going to keep it going. In Africa, the government could have stepped in and provided food for the cattle, but it wouldn’t have solved the problem. Resources would have been expended on items that were economically unfeasible. This is what our government has done to the housing bubble. It has enabled more resources to be spent on a project that has no real return. Notice that as long as the real price for raising cattle or real estate is subsidized by government forces, the market cannot return to normal. The government subsidies insure that the misallocation of resources will continue.

The questions that need to be asked, are; “Where does the Federal Reserve get the written authority to buy 85 billion dollars’ worth of bonds each month?” and “Where does the Federal Reserve get the mandate to set interest rates?”. We are talking about a government agency that has the ability to spend trillions of dollars a year, saving the banks and the housing market from ruin, on the assumption that this “herd of cattle can be fed” and sold later for the dollars loaned earlier. This is a government agency that has the ability to spend more in one year than Congress has funds to spend from taxes collected.

It comes to mind that we have a 85 billion dollar sequestration for a year that appears to be a real monkey wrench in the economy. And here's the Federal Reserve with that same amount for a monthly allowance with which to purchase bonds.--must be my imagination.

People over a lifetime saved their earnings for retirement expecting interest rates would reflect risk in the market. Does the Federal Reserve have the right to artificially manipulate interest rates to support this misallocation of resources? The Federal Reserve has saved the banking system and now they are working on Fannie and Freddie. Failure is rewarded with bailouts and individual risk is eliminated with government guarantees. Without the Federal Reserve interference, interest rates would be able to return to normal levels. That would be too bad for the housing market, but then maybe our kids could afford to buy a home, and Grandpa and Grandma, might get some real interest paid on their savings. Let’s return risk to our markets and reward success --- unfortunately Ben's going to save that real estate market, and avoid a Great Depression. Ben's got some great deals on 100 acre "farms" inside the city limits of Detroit and they're already zoned residential.