US Labor Costs Are the Key to More Jobs

We took a small trip to Crater Lake last week. Its a real pretty place. If you are over 62 a lifetime National Park pass is $10 and it covers everyone in the car.

I went to the gift shop and thought the little beaver with a park ranger hat (below right) was neat. I almost didn't buy it, it had a "made in China" tag. Plus it seemed kind of phony as a souvenir from Crater Lake, it was made a half a world away (as was almost everything else in the store). The bag on the left, I picked up later. It's recyclable and made in the USA! WOW!!! Politically correct, but how many college grads does it take to load a roll of paper onto a bag making machine?

As an entrepreneur, you want inexpensive souvenirs to sell to the tourist and China is where you shop. Why make it in the USA, where labor laws and employment taxes eat you alive? How can we blame the retailer for using common sense?

The picture below is also from Crater Lake. It's an outhouse (no longer in use), that kind of reflects how Congress solves our problems. The solution to one problem creates another. Tax the employer and bring in more revenue.

What is the real issue, jobs or the cost of labor? Why employ an American when you can pay someone in China at 1/10th our wages. Remember Ross Perot and the "Giant sucking sound" from our free trade agreements? He lost the election, but he was spot on!

Maybe if the Chinese were saddled with Obamacare instead of us, it would be cheaper to make things here instead of over there. Jobs are all about the cost of doing business. The American public is the ultimate employer. We want it cheap and to hell with employee benefits. How can we expect to create more jobs if we can't compete realistically with China?

We have set the tone for consumption in the US, "Low costs" and that kind of answers the question of, "Where are the good paying jobs?"

Here I sit with my cute little souvenir from Crater Lake made in China and a paper bag made in the USA. It comforting to know that whoever wins the next election is going to provide more jobs for unemployed Americans, Mexicans, Chinese and other third world countries. You'll need a passport to apply, if you're from here.


Copyright 2012 by Jim Brubaker

Living Paycheck to Paycheck With Obamacare

Probably half of the population lives from paycheck to paycheck. And even if that isn’t the case, everyone’s priorities on what bills get paid are different. A large majority of people never saved for retirement. Social Security changed that. So now what’s left of the paycheck is spendable. The major spending decisions revolve around the rent/mortgage payment, food, auto payment, car insurance etc. The car and home are the two bills that have to be covered, no matter what (unless your home is in foreclosure, in that case you don’t have to worry about house payments, only about eviction).

In the event the wage earner’s income gets squeezed, decisions are made on what is necessary for day to day living. Is it diapers or a 12 pack of beer and cigarettes? Do you really need car insurance? Can we get the kids on the free school lunch program? Cut out day care for the kids and instruct them not to answer the door.

With government programs like food stamps, cable TV and cell phones suddenly become affordable. Notice that the family decides on what expenses are necessary. Health insurance is not on the top of the list. Why pay for it, go to the emergency room if you really need to, otherwise forget it. These are the 50 million people that Obama wants to insure. In the past they have made the decisions on where they spent their income; now one of these financial decisions is no longer optional. In the lower income households, this will become visibly obvious, as a tax. A yearly income of $36,000 drops to $34,000 with health insurance. Their paycheck will be 50 dollars a week smaller. So the single woman with 2 kids gets a $200 dollar a month loss of income and wow, paid health care. No Cable TV for the kids and Mom has no car insurance. Mom and the kids are one car accident away from real trouble.

We know what happened when Congress tried to make home ownership affordable for everyone. It was the American Dream turned into a nightmare for many home owners. This health care insurance for everyone is an undefined bottomless pit. The neat thing about it, when it goes bust, nobody will be scratching their heads wondering why. The question you have to ask is, "How can this new government program promise the moon for no charge?" Doctors right now are refusing Medicare patients because of the paltry government reimbursement rates. And we are not even talking health insurance here.

The Supreme Court has ruled Social Security and Obamacare are taxes. In other words, the government cannot be held accountable as to what they spend the collected money on. The benefits are not guaranteed, only promised. This law will change how each house hold spends its weekly pay check. Rent, car payments/repairs, gasoline, cigarettes, booze and lottery tickets are the bare necessities. Food for the kids and day care are now optional. The family budget is a little like a balloon, squeeze it with your hand and it moves out between your fingers. Those 50 million people will probably now qualify for food stamps. Hmmm take away $50 a week with one government program and get it back with another.

Car insurance will become optional for the Hoi Polloi and sadly, the emergency room can't be used for auto repairs. The road to hell is paved with good intentions. Why do I get the idea that Obamacare is not going to work quite as planned?


Copyright 2012 by Jim Brubaker

The Death of Private Health Insurance

I just heard someone touting Obama care stating this would end the outrageous premiums the insurance companies were charging. Remembering back to an interview with the head of Blue Cross in February of 2010 here is an excerpt from my blog post two years ago.

Last Wednesday a Congressional committee grilled Angela Braly the CEO of Wellpoint Health Insurance (Anthem Blue Cross). House member Bart Stupak was upset that Angela was paid a million a year and the Company made 2.7 billion dollars. The fact that it was a 4 percent return on investment, didn’t sink through Representative Stupak’s head. He kept referring to the 2.7 billion dollar profit, being a lot of poor people’s insurance premiums; that was just too much profit for a private insurance company. He thought that a 39 percent increase in premiums was outrageous. As an investor, a 4% return is pretty poor also. Common sense suggests that no company would raise rates 39 percent just to make a profit. Irritating your policy holders doesn't help when it comes to renewals.

In the investment world, a 20 percent return is more of the norm. The question arises why play here if you can make more money elsewhere? The other point to ponder, if there is gobs of money to be made in health care, there would be more competition for those big bucks.

The point that impressed me at this interview was the fact that a private company trying to make a profit, was charging rates that allowed it to survive. To some the rates seemed exorbitant. But that is always the case when you can’t afford the premiums. The private sector has to know all the costs of doing business. Make a wrong estimate and the company is out of business.

Some of the provisions of Obamacare spell the end of health insurance. No limits on claim amounts and no denial for previous conditions, cannot be tolerated in a for profit insurance business model. These values have to be defined. It is grand and noble to want to cover every condition, but as a business model, it cannot survive. As a government model it can survive, governments do not need to make a profit. Can Blue Cross compete against the government model?

The Democrats point to the "unfortunate" 50 million people who are uninsured. Without doing any research, I would guess the group of people from the age of 18 to 40, are the 50 million people without coverage. At their age, they're immortal, why buy health insurance? But with them paying premiums into the system, the insurance companies could offer lower rates to everyone. These young people are not about to buy health insurance, they’ll pay the tax.

Once the government destroys the health insurance industry by eliminating their ability to make a profit, then Obamacare will be free to charge (TAX) whatever they need to kick the can further down the road. The neat thing about this, raising health care rates will be done by a committee not Congress, so it won’t be considered a tax increase. We the people will have no control over it. We will pay for steak and end up getting dog food. Government run programs are a little like public restrooms, they get used and abused.

There is no reason for a company to sell health insurance if they can’t make a reasonable profit. And of course any business where the government tells you what you can or can’t charge for, is one to be avoided, especially if they are the competition. Big government it going to teach private health care insurance a lesson. John Q Public gets to keep their present health insurance until it goes out of business. It’s a little like signing up for a cruise around the world-- it’s when they pass out the oars, that you realize this isn’t quite what you had in mind. Plus the fun part, you won't know the costs of the tour until after the cruise.



Copyright 2012 by Jim Brubaker

The Difference between the Great Depression of 1929 and Today's

Lately you hear, “This is the worst it’s been since the Great Depression!” Think about it for a minute, know anyone that was around for the last one? They’d have to be about 100 years old. There is only history and statistics to define our present plight. So far, we seem to be off of the charts, of course, it’s still not a depression; it’s just the worst thing we have ever experienced.

What makes this depression different than the 1929 one? Credit, lots of it. Psst wana buy a house cheap, boy do we have a deal for you, sign here no money down. I can’t get 2 percent on my savings in the bank, but I can get 2 percent back on my consumption using my credit card. Want to buy on plastic with monthly payments? 20 percent  or more interest. Of course to point out the obvious, no one had a credit card in 1929.

The banks in Greece and Spain are not running out of money when the depositors make a run on the bank. In 1929 a bank run, would close the bank and put it out of business.

It has been suggested that there could be a possible charge card frenzy in Europe. People would buy on their card until the credit card companies refuse to honor them. This could have global ramifications. Credit has been abused worldwide by everyone and most excessively by governments. What happens if the world goes on mad buying spree and decides to buy and put it on plastic?

Bond yields in the US are down to one percent. Where is the incentive to save? Insurance companies invest their premiums in the financial arena and policy rates depend a lot on investment returns. Their worst case scenario model for future income generation from investments never went this low. The net result, insurance premiums have to at least double and a lot of people will no longer be able to afford insurance. We are talking, health care, life, fire and car insurance to name a few.

The CalPERs retirement plan has a real big headache. Their investment model assumes an 8 percent return on investments. Using the rule of 72, their invested funds double every 9 years. So if you’re a part of that plan and are 9 years away from retirement, the money you have in that fund is not going to double as anticipated. CalPERs did nothing wrong, their business model went to hell. As a retiree, you’re guaranteed X amount for life. X/2 is not an anticipated outcome, but it is a probable one.

Where was the mistake made? Everyone went on the assumption that the short term economic model would continue and it didn’t. The housing bubble collapsed and Congress picked up the tab. Then the financial bubble collapsed leading to massive bailouts and now we only have the national debt bubble. Of course, that’s not a bubble; we can still pay the interest on the debt.



The 17 trillion is real money borrowed from real people. Ever wonder who we borrowed that much money from? And why are they happy with 2 percent interest? But wait, interest rates, given time, will get back to 8 percent when good times return. There is just one little hitch, the interest on the national debt will be too large to pay.

Of course, there are two types of depressions, deflationary ones and inflationary ones. In 1929 our currency was married to gold and silver and it was a deflationary one (the country couldn’t print money). Today's dollar is not backed by any precious metal (Congress can print dollars). Conclusion: our money isn’t as real as the currency during the Great Depression. That’s what makes this depression different from the last one. This one is inflationary and of course Ben is putting out the deflationary fires.

Gold and silver are an option to consider. Not as investments, but as a good store of value. A silver quarter will buy two gallons of gas.



Copyright 2012 by Jim Brubaker

Belt Tightening, Pay Cuts For Everyone, Retirees Included

It looks like the voter is going to hit on government employee wages. Every survey so far, shows the benefits and wages paid to the government workers far exceed what is paid in the private sector. The governor in Wisconsin didn’t get recalled and it looks like he’s going to cut some things a lot of people take as god given rights. The voters that tried to get him fired, have a payback coming.

When I was a kid, everyone joked around about government jobs not being real jobs. You started there, got experience and then moved on into the private sector if you wanted to earn some real money. Over the last 50 years, something changed and it was hardly noticeable, but it sounded like good common sense. “Let’s pay these government employees enough so they don’t quit and go to the private sector.” In hindsight, that doesn’t seem like a very smart thing.

The big thing to notice is that these wage surveys of the private sector, were based on pay for performance. If you were good, you got paid more. From there, each government job is linked to that private sector wage survey. Pay for performance drops out of the equation. Your government pay will keep up with the private sector whether you produce or not. And then there are the government benefits that are locked to the wage rate. So it’s not hard to see how government employees can retire with 100k per year pensions. It went from “the pays lousy, but they have good benefits,” to “The pays great and so are the benefits.”

This happened very slowly over 50 years. When times were good, no questions were asked. Now in today’s bad economy, there aren’t enough funds to pay for everything promised to the workers.

This gets worse if you look at retirement pension funds. At an 8 percent interest rate the funds of a pension fund double in 9 years. Well, rates are about ONE PERCENT. The rule of 72 here, means that the fund won’t double for 72 years. But most of the calculations of benefits were done when rates were 8 percent or higher. Hmmmmmm.

North Carolina has invested their retirement funds in some high performance stuff to get the return they needed for their retirees. Kind of make you wonder if they were Greek or Spanish Bonds?

We have come to a fork in the road. Pay all benefits or pay for services. Not an easy choice. And this is just the beginning! Bad choices are being made every day now to keep things as they once were, and that just isn't possible. I wonder, how long to we have to wait before some of these State financial insolvency problems start to hit the fan? There is no such thing as reserved seating in a lifeboat.


Copyright 2012 by Jim Brubaker

Put Fannie and Freddie to Sleep

In the beginning, Congress created Fannie and Freddie to make homes affordable to more Americans. It was a fulfillment of the American Dream, home ownership. There are renters and there are homeowners. Raise your hand if you have owned your home 100 years or longer; so basically everyone reading is a renter.

When the housing bubble took off, everyone was financing homes, and they sold the paper to the banks, Fannie, Freddie and private investors. Any bad performing loans that the banks held, have probably been turned in for foreclosure redemption. Basically the loan insurer eats the first 20 percent of the loan amount on a home (Fannie, Freddie and VA); the bank eats the second 20 percent. Looking back over time, there hasn’t been a span of time where a bank could sustain a 20 percent loss on a home loan with 20 percent down unless you go back to the Great Depression. The bank has an owner cushion of 20%, and their losses start from there, they could sustain a 40 percent drop in equity without sustaining a loss.

But about the year, 2000 everyone was writing zero down “no doc” loans. The two GSE’s, Fannie and Freddie packaged up the paper and sold it to anyone. They made gobs of money and then things started to go south.

Once the bubble burst, you have millions of home owners in homes with no money down and they are upside down on their loan. Fannie, Freddie and the VA are left holding the bag. They guaranteed the loans. Congress realizes that they need to bail out Fannie and Freddie to keep the housing market from collapsing. If it collapsed, the losses would be catastrophic. But if they can keep people in the homes and make payments of some sort, the game can go on. The other thing they needed to do was find a source of low interest rate financing to entice people to buy the homes that they have already guaranteed. The Federal Reserve did that by dropping interest rates to unheard of levels. Notice Fannie and Freddie didn’t drop the prices of the homes they held by much, but they did reduce the qualifying requirements for the loan - - nothing down, but take the original note with very little discount. Second, release the homes very slowly. Fannie and Freddie own these homes at full list bubble prices.

The government guaranteed these GSE’s and assumes all losses. Ask yourself one question. Has the mission statement of Fannie and Freddie changed? Is it to make homes more affordable to our children? Or to cut the losses of these GSEs? Fannie and Freddie have nothing to lose by selling a home to just about anyone with nothing down. A vacant home is on the books as a loss, a signed contract is a performing loan. The problem here, the new owner may make one payment and ride free for two years. As far as Fannie and Freddie are concerned, that’s a good thing; the house is occupied and less liable to be stripped out. Talk about job security, inefficiency keeps the ball rolling.

The issue here isn’t banks, it is Fannie and Freddie, these two programs are a dis-service to the community. They need to be stopped in their tracks and the homes put on the market, what ever the price. We need to sell homes with 20% down payments. Fannie and Freddie are circumventing this common sense rule. What they are doing should be against the law and it isn’t. The banks can’t do it so why should the GSE’s under government management.

It’s a little like when my dog was terminally ill, I was doing everything for him, because he was my best friend, and then I realized, I wasn’t really doing him a favor by extending his suffering, I was just satisfying my needs for his companionship. I had to make a hard decision, and it was something I still shed a tear over when I think back about it.

Reality is right around the corner (of course if you are dealing with deck chairs, it's a lifeboat away). Not sure how this will turn out, but it is obvious, the decisions that have to be made are not being made. Can we trust the political judgment of our government and Congress? I think not. But if we terminate those two (failed) GSE's, pricing reality may emerge in the real estate market. The real irritating thing, is that we know that just isn't going to happen!




Copyright 2012 by Jim Brubaker

Cartoons

Here's a political joke

Here's a real joke that Ben and Tim pulled on us and nobody is laughing!--- (newspaper ad LA Times pg 5A 5/17/2012).

I can just envision a fun-time retirement. I'll mosey down to Walmart and pick up a shopping cart--before they run out. And if I'm lucky Maytag may have a "collapsible mobile home" that I can snag.


Copyright 2012 by Jim Brubaker

Lost in the Woods

In California, tax income shortfalls have increase from 9 billion to 16 billion in 3 months. Governor “Moonbeam” Brown has proposed new bond issues to raise the revenue. Does anyone think that we are in a better position now to pay more in taxes than we were, when times were good? The logic escapes me. The State governments have to have a balanced budget. And the way to do that is by hook or crook—(Also known as creative financing). The trouble is, we have run out of hook and crook. Kind of looks like Moonbeam hasn't run out of rope to smoke - - yet.

If we shift to Greece, there is all of this doom and gloom. Why? If Greece repudiates its debs and gets off the Euro - - hey, we have another Iceland (A country that can now live within its means after telling the world to “go fly a kite”). Of course the people who loaned the money have a different perspective on this. The rich euro counties loaned money to their poor neighbors without regard to their ability to repay the loans. Mobilizing the military to get them to pay, would solve the European unemployment problem and bring in some cash--hmmm.

In the United States, the government has decided that if you bought a home with nothing down, you entitled to government subsidies to help pay it off. No Money down for a GSE home. And if you are upside-down they will forgive that part of the loan. Of course if you buy a Fannie or Freddie home, no money down, and need to sell right away, you’re already upside-down (with the 6 percent Realtor's fees). On the flip side, if you lose your job, you can live in the home rent free for two years while they go through the foreclosure process.

The debts are real, and the expectations that the debtors will pay back the loans, is nothing more than wishful thinking. The governments of the world have only postponed the final outcome. Reality is just around the corner. To quote Obama, “We are not out of the woods yet,” - - I wonder if he’s noticed that the smoke is getting thicker?

Copyright 2012 by Jim Brubaker

The Gold Behind THIS Dollar is Gone FOREVER

Anyone ever ask the question, “How did gold and silver disappear out of our coinage system?” We had them both until you could make more melting the coins down and selling them as bullion.

Go back to 1920, they actually used gold and silver coins. You had the option of paper, gold and silver. There was no real shortage of metal coins for one reason, they paid no interest. Money in the bank could be loaned to someone else with an expected rate of return.

There was however a bond between the currency and gold and silver. They were one and the same. People that understood a currency backed by gold and silver knew the paper was as good as gold. Well, we have progressed a bit. The twenty dollar gold coin is still minted by the US Mint, but they’re not selling it for $20 anymore.

Inflation as far as the general public is concerned has nothing to do with government; it’s just a fact of life. Things over time just cost more.

The only thing that has kept pace with the value of a $20 gold piece is the Dow Jones Average. A move of 500 points on the DJIA reflects your loss or gain from the year 1890. Not many people today have been holding stock that long. Of course I digress.

The thing to really examine is that in the 1920’s your bank loan was payable in gold to the bank. There was a certainty to that that every banker could appreciate. Plus even if the saver knew nothing about inflation, they were protected from it and got a real return on their savings. Twenty dollars of paper money was just as good as a 20 dollar gold piece, they were interchangeable.

Fast forward to today. Interest rates are at 1% and inflation is at 8%. People marvel at the cost of silver and gold. The real disconnect is between the banks and government inflation. The banks’ loan money long and have to cover short term. Inflation leaves them with a built in loss. In today’s world, borrowers are paying back, a hell of a lot less in real dollars than they borrowed 20 years ago. In the 1920’s with gold as base, this couldn’t happen. A dollar WAS a dollar and time had nothing to do with it. The concept that the dime you loaned would buy the same can of beans 20 years later was a given. In today’s world, that isn’t true. Bankers lose over the long term as do savers. Today’s dollar isn’t going to have the purchasing power it does today, in 20 years.

The masses have been weaned off of their commons sense that revolved around the interchangeability of printed currency for Specie. What if we returned to using silver and gold in our currency? How would it work out? We could value silver at $100 per ounce and gold at $2,000 an ounce.

Examine an old 20 dollar gold piece. Even the newly minted gold coins say 20 dollars. The copper penny had to come to an end in 1982. It cost more for the copper than the penny was worth. There was nothing stopping you from melting the pennies down and selling them back to the government to make new coins. So now we have a copper clad zinc penny (FYI a copper penny 1982 weighs in at 3.11 grams and a zinc clad weighs in at 2.5 grams).

Reality could be a new government edict. Issue a new currency backed by gold and silver (Chances are slim to none on this). But take everyone’s savings and divide it by 100 and convert it to new dollars. We would be back to 1920 and it would take two zeros off of the national debt (don’t think for one moment that it would in any way solve that problem). The penny would again represent buying power (four cent a gallon gasoline, WOW!). It could work, but what do you do if prices go up again? Gold and silver will again start to disappear out of the system. There is a saying, “bad money chases out good money.”

The sad thing is that the present financial system is working “Just Great!” No need to change anything. The European Euro is in its death throes, our real estate market has had the “Cesspool” sign removed and replaced with one saying “Government Financed Housing.” The only drawback, the smell is not going away. The thing that cracked me up today was a comment I read, “Everyone figures that they have to work to the age of 80 before they can retire, and that’s two years longer than they are expected to live!” Go Figure.


Copyright 2012 by Jim Brubaker

It's Never Been This Bad Before (Reprinted)

This is a reprint from January 16, 2008 that is worth a second look. Have been short of spare time lately, will get back into the writing mode this weekend

Here is a little bit of history. It gives you an insight into real estate during the Great Depression from people who lived through it. Quoted from: http://xroads.virginia.edu/~HYPER/ALLEN/ch11.html

By 1927, according to Homer B. Vanderblue, most of the elaborate real-estate offices on Flagler Street in Miami were either closed or practically empty; the Davis Islands project, "bankrupt and unfinished," had been taken over by a syndicate organized by Stone & Webster; and many Florida cities, including Miami, were having difficulty collecting their taxes. By 1928 Henry S. Villard, writing in The Nation, thus described the approach to Miami by road: "Dead subdivisions line the highway, their pompous names half-obliterated on crumbling stucco gates. Lonely white-way lights stand guard over miles of cement side- walks, where grass and palmetto take the place of homes that were to be .... Whole sections of outlying subdivisions are composed of unoccupied houses, past which one speeds on broad thoroughfares as if traversing a city in the grip of death." In 1928 there were thirty-one bank failures in Florida; in 1929 there were fifty-seven; in both of these years the liabilities of the failed banks reached greater totals than were recorded for any other state in the Union. The Mediterranean fruit-fly added to the gravity of the local economic situation in 1929 by ravaging the citrus crop. Bank clearings for Miami, which had climbed sensation- ally to over a billion dollars in 1925, marched sadly downhill again:

1925.............................$1,066,528,000
1926................................632,867,000
1927................................260,039,000
1928................................143,364,000
1929................................142,316,000

And those were the very years when elsewhere in the country prosperity was triumphant! By the middle of 1930, after the general business depression had set in, no less than twenty-six Florida cities had gone into default of principal or interest on their bonds, the heaviest defaults being those of West Palm Beach, Miami, Sanford, and Lake Worth; and even Miami, which had a minor issue of bonds maturing in August, 1930, confessed its inability to redeem them and asked the bondholders for an extension.

This next bit discusses the dire straights of many states in 1933: Pg 285 America’s Great Depression by Murray Rothbard. Quoted from Agricultural Discontent in the Middle West, 1900-1939,Wisconsin Press 1951 p.448

As in most depressions, the property rights of the creditors in debts and claims were subjected to frequent attack, in favor of debtors who wished to refuse payment of their obligations with impunity. We have noted the Federal drive to weaken the bankruptcy laws. States also joined in the attack on creditors. Many states adopted compulsory debt moratoria in early 1933, and sales at auction for debt judgments were halted by Wisconsin, Iowa, Minnesota, Nebraska, and South Dakota. Governor Clyde Herring of Iowa asked insurance and mortgage companies to stop foreclosing mortgages. Life insurance companies protested that they were being very lenient, yet in many areas the courts would not enforce foreclosures for insurance companies, enabling many borrowers arrogantly to refuse to pay. Minnesota forbade foreclosures on farms or homes for several years.

So we can say without a doubt that we have never seen anything like this, but it did happen here about 78 years ago. We could be on our way to an experience of a life time. Are you ready?


Copyright 2012 by Jim Brubaker