State of the Economy–Feb 2012

It has been a while that I’ve addressed the state of the economy. This morning I read the breaking news that the U.S. economy gained 243k jobs in January, far above expectations. The unemployment rate respectively dropped to 8.3%. The old norm was in the 5% range. It may be that the new norm for a generation will be closer to 7%, but slowly we are reaching more reasonable levels.

Unemployment is key to recovery, as it puts money in the consumer pockets and creates demand across the market. Housing stability is also key, as it is still the main driver accumulation of wealth for majority of Americans. I’ve read articles claiming that taxing corporations less will enable them to hire more and grow. I am more of a believer that demand drives growth and demand is created with when money is put in consumer pockets. Growth does NOT precede demand. Growth without demand only serves to create a bubble that will lead to yet another painful market correction.

As the wars are closed down and hundreds of thousands of troops flood back into the domestic job market, the nation needs to have a plan in place. President Obama’s proposed bill to provide grants to employers of post 9/11 veterans is a an election year political move. Rather than increasing debt to place vets in companies artificially, when demand doesn’t exist, we should be focused on spending resources at increasing demand. Blocking the Keystone XL oil pipeline is a terrible decision. The project has environmental risks, but it is also key to national security and economic prosperity through energy independence. The Savannah harbor expansion to accommodate super tankers is vital to economic development in southern states and should be fast tracked to completion.

I’ve written many times that we need to invest into infrastructure that will create jobs and opportunity for decades. Wealth transfer to corporations through grants and tax breaks is a band aid fix and only serves appease lobbyists in a election year. We need bold moves and national projects of significance.

Providing funds to alternative energy industries theoretically speeds up technology development, adoption and drives prices down faster. I believe in free market economy. As gas prices again climb over $4 per gallon, as they are sure to do, alternative energy sources will become cost effective on their own without government intervention. Massive adoption will drive down unit costs and fund further development and competition. I’d love to install solar power to cut my electric bills. In Georgia solar power is something that we have plenty of. As long as breakeven is 15 years plus for that investment, I personally think it is ridiculous. Returns need to be within 5 years and then every house would heat water using solar power. Paying a premium for a hybrid car is also not that interesting, until a gallon costs $4 plus and stays at that level.

On the long term it is all about education, education and education. Without education there is no innovations and without innovation there is no competitiveness. Without the ability to compete and dominate the American dream is lost. The same way that demand needs national infrastructure projects, innovation needs national investment into science and space exploration. Without the arms race and NASA program, where would we be today in terms of technological advances? Building a lunar base or going to Mars seem frivolous, but the journey to those goals is an investment to innovation and future competitiveness. I am not saying that we should make a moon base, just to because, but we do need a lofty national scientific goal that the nation can understand, get behind and take pride in.

As a species we are reaching the limits of what our home planet will sustain. As a species we need to explore our own planetary system and beyond in order to grow. With technology today it takes on average 2.1 hectors of biologically productive land to sustain a single person. The planet has $13.5b hectors of biologically productive land. The world population has already surpassed 7 billion. My daughter, with her third grade math skills, could tell you that just doesn’t add up.

State of the Economy: December 2011

Its been a while since I wrote on the economy. From where I sit the US economy has stabilized and are growing in strength. Consumer confidence and spending is back. Large corporations are still making good profits. The only big minus, is congressional inability to decide on anything at all. I don’t see congress being able to get anything meaningful done before the nation votes either for a new President or gives the current President’s policies a vote of approval. Until then we could just send congress home to their states and save tax payers money.

EU had a major economic conference last night and it was a total disaster. In my opinion EU was destroyed for good when Germany, France and Italy retained a veto, while scrapping the need for full consent of all members of emergency fund decisions, ending any equality between member states. Imagine the United States with California, Texas and New York having a veto in congress. I think we would start to hear about secession plans very quickly. The fact that the UK was totally isolated from the EU also doesn’t speak well for the future of the union. Imagine having Florida sidelined from the union.

What I think will happen is that we will see the monetary union first down sized to fiscally healthy members. Without monetary union the economic differences between nations in the political union will grow out of control, which will force the better performing nations to limit free movement of labor across boarders. Then goes Schengen. Once we dismantle Schengen, the union is gone. With time we will only have a union between France, Germany and Italy, with a handful of smaller countries, as second class citizens.

Going back to the US, the reason why the United States is starting to rebound is due to the unprecedented level of monetary intervention by the Federal Reserve. Yes, there will be commissions and blaming, because the trillions of dollars spent and the national debt are hard for the nations collective psyche to accept, but the fact is that without bold decisive action we would be facing the same crisis as Europe. The difference being that the EU doesn’t have the collective will to take unprecedented action and thus will ultimately fail. Could the monetary intervention have been handled differently… absolutely. And that is why congress will be having hearings for years. In a society with this degree of political power wielded by special interest groups, you will always see in any big policy change morally questionable transfer of wealth. We need to remember that all sectors of American industry operate under the economic principle of maximizing share holder value. The current execution of that principle is short term and we need to get back to a long term mindset, but that change in mindset will take a generation. Universities need to be teaching economics students about long term shareholder value creation and grinding it into their thinking. We balk at C-level greed, but as a nation of shareholders that is what we’ve asked of them, what we incentivize them on and how we have our universities educate them.

Like with everything else, the future is in our youth. We need to instill healthy principles of frugality, equality, hard work and ethics in to our youth, so when they grow to lead our nation they will make better decisions than we have.

State of the Economy–August 2011

Markets are anticipating a poor jobs report. Dow dropped 100+ point yesterday and will probably drop another 100+ today if report is poor. It will be interesting if the report exceeds estimates. US growth is projected around 1%, which is not recession, but near stagnation. Europe is more inclined to double dip this fall.

You can see the the indicators, as large European firms are letting people go to further streamline their operations. In the US consumer buying saw its best month in the last five this past review cycle, which speaks well for the fall.

Nuriel Rubini writes that we are collectively worse of than in 2008. Yes, if we all panic and start a down ward spiral… there is no buffer to slow the fall left. I personally think that we need a bit of positive thinking here… solutions rather than fear mongering. Nuriel is a publicity hound and the only way he seems to get attention is by yelling that the sky is falling.

I became a US citizen yesterday, so today I am asking my elected representatives: what are you doing to offer constructive solutions? I recently read about the White House plan to allow mortgage owners to refinance without having 20% in equity. I think that would be a great move. The concern is that the tax payer owned Freddy and Fanny would take the hit. Well yes, if you cut mortgage payments for millions of home owners those agencies will be hit, but if it stabilizes the housing market and prevents millions of homes from foreclosure and decline in property values the end outcome will be net positive for all.

The U.S. Department of Transportation announced last Tuesday that roughly $745 million of Florida’s portion of high-speed rail money had been “obligated” toward upgrades on heavily used Amtrak lines in the Northeast Corridor. So much for the large scale infrastructure project that would great opportunity for massive growth in the South East. The California high speed rail project is going forward, but estimated to be way over budget.

Savannah Port expansion project is going through environmental studies. It is a widely contested project, as it would be a major blow for Charleston harbor, but a big windfall for Georgia. Being Georgian I say to Charleston… you are free to compete, but don’t try to stop growth. The port project will require rail system upgrades to handle additional cargo traffic. I say lets look at passenger rail travel in Georgia as well. Let’s tie all the major cities to Atlanta and let’s build a new Amtrak terminal that says that we are serious about rail travel. I’d love to take a train ride to Savannah or even down to Orlando or Destin. Quantitative easing has not delivered… build infrastructure that will provide structures for economic growth will.

Sad but true… Georgia is Atlanta. My family loves driving South to the beach. We take the smaller roads and we stop to visit small Georgia towns on the way. It is truly sad to see those main streets on a day when they should be crowded. Boarded windows… ghost towns. The cotton and peanut industries are becoming more automated every year. We need to link those rural areas more effectively to Atlanta enabling companies to create 21st century jobs. We need to provide even higher incentives for manufacturing companies to build big plants in Georgia… free land, zero tax and labor services. Massive modern technology parks in Macon and Gainsville linked with Atlanta by a high speed train service. Why not take an hours train ride for a meeting in Macon. Why not setup offices in Macon and access Atlanta airport by high speed train? Would be faster than driving from some of the northern suburbs.

State of the Economy – July 2011 (Debt Ceiling)

Will the global economy come to grinding halt on August 2nd if the debt ceiling is hit? Will the global economy fall into another massive recession? For either party to allow that would be political suicide, but it makes for good headlines.

Speaker Boehner’s plan was taken back to the drawing board after analysts said it would not provide the savings advertised. Reid’s plan projected a $2.6 trillion savings, but that figure included a draw down of wars in Afghanistan and Iraq. One would think that a decision to end a war was determined by other factors than a need to cut budget. ‘Guys we cant afford to fight anymore. Pack it up!’ Cuts probably need to come from other less fluid sources.

Democrats need to be open to restructuring social programs. Those programs need to have sustainable strategies for the next 50 years. Hope is great, but hope is not a strategy! Republicans need to be open to increased taxation through elimination of tax brakes and loop holes. Streamline and simplify the tax code… cowboy up and fix it! The argument that removing tax brakes for the ultra rich and subsidies for industries making record profits would reduce hiring is absolute rubbish! Companies will continue to invest in growth in accordance with growing market demand and not because they can afford to hire more people they don’t need. The idea is absolutely ridiculous! With the ultra rich, it’s not a lack of available funds, but rather a lack of potential and opportunity in the current economy. Wealth has not vaporized. It has changed ownership and been secured in less fluid and less risky instruments. Removing tax brakes would not impact the amount of absolute investment at all. How much has QE1 and QE2 impacted in liquidity and borrowing in the market as a whole? Quantitative easing (printing money) has served to weaken the dollar, which has reduced the absolute value of national debt in relation to other currencies. It has also increased the dollar value of US made exports and cooled the trade deficit with China. Quantitative easing is not a domestic policy, but rather an instrument of international trade… and a necessary one.

I agree that we should not add additional tax burdens across the board, as those would truly impact the economy as a whole. Touching the mortgage interest reduction would be a catastrophic move. With depressed home prices, underwater mortgages and generally a sluggish market… yeah, let’s remove incentives for home ownership and let’s add hardship to distressed mortgage holders. Real smart!

The discussion is more political than rational and the stakes are high. Watching the political news this week is like watching So You Think You Can Dance. I just hope that the voters see it for what it is and hold the ‘players’ accountable in the next election, regardless of their party. We need doers, not dancers. My challenge to Washington is: look me in the eye, offer me a long term deal that makes simple common sense and I’ll shake your hand.

State of the Economy–Greece 20th June 2011

The default of Greece is not an if, but a how and when. Make no mistake, reductions in principle are a default and should not be seen as mere refinancing. The reality is that Greece will not be able meet their sovereign debt obligations in full regardless of any further ECB bailouts.

How the eventual default will impact the euro zone and global markets is a question of wording. With a default wealth is always written down and someone will be left with the bill. A bailout would enable a controlled default, which means that the ECB could slow down and partly prevent the cascading effects.

ECB austerity conditions for the next round of bailouts are toothless for the most part, because not releasing the funds and a rapidly cascading default scenario would decimate the European financial system. With the previous crisis banks were over extended with housing and artificial instruments. In this case a number of French and German banks will make sufficient losses that they no longer meet regulatory capital adequacy requirements. The European Central Bank will become insolvent, given its very high exposure to Greek government debt, and to Greek banking sector and Irish banking sector debt. The harsh reality is that nations are already over extended and would not be able to bailout the financial sector the way that liquidity was pumped in during the last crisis. Europe could start printing money the way that the US fed did, which devalue the Euro.

On the flip side, not implementing austerity measures is also not an option. A full default would lead to Greece dropping out of the Euro. The new local currency would effectively devalue over night. This would cut sovereign debt to a half (or more) over night. It would also cause massive inflation on foreign exports and Greece isn’t self sufficient by any means. If the there is a no confidence vote and nationalization of banks becomes more probable, we will see a run on the banks… people wanting to take out all their euros. This would cause the Greek financial system to implode. If the Greek government puts a hold on all withdrawals they will also need to issue martial law, which would tear a part the Greek social fabric.

One possibility is that Greece doesn’t implement austerity measures and calls ECB’s bluff. ECB pays up anyway for a controlled default. This would be the end of bailouts. This would eventually tear the euro zone to shreds and start an era of protectionism. More likely we would see a northern euro zone of financially stable nations and the those that do not meet financial targets to take part would fall into a pool of second class European nations.

In summary bailout and austerity are a must. Default will be controlled and contained. Unless confidence vote doesn’t pass and then its anyone’s guess how the meltdown will happen.

State of the Economy – June 2011

I follow economic predictions and news every morning and I have to say that during the past months the general tone has taken a major dip. We have countries in Europe and Asia falling into recession. Greece will default… it is not a question of if, rather when and how. The Euro zone will be tested over the next 12 months. If the Euro get’s through this with enough member state support and political will, then the Euro will last. A total crash is unrealistic, but even a reduction in size (very possible) will impact the long term valuation of the Euro in a way that will dwarf the cost of bailing a couple of nations.

The root of the Euro zone problems are not in the last recession, but rather in the birth of the Euro zone itself. The monetary union opened up markets and over a short period of time brought living standards, consumer pricing and wage expectations on an equal footing across the zone. This if anything was a bubble created on a dream of politicians. A crash was inevitable. I am sure that the stronger member countries benefitted from the rapidly expanded markets… now its time to pay the bill. I wont even comment on how China has benefitted and what their portion of the bill should be.

In Asia, Japan will rise through massive reconstruction investment by the government. China already proved in the last recession that they can drive growth in the short term through domestic consumer spending. China has fueled their growth with export revenues smartly reinvesting those gains. China is probably the most capitalistic country on the planet, but rather than a nation, should be viewed as a massive corporation, with a management team and a board of directors, with a long term vision. Smaller countries in APAC have grown organically; maybe too fast. Unlike in some Euro zone countries, organic growth is more adaptive to fluctuations, so I am not too concerned about APACs ability rebound quickly.

The US market is harder to predict. US companies have shown strong growth with the weak dollar boosting revenues. Detroit’s auto industry has made a robust recovery and is showing innovation that was lacking during the era of one size fits all truck and minivan. US recovery is slowed down by high unemployment and lack of rebound in the housing market. US household savings are still in their homes. This will not change in our life times. Home prices must rise for the US family to rise. I’ve said it many times and I will say it again. Unemployment is structural and requires retooling on a massive scale. US companies have room to grow without hiring. We need new industries and new industries need new skills. We can import those skills (and loose a generation) or we can retrain the work force.

Georgia recently changed its immigration laws imposing punitive measures on the employers of illegals. This is a trend that is washing over the southern and agricultural states. Farming has largely run on seasonal immigrant workers. Some could argue that the use of immigrant laborers has been a version of modern day slavery; workers without unions, minimum wage protections and/or workers rights. Yet this has provided work for hundreds of thousands of Mexicans funneling wealth to Mexican boarder communities, raising living standards and improving the overall Mexican economy. This ‘arrangement’ has also served as an undocumented agricultural subsidy enabling US consumers to enjoy lower cost groceries, which has increased disposable income in families. Georgia is now facing 50% loss in the seasonal work force pool. Some states that have gone before Georgia have seen unemployment reductions, but this will reduce farm margins forcing inflationary pressure of farm produced goods. Illegals are on the move and over the next few years will flow from state to state until immigration reform catches up on a national level. This migratory pattern will cause massive societal pressures and I think that the current administration is being short sighted in not seeking more compromise between proactive states in instituting national immigration reform.

We still need easing, not in the form of free money, but in the form of massive federal investment into the future. Free money is merely protective of existing institutions and is not flowing deep down enough to spur entrepreneurship and innovation. Federal investments require unprecedented oversight and transparency. Regional pet projects are a form of political capital in Washington, which is used for trading and bartering of votes. This will never change, but the reality is that most regional pet projects, if compared on a national level, do meet any reasonable criteria for long term return on investment. Over a longer time span investment needs to be spread geographically, so that we don’t kill smaller cities and rural areas. This would not serve a national interest. I would not remove ‘pork spending’, but rather issue a moratorium on ‘pork’ for a period of four years (next Presidential term). The next administration should them reinvest that ‘pork’ into national infrastructure initiatives with a higher return on investment.

The oil sands of North America and natural gas deposits are America’s energy trump card. When the national average of petrol prices at the pump exceeds $4 per gallon, political will starts to grow through complaints from constituents. OPEC has been good at playing on the edge by allowing oil prices float past that invisible line long enough to boost profits, but not long enough for major change to take hold. Over time the balance will shift and the OPEC oil monopoly will weaken, but before that happens countries like Saudi Arabia will have benefitted billions of dollars and reformed their national economies and energy policies for a new millennium. The oil price equation was simply about supply and demand, then we would see much faster change, but the equation has to take into consideration also international security concerns. Oil revenue is vital for reforming the Arabian peninsula and without reform this springs revolts will seem small in comparison. Rationalizing the situation, consumers in the developing countries are paying fair price for the natural resource and at times a premium for relative peace and security. As in any equation there is the human condition and one can question if the current leaders have reform or personal wealth accumulation at heart. The altruistic nature and dictatorial empowerment of ancient Greek democracy are so hard to find these days.

To wrap this article up, I predict that we will see a global correction in the fall. This will be short and will provide a needed cleansing for building a stronger and more sustainable recovery (especially for the housing market). I do not predict a recession in the US economy, but I do predict that we will see really poor growth in the third quarter. Corporations need to look beyond 2H FY11 and continue investing into FY12 growth.

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