luni, 20 septembrie 2010

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Amazing Arrogance, Gall, Chutzpa, and Unmitigated Effrontery from Berkshire Hathaway

Posted: 20 Sep 2010 08:07 PM PDT

It's hard to know exactly the precise words to describe the arrogance and unmitigated effrontery of Charles Munger, the billionaire vice chairman of Berkshire Hathaway, who today rattled off an insane barrage of insensitive comments regarding the bailouts.

Please consider Munger Says 'Thank God' Bailouts Came Before Handouts
Charles Munger, the billionaire vice chairman of Berkshire Hathaway Inc., defended the U.S. financial-company rescues of 2008 and told students that people in economic distress should "suck it in and cope."

"You should thank God" for bank bailouts, Munger said in a discussion at the University of Michigan on Sept. 14, according to a video posted on the Internet. "Now, if you talk about bailouts for everybody else, there comes a place where if you just start bailing out all the individuals instead of telling them to adapt, the culture dies."

"Hit the economy with enough misery and enough disruption, destroy the currency, and God knows what happens," Munger said. "So I think when you have troubles like that you shouldn't be bitching about a little bailout. You should have been thinking it should have been bigger."

Germany was unable to stabilize its financial system in the 1920s, and, Munger said, "We ended up with Adolf Hitler."
Nauseating Insensitivity

If that kind of arrogant insensitivity does not make you nauseous, what will?

It's hard to know where to start, but let's start with a blatant lie. This was no "little bailout", this was a multitrillion bailout, not just from the Fed and Congress but from every central bank in the world.

One of the beneficiaries of course was billionaire Charles Munger. Middle class America was the loser.

Displays of Ignorance

The biggest display of ignorance in Munger's rant is his comparison of the current financial mess to Weimar Germany. Forgive me for asking but pray tell in what kind of fairytale fantasyland is the current deflationary credit bust remotely related to the war reparations imposed on Germany after the end of World War I that gave rise to Hitler?

Need for a Culture Change

The ridiculous Weimar comparison was not the Munger's most galling statement, however.

This is: "Now, if you talk about bailouts for everybody else, there comes a place where if you just start bailing out all the individuals instead of telling them to adapt, the culture dies."

The one thing we desperately need is a culture change. Instead, we made too big to fail, too bigger to fail. We preserved a culture that benefits billionaires like Munger and greedy CEO's that helped cause this mess. That culture benefits no one else.

Yet Munger wants us to "suck it in and cope" and expect to be happy that he did not get wiped out.

You know what? It would have been a damn good thing if the culture died and assholes like Munger got wiped out. Munger just proved beyond a shadow of a doubt Wall Street's culture was not worth saving.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Good News: The Great Recession is Over; Bad News: It Doesn't Feel Like It

Posted: 20 Sep 2010 10:01 AM PDT

According to the NBER, at long last the great recession is officially over. Bloomberg reports Worst U.S. Recession Since 1930s Ended in June 2009.
The longest and deepest U.S. recession since the Great Depression ended in June 2009, lasting 18 months, the National Bureau of Economic Research said.

"The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007," the Cambridge, Massachusetts-based bureau's business cycle dating group said today in a statement. "The basis for this decision was the length and strength of the recovery to date." The committee is the accepted arbiter of when recessions start and end.

"The economy has begun to move forward, albeit at a slow, disappointing pace," said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York. "It's a recovery that feels fragile, and still raises questions about the risks to its sustainability." The odds of the economy falling back into another recession are about 25 percent, Kasman said.
Over 50 and Never Working Again

The New York Times comments on the Fears of Never Working Again
Of the 14.9 million unemployed, more than 2.2 million are 55 or older. Nearly half of them have been unemployed six months or longer, according to the Labor Department. The unemployment rate in the group — 7.3 percent — is at a record, more than double what it was at the beginning of the latest recession.

According to a Gallup poll in April, more than a third of people not yet retired plan to work beyond age 65, compared with just 12 percent in 1995.

Older workers who lose their jobs could pose a policy problem if they lose their ability to be self-sufficient. "That's what we should be worrying about," said Carl E. Van Horn, professor of public policy and director of the John J. Heldrich Center for Workforce Development at Rutgers University, "what it means to this class of the new unemployables, people who have been cast adrift at a very vulnerable part of their career and their life."

Older people who lose their jobs take longer to find work. In August, the average time unemployed for those 55 and older was slightly more than 39 weeks, according to the Labor Department, the longest of any age group. That is much worse than in August 1983, also after a deep recession, when someone unemployed in that age group spent an average of 27.5 weeks finding work.

At this year's pace of an average of 82,000 new jobs a month, it will take at least eight more years to create the 8 million positions lost during the recession. And that does not even allow for population growth.
Assuming it does take 8 more years to create 8 million jobs, of one accounts for population growth, unemployment will be 8% or more all the way to 2020.

Indeed America has Lost One Decade - Another One in Progress Now

Lost Decade Lowlights

  • Americans living in poverty rose sharply to 14.3% from 13.2% in 2008
  • Poverty level is the highest since 1994
  • 43.6 million Americans are living below the official poverty threshold
  • Inflation-adjusted income of the median household fell 4.8% between 2000 and 2009
  • The number of 25-to-34-year-olds living with their parents rose 8.4% to 5.5 million in 2010 from 2008
  • Child poverty rose to 23.8% for kids under six in 2009, compared to 21.3% a year earlier

What America Really Needs

Given the structural problems in the US, there is no strong reason to think this decade will be much better than the last. I talked about those structural problems in Response to Nouriel Roubini regarding "America Needs a Payroll Tax Cut"
Roubini says "America Need a Payroll Tax Cut".

I say what America needs most right now is an honest appraisal of the sorry economic mess we are in, politicians who will work in genuine bipartisan effort to tackle our numerous structural problems, and willpower from everyone to make short-term sacrifices for the long-term benefit of the country.

To date, all the Fed and Congress have done is bail out the banks and the bondholders (in other words the wealthy), at the expense of the middle class.

Given the problems are numerous and deep, the solutions will undoubtedly require a series of across the board sacrifices. Those sacrifices need to start with public unions, the gigantic military complex, government employees in general (Congress and state legislatures in particular), as well as anyone bailed out or benefiting from the numerous and massive fiscally unsound policies of the Fed and Congress.
So far, we do not even have an admission by the President, by Congress, or by most economists as to what the problems are. Instead everyone wants to "stimulate" something, typically by throwing money at problems.

This is why the problems are unlikely to be fixed, and this is why we are likely to remain in a stagnant economy that produces few jobs for the remainder of the decade.

While the recession is over, it certainly does not feel like it. Moreover, because we fail to address the structural issues, the odds of slipping back into another recession are exceptionally high.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Response to Nouriel Roubini on "America Needs a Payroll Tax Cut"

Posted: 20 Sep 2010 01:01 AM PDT

Nouriel Roubini makes the case What America needs is a payroll tax cut.
Nearly three years since the onset of the financial crisis, the continued weakness of the labor and real estate markets, U.S. consumers' unbalanced balance sheets and fading support from policy stimulus have transformed the risk of a double-dip recession from unlikely to about a 40 percent likelihood.

The administration knows that it needs to fashion a revenue-neutral fiscal stimulus that increases labor demand and consumption. Its proposal to make permanent a research and development tax credit that dates to the 1980s, and then to enact a temporary investment tax credit allowing firms to write down capital investments at 100 percent of cost, are welcome -- but too modest a cure for what ails the economy.

A much better option is for the administration to reduce the payroll tax for two years. The reduced labor costs would lead employers to hire more; for employees, the increased take-home pay would boost much-needed economic consumption and advance the still-crucial process of deleveraging households (paying down credit card debt and other legacies of the easy-credit years).

Proportion is critical in designing the payroll tax cuts. Small and medium-size enterprises have had it rough the past three years. They are scrambling for operating capital as banks hold reserves tightly, and they face higher borrowing costs than large corporations when they do find willing lenders. To maximize the incentives for private-sector hiring, there should be sharper reductions to the payroll taxes paid by employers than for those paid by employees.

Low-income workers have historically shown a much higher propensity to consume when given extra money, so the payroll tax cut should be designed to provide a larger-percentage break to those on the low end of the income scale compared with the upper middle class.
Stimulating Production a Mistake at this Juncture

Certainly some of what Roubini says makes sense. For example, it makes little sense to stimulate capital expenditures and production when there is a glut of overcapacity already.

Unwarranted stimulating of production is one of the reasons tax credits for news homes fell flat on its face. The last thing we needed to do was encourage homebuilders to build more houses.

What Roubini misses is that attempts to stimulate hiring (thus production) won't work because businesses will not hire just to get a tax break. There has to be a legitimate need for businesses to hire. For there to be a legitimate need, there has to be genuine consumer demand.

Plight of Small Businesses

I have written extensively about the plight of small businesses. Here are some examples.

For several quarters, the number one problem in every NFIB report is lack of customers.

The number two and number three problems are Obama's healthcare "solution" and business uncertainty in general.

While business tax reductions will help profits, payroll tax reductions will not address the underlying structural problems, nor will they address the problem of too few customers. A look at the math will show why.

Employer Tax Break Math

If we completely eliminated the U.S. federal payroll tax employer contribution it would save employers 6.2% for Social Security (for wages up to $106,800 and nothing after that), and precisely 1.45% for Medicare.

Will a Pizza Hut, Home Depot, Citigroup, Bank of America, home builder, or specialized small manufacturer hire someone because of tax breaks? Would anyone?

I think not. The maximum possible saving, assuming we forgave all employer contributions, is 7.65%. Health care costs have been going up more than that!

Unless and until businesses can add employees that will increase the bottom line, they won't hire, tax breaks or not. Perhaps it will make a difference for some marginal businesses sitting on the fence wondering if they should hire one more employee, but that is the practical extent of it.

In a sense, the proposal is something like firing a shotgun over a swamp hoping to kill mosquitoes.

Arguably, payroll tax reductions will keep some marginal businesses alive, preventing layoffs. Then again, marginal businesses need to go out of business. Keeping them alive is a bad thing.

Proposal Helps Wall Street More Than Main Street

Lowering employer payroll taxes certainly will help business profits, but that does not mean businesses will hire. In fact, as noted above, they won't.

Thus, Roubini's proposal, as weighted, would help Wall Street more than Main Street. It addresses the symptoms and not the disease.

Consumer Attitudes Are The Key

Let's turn to the consumer side of the proposal. The #1 factor affecting small businesses is lack of customers. Would cutting taxes for the average Joe encourage more spending?

Ultimately one can count on it. Initially, many consumers will take every cent and pay down debt. However, paying down debt is a good thing. Over time, as consumer balance sheets are repaired, people will spend. More spending will promote hiring.

Philosophically Speaking, I Like Business Tax Cuts

Philosophically speaking, I am all in favor of businesses keeping more money and consumers keeping more money. The less money that goes to Washington the better. However, we must look at the proposal as laid out, to see if it meets the stated objective of stimulating the economy and getting businesses to hire.

Targeting businesses with payroll tax reductions will not do nearly as much as middle class tax cuts.

Complete Economic Overhaul Needed

Unfortunately, there is no simple solution to this mess. Structural problems run deep and a complete economic overhaul is in order. Here are a few of the structural problems.

  • The US can no longer afford to be the world's policeman. Military spending has to be reined in.
  • Public unions have bankrupted many cities and states. The complete dismantling of public unions is mandatory for the long-term fiscal health of the country.
  • To stimulate hiring and reduce the cost of government expenditures, we need to scrap Davis-Bacon.
  • We do need to reduce business taxes, but only if we can pay for it. I propose we pay for it by slashing military spending.
  • We need to fix the corporate income tax structure that gives incentives to businesses to move jobs overseas. Because of tax deferments, businesses pay less tax overseas than in the US. To promote hiring in the US we need to reverse that setup.
  • Health care is an abomination. We need to start over from scratch.
  • We need to eliminate too big to fail.
  • We need to abolish the Fed.
  • We desperately need a balanced budget amendment.

The public pension mess is nearly beyond belief. Extend-and-pretend not only affects banks, but public pension plans to the tune of $3 trillion. Please see Recently Introduced Actuarially Unsound Methods Hide Pension Mess in Illinois, Texas, Ohio; $3 Trillion Pension Deficit for a discussion.

The Goals

The goals must be a sound currency, a balanced budget, and less government, not more.

We can follow the path of Japan and its two lost decades, or we can make tough choices for the long haul. Sadly, the US has One Lost Decade Already with Another One in Progress Now.

There are no short-term fixes, nor are there painless solutions.

Unless and until we address our structural issues, the economic crises will not go away.

I am all in favor of incremental progress along the way, but a payroll tax cut is certainly not a silver bullet. In the grand scheme of things, a payroll tax credit is no bullet at all, given that it fails to address a single structural problem of any kind and stand to benefit Wall Street more than Main Street.

We need to address the disease, not the symptoms.

What America Really Needs

Roubini says "America Need a Payroll Tax Cut".

I say what America needs most right now is an honest appraisal of the sorry economic mess we are in, politicians who will work in genuine bipartisan effort to tackle our numerous structural problems, and willpower from everyone to make short-term sacrifices for the long-term benefit of the country.

We need to start with a fresh look at numerous structural problems one-by-one and propose solutions to those problems one-by-one, starting with a breath of fresh air from the administration and Congress as to what those problem are!

After all, how can you fix something unless you admit what the problems are?

To date, all the Fed and Congress have done is bail out the banks and the bondholders (in other words the wealthy), at the expense of the middle class.

Given the problems are numerous and deep, the solutions will undoubtedly require a series of across the board sacrifices. Those sacrifices need to start with public unions, the gigantic military complex, government employees in general (Congress and state legislatures in particular), as well as anyone bailed out or benefiting from the numerous and massive fiscally unsound policies of the Fed and Congress.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
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