Tuesday, May 29, 2012

Who has skin in the poverty game?

The first paragraph in the comment section following Paul Krugman's latest NY Times rant Big Fiscal Phonies is telling:
I am very afraid that, as of today, this election is a toss up! The GOP has not changed its fiscal policy of tax cuts for the wealthy being financed by the destruction of those safety net programs that have made this country great.

That narrative, while nothing new, sure seems to be the mantra of the (I distinguish) "hard left" these days. I.e., the right, and their benefactors (the "wealthy") would have people starving in the streets, and that this country somehow owes its "greatness" to its "safety net" programs. Krugman went so far as to say that Republicans and their financial backers are willing to "snatch food from the mouths of babies (literally, via cuts in nutritional aid programs)."

Among partisan economists, Krugman is as aggressive as they come. But to suggest that anyone, wealthy or otherwise, is out to starve babies is beyond ridiculous.

Think about it:

Would the wealthy somehow benefit from starving babies?

Before welfare, etc., did wealthy Americans simply sit back and watch those of lesser means die in the streets?

Would today's wealthy American just sit back and watch?

Are the wealthy better or worse off when an individual emerges from poverty?

Are today's social programs working?

Do today's social programs exist for their own sake?

Who's more likely to facilitate a legitimate plan to employ the poor; a wealthy employer or a bureaucrat?

Who, to a greater extent, resides in the "safety net"; the recently fallen or those born within it?

Do government programs support the victim or do they support the safety net entangling him?

Does making the safety net more comfortable in any way inspire the entangled to free himself?

If we were to win the war on poverty, what would happen to the troops?

Am I being ridiculous (suggesting that those who make their living [or devote their political careers to] "caring" for the poor would at some level [subconscious even] wish for the perpetuation of poverty)? Am I as egregious in my (albeit subtler) assertion as Krugman is in his? Perhaps, but who---the wealthy or the bureaucrat---has more skin in the game?

P.s. Speaking of ridiculous; were you appalled a year or two ago by the commercial showing a Paul Ryan look-alike wheeling a little old lady off a cliff? Well apparently some on the right are no better; there's a sequel on the way featuring a President Obama look-alike doing the same... Whether you lean right or left, you have to find this sort of political shenanigan (Krugman's comment included) to be utterly tasteless... And utterly insulting of our intelligence...

Friday, May 25, 2012

My response to pushback on The Magic of Private Equity...

I've received some (understandable) pushback on yesterday's article The Magic of Private Equity from folks with firsthand experience... Clearly, not every private equity project has evolved into a lasting great American enterprise... Depending on the source, you'll find Bain's (for example) success rate reported to be as high as 92% and as low as 50%... I suspect reality lies somewhere in between...

For the person who might still feel (success stories notwithstanding) that private equity firms have utterly no social utility, that they represent nothing more than the greedy rich getting richer, I've amended a couple paragraphs (in red below) from yesterday's post to drive home an important point... Understand that if all private equity firms exist to turn their victims into anorexic, debt-ridden, entities, we have little to worry about going forward... For they'll fail their ultimate objective (selling at a huge profit, after levering up the company) miserably... Make no mistake, the bankers who would fund those special dividends, and the would-be buyer (and the would-be buyer's bank) will perform their due diligence (thoroughly) before making the private equity executive "obscenely" richer... If indeed the examples presented to me, and others I've (since yesterday) Googled are the rules rather than the exceptions, well then, again, we've nothing to worry about - the market will sooner-than-later purge itself of these abusers, I assure you...

Now here's my warning to those of you who believe private equity firms exist only to make their partners mega-rich at the expense of businesses, their employees and the overall economy: Under no circumstances are you to ask Uncle Sam to fix it through regulation... Let the market handle it... For if politicians step in (alas, I understand they're already building their case), well, let's just say if you hate greed, you ain't seen nuthin yet...

You see biggovernment is THE playground of greedy corporate executives... I.e., the more government influences industry the more incentive industry has to influence government - and make no mistake, it will... Regs will indeed be written, but their authors will leave nicely paved paths for their benefactors (campaign contributors, etc.) to stroll right through...

Uh-oh!! Now that I think about it, one politician has indeed been raking in the contributions from the private equity industry... In fact, at the rate of $35,800 a plate during a recent fund raiser hosted by none other than Tony James, the president of private equity firm Blackstone Group... Here's an excerpt from last week's Fortune article At Obama fundraiser, no one mentions private equity:

Obama raises money from private equity, hours after bashing the industry.

FORTUNE -- At a Democratic Party fundraiser, I guess it's inappropriate to mention the elephant in the room.

President Obama last night spent time at the Park Avenue apartment of Blackstone Group (BX) president Tony James, to press the Wall Street flesh and collect $35,800 per plate. It came just hours after his campaign launched its first formal attack on Mitt Romney's record running Bain Capital -- a private equity firm not terribly dissimilar from Blackstone. Talk about awkward! Click here for entire article...

As for whether Romney would accept a little assistance from private equity, given his background, there's no need to go looking, it would make perfect sense...

Here are the amended paragraphs from yesterday's article...

Step Six: If they do their job well, the company is

Thursday, May 24, 2012

The Magic of Private Equity (video)

In just over 2 minutes, former Labor Secretary Robert Reich teaches us how private equity managers become "obscenely rich"... Following is the text -each point followed with my take (in red)... I want to offer you a cleaner (and clearer) insight into "the magic of private equity"... This is not my defense of a particular candidate, or a particular private equity firm,justmy effort to help you read between the lines... Enjoy!



Step One:

Tuesday, May 22, 2012

In the Long Run We're All Dead...

Greece's former prime minister says there are preparations in the works for a Euro exodus, just in case - and U.S. stocks rapidly give up the day's gains... Isn't that interesting? Every economist with no skin in the game has been predicting Greece's ultimate ouster for at least the past couple of years... So wouldn't ya think Greece might attempt to batten down the hatches, just in case? Should we therefore be alarmed? Really?

But here's the problem; the market's (traders') tolerance for pain is exceedingly low these days... All evidence as to what the hell happened points to over-spending, over-borrowing, and over-governing, and traders couldn't give a rip... All they know is thatif Greece exits the Euro, all hell "might" break loose... So any measure (printing) that would keep that from occurring is a buy stock-worthy proposition...Forget about bubbles, forget about the long-run; like Keynes always said, "in the long run we're all dead"...

Clearly, common sense to you and me (the notion that when you party too hard you suffer, learn, and [for survival's sake] change) is utter taboo to traders, to too many economists, and to the monetary policymakers of virtually every developed nation... In the trader's, and academic's, view of the world; you party hard, you suffer, you stop spending, the economy suffers, politicians suffer, central bank officials panic, they print, you go back to partying, the economy heals (itself, by the grace of amazingly resilient entrepreneurs) and begins to turn the corner (albeit at a substantially slower than a free-market pace) - and policymakers will believe they made it happen...

Or, in the words of Nassim Nicholas Taleb:

"Just as one day some primitive tribesman scratched his nose, saw rain falling, and developed an elaborate method of scratching his nose to bring on the much-needed rain, we link economic prosperity to some rate cut by the Federal Reserve Board."

As for Greek [fiscal] culture; in the words of David Letterman:

"Facebook is worth $100 billion. Today it was friended by Greece."

Sunday, May 20, 2012

Your Future Looks Quite Bright to Me...

If your personal stock market experience began twenty years ago (assuming you're the diversify, buy and hold type), you lived through four notable declines; '94, '98, '00-'03 and '08 (the latter two being [historically] extreme) - and yet you have cause to feel pretty okay about your venture... The Dow (I use the Dow because it's the media's benchmark) sat at 3,379 on May 21, 1992... Last Friday it closed at 12,369... A near quadrupling over twenty years ain't that bad - all things considered...

But if your foray into stocks wasn't until late spring 2002, you've suffered the worst of the tech-burst and all of the Great Recession - in the span of a single decade... Thus you're not nearly as inspired by the market as the bloke who got in ten years earlier... The Dow, on May 21, 2002, closed at 10,106... A mere 20% gain isn't at all what you had in mind all those years ago...

Let's go back forty years and play this out a decade at a time - (around) means I had to take the number from a graph:

2002-2012: 10,106 - 12,369
1992-2002: 3,379 - 10,106
1982-1992: (around) 870 - 3,379
1972-1982: (around) 925 - (around) 870

(Consider this a snapshot... A thorough analysis [an utter waste of time that is] would include all thirty decades ['73-'83, '74-'84, '75-'85, and so on, with the last being '02-'12])

As you can see, the market was a nice place to spend a decade if you began in '92 or '82... But no picnic had you started in '72 or '02... And while 2 decade experiences have tended to validate equity investing(look at '72-'92, '82-'02 (meteoric) and '92-'12), 20 years is a friggin long time, particularly if you began in '72 (abysmal first 10 years) or '02 (uninspiring first 10 years)...

So what does all this mean for you? Unless your last name is McFly and you drive a DeLorean, absolutely nothing... Hindsight (regardless of what the "expert" or the historian might have us believe) tells us to never rely on hindsight... I.e., while pros [like yours truly] are notorious for using charts to keep their clients engaged, at the end of the day we have to get back to the future, and literally (well, let's say virtually) forget about the past...

Not that there aren't any heedable lessons from the markets of old, but those worth heeding (like never buy a tech stock that's never made a dime, or real estate when everyone you know has three adjustable-rate home equity loans) simply don't come from price charts...

The future will have little to do with yesteryear, and everything to do with the [global] state of entrepreneurship... And when we look beyond the present failure of the policies of those who lead 15% of the world's people - and look to where the other 85% live (emerging countries); to their demographics, to their needs for infrastructure and technology (Caterpillar and GM are #1 in their respective industries in China - Apple can't keep up with iPhone demand in Asia - 82% of Intel's earnings come from emerging markets - India is taking over as Facebook's #1 country), to their growing thirst for the things only capitalism can quench - well, let's just say I'm now covered with goosebumps...

In other words: "Your future looks quite bright to me"

Friday, May 18, 2012

How to Create a Job (video)

Next time you're stopped by the portly gentleman holding the orange 'stop' sign, while heavy equipment feasts on the asphalt remnants of a road that was, be sure to properly observe the sign to your right; the one reminding you that your taxes are indeed doing some good, that government does create a job now and again... And pay no mind to what those tax dollars might have created in the private sector... Perhaps something innovative, something other than mere consumption...

Here's Professor Ben Powell of Suffolk University on the subject:

Thursday, May 17, 2012

Ingrate Emigrant or True Patriot??

I have to vent, just real quick... A client just left my office... This man spent his entire working life here in California... He amassed a great sum of money in his tax-deferred retirement plan and will be taking a sizable monthly distribution beginning next month, after he relocates to Texas... Texas!! Where there's no state income tax!!

He made a ton of money right here in California, and that's the thanks we get!! The ingrate is emigrating to Texas!!

I wonder how many x-Californians are enjoying richer lives in no-tax states, and who are yet appalled by Mr. Saverin's move to Singapore? I'd bet quite a few... And I wonder how many still-Californians would condemn Mr. Saverin's move, but would totally condone my client's? I'd bet quite a few...

Note: My client loves to play golf and will have substantially more net income to spend on his Callaway (a California employer) supplies... But better yet, and more certain, Mr. Saverin will have 600 million more claims against U.S. products and services... I.e., the money will indeed find its way back to the U.S. private sector (or, alas, I guess it could buy U.S. treasury bonds), it has to...

Ironically, therefore, Mr. Saverin turns out to be a true benefactor to the U.S. economy; not only by his contribution to Facebook, but by the 600 million U.S. dollars that will ultimately find their way home (let's hope to the private sector)...

Market Commentary May 17, 2012

Click here for today's commentary...

Wednesday, May 16, 2012

Intervention; works for Japan...

Demand-side economists, aka Keynesians, believe it's all about aggregate demand... Get consumers in a demanding mood, get them more spendable cash, and you'll see the economy take off, or so goes the narrative... And sure enough, as we speak, the great nation of Japan is living proof that Keynes was right...

Japan's Economy Rebounds in First Quarter on Consumption, reads the headline that caught my eye while browsing CNBC Online a few minutes ago... The following sentence (quoting Yoshimasa Maruyama, chief economist at Itochu Economic Research Institute) is music to the Keynesian ear;

"Consumer spending and public investment are what drove the economy, with auto demand stirred by government subsidies and investment helped by extra budgets after the earthquake."

"Demand stirred by government subsidies" says it all... The way you get an economy moving is you take a bunch of money from the taxpayer, then give it right back to him - but only if he spends it precisely where government directs... In Japan's case, a fuel-efficient automobile... Then, when it's time to report auto sales, voila!, the economy's growing! Never mind where that money would have gone; the industries that will take the hit...

It's like magic, and think of all the ancillary benefits for the politician... You know, get behind an industry that'll get behind your campaign(like say, I don't know, Solar maybe... Or, think back a few years, maybe Ethanol), then direct a government handout (taxpayer dollars) right back at them... You take from the taxpayer then goose whatever industry you like... Yyyyep... It happens...

"But dang!" says the frustrated Keynesian, Mr. Maruyama isn't quite drinking the Kool Aid - per his next statement;

"So, with government polices behind the quarterly growth, we can't say this is a reflection of real strength in the Japanese economy."

Nope, we can't say that at all... Although the politician sure can...

Today's TV Segment May 16, 2011

Singapore's Newest Citizen...

"This pisses me off" tweets Mark Cuban on Singapore's newest citizen and Facebook cofounder Eduardo Saverin's renouncing of his U.S. citizenship... Yep, he was born in Brazil, came to the U.S., became a citizen, went to Harvard, almost got totally screwed by Zuckerberg, and is dodging $600 million in taxes to take his profits in Singapore where there's no capital gains tax...

Mr. Cuban and God knows how many million Americans are mad as hell at youngMr. Saverin... How could he, after this country has been so good to him, turn his back on us, not pay his fair share, yada, yada, yada????

Hmm... Hmm... (this is me thinking how to best say what I'm thinking).... Hmm... Okay: $600 million not going to the U.S. Government... Hmm... Saverin moving to Singapore, #2 on the Economic Freedom Index (I'm predicting that, now that Hong Kong has a minimum wage and some new regs, a #1 rank is in Singapore's future)... $600 million not going to the U.S. Government, who sits at #10 (I think) on the E.F. Index... The U.S. Government; who's burning a $trillion+ (budget deficit), third year running... The U.S. Government, who's lost $billions on crony green energy investments... The U.S. Government, who vows to, in our President's own words, "spread the wealth"... The U.S. Government who, in 3 years, has added $5 trillion to its debt burden...

Let's say you're a parent, a very bright, talented parent who just sold a business for $you-pick-the-number... Insert your kids name in the "U.S. Government" spots above (change the numbers to make it more real for you)... Would you? Would you hand your boy Sam, who blows money like a drunken U.S. politician, 15% of your huge gain? Would you? Seriously? Think about it; who's going to do the most good with all that money, you (the one who earned it), or your profligate boy Sam? Wouldn't it be a good lesson for Sam to see what he would've gained, had he a brain?

Read my praises of Singapore here...

Sunday, May 13, 2012

The Fat Can Eat No Lean - or - Too Much Pain to Pass Up

Housing prices, we'd agree, got way ahead of themselves in the mid '00s. The problem, we 'should' agree, was easy money - i.e., an over-abundance of capital and an under-abundance of prudence on the part of consumers, lenders and policymakers. Easy mortgages made big-shot bidders out of little-shot consumers, leading to fat housing prices, fat realtors and fat cat bankers.

I read a way overdone article this morning in the Times on the plight of the college student. The stats on student indebtedness are staggering. But you know the story. And, when you stop and think about it, you know the problem; it's very much like housing. Politicians promised a post-secondary education in every pot. The floodgates opened - easy cash galore! Jobless students levered up against the promises of a college degree. The result; fat colleges, and fat staff living on fat salaries. Once again; easy money.

Here's how this one plays out as the bubble bursts:

1. The job market stiffens, students feel stooged.
2. Subsidies wane, tuition spikes (the fat can eat no lean).
(1 and 2 represent the current state of affairs, 3+ is where it's headed).
3. Lending gets lean.
4. Kids (parents) get stingy.
5. Colleges compete.
6. Staff gets skinny.
7. Tuition peaks.
8. Things start making sense.

At least that's what should play out, if government steps out of the way. On second thought, scratch all that. There's too much pain (opportunity) for politicians to pass up. We should therefore expect:

1. Same as above.
2. " " "
3. Hard working taxpayer gets saddled with Sally Student's debt.
4. Ugh... stay tuned.

Saturday, May 12, 2012

The Unseen Risk...

So does Jamie Dimon have egg on his face or what? Barney Frank, and every other Dodd Frank supporter, jumped all over JP Morgan

Thursday, May 10, 2012

$billions to the wind...

Jamie Dimon's on the hot seat over some $2 billion in recent losses on derivatives... Fueling the fire for those pushing for yet more regulation of the financial industry...

We're talking JP Morgan; the firm that had the wherewithal to take over Bear Stearns and Washington Mutual (with a little help from the Fed) during the 2008 credit crisis... The firm that has earned over $4 billion a quarter over the past couple of years... The firm with $2.3 trillion in assets and $190 billion in shareholder equity for crying out loud...

Now wouldn't ya think a firm with the ability to generate some $19 billion in earnings in a given year (last year) is taking on a little risk here and there? Indeed, without that four-letter-word, could a firm even begin to generate that kind of cash? But, alas, we're talking a big, systemically important bank... What's to keep it from making similar mistakes going forward, that, cumulatively, could indeed threaten the system, once again? Don't we therefore need to regulate away that sort of behavior? Well, NO... For there is yet another four-letter concept that offers all the incentive a big bank needs to better calculate its bets going forward... It's something we call LOSS... Believe me, nothing inspires prudence like suffering a loss every now and again... Regulation, on the other hand, rather than protecting the system, inspires lobbying, cronyism and, sadly, corruption...

That said, there is this other firm that I'm thinking we do indeed need to clamp down on - big time.. This one's upside-down by $16 trillion and burning another $1.5 trillion a year (talk about systemic relevance!)... Yet, puzzlingly, its top execs were quoted [yesterday] as saying things like: "The enormous loss JPMorgan announced today is just the latest evidence that what banks call 'hedges' are often risky bets that so-called 'too big to fail' banks have no business making." Those would be the comments of none other than Senator Carl Levin...

I'm thinking the good Senator ought to concern himself with the billions he and his team are throwing to the wind, or the sun [as it were], on "risky bets", like Solyndra, and let Mr. Dimon deal with JP Morgan...

Tuesday, May 8, 2012

99 weeks; perhaps not the best political calculation after all...

Extending unemployment benefits may have seemed politically expedient at the time(s), but if a high unemployment rate is, as many think, an insurmountable hurdle for an incumbent president, it could backfire big time...

The story behind the story of the 8.1% unemployment rate, is the 14.5% "true" unemployment rate - when you factor in those who have "left the workforce"... Now think about it; of course you wouldn't do this, but do you think maybe a few of the unemployed would pretend to look for a job for 99 weeks, then when their unemployment checks run out, step out of the workforce? You think maybe a lot would? I mean if benefits were to cease after say 26 weeks (the olden days), today's dropout would've dropped out (dropping the headline unemployment rate) 72 weeks ago, right?...

As for the jobs that have been landed of late, I wonder to what extent that's the result of folks having to go to work now that their benefits have finally expired? Again, the U.S. employment picture, I think, would have started looking a whole lot better a whole lot sooner were it not for the unemployment benefit extensions...

Market Commentary May 8, 2012

Click here for today's commentary...

Sunday, May 6, 2012

QE3's a Coming!!

It's Sunday evening, just looked at stock futures (not pretty) and caught up on the election results in Greece and France (very not pretty)...

A new crop of politicians seized the opportunity to make entirely unfulfillable promises... Shaming their predecessors who dared to renege on all their unfulfillable promises just because they didn't have the revenue to make the payments on all the debt they incurred to fund the deficits they incurred to fund all their unfulfillable promises... Of course if the opportunists had been at the helm all this time, the citizens of these two great (not!) countries would be enjoying the spoils of robust economies, or so they promised (I honestly don't "know" what they promised, but politics ain't rocket science)...

"So then", you ask, "if, when the dust settles, this is bad news; what's the likeliest scenario for the economy and the stock market for the balance of the year?" "Sorry", I reply, "I won't prognosticate on either, but I'll be happy to speculate on the responses of policymakers" (odds are good that I'll be right on two of these three [number two being the least certain]):

1. In response to panicky credit markets in Europe (spiking interest rates) the ECB will open yet more windows for banks to come get really cheap money...

2. The EC, the IMF and the ECB (the so-called troika) will meet the new regimes at the negotiating table... Yes, alas, there'll be private meetings, public promises and plenty of printing till they come up with enough somethings to calm the debt markets and justify the next round of bailouts... (This one's likely, but a tough one for the troika, particularly with regard to Greece... They've been very definite with their threats to abandon the bailouts if austerity measures aren't implemented...)

3. As for the Fed: QE3 is a coming if this gets ugly...

But you're still wondering what'll happen (in the near-term) with stocks? Is it d

The 99% get screwed, Again!!

"They" say; "It's simply not fair that some prosper and some don't in this here greatest nation on earth''... True that!! Yet another example was illustrated in last Tuesday'sWall Street Journal article UAW Freezes Rival Out of Rebound...

As you'll read, an auto manufacturing plant in Moraine, Ohio, one of GMs most productive, was shut down during bankruptcy proceedings in favor of unproductive capital-burning plants, for the simple reason that its workers did not belong to the UAW... Wow!! I am forever amazed at what can be had in return for political favor - at the expense of integrity, productivity, profitability, the rule of law, freedom and, dare I say, fairness (no, scratch that, fairness is way too subjective) - there's [virtually] no bounds... If this is to be the culture of the GM of the future, I predict, well, let's just not bail them out next time...

Once again, politicians picked their winner, that 1.2% (UAW membership as a % of the U.S. population) and their losers (Moraine, Ohio - and society at large - as productivity leads to long-term employment, better quality, better pricing, better economy)...

 

Friday, May 4, 2012

Government, the economy's best friend??

A CNBC senior staff writer writes"Government has become its own worst enemy when it comes to the economy, with public spending putting a damper on growth that otherwise continues at a steady if unspectacular pace."

Amen Brother!! Finally the mainstream (CNBC?) media is starting to publish a little logic, or so I thought upon reading paragraph one of last Friday's article Economy's Biggest Drag Right Now Is Government. Of course I should have known that Mr. Cox was simply stating statistical fact... In that GDP is the sum of consumer spending, investment, government purchases, and net exports, as represented by the equation:

Y= C + I + G + NX

The two factors I wouldn't sweat are government spending (except of course when it rises) and net exports. Think about it, while for the moment, less government spending lowers GDP, less government spending 'ultimately' means more resources remaining in the private sector (consumer, investment). As for net exports; lower NX = higher FCI (foreign capital investment [they do something with those dollars]).

I would say that Government, when it spends less, may indeed be "its own worst enemy", but, longer-term, it's the economy's best friend.

Market Commentary (white board)