Sunday, July 8, 2012

Cutting to the Chase - And - Italy, America's Wakeup Call

I'm just now catching up on the headlines after having been disconnected for a few days. I'm thinking that rather than reading all of the articles and offering up my interpretations, in part one I'll simply cut to the chase and give you my thoughts (one paragraph each), on the first four (economy related) topics based solely on the headlines. In Part Two I hope to touch a nerve.

Part One: Cutting to the Chase

"Job Weakness Starts to Define Landscape of Election Year"
The question is; is it fair to judge a presidency based on the employment experience during its term? Typically no. This time, perhaps. Employment growth typically comes late to a recovery. Employers hold out as long as possible after a recession before adding labor (their largest expense). What's been atypical about this recovery is the palpable uncertainty over future tax rates and regulations. This clearly reflects our lack of leadership. The next question would be; are we talking lack of leadership from the White House or the Hill or both?

"Running Out of Options, Euro Zone May Face a Stark Choice"
Even the measures agreed to during the recent EU summit won't do the trick. I'd place the odds of these "fixes" buying enough time for countries that have been constrained by profligacy and corruption* for decades to grow themselves out of their messes at somewhere between cero and nichts. The "stark choice" being simply: scrap the Euro altogether or do the Eurobond. My money's on the latter.

"Earnings are the Next Big Test for Stocks"
Yep,this week begins Q2 earnings reporting season. Alcoa is the first out of the gate. I have to believe, in light of recent disappointing economic results [globally], that this season may be the worst we've seen in a while. But keep in mind, earnings have been consistently stellar for quite some time. Therefore the 'worst in a while' doesn't mean horrendous. I'm simply guessing (and I do mean guessing) we won't see 80% of the S&P 500 companies blowing away estimates this time around. But if I were a trader (which I'll never be) I'd be more focused on the Fed. The market's begging for yet more easing. That is, QE3.

"Signs We are Approaching a Zombie Economy"
The Fed has pumped a few trillion "into the economy". Well, not exactly. They've pumped a few trillion into bank reserves, and there that few trillion remains (the economy has to come and claim it). And they've lowered interest rates to levels not seen since the fall of Mesopotamia. So then; we have plenty of liquidity, record low interest rates, and sub 2% GDP. Keynesians call this a liquidity trap. I call it palpable uncertainty.

*Part Two: Italy, America's Wakeup Call

(Note: While I entirely sympathize with the following, it is my hope that in our efforts to rein in corporatism that we do not promote yet more business-stifling regulation and collectivist policies here in the United States. Crony capitalism today won't be hindered in the least by giving more power to one of the perpetrators. In fact the exact opposite is what's needed. That is, if we would aim to reduce the politician's power over business we would effectively reduce the incentive for business to capture the politician. The solution is therefore painfully (to the perpetrators) simple: Less government intervention into the economy, close all corporate tax loopholes (while lowering the rates), end all subsidies and tariffs (allowing all the competition the outside world can muster), and absolutely commit that under no circumstances are we to ever again bail out failed institutions (idealistic, I know). Note: not having finished the book, I don't know that Dr. Zingales doesn't draw the same conclusions.)

For a better understanding of why Italy is where it is, here are a few excerpts from University of Chicago Professor Luigi Zingales's recently pubished A Capitalism for the People.

"I came here in 1988 from Italy because I was trying to escape a system that was fundamentally unfair. Italy invented the term nepotism and perfected the concept of cronyism, and it still lives by both. You are promoted by whom you know, not what you know."

"I emigrated to the United States because I realized that it offered me an inestimably brighter future than my native country. And when I got to America in 1988, I wasn't disappointed; I experienced for the first time the inebriating feeling that any goal was within my reach. I had finally arrived in a country where the limits to my dreams were set only by my abilities, not the people I knew."

"Wherever you stand on the political spectrum, whether you're a conservative Republican or a liberal Democrat or somewhere in between, I would gently suggest that you have no idea what it's like to live in a country where there is virtually no meritocracy and competition is considered a sin. Even emergency-room doctors in Italy are promoted on the basis of political affiliation instead of ability. Young people, rather than being told to study, are urged to "carry the bag" (fare il portaborse) for powerful people, in the hope of getting back some favors."

"The best way to get rich is to be politically connected and receive a government contract."

"The only protesters against the system came from the radical Left, which was less interested in changing the system than replacing it with a socialist one. In a country full of privileges based on birth, the Left, instead of fighting for equality of starting points, fought to eliminate all selection mechanisms, viewing them as discriminatory against the have-nots."

"But it wasn't long after arriving in the United States that I began to notice things that felt more like home - as if I were watching a movie I'd seen before. The first case was the 1998 rescue of the largest hedge fund of the time: Long Term Capital Management (LTCM)." "At the time Warren Buffet offered to rescue LTCM, though in a manner that would have cost its owners their entire investment. Instead of allowing that to happen, the Fed stepped in and coordinated a rescue effort that proved more generous to LTCM's investors and managers - a group that happened to include David Mullens, former vice chairman of the Fed." "the Fed had used moral suasion to alter the normal market rules - worse yet, for a friend."

"Under him (GW Bush), the Republican Party moved away from the promarket principles espoused by Ronald Reagan and became increasingly pro-big business, placing a tariff on imported steel in 2002 to protect American manufacturers, for example, and offering corporations special rates to repatriate their profits. At the same time, Democrats were becoming cozier with big-business interests, launching "public-private partnerships," a way to suck money from the government while pretending to do good."

"What I was watching was the transformation of American finance into an Italian-style crony-capitalist system. Indeed, in one way the American situation is worse, since Americans, unlike Italians, cannot place blame on one bad guy. Berlusconi is us. Through our retirement funds and stock investments, we are the owners of the very companies that lobby to grab our tax money and dominate our political life."

"At stake is not just our money but our freedom. Cronyism represses freedom of speech, eliminates the incentive to study, and jeopardizes career opportunities. It has robbed my home country of much of its potential for economic growth. I do not want it to rob the United States as well."`

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