Effor.com

I was reading a Reuters story about the proposed budget in California tonight when I saw this:

Wheelchair-bound Christina Mills, 32, of Sacramento, California said disabled workers could not afford to have subsidies for assistants cut as the governor proposed.

“If they didn’t have home-care workers to help them get dressed in the morning, they wouldn’t be able to go to work.”

Hey Christina – that sucks doesn’t it?  It’s sad, but true – if you need someone else to pay for you to get to work, you’re not earning enough to make your job worth the investment in you!  It would be cheaper for everyone if you stayed home and we payed to take care of you there.  Plus, you wouldn’t be in denial about how much your work is actually worth.

Yes, it’s harsh.  But it’s also true.

gk

Share on Facebook

I haven’t posted in what seems like forever.  It’s a combination of work and a lot going on personally, but really just apathy on my part.  I’m spending a lot of time on fantasy football and stuff with my kids, and I hate saying the same things over and over in a different way.  “Yes Johnny, the government is getting bigger each and every day and I think it sucks.”  That’s the basic message of most of what I have to say.

But I read a post from The Daily Reckoning today that made quite a bit of sense in looking at the future in an optimistic light by comparing it to what we faced in the 1970’s.  I’ve copied it here because it’s worth reading to put things into perspective.  Enjoy!

gk

And finally today, back to Bill…

Our old friend John Mauldin answered last week’s note. Our point was that our children face a different world than we did. From what we can make out, it will be a tougher world. Everything was looking up with the baby boomers. Especially in the lives of the luckiest of them – your editor and John included. Is everything still going up? The US economy? The power and wealth of the US empire? And how about our children? John and I started out with nothing to lose. Our children can slip down as well as slide up. John has today’s Daily Endnote for us. Please enjoy…

It’s More Than Half Full.

Ok, Bill, let’s review those wonderful days from whence we sprang, so fraught with the advantages of having nothing. So potent with opportunity. It was the middle of the ’70s when we started our careers. Inflation was high and rising. The Soviets were seen as a major threat. Japan was beating our brains out and buying everything, even if nailed down (like Pebble Beach and New York skyscrapers). I had to borrow money at 15% (or more) to buy paper in order to meet customer demands for printing. And guess what? The banks got into trouble and called loans willy-nilly. (My bank even called my mother and threatened her to pay my loan – against written agreements – and she did. Evil sons of bitches. The more things change… And they delightedly did fail! Not that I hold a grudge.)

There were multiple successive and deeper recessions. Gold was rising as the dollar was seen as a joke. Howard Ruff (a good friend to both of us when we were starting out!) and almost every newsletter writer were telling people to buy gold and freeze-dried food to protect themselves against a near certain economic, if not apocalyptic, catastrophe. Unemployment was high and rising for a decade.

The correct answer to the question, “Where will the jobs come from?” back then was “I don’t know, but they will.” And it is the correct answer today.

In 20 years, no one will want to come back to the halcyon days of 2005. Our kids (all 13 of them) are getting ready to live through what will be the most exciting period in human history. There will be a century’s worth of change, measured by the standard of the 20th century, just in the next ten years, and then we will double that pace in the next ten after that. Medical miracles that will mean our kids and grandkids will live a lot longer than their dads, although I intend to be writing well into my 80s, like our mutual hero Richard Russell.

There will be whole new industries developed in the US. How do I know that? Follow the money. The rest of the world spends a fraction on research and development that we do. Where do you go if you are looking for venture capital?

Do I care if the Chinese and the “developing” worlds are far better off, relatively speaking, than the US in 20 years? Not a whit. Good on them. I hope they make discoveries and inventions and new businesses that benefit us all. But we are not going into some long dark night. We, and our kids, get to choose how we respond to what is the reality of the day.

Our nation had to almost hit the wall in 1980 before a Volker could come along and force us to take the pain of recessions to beat back inflation. And we will have to come perilously close to the wall this time before we take action as a nation. Way to close for comfort. Maybe you are right, and we have a soft depression. I hope not, but even so, the world will be better, far better, in 20 years, with far more opportunities than today.

It was not fun starting new businesses in the ’70s and early ’80s. But we did. I remember coming to Baltimore and being (literally) afraid to get out of the car to visit your offices in the slums. But that was what you could afford. A far cry from the chateau in Ouzilly.

I lived in a small mobile home. Tiffani was born there, and we converted part of the kitchen to be her bedroom. (Yes, I was white “trailer trash.”) But I got up every morning just like you did and killed as many alligators as I could. The rest had to wait till the next day.

And that is the legacy our kids have. They know what it is to wade into the swamp every morning. Never quitting. In thinking about this, you may be the father I respect the most. You have raised your kids to be multi-lingual children of the world. What a work ethic. How did you get them to scrape window shutters at your chateaus? (I actually saw this, and my kids marveled.

Thereafter I threatened to make them go live with you when they did not act right!)

You have given your kids the opportunity to follow their dreams, even demanded that they do so. And such dreams they (and mine) have. Will they succeed? Who knows? But they will go at it with gusto, in a world with more opportunities than you and I ever imagined 40 years ago. And, oh boy, were we optimists back then. How else could we have done what we did? If we believed the rhetoric that the world was coming to an end, would we have dared to venture out?

You cannot have raised your kids to be such bold adventurers without instilling in them a certain high level of optimism. I am going to out you, Mr. Bonner. You present yourself to your readers as a bona fide end of the world pessimist. But you are a really and truly a closet optimist. Your whole business empire (and what an empire it has become!) is based on finding people who are optimists, in the sense that they think they can actually get people to send them money for what they write. Which they do! Even if it is to read why the world will come to an end, which it thankfully never does.

You are right in this: it is personal gumption that makes or breaks us. There are those who started out with less than we did (hard to imagine but true) and made a lot more. And there are those who started out with far more and made less. But there are very few who are happier than either of us. Or luckier.

Our kids? It is not the times which dictate the man (or daughter!), but the response of the man which dictates his own time. Today has a brighter future for someone young than any other time in history, whether they are in the US or Brazil or China. They just have to seize it.

And as our kids do just that, and as the millions of kids of those who read us do so, and the billions of kids who are just now getting ready to bust loose all work to achieve their dreams, the world is going to be a far more fantastic place. Smooth ride? Not a chance. We didn’t get one, and in thinking through history, there have not been many smooth rides. Why should we think we will get any better? Our kids will just have to live with our generational (and individual) iniquities, government debt and all, and figure out how to master their own fates. But if I had a choice to take the ’70s or today? In less than a heart’s beat I choose today. And I bet you would too!

Regards,

John Mauldin
for The Daily Reckoning

Share on Facebook

Here’s a bumper sticker someone needs to make – “Honk if I bought your clunker”, or “Honk if I bought your new car”.

Just like the “Honk if I’m paying your mortgage” stickers last year, cash for clunkers is simply a way for politicians to take money from one group and give it to another who hasn’t earned it.  It’s a redistribution of wealth, just like the bread and circuses of Rome.  Keep the plebes happy so they continue to vote for the incumbent – and so they don’t revolt.

When are Americans going to say “Enough”?  I don’t think enough of us will ever get to that point, and I think we can look forward to a fairly rapid decline of this country.

gk

Share on Facebook

Cash for clunkers seems to be all the rage this week.  Hundreds of news stories and blog posts are telling everyone how successful it is, how it RAN OUT OF MONEY IN ONE WEEK when it was supposed to last until November, and how this will boost the economy.

Bullshit.

Here’s an excerpt from the Daily Reckoning.com explaining why it’s bullshit.

And as Bill has been pointing out, this is just another example of the government promoting the idea that the future doesn’t matter – just spend for today. He wrote in Friday’s essay: “Instead of letting the consumer buy a new car when he is ready, the feds give them money to buy now. So, he buys in 2009 and not in 2010. What good is accomplished? It is as if they didn’t expect 2010 to ever arrive…”

The Wall Street Journal backs us up here: “The subsidy won’t add to net national wealth, since it merely transfers money to one taxpayer’s pocket from someone else’s, and merely pays that taxpayer to destroy a perfectly serviceable asset in return for something he might have bought anyway. By this logic, everyone should burn the sofa and dining room set and refurnish the homestead every couple of years.”

This is what’s known as the “broken window fallacy” that I posted about in February 2008.  It’s a classic story and you can read all about it on the link, but here’s the main part as told by Henry Hazlitt’s classic “Economics in One Lesson” (Which I urge you to read.) It’s copied from my earlier post -which was copied from Lew Rockwell’s post on Mises.org.

A kid throws a rock at a window and breaks it, and everyone standing around regrets the unfortunate state of affairs. But then up walks a man who purports to be wise and all knowing. He points out that this is not a bad thing after all. The man fixing the window will get money for doing so. This will then be spent on a new suit, and the tailor too will get money. The tailor will spend money on other items, and the circle of rising prosperity will expand without end.

What’s wrong with this scenario? As Bastiat put it, “It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way which this accident has prevented.”

You can see the absurdity of the position of the wise commentator when you take it to absurd extremes. If the broken window really produces wealth, why not break all windows up and down the whole city block? Indeed, why not break doors and walls? Why not tear down all houses so that they can be rebuilt? Why not bomb whole cities so construction firms can get busy rebuilding?

It is not a good thing to destroy wealth. Bastiat puts it this way: “Society loses the value of things which are uselessly destroyed.”

It sounds like an unexceptional claim. But herein rests the core case against everything the government does. Perhaps, then, we can see why the allegory is not better known. If we took it seriously, we would dismantle the whole apparatus of American economic intervention.

If you are with me to this point, perhaps you have a hard time believing that anyone really believes that wealth destruction is actually a good thing. Let me try to show that the fallacy is as pervasive as ever.

After every natural disaster, we at the Mises Institute start what we call the “Broken Window Watch.”

After hurricane Katrina, the Labor Secretary said, “[W]hat will happen — and I have seen this in previous catastrophes and hurricanes — there is a bright spot in that new jobs do get created.”

And The Economist said, “While big hurricanes like Katrina destroy wealth, they often have a net positive effect on GDP growth, as the temporary downturn immediately after the storm is more than made up for by the burst of economic activity that takes place when the rebuilding begins.”

And the New York Times said, “Economists point out that although Katrina has destroyed a lot of accumulated wealth, it ultimately will probably have a positive effect on growth data over the next few months as resources are channeled into rebuilding.”

That’s what we’re doing with Cash for Clunkers.  We’re diverting capital from where it would naturally go into a program to destroy valuable assets and replace them.

Why not apply the concept elsewhere? How about cash for houses? Cash for liquor? Cash for newspapers? Cash for trips to Europe?

Yes, there will be a temporary boost to the economy, but it comes at the expense of next year, and the next year, and the next year.  WHO IS PAYING FOR IT?  We all are, and all we’re actually doing is postponing the day of reckoning.  You cannot borrow your way out of debt, and that’s what this program is trying to do.

gk

Share on Facebook

Just glancing through the news this morning and saw this in a story on CNN.com:

The blue-chip Dow turned in its best July performance since October of 2002.

On a related subject, this could be the best August since April….

gk

Share on Facebook

I was browsing through MarketWatch.com tonight and saw this story from Todd Harrison.  If you’re unfamiliar with Todd, he’s the founder of Minyanville.com, and he caused an uproar in the trading community last year when he announced that he had moved 100% of his long term money into cash.  The Dow was at 11, 346 when he said that.

Back to the story.  Today Todd says that he thinks a chart of 2009 is going to look like a “W”, and that “We’re currently dancing around the middle spike“.  In other words, the current spike in stocks is just a spike, and it’s going to head lower again.  I agree.

To explain his reasoning, Todd says “The market has room to run in the context of the lower highs that define a bear market. The first test will arrive around S&P 950, which is dual resistance in the form of the 200-day moving average and the one-year downtrend.”

The flies in the sustained recovery ointment are two-fold, which is why I’m of the view that this is a bear-market bounce. First, rampant inflation requires legitimate demand for goods and services coupled with the healthy velocity of money, neither of which can be artificially manufactured by the litany of government acronyms or tough talk from the Beltway.

Second is the unavoidable reality that the cure for an imploding debt bubble isn’t the inducement of more debt but rather the destruction of it. That is the single greatest flaw in the “all-clear” thesis; we’re swimming backwards against a growing tide of credit dependency and the cumulative imbalances that have built since the turn of the century.

Employment is still dropping, housing prices are still dropping, earning are still declining.  I see no reason to buy back in at this time.

gk

Share on Facebook

Just scanning the headlines on Google News tonight and happened across this in the NY Times.

The highly complex tactic has become a cause of growing concern within the Internal Revenue Service in recent years because it deprives the Treasury of billions of dollars a year, according to private-sector estimates.

It “deprives the Treasury of billions of dollars a year”?  Really?  How about phrasing it something like “it doesn’t take billions of dollars a year from the companies who earned it”?

BTW – The “highly complex tactic” simply says that a company isn’t taxed on money it earns outside of the country as long as it re-invests the money in the country where it was earned.  As in building a better, more efficient factory, or buying the materials it needs to keep producing the product

The NY Times (and Obama) seem to think that they are being “deprived” of billions of dollars per year.  How?  Did they earn it?

That’s what I thought.  Now shut up and quit spending so much of our money.

gk

Share on Facebook

It’s been a while since I’ve had time to post any new info, and as I was reading through the news tonight, it occurred to me to close the loop on the dismal S&P 500 earnings in Q4 of 2008.  To sum it up, they sucked.

Standard and Poors has the final numbers for 2008 here.  (Link will open an Excel spreadsheet from S&P.)  Take a look at the “12 month values” tab where you can see the annual earnings of the S&P 500.  In particular, look at columns “C” and “D” which are the operating earnings and as reported earnings.  The 2008 operating earnings came in at $49.51 and as reported came in at $14.88.

Operating earnings are the lowest since June 2003, and as reported earnings are the lowest since – well, they’re the lowest as far back as S&P reports, which is 1987.  As reported earnings haven’t been this low since at least 1987.  The S&P 500 closed 1987 at 247.08, and the DJIA finished that year at 1938.83.  That should give a little perspective on why I think stocks are still way too high.

Want more?  Take a gander at the “Estimates & PE’s” tab.  Look at the estimates for earnings and PE ratios.   Notice anything weird?  Like a negative P/E ratio in cell H33 maybe?  Here’s a clue – there’s NEVER been a negative P/E ratio for the S&P 500.  Negative numbers aren’t good when you’re talking about earnings.  And S&P is estimating a P/E ratio of -465.29 at the end of September 09.

Super high numbers aren’t good when you’re talking about P/E ratios.  With that being said, I give you cell H34 as Exhibit B.  That number is 1951.66.  Go ahead, look through the spreadsheet.  Try to find a P/E ratio anywhere in the past that was that high.  I’ll wait…..

You back?  Cool.  The highest P/E ever in the SP500 was at the end of 2008, when it was 60.7.  Does that give you some perspective?  That tells you that stock prices were way too high at the end of 2008 – and justified the sell-off into the March lows.

The current estimated P/E (for Q1 2009) is 128.  Which is the highest ever so far.  But as I showed above, the forward looking numbers are even worse.  So why do some people think this is the time to buy stocks?

That’s not a rhetorical question, as I don’t see anything that justifies current stock prices.  Even with projected earnings (which I think are still too high) the P/E’s are sky high.

Either the earnings need to soar, or the price needs to drop.  I think the price will drop, because I’ve seen nothing that indicates the recession is close to ending which would cause earnings to skyrocket.

What do you think?

gk

Share on Facebook

Here’s a post copied from Save Capitalism. Check out his blog if you’re interested in how a capitalist from Sweden views the economic meltdown.  It’s good stuff!

gk

Capitalist Blog Revolution (III) : We all hate Keynesians now

Share on Facebook

It’s a cool rainy day in Knoxville, so I’ve been catching up on my reading.  Yesterday’s Daily Reckoning had a great article titled “How to Save the World” and I want to post a bit of it here with some comments, because it sums up the cause – and the solution – to the economic train wreck we’re all watching.

I like this line: It is not often that we are called upon to advise the world’s government. In fact, we can’t remember a single time. But we can’t resist a lost cause. So, we offer the Daily Reckoning Plan to Save the World, or DRPtStW for short.

Humor like that always make Bill Bonner’s articles a great read.

Just read the Financial Times. This week it has a windy series on the “Future of Capitalism,” inviting readers to imagine how the decaying old creed might be reformed. Alas, for capitalism, it’s out of the frying pan, into the toilet. Larry Summers, Obama’s number one financial advisor, voiced the prevailing view: “This notion that the economy is self-stabilizing is usually right, but it is wrong a few times a century. And this is one of those times…there’s a need for extraordinary public action at those times.”

Larry Summers is wrong.  The economy is self stabilizing – if only government would get the hell out of the way and let the stabilization happen.

The gist of his program can be expressed in another wistful absurdity: The consumer economy died because of too much spending; now we will revive it by spending more. “Give me your cunning bankers, your hopeless CEOs, your huddled masses of chiselers, spendthrifts and boondogglers,” says the Obama team, “and we’ll give them other peoples’ money!”

This is Keynesian economic theory in action.  It’s just as wrong now as it was in the 1930’s, but the government feels it has to do “something” even it it doesn’t makes sense.

Note – government spending in times of economic slowdown can help alleviate the suffering, but only the government has money to spend.  We’re $11 trillion in debt. Too much debt caused the problem – does anyone really think borrowing more is going to fix it?

“There’s no place that should be reducing its contribution to global demand right now,” explained Summers. “The world needs more demand.” But it was demand that the world recently had too much of. English speakers took on too much debt to create it…and built too many houses and too many shopping malls to satiate it. And despite the ready cash offered by Bush, Bernanke, and Paulson, demand has sunk, because the real problem is not an absence of spending, but a surfeit of debt. In America, for example, total debt went from 150% of GDP in the ’80s to 350% in 2007. The financial markets panicked when it became clear that debtors didn’t have the cash flow to pay off the debt…and that an entire world economy had been fizzed up to supply products to people who couldn’t afford them. Investors have been discounting debt-soaked assets ever since.

The fix is obvious – reduce the level of debt. About $20 trillion worth of debt, in the United States alone, needs to disappear. Then, consumers can go back to doing what they do best – consuming. But how do you reduce the debt level? Former Treasury Secretary Andrew Mellon had the right idea in 1929: ‘Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate…It will purge the rottenness out of the system…Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

It really is that simple.  That’s capitalism.  People who make bad decisions go broke, and people who make good decisions get wealthy.  Government interference only gums up the process and keeps it from working.  Which is about the only thing governments do well.

What’s the cure for a depression? It’s a depression. Let willing buyers and sellers mark debt down to what it is really worth. Mellon’s plan was not followed by the Hoover or Roosevelt administrations. Instead, they introduced elaborate bailouts, stimulus programs, and boondoggles. That is why the depression is known as the Great Depression, rather than the So-so Depression. By the end of the 30s, the US economy was almost exactly the same size it had been at the beginning. Likewise, in Japan, holding off liquidation brought a “lost decade” in the ’90s. Bush followed in Hoover’s footsteps. And now, the Obama administration follows in Roosevelt’s and Miyazawa’s.

Here’s our advice: forget it. Let the depression do its work. Let the bad times roll!

Great article Mr. Bonner.

gk

Share on Facebook