At no point in recent memory have I been more proud to be born and raised a Hoosier. No, not a graduate of Indiana University, but to be a resident of the great State of Indiana, one of the last remaining bastions of common sense in this country we call the United States of America.
Political convenience is being placed ahead of common sense and rules, laws, and ordinances that have existed for centuries. Common sense and tradition are being hurriedly tossed to the wind. To what do I refer? I am referring to the recent lawsuit filed by no other than Indiana’s State Treasurer to stop the bankruptcy fire sale of Chrysler to Fiat.
I have intentionally avoided writing anything about the automotive industry on my blog site. My father-in-law retired from GM, my grandpa, uncle, and cousin all retired from Chrysler, and many, many friends and clients are either employed or retired from Delphi, Delco, GM, Chrysler, or work in auto sales. The automotive industry has been a staple in Indiana for decades, but for many Hoosiers it is a love-hate relationship with the carmakers. Employees, retirees and their families all love the industry; others blame the UAW for the current automotive crisis and are more than willing to say that "they are getting what they deserve." Knowing that I would receive hate mail or fan mail from one side or the other, regardless of what I would write, I have tried to avoid the situation altogether.
However, this article, while dealing indirectly with the automotive industry, deals directly with the property rights and legal rights of every American citizen. Why does real estate in the US cost more than like properties in most other areas of the world? Because we have a long-standing tradition of actually recognizing the legal owner. Anyone that buys a piece of property knows that our government will not just arbitrarily come in and take our property away. That is, until recently…..
There is a pecking order in the structure of capital. A company could issue common stock, preferred stock, senior debt and junior debt. If a company were to go belly-up, the long-standing rule is that senior debt holders could seize any assets that have been pledged as a security, and then sell them to satisfy claims. If any value remains in the company, holders of senior debt are then paid. Junior creditors are next in line, followed by preferred shareholders, and common shareholders are last in line, getting paid only if everyone else has been paid back first. For example, let’s say you have a first mortgage and a second mortgage. If you had to declare bankruptcy, the first mortgage would be paid back from the sale of your property before the second mortgage would get a single penny. And, all things being equal, the interest rate you pay on a first is generally less than you pay on a second. Why? Just like most securities, the more perceived risk, the higher the expected return. A first mortgage (being senior debt) has less perceived risk than a second mortgage (junior debt).
And so it was with Chrysler. They had senior creditors and junior creditors. The senior creditors should be the first to be paid back in a bankruptcy. And this is where the State of Indiana comes into play. The Indiana State Teachers Retirement Fund, Indiana State Police Pension Trust, and Indiana Major Movers Construction Fund represent approximately 100,000 civil servants, police officers, school teachers and their families. These three funds were senior creditors to Chrysler, investing millions of dollars, receiving less interest in return than junior creditors, and are now being told that they will not be paid back before junior debtors; in fact, it is just the opposite!
Now that Chrysler has filed for bankruptcy, Indiana and other secured creditors are being told that they will get roughly 30 cents on the dollar. But the UAW, an unsecured junior creditor, will get approximately fifty cents on the dollar. Doesn’t quite sound equitable, does it? Would it be fair for your second mortgage or home equity line to be paid back before your first mortgage? No. Common sense tells us that this is wrong. So why was it just Indiana making a fuss?
Turns out the major holders of secured senior debt to Chrysler were none other than the big banks – you know, those same big banks that received billions of dollars in TARP money. The President has already demonstrated that he IS the CEO of every firm receiving federal aid: remember, the President fired the CEO of General Motors not long ago, and the CEO’s of the banks would like to remain in their positions. So the big "I took the TARP money" banks reluctantly agreed not to fight for more than 30 cents on the dollar for their secured debt.
The powers that be in Washington knew that with the banks out of the way, they could brush away any investors – including the State of Indiana – that would try to hold out for what is rightfully theirs. What truly amazes me is that the Supreme Court agreed to the sale, and effectively slapped Indiana – and all secured creditors throughout the United States – in the face. This decision will change the way that companies will issue debt in the future, and it will change they way that foreign investors view the United States indefinitely. From now on, there may be better places to invest – countries that have more solid property rights and contract rights than we do.
The President helped out the UAW at the expense of other unions, such as the Indiana State Teacher’s Association. But what has he done to capitalism as a whole? Why would anyone be willing to accept a lower yield as a "secured" debt holder, after the junior creditors with Chrysler were paid back before the senior creditors? Why become a bond holder at all? How will future companies raise capital?
My hat goes off to State Treasurer Richard Mourdock for displaying common sense. He lost the battle, but hopefully common sense will eventually win the war.
Of course these are just my thoughts – Clark’s Thoughts.
Thursday, June 11, 2009
Friday, June 5, 2009
It's a gas!
I am not an energy expert. I have no training in the subject, and I have never been involved in any industry that has had to worry about carbon emissions. There are many more people in our community better suited to write a column on this topic than I am, but since most Hoosiers, as well as the majority of Americans, are nearly as clueless as I am on the subject, I decided to look into it a little bit in hopes of gaining a better understanding.
HR 2454, the American Clean Energy and Security Act, sets the groundwork for a "cap and trade" system when dealing with carbon emissions. What exactly is cap and trade?
Each individual company will have a limit on the amount of carbon it can emit into the atmosphere. The company would have to have a permit for every ton of carbon dioxide it emits. The permits then serve to limit, or cap, the greenhouse gas pollution that the company is permitted to emit.
Keep in mind that a company will have to pay for these permits. The government may dictate how many permits a company can purchase, and then it is up to that company to either make sure they comply with not emitting more carbon than the permits allow, or buy purchasing additional permits from other companies that reduced their emissions quicker than anticipated. This is where the "trade" comes into play.
For some companies, it will be easy to reduce their amount of emissions and sell their extra permits to companies that are less fortunate. Other companies, in other industries, will be forced to purchase those permits at market price or face hefty fines.
Why does the government want to issue a cap and trade program? Maybe they really want to reduce the amount of greenhouse gasses, but my guess is they are really looking for an income stream. Each year the companies must purchase the permits. Each year the government rakes in some extra cash.
About two weeks ago, the Governor of Indiana, Mitch Daniels, wrote an outstanding Op-Ed in the Wall Street Journal. (May 15, 2009 – "Indiana Says ‘No Thanks’ to Cap and Trade") Regardless of your politics, I think that Mitch did an outstanding job in the letter, and if you are interested in this subject, I would recommend that you look it up on the internet.
Mitch believes that passage of this bill, a bill that would penalize some of our alternative energy initiatives in Indiana, would do little more than to double electric bills in our state. Not only does Mitch argue that Indiana would lose plenty of jobs because of this system, but a study by Buckley and Mityakov show that estimates of job losses attributable to cap-and-trade range in the hundreds of thousands, with the price for electricity, natural gas, and gasoline also increasing exponentially. Mitch goes on to call this an "imperialistic" bill, with states like California, Massachusetts and New York reaping the benefits of these new taxes at our expense.
I know that this discussion on cap and trade may seem one-sided, and I am as much in favor as being green as the next guy, but Indiana has been a frontrunner in biodiesel, ethanol (take CIE in Marion for instance), and clean coal technology. We are working for a greener world. Why should we be penalized for our efforts?
One final quote from Mitch on this topic, and again, I would encourage you to read the May 15, 2009 article:
"And for what? No honest estimate pretends to suggest that a U.S. cap-and-trade regime will move the world’s thermometer by so much as a tenth of a degree a half century from now. My fellow citizens are being ordered to accept impoverishment for a policy that won’t save a single polar bear."
Those are not my thoughts; they are Mitch’s. But from what little I do understand on this subject, I would tend to agree with him.
HR 2454, the American Clean Energy and Security Act, sets the groundwork for a "cap and trade" system when dealing with carbon emissions. What exactly is cap and trade?
Each individual company will have a limit on the amount of carbon it can emit into the atmosphere. The company would have to have a permit for every ton of carbon dioxide it emits. The permits then serve to limit, or cap, the greenhouse gas pollution that the company is permitted to emit.
Keep in mind that a company will have to pay for these permits. The government may dictate how many permits a company can purchase, and then it is up to that company to either make sure they comply with not emitting more carbon than the permits allow, or buy purchasing additional permits from other companies that reduced their emissions quicker than anticipated. This is where the "trade" comes into play.
For some companies, it will be easy to reduce their amount of emissions and sell their extra permits to companies that are less fortunate. Other companies, in other industries, will be forced to purchase those permits at market price or face hefty fines.
Why does the government want to issue a cap and trade program? Maybe they really want to reduce the amount of greenhouse gasses, but my guess is they are really looking for an income stream. Each year the companies must purchase the permits. Each year the government rakes in some extra cash.
About two weeks ago, the Governor of Indiana, Mitch Daniels, wrote an outstanding Op-Ed in the Wall Street Journal. (May 15, 2009 – "Indiana Says ‘No Thanks’ to Cap and Trade") Regardless of your politics, I think that Mitch did an outstanding job in the letter, and if you are interested in this subject, I would recommend that you look it up on the internet.
Mitch believes that passage of this bill, a bill that would penalize some of our alternative energy initiatives in Indiana, would do little more than to double electric bills in our state. Not only does Mitch argue that Indiana would lose plenty of jobs because of this system, but a study by Buckley and Mityakov show that estimates of job losses attributable to cap-and-trade range in the hundreds of thousands, with the price for electricity, natural gas, and gasoline also increasing exponentially. Mitch goes on to call this an "imperialistic" bill, with states like California, Massachusetts and New York reaping the benefits of these new taxes at our expense.
I know that this discussion on cap and trade may seem one-sided, and I am as much in favor as being green as the next guy, but Indiana has been a frontrunner in biodiesel, ethanol (take CIE in Marion for instance), and clean coal technology. We are working for a greener world. Why should we be penalized for our efforts?
One final quote from Mitch on this topic, and again, I would encourage you to read the May 15, 2009 article:
"And for what? No honest estimate pretends to suggest that a U.S. cap-and-trade regime will move the world’s thermometer by so much as a tenth of a degree a half century from now. My fellow citizens are being ordered to accept impoverishment for a policy that won’t save a single polar bear."
Those are not my thoughts; they are Mitch’s. But from what little I do understand on this subject, I would tend to agree with him.
Wednesday, June 3, 2009
Robbing Peter to Pay Paul
Raising taxes of any kind is not a good move for a politician. Politicians fear that if they vote for tax increases, then they will not get reelected. The problem is, sometimes they really do need to raise taxes. In today’s demographic shift, in my opinion, there is only one direction for taxes to go, and that direction is up!
Let’s look at it this way: When JFK was in office, the highest marginal tax bracket was at 90%. Ninety percent!! Can you imagine? Can you imagine that for every dollar you earned, you only brought home ten cents? But here comes the Baby Boom. A huge mass of Americans all entering the workforce at once. As more and more Baby Boomers entered the work force, there were more and more people paying taxes. The more taxes they paid, the lower the top marginal tax bracket could go. Today, the highest bracket is right around 35% - quite a huge difference than it was during JFK’s tenure.
Now we have to realize what is happening. The Baby Boomers, as big of a blessing as they once were, are now entering into retirement. They are earning less money per year. They are paying fewer taxes than they did during their working years. Now what happens? We have a deficit. Our government is used to operating on "x" dollars, indexed for inflation of, of course, and now the Baby Boomers are being replaced by younger workers, earning lower wages than the Boomers were getting, and obviously paying less taxes than the Boomers were paying in recent years. "Houston, we have a problem!"
I believe wholeheartedly that no matter who became President, taxes would have to head north. But politicians on both sides of the fence are scared to death of raising two types of taxes: income and property taxes. They know that by raising either of these taxes, they will face a tough time getting reelected. But they need tax revenue. How can they get it? My belief is that we are seeing a huge trend toward consumption taxes.
A consumption tax is simply a tax based on the good or service that you purchase. Some consumption taxes are also called "sinners taxes" – taxes on alcohol and tobacco, for example. But there are other types: the City of Marion just recently began giving a surcharge on trash disposal. The counties surrounding Indianapolis face additional taxes when dining out. Citizens of Indiana already pay a pretty hefty bill when getting license plates.
In the future I can see more taxes for utilities, gas, license plates, trash, water, cell phones, internet access, retail sales tax, restaurants, etc. They will raise whatever they can to help prevent raising income and property taxes, since those are such critical issues. But call it what you want, disguise it however you want, a tax is a tax. Whether they put it on income or property, we are still paying it. They will be robbing Peter to pay Paul, so to speak.
One form of consumption tax that I think we will see eventually is that for Police services. It only makes sense that we will eventually be charged. When an ambulance shows up at your house, who pays for that service? We do. Some of us have insurance, some of us don’t. But we pay. What will happen when the municipalities start charging to send officers to your door? Maybe everyone gets one free visit. But think about it – the third time the officer has to come to a home because of a domestic violence dispute - that costs the taxpayers money. Why shouldn’t the disputing couple have to pay for that visit? Why should the taxpayers have to pay for the firemen to rescue a cat out of a tree?
In no way do I want you to think that I support consumption taxes; in no way do I want you to think that we should have to pay to call out the local sheriff. But I do think fees like this will be heading our way. It is a growing trend that we will unfortunately see more and more of, not just at the federal level, but state and local municipalities, as well.
Of course, these are just my thoughts, Clark's Thoughts.
Let’s look at it this way: When JFK was in office, the highest marginal tax bracket was at 90%. Ninety percent!! Can you imagine? Can you imagine that for every dollar you earned, you only brought home ten cents? But here comes the Baby Boom. A huge mass of Americans all entering the workforce at once. As more and more Baby Boomers entered the work force, there were more and more people paying taxes. The more taxes they paid, the lower the top marginal tax bracket could go. Today, the highest bracket is right around 35% - quite a huge difference than it was during JFK’s tenure.
Now we have to realize what is happening. The Baby Boomers, as big of a blessing as they once were, are now entering into retirement. They are earning less money per year. They are paying fewer taxes than they did during their working years. Now what happens? We have a deficit. Our government is used to operating on "x" dollars, indexed for inflation of, of course, and now the Baby Boomers are being replaced by younger workers, earning lower wages than the Boomers were getting, and obviously paying less taxes than the Boomers were paying in recent years. "Houston, we have a problem!"
I believe wholeheartedly that no matter who became President, taxes would have to head north. But politicians on both sides of the fence are scared to death of raising two types of taxes: income and property taxes. They know that by raising either of these taxes, they will face a tough time getting reelected. But they need tax revenue. How can they get it? My belief is that we are seeing a huge trend toward consumption taxes.
A consumption tax is simply a tax based on the good or service that you purchase. Some consumption taxes are also called "sinners taxes" – taxes on alcohol and tobacco, for example. But there are other types: the City of Marion just recently began giving a surcharge on trash disposal. The counties surrounding Indianapolis face additional taxes when dining out. Citizens of Indiana already pay a pretty hefty bill when getting license plates.
In the future I can see more taxes for utilities, gas, license plates, trash, water, cell phones, internet access, retail sales tax, restaurants, etc. They will raise whatever they can to help prevent raising income and property taxes, since those are such critical issues. But call it what you want, disguise it however you want, a tax is a tax. Whether they put it on income or property, we are still paying it. They will be robbing Peter to pay Paul, so to speak.
One form of consumption tax that I think we will see eventually is that for Police services. It only makes sense that we will eventually be charged. When an ambulance shows up at your house, who pays for that service? We do. Some of us have insurance, some of us don’t. But we pay. What will happen when the municipalities start charging to send officers to your door? Maybe everyone gets one free visit. But think about it – the third time the officer has to come to a home because of a domestic violence dispute - that costs the taxpayers money. Why shouldn’t the disputing couple have to pay for that visit? Why should the taxpayers have to pay for the firemen to rescue a cat out of a tree?
In no way do I want you to think that I support consumption taxes; in no way do I want you to think that we should have to pay to call out the local sheriff. But I do think fees like this will be heading our way. It is a growing trend that we will unfortunately see more and more of, not just at the federal level, but state and local municipalities, as well.
Of course, these are just my thoughts, Clark's Thoughts.
Tuesday, May 5, 2009
The Oracle of Omaha
I just returned from the Annual Berkshire Hathaway shareholders meeting. This year witnessed a record attendance – approximately 35,000 people from around the globe flocked to Omaha, Nebraska to have the opportunity to hear some words of wisdom from the "Oracle of Omaha," Warren Buffett, and his partner and long-time sidekick Charlie Munger.
In case you are not familiar with Warren, Warren is the world’s wealthiest person. Depending on the quarter, he is neck-and-neck with Bill Gates and Mexican telecommunications giant, Carlos Slim Helu, but as of last year, I believe Warren was still in first place. How did he get there? Hard work making money, and then working hard to make his money work for him.
One of the best Buffett books that I have read, and I am by no means a Buffett expert, was the The Snowball: Warren Buffett and the Business of Life by Alice Schroeder, published last year. The Snowball explains how Buffett was an entrepreneur at an extremely young age, and as he accumulated assets, the book details how he gradually invested his money, and other people’s money, to propel him to the wealthiest human on the planet.
Warren is undoubtedly the most famous investor in the world, and plenty of people flocked to see him last weekend. At one point during the conference, I was within a few feet of multiple billionaires, including Bill Gates, Charlie Munger, and himself, Warren Buffet. At one point in time, I literally bumped into Warren. What do you say when you have about 1/10th of a second to have a conversation with the world’s wealthiest person? In a blink of an eye, I knew exactly what to say. "Hi, Warren!" I said gleefully as he passed by. "Hi, how are you doing?" he responded with a smile, and hurried through the crowd to take his seat.
Not much, I know, but it was the extent of my conversation with Warren, nonetheless. But soon the shareholders Q&A meeting would get started, and I would have the opportunity to hear some valuable insight from this brilliant investor.
This year, three journalists would ask questions that were chose from thousands of different shareholders, and some shareholders present were selected from a lottery system to ask the questions. Both Warren and Charlie are known for their words of wisdom. During the meeting, Warren would routinely take 5 minutes to answer a 1-minute question, and Charlie, who always batted second, would take 1 minute to answer a 10-minute question.
All sorts of questions were asked of the two, from the economy to any other question regarding Berkshire Hathaway’s holdings or operations. Buffett, who is a well known Democrat, and Munger, who is a Republican, both had the same view from the measures the government has taken recently to stimulate the economy: What they did wasn’t perfect, but it beat doing nothing.
When asked about Government Bonds, Buffett was clear that fixed income investors were going to lose purchasing power over time. Munger was a little more direct, saying that one "should become a brain surgeon and invest in Coca-Cola rather than government bonds."
On Inflation: "The best protection against inflation is your own earnings power," according to Buffet. In other words, excel in your chosen career path. Be the best you can be, and you will be able to earn more and more. The second best protection against inflation is the "earnings power of a wonderful business," especially ones that do not require heavy capital outlay.
Buffett and Munger mentioned several times that it is important to have emotional stability when being an investor, and slammed investors and analysts that try to "outsmart" the system. According to Buffett, "it is much better to have an IQ of 130, than to think you have an IQ of 160, when it is only 150." High IQ’s can get you into trouble. "Investing is simple, but it isn’t easy." You don’t have to be a brain surgeon to make money in the market.
Over the years, there have been thousands of words of wisdom from Buffett, 78, and Munger, 85. "You should invest in a business that even a fool can run, because someday a fool will," and two rules, "#1. Never lose money. #2. Never forget rule No. 1," both attributed to Buffett. Munger’s wisdom is equally revered: "Bull markets go to people’s heads. If you’re a duck on a pond, and it’s rising due to a downpour, you start going up in the world. But you think it’s you, not the pond, "and "People calculate too much and think too little."
Whether or not you like Warren Buffett and Charlie Munger or their politics, there is no doubt they will go down as two of the absolute best investors this world has ever known. Of course these are just my thoughts – Clark’s Thoughts.
In case you are not familiar with Warren, Warren is the world’s wealthiest person. Depending on the quarter, he is neck-and-neck with Bill Gates and Mexican telecommunications giant, Carlos Slim Helu, but as of last year, I believe Warren was still in first place. How did he get there? Hard work making money, and then working hard to make his money work for him.
One of the best Buffett books that I have read, and I am by no means a Buffett expert, was the The Snowball: Warren Buffett and the Business of Life by Alice Schroeder, published last year. The Snowball explains how Buffett was an entrepreneur at an extremely young age, and as he accumulated assets, the book details how he gradually invested his money, and other people’s money, to propel him to the wealthiest human on the planet.
Warren is undoubtedly the most famous investor in the world, and plenty of people flocked to see him last weekend. At one point during the conference, I was within a few feet of multiple billionaires, including Bill Gates, Charlie Munger, and himself, Warren Buffet. At one point in time, I literally bumped into Warren. What do you say when you have about 1/10th of a second to have a conversation with the world’s wealthiest person? In a blink of an eye, I knew exactly what to say. "Hi, Warren!" I said gleefully as he passed by. "Hi, how are you doing?" he responded with a smile, and hurried through the crowd to take his seat.
Not much, I know, but it was the extent of my conversation with Warren, nonetheless. But soon the shareholders Q&A meeting would get started, and I would have the opportunity to hear some valuable insight from this brilliant investor.
This year, three journalists would ask questions that were chose from thousands of different shareholders, and some shareholders present were selected from a lottery system to ask the questions. Both Warren and Charlie are known for their words of wisdom. During the meeting, Warren would routinely take 5 minutes to answer a 1-minute question, and Charlie, who always batted second, would take 1 minute to answer a 10-minute question.
All sorts of questions were asked of the two, from the economy to any other question regarding Berkshire Hathaway’s holdings or operations. Buffett, who is a well known Democrat, and Munger, who is a Republican, both had the same view from the measures the government has taken recently to stimulate the economy: What they did wasn’t perfect, but it beat doing nothing.
When asked about Government Bonds, Buffett was clear that fixed income investors were going to lose purchasing power over time. Munger was a little more direct, saying that one "should become a brain surgeon and invest in Coca-Cola rather than government bonds."
On Inflation: "The best protection against inflation is your own earnings power," according to Buffet. In other words, excel in your chosen career path. Be the best you can be, and you will be able to earn more and more. The second best protection against inflation is the "earnings power of a wonderful business," especially ones that do not require heavy capital outlay.
Buffett and Munger mentioned several times that it is important to have emotional stability when being an investor, and slammed investors and analysts that try to "outsmart" the system. According to Buffett, "it is much better to have an IQ of 130, than to think you have an IQ of 160, when it is only 150." High IQ’s can get you into trouble. "Investing is simple, but it isn’t easy." You don’t have to be a brain surgeon to make money in the market.
Over the years, there have been thousands of words of wisdom from Buffett, 78, and Munger, 85. "You should invest in a business that even a fool can run, because someday a fool will," and two rules, "#1. Never lose money. #2. Never forget rule No. 1," both attributed to Buffett. Munger’s wisdom is equally revered: "Bull markets go to people’s heads. If you’re a duck on a pond, and it’s rising due to a downpour, you start going up in the world. But you think it’s you, not the pond, "and "People calculate too much and think too little."
Whether or not you like Warren Buffett and Charlie Munger or their politics, there is no doubt they will go down as two of the absolute best investors this world has ever known. Of course these are just my thoughts – Clark’s Thoughts.
Monday, May 4, 2009
My Two Greatest Fears
Contrary to popular belief, heights are not one of my two greatest fears, although I am not too fond of heights, either. I used to quip that I am so scared of heights that if I was any taller than 5’ 8", I would walk around scared all day. But as much as I dislike heights, there are two things that concern me even more – Taxation and Inflation.
Why are we concerned so much with taxation? In a nutshell – demographics. I don’t want this to be a political blog – not in the least. But obviously there are political forces out there that can influence in our economy. At the present moment, we have Oval Office intent on spending our way out of a recession. To date, we have lent, spent, or promised roughly $13 Trillion. Folks, this money must be paid back at some point in time. Whether or not some of the TARP funds get returned; whether or not some of the taxpayer dollars get paid back; this money has to be returned.
Noticed I mentioned the word demographics, and then criticized the current administration. But I honestly believe that no matter which political party that took office, taxes would have to eventually increase. When JFK was in office, the top marginal tax bracket was around 90%. As more and more Baby Boomers entered the work force, guess what? Taxes came down. The larger the workforce, the more tax revenue. The higher these Boomers moved up in seniority, the more taxes they paid. But unfortunately, the reverse is also true. The smaller the workforce or the lower the average salary, the lower the tax revenue. As Boomers retire, new employees replace them at the bottom of the pay scale. The current top marginal tax bracket is around 35%. And herein lies the problem. For the first time in our nation’s history, we are witnessing a smaller generation follow the current one. According to the H.S. Dent foundation, we have .95 "Echo Boomers" for every Baby Boomer. This is a huge problem.
Just think about it. For every high school that we once had, we only need .95 of them. For every car, we only need .95 of them. And to really bring it home, for every house, we only need .95 of them. That means that for every 1,000 houses owned by Baby Boomers, roughly 50 of them will not be needed. But it also means that for every person on Social Security, we have fewer active workers. For every person on Medicare, we have fewer people paying into the system. And right now, we have a huge problem with Medicare. According to CNBC, Medicare will be bankrupt in 10 years. Now that is a problem!
It doesn’t matter who won the election – taxes can only go one in direction. Want to solve the Medicare crisis? Want to solve the Social Security problem? I can think of only three possibilities, and none of them are good. 1) Raise Taxes. Obviously, current workers would not be in favor of this. 2) Lower Benefits. Obviously, current retirees will not be in favor of this. 3). Do a combination of numbers 1 and 2. Obviously, no one will like this, but it may be the most rational answer.
Now for the second fear: inflation. We are printing tons of cash right now. All things being equal, from an economic standpoint, this should cause inflation. But we are also witnessing a switch to a wants-based economy, as shared in a previous post. As we move to a wants-based economy, we are starting to see demand for some goods decrease, which can have the impression of deflation. But we can also clearly see demand for other goods and services which have the clear impression of inflation. Think about our current environment: many have seen their retirement accounts go down in value, their homes go down in value, and their vehicles go down in value. But take a trip to the grocery store, buy groceries and diapers, or take a trip to the doctor and tell me there is no inflation….
As more and more money gets printed, as more and more money gets promised, there is little doubt that inflation will be heading our direction. The question is: when? Every economist knows that as the Fed lowers interest rates, the value of the dollar should decline. If the value of the dollar declines, the amount of goods that we can purchase also should decline, thus we would experience inflation. But if the entire world cuts rates, then the dollar would not decline as rapidly as one would expect. At some point in time, however, the chickens will come home to roost, the Fed will have to raise rates to help fend off inflation, and many people hiding in fixed income investments will eventually lose purchasing power.
Taxation and Inflation will be heading our way….the big question is how soon?
Of course these are just my thoughts, Clark’s Thoughts.
Why are we concerned so much with taxation? In a nutshell – demographics. I don’t want this to be a political blog – not in the least. But obviously there are political forces out there that can influence in our economy. At the present moment, we have Oval Office intent on spending our way out of a recession. To date, we have lent, spent, or promised roughly $13 Trillion. Folks, this money must be paid back at some point in time. Whether or not some of the TARP funds get returned; whether or not some of the taxpayer dollars get paid back; this money has to be returned.
Noticed I mentioned the word demographics, and then criticized the current administration. But I honestly believe that no matter which political party that took office, taxes would have to eventually increase. When JFK was in office, the top marginal tax bracket was around 90%. As more and more Baby Boomers entered the work force, guess what? Taxes came down. The larger the workforce, the more tax revenue. The higher these Boomers moved up in seniority, the more taxes they paid. But unfortunately, the reverse is also true. The smaller the workforce or the lower the average salary, the lower the tax revenue. As Boomers retire, new employees replace them at the bottom of the pay scale. The current top marginal tax bracket is around 35%. And herein lies the problem. For the first time in our nation’s history, we are witnessing a smaller generation follow the current one. According to the H.S. Dent foundation, we have .95 "Echo Boomers" for every Baby Boomer. This is a huge problem.
Just think about it. For every high school that we once had, we only need .95 of them. For every car, we only need .95 of them. And to really bring it home, for every house, we only need .95 of them. That means that for every 1,000 houses owned by Baby Boomers, roughly 50 of them will not be needed. But it also means that for every person on Social Security, we have fewer active workers. For every person on Medicare, we have fewer people paying into the system. And right now, we have a huge problem with Medicare. According to CNBC, Medicare will be bankrupt in 10 years. Now that is a problem!
It doesn’t matter who won the election – taxes can only go one in direction. Want to solve the Medicare crisis? Want to solve the Social Security problem? I can think of only three possibilities, and none of them are good. 1) Raise Taxes. Obviously, current workers would not be in favor of this. 2) Lower Benefits. Obviously, current retirees will not be in favor of this. 3). Do a combination of numbers 1 and 2. Obviously, no one will like this, but it may be the most rational answer.
Now for the second fear: inflation. We are printing tons of cash right now. All things being equal, from an economic standpoint, this should cause inflation. But we are also witnessing a switch to a wants-based economy, as shared in a previous post. As we move to a wants-based economy, we are starting to see demand for some goods decrease, which can have the impression of deflation. But we can also clearly see demand for other goods and services which have the clear impression of inflation. Think about our current environment: many have seen their retirement accounts go down in value, their homes go down in value, and their vehicles go down in value. But take a trip to the grocery store, buy groceries and diapers, or take a trip to the doctor and tell me there is no inflation….
As more and more money gets printed, as more and more money gets promised, there is little doubt that inflation will be heading our direction. The question is: when? Every economist knows that as the Fed lowers interest rates, the value of the dollar should decline. If the value of the dollar declines, the amount of goods that we can purchase also should decline, thus we would experience inflation. But if the entire world cuts rates, then the dollar would not decline as rapidly as one would expect. At some point in time, however, the chickens will come home to roost, the Fed will have to raise rates to help fend off inflation, and many people hiding in fixed income investments will eventually lose purchasing power.
Taxation and Inflation will be heading our way….the big question is how soon?
Of course these are just my thoughts, Clark’s Thoughts.
Thursday, April 23, 2009
The TARP is a TRAP
I really, truly, don’t want this be a political blog, but sometimes it is impossible to separate politics from the economy, especially when rules made in Washington impact the economies of Wall Street and Main Street so much.
Whether or not we should have ever created the TARP, whether or not we should have ever bailed out AIG or any other bank or auto industry, that is all now irrelevant. The fact of the matter is that we did, and the question is, "How do we go forward?"
I think it is interesting to note that TARP, when rearranged, spells "trap," and many banks and financial institutions are finding that out the hard way. Several institutions took the "trap" money, and then Washington created some ex post facto regulations for the recipients of the trap money. And I am not just referring to the "excessive" bonuses that were paid out by AIG. Once an institution took the trap money, they became at the mercy of government intervention and regulation. Should they be able to continue to advertise on television? Should they be able to sponsor golf outings? Should they continue with holding national conferences or conventions? Should they continue to operate as usual, or better yet, should they convene to determine how they should change their business model? Yet, any little expense became an issue with the media, the politicians, and the taxpayers.
Why? Essentially it is because we now have an ownership stake in the company. Like it or not, the taxpayers now have a say-so in institutions that went into the trap, and there is speculation that the taxpayer money will soon be converted from preferred shares into common stock, which would truly give us ownership. We now have voting rights!!!
This now presents a new problem. Taxpayers own companies they never wanted to own in the first place - Banks. Who wants to own a share of a bank that needed to accept the trap money to begin with? But we do. And we own lots of shares. And why do we buy shares? In theory, you would only go long with one anticipation: to make money. And in theory, the more money a company makes per share, the higher the stock price should go. Right? Don’t you think the politicians know this as well? Don’t bet on it.
This week, the President has started a crusade to eliminate the "excesses" in the credit card industry. Lawmakers have expressed concern at certain credit card practices. Maybe they will reduce the rate of interest that a bank can charge. Maybe they will reduce the fees for late payments. While many may applaud Washington’s efforts, keep in mind that credit cards and banks are not philanthropic institutions. They have to make a buck to stay in business, too, and with credit card defaults at all time highs, the efforts in Washington may just lead to another bailout – this time, the bailout of the credit card industry.
This is a major note of concern: First, we use taxpayer money to take ownership stakes in banks we didn’t want to own anyway, and now, Washington is trying to limit the profit that those banks can make…. So how is the taxpayer ever going to get the money back?
It makes you wonder who really got "trapped" – the banks or the taxpayers? Or both?
Of course, these are just my thoughts - Clark's Thoughts.
Whether or not we should have ever created the TARP, whether or not we should have ever bailed out AIG or any other bank or auto industry, that is all now irrelevant. The fact of the matter is that we did, and the question is, "How do we go forward?"
I think it is interesting to note that TARP, when rearranged, spells "trap," and many banks and financial institutions are finding that out the hard way. Several institutions took the "trap" money, and then Washington created some ex post facto regulations for the recipients of the trap money. And I am not just referring to the "excessive" bonuses that were paid out by AIG. Once an institution took the trap money, they became at the mercy of government intervention and regulation. Should they be able to continue to advertise on television? Should they be able to sponsor golf outings? Should they continue with holding national conferences or conventions? Should they continue to operate as usual, or better yet, should they convene to determine how they should change their business model? Yet, any little expense became an issue with the media, the politicians, and the taxpayers.
Why? Essentially it is because we now have an ownership stake in the company. Like it or not, the taxpayers now have a say-so in institutions that went into the trap, and there is speculation that the taxpayer money will soon be converted from preferred shares into common stock, which would truly give us ownership. We now have voting rights!!!
This now presents a new problem. Taxpayers own companies they never wanted to own in the first place - Banks. Who wants to own a share of a bank that needed to accept the trap money to begin with? But we do. And we own lots of shares. And why do we buy shares? In theory, you would only go long with one anticipation: to make money. And in theory, the more money a company makes per share, the higher the stock price should go. Right? Don’t you think the politicians know this as well? Don’t bet on it.
This week, the President has started a crusade to eliminate the "excesses" in the credit card industry. Lawmakers have expressed concern at certain credit card practices. Maybe they will reduce the rate of interest that a bank can charge. Maybe they will reduce the fees for late payments. While many may applaud Washington’s efforts, keep in mind that credit cards and banks are not philanthropic institutions. They have to make a buck to stay in business, too, and with credit card defaults at all time highs, the efforts in Washington may just lead to another bailout – this time, the bailout of the credit card industry.
This is a major note of concern: First, we use taxpayer money to take ownership stakes in banks we didn’t want to own anyway, and now, Washington is trying to limit the profit that those banks can make…. So how is the taxpayer ever going to get the money back?
It makes you wonder who really got "trapped" – the banks or the taxpayers? Or both?
Of course, these are just my thoughts - Clark's Thoughts.
Thursday, April 16, 2009
Welcome to the Wants-Based Economy!
You would have to have been living in a cave to think that we were not going to have negative earnings reports. It will be ugly, potentially very ugly, but there aren’t many people out there who aren’t expecting that to happen, and that being said there may be relatively few suprises.
The last several quarters have brutalized companies that missed earnings expectations, but the markets have not dramatically rewarded companies that beat expectations. As a result, you will begin to see fewer and fewer companies that will be willing to offer guidance.
Consumer spending drives the economy. The problem is that the big spenders – the people with the most discretionary income – are Baby Boomers, and those Baby Boomers have now moved into a "wants-based" ecomomy instead of a needs based. When they had kids at home, they had very predictible spending patterns. The kids needed a new ipod, they needed new clothes, they needed a car when they turned driving age. But now those kids are out of the house, and many are out of college. Their parents can now spend their money any way they want – thus, they are in a wants-based ecomony.
Think about it for a second. The aging Baby Boomer doesn’t need to buy a toaster, a microwave, or a host of other itmes found at your local retailer. They already have an established home. They don’t need a bed, loveseat, or lawn mower. They already own the stuff they need. Now that junior is out of the house, his parents can buy the stuff they want.
The way this impacts the earnings season is that creating the earnings estimates becomes progressively more difficult – a high school kid may go to Best Buy every week and buy a new cd or a video game. A Baby Boomer with discretionary income may go to Best Buy this quarter and buy a new flat screen television, but that doesn’t mean they will be back next quarter. Unpredictible spending makes for more uncertainty in the marketplace. The expenditures have gone from small but expected to large and unpredictable.
Look for the cream rise to the top over time, as early as this quarter. Expect businesses within similar segments to have vastly different numbers. Just because Best Buy does well, does not mean that Circuit City or other type retailers should do well. Just because Lowes has a good quarter, doesn’t mean that Home Depot will. In the past, there were enough consumers to make the entire sector look good. Now that the majority of consumers with discretionary income are in a wants-based environment, and add to that fact that many consumers scared to death to spend their money, expect for the top businesses in each sector to start to shine, as the weaker ones begin to show their faults. Of course those are just my thoughts....Clark's Thoughts.
The last several quarters have brutalized companies that missed earnings expectations, but the markets have not dramatically rewarded companies that beat expectations. As a result, you will begin to see fewer and fewer companies that will be willing to offer guidance.
Consumer spending drives the economy. The problem is that the big spenders – the people with the most discretionary income – are Baby Boomers, and those Baby Boomers have now moved into a "wants-based" ecomomy instead of a needs based. When they had kids at home, they had very predictible spending patterns. The kids needed a new ipod, they needed new clothes, they needed a car when they turned driving age. But now those kids are out of the house, and many are out of college. Their parents can now spend their money any way they want – thus, they are in a wants-based ecomony.
Think about it for a second. The aging Baby Boomer doesn’t need to buy a toaster, a microwave, or a host of other itmes found at your local retailer. They already have an established home. They don’t need a bed, loveseat, or lawn mower. They already own the stuff they need. Now that junior is out of the house, his parents can buy the stuff they want.
The way this impacts the earnings season is that creating the earnings estimates becomes progressively more difficult – a high school kid may go to Best Buy every week and buy a new cd or a video game. A Baby Boomer with discretionary income may go to Best Buy this quarter and buy a new flat screen television, but that doesn’t mean they will be back next quarter. Unpredictible spending makes for more uncertainty in the marketplace. The expenditures have gone from small but expected to large and unpredictable.
Look for the cream rise to the top over time, as early as this quarter. Expect businesses within similar segments to have vastly different numbers. Just because Best Buy does well, does not mean that Circuit City or other type retailers should do well. Just because Lowes has a good quarter, doesn’t mean that Home Depot will. In the past, there were enough consumers to make the entire sector look good. Now that the majority of consumers with discretionary income are in a wants-based environment, and add to that fact that many consumers scared to death to spend their money, expect for the top businesses in each sector to start to shine, as the weaker ones begin to show their faults. Of course those are just my thoughts....Clark's Thoughts.
Wednesday, April 15, 2009
Staying up with the Lingo
Staying up with the Lingo – The Second Derivative
Have you ever noticed that any time a group of people get together with the same interests, a new language evolves? They create their own jargon, their own slang, their own lingo. Sometimes it goes to the point of what outsiders would call, "excess." Occasionally the lingo gets used often enough to spread to the "civilian" world. I have a friend who will routinely ask me for my 10-20, and will conclude the conversation with a "10-4, over and out."
Educators have "educationese." In Indiana they have PL221, NCLB, TRF, SST, and 504 plans.
The military uses terms like Squid, Jarhead, Wingnut, Grunt, ASVAB, AWOL, GI, and ROTC to name just a few.
If you have teenagers at home, you may have heard or read the terms LOL, OMG, OXOXOX, W8, AFAIK, and BRB,
The financial services world can be every bit as confusing. 401K, 403(b), 457, IRA, Roth IRA, SEP, SIMPLE, 1035 and 1031. You can’t watch CNBC for too awful long before you hear economic terms like leading, lagging, contango, stochastic indicators, moving averages, and so on. But, like everything else, the jargon is always evolving.
The new "in" word happens to be a math term. Now, I am not a mathematician. MA 223 at Purdue just about put me over the edge. But I do know that math terms are routinely used in our industry, and rightfully so. Technical traders rely on math computations to plan their daily trades. Math is essential for fundamentalists when calculating P/E ratios and dividend discount models.
But recently economists have been utilizing a calculus term to help find a glimmer of hope in a topsy-turvy world. The "second derivative", as it is being called, is, as one would assume, a movement of a second order. What does that mean in plain English? Instead of the absolute change in a number, it is the rate of change of a variable. Got it? If so, then you had more fun in MA 223 than I!
More simply put, it is the rate of change in deterioration. In today's economic context, we can look at economic variables such as unemployment. For instance, if employment numbers continue to worsen, but worsen by a smaller margin than the previous month, than we have improvement in the "second derivative."
Is this a good thing? Of course. Presumably, the second derivatives must all improve before we have positive change in the "first derivative" (the leading and lagging indicators). But call it improvement in the second derivative or not, the fact remains that things are still bad. The importance in the stock market is that the market moves very quickly in front of actual changes in the economy. So many highly paid individuals are looking at anything resembling "second derivative improvement". Little doubt exists that these types of "improvements" have helped fuel the nice run the markets have had over the past several weeks.
You can impress your friends by using the term when talking about a cigarette smoker. Is he still smoking? Yes, but if he has cut back on the number of cigarettes each day, then there has been improvement on the second derivative. But the fact remains that he is still smoking and still harming his body.
I am just glad that there has been improvement in my second derivative of personal pizza consumption during the last year…..
Have you ever noticed that any time a group of people get together with the same interests, a new language evolves? They create their own jargon, their own slang, their own lingo. Sometimes it goes to the point of what outsiders would call, "excess." Occasionally the lingo gets used often enough to spread to the "civilian" world. I have a friend who will routinely ask me for my 10-20, and will conclude the conversation with a "10-4, over and out."
Educators have "educationese." In Indiana they have PL221, NCLB, TRF, SST, and 504 plans.
The military uses terms like Squid, Jarhead, Wingnut, Grunt, ASVAB, AWOL, GI, and ROTC to name just a few.
If you have teenagers at home, you may have heard or read the terms LOL, OMG, OXOXOX, W8, AFAIK, and BRB,
The financial services world can be every bit as confusing. 401K, 403(b), 457, IRA, Roth IRA, SEP, SIMPLE, 1035 and 1031. You can’t watch CNBC for too awful long before you hear economic terms like leading, lagging, contango, stochastic indicators, moving averages, and so on. But, like everything else, the jargon is always evolving.
The new "in" word happens to be a math term. Now, I am not a mathematician. MA 223 at Purdue just about put me over the edge. But I do know that math terms are routinely used in our industry, and rightfully so. Technical traders rely on math computations to plan their daily trades. Math is essential for fundamentalists when calculating P/E ratios and dividend discount models.
But recently economists have been utilizing a calculus term to help find a glimmer of hope in a topsy-turvy world. The "second derivative", as it is being called, is, as one would assume, a movement of a second order. What does that mean in plain English? Instead of the absolute change in a number, it is the rate of change of a variable. Got it? If so, then you had more fun in MA 223 than I!
More simply put, it is the rate of change in deterioration. In today's economic context, we can look at economic variables such as unemployment. For instance, if employment numbers continue to worsen, but worsen by a smaller margin than the previous month, than we have improvement in the "second derivative."
Is this a good thing? Of course. Presumably, the second derivatives must all improve before we have positive change in the "first derivative" (the leading and lagging indicators). But call it improvement in the second derivative or not, the fact remains that things are still bad. The importance in the stock market is that the market moves very quickly in front of actual changes in the economy. So many highly paid individuals are looking at anything resembling "second derivative improvement". Little doubt exists that these types of "improvements" have helped fuel the nice run the markets have had over the past several weeks.
You can impress your friends by using the term when talking about a cigarette smoker. Is he still smoking? Yes, but if he has cut back on the number of cigarettes each day, then there has been improvement on the second derivative. But the fact remains that he is still smoking and still harming his body.
I am just glad that there has been improvement in my second derivative of personal pizza consumption during the last year…..
Thursday, April 9, 2009
Social Changes?
Last week ended the best 4-week rally for the Dow Jones Industrial Average and the S&P 500 since 1933, and it saw the best 4-week rally on the NASDAQ in history. But all good things must unfortunately come to an end, and Tuesday evening, the earnings season officially began with Alcoa kicking things off. It is interesting to note that Alcoa was off 2% during the intraday trade. That is before they even made an earnings announcement. The fact of the matter is that in recent quarters companies have been brutalized for missing earnings expectations, and their stock prices have not been dramatically rewarded for beating the earnings estimates. One trend that we believe we will continue to see is that companies will become less and less willing to offer guidance. Why should they? If they miss, they look bad, and if they hit, they aren’t rewarded. Perhaps it is far better to offer no guidance in the future and just report their earnings.
We know that we are facing a high unemployment rate right now, and we know that families all over the United States are feeling the effects. Recent reports indicate that 1 in 10 Americans are receiving food stamps. This is an ugly statistic. The big question is why? Unemployment? Recession? Maybe. But perhaps it is a change of attitude in general. Perhaps one big reason for the increase in food stamps is that they are becoming more socially acceptable, and there is less of a negative stigma for recipients, whereas at one point in time it may have been a pride factor to have not accepted the welfare. There used to be a social stigma associated with food stamps - not that I am opposed to helping people who need it, and with the high unemployment I have no doubt that many more people need it today than in recent years, but in days gone by I know many people personally who would have used government assistance as the absolute last resort., and not one of the first.
Another noticeable difference today is that the social changes we are witnessing are not just with the individual. The FED tried to do whatever they could to reduce the stigma attached to using the Fed’s lending facility. They readily encouraged the use of TARP funds for the big banks. And now, some of the banks that took the taxpayers money are being rewarded for their fiscal irresponsibility. Warren Buffett, an investing icon, was quoted (very correctly, I am afraid), as saying: "At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one." In his letter to shareholders he points out that companies that received bailout funds (like Citigroup, Bank of America, Freddie and Fannie) are paying lower interest rates on bonds than Buffett’s own company. Why should a company that needed to rely on taxpayers, a company that couldn’t make it on its own, pay lower interest rates on bonds?
I must say that I was proud to hear that Old National Bank, an Indiana-based company, was one of the first four banks to pay back the TARP funds. On March 31, 4 Regional banks returned a total of $338 Million. Obviously, this was a good sign for those banks and good for the tax payers.
But will the Fed try to limit these paybacks? One concern with the TARP paybacks is that it will damage confidence in banks that cannot pay back the money. In other words, the FED is concerned that if healthy banks pay back their bailout money, there may be concerns about banks that don’t pay theirs back. It makes us wonder if the "big boys" will be scorned (or even prevented) from being able to pay back the TARP funds early.
It seems to us that the government and the FED are doing what they can to promote the social change. It seems like they almost want us to rely on government welfare….of course those are just my thoughts – Clark’s Thoughts.
www.clarksthoughts.com
We know that we are facing a high unemployment rate right now, and we know that families all over the United States are feeling the effects. Recent reports indicate that 1 in 10 Americans are receiving food stamps. This is an ugly statistic. The big question is why? Unemployment? Recession? Maybe. But perhaps it is a change of attitude in general. Perhaps one big reason for the increase in food stamps is that they are becoming more socially acceptable, and there is less of a negative stigma for recipients, whereas at one point in time it may have been a pride factor to have not accepted the welfare. There used to be a social stigma associated with food stamps - not that I am opposed to helping people who need it, and with the high unemployment I have no doubt that many more people need it today than in recent years, but in days gone by I know many people personally who would have used government assistance as the absolute last resort., and not one of the first.
Another noticeable difference today is that the social changes we are witnessing are not just with the individual. The FED tried to do whatever they could to reduce the stigma attached to using the Fed’s lending facility. They readily encouraged the use of TARP funds for the big banks. And now, some of the banks that took the taxpayers money are being rewarded for their fiscal irresponsibility. Warren Buffett, an investing icon, was quoted (very correctly, I am afraid), as saying: "At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one." In his letter to shareholders he points out that companies that received bailout funds (like Citigroup, Bank of America, Freddie and Fannie) are paying lower interest rates on bonds than Buffett’s own company. Why should a company that needed to rely on taxpayers, a company that couldn’t make it on its own, pay lower interest rates on bonds?
I must say that I was proud to hear that Old National Bank, an Indiana-based company, was one of the first four banks to pay back the TARP funds. On March 31, 4 Regional banks returned a total of $338 Million. Obviously, this was a good sign for those banks and good for the tax payers.
But will the Fed try to limit these paybacks? One concern with the TARP paybacks is that it will damage confidence in banks that cannot pay back the money. In other words, the FED is concerned that if healthy banks pay back their bailout money, there may be concerns about banks that don’t pay theirs back. It makes us wonder if the "big boys" will be scorned (or even prevented) from being able to pay back the TARP funds early.
It seems to us that the government and the FED are doing what they can to promote the social change. It seems like they almost want us to rely on government welfare….of course those are just my thoughts – Clark’s Thoughts.
www.clarksthoughts.com
Friday, April 3, 2009
The Credit Crunch = 1 Year's GDP
It was a beautiful month for the indices – the S&P 500 gained 9% for March, the Dow had its best percentage month since October of 2002, and the NASDAQ had its best March ever. Unfortunately, January and February were two horrible months in the equity market, and on a year-to-date basis, the S&P 500 and the Dow Jones Industrial Average are still both off more than ten percent.
This last week brought forth many news items, and many stories that we won’t dwell on so we don’t beat a dead horse, such as the AIG "Bonusgate" and the ousting of GM CEO Rick Wagoner. Whether or not GM and Chrysler will be forced in to a structured bankruptcy remains to be seen, but the rhetoric used this week by both the CEO’s of the auto manufactures and that of the President would lead one to believe that bankruptcy is a high probability.
One headline that the mass media will probably not be too keen on reporting is the sheer dollar amount that the United States has already committed to get us out of the Credit Crunch. According to recent figures from Seeking Alpha, we have lent, spent, or committed to $12.8 Trillion in rescue and stimulus packages so far. This figure includes the Stimulus Packages (both Round 1 and Round 2), the TARP, the TALF, and every other promise from the Fed and the Treasury. Just a few years ago, the notion that we would have a $200 Billion deficit scared nearly everyone. At the G-20 meeting, we committed about $100 Billion more to go to the IMF. Today, we are looking at a debt of $12.9 Trillion. Our entire GDP is roughly $14 Trillion. Essentially, we have just committed a year’s worth of American productivity in an attempt to get out of this crisis.
Now, I know that some of the promises are tied up into possibilities of a potential return for the taxpayers, and in some cases, we actually believe that the taxpayers can make some money. But, as one of my favorite economists Brian Wesbury pointed out, in February, the government said that the $787 Billion stimulus was spent to create 3.5 million jobs. That means we are creating one new job for every $225,000 that is spent – and that is assuming that 3.5 million jobs truly do get created! Either way, that is money that will have to be paid back over time, and one more reason that we believe tax rates will only be heading one direction over the long-term.
This last week brought forth many news items, and many stories that we won’t dwell on so we don’t beat a dead horse, such as the AIG "Bonusgate" and the ousting of GM CEO Rick Wagoner. Whether or not GM and Chrysler will be forced in to a structured bankruptcy remains to be seen, but the rhetoric used this week by both the CEO’s of the auto manufactures and that of the President would lead one to believe that bankruptcy is a high probability.
One headline that the mass media will probably not be too keen on reporting is the sheer dollar amount that the United States has already committed to get us out of the Credit Crunch. According to recent figures from Seeking Alpha, we have lent, spent, or committed to $12.8 Trillion in rescue and stimulus packages so far. This figure includes the Stimulus Packages (both Round 1 and Round 2), the TARP, the TALF, and every other promise from the Fed and the Treasury. Just a few years ago, the notion that we would have a $200 Billion deficit scared nearly everyone. At the G-20 meeting, we committed about $100 Billion more to go to the IMF. Today, we are looking at a debt of $12.9 Trillion. Our entire GDP is roughly $14 Trillion. Essentially, we have just committed a year’s worth of American productivity in an attempt to get out of this crisis.
Now, I know that some of the promises are tied up into possibilities of a potential return for the taxpayers, and in some cases, we actually believe that the taxpayers can make some money. But, as one of my favorite economists Brian Wesbury pointed out, in February, the government said that the $787 Billion stimulus was spent to create 3.5 million jobs. That means we are creating one new job for every $225,000 that is spent – and that is assuming that 3.5 million jobs truly do get created! Either way, that is money that will have to be paid back over time, and one more reason that we believe tax rates will only be heading one direction over the long-term.
Wednesday, April 1, 2009
What can the G-20 really accomplish?
The G20 is meeting this week in London to see what they can collectively do to help solve the global crisis. You may be wondering, "Exactly who, or what, is the G20?"
The G-20 is a group of 20 countries formed in 1999 for cooperation and consultation on matters pertaining to the international financial system. Specifically the countries on the G-20 are: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, and the United States. The 20th member is the European Union, which is represented by the rotating Council presidency and the European Central Bank. In addition to these countries, representatives from the International Monetary Fund, the World Bank, and the International Monetary and Financial Committee will be there, and this year, the Netherlands and Spain have also been invited.
Just what exactly do they think they can accomplish? That is hard to tell, since there are so many countries represented from across the spectrum. The US, UK, and Japan have been encouraging stimulus spending as a potential to help curb the global crisis. Russia and China are calling for a new global currency, and they will more than likely expect the IMF to come up with that currency. The European Central Bank, unlike the central banks in the US and the UK, can not buy debt directly from a member state, although it can purchase the debt on a secondary market. The economic slowdown in Germany is hurting all of Europe, and the perpetual loudmouths in France have already threatened to walk out of the G-20 summit if things don’t go to their liking.
No matter what can get accomplished at the G-20, assuming anything will truly be accomplished, one thing is for certain: this is not a group of buddy-buddies. I am not going to refer to any particular country as the "Evil Empire," but we all know that Russia, China, and Saudi Arabia are looking out for their own interests, which most assuredly, are not typically ours. Mexico just put tariffs on 89 US imports after the US broke part of the NAFTA agreement with Mexico. France, although recently on fairly decent terms with Germany, has not always been the closest of allies with her neighbors. If memory serves me correctly, Germany invaded France in 1871, WWI, and WWII, and there may have been several border skirmishes between 1871 and WWI that I am forgetting.
The fact of the matter is, even though we have one global crisis, I doubt that a collective group of global leaders can get us out of this mess, especially in a 2-day meeting that begins on April Fool’s day…..
The G-20 is a group of 20 countries formed in 1999 for cooperation and consultation on matters pertaining to the international financial system. Specifically the countries on the G-20 are: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, and the United States. The 20th member is the European Union, which is represented by the rotating Council presidency and the European Central Bank. In addition to these countries, representatives from the International Monetary Fund, the World Bank, and the International Monetary and Financial Committee will be there, and this year, the Netherlands and Spain have also been invited.
Just what exactly do they think they can accomplish? That is hard to tell, since there are so many countries represented from across the spectrum. The US, UK, and Japan have been encouraging stimulus spending as a potential to help curb the global crisis. Russia and China are calling for a new global currency, and they will more than likely expect the IMF to come up with that currency. The European Central Bank, unlike the central banks in the US and the UK, can not buy debt directly from a member state, although it can purchase the debt on a secondary market. The economic slowdown in Germany is hurting all of Europe, and the perpetual loudmouths in France have already threatened to walk out of the G-20 summit if things don’t go to their liking.
No matter what can get accomplished at the G-20, assuming anything will truly be accomplished, one thing is for certain: this is not a group of buddy-buddies. I am not going to refer to any particular country as the "Evil Empire," but we all know that Russia, China, and Saudi Arabia are looking out for their own interests, which most assuredly, are not typically ours. Mexico just put tariffs on 89 US imports after the US broke part of the NAFTA agreement with Mexico. France, although recently on fairly decent terms with Germany, has not always been the closest of allies with her neighbors. If memory serves me correctly, Germany invaded France in 1871, WWI, and WWII, and there may have been several border skirmishes between 1871 and WWI that I am forgetting.
The fact of the matter is, even though we have one global crisis, I doubt that a collective group of global leaders can get us out of this mess, especially in a 2-day meeting that begins on April Fool’s day…..
Keep a close watch on your "small" accounts
When most people think about retirement, they tend to dwell on their larger assets. It is fun to sit back and think about what the future will hold when you are starting out with a lot of assets or a nice-sized pension. All too often people seem to "skip" over some other key assets, such as an older 401K or 403B from a previous employer that has just been sitting there – rusting away like an old vehicle set out behind someone’s barn. I am always amazed at the number of people that tend to ignore smaller investments, and "put them out to pasture." When asked why the individual hasn’t done anything with the old investment, results like, "Oh, it’s no big deal. It is just a small amount of money," are fairly common. Many people think that a $3-4000 account is not worth the hassle, or it is just "play" money.
But the money didn’t get there on its own. One of two things had to happen to get the qualified account built up. Either the employer contributed money into the account on your behalf (in lieu of a higher salary, of course!), or you contributed to the account on your own. Either way, it cost you something. Don’t treat it as "no big deal." A properly managed account can add up to a considerable amount over several years.
What should you do with a smaller account? First, consider all of your options. In some cases, you can consolidate accounts. This is generally viewed as being a sound thing to do. Secondly, you can start to manage the account yourself, or have a financial professional do it for you.
Depending on how long you have had these smaller accounts, you might have other options to consider as well, such as rolling them into an IRA, and possibly converting the IRA into a Roth. By now you should know that we like the Roth IRA option. Pay your taxes now and get them over with. Which way are taxes heading? No one knows for sure, no one has that proverbial "crystal ball." But according to the latest reports, our government has already committed $12.7 Trillion to help get us out of the Credit Crunch. At some point in time it will have to be paid back…
But the money didn’t get there on its own. One of two things had to happen to get the qualified account built up. Either the employer contributed money into the account on your behalf (in lieu of a higher salary, of course!), or you contributed to the account on your own. Either way, it cost you something. Don’t treat it as "no big deal." A properly managed account can add up to a considerable amount over several years.
What should you do with a smaller account? First, consider all of your options. In some cases, you can consolidate accounts. This is generally viewed as being a sound thing to do. Secondly, you can start to manage the account yourself, or have a financial professional do it for you.
Depending on how long you have had these smaller accounts, you might have other options to consider as well, such as rolling them into an IRA, and possibly converting the IRA into a Roth. By now you should know that we like the Roth IRA option. Pay your taxes now and get them over with. Which way are taxes heading? No one knows for sure, no one has that proverbial "crystal ball." But according to the latest reports, our government has already committed $12.7 Trillion to help get us out of the Credit Crunch. At some point in time it will have to be paid back…
Sunday, March 29, 2009
The Continuous Game of Chicken with China – or Kung Pow Chicken!
China owns tons of US Treasuries. They need to diversify their portfolio, and will soon begin selling some of these treasuries. They have also been accused (rightfully so) of manipulating their currency to keep the Yuan at falsely low levels. What this does to help China is to keep their exports at artificially low levels. This also helps US consumers afford their goods, but makes it difficult for American manufactures to compete.
Hank Paulson – the former Secretary of Treasury – was instrumental in fostering good relations with China. The hope was that Hank could help persuade China to free-float the Yuan. Although that didn’t happen, China did allow it to fluctuate a little higher heading into the Olympics. Now we have a new Treasury Secretary, Timothy Geithner, who has already expressed to senators his views that China is manipulating their currency.
So, what is the game of chicken? The game of chicken is that China gets irritated enough to dump all their US treasuries at once, immediately hurting the value of the US dollar. Some economists believe this could be a severe blow to our economy; others believe that as China sells, other countries will buy. Either way, selling all the treasuries at once would undoubtedly also hurt China’s ability to export to the US. The goal is to get China to free-float the Yuan, something that would ultimately be in China’s best interest, without irritating them enough to sell off all the treasuries in one fell-swoop.
Within the last two weeks, this game of chicken has escalated rapidly. Last week, the Premier of China for the first time publically criticized our debt holdings, and the Chinese are now vocal that they are concerned. "We have lent a massive amount of capital to the United States, and of course we are concerned about the security of our assets. To speak truthfully, I do indeed have some worries," and he wants the US to "keep their promise and guarantee the safety of Chinese assets."
This was followed up immediately by the Fed’s statement this week that it is purchasing mortgage-related securities and government bonds, thereby pushing down the yields on the treasuries and slightly devaluing our currency. Obviously the Chinese were not happy with what transpired, and this morning China called for the creation of a new currency to replace the dollar as the world's standard. Russia made a similar proposal earlier this month, and OPEC publically discussed this last fall. Only time will tell if the Greenback will lose its throne or not, but the escalating "cold cash" war with China will continue into the foreseeable future. Although these are my thoughts, Clark’s Thoughts, they are also the thoughts of our entire Allocation Team.
Hank Paulson – the former Secretary of Treasury – was instrumental in fostering good relations with China. The hope was that Hank could help persuade China to free-float the Yuan. Although that didn’t happen, China did allow it to fluctuate a little higher heading into the Olympics. Now we have a new Treasury Secretary, Timothy Geithner, who has already expressed to senators his views that China is manipulating their currency.
So, what is the game of chicken? The game of chicken is that China gets irritated enough to dump all their US treasuries at once, immediately hurting the value of the US dollar. Some economists believe this could be a severe blow to our economy; others believe that as China sells, other countries will buy. Either way, selling all the treasuries at once would undoubtedly also hurt China’s ability to export to the US. The goal is to get China to free-float the Yuan, something that would ultimately be in China’s best interest, without irritating them enough to sell off all the treasuries in one fell-swoop.
Within the last two weeks, this game of chicken has escalated rapidly. Last week, the Premier of China for the first time publically criticized our debt holdings, and the Chinese are now vocal that they are concerned. "We have lent a massive amount of capital to the United States, and of course we are concerned about the security of our assets. To speak truthfully, I do indeed have some worries," and he wants the US to "keep their promise and guarantee the safety of Chinese assets."
This was followed up immediately by the Fed’s statement this week that it is purchasing mortgage-related securities and government bonds, thereby pushing down the yields on the treasuries and slightly devaluing our currency. Obviously the Chinese were not happy with what transpired, and this morning China called for the creation of a new currency to replace the dollar as the world's standard. Russia made a similar proposal earlier this month, and OPEC publically discussed this last fall. Only time will tell if the Greenback will lose its throne or not, but the escalating "cold cash" war with China will continue into the foreseeable future. Although these are my thoughts, Clark’s Thoughts, they are also the thoughts of our entire Allocation Team.
What's made in Mexico - stays in Mexico!
One of President Obama’s campaign promises was to look into NAFTA, and make appropriate changes. It was ironic that on Obama’s first foreign visit, he went to Canada and had a joint appearance with Prime Minister Stephen Harper. During the visit, Obama highlighted the strong partnership we have with Canada. "I expect that four years from now the U.S.-Canadian relationship will be even stronger than it is today," Mr. Obama said. "I love this country and think that we could not have a better friend and ally, and so I'm going to do everything that I can to make sure that our relationship is strengthened." And when talking about strengthening labor and environmental standards in NAFTA, he said that there was a way of accomplishing that that was "not disruptive to the extraordinarily important trade relationships that exist between the United States and Canada."
So, if he runs on an Anti-NAFTA program, yet pledges continued, open trade with Canada, what part of NAFTA does he not like? Obviously the answer lies with Mexico.
According to NAFTA, the US had an agreement to grant Mexican trucks full access to its highways by January 2000, but some US legislators delayed that until 2007. The US ended that program last week, banning Mexican trucks access to US highways. So what did the Mexican’s do? They retaliated they only way they could: by instituting new tariffs that will affect about $2.4 billion in annual trade and 89 products, ranging from fruit to washing machines.
According to www.census.gov, Canada is our leading trade partner, followed by China, and Mexico ranks a close third. Why in times of economic distress would we allow our government to come up with protectionist policies and begin a new form of trade war? In our opinion, the moves made by the US were not in our country’s, or Mexico’s, best interests, and will serve to do nothing but to prolong the economic downturn.
The big question that should be on everyone’s mind is, "Which country is next?"
So, if he runs on an Anti-NAFTA program, yet pledges continued, open trade with Canada, what part of NAFTA does he not like? Obviously the answer lies with Mexico.
According to NAFTA, the US had an agreement to grant Mexican trucks full access to its highways by January 2000, but some US legislators delayed that until 2007. The US ended that program last week, banning Mexican trucks access to US highways. So what did the Mexican’s do? They retaliated they only way they could: by instituting new tariffs that will affect about $2.4 billion in annual trade and 89 products, ranging from fruit to washing machines.
According to www.census.gov, Canada is our leading trade partner, followed by China, and Mexico ranks a close third. Why in times of economic distress would we allow our government to come up with protectionist policies and begin a new form of trade war? In our opinion, the moves made by the US were not in our country’s, or Mexico’s, best interests, and will serve to do nothing but to prolong the economic downturn.
The big question that should be on everyone’s mind is, "Which country is next?"
Saturday, March 28, 2009
What is a trillion??
Remember last fall? There was talk of a stimulus package. A $700 Billion stimulus. Notice I said the word "Billion." Back then figures that large scared everyone! Today we are using the word "Trillion." And that word is getting tossed around every other day or so it seems.
But – in plain English – what exactly is a trillion? A trillion is a number that has twelve zero’s (14 if you include the decimals!) - $1,000,000,000,000.00 . It is a bunch of money. It is hard to grasp. In terms of money, it is incredibly hard to really, truly understand how much it is.
Or, let’s put it into another perspective. If I gave you $1.00 every second, how many years would you have to live before I had given you a trillion dollars?
Well, let’s see: One minute = 60 seconds
1 hour (60 seconds x 60 mintes) = 3,600 seconds
1 day (3,600 x 24 hours) = 86,400 seconds
1 year (86,400 x 365.25 days) = 31,557,600 seconds
One Trillion/31,557,600 = 31,688years!!!!!!!
(Obviously, neither one of us would live long enough for you to collect the trillion dollars!)
Let’s break it down another way. If you won the largest jackpot in the world, and you won $1 Trillion, how much money would you have to spend daily to spend it all in one year? More than $2.73 Billion. Can you truly immagine spending $2.73 Billion in one day, let alone one year, or even during the rest of your life? It is truly hard to fathom.
Yet, the Congressional Budget Office (CBO) on March 22, 2009 said its latest budget deficit estimate for this fiscal year, which ends on Sept. 30, would amount to US$1.845 trillion, or 13.1 percent of the country’s entire economic output. Notice this is a budget deficit. This is money that we don’t have, and money that will have to be paid back at some point in time. According to the US Census Bureau (www.census.gov), as of July 1, 2008, we had an estimated 304,059,724 citizens. That means we have a deficit of $6068 for every man, woman, and child living in the US today. Or, looking at it from this perspective, a family of four would have ownership of more than $24,000 of debt…..
And, what my greatest concern is, this is just the budget deficit. This does not include the money that is being printed by the Fed, money going into the TARP, the TALF, or any other recent government package. And what is even more harmful to my sleep, is that someone, at some time, is going to have to pay for this…..Do I have any answers? No, but this is just one more reason why we like anything that says "Roth" on it right now. If you are unfamiliar with "roth" style of investing, please send me an email at: jclark@yourlifeafterwork.com, and I’ll be happy to give you some information. Of course, those are just my thoughts. Clark’s Thoughts.
But – in plain English – what exactly is a trillion? A trillion is a number that has twelve zero’s (14 if you include the decimals!) - $1,000,000,000,000.00 . It is a bunch of money. It is hard to grasp. In terms of money, it is incredibly hard to really, truly understand how much it is.
Let’s break it down some more. A trillion is:
1,000 Billion
1,000,000 Million
1,000,000,000 Thousand
1,000 Billion
1,000,000 Million
1,000,000,000 Thousand
Or, let’s put it into another perspective. If I gave you $1.00 every second, how many years would you have to live before I had given you a trillion dollars?
Well, let’s see: One minute = 60 seconds
1 hour (60 seconds x 60 mintes) = 3,600 seconds
1 day (3,600 x 24 hours) = 86,400 seconds
1 year (86,400 x 365.25 days) = 31,557,600 seconds
One Trillion/31,557,600 = 31,688years!!!!!!!
(Obviously, neither one of us would live long enough for you to collect the trillion dollars!)
Let’s break it down another way. If you won the largest jackpot in the world, and you won $1 Trillion, how much money would you have to spend daily to spend it all in one year? More than $2.73 Billion. Can you truly immagine spending $2.73 Billion in one day, let alone one year, or even during the rest of your life? It is truly hard to fathom.
Yet, the Congressional Budget Office (CBO) on March 22, 2009 said its latest budget deficit estimate for this fiscal year, which ends on Sept. 30, would amount to US$1.845 trillion, or 13.1 percent of the country’s entire economic output. Notice this is a budget deficit. This is money that we don’t have, and money that will have to be paid back at some point in time. According to the US Census Bureau (www.census.gov), as of July 1, 2008, we had an estimated 304,059,724 citizens. That means we have a deficit of $6068 for every man, woman, and child living in the US today. Or, looking at it from this perspective, a family of four would have ownership of more than $24,000 of debt…..
And, what my greatest concern is, this is just the budget deficit. This does not include the money that is being printed by the Fed, money going into the TARP, the TALF, or any other recent government package. And what is even more harmful to my sleep, is that someone, at some time, is going to have to pay for this…..Do I have any answers? No, but this is just one more reason why we like anything that says "Roth" on it right now. If you are unfamiliar with "roth" style of investing, please send me an email at: jclark@yourlifeafterwork.com, and I’ll be happy to give you some information. Of course, those are just my thoughts. Clark’s Thoughts.
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