Some ideas to think about as we head into 2010

We all have ideas about what 2010 will bring. I have made a list of some ideas, some thoughts, and some possibilities that I think might happen in 2010. But rather than guess at where the S&P 500 will end up or how much analysts will trim their earnings estimates; I thought I would come up wit a list of things that could make 2010 better or worse than I envision now. But I also wanted possibilities that would make people think about key elements of the economy as we move through the year. Here is the list.

1.Unemployment will not get much better and could get worse in 2010 because consumers are now into saving and debt reduction rather than spending; and companies key their inventories and expansion off consumer demand.

2.Dollar could increase in value early in the year due to global uncertainties (risks) and what looks like an improving U.S. economy and then fade later in the year.

3.The number of “Tea Party” people will continue to grow and will shape the look of the Republican candidates in the 2010 primaries.

4.More burdensome and anti-competitive regulations will come out of Congress that will prove to be roadblocks to recovery.

5.Concerns about when the Fed and Bernanke will raise interest rates will become mute because the market will raise rates months before the Fed and Bernanke decide it is time to raise rates.

6.The central Bank will hold interest rates low and continue to print money causing the next bubble because of malinvestments.

7.Residential housing will get worse in 2010 due to millions more foreclosures and more “toxic assets” put on bank balance sheets. Commercial real estate will continue to decline into 2011 because of the need to refinance “underwater” properties. However, new investors with assets will begin to buy up these cheap properties.

8.Banks will have to build assets to cover the toxic assets they currently have on the books and to cover the new toxic assets to come in 2010 and 2011. Therefore, bank lending will remain tight (and credit worthy borrowers scarce.)

9.Corporate winners and losers (consumers and tax payers have already lost) in the health “care” legislation will begin to become apparent in 2010 and the health care CEO’s and Unions who made deals with the administration will be surprised when they find that their negotiated “deals” will not be honored by the government.

10.Congress will pass another stimulus package to again help create jobs. It will be large, but it will be passed in smaller packages so they can get the spending bills passed without attracting too much attention or outrage.

11.Climate change hysteria will begin to abate during 2010 and Congress will begin to work on a realistic energy plan that we have been waiting and paying for since 1975.

12.Corporate revenues will continue to be elusive so companies that can raise money (with low interest bonds) will buy revenues and earnings with more mergers and acquisitions.

13.Government debt levels, already very high, will get much higher and the Federal Reserve is funding this debt with short-term bonds. Therefore, the Fed will be reluctant to raise interest rates. Imagine a 50% increase in rates (or from just 0.25% to 0.5%) would due to your “costs” when you are already paying hundreds of billions of dollars in interest.

14.This is certainly a minority opinion, but corporate earnings for 2010 are too optimistic and will be revised downward beginning with the second quarter numbers.

15.New investment areas will emerge because where you have buyers you have sellers and vice versa.

Is that enough or have I missed some important ones. If you have some others that should be added, please e-mail me your idea.

If we could just spend more on interest, we could really stimulate GDP growth

This may not sound right, but give me a second and I’ll show you that this statement is true.

The economy, as defined by most politicians and economists, is a mathematical model called Gross Domestic Product or GDP. This model is based on consumption (spending by consumers, businesses and the government.) rather than wealth building or production. So every dollar spent is a dollar of GDP and every new dollar spent is GDP growth.

Now, if you are in Congress or the President, you could catch on to this real fast. The more you spend, the more GDP goes up and the better your chances for reelection. But it gets even better.

But, we have one speed bump to get over first. To spend a dollar you have to produce a dollar. But the government doesn’t produce anything so it has no money to spend. No problem, it just has to get its dollars from somewhere else.

The government has to take a dollar from producers in order to spend a dollar; or it has to borrow the money with interest from someone else. It doesn’t matter where the dollar came from in the GDP model because every additional dollar the government spends is counted as an increase in economic growth (GDP.)

Now, if the government takes a dollar in taxes from a producer to spend. You could argue that the net is the same; you subtract a dollar from the economy in taxes and then spend that dollar. This could hurt down the road when you have to increase taxes to pay for the dollars you are spending now; but who cares. Many think they will be out of office by then.

You would think tax payers would catch on to this, but remember you elected them because they were clever and great communicators. So they just change the meaning of the word spending to investment and everyone is happy. Long-term you try to convince tax payers that you are only doing this because the government can spend dollars more wisely than the producer or because the government can buy something the producer cannot.

Wait. I’m not done. Here is the BINGO. You borrow lots of the money because if you pay-as-you-go, tax payers could catch on. And you get to pay huge interest payments on the borrowed money—you got it. Every new dollar paid is an increase in GDP.

Now, think of the GDP growth we are going to get when our deficits go up by 10 trillion or more over the next few years. PLUS, if interest rates rise significantly because of all the debt, BINGO –even more GDP growth.

If you think this is a sane approach to our economy, do nothing. If not, support politicians who are sane.

Opinion: Why health care costs will be significantly higher than congress is projecting

The current House version of the “Healthcare Reform Bill” (H.R. 3962) is projected to cost about $900 billion which is the spending limit President Obama said he would place on the bill. President Obama also said the bill would have to be “revenue neutral” which translated means you can spend up to $900 billion but you cannot (directly) add to the deficit.

The house bill claims to meet these two requirements. It spends $900 billion (or more) and it is revenue neutral if you believe in fairy tales. Following are some reasons why:

1. Taxes paid in advance will be put into the same “lock box” used for Social Security

To get to revenue neutral, the bill provides for taxes to be collected immediately (about $600 billion over 10 years) but doesn’t start healthcare services until 2013. That’s one way to get the costs down to $900 billion: charge for the service for years in advance so you get 10 years of taxes but only have to deliver six or seven years of service.

But we’ve had enough experience with Congress to know that they will simply spend all the money they collect and then in 2013 make payments out of the general fund --.just like they did with Social Security.

2. The $400 billion dollar cuts to Medicare and Medicaid are vary unlikely to happen

They have not been able to cut 10 cents out of these entitlement programs since they were enacted in 1964. Now they are suddenly going to throw seniors under the bus. I don’t think so. Here are a couple of examples why:

Social Security recipients are not going to get an increase in their social security payments in 2010 because there is no inflation. And they are scheduled to get an increase of about $8 in their Medicare insurance payment. Unable to withstand the pressure for even an $8 cut in benefits, Congress is looking at a new program to pay each recipient $250 as part of a “stimulus” package.

Or, how about the $250 billion reduction in payments to doctors (part of the $400 billion overall Medicare reduction) to help pay for the health care program (and keep the total costs under $1 trillion.) But, they then introduced a separate bill to pay doctors $250 billion to replace the $250 billion they would lose in the Healthcare bill. Since this bill is not part of the healthcare bill, the costs don’t count. The bill was voted down but you know what their intent is and they will find a way to pass it or disguise it sooner or later.

3. Waste, fraud and abuse will be eliminated or severely reduced

There is no line item in the budget for waste, fraud and abuse. Therefore, politicians on both sides of the isle have been unable to find these unnecessary costs for the past 45 years. Now they expect us to believe they are going to find them next year.

It’s time for us to wake up and realize this is not a health care reform bill. It is a big government, big spending bill. We already have the best health care in the world and yes the most expensive because we like to eat cheeseburgers, get hip and knee replacements to make our lives better, and get the best and latest cancer treatment, etc.

If politicians were serious about reform, they would attack the real reasons healthcare cost are rising so quickly that many people can’t afford health care insurance like the aging population which is about half of the future rise in costs and federal and state government regulations that prevent us from having a consumer driven healthcare system.

If you would like to get more information on fiscal and monetary policy, you can go the non-partisan, web site of the Concord Coalition www.concordcoalition.org

Market Rising Faster Than Economy: Five Reasons Why

The market has significantly outperformed the economy recently. It seems confusing because of all the headwinds making economic recovery so difficult. For example: housing and commercial real estate continuing to decline, an over-levered consumer, growing unemployment, etc. However, the market does not seem to be concerned about these headwinds (at this time) so what are traders and investors using to bid up this market? You see and read a lot about the recession being over or that we’ve avoided a depression or consumer attitudes are improving etc. But it appears there are five major reasons the market is outpacing the growth of the real economy.

1. The “economy” is assembled and dissected as a Statistical Model

Remember, most people see the market through the lens of the conventional, statistical model of Gross National Product (GDP.) This model looks at the economy from a consumption point of view: a dollar spent, no matter who spends it, represents a dollar of GDP. This of course is why many people see green shoots all over the place and hear so many declarations from politicians, economists and the media that the positive GDP growth in the third quarter means the recession is over. They don’t seem to consider that a dollar spend today (increase in GDP) is a dollar that has to be subtracted (from GDP) through taxes later. Nor do they seem to consider that the dollar will be taken from someone who could probably use it more effectively.

2. U.S. fiscal policy is out of control

Government spending is out of control and congress has every intention of spending more and more. The government will pump in at least $1 trillion (above tax collections) this year and probably each year for the next ten years. That’s a lot of GDP “growth.” Add to that any new programs that might be enacted like health care spending or cash for clunkers. Also, the $800 billion stimulus package has not worked (business revenues still falling and unemployment has gone from 5% to 10%.) Yet, according to demand side economists (preferred by most politicians) like Paul Krugman at Princeton, we need another, bigger stimulus package if we really want to turn this economy around.

The government may not (at this time, be able to get another big, trillion-dollar stimulus package through Congress. However, they may be able to get a lot of “little, very targeted stimulus packages” through congress like: $11 billion more for home buyers, $33 billion for businesses on tax losses 3-5 years ago, $250 for each Social Security recipient at a cost of $14 billion, how about another “successful” cash for clunkers program because GM needs money, etc. All of this money will push up the GDP.

3. U. S. monetary policy is out of control

The Federal Reserve has reduced interest rates to 0-.25 percent (basically free money for banks); expanded its balance sheet by $1.75 trillion dollars and guaranteed the financial community $4.3 trillion to make sure banks will trade with other banks. The Fed, at its meeting last week, stated again that it intends to keep interest rates low (where they are) for an extended period of time (until the economy turns around or until they see inflation.)

This “liquidity” not only helps the banks recapitalize, it punishes savers and forces them to buy risk assets if they want to earn a return on their money (or simply spend it and help GDP.) All of this liquidity helps consumption, but it also causes malinvestment and the current “carry trade.”

4. Stable, low-cost money encourages a Carry Trade

This simply means you capitalize on the returns you can get by borrowing money at low rates in one country and investing the funds in another country for a higher return. Remember reading about this when people were borrowing the Japanese yen at zero percent interest and investing in the U.S. at a higher rate of interest. Well, you can do that right now without leaving the U.S. We are now the carry trade. Banks can borrow from the Federal Reserve at zero percent and buy longer term Treasuries and make the difference. Or, some can short the dollar (it’s down over 10 percent this year) and use the money to buy higher risk assets (equities, gold, etc) and make even more.

5. Global funds still streaming into the U.S.

This carry trade is not just being done by Americans, it’s global. Countries around the world have more growth than ever and are taking advantage of the declining dollar and the rising assets like equities, commodities, etc. As we saw in the Technology bubble and the housing bubble, the world is awash in money looking for a place it will be treated well.

These are certainly not all of the reasons the market is rising faster than the economy, but they are some of the more significant reasons. Also they may stay in place until the headwinds become too strong.

Cash For Clunkers: Another Valuable Lesson

As you know from my previous article on, “Cash for clunkers,” it helped the targeted group but hurt many other groups. This is often the case when the government (we) examine a problem: we focus on the group or thing we want to help with a short-term solution; and we are generally blind to the short- and long-term consequences of our decision on everyone else. This is a typical government and hopefully not business or personal approach.

Now, in recent article in CNN Money titled: “Clunkers: Taxpayers paid $24,000 per car” based on an analysis done by Edmunds.com; the article also illustrates an excellent example of how to determine the success of a program (a decision) by looking at a seemingly complex problem and breaking it down into simple, measurable ways in order to measure its “success” (the correct decision.)

Edmunds.com compared the sales of luxury cars and other cars not covered by the program to determine a relationship between the two groups. Then, they projected what sales would have been during the “promotion period” and afterward. The auto industry agreed with those numbers. Based on this, they estimated that cash for clunkers resulted in an additional 125,000 cars sold that wouldn’t have been sold. Therefore, 125,000 cars sold at a cost of $3 billion (the government budget) amounts to $24,000 per car.

It also resulted in a bigger drop in October sales that would not have been as deep without the government program.

Now we know the impact this government program had on new car sales. But more than that, this analysis is a great learning tool. First, it was (in concept) a simple way to measure the effectiveness of this program; and gave us the ability to make a course correction (to our original decision) so we don’t repeat this program again ---in spite of the government and auto industry telling us how successful it was.

Here is the new question: Do you think the government will look at this data and analysis when the pressure builds again for the government do something to save the auto industry?

Also, what does this tell us about the probability of success in the about to be extended and expanded “buy a house and get taxpayer money “ program.”

The Market Has Turned Up But What About The Economy?

With the DOW at about 10,000, it's hard to argue with a market that has gone from 6,500 in March to 10,000 in October. That is a significant move. Many are now asking is it real? Will it hold? Will it continue to go up?

No one knows for sure, but many traders believe it will continue to move upward because:

1. Interest rates are at zero and the Federal Reserve has no plans to raise rates anytime soon,

2. Government spending is increasing as fast as Congress can vote with current 2009 budget deficits at $1.4 trillion to date,

3. Massive spending coming on the health insurance program which will result in billions of additional borrowed money (do you really think congress is going to cut $500 billion

out of Medicare when they have been unable to cut out five cents in the past,)

4.The possibility of another stimulus package as soon as this fall.

5. The Federal Reserve printing money 24/7,

6. The Treasury trying to come up with new acronyms as fast as they come up with new "investment" programs,

7. I could go on but you've got the idea.

All of these spending programs, as I've discussed in the past add, at a minimum, dollar for dollar to the Gross National Product (GDP.) Spend a dollar and GDP goes up a dollar. When you are spending trillions and trillions of dollars, you are going to get an up turn

in GDP (more consumers spending, more business spending and more government spending.) And when you spend month after month, you are going to get a trend. So

for those people who see the economy through the lens of a statistical model defined

and framed by the GDP, it may look like a V shaped recovery.

But what happens when the music stops? What happens when the government stops spending (IF that happens, when that happens) and the Federal Reserve raises rates and or stops printing money 24/7? What happens when the government has to hand

off the economy to the private sector?

However, to make that hand off, we will have to solve some of the problems that brought this recession on in the first place. For example, we need to get:

1.Both major banks and regional/local banks healthy again because of mortgage defaults, credit card defaults, a significant downturn in commercial real estate loans, declining revenues, etc.

2. Consumers to spend again. But they have to get de-leveraged first and increase their saving (which they are doing, but they have along, long way to go (consumers were leveraged to 130% of assets and are now down somewhere around 127% of assets.)

3. Positive job growth. With a GDP growing at 1% per year (pessimists) or 3% growth per year (optimists) we will not be able to provide jobs to new people entering the market let alone the 6 or 15 million (depending on how you count unemployment) already unemployed. Continuing unemployment will compound the problems listed above,

4. Congress to come to their senses and stop spending, check their anti-capitalist, anti-free market, anti-globalization wishes and programs,

5.Congress to recognize that every dollar they impose in new taxes (and there are going to be significant new taxes) will have to come from the people they want to spend, invest and create new jobs.

6. That's good for starters.

So far, all we are doing is kicking the can down the road like they did in Japan after their real estate bust because dealing with these problems is very difficult and painful. For example, to recapitalize the banks and reduce the toxic assets problem, we may have to "force" the creditors and bondholders of these banks to convert their "assets" into equity at a significant loss to them. This is capitalism. But it appears that not enough politicians in our mixed economy have to courage to solve this problem.

So, to answer the question of whether the market will continue its upward ways, the answer has to be yes. It very well could, at least, in the short-term. The long term will depend on solving some of the real problems in the way of real economic growth.

So, you need to stay both a bull and a bear, stay tuned in and be willing to change colors at a moments notice.

New Tariff On Tires: A Help To Labor Or A Roadblock To Recovery?

After everyone went home on a Friday night and the news industry geared down for the weekend, the White House increased the tariff on tires, imported from China, by 35% on top of the existing 4% tariff.

Why? The Steelworkers Union (the union for tire workers) “convinced” the White House that they needed to increase the tariff on tires imported from China to “protect” 5,000 jobs in the tire industry. China has 18% of the low-cost tire market.

This may be good party politics (supporting your base) but it is poor economic policy and it is another roadblock the administration has put in the way of economic recovery. Lets look at who is helped by this policy and who is hurt.

The union is helped in the short-term. This will increase tire prices (some guesses are $30 to $90 per tire), which will generate money that can be used to keep employment at current levels or increase employment. Unfortunately, this help may be short lived because low cost tires can also be imported from Indonesia and Mexico or other low cost producers.

The policy will also help the tire companies in the short term. They will be able to raise prices on the 82% of the market not imported from China (you are not going to sell higher quality tires at prices below low quality tires.)

This helps the government in the short term because it raises revenues with a 39% tariff plus the higher excise taxes that go along with it.

Looks good so far: short-term, it saves jobs, increases revenues and profits for tire companies and raises badly needed revenues for the Federal government. But the problem is that it does more damage than good.

The problem is that these short-term effects also have some very negative effects.

First, it signals protectionism. Exactly what we did in the depression that resulted in extending and deepening the depression. This single act will be a speed bump in the economy but if it is the start of more protectionism, it will be devastating to the economy. China is already talking about putting tariffs on poultry and auto parts after an agreement last year to export to China $2 billion in autos and parts (much of which comers from Michigan.)

Second, it raises the price of all tires so we will have to pay significantly more for the same quality product. This will hit the “working poor” especially hard (for example about $140 for a $100 tire) and right after the cash for clunkers program raised the price and availability of all used cars. It’s a double whammy for those who can afford it the least.

Third, the extra money paid for all these tires (100% of market share times 35% tariff) means that consumers would have to reduce that same amount of spending on other products and services. This means GDP will not increase and employment will have to decline –in other industries—equal to the loss of revenues to the tire industry. Therefore there will be no gain in employment only other employees displaced. The political focus should be on helping the displaced tire workers get through this pain and get retained.

Fourth, the American economy will be worse off because productivity (how wages are increased) will decline because we are subsidizing an unproductive industry as we take money away from more productive industries. This is not how you create wealth.

Fifth, union tire workers will suffer long-term because they will not be trained for non-subsidized jobs in the future. In my opinion, unions should be “guaranteeing” its members that they will be employable in the future not that they can keep their exact job in the future.

Regardless of the union’s arguments or political games, the net of this mis-directed protectionist program does not help tire workers. It does not create jobs or raise wages. But it does hurt consumers and cause long-term damage to the economy and the dollar. Plus, it opens the door to reduced trade and increases the fear and uncertainty in the capital markets.

Cash for Clunkers: Free Money For Some, A Burden For Others

What would you say if I came to you with this idea?

To help the economy, let's borrow $3 billion dollars (from the Chinese if they will still lend us money) plus whatever interest we have to pay for 10 years. Then we’ll offer to pay $4,500 for 10-year old cars which is more than they are worth if they buy a new car that gets better millage than their old car.

This would provide instant stimulus to the economy and hopefully some of these buyers will purchase their new car from one of our government owned car companies. We could sure use the revenues.

Then, we'll pay someone to destroy the old, used cars which will reduce the supply of used cars and drive up used car prices for months and months which would also be good for the dealers.

Even more brilliant, we could pay some banks we own, like Citi bank, millions of dollars to administer the program. But I’m not finished yet. We could also sell this idea to the public, if free money wasn’t a strong enough incentive, by emphasizing how the better gas millage will help save the economy.

What do you think?

If you were a typical politician or economist, you would probably go for this because it focuses on several groups that need help; and it would help them immediately.

If you were anyone else, you might think I’m nuts because it spends money we don’t have, it props up failed car companies slowing down the recovery, it destroys our wealth (700,000 used cars), it’s not real demand because it pulls future sales into this year. And that’s just for starters.

You might also think it’s a nutty idea because it doesn’t look at all the other groups that are affected by this policy.

For example: the auto repair shops across the country that will lose about $70 million dollars per year in repair service. Lower income people who buy and rely one these functional, low-cost “clunkers” to get to work and get their kids to the doctor. Or Charities who depend on the donation of these “clunkers” to raise money for their important work.

And by the way, the additional CO2 saved by the extra 10 miles per gallon won’t help save the earth either. 100 gallons of gasoline produces approximately one ton of CO2 (one gallon produces about 20 pounds.) At a CO2 cost of $50 per ton, you could have driven the clunker 1,000 miles per month for the next 15 years before you reached $4,500.

And this is just the immediate effect. Long-term we will have to raise taxes to pay for this program, which will take money out of the pockets of people who could use it more effectively to build wealth rather than destroy it. Small businesses, charities and the poor will have to find other ways, around government policy, to earn a living or help other people.

The net is that this kind of policy may help some people or groups today but it will hurt other people and groups as well. long-term, it will hurt the economy and the pace of the recovery.

As President Reagan said, government isn't the solution to our problems; it's often the cause of our problems. This may not be true all of the time but it certainly is true in this case.