Miller's Market Musings

Let's See How Stupid We Can Be

Despite what the President might think, he can’t create any jobs.  (Well he can by building roads, bridges, and schools – all things we need.  But that’s not likely to happen soon.)   But he can’t create jobs in most private companies – for that we need private entrepreneurs will to take risks and start companies in return for commensurate rewards.  In addition, the President is going to have a hard time changing our country’s current corporate predilection for outsourcing, not because the U.S. manufacturing labor force isn’t competitive with China or India – it is.   3 years into this recession, labor costs are relatively inexpensive, especially when you consider the enhanced productivity of the U.S. labor force compared to those other countries – we are a lot more efficient and operate with much lower friction costs (fraud, theft, etc.).    He is going to have a hard time changing things because he is unwilling to do the very simple task of changing our immigration laws for highly educated engineers, of which the country is in very short supply.  Bring in more engineers, and you’ll get more manufacturing jobs.   Send engineers overseas, and watch the manufacturing jobs disappear.   It’s simple.

So what’s the problem?   Regulation.   Not just regulation of financial companies, which is going to drive down their returns until they resemble utilities.   Overall stupid, needless regulation – sometimes regulation that is so mind-numbingly dumb as to defy belief.   Now wait a second you’re probably saying to yourself, some regulation is good – environmental regulation, for instance.   And I agree that some regulations are a good thing, particularly when without it companies can get a “free rider” benefit from using public resources (clean water) for private gain (dumping toxic sludge into rivers).    But the U.S. immigration visa requirements that send home engineers and Ph.D.’s as soon as they earn their degree here, instead of encouraging them to stay in this country (which many want to do) and start companies here, make no sense at all.    Think this is a Wall Street free-market rant?   Actually, this issue is a very hot topic in Silicon Valley.   Steve Jobs recently had some interesting comments on this.  Among them:

'You're headed for a one-term presidency," Steve Jobs told President Obama at the beginning of a one-on-one session the president requested early last year.  As described in the authorized biography by Walter Isaacson, Apple's founder said regulations had created too many burdens on the economy.

“This isn’t My Problem”, or “Why the German’s Won’t Bail out Europe.”

Wasn't it nice when Eurotrash meant an annoying group at the bar and not Sovereign Debt?  Anyway, despite what you might have read in the paper or seen on the news, the recently announced rescue package isn’t a rescue at all.   It’s like sending someone who can’t swim into a riptide to rescue a drowning swimmer.   Or to use another analogy, Europe is like 2 drunks staggering down the street leaning on one another.   They think they are sober and fine until one stops walking.   Then they both fall over.   Lending money from one broke country to another broke country doesn’t make the first one less broke.  It just props it up for a while.  See our note from yesterday for more on this issue.

Since the solution to the problem is easy, clear, and everyone seems to actually know what it is, why won’t it happen?  Simply put, just like the US fears a second Great Depression, Germany fears a second Great Inflation.   They are worried that monetizing the debt via the European Central Bank (ECB) will cause rampant inflation.   Secondarily, the German leaders have a political problem.   They can be seen by their citizens (who have actually done a good job of saving and not over-extending themselves) as bailing out the lazy early-pension-taking partiers in southern Europe, or they can wait for Greece and Italy to default (“voluntary reduction”, sorry) and then backstop their own banks.   The amount of money at stake is about the same (for the Germans).  But it is much more politically palatable to give German money to German banks than to give it to Greece so that German banks don’t take losses on Greek bonds.   Simple right?  

So what are the Germans afraid of?  Art Cashin is the best writer on Wall Street.  His daily notes are a must read.   So instead of doing his history a disservice, I have quoted it in its entirety below.   Enjoy.

An Encore Presentation

By Art Cashin

Originally, on this day (-2) in 1922, the German Central Bank and the German Treasury took an inevitable step in a process which had begun with their previous effort to "jump start" a stagnant economy. Many months earlier they had decided that what was needed was easier money. Their initial efforts brought little response. So, using the governmental "more is better" theory they simply created more and more money.

I got it, I got it! What is it?

Late last night (actually really early this morning) as everyone knows by now, Europe “solved” the Greek debt crisis.   According to Reuters:

Euro zone leaders struck a deal with private banks and insurers on Thursday for them to accept a 50 percent loss on holdings of Greek government bonds as part of a plan to lower Greece's debt burden and try to contain the two-year-old euro zone crisis.

In an agreement reached after more than eight hours of sometimes harsh negotiations, the private sector said it would voluntarily accept a nominal 50 percent cut in its investments to reduce Greece's debt burden by 100 billion euros, cutting its debts to 120 percent of GDP by 2020, from 160 percent now.

At the same time, the euro zone will offer "credit enhancements" or sweeteners to the private sector totaling 30 billion euros. The aim is to complete negotiations on the package by the end of the year, so that Greece has a full, second financial aid program in place before 2012.

The value of that package, EU sources said, would be 130 billion euros — up from 109 billion euros when a deal was last struck in July, an agreement that subsequently unraveled.

"The summit allowed us to adopt the components of a global response, of an ambitious response, of a credible response to the crisis that is sweeping across the euro zone," French President Nicolas Sarkozy told reporters afterwards.

The stock market rallied strongly on this, pushing the monthly gain for the S&P 500 to its highest level since 1987.   We expected this rally, and expect continued market strength in over-sold sectors, although the overall market will probably fade a bit here.  However, those who understand how the markets work in Europe don’t think this is a permanent solution – just like the first Greek “solution” over 2 years ago wasn’t the solution either.  But it works now, and we’re in the here and now business, not the “ivory tower what’s right” business.   This is a big move and the markets are working off of a big oversold condition last month.   Our long call starting October 5^th was about as good as it gets, but its nearing time to tip the man and go home.    

Quoting our trader at Goldman, Sachs: 

China is a model economy? Yes, a model for disaster.

The Chinese, despite popular press to the contrary, are not an economic model to emulate.   While their country appears to be growing at the same time the U.S. is stagnating, the reality is that their growth is being “bought” with cheap credit, which will not be repaid.   Banks are lending tremendous amounts of money to enterprises without profits and without the prospect of profits.   The new loans are simply going to be spent on getting the lights on and the payroll paid. 

Why are they doing this?  Economic expansion in China is necessary to maintain societal calm, particularly in the countryside, where poverty is still rampant.   Without new factories and jobs with which to satisfy their citizens’ demands for higher wages, the ruling members of the Communist Party of China and its very industrious military would lose control over the populace.   Given China’s thousands of years of history of regime change via popular unrest, and the subsequent death of the previous leaders, it is understandable why the current leadership will maintain growth at literally any cost.  For an interesting article on this topic, click here.

It is refreshing when someone speaks the truth - even if they might not have meant to.

For an interesting perspective on the real risk to our economy from over-regulation by a Congress that is run by lobbyists, read this interesting article on Google's Eric Schmidt's discussion of Washington politics.

Some highlights:

"So we get hauled in front of the Congress for developing a product that's free, that serves a billion people. OK? I mean, I don't know how to say it any clearer," Mr. Schmidt told the Post. "It's not like we raised prices. We could lower prices from free to . . . lower than free? You see what I'm saying?"

He contrasted innovation in Silicon Valley with innovation in Washington. "Now there are startups in Washington," he said, "founded by people who were policy makers. . . . They're very clever people, and they've figured out a way in regulation to discriminate, to find a new satellite spectrum or a new frequency or whatever. They immediately hired a whole bunch of lobbyists. They raised some money to do that. And they're trying to innovate through regulation. So that's what passes for innovation in Washington."

An interesting and quick read - and one you won't see again for awhile.

 

History Sometimes Does Repeat Itself

For an interesting look at how past Presidents have tried (and failed) to bully business into doing their bidding, read this article in the Wall Street Journal about FDR's response to the double-dip recession of 1937.  (For those who weren't around back then, industrial production fell by 1/3, stocks by 50%, payrolls by 35% and unemployment reached 20% - all 5 years AFTER the recovery began).  

Some interesting portions: 

"Privately, FDR told Robert Jackson, head of the Justice Department's antitrust division (and a future Supreme Court justice), "Bob, I'm sick of sitting here kissing [businessmen's] asses to get them to" invest and increase employment. Publicly, Jackson agreed in a December 1937 speech that the country faced a "strike of capital" by business in order to get New Deal legislation repealed. He denounced the notion that the president's program was antibusiness. Given the "astounding profits under the present administration," he said, "big business will never be able to convince the American people that it has been imposed on, destroyed, or even threatened. It has merely been saved from ruin and restored to arrogance."

FDR told former speechwriter Rex Tugwell late in 1937 that he "wanted to scare these people into doing something." It was an odd strategy, trying to vilify business into creating jobs. And it didn't work well.

The full article can be found here. 

 

Great Speech by Dallas Fed Chief Richard Fisher

On Friday Dallas Fed President Richard Fisher gave another of his honest and frank speeches.  I have quoted part of it below, and posted the link to the speech itself here.  Washington needs to get going on regulatory and fiscal reforms soon, or there will be nothing left to fight over.

From his speech:  "And yet, even in this blessed state, there are too many unemployed and underemployed, just as there are in the rest of America. We can do better. America must do better.

The question is: How?

To create employment, we must have economic growth.

The simplest of econometric equations posits that the key components of economic growth are: domestic consumption, plus foreign demand for U.S.-produced exports, plus investment by businesses, plus spending by government.

I think it is pretty clear to everyone who lives on the planet that in order to expand our economy and put our people back to work, we must rely on our ability to curry to domestic and foreign consumption and invest here at home to produce the goods and services to sell into the marketplace here and abroad. You’d have to be from Mars to believe that our financially strapped federal and state governments will be the source of much direct spending stimulus to the economy going forward."