Tuesday, February 24, 2009

- The Economic Education Of Barak Obama

Barak Obama has never had to deal with the pressure of producing a profit, so he’s never learned how difficult it is. The closest thing that America’s community organizer in charge has ever done to a private sector job was teach at law school, and no one is as cloistered from the pressures of producing results as those in higher education.

To be completely fair about it, Barak isn't the only person in Washington who has some learning to do. Listening to Chris Dodd and the other imbeciles (of both parties) in congress talk about banking policy is like watching over a mine field planted outside an insane asylum. While he and the other inmates go chasing around the yard after imaginary demons, you sit there knowing it's just a matter of time before it ends badly. You just hope that not too many innocents get hurt in the process. But I digress.

The act of ‘getting more money’ has never been a troublesome issue at all from Barak Obama’s perspective. In his world you either ask your benefactor (usually the government) for more while describing your intentions, confident in the knowledge that no one will ever come back and ask you if the results you achieve matched your expectation. Or you simply go and take it from the taxpayers. That’s how you manage ‘more money’ in academia and government. And it’s this lack of a reference point for the difficulties of the private sector that has skewed Obama’s worldview in important ways; ways that we’re just beginning to see.

When I watch Obama and his team falter on economic policy, I’m reminded of how little he knew about this sort of thing going into the job of president. This in itself doesn’t strike me as such a big deal. There is no doubt that the job of president is harder than anyone who’s never had it thinks it is, and it always involves a measure of on the job training. But as we now stand, the markets are in open revolt against the Obama administrations ‘top down – managed economy’ and we hear expert after expert from the Democrat party trying to lower expectations by describing how hard it all is to get a handle on.

Well of course it’s hard… we already knew it was hard. In fact the only people who didn’t, seem to be the people in Washington who now say that they’re the only ones who can solve this. There is no entity in the private sector which has as thoroughly mismanaged its finances as the US federal government. And yet the government now wants us all to believe that the best way to solve these issues is to make the private sector work more like Washington instead of making Washington work more like the private sector. This is the kind of lunacy that only the self congratulatory dimwits in government could think was rational.

Washington and “Team Obama’ have had a lot to learn about how an economy works. They’ve already apparently learned ‘how hard it is’, and there are a few more things they’re about to learn which are even harder. Lets do a quick recap of where we are in the lesson plan:

Congressional Democrats pass an 800 Billion dollar ‘stimulus bill’ which is little more than a combination of political payback and liberal pork. By their own estimate only 60% of the bill is designed to do anything to help jobs, and of the 3 million jobs it targets, 600,000 of those will be government bureaucrats. This (and the other recent acts of the Democrat congress) have expanded our total debt to GDP ratio from 3% last year to 25% now. Add in a few more bailouts for the politically connected car companies and banks, and we could very well be looking at a total debt in 2010 that's 40% of GDP.

In order to fund the giveaway bill and the other government inspired wealth redistribution plans, the Treasury has to go out and borrow several Trillion dollars more than usual from the Chinese. But our government is already so in debt that the Chinese are reluctant to continue to feed our habit for cheap money. For the time being jawboning looks like it will be incentive enough so Hillary Clinton (popular with socialists the world over) is sent to beg and plead with the Chinese. But in the process, the Whitehouse has realized that it can’t fund all their plans with debt alone, so they announce a soon to be enacted tax increase on the rich.

They don’t worry about the disincentive this created for 'the rich' or the inspiration they'll have for legally avoiding those taxes. I know that if Obama wants to tax me an additional $20,000 per year, I’ll happily spend $19,000 per year avoiding it. (And I'll be sure to hire an international law firm to help me.) But Obama and his team apparently haven’t realized that sort of thing yet, so this brings us to the present day in the economic education of Barak Obama. Now let me detail a few other things he’s going to have to learn over the next few months:

When the rich are taxed, the government is taking away what would otherwise be investment capital in the financial markets. So instead of that money being used to create jobs and invest in new business and technology, the money will be used for some political purpose instead. Whether you agree with the political goal it’s used for or not you still must admit that removing the money from the markets will certainly cause stock prices to fall, and interest rates to rise.

As interest rates rise, and less capital is made available for business, economic growth will slow and tax revenue will fall, so taxes will need to rise again. Think of Barak trying to run up a very long and increasingly rapid escalator where reaching the top means that taxes have reached 100% and economic activity has fallen to zero. But even if he just keeps up, other market participants will see the writing on the wall and realize what’s coming next. And what’s coming next is that the Whitehouse will give in to the temptation to monetize the debt.

You see, as Democrat operatives and journalists have ceaselessly told us all, managing an economy from the top down is really hard. But buying the debt with newly printed dollars is actually quite easy. You simply print more money, buy the bonds (keeping interest rates low in the process) and throw the debt in the fireplace. In fact, in an economic emergency the added ‘liquidity’ could be credibly described as a good thing for the sake of the economy. This will give a party spokesman the opportunity to hail Barak’s great leadership at ‘slashing the government debt’ even in the face of continued economic crisis. Many Americans (and the New York Times) will think that’s a good thing but most won’t notice.

Of course, even though most American’s won’t notice, the Chinese certainly will. You see when they monetize that debt they will be lowering the value of the dollar, and that in turn will lower the values of all the dollars that the Chinese are owed. They won’t like that. And I don’t think they’ll take it sitting down. Expect them to stop buying US debt and for the value of the US dollar to collapse relative to the price of hard assets. There is a small chance that the administration will be able to negotiate a settlement with the Chinese, but given the performance of Team Obama so far, I’d bet against it. Their already demonstrated audacity seems to be their guiding principle to me, so personally, I have little hope.

Barak could forestall all of this of course, but it would involve abandoning his entire political philosophy so I don’t think it’s very likely. Instead I think he’s simply going to learn it all the hard way. He hasn’t had any experience dealing with economic reality, and we’re all going to pay the price for that now. This seems fitting since he was elected by people who are in the same place as he is with their economic education. The most pampered and spoiled generation in the history of America made their choice and they chose someone as untouched by economic realities as they are. So be it. They’re all learning together now.

And as an aside, for those who think this opinion is just partisan politics let me say this: I think John McCain would have very likely been just as bad at all of this as Obama is turning out to be. McCain was well known as an economic illiterate and has shown me nothing the change that view of him.

The fact is, I don’t intend this as criticism of President Obama exactly, just a recognition of the facts. He has no experience in dealing with economic reality, so it wouldn’t be fair to expect him to be good at it. And for the record, I don’t expect it, and neither apparently do the financial markets. They know exactly what’s going to happen and are changing to reflect that increasingly bleak view. He’s never had to deal with any of these issues before but the simple fact is, this is something that Barak Obama is going to have to learn. I only hope he can figure out which of his preconceived notions he needs to abandon before it’s too late for the rest of us.

Friday, February 20, 2009

- Rick Santelli Is A Racist!

No, I don’t really think Rick Santelli is a racist, but since I’m quite sure that someone as nuanced and enlightened as say a Joy Behar or Whoopie Goldberg will certainly be saying it very soon, I thought I’d try to stay ahead of the curve.

The truth is while I don’t think too much of most of the people on CNBC, I’ve always kind of liked Rick. Even though I haven’t worked on an energy desk in nearly 2 decades, it’s where I started my career. In my heart of hearts I’ll always think of myself as a commodity guy so I guess I feel that connection. And Rick appeals to me in the same way that Sarah Palin does. In my circle of acquaintance I don’t think he’d be one of the smarter people, but his head is screwed on straight, he’s guided by his conscience, and he has learned the lessons of history, so he’s my kind of guy. His basic view is one that we would all be better off if we were left alone to decide for ourselves how to live our lives, and I strongly agree with him there. I’m quite sure we’d get along well.

Steve Liesman on the other hand, is Rick’s liberal alter ego on CNBC and although I have much bigger problems with his view, that isn’t to say that I have problems with him. Like Rick, he seems to be a nice, likable, honest, and certainly well intentioned guy. His problem is that he’s simply wrong about his basic political philosophy. At his core, his view is based on a belief that Americans are too stupid to run their own lives and that things would be better for everyone if we just empowered ‘the smart people’ to make all our decisions for us. Since liberals assume that means they get to run things, it’s their view pretty much all the time. But in Steve's defense it’s during times of crisis when there appears to be the most evidence to support the 'elite' view.

But if you take an honest look at history the evidence is overwhelming that it’s the Santelli view of 'every man choosing how to live his own life' that leads to the best result for the most people. Every time collectivism has been tried it’s led to disaster and suffering. The more centralized the control, the more serious the disaster. This is because it's impossible for any one person, no matter how smart or enlightened or well intentioned, to know enough to get it right for everyone. But after decades of being told otherwise in our academic institutions and in Paul Krugman’s OpEd columns, we seem to have forgotten that basic historical fact.

I’m sure it’s simply an oversight, and has nothing to do with the press being ‘in the bag’ for Obama, but amazingly, the mainstream press keeps forgetting to mention that nearly half the people in the country don’t agree with Obama’s plan to make out children into serfs to reward irresponsible homeowners. That’s why Rick Santelli’s little rant on Squawk Box has garnered such attention. He's a part of that half and I guess he isn’t ‘enlightened’ enough to read the writing on the wall and modify his opinions to be in line with the editorial view of CNBC. He’s more commodity guy than journalist I guess. But unlike the New York Times attack dogs, when I say it... I mean it as compliment.

And I'm sure those aren’t the only attack dogs who will be taking an interest in Mr. Santelli. He is from Chicago after all… I’m sure right now every prosecutor in Illinois is digging through his past to find enough dirt to shut him up. We’ll no doubt be hearing all about his speeding tickets from the 80’s, and the time in college when he was caught drinking in public or some other travesty. Katy Couric will be doing a prime time interview of his grammar school teacher who claims that he was always a ‘bad influence’ because he refused to share his twinkie with the other kids. And 60 minutes will have an in depth expose about how he got his driveway repaved without filing a construction permit.

And there is no doubt that the dimwit liberals of the media world like the chicks from the view, will almost certainly be calling him a racist. Why? Well he’s opposing an Obama plan so why not? It doesn’t matter to them that Rick just doesn’t want people who acted responsibly to have to bear the burden of those that didn’t. And it won’t matter to the politicians either. We’re getting Obamunism whether we like it or not. We’ve already made that poor choice, and unfortunately there isn’t much Rick Santelli can do about it now.

Too bad though…. He’s got the right idea… and I hope that in a few years when the bill starts to come due we all remember that. I hope he’s around to help rally the troops. He’s an honest guy who spoke from his heart, but when liberals are running the show that’s a very dangerous thing to do. And I genuinely hope it doesn’t cost him.


After today I think it’s pretty clear where the battle lines for the Obama administration are going to be. During the Bush Administration it was Hollywood, journalists and the academic elites aligned firmly against the US government. But along with the labor unions and civil service unions, those are Obama’s allies. For Obama the people who will actively oppose him are going to be the capitalists in the market and small businesses. In that war the Obama administration will tell us why we have to do what he says because ‘it’s for our own good’ and capitalists will respond by selling the dollar, selling the equity markets, and fleeing from risk.

In the end, the Obama administration is trying to circumvent the natural order of capitalism with the audacity of central planning. Obamunism. but the harder he tries, the harder the markets will push back. Any best on who wins?

Rick Santelli is being viewed as a hero because he has shown the kind of courage that none of our politicians have. Well maybe it wasn’t courage… maybe it was just a moment of passion. But all the same he’s saying what many want to hear. It’s a message the Republicans should be touting, but they’ve all decided to look after the interest of the political classes (especially themselves) first. That’s why they sound so much like Democrats these days.

It’s abundantly clear that the Republicans don’t really want to oppose Obama because what he wants to do (increasing the control of the government over people’s lives) will help them too. But if they won’t be the opposition, then the markets certainly will be.

Thursday, February 19, 2009

- America's Long Term Future

"On a long enough timeline, the survival rate for everyone drops to zero.”
Tyler Durden - 'Fight Club'

The future of America has come down to a single question, and it’s a question of politics not economics. The question itself is this:

“Do you believe that we can elect a body politic of such strong moral character and huge popularity that they will be able to go to the American people and renege on the government’s promise for Medicare and Social Security without being immediately voted out of office for it, and their decisions reversed?”

If you can’t imagine that happening; if you can't imagine the US government giving up on Medicare and Social Security, even in the face of the increasingly shrill demands of the baby boomers then we're done. If you can't imagine them standing up to all those entrenched special interests, the AARP, the unions, the wholly irresponsible state governors, and all the freshly retired civil servants who all want free everything forever, then you can't imagine the US surviving. There will be no way remaining for the US to resolve its National Debt to the benefit of the debt holders and that will mean a default, and the end of the west.

The debt will be resolved of course, but it will either be through monetization (the Fed buys the debt with newly printed cash and throws the bonds in the fireplace) or through the government default. Thanks to this Democrat congress, the burdens placed on the taxpaying portion of the US citizenry are already so great, that there is no longer any way for the US economy to demonstrate the amount of growth necessary for the government to be able to provide for all its future commitments.

The huge burden of the Obama Stimulus makes a necessity of higher taxes. High taxes depress growth, which increases the portion of government spending funded through debt issuance, which increases the supply of the bonds and with it the interest rates, which in turn depresses growth further. The government can keep the bond supply low through monetizing the debt, but that leads to inflation and lowers the standard of living for all Americans. This depresses spending, and if you believe the Keynesian's running around these days, that depresses growth even further.

Eventually, the process becomes unsustainable. And unless you can think of a way for the question above to be addressed by our politicians, then that time is upon us. The current Debt to GDP ratio is something like 25%. When the full burden of Medicare and Social Security comes to bear, the Debt to GDP ratio will be more like 250%. That is, the US government will owe $2.50 for every dollar of the entire country's gross domestic product. Even if the government responded to a crisis like that by making taxes 100%, it would still take 2.5 years of work by every man, woman and child in the country for us to pay off what we owe. This is not a reconcilable issue for any institution.

Just to be clear here, I’m not some crazy guy living up in the hills writing my manifesto. I’ve never been a ‘gold bug’ in fact the bulk of my experience in the commodity markets has been in energy not metals. You’d never know it if you read my stuff lately, but I’m not the kind of guy who’s been ranting about our inevitable doom for a decade. I’m a professional investor with two decades of experience working at some of the most respected and highly profitable firms in the world. For two decades it’s been my job to try to look around the next corner before anyone else does. And when I look around this corner, what I see is the question above.

I won’t answer the question for you; I’ll leave that to you. But if you can’t think of a way for the US to pay down its debt before the deluge of Baby boomer entitlements comes due, then there is no long term future for America.

Tuesday, February 17, 2009

- Behold Your Future America

This Story from Kansas.Com is the kind of thing we'll be seeing from more and more states going forward. Basically the state of Kansas is refusing to hand over people's tax refunds in a timely manner because ... well really ... because they dont' have to.

I would expect the same kind of behavior from the big 5 of fiscal irresponsibility very soon... those would be California, New Jersey, Michigan, Illinois, and Massachusetts. They're all in fiscal trouble, and they are all run by legislatures who have grown accustomed to putting the needs of the taxpayers.

It will take longer for this sort of thing to be seen elsewhere now that the Obama Stimulus plan is bailing out those states that have been the most irresponsible, but it will also be much more common now that the Obama Stimulus plan is bailing out those states that have been most irresponsible.

And when you hear the federal government doing the same, you know it's time to make tracks for the exits.

Wednesday, February 11, 2009

- Congressman You Go Too Far

If the (cough sputter) ever diligent watchdog media decides to recover from it's Obama induced stupor and tell the truth about the complicity and participation of the government in creating the circumstances that caused the present economic crisis, I'd really hate to be Barney Frank.

If the people of the US ever find out the real role of Congress in this mess and they then think about the arrogance displayed by Rep Frank, I'm genuinely afraid for what will happen to him.

I've spent most of my career working for Billionaires and even with that sampling bias I don't think I've ever seen such astounding arrogance before. This man is beyond belief.

Thursday, February 5, 2009

- The Left's Religious Dogma

- Nero On The Potomac

This is just breathtaking. Apart from the headline grabbing examples of utter waste shoved into the "stimulus bill" by Imbecile Pelosi et al. (which everyone knows won't stimulate anything), these are a few of the items that the administration thinks will actually work at creating jobs:

$79 billion for State Fiscal Stabilization Fund
$4.5 billion for U.S. Army Corps of Engineers
$850 million for Amtrak
$87 million for a polar icebreaking ship
$1.7 billion for the National Park System
$55 million for Historic Preservation Fund
$7.6 billion for “rural community advancement programs”
$150 million for agricultural-commodity purchases
$150 million for “producers of livestock, honeybees, and farm-raised fish”
$15 billion for business-loss carry-backs
$145 billion for “Making Work Pay” tax credits
$83 billion for the earned income credit
$150 million for the Smithsonian
$34 million to renovate the Department of Commerce headquarters
$500 million for improvement projects for National Institutes of Health facilities
$44 million for repairs to Department of Agriculture headquarters
$350 million for Agriculture Department computers
$88 million to help move the Public Health Service into a new building
$448 million for constructing a new Homeland Security Department headquarters
$600 million to convert the federal auto fleet to hybrids
$450 million for NASA (carve-out for “climate-research missions”)
$600 million for NOAA (carve-out for “climate modeling”)
$1 billion for the Census Bureau
$89 billion for Medicaid
$30 billion for COBRA insurance extension
$36 billion for expanded unemployment benefits
$20 billion for food stamps
$50 million for the National Endowment for the Arts
$380 million in the Senate bill for the Women, Infants and Children program
$300 million for grants to combat violence against women
$2 billion for federal child-care block grants
$6 billion for university building projects
$15 billion for boosting Pell Grant college scholarships
$4 billion for job-training programs, including $1.2 billion for “youths” up to the age of 24
$1 billion for community-development block grants
$4.2 billion for “neighborhood stabilization activities”
$650 million for digital-TV coupons; $90 million to educate “vulnerable populations”
$2 billion for renewable-energy research ($400 million for global-warming research)
$2 billion for a “clean coal” power plant in Illinois
$6.2 billion for the Weatherization Assistance Program
$3.5 billion for energy-efficiency and conservation block grants
$3.4 billion for the State Energy Program
$200 million for state and local electric-transport projects
$300 million for energy-efficient-appliance rebate programs
$400 million for hybrid cars for state and local governments
$1 billion for the manufacturing of advanced batteries
$1.5 billion for green-technology loan guarantees
$8 billion for innovative-technology loan-guarantee program
$2.4 billion for carbon-capture demonstration projects
$4.5 billion for electricity grid

By my count that's $503,336,000,000.00 that the federal government has every intention of taking from the private citizens by force, and distributing as they see fit. Basically it's a massive giveaway to every pie in the sky liberal interest group, and entrenched bureaucrat in the federal government. Personally I think we would do just as well if Obama spent the money on Palaces.

This recession is going to continue for some time. Specifically it will continue until we stop believing in economic fairy tales. The government can't create growth by spending money poorly. In fact, it can't even create it by spending it well (not that it has ever tried). All it can do is make it harder for the people who could otherwise create that growthby burying them under oppressive taxation and fantasy driven regulation.

for more detail on the how and why of the waste in each of these items, see here.

Wednesday, February 4, 2009

- The Liberal Flag Bearer

Nancy Pelosi is dangerously stupid. This incident is probably just a mistaken turn of phrase, but that isn't to say that it's not the kind of thing that would be a front page, above the fold NYT headline if she were a Republican. But even so, it's the things she says that she defends after the fact that make her the dumbest woman in DC.

"500,000,000 people lose their jobs."

Good Nancy. Well nothing lowers unemployment like a massive increase in taxes and public sector indebtedness so I guess you're right on the mark.