Sunday, July 31, 2011
If there is one thing that has defined the Obama presidency, its that according to him nothing... ABSOLUTELY NOTHING... has ever been his fault. Every bad thing that's happened from the Japanese Earthquake, to the death of Amy Winehouse, has been the fault of that evil super villain, George W. Bush.
But for him, it would surely be all unicorns and rainbows in Obama land by now.
Anyway, they'll be hanging out together at the 10th anniversary of 9-11 Which is apparently why I saw them tuning up the monument last week. (Pictured above.)
And Obama being the ceaselessly classy guy he is, will probably make sarcastic remarks behind his hands to Bloomberg while Bush is speaking, and make fun of the Ex-President's hair or something equally low rent. It's all about snarky condescension when you're as great as Obama.
Friday, July 29, 2011
Since my buddy from the NYSE just called me and we were talking about it, I figured I’d give you guys a window into what I think are the worst case, the best case and the most likely case for the various option surrounding the debt ceiling debate. First lets start with the bad news:
The Worst Case:
The worst case assumes that there is no deal made, and the Treasury runs up against the wall. They’ve been leaking documents that indicate that they will not fail to pay interest and principal on US debt, whatever the circumstance. That’s good news and averts the worst of the worst possible cases. It means that whatever else may happen an actual ‘Default” of US debt is unlikely to occur. The NY Fed has also called in the Primary Dealers for a ‘chat’ this morning, and I suspect they’re talking about some extraordinary measure like I have discussed as an option in the past.
Failing that though, there isn’t enough money to go around, so someone somewhere isn’t going to get paid. In the worst case scenario, that event would be treated as a ’defacto’ default by the markets, and there will be a run on US issued paper. There will be a downgrade of US credit along with this, but the markets would be in such turmoil that no one will notice. The fed will not be able to leave this situation un-addressed so they will probably intervene in the markets, greatly expanding their balance sheet. Before it’s over, the dollar could lose up to 30% of its value against other currencies and gold.
The downstream consequences for the financial markets and for the broader economy will be catastrophic. Economic activity will halt, along with the normal functioning of most capital and money markets. Extreme measures like those which were implemented by Argentina during its default crisis would be put in place. Confiscation of retirement savings, mandatory investment in Treasuries would both be seriously considered and possibly implemented. As civil strife increased in reaction to those changes, martial law would not be out of the question.
This is an extremely unlikely scenario, but it’s not completely impossible. I personally would estimate the probability of an outcome like this at less than 2%.
The Best Case:
The best case is that a deal is made where President Obama and the Senate Democrats are politically compelled to accept a bill which includes major real cuts in spending, without adding an additional tax burden to the economy. This could avert the potential of a credit downgrade (something my friends and peers view as a 100% certainty in the present state of the discussion) and encourage increased economic growth.
This is an unlikely but still potentially possible outcome. I’d put it’s odds at somewhere between 5% and 10%.
The Likely Case:
A cross pollinated bill which combines some of the Reid plan, and some of the Boehner plan is passed by both houses on August 4th or 5th. The Treasury cobbles together some extraordinary measures to prevent a government shutdown, and the president signs the bill over the objections of his base, before the end of next week. The bill will be weak kneed jumble of lies and distortions which GREATLY overestimate the actual spending cuts, but at least does not include any new taxes.
This will not be enough to avert a credit downgrade, and both S&P and Moody’s downgrade US debt before Thanksgiving. This will cause an immediate 50 basis point rise in interest rates, and another 300 basis points over the longer term. It will also cause the downgrades to cascade to other states and cities with ‘at risk credit’, causing eventual insolvency in California, Illinois and a host of cities in deep blue states.
The Fed will react to higher rates by implementing a plan for expansion of it’s balance sheet in an attempt to avoid any negative economic impact or higher unemployment. Their plan will not be called QE3, but will involve the intervention in the Treasury markets, and the lowering of the value of the dollar. Under this scenario, I would expect gold to be above $2,000 per oz by the end of 2012 and $2,500 per oz by the end of 2013.
I think this is the most likely scenario, but there are an awful lot of ‘ifs’ embedded in there. I would still put it’s odds of being less than 50%, with the remainder of the outcomes involving only small changes to this version, and will produce outcomes equally similar to this scenario. It may take more or less time for a downgrade. They may trim more or less spending. The Fed may act sooner or later, by a lesser amount or more. But to the degree that Obama and Reid lose, America wins.
One thing I didn't really think about was the fact that the ratings agency's will be pressured by the Executive branch not to lower the rating.
The ratings agencies are a monopoly, and like all monopolies, they can only be enforced by government. So the ratings agencies have a long history of doing what government tells them to do. If you need evidence of their collusion with government toward achieving political goals, I refer you to the 2008 credit crisis, where every POS Mortgage bond Fannie and Freddie had any part of was rated AAA because the government wanted them to be.
However, while political pressure can make you swear that your feet are dry, they can't actually keep the tide from rising. And eventually reality will be so obvious to everyone that it won't matter what the credit agencies say. If they veer too far from what the markets consider 'reasonable' then for the sake of preserving their already threadbare credibility, they will have no choice but to lower the rating even though they were told not to.
They can put off a downgrade, but not indefinitely. I believe we'll be downgraded in time for the election, no matter what threats are levied against Moody's and S&P.
I hear people in the press talking about the ‘moderates’ as if there is some wisdom inherent in a compromise, but I don’t think that way. In his NYTimes piece today Paul Krugman said that he doesn’t think that way either. He believes politicians should do ‘the right’ thing not the moderate thing, and in this case he believes that the right thing is vast amounts of new, totally unsustainable spending, supported by lofty new tax rates on the (evil) rich. You know Krugman, he's always good for a laugh. But I confess, I do agree with him on the idea that moderates aren’t the place to look for the answer.
As I see it, the Democrats believe that we would all be better off if we raised taxes on the rich (everyone who makes more than 250K a year), made some politically expedient cuts to the defense budget, and then borrowed a few trillion more dollars to pay for free welfare cell phones, electric car subsidies, and community organizing.
They aren’t thinking about the unsustainably of that spending, or the fact that it will do nothing (nothing positive anyway) for economic growth. They aren’t thinking about the negative impact on economic growth that those tax increases will have. In fact, they aren’t thinking about anything that extends beyond November, 2012. What they’re doing is the same thing Washington politics has always done. They’re trying to buy votes.
From a perspective like that even keeping federal spending exactly the same next year seems extreme. And the beltway media is happy to oblige that narrative. “The Tea party people are ‘maniacs’ who are willing to risk default to achieve a political goal” according to them. They genuinely don’t see the irony in that statement. The fact is, the exact same thing can be said about congressional Democrats and Obama so long as you replace the phrase “willing to risk default” with the phrase “make default an absolute eventuality”.
I personally get the Tea Party argument in this debate. Our politicians, (particularly our Democrat politicians but both party’s to be fair) have shown no sign changing their behavior in a way that would prevent an eventual default. "And since that’s so," say the Tea Party folk, "why don’t’ we have a default today when there is 2.5 Trillion less of our children’s and grandchildren’s money thrown into the fire." You might not like what they’re saying, but when presented in that light it’s hard to find cause to contradict it.
But those moderates still want ‘compromise’. Or maybe they don’t. Maybe those ‘moderates’ don’t actually exist at all. Maybe they are an invention of the media who are looking for a clean way to complete the narrative. They want the hero to ride in at the last minute, declare everyone a winner, and then go on to the next ‘crisis’. But they don’t want to have to openly choose sides to do it. They want to be subtle and opaque about their spin, so they can live to spin another day.
I don’t personally know any moderates; I only know people who follow the discussion and people who don’t. The people who do follow it all apply their style of reasoning to the question and either end up advocating a liberal or conservative view. You don’t get a lot of cross over in my experience. Either you believe reality is objective and you’re a conservative, or you believe is subjective and you’re a liberal. The two philosophies really are mutually exclusive.
And that means that the moderates are really just the people who aren’t following along in the first place. They don’t see politics as having any direct effect on them. To them, the effect of politics on their lives will always be a surprise. They are the "Rodney King’s” of American politics. They're completely oblivious when it comes to the bigger issues, but being generally nice people they would prefer that everyone just ‘all get along’. And if things go that way (and they often do), they happily chomp down their chocolate ice cream and wonder where that manure like ‘aftertaste’ is coming from. It never occurs to them that rather than having something to eat OR something to spread on the garden, they're getting both together. And it’s they who insisted that the two be mixed.
I personally don’t see the wisdom in compromise. If I think 2+2= 4 and you think 2+2=5, we are no closer to correct if we make if 4.5. Some questions are not a matter of opinion, they are a matter of metaphysical fact. And what we need in this debate is for liberals to realize that our federal budget and our tax policy are not a place where everyone’s ‘opinion’ is equal. There are changes we can make which will help us, and changes we can make which will hurt us. And so far, all the ‘hair of the dog’ proposals we’ve seen from the left will bring more harm to us all than good.
Thursday, July 28, 2011
The question of the debt ceiling is really about another question. Do the Republican politicians have more in common with Democrat politicians or Republican voters? If the latter then there will be no deal, and the government shutdown that comes from it will represent real reductions in spending instead of somewhat smaller baseline increases like they’re talking about in the various deals.
But I suspect that Republican pols actually have more in common with Democrat pols, and that they’ll knuckle under and make a deal. In the end, all politicians like government spending. That’s how they buy votes. That’s what ‘other people’s money’ is for as far as they’re concerned. And I believe that when the pressure is really turned on, they’ll let down the people who elected them.
That’s tragic, but I do think it’s the lesson most supported by history. I see no real reason to hope for anything else. Attrition will wear at any group and in the case of congress, attrition always supports the liberal view, which is by it's nature easier for them. By the time the Republican leadership gets done promising extra deals and special treatment, enough of the previously committed 2010 freshmen will break off and support more can kicking.
That means that instead of real cuts in spending, there will be accounting tricks, deceptions and a few outright lies. The profoundly insulting Ried proposal will probably be the base they’ll work from. The Democrats wanted to salt the Republican ice cream with both bull$hit and arsenic, but have now compromised, and agreed to give up the arsenic. And that’s got the press saying that the Republicans can now declare victory and feed us their mix of chocolate ice cream, and BS. Same as always.
The deal won’t be in time for August 2nd. And what that will teach us is that the administration was lying about the importance of the date. They won’t admit that. Instead they’ll invent some new and unique financial genius; some last minute inspiration that ‘saves’ us all. And the press will be willing accomplices in that falsehood. We’ll all get to hear the hollow metal clatter of team Obama’s kicking our collective finances down the road, and spending another $7,000 per person on windmills, “no work” union jobs, and other uselessness.
I was hopeful. Now I’m back to disgusted.
Reality will still be out there waiting for us. Only now, when we are finally forced to accept it, our children will have another 1.5 Trillion or so in debt on their plates. And because that’s so, the odds that we will resolve this without bloodshed will be markedly decreased. I don’t think many people realize it yet because it’s still so far off. But that’s where this road we’re kicking the can down leads. If we can’t settle this politically then that’s the only other means left. That’s the alternative to a political solution. And a Democrat win (or even a compromise with the Democrat position) is not a ‘solution’ to this problem, it’s making the problem worse.
As for me, when the Republicans finally give in on this issue, I’ll be looking for a third party to support. I know that means time spent in the political wilderness, but I don’t think that will matter. The third party will only be organizing for the purpose of picking up the pieces after the liberal vision collapses under its own weight. If it’s unopposed in any meaningful way, it won’t have more than 5 or 6 years left anyway. After they make a deal with the Democrats, the Republican opposition can be seen as accomplishing nothing except prolonging the inevitable.
Take that away and Nancy Pelosi and her ilk will accelerate us all off the cliff much more rapidly. So at this point it might be better to plan for picking up what's left than trying to stop her. that's the kind of thinking I believe should spring from a Republican 'compromise'.
Wednesday, July 27, 2011
Can someone please explain to me how not wanting to borrow 40c of every dollar you spend has become an 'extremist' position?
I continue to believe that the house Republicans should be as open to compromise with the Democrats as the Democrats were willing to compromise with Republicans during the Obamacare negotiations.
I had a meeting today with a firm whose offices are at seven World Trade Center; the building just north of ground zero. Their offices were on the 37th floor, so it offered a unique view of the goings on at the construction site, which is otherwise closed to the public. I snapped the photo above from their conference room window using my phone. (it's linked to a larger version)
First, there is a very substantial building going up, and it's rising at the breathtaking pace that is typical of New York City Iron workers once they get all their forms filled out, their bribes paid, the unions takes their cut, and the work actually begins. You can't see it in the photo, but from my south facing view it was out of the frame on the right, and it spanned many stories above 37. It's partner is rising a little more slowly in the foreground and it partially obscures the memorial to commemorate the south tower.
I don't know if it was for testing or what, but the water was flowing in the south tower memorial, giving me a glimpse into what the future holds for the site. The north tower memorial is partially visible on the lower right, and as you can see, it's dry. This was my first and only glimpse of either of them so it's impossible for me to say what stage of construction they're in.
The memorial itself is a simple square hole in the ground, visible as a dark square in the center of the photo above, shadowed by another nearby building. Water was flowing down each of the sides into the hole, where it continued across the floor and was eventually bled back into the system from a smaller square in the center. (the upper right corner of the smaller square is barely visible for the south tower memorial) It was tough to estimate the depth of the hole precisely from my altitude, but it looked to me to be 40 or 50 feet deep.
The effect of the water falling such a great distance was really quite remarkable. It was as if the walls of the now missing building were continuing to fall somehow. From my altitude it seemed to fall slowly, vaguely reminiscent of that video we've all seen. Coupled with the low dark material which makes up the rest of the monument, it really made a profound and humble statement and I thought it communicated a deep sense of loss. I was astounded at how emotionally affecting it was, and how much I felt that it suited the site. As a piece of art, it seemed to me to be a great success. I know my description doesn't do it justice... but take my word for it, it was surprisingly moving.
The area is still closed to the public so I wasn't able to get any closer, but since I had the opportunity to peak over the fence, I thought you might like to get a little glimpse of what I saw. Even from that altitude, I think it's an impressive bit of work, and a surprisingly tasteful statement. Well suited to the ground it occupies.
In my world, there is nothing more dangerous than believing in a process which in does nothing but confirm your biases. The question that successful money managers ask themselves more than any other is “How can I be wrong about this?” We obsess over it, and re-ask it continually. We revisit it over and over and over again, and lose sleep over it. And only after we’ve obtained all sorts of external confirmation of our conclusions do we consider taking concrete action.
But I don’t think this is how Obama operates. Instead of continually looking for external confirmation for his conclusions, he fixes his beliefs about a question based on his vision of the world. Then when reality fails to meet his expectations, he re-examines the question ex-post, finds some other ‘externality’ to blame the failure on, and carries on with the same set of progressive biases. This is common problem with folks from the faculty lounge, and it’s particularly pronounced in more liberal academics. Obama certainly fits that description, and his past behavior seems to confirm it.
When it came down to the wire on the Obamacare debate, the bill was more or less defeated by the Republican Senate win in Massachusetts. At that point, Obama and the Democrat congress were operating on the assumption that it was a ‘failure to pass a bill’ on healthcare that hurt Democrat’s in past elections. So rather than reexamining what was motivating voters and looking for external confirmation, he found polling data which confirmed his initial bias and acted on those assumption.
They found an obscure parliamentary procedure which allowed them to pass a bill over the objection of the voters, believing that this 'success' would cause them to rally to his flag. But it didn’t work out that way. Instead, the American people decided that if one Scott Brown wouldn’t spell it out to Obama, maybe 65 Scott Browns would. And in the midterm 2010 elections, the Democrats were routed, and the Tea Party took effective control of the house.
Once again, Obama didn’t see it that way. He looked at new polling data which confirmed his bias that the American voters still wanted ‘change’. He stated his view that the ‘Tea Party’ victory in 2010 was caused by the same instinct which brought him into power in 2008. This sounded laughable to the people who supported the Tea Party. But to Obama this made perfect sense because it was the only view that would confirm his initial biases. It hadn’t occurred to him that the Tea Party was a protest vote directed at the Democrat vision, or that voters saw him not as a change for the better but for the worse.
Now here we are again. Rather than seeing a single chain of events with a common thread which would invalidate his worldview, Obama is once again looking at the situation and seeing a totally new problem. He sees this debate as being unconnected to the Obamacare debate or the 2010 election. And as is typical for him, he’s finding polling which confirms his initial biases, and immediately acting on them.
This time he’s gotten the idea that Americans want a ‘balanced’ approach to this debt ceiling issue, and he’s interpreting that as showing broad support for new taxes. His belief in this view is so strong, that he says he’s willing to veto a bill that doesn’t include them.
Yesterday on CNBC Squawk Box, Judd Gregg speculated that Obama is trying to force a crisis so that he can garner the political favor that would come from a delay in issuing social security checks. To call that a risky tactic is an understatement.
But if anyone were going to take a chance like that, I think it’s someone like Obama. If you operate exclusively on bias confirmation and a bias like that matches your vision, then this makes perfect sense both as a political tactic and as a means of garnering broader support. He’s obviously hoping that he can go on TV, blame the Republicans, and that America will rally to his flag. I'm afraid he's horribly mistaken in this belief.
If you think this is a criticism of Obama, I suppose it is, but it’s not a personal one. I think he’s a fairly intelligent guy who because of his career choices, has never learned ‘how to think’. It’s common enough on the path he’s chosen. And I think it’s the only way he can be as detached as he seems. Instead of learning how to determine the objective truth, he’s spent his whole life insulated from the consequences of being wrong, and embracing a vision that requires no external verification. And he’s taken that vision with him into the presidency.
I think he was fantastically wrong about the lessons of the healthcare debate. I think he was fantastically wrong about the lessons to be learned from the 2010 election. And I think he continues to be fantastically wrong about what the debt ceiling debate should be telling him. I think he’s filtering out any information that doesn’t confirm his initial bias, and because that’s so, he has every intention of ‘doubling down’ again. There still won’t be any personal consequences to him if he does this – and if you are operating with his bias, it’s a tactic that makes perfect sense.
I hope I'm wrong. Maybe it's my biases about academia and the progressive worldview that are being confirmed here. But I think you have to admit that my conclusion has a worrying amount of external data to support it.
Tuesday, July 26, 2011
That's essentially the Obama position. No debt ceiling approval without new taxes on America's most productive citizens.
I heard Judd Gregg this morning saying that he believes Obama is trying to force a crisis because he wants an excuse to delay social security checks. He assumes (and he'll certainly say) that this is all the Republican's fault. But if a bill passes the house and Senate and he veto's it, then using his discretion as President (which in this matter is absolute) he withholds Social Security checks expressly to force some political gain, I think he'll be lucky to make it out of Washington DC alive.
If that happens, he may very well be the last Democrat ever elected to the presidency, and maybe the last one elected to national office.
Let me say this about the downgrade risk. In my world, the credit agencies are considered a day late and a dollar short. If they are saying that a downgrade is imminent, and nothing meaningful has changed in our national balance sheet, then it’s already a done deal. We’re getting a downgrade. It’s only a matter of when. And with the President’s performance last night, it’s not hard to see why.
You remember that moment during the 2008 campaign when Obama said that he would raise the capital gains tax just to ensure ‘fairness’ even though it would hurt the economy overall, and would not raise revenue to the government? Well he’s still pulling for that kind of fairness. He thinks it would only be fair if the 10% of people who are paying 71% of all income taxes now, are forced to pay a little more.
He brought up his favorite whipping boys, big (evil) corporations, corporate jet owners, hedge fund managers; All the people who under a less combative administration would be willing to provide jobs for Americans that Obama believes are less evil. But Obama doesn’t like that idea. He thinks it would be better if he took the money away from those who would know how to create economic growth with it, and spent it himself on infrastructure, education, and new technology.
That too is a total sham. Obama can squander money on all the green energy boondoggles and unionized edu-crat giveaways he likes, but that’s not investing. Investing requires that you provide a meaningful return on the money you invest. All Obama is buying with other people’s money is goodwill from his union base and votes in the next election. There will be no future for America in government subsidized green projects, or community organizing.
But none of this is new, or secret. Obama has become the veritable one trick pony. He has only one song to sing and one key to sing it in. The lyrics are even the same every time. Blah blah blah, corporate jet owners, blah blah blah, shared sacrifice, blah blah blah, millionaires and billionaires, blah blah blah winning the future. I’d say he sounds like Bob Dylan except even Dylan is a conservative compared to Obama.
Rush Limbaugh had a great line the other day about Obama that reminded me how much this ‘feels’ like the Carter administration. To paraphrase, he said something like how “the media is certain that the leadership from Obama is absolutely superior; it’s only the followers that are giving us all so much trouble.” For me that conjured an image of Obama leading a parade of one, down a road where no one wants to go.
He’s standing there in his band leader’s uniform and holding his baton. But the crowd is standing by just looking at him. He wants social justice, and redistribution of wealth. He wants huge groups of client - citizens who vote the way their betters tell them to and cash the checks that the government gives them without troubling themselves with 'thinking'. He wants cheaper energy made costly by intense regulation, a windmill on every roof, and every neighborhood 'organized' on the Alinsky model. Most of all though, he wants to be in charge of every aspect of American life, even though no system based on merit would ever allow him to be. That’s exactly what it felt like with Carter in charge. No merit, just politics.
In the meantime, what the people want, is jobs. But you can't have what Obama wants and have a thriving private sector with full employment. Either the government makes everyone's decisions or everyone decides for themselves. Those are the only choices. And if government is running the show, then there is no point in taking the risk of hiring someone. In fact, there is even less reason to take the risk if you'll lose money when it doesn't work out, and be called 'evil' by the president and taxed more if it does. What's the point in that.
So with the government making everyone's decisions for them, unemployment will be higher. Period. It's not subject to debate, and it's not going to be 'different this time'. It's not a question of being fair, it's a question of who decides what 'fairness' actually is. It's a question of whether 'fairness' is defined by politics or based on merit.
Obama’s record as president is not the kind of flag you wave if you want to be reelected. He has record debt, record spending, skyrocketing consumer and energy prices, falling real estate prices, and a 9.2% unemployment rate. Even his golf handicap is a thoroughly unimpressive 16, and that’ something he’s really worked on. So bragging about his record is not the punch he's going to throw.
In this next election (and if that pathetic speech told us anything, it’s that we’re already beginning the next election) he’ll be betting the ranch on class warfare, and personal attack ads. He has no record to run on, and hundreds of millions of dollars to spend. His team will be sending gaggles of ultra-left journalists and bloggers to dig through the trash of his competitor. There will be entire NYTimes editorials (probably run on the front page) about the time they wore stripes with plaid. No stone will go unturned (or un-thrown by some ‘objective’ journalist.)
For my money, I think Obama looks weak and detached. He’ll have his high points over the next year – surely. And his competitor (when we pick one) will have numerous gaffes. But I think the cards have already been dealt for Obama’s legacy. And I think he’s going to be a one term President.
Monday, July 25, 2011
Who are these people the Democrats keep talking about…who are these ‘most vulnerable’ Americans? To hear Democrats tell it you’d think they’re the kids from the UNICEF commercials, cowering in the filth and squalor, while congressional Democrats stand alone, their capes waving in the threatening wind, to protect them from the harsh forces of those bloodthirsty Tea Partiers.
What a yuk. In reality the ‘most vulnerable Americans’ are the people who have hitched their future to the wagon of big government, and they’re vulnerable now because Obama has promised them more free stuff than he will ever be able to deliver. They are people who are relying on Obama continuing to “invest” (another yuk) in the future. So who are they? Look at what Obama wants to invest in and you’ll clearly see.
First and foremost they are edu-crats, made manic over the threat of encroaching reality. Their pensions are being cut, they’re being asked to contribute to their medical plans and even that most unspeakable horror is being considered in the form of Chris Christy eliminating …. (gasp) “Tenure!” What’s worse, they’re made extra vulnerable because they were HUGE contributors of Obama’s last campaign and if they don’t get their payoff then it was all for nothing.
Next on Obama’s list of “vulnerable American’s” are those unionized laborers whose politically connected employers are in line for government contracts. Think GE, GM, and all those people that hire from the SEIU. In Obama vernacular, you probably know these people as part of an investment in "infrastructure". No one can waste public money like a road crew, and they need those ‘investments’ to keep flowing.
Third are those people who rely on public money to fund their "technology" companies. The entire alternative energy and electric car industries would collapse unless Team Obama continued to provide the subsidies around which their business models are based, and continued to enforce intrusive regulation to make other forms of energy expensive enough to justify their market. Those higher energy costs contribute greatly to unemployment, but if they don’t stay in place then they will lead to unemployment in alternative energy. And that makes them ‘vulnerable’.
The poor in American have cars, cell phones, air conditioning, and more living space than the average ‘middle class’ person in Europe. But that doesn’t make them ‘vulnerable’ to team Obama. What makes them vulnerable is that they vote Democrat and are a recipient of government largess. What makes them vulnerable is that they pay no income taxes whatsoever and they are a sort of ‘client citizen’ of the federal government. But what makes them truly vulnerable’ to team Obama is that the money is about to run out for them. And Obama is going to do all he can to prevent that from occurring, no matter how much long term damage it may otherwise create.
I think it’s worth saying that this conflict over the debt ceiling really is a clash of political philosophies. Keynesians are institutionally short sighted and believe that you can bear any long term expense for a defined short term benefit. They will spend Thursday’s hamburger today in the hope that by the time Thursday comes there will be another way to solve the problem.
Meanwhile the Austrian school focuses on long term realities which are completely unavoidable. But while the Austrian thinkers can tell you what will happen, it’s terrible at letting you know precisely when. Things work until they don’t, and when they collapse it’s a surprise to everyone – even the Austrian school-ers.
So we have Team Obama and the congressional Democrats worried about the short term economic impact that will come from no more spending, and we have the house Republicans worried about the long term consequences of even more borrowing. Obama is the junkie who wants more crack, and Republicans are worried about letting him burn the furniture to keep the house warm.
As a professional investor, I think if there were any indication that the Democrats were capable of dealing with these issues, I’d come down on their side. I think the situation in Japan indicates that we have far more rope than anyone believes. I don’t think the US is nearing insolvency and that we can run our debt to GDP ration much higher before the markets decide to balk.
But I don’t think there has ever been a group of political actors less ‘serious’ than the current spate of Democrats. They are as delusional and detached from reality as many mental patients. I’m astounded they can dress themselves in the morning. One look at Nancy Pelosi will tell you all you need to know about these people. They see themselves as the heroes of a movie that is playing, only in their heads.
I don’t believe they are capable of managing the government of the United States or its finances in any rational way. I think if left to their own devices they will burn the furniture, the floorboards, the walls and ceiling, and anything else they can get their hands on. And winter is still a long way off. I think they are behaving like completely irresponsible children. And they are showing no sign of awareness that there are consequences to their actions.
Because that’s so… because I believe that if left to their own devices Democrats would make things much worse not better, I have to come down on the side of the House Republicans. This isn’t a question of political pragmatism, but of the long term solvency of the Republic. If we were to give the Democrats what they want, then the next time we ran out of money we would have the same problems with a higher multiple.
Sunday, July 24, 2011
Wherever the soul of Amy Winehouse is right now, I'm sure she's trying to explain to someone how nothing that ever happened to her was really her fault. That's one of the absolutes when dealing with junkies, it's never, ever their fault. There are other things too. Like for instance, when they run out of whatever they're addicted to, they swear that they only need "a little more - just to get by."
And if they don't get their dope, then the reason things have gone badly for them is only the fault of whoever has cut off their supply. There is no connection between their months and years of drug abuse and the withdrawal they're feeling. There is no acceptance of responsibility. It's all someone else.
There's one other thing that all addicts have in common: they are all liberals.
The comparison to Obama is obvious. Since Obama came to Washington, everything bad that happened has been the fault of someone else. It's usually been George W. Bush, but sometimes it's been congressional Republicans, corporate jet owners or big oil companies. But whoever it's been, it's always someone other than he and his liberal supporters who have been spending money like they are addicted to the act.
Right now, he's saying he needs 'just a little more' but his addiction to other peoples money is so great, that 'just a little' is now measured in the Trillions. He and his minions say it's not his fault that there may be withdrawal symptoms coming. They instead insist that it's the fault of the people who have cut off their 'jack'. And when it gets bad, they'll continue to ignore their culpability in the whole thing.
I've dealt with addicts all my life. I have some friends who have given up their addiction and I admire them for it. I support them in their efforts and I wish good things for them in their lives. They have convinced me they deserve it. But I have utterly no sympathy for the addict who continues in their addiction. I know that I would be doing them no favors by keeping them going. It's better to let them bottom out and see what they really have after that.
I think it's time to let Obama and liberal Washington DC, hit rock bottom. Listen to Obama for just a few minutes and it's obvious he has an addiction. He wasn't sent to Washington 'to make hard choices' like he claimes. He was sent to get his supporters more free stuff. And the power that comes from delivering that free stuff to his supporters, is exactly what Barak Obama is addicted to.
Saturday, July 23, 2011
At some point, you need to stop worrying about what you wish would happen and start focusing on what is most likely to. In the real world, long shots run last, you don’t win the lottery, and rainbows never lead to pots of gold. In the real world, success comes from doing tedious and difficult things, not from good intentions and hope for the future. In the real world, there is no free lunch.
This is a tragic perspective, but very true. There is no doubt that the world would be a happier place if all we had to do to achieve our goals was to ‘believe’ in them hard enough. But that isn’t how the world works. And it’s time now for liberal America to realize this, and to finally face the unfortunate facts of life.
They still have a choice of course. They can continue to stand firmly behind their dreams of a world where they are the ones who decide who bears the burden and who gets the benefits. They can remain devoted to raising taxes and redistributing wealth. But that dream of a social welfare state is already in flames and Europe. And if they continue to hold fast to it, then it’s about to burst into flames here as well.
If liberal America can resign itself to the unfortunate facts of life, then we may still be able to avoid the worst of the possible consequences. The US will be downgraded of course, but only to double A. The consequences of this would be considerably better than the D rating that will come from an actual debt default. Interest rates will rise, and the economy will slow, but not nearly as much as it could. And the Fed will still be able to mitigate some of the difference with monetization, and by relaxing Cap Reqs. In short, life will go on.
We can then find a way to get our fiscal house in order while there is still time. We can rework the tax code to encourage economic growth, cut regulation, and focus on liberty instead of top down control. If we do that now, and continue to do that through the 2012 election, then there may still be time to save the republic.
But if they cling doggedly to their positions, then even if they win this argument, the inevitable result will be a credit default causing a much deeper economic slowdown. Capital formation in the US will come to a complete halt, the short term money markets will freeze, lack of access to capital will force corporate America to slash millions of jobs, and the wealth of America will flee for safer havens overseas. There will be nothing that anyone can do to mitigate enough of it to matter. At that point, we may very well see martial law before the crisis is ended.
If liberals continue to focus on the politics, they’ll probably feel like they’re losing. But it won’t actually be so. By accepting the tragic reality of a world where scarcity is the final arbiter of ‘cost’, they will really be the biggest winners. They’ll be taking the first step toward implementing policies that are far more likely to achieve their goals than what they have proposed thus far. They may not be in the fastest most luxurious yacht any longer, but they will at least be in the lifeboat. And right now, the lifeboat is the best any of us can hope for.
So there is the choice for liberals. Accept the unpleasant truth, and learn the lessons that this recession can teach them, we may all be fine. There will be some unavoidable pain, but it’s unlikely to be fatal. But if they cling to their dream of self importance where ‘enlightened’ guidance passed down from on high can make 2+2 equal to 5, then we will all have no choice but to watch it all burn.
It’s all on them now. They can either learn the facts or continue to deny them. But the market (and the real world) isn’t going to wait for them any longer. If you want to be the grownup in the room, facing reality is a vital part of that.
Friday, July 22, 2011
Suggestion from my wife this afternoon:
"Wouldn't it have been funny if we all dressed up in Ape suits for the landing of the last space shuttle?"
Had she mentioned it early enough I'd have had the suits rented and booked us a flight to Houston in an instant.
We now know one thing for sure, Obama ain't no Reagan.
I'm watching his Friday afternoon presser and he sounds utterly terrified to me. He sounds like he knows that he either gets the Republicans to buckle or his chances of reelection are gone. And it sounds like he's not getting it.
He's pulling out all the standard liberal nonsense... corporate jet owners, kicking granny out in the snow, letters from people skipping meals, blah blah blah. But I don't think he's convincing anyone that isn't already on his team. His every compliant about the political posturing could be turned back on him.
He may not have lost this battle yet, I don't know whats happening behind the scenes. But if I were on the negotiating team I'd be telling him to approve the deal that the house has drafted and passed, or he can manage the default.
Thursday, July 21, 2011
The Dodd - Frank finance reform bill is a year old today. And rather than relate a bunch of policy on it (that you can get probably anywhere), I thought I'd tell you how my personal experience has been effected by these new regs.
As you probably know, I'm a hedge fund portfolio manager. There are plenty of people out there who are bigger than me, and just as many who are more important. But given my professional credentials and capital under management, I think most people would consider me a 'senior' manager.
I was, until very recently, affiliated with one of the largest and most prestigious hedge funds in the world that would be well known even to many outside the industry. Since we continue to discuss a working relationship, I'm afraid I can't name them here at this time. But it's a firm on the order of my last 2 employers, Caxton Associates, and Moore Capital.
Dodd-Frank didn't play a direct role in my hiatus last April, rather it came from the same source. The broader culture in Washington right now is to demonize success, particularly success in finance, and that led both to Dodd-Frank, and my situation.
My strategy was profitable and the firm's management was happy both with me and my performance. But a compliance issue arose with another manager whose contract was structured similar to mine. I had no connection to him at all, in fact I didn't even know of his existence. But the firm's legal team reviewed the compliance issue, and given the prevalent culture in Washington, decided it would be better to terminate all 'outside managers', rather than run the risk of some vague association being inferred later on by someone trying to score political points.
They made a choice to throw out the bathwater, the baby, and the sink they washed up in.
So in recent weeks I've found myself either looking for a new position in a hedge fund, a prop trading desk, or seeking capital to run my fund on my own. And this has put me in a unique position to poll the industry and to see trends in how the regulation is affecting things. Here's what I'm seeing:
The US banks are all divesting their proprietary trading operations, and the people who ran them are setting up new operations as hedge funds. Hedge funds were in no way responsible for the 2008 credit crisis but Washington has seized upon the opportunity to regulate them in Dodd-Frank anyway, So as a result, many of the new funds are being started overseas in an effort to remain competitive. Singapore seems to be the premier destination, followed by the European tax havens like Jersey and the Isle of Man. I haven't seen anyone move their physical operations to the Caribbean yet, but it remains the most popular location for legal domicile of the corporations.
The foreign owned banks have consulted their legal teams and come to the conclusion that they are not affected by Dodd-Frank. So while they are not eliminating their prop trading, Washington's support of the 'too big to fail' banks have left them at a competitive disadvantage. So they are trimming staff in the states in order to cut other costs. One bank who I spoke to is leaving the option open to move their New York trading operations to Toronto, just in case the vague rules of Dodd-Frank are later judged to apply to them after all.
As for the hedge funds that remain in greater NY, I've noticed an interesting trend. Very few funds continue in the classic model of a single company with multiple employees. Instead, many are opting for a much larger number of legal entities, and a much more complex internal legal structure. In summary, they're trying to use international law to insulate themselves from capricious or unexpected regulatory changes. No one is specifically saying so, but it's obvious that they are most concerned with hedging themselves against further capriciousness in Washington and the various 'big blue' states.
Anyway - that's the 50K foot view. Dodd-Frank, and more broadly, Washington's new regulatory culture, has seriously diminished employment options in New York and CT, improved them in Singapore, and reduced fairness and competition in the investment banking industry as a whole. It's caused the US banks to move some businesses offshore, caused others begin their operations there in the first place, and made 'regulatory arbitrage' an important global business. Its stacked the deck in favor of the largest US banks, and hurt all the rest. The net of all that is fewer jobs at every level of finance, in the USA at least.
As for me, I'll be fine. I have a lot of interest and am being meaningfully courted by several firms. It takes some time to resolve at my level, but that's not unexpected. Even my past employer continues to try to find a way to renew our relationship, so I think I'll be OK. But while I can't see a lot of good coming from Dodd-Frank yet, the bad parts have all arrived already. It won't stop the things it wants to stop (systemic risk) and it will stop the things it doesn't want to (hiring and tax revenue). So in that way, I guess it's like everything else that liberals do. It's long on good intentions, painfully short on results.
Happy Birthday Dodd-Frank. Or I guess I should say:
"shēngrì kuàilè" ( 生日快樂 [生日快乐] ).
Tuesday, July 19, 2011
Chris Rock used to have a joke in his routine about taking away all gun restrictions but making a bullet cost $5,000 dollars. I personally like Chris rock. I think he's funny, intelligent and has a measure of class. And since Chris Rock is a comedian, I certainly don't fault him for trying to make a joke. But as it turns out, Democrat politicians are equally hysterical.
Otis Rolley, the democrat mayoral candidate in Baltimore wants to impose a $1 per bullet tax. Since his authority will only be local, I'm going to have to look into the legality of selling bullets individually online - for 90c each when delivered to the Baltimore area.
The Democrat party has become an actual party; and as you would expect, it’s a wild one.
The folks from the faculty lounge have reverted into the college kids they still imagine themselves to be. Only now, instead of being impoverished like the rest of the kids, they’ve found their uncle’s credit card and they’re running up a tab like nothing anyone has ever seen. At the moment most of them are somewhere between their 19th drink and the moment when they’re discovered puking in the alley. And all any of them can manage to say coherently is “one more for the house!”
They aren’t even looking at the tab and if anyone else tries to, they get insulted and call them ‘radical tea baggers’ through slurred speech.
At first, Mr Hu, the Chinese guy who owns the place, was thrilled to have all the new business. And for a while you could see him happily estimating the totals in his head. But he’s been at this long enough to know that when it gets this late things can turn south quickly. For a while now he’s been hoping to see this ended without having his place trashed by the drunken mob. So for the last hour he’s been turning down the music, easing up the lights, and hoping that people get the idea to go home on their own before he has to force them to leave. He knows that with a group this delirious a scene like that can’t end well, and he’d like to avoid any bloodshed – especially his own.
His bartenders (Goldman and Morgan) aren’t cutting anyone off just yet, but they are eyeing the Party of Democrats with increasing suspicion. The crowd is getting unruly enough so that they won’t be buying them any more drinks; that much is for sure.
The union bosses who came in with the Democrats are still passing shots around and talking tough about ‘getting even with those rich bastards’. And all the blue collar machismo has rubbed off on Obama and his roommates, getting them all charged up. Someone keeps mentioning “seal team six” and “Muamar Ghaddaffi”, but with the general noise level it’s hard to tell exactly who. Knowing Obama, it’s probably one of the women in the group.
When ‘Revolution’ by the Beatles came on, Nancy Pelosi howled hysterically and started dancing on the table top. But no one really wanted to see something like that, so the non Democrats in the bar quickly shouted her down. Now the CBC guys are all hovering around her trying to get her to take her bra off, but she doesn’t seem too interested in them. Instead she’s draping herself sloppily over Jon Stewart and loudly asking him if he “really wants to let a crisis like this go to waste?”
Sheila Jackson Lee is walking around the room randomly pointing her finger in each persons face and screaming ‘Racist!”, while Kieth Olberman and Chuck Schumer keep pushing in front of each other to be able to see their mugs on the security camera. Maxine Waters is talking to her own reflection in the mirror and threatening to nationalize ‘every damned thing!’, and Harry Reid is drunkenly reciting cowboy poetry to absolutely no one at all.
A little while back they got Anthony Wiener to FINALLY pull his pants up. Now all he can manage is sitting in the corner alone nursing a strawberry daiquiri and mumbling “I’m NOT a pansy!” While Barney Frank keeps scowling at him through thoroughly bloodshot eyes and muttering ‘amateur’ while setting fire to a book of matches in the ashtray on the bar.
This isn’t a party that’s just getting rolling; it’s a party that is on its very last legs. It’s become a perverse and disgusting joke – not even an echo of its better moments. Its been going on in it’s present form since the 60’s and its participants are now tired, haggard and ready for sleep – even if they don’t know it yet.
When it finally ends, everyone else will be relieved more than anything else. And the longer it goes on now, the greater the chances that it will do real damage to someone, something, or both. No one will benefit from even another minute of this circus sideshow. And it’s turned as ugly and vomit soaked as any party in history. The general level of corruption, perversity, and overall degeneracy made the fall of Rome look like high tea at the Vatican in comparison.
In fact, even if it were to end at this very moment, there is a considerable amount of damage that’s already been done. The collective hangover for this outing will be unprecedented. The mess they’ll leave for others to clean up is horrifying, and paying the tab alone will take several generations, if it’s ever fully paid at all.
Ben Bernanke and a few Republican crashers seem to be the only one’s who have a grip on that concept. Every time someone makes eye contact with Bernanke he looks at his shoes and mutters something about how he can’t possibly pay this bill alone. Mr. Hu can hear him fine of course, and he nods every time Ben says it. But knowing who can’t pay is not what he’s interested in, and it clearly doesn’t make him feel any better.
So things are winding down now, and dawn is about to break on the Democrat party, one way or another. It’s gone on longer than it should have, and everyone will suffer for it tomorrow - Democrats or not. We’ll all certainly feel awful just considering the bill.
But the very worst will be for the Democrats themselves. Like most party-goers who imbibe too much, many of them can’t admit that the party has ended. Some will never be able to. And when they begin day two of this bender, to the rest of us they will look increasingly pathetic and ridiculous. It’ll be a tough way for them to end.
What’s worst of all though is that when you party as hard as they have, and for as long, sometimes you don’t survive it. And if the only choice is to carry on like Charlie Sheen or Lindsay Lohan, with all credibility shattered and all fame and power lost, many will choose to take that option. The only real question is whether they manage to take the Republic with them.
Then again, if it brings an end to Harry Reid’s drunken cowboy poetry, it might be a small price to pay.
Monday, July 18, 2011
Let’s try a little thought experiment. If NASA announced that an asteroid big enough to utterly destroy every land creature on the planet was going to hit us in 2 weeks and there was absolutely nothing they (or anyone else) could do, how would you spend your remaining time? We all think about how we would spend our last 15 minutes… but what would you do with 2 full weeks to fill?
That’s too long to stay awake… too long to go without food or water. So some of the time you will spend sleeping, eating, and doing the normal things that make up a life. In some respects, things would be ‘normal’, because … what else would you do? I would imagine that many people will still show up at work every day – why not? Maybe you’re one of those people who are closest to their coworkers. There are plenty of people out there like that.
What about when you pulled up to the gas pump? Would you pay for the gas you took? I know I would, so long as someone was there to charge me and wanted me to pay. The money would mean nothing to me at that point, and if he still wants it for some reason, why not give it to him? What exactly are you going to do with the money otherwise…buy a vacation home? There are no more vacations coming.
Would you go on a rampage of mayhem throwing bricks through the window of Tiffany’s or raping your way through the high school senior class? I suppose it’s possible, but I doubt it. Maybe I’m just naïve, but I don’t think there are that many people who want to do things like that who aren’t already trying to. Most people I think will probably be more or less the same people they are right now.
In other words, life would be very close to normal. In many respects, you’d hardly know the difference. And the reason is that in the face of imminent destruction, most people will simply blot the whole thing out. It’s a difficult thing to imagine yourself beyond an unknowable abyss like that, so very few people would have a plan for living among the ruins afterward.
Anyway, there are three main reasons that the US 10 year bond is yielding as little as it is. The first is that old axiom that it’s always better to bet against the huge asteroid hitting the earth, because if it doesn’t hit you get paid, and if it does, there is no one left for you to pay.
The second is the assumption that if there a ‘credit event’ then the Fed will step in and buy up US treasury debt forcing rates to stay low, so there is no profit to be made on the short side, even if the outlook justifies it.
The third reason for the persistently low yield on US Treasury debt is that people are buying Treasuries for the same reason that many people will go to work after they know the world is going to end. What else are they going to do?
But markets are flexible, and reality will not be denied. The risks are there so the money is going somewhere. And if you can’t expect a profit shorting Treasuries, and you can’t short the dollar because the euro is collapsing even faster than it is, then what’s left?
In a word, it's the Swiss Franc and precious metals, which are the only way left to profit from the collapse of the US sovereign balance sheet.
The market for US Treasuries is broken. It has been since QE1. So it’s not giving anyone the feedback that it ordinarily would. But have a look at the yield that you get from US treasuries if they were priced in Gold instead of dollars, and you’ll get at least a window into the reality of what the market thinks for the outlook on US government debt.
I was in junior high school during the Carter administration. It was really my first moment of political awareness, and our local paper would run a new political cartoon every single day. Since they were critical of Carter they tended toward the conservative side, but I had no idea at the time. All I knew was they were funny.
As a kid I even tried my hand at it myself once. I drew a picture of Carter sitting at a desk, the treaty where he gave away the Panama canal in his hand, and a big lipped frown on his face. Behind him on the wall was a picture of Teddy Roosevelt, the builder of the Canal, smiling broadly and holding his iconic 'big stick'. And rising from the top of Carter's head was a tall Wile E. Coyote style lump, from where Roosevelt had obviously just hit him.
Back then the reporters would ridicule the politicians, not the other reporters. But the reporters have never deserved it as much as they do now.
On Squawk Box this morning, they just announced that Andrew Ross Sorkin, of NY Times fame, is replacing Carl Quintanilla. And it took him exactly 8 minutes to make public his belief that the average American consumer is stupid. Personally I'm shocked that he was able to contain himself for so long. The thing that someone like him will never realize is, no matter how dumb he may believe the Average American to be, they still know way more about what they want for dinner than the government in Washington ever will.
But that won't stop A-hole know-it-all's like him from demanding that the government regulate 'what's for dinner'.
Sunday, July 17, 2011
The always lucid Veronique De Rugy has discovered that contrary to the opinion offered by Democrat Pols at the time, we have not in fact eliminated any risks by having the government buy bad mortgage assets from banks. She's very bright, so she probably knew that already. But it's a nice clear chart all the same, so that's seems a good reason to bring it up.
My first recollection of writing about this phenomenon was in November of 2008, just a few moments after the Feds decided what they were going to do. So it's certainly no surprise to me. This is what it means when we call a risk 'systemic'. And from that point on, the only question for me has been how long it would take before it all goes up in flames.
If someone replaced economically illiterate John McCain with someone who understood economics, and magically caused him to win the last election, there was still probably enough runway left for America to clear the trees. But after the bailout, and the thoroughly pissed away stimulus, we're now out of black top. We can no longer pull up fast enough to make it.... so at this point we're probably better off cutting the engine, slamming on the brakes and hoping we can stop before we "become one with nature".
Being "Short - Vol" means that things look like they're getting just a touch better every day, until they don't. then is a single day of losses you give back all your profits and then some. America has taken on a massive "short - vol" position (along with a massive short Treasury position") and although I can't say precisely when it will happen, I do know what it will look like when it does. I'll bet some institution will have a total loss in the Trillions.
I was shooting yesterday with two friends and one friend's 16 year old son. At lunch afterward, the talk turned to 'downside preparedness' in case it all turns south in the debt ceiling debate. The chart above was nicked from zerohedge, and I wish I had it with me at the time.
I made the point that if we believe that the federal government is paying lots of money to people who really don't deserve it, then we don't have that much to worry about in terms of civil unrest. Illegal aliens will not be rioting to demand more free services that they aren't actually entitled to in the first place. And all those people with jobs which are created only to fulfill the Democrat political agenda probably won't either.
I have to believe that in their heart of hearts, all those 'green jobs' sustainability consultants and race baiting 'diversity' executives all know that they aren't really accomplishing anything in the real economy. They are only the beneficiaries of a political scam. They know that they're job isn't producing any actual GDP, only the 'good feelings' that come from achieving a political goal. And if the money runs out at the federal government they end up on the unemployment line, it won't hurt the 'actual' economy at all.
But my friend made the point that when the money runs out it won't be the least deserving that lose funding but the least politically connected. The worst of them will be the ones who survive best. So we'll still have plenty of diversity managers, and sustainability consultants at 200K a year each, but there will be lots of people who no longer get food stamps or other services that (for some people at least) are really vital.
Then it occurred to both of us, (more or less at the same time) that so long as the Democrats still run things in Washington, the people who will really be least likely to lose their funding are those who will be most likely to bring about a violent response if it's cut. Senior citizens don't generally riot no matter how much you slash their entitlements, but reduce the flow of free money for college kids from 95% of their expenses to 92% and it's Molotov cocktail time. As you can clearly see by the difference between the way Liberals treat Christians vs how they treat Muslims, if the Democrats are you opposition, then violence very much does pay.
This is exactly what we're seeing in Greece. It's not the people who deserve the most but the people BELIEVE they deserve the most who are the worst actors, and are therefore being treated to the smallest percentage of austerity. And in our political landscape, it's much easier for me to imagine Van Jones and the Marxist rabble out there throwing grenades and storming the federal position than my deeply patriotic father in law with his walker and two artificial hips.
Anyway, the chart above gives an idea of total numbers for the federal government, but I personally don't think that's where the action will be. If we get any substantial increase in interest rates then a whole host of deep blue states will be forced into bankruptcy - California and Illinois first of all. That will mean massive job cuts at the state and local levels, way before we see much from the Feds. We will absolutely get a rise in interest rates when we get downgraded, unless the Fed picks up the difference itself.
And if the Fed will step in as buyer of last resort for Treasuries, they'll be converting as Treasury issue into an issue for the currency instead. This will lower the purchasing power of the people still employed, effectively slashing their pay. But so long as the police and the soldiers still get paid, then even in a worst case scenario I don't think we have anything more than local problems. Nothing wholesale or wide spread. So don't go throwing up your sandbags just yet.
Of course - all this assumes a level of economic rationality from Obama that to be frank, he has yet to adequately demonstrate. He may very well think that windmills, solar panels and Ethanol subsidies need to be paid before the interest on the debt. Who knows what his real priorities are.
But since this issue is pretty much at his sole discretion, then I'm afraid that we're all likely to find out.
Friday, July 15, 2011
Obama believes that 80% of Americans want higher taxes.
So that settles it. It's not that Obama is trying to destroy America, it's that he really is a true believer. He has been so sheltered from real life (like most academics) that he truly believes that the only reason we don't have socialism already is because of the efforts of evil capitalists and their lobbyists.
I hope the Republican side of the table is less delusional.
I have a bunch of friends and coworkers whose opinions I value, and I like to poll them sometimes on issues like the Debt ceiling debate and the odds of default. These guys are all institutional investment professionals and don't generally allow their opinions to be influenced by their personal politics as much as by their desire to turn a profit. I find them to be highly insightful on issues like this.
I spoke to 16 guys on this particular topic. That is by no means everyone I speak to about this stuff, but I think it represents a pretty good cross section. Their titles rank from the position of "Trader" on the low end to "Hedge fund CEO' at the high, and in aggregate, they have direct control over a total open market position measured in the Billions. As I've said before, 95% of the people I know are geniuses. That would describe every one of these guys. Every one of them knows more about how the US Economy really works than Paul Krugman, or anyone on CNBC.
The broadest consensus was that the people in Washington make their way in the world by abandoning their principles (if they had any in the first place). To them that meant that eventually, someone somewhere will get sold out to make a deal, thus avoiding default. Since the Democrats have the media on their side, most felt the Republicans would be the ones to break, but that they would stop short of allowing any new taxes. It was also the consensus that the net effect would be temporary, and that the plan that the Democrats are promoting will lead to a default eventually - just not now. If Obama gets reelected, they view an eventual default as an extremely high probability - in excess of 95%.
That was the 'more or less' consensus view, but there were a few notable exceptions.
For instance the guy whose opinion I hold most valuable above all others on issues pertaining to fixed income and debt was firmly in the "there will be no deal and we're getting a default" camp. So too was the man with the loftiest title of the group, and the guy who controls the largest amount of investment capital, who is also a fixed income investor. One other guy who I think is brilliant in the High Frequency space, but is usually a negative indicator for issues pertaining to macro economic forecasts, thinks everything will work out fine.
All this discussion has pushed my personal opinion closer to the 'we will default' view than it was before. But even thought my personal odds now say that it's more likely than not, I'm not completely convinced of it's inevitability yet.
Make of this what you will.
Thursday, July 14, 2011
If this poll is accurate, then the only conclusion I can come to is that the American voting public is a lot dumber than I give them credit for. Maybe you people really are so stupid that you'd be better off having some DC know it all making all your decisions for you. You apparently have no business making them for yourselves.
Here's a newsflash for you idiots supporters of the Democrat position.
All the things that the Democrats say will happen if we default... won't; or at least they don't have to unless Obama says so. But if we don't do something REALLY meaningful about the fiscal insanity in Washington, then every single one of those dire warnings will inevitably come true. Raise the debt ceiling without deep cuts in spending (and much MUCH more later), and eventually, social security and the military won't be paid, and old people will be kicked out into the snow.
Obama is looking for permission to add 2.4 Trillion to our national debt over the next 16 months, and the media is treating that idea as if it’s the only ‘grownup’ option. This is genuinely nuts. We’re talking about borrowing an additional 150 Billion dollars per month until the election. If Obama were to be re-elected and keep that same pace of spending with no further increases, then we’re talking about an additional $30,000 in debt for every man, woman and child in America by the end of his term. Given his history, I think most people would call that a conservative estimate.
With that potential, and our present economic condition, I think it’s legitimate question to ask if America wouldn’t be better off over the long term simply defaulting on our debt today. It will be a painful process that will cause massive displacement. But in my opinion, I think it would considerably less destructive over the long view, than another Obama term.
How in the hell does he even manage to waste that kind of money? It reminds me of that movie from the 80’s Brewster’s Millions, where Richard Pryor played a minor league baseball player trying to claim his full inheritance by squandering 30 million in 30 days. He does things like buy rare stamps and use them to mail letters, and buys an iceberg to bring water to the Sahara.
The point is, the only way that any entity can go through that kind of cash is by destroying value, and massive waste. It isn’t possible for any entity no matter how enlightened, to spend that kind of cash thoughtfully. Government was never particularly careful about getting a return on the money it spends in the first place. And with it spending an ever larger portion of our GDP, it’s no wonder that we aren’t able to produce much economic growth.
That’s the real issue with the economy. That’s the real reason things are stagnating. For every dollar that the government spends, it’s taking an equivalent dollar from an entity that would spend it ‘better’. How do I define ‘better’? Well I define it as producing a return. If I spend a $1 and get back $2, I’ve done better than someone who spends a dollar and gets back $1.20.
The private sector is much better at delivering a return on the dollars it spends than the government is – even when the government is operating at its best. But that's mainly because the government isn’t trying to provide a return. The government is trying to meet the political goals of those in government. They’re shooting for "fairness" (taking from those who did well, and giving it to those who didn't), and reducing the gap between rich and poor. If the only way to do that is to make things worse for everyone, that's OK with them.
But even those are secondary goals. The thing the government really wants is more cash with which to buy votes.
If I’ve learned one thing in over 20 years on Wall Street it’s this: if you aren’t putting 100% of your effort into producing a return, then you aren’t going to get one. Any dilution of your goals all but assures failure. It doesn’t matter how smart you are, or how enlightened, or how noble your other goals. and if the government is failing to achieve economic growth, it's only because it’s too low a priority for it.
The Republicans seem to have awakened to the new world. They seem to understand that for them, the days of buying votes are over. But the Democrats still seem to believe that there will always be enough of other people’s money to keep the party going. Given how far we’ve had to go to bring ourselves to this precipice, I find that astounding. And I think it’s nothing but their detachment, and their broader disconnect from reality that allows them to.
Nicholas Krtisfof dredges up every single BS liberal talking point designed to scare the idiot NY Times reader into badgering House Republicans into making a deal with Democrats. (As if a NY Times reader would know any Republicans.) You've heard most of them before I'm sure, but this one is my personal favorite:
Republicans have historically been more focused on national security threats than Democrats. Yet what would do more damage to America’s national security than a possible default that might halt paychecks for American military families?
This is nonsense of course. As soon as you stop paying the army, they become nothing more than a bunch of guys with guns. Stop paying the Army, and you know longer have the means to enforce your will. Obama knows that, or if he doesn't, I'm sure someone will explain it to him. Even economic basket case Robert Mugabe who trashed one of Africa's most prosperous nations, knew that he had to pay the army. But not Kristof.
So Kristof is either a shameless scaremonger, a complete imbecile or both. Can you guess my bet?
Wednesday, July 13, 2011
In 1979, the US Treasury failed to redeem 122M in Treasury bills. At the time, they blamed technical errors with a word processor and a delay in approving an increase in the debt ceiling. But as soon as those issues were addressed the money was repaid along with a penalty, and world continued to spin.
The world didn't end in 1979. Borrowing became horribly expensive for the government and the price of hard assets skyrocketed. We had to invent a new term for the failure of keynesianism - the hence overused term 'stagflation'. But in the fullness of time we elected an administration that actually understood something about how the economy works, and all the issues were resolved.
If we have a technical default, we will survive it. Even if Obama decides to keep the money flowing to his union handlers instead of paying the debt, turning our technical default into an actual default, we will still survive it. Countries have defaulted before. And although standards of living fall, and maybe government are overturned... life goes on.
So the good news is, even if everything he does turns out to be the exact wrong thing to do, Barak Obama does not have to worry about destroying the United states in that way. It won't happen. We'll continue to see the completion of Jimmy Carter's second term, with anemic economic growth, skyrocketing prices of hard assets, a lowering of the standard of living, and a general economic malaise. But the world will not end that way.
But if Obama decides to issue debt in defiance of the 14th amendment, then all bets are off.
Most Americans don't seem to realize that inflation and hyperinflation are two very different things. Inflation is a mistake. Mistakes happen, and when they do, they can usually be corrected by the person who made them (or at worst - the person who replaces him). In almost all cases, inflation is a relatively mild and short lived phenomenon. And when it's recognized by policymakers, it can be dealt with very effectively by increasing interest rates.
But hyper-inflation is not caused that way. Hyper-inflation is caused when the markets lose confidence in the ability of a political body to act rationally. When political decision makers let politics trump every decision, be it rational or not, then hyper-inflation is often the result. Printing money is easy, and virtually costless to the people who do it. And when politicians let it become a solution to problems that should be solved in other ways, a run on the currency is often the result.
It's literally the difference between being wrong, and acting crazy. If Obama issues new debt without getting the debt ceiling raised, then it will be an announcement to the markets that the US is no longer respecting the rule of law. It will be an economically irrational act, driven by politics. And if that's so, then what's next? Downgrade or no downgrade, the result will be a run on US Treasuries and radical rise in interest rates. If that happens, the Fed will likely step in as a buyer of last resort and the run will move from US Treasuries to the US Dollar.
At best the result will be a dramatic drop off in economic activity and a fall in the prices for all risky assets. America can be impoverished in an instant.
Obama cannot destroy America by being wrong. Neither can Tim Geithner, or Ben Bernanke. No one can. Jimmy Carter was wrong about everything, and he didn't manage it. But if Obama abandons the rule of law, it will shake the markets at their foundations. At that point, America really will have become a banana republic and it will be Barak Obama who finally made it into one.
Monday, July 11, 2011
Sunday, July 10, 2011
John Derbyshire and I are mid-disagreement about cynicism. Oh, not that cynicism is appropriate, we agree about that of course. John is a brilliant, clear eyed man of many talents who better knows the value of cynicism than most. And momma RFNJ didn’t raise no fools either. Just as ‘the man’ did so eloquently say in his earth shattering book… “We Are Doomed”.
But the nature of my cynicism and the nature of his have diverged somewhat. Or that is to say, he cynically believes we’re going down one path to destruction while I cynically believe we’re more likely to take another. He’s busier than me today so it’s probably not fair for me to make our disagreement public like this (especially when he makes his living writing about this stuff) but it’s on my mind. So here we are.
He’s of the opinion that the house Republicans will cave in to Obama’s demand for new taxes, kicking the same old can further down the road to serfdom, while our technocrat masters in Washington flail about trying to find new ways to control our lives. This will, he believes, lead to our destruction since it’s the only destination on that road. This is deeply cynical view, worthy of his reputation.
Meanwhile, I’m convinced that the Republicans won't give in on Obama's ultimatums. They may not have any firm principle about raising taxes (or anything else for that matter) but they know that raising taxes now will cost them the next election. So I believe they’ll stand firm because they think it's in their political interest to. The 'no new taxes' pledge has worked it's way into Republican mythology the same way the 'failure to pass health care' has in Democrat mythology. And just like the Democrats did last year, I think the Republican's are more likely to 'double down'.
That would mean that in order to get a deal on the debt ceiling, Obama would have to accept a political defeat. But this is very much not his way. He's prepared to ignore 'actual reality' forever, but 'political reality' not at all. And if forced into that position, I believe Obama will sooner allow the country to default on its debt than deny his constituents their access to government freebies; which was the whole reason they elected him in the first place.
I have to laugh when I hear Obama’s teleprompter talking about how he was sent to Washington to make ‘hard choices’, when it’s so obviously not true. Obama wasn’t sent to Washington to make hard choices. He was sent to Washington to ensure (and hopefully increase) the flow of free government stuff. They said as much every chance they could during the election. They wanted a ‘free mortgage’, ‘free gasoline’, ‘free money’, free, free, free, free….free stuff. That was the 'change they were hoping for'. And as much as is possible, Obama delivered.
Obama sent 1 Trillion dollars (all of it earned by other people) off into the black hole of American liberalism with nothing at all coming out. Much of it went to no-work union contracts, six figure public employee pensions, lying cheating edu-crats, and guns for Mexican drug gangs. And while that money did a lot of things, two things it did not do were increase employment, or improve the economy. Instead it went to people who contribute nothing at all to America's wealth, specifically for the purpose of not contributing to it.
The money was utterly wasted, to a degree, and on a scale, that only government can manage. And now, having wasted an unprecedented amount, equivalent to every net dollar borrowed by the American Republic from George Washington to Ronald Reagan, Obama is laying down an ultimatum about the debt ceiling deal. There will be no agreement, unless it also gives him the chance to waste some more.
Obama has never created even a single productive job. He’s never improved a product or service of any kind. As I understand it, he’s never even earned a tip. That means he knows less about how the real economy works than your average parking lot attendant. And after already squandering a Trillion bucks, he wants the chance to do it again. John thinks the Republicans will let him, and I think they won’t. We both think the end will be disaster. Or to put it another way, John thinks the Republican will let America down because of a lack of principles, and I think the Democrats will do it because they have principles which ALWAYS bring about negative results. It’s the Scylla and Charibdis – the devil and the deep blue sea – the rock and the hard place.
It’s all political handicapping, so I have no more information on the topic than he does. We’re neither of us Washington insiders. But since I think it’s usually a good idea to bet against the big catastrophic event, his view is probably the way to go. That means that my view, as dark and dangerous as it is, is probably the more optimistic. A default would be the dose of reality that many on the left need to finally wake up and smell the latte. And while it would be terrible, we could recover from it, and retain at least a portion of our individual liberty.
But John's view has none of that. He has us taking slightly longer to go off the cliff, but when we do it's a more complete destruction of the American ideal. He has us all shrugging off the last of our liberty and joining Greece, Spain Ireland and Portugal as one of the failed 'social democracies' of the modern west. All of us living henceforth under the the kind of abject tyranny that has been the norm to most people in history.
It's hard to believe, and it feels funny to type this... but offered those choices, I'm actually 'hoping' for a default. This is how the story of Obama ends.
Friday, July 8, 2011
Democrats continue to sing the same song. According to them, we need more taxes on the rich to fund more infrastructure (no-work construction union giveaways) investments in education (civil service union giveaways) and investments in innovation (BS green energy boondoggles). But they've thrown over 1 Trillion dollars at that plan already and their plan hasn't worked.
Left to his own devices, Obama couldn't run a lemonade stand, and neither could his advisers. They have taken the single most economically destructive path available to them at every turn. And now that their polices of higher energy costs, more regulation, and greater mandatory governmental inefficiency have begun to bear fruit, they still don't realize that it's their fault. They'll keep telling the rest of us that the only way to solve this problem is to put them in the economic driver's seat no matter how incompetent they are.
Obama knows nothing about investment. He knows nothing about productivity, and even less about economics. His entire worldview leaves him doing the precise wrong thing, every time. He is arguably the most ant-American American president in history. But the good news is that the American voters are finally waking up to that.
At this point, even his most rosy outlook leaves unemployment considerably above 8% at the next election. That makes him all but unelectable. In fact, the only way that Barak Obama can get re-elected President, would be for the Republicans to give in and allow him to raise taxes during the debt ceiling negotiation. Anything else, and he's finished.
That's one more incentive for the Republicans to stand firm. And ironically, it's more reason for the Democrats to stand firm too. Obama may very well be saying "If I can't run things, then I might as well blow the whole thing up!" I wouldn't put it past him. So maybe this isn't such good news after all.
I think if this were really happening in West Africa, the soldiers would be wearing wedding dresses, and the chimp would be killed and eaten.
But it's a fun bit of video anyway - even if it's fake. Thanks to my buddy Rob who forwarded it. (I suspect it has something to do with the promotion of the new Planet of the Apes movie.)
I'll tell you a secret. It's a secret that all the Democrat hacks like Austan Goolsbee know. A temporary payroll tax cut does not create an incentive for growth. Have a look at what many consider to be Milton Freidman's best work, the Permanent Income Hypothesis.
To summarize, what this says is that people change their behavior based on their long term cost expectations, and 'temporary' changes to the tax code will not act as incentives for growth. I doubt that even someone as willfully blind as Krugman would challenge this. But pols (who don't know their... hats... from a hole in the ground) don't tell you that, and neither do their economic apologists.
The temporary payroll tax cut would be a waste of time. It will hurt the federal budget more than it helps us. It's the leftists answer to 'actually' solving real problems. They want to be seen as doing something, but they need to keep their 'looter' base happy. So they mix up the horse manure in with the chocolate ice cream and hope it's just as tasty.
It never works - and they know it.
Declan O'Scanlon is on of my local Reps. I've had a mixed experience with him. I like rep Caroline Cassagrande (pictured right) more, and our State Senator (devoted RINO) Jennifer Beck (pictured left) substantially less. But he's now done one thing which raises my estimate of him, even if it's likely to go nowhere. Declan O'Scanlon has proposed the first steps in making NJ a "right to work" state.
The problem with unions isn't the union itself per se, it's all the preferential treatment they get under the law. In NJ, the union is allowed to extract compulsory dues, even from non-members. They get all sorts of preferential treatment having to do with how a business can get rid of them, and even how the union is elected in the first place. The net effect is that a union increases the unemployment rate, by preventing non union employees from underbidding them, and by exploiting their legal advantages in a number of ways.
But if you passed a law which let employees either join the union or not, and pay the union dues or not, then the union is forced to add value for it's members and the business if they want to survive. If all they do is make the cost of labor higher while providing no additional benefit, then the market quickly forces them out. This has mostly been the case historically. But if they increase quality or productivity in exchange for their demands for higher pay, then the union thrives.
To date, unions don't have a great history of doing the latter - but I don't want to eliminate it as a possibility. It is possible that unions could evolve into something that increases quality and offers a premium service for the higher wages they extract. And if so, I have no objection to them. But if all they do is increase costs (and thanks to convoluted work rules) actually lower productivity, then they only hurt the broader economy.
Right now, employers are fleeing union dominated states for 'right to work' states. If NJ eliminated compulsory union membership, then it would increase job growth in the state - even if it's only for the public sector. If nothing else that would lower the cost of the services that government provides, delivering more for less. Even that would only help the employment picture in NJ.
The Star ledger will never tell you that, but I suspect you already know.
Everyone else does.