Could the new round of mega mergers spark an economic Earthquake?

United Airlines recently announced it's merging with U.S. Airways. Berkshire Hathaway and Brazil's 3G just announced they're purchasing Heinz for $23 billion dollars. This comes in an atmosphere in which shareholders are increasingly telling boards of big corporations to put their cash hoards to work or give it back to the stock holders.

Corporations around the world are sitting on trillions of dollars because the global economy doesn't seem to be offering worthy investments in the minds of many. However, like birds on a wire, when one or two key players decide it's time to go back to the lawn and forage, the rest soon follow en masse.

Warren Buffet has said he's ready for yet another big deal. He likes to keep about $20 billion on hand, which means, even after the investment in Heinz, Berkshire still has about $12-$13 billion to shop with. Apple is sitting on a mountain of over $120 billion in cash. Many investors have decided that putting enormous stockpiles of dollars into money markets in this interest rate environment is a waste of capital.

This could upset the government's apple cart. First, if companies start spending their excess capital instead of buying Treasuries with it, interest rates are going to go up, which means financing the debt gets even more expensive. It also means that money is going to find its way into the hands of people who actually have an idea what to do with it. There could be a rash of new start ups, which is great for the economy, maybe not so great for the government.

If investors start to get the idea that equities are a far superior play than government debt, interest rates go higher, faster.

Of course none of this takes place in a vacuum. The government will see some benefit in increased taxes, but will that outpace interest rate increases? Will the government try to put the brakes on growth, should it occur? Can they stop that train, once it's left the station?

We could be approaching the point where all that "kicking the can down the road" finally catches up with the government. The fact is, even a thriving economy can't fix their balance sheet without massive changes that nobody in Washington D.C. is willing to make.

But it's not all gloom and doom. We could conceivably have a financial disaster in the public sector along with massive growth in the private sector. Where it goes from there depends on how everyone reacts to such a dynamic. I'm not even going to try to predict that.

Maybe the Ravens weren't the only winner of Super Bowl XLVII

Congratulations to the Baltimore Ravens who fended off a tremendous comeback run by the San Francisco 49ers to win the Super Bowl. The Ravens may not have been the only winners. The post half time delay brought about by a power outage may have been a victory, or at least an opportunity, for the fuel cell industry.

This is not the first time the power has gone out at an NFL game. It happened in December 2011 during a game in San Francisco. Aside from aggravating fans, such occurrences can have serious financial repercussions. What if someone in the stadium gets hurt stumbling around in the dark or because they were startled when the power went out? What if a lot of someone's get hurt? It can also cause people to change the channel. Remember at the time of the outage in this case, the game was looking like a blow out. It can also damage the brand of the NFL and the stadium sponsor. Bottom line; it hurts the bottom line. 

The energy consumption of such a large and profitable entertainment venue is not likely to decrease any time soon. Maintaining power probably just moved up a few notches on the priority list. Of course stadiums have emergency generators for some lighting, but not enough to keep the game going and hold the attention of the viewing audience. In the event of a power loss from one source, ideally you want to go directly to full power from another source. This is where fuel cells could come in. 

Why fuel cells? Well, because wind, solar, hydro, combustion and nuclear just aren't practical for a sports stadium. Why aren't they using them now? Because fuel cell technology still has some issues to deal with before they're practical; cost, service life and reliability among them. What a couple of embarrassing and perhaps costly events may do for the industry however, is to lower that cost barrier by making solving the problem a bit more valuable to the end user.

A stadium owner may not be willing to pay double for reliable, always on power, but they might go for 140% today, where it was only worth 120% yesterday. That means researchers and developers have a few more dollars to throw at the other issues. They don't have to bring the cost down as much to be competitive. Perhaps materials and systems that had been ruled out as too costly in the past can be ruled back in. 

The incentive can be tremendous. If a team of researchers thought they were about 4 years away from a viable commercial product, then a change in parameters leads them to believe they're maybe 18 months away instead, the urgency increases exponentially. If your team is getting close, other teams are getting close. First one there with a reliable, affordable product gets the first big payday. Once someone demonstrate that there's a market for existing technology in which actual profits can be made rather than just research grants to win, the competition and innovation takes off as well. 

Whether this event will trigger the above scenario, I don't know. I think it depends on how much the parties believe it cost them, if anything. It's not a question of whether or not they made boatloads of money. It's a question of whether they believe they left anything on the table, and how much. 

An alternative to Atlas Shrugged; Atlas Spent?

In Ayn Rand's novel Atlas Shrugged, our capitalist heroes ultimately defeat the collectivist power grab by going on strike. They drop out of society, taking their ingenuity, productivity and imaginations with them. Society soon crumbles and the bureaucrats beg for their return.

In real life, there are problems with this approach. Not the least of which is the nature of the capitalist. When a capitalist sees a problem, he or she sees opportunity. They want to fix it. They want to fix it profitably, but they want to fix it. When they see an insurmountable problem (or so perceived by general consensus) they see an opportunity for an enormous return. The other problem is that, unlike in the book, societies don't generally blow up quickly. They die a slow and agonizing death. Rome didn't fall in a day. It took centuries. Personally, I don't want to wait that long.

If you believe in capitalism, you believe it works because it takes advantage of human nature rather than fighting against it. There has been much made of the fact that nearly half the people who file taxes in the U.S. pay no income taxes. Thus, they have little concern about rising taxes and increased regulation. But what if they did pay taxes? What if they had a taste of capitalist success? What if they saw things from the same perspective you do? It is not human nature to do yourself harm.

So how do you create more tax paying capitalists? Invest in your business, locally. Look for small businesses at the local level that can provide things for your business. It may cost you more, but there is value to be had in this approach. For one thing if you're paying 50+% in taxes on your income anyway, why not get the most luxurious office equipment and furniture available (in town)? Make your workplace comfortable, cozy, attractive. This will bring down your bottom line some, but after taxes, it's not that big a difference, and as a bonus, you create tremendous goodwill at the local level. Look for local service providers and suppliers as well.

When you place a $3000 order with a multi-billion dollar company half way across the country, do you think they're bubbling over with gratitude. Now spend that $3,000 or $4,000 at a local shop that averages $2,500 in revenue a week and see if it doesn't get their attention. You can still shop quality and price, at the local small business level. It's going to be more costly than using a super-efficient giant producer, but even if you just spend a portion of your operating capital locally, the return in goodwill can be well worth it. Also, rather than letting the government pick winners and losers with your money, wouldn't it be smarter to eliminate the middle man and pick some winners yourself? Who do you think is a better judge of the worthiness of an up and coming entrepreneur? You, or a panel of bureaucrats at the Department of Commerce?

Further, if this were a trend that caught on, successful small business people would become much more aware of the burdens, speed bumps, roadblocks and useless paperwork, regulation and make-work that government imposes on the business community. They would have to hire help, who, now having jobs, wouldn't have the time or inclination to "Occupy Main Street" or worry about where their next condom is coming from.

In short, if you want to keep the country from going down the drain, don't look to the global financial markets. Look to the local market and see who you can lift up. Create allies and compadres at the grass roots level. Someone who is defending an income of $50,000 a year and rising is likely to be much more passionate in that defense than someone who's already sitting on $250 million hedge fund account. They may not have the same resources, but they have the same number of votes come election day, and if you want to see change in government across the board, you need representation at the City Council in places like Falcon, Colorado and Springfield, Missouri, not just in New York and Los Angeles.

Waiting for society to collapse and come to its senses is a long wait for a train that aint coming (to steal a line from Firefly). Investing in a new generation of capitalists seems much more win/win and intuitively more capitalist to me than hoping the populace will eventually become miserable enough to see things your way. It's also faster, more likely to succeed and more gratifying.

You're in Charge Here!

As I was watching a Fox News panel discuss the brilliance of the Obama administration's move to convert their re-election infrastructure assets into an issue advocacy organization it suddenly occurred to me that perpetuation the vision of both political machines; Democrat and Republican, as monolithic, insurmountable barriers to the interest of any particular individual, serves the interests of national celebrity pundits of all stripes.

The political machinery that operates our country is perceived and portrayed as too complicated and intricate to be understood by the common man (or woman) and therefore must be carefully studied and analyzed on our behalf by specially trained and educated experts who can tell you what to think and how to react.

In reality, the "massive databases" to which they refer are simply lists of contact information for individuals. The purpose of making contact with all those individuals is to influence the behavior, actions, non-actions or acceptance of each individual. Without the cooperation or at least surrender on an individual basis, none of the complicated, convoluted agendas of the monoliths can work.

Too many individuals in America have bought into the idea that they are powerless, when in fact, they are the source of all power. Just look at the typical political post on your social pages. Most have a common theme, which is that you either buy the entire package of ideas presented by the Democrats or the entire package of ideas presented by the Republicans. Recognize that neither party is a philosophy. They are infrastructures designed to do one thing; get their people elected. They will adopt whatever philosophy you, the individual demand in exchange for your vote.

The Constitution of the United States explicitly spells out the role of the Federal government and the limits of its authority, which is granted to it by the people. It has been blatantly ignored over the years, but it still exists. It can still be invoked and used to undo years of accumulated abuse of power on an unchecked government beginning at the local level.

When new laws and regulations are passed in your community, don't be afraid to ask "why?" and "under what authority?" Does it advance the rights of the individual to Life, Liberty and the Pursuit of Happiness or just provide a new revenue stream to politicians and bureaucrats and those who feed off them? Remember local politicians become state politicians who become national politicians. You can change the character of the "powers that be" from the bottom up.

Become familiar with your Constitution and the reasoning and purpose behind its provisions. It is a charter created to limit the power of government, not the individual.

It is the nature of politicians and bureaucrats to advance more regulation and grow their organizations. That's how they make headlines and advance their status within the party. You are the only check on that tendency. The people who make up our monolithic political parties work for you. Don't let talking heads of any political persuasion convince you otherwise.

How taxes on the rich get paid, by you

The Obama administration held true to the campaign promise of raising taxes on the rich. Now we've really started to take a whack at the Federal budget deficit by introducing new revenue, right? Not quite.

In recent days the yield on the 10-year Treasury bond has gone from around 1.75% to about 2%. What's the significance of that? Well, taxes went up on people making over $400,000/year. For many, a chunk of that income comes from interest on things like 10-year Treasury bonds. When the government raised taxes on that income, they lowered the net return, which lowered the value, hence higher rates. So how did the Treasury fare in this exchange?

Well, if you bought a $1,000 bond at 1.75%, over a year you'd get $17.50 in interest paid by the Federal government. You'd pay $6.30 in taxes at the old 36% tax rate. Now if you buy a $1,000 Treasury bond at 2%, you'll make $20 in a year and at the new tax rate of 39.6%, the Feds will take back $7.92. So, when you compare the net cost of borrowing for the government (interest paid, minus taxes received) their borrowing cost on that $1,000 actually went up by 88 cents. The effect is not immediate of course. They'll come out ahead on debt already issued, but on new debt, they're actually losing money on the deal. This from a scheme that was supposed to address the government's debt problem.

The wealthy also have options when it comes to income and the rate at which it's taxed. They can move investments around. Even in Treasuries, they can buy bonds with the coupons (interest payments) removed (they're sold off to other investors, money market funds, mutual funds, etc). Without the coupons, the net return is no longer income, but a capital gain, which is taxed at a much lower rate. They can also switch from Federal debt to local or state debt, which is not subject to Federal taxes.

The greeter at WalMart doesn't have these kinds of options. If your taxes go up, you pay them and that's that. The new deal did nothing to address the deficit and the ballooning national debt. It's going to get dealt with one way or the other. You'll pay in either higher taxes or by way of massive inflation. Maybe you'll get lucky and the party wont come to an end until after you're gone. In that case, your kids and grandkids will pay.

The moral of the story? There is no good way to pay for a bloated, out-of-control government. If you want to make it better, all you can do is make it smaller.

The Fiscal Cliff is more like Fiscal Quicksand

The United States government is nearly $17 trillion in the hole. It's an unimaginably large number. Years ago people predicted disaster if we went over $6 trillion, then $10 trillion. The train wreck never came. What's the limit of our debt? The fact is, there isn't any.

The Federal Reserve can literally create money at will. It's nothing more than a spreadsheet entry. Theoretically, they could create $17 trillion out of thin air and buy up the entirety of U.S. debt. What if the U.S. defaulted on its debt to the Fed? So what? The Fed can create money. They'll never go bankrupt. The government will never default though, because the Fed will provide all the money that's needed, even to borrow to pay the interest...to the Fed. It can even loan the government money at zero or negative interest rates.

At some point people will come to realize that the only restraint on the spending of the Federal government is the will of Congress. Congress has shown no signs that it's appetite for more spending is diminishing. When they talk about cuts, they're really talking about slowing down the rate of growth of spending, not actually reducing spending.

The consequence is not really government taking money from the private sector, it's the government directing resources, rather than the private sector. Once people figure out that the government is a source of unrestricted cash, lots of them will want to work for and sell things to the government. What's wrong with that? Well, it directs human activity to the most unproductive endeavors human kind has ever come up with.

In the old Soviet Union, people had savings. But what do you spend your money on when you walk into a shop and there are 25 of the same crappy suit you already own? Nobody's engaged in anything creative, new or exciting. That's not how government work rolls.

Cuba recently announced that unemployment hit a high of 3.8%. They have virtually no unemployment, because 80+ percent of adult workers work for the government and many adults just don't work, and aren't counted as members of the workforce. So even with great employment stats, the economy and quality of life are third world.

A thriving economy is not built on statistics. It's more than a measure of the cash in circulation. It's about incentives. People want to do exciting things in exchange for cash they can use to buy exciting things. If cash can be obtained by simply engaging and participating in some mundane make-work activity assigned by Uncle Sugar, there's no incentive to be extraordinary, and there's nothing extraordinary to buy, because nobody else has any reason to excel either.

This explains how you can have a mountain of debt, printing presses running at full tilt, and no inflation. The inflation doesn't come about until necessities become scarce. We're not there yet. But we're on our way.

Obamacare and the job market

With the re-election of Barack Obama and the Supreme Court decision that the individual mandate can stand as a tax, Obamacare is the law of the land, like it or not. It will be fully implemented in 2014. With all the uncertainty surrounding the law, one thing is certain; labor costs are going to go up. How will that effect the labor market? For clues, look at the housing market.

After the credit market debacle of 2008, new requirements were put in place for loans, making qualifying for a home mortgage much more difficult. Demand for housing is still there, but fewer people can qualify to buy a house. Hence the housing market, four years later, is still lackluster at best.

The same principals will apply to the labor market. In fact, anticipated cost increases have already had a major impact. The official unemployment rate for November actually dropped to 7.7% as the economy reportedly created 120,000 new jobs. However, the drop in the rate came from the fact that 350,000 people quit looking for work and are therefore no longer counted in the employment numbers. The percentage of working age adults participating in the workforce is now at a 50+ year low.

There are job openings out there, but the bar has been raised and is going to be raised further. Consider a company that operates on a 30% margin. That means that for every $1 they generate in revenue, they net a profit of 30 cents after expenses. If their current cost per employes is $20,000 per year, they have to take in an additional $66,000 in revenue per new employee to maintain that margin. Now increase the cost per employee by $5,000 per year to cover an insurance requirement. The company now has to generate over $83,000 per employee to justify a new hire. If you can't deliver that kind of productivity, they don't need you.

This may actually benefit companies at the top of their field as companies operating on tighter margins drop out. It could also benefit temporary employment services. More companies may opt for "just in time" labor, using them only when they really need them, rather than taking them on as employees. Again, look at the housing market. In our area, it now costs almost twice as much to rent a house as to it does to pay a monthly mortgage, but if you can't get the mortgage, you're going to have to rent. Your hourly cost to rent an employee may be substantially higher than taking one on permanently, but you can let them go or stop using them any time without consequence.

It may also cause an increase in independent contractors as individuals find it easier to get a little work from a lot of companies than to get a full time position with one company.

Obamacare will cause changes in more than just the labor market, but the labor market may be where most people experience change first. I'm not going to say the world will come to an end or that we're going to suddenly experience some kind of train wreck. After all, Greece, Portugal and Spain still exist, despite their economic woes. Life will go on, but it will likely be quite different. You can't regulate, mandate, tax and spend your way to a vibrant economy, but that's not what America voted for.