Wednesday, December 24, 2008

Why soaking the rich doesn't work

The current path of our federal government's budget could lead you to two possible longer term resolutions. One is that hyper-inflation will bring the government's balance sheet back in line by devaluing the outstanding debt. Another is substantially higher taxes fill the spending to revenue gap.

Who will be taxed? Not the middle class. That would be political suicide. The wealthy are the natural target. It sounds good. They've got the money. They'll never miss it. But, reality doesn't always cooperate with the plan on paper.

Let's suppose I'm a rich guy. I make widgets. I don't make widgets because I need the money. I could retire now and live very well for the rest of my life. I make widgets because making mountains of money is something I enjoy and happen to have a knack for. I've decided that if I'm going to go to the trouble of making widgets, I want at least a 50% mark-up. Widgets cost me $20 to manufacture, so I sell them for $30 right? Wait, there's taxes. If my tax rate is 25% I have to make about $13.35 to clear $10, so my price is $33.35.

Now my tax rate is raised to 50%. Now I have to make $20 to clear $10, so guess what? Widgets just went up to $40. Fewer people may buy at that price, but remember, I don't need the money. I set the terms for the kind of return I want. I cut production and employees and simply make fewer widgets at a higher price.

On paper you're taxing my income. In reality, you're still paying the bill, no matter how low your tax rate is. Bigger government will always cost you more. There are ways to make it difficult to track, but the buck always comes from you.

Friday, December 5, 2008

Everybody Back in the Pool!

This was a terrible week for the market in terms of news. Tens of thousands of new layoffs were announced. The jobs report was abysmal. Foreclosures are up. Home sales continue to fall and the Big 3 are back in DC, hat in hand. Yet, the indices not only held, but added to gains made last week. In the lingo of the Great Depression era that's so often alluded to these days "What gives?"

It's not that big a mystery if you don't try to over-think it. The Fed has been injecting trillions of dollars in new currency into the markets to replace the "toxic assets" that banks had been trading, until they realized they were toxic. There has not been a corresponding increase in the amount of corporate equities in circulation. The supply of one currency went way up. The other remained constant. The value of the dollar is simply falling with respect to equities as the market adjusts to the new currency mix.

No, this doesn't mean we're about to have a thriving, healthy economic recovery. It just means stock prices may spike, which may simply be a prelude to inflation throughout the economy.

Saturday, November 29, 2008

Who's to blame for our economic situation? I blame Star Trek!

In a free market environment, people try to better themselves by finding ways to create value for others. That is, they create something, be it a product or a service, that is of more value to someone else than it is to them. Then they trade. Some ideas succeed. Some fail. It's an evolutionary process of natural selection that brings to market the things people most want at prices they're willing to pay.

In the United States today, we increasingly look to the government to provide the things we want. We also look to them to take the pain away from trying and failing. We've subverted the evolutionary process. Even politicians who once championed capitalism and limited government have gotten on the bandwagon. The government now owns stakes in banks, insurance companies and soon, the auto makers. In exchange for the cash infusions, government will have a say in how the companies are run, who they hire, what they produce and how much they'll make. There is no longer a debate as to whether or not the government should ensure everyone gets health care. There's just some disagreement as to the terms. Worrying about the national debt is not even on anyone's radar in this new paradigm.

How did we get here? Well, I blame sci-fi, at least in part. Science fiction has the ability to stir our imaginations. Some of the nifty devices used on shows like Star Trek have actually been produced and are in every day use (automatic doors, "communicators"). There have been many positive influences. But one thing most every popular science fiction drama has in common is a view of the future built by the government. Nobody uses cash in Star Trek. Everyone simply does their duty and is happy to do it. We see the dozen or so folks who get to go on the occasional adventure, but I can't help but wonder about the other 400 who simply do their jobs, day in and day out, and never get paid. All their needs are met by the Federation. Once in a while a "capitalist" type will appear on an episode, but they are backward, goofy, greedy and usually ugly comic relief.

The Stargate series is no better. The government is engaged in inter-gallactic trade and diplomacy on the taxpayers dime. Not only does the general public not know anything about it, they have no direct access to any of the benefits or technology. Yet the government forces that carry on this clandestine operation are the heroes.

There wasn't much mention of the common man in Star Wars, outside of the bar scenes, but there again the main characters who were engaged in private commerce were depicted as selfish, greedy, unreliable and eventually saw the error of their ways.

We have been sold a vision of a Utopian future without free markets, without capitalism, without the free association of independent individuals. Of course the message is subtle and packaged with lots of explosions and drama sprinkled with comedy, but it's there and it's effective.

We are reaching for Never Never Land; a future that will never come to pass because the fact is that an economic system based on resource allocation determined by an elite group, even a democratically elected elite group will never achieve the efficiency and genius of a system based on resource allocation by the cumulative effects of free individuals making voluntary decisions in a free market.

If we truly want to go where no man has gone before, we're not going to get there in a government chartered bus.

Monday, November 24, 2008

Too Big To Fail

One by one the CINO's are showing their true colors: Capitalists In Name Only.

The bail outs continue. Now it's Citigroup. The standard line is "I don't like it, but we had to do it." or "Yes it makes me angry that we're in this situation, but we have no choice." What does that mean exactly? That we've gone so far toward the China model that there's no turning back? If these entities are too big to fail now, what happens when we've consolidated power in just a few of them and they begin to fail again? I'll tell you what happens. We exercise the warrants that the "taxpayers" are going to receive in exchange for this round of bailouts. A warrant is an option to buy stock in the future at a fixed price. It's supposed to ensure that if and when these companies become profitable, the government can recoup some of its investment by selling the warrants. What will actually happen is the failing business models will continue to fail and the government will not sell the warrants but exercise them. That is, buy the stock, giving the companies another cash infusion and the government a seat on the board. In the name of negotiating on behalf of the taxpayer, of course they'll negotiate a lower exercise price. (write that down, you heard it here first).

The government will have a major equity stake in banks, insurers, the auto industry, more control over the health care industry and of course, the alternative energy initiatives are not going to be without strings attached.

The collectivists have won the war without firing a shot because most of the capitalists still aren't even aware that there was a war.

Tuesday, November 18, 2008

Whistling past the graveyard

The economy continues to slow even as the Fed cuts interest rates and injects capital into the banking system. Other industries are likely to get low interest loans and other forms of capital infusion as well. Why isn't all this "economic stimulus" causing optimism and rising prices on the stock exchanges? Because none of it addresses the real problems, which are only getting worse.

You stimulate economic activity not by manipulating data and artificially inflating the numbers, but by making it easier and more rewarding to take risks in the market place. That is not happening. Business is continually being curtailed by more and more regulation and mandates. Next on the agenda is some kind of universal health care, which will be the responsibility of employers. Man made global warming is no longer permitted to be questioned and more regulation, mandates and subsidies will be coming our way from the priests and priestesses of that cult. Minimum wage will be increased, this time probably with some kind of automated increase for inflation. The new administration has said that more funding for education "can't wait", although they've yet to connect throwing piles of money into the system with smarter students. There will be infrastructure spending as well as more subsidies for alternative energy. The federal deficit is completely out of control, so anyone who does manage to achieve some measure of success will be immediately targeted as a revenue source for the government. Those who keep their income low enough, will get a check.

As government doles out cash to struggling industries, it also gains more control. The cash comes with strings. Professional campaigners and attorneys will be making human resource and production decisions on behalf of some of the largest corporations in the country. The people who brought you Amtrak, the DMV and the Postal Service will soon be calling the shots for the major banks, insurance companies and auto makers. The Postal Service, has a federally protected monopoly on first class mail delivery, yet consistently cites cash flow shortages as an excuse for every rising prices, and now will be conducting the first layoffs in its history. That's the level of competence we're empowering.

The small business community is being zoned, taxed and regulated out of existence while large box stores gain multi-year exemptions from the taxes everyone else must make up. This, in spite of the fact that small business accounts for the vast majority of new job creation. Politicians pay lip service to small business, even as they are strangling it.

If you wonder how this mingling of government and big business, along with near zero interest rates and frequent cash infusions might play out, look at Japan. They've been following the same program for over a decade, with no success. Entrepreneurship is out. Bureaucracy is in. We're well on our way to becoming a fascist nation, but nobody's calling it that, probably because most don't really know what it means. Fascism is when producers still get to own their businesses, on paper, but the government dictates what will be produced, how it will be produced, where and when it will be distributed and at what cost. This is being done through subsidy, regulation and the tax code, rather than outright proclamation, but the nature is the same.

Saturday, November 15, 2008

TIme for a New Tea Party

(A Guest Post by Wifezilla)

Taxes are the life blood of the government. Unfortunately, government treats tax money like a teenager treats your refrigerator. It grabs whatever it wants, doesn't care if there is anything left for any other members of the family, and constantly whines for more. No matter which party a politician claims to belong to, there always seems to be a reason the government needs your money more than you do. The only way I can see to change the situation is to cut off their allowance so to speak.

Reforming our government because of taxes is not a new concept. Our founding fathers let England know how they felt about taxes when they dumped crate after crate of tea in to Boston Harbor back in 1773. Lacking a ship, a harbor and only having a small stash of Celestial Seasonings Bengal Spice herbal tea that I would rather not part with, I decided to find a slightly different way to protest taxes and the government waste of those tax dollars.

Below is a list of ways that you can cut off or reduce the flow of your money in to the pockets of politicians.

1. Drive a fuel efficient car.
A large chunk of the price of a gallon of gas is taxes. In Colorado, between state and federal taxes, you pay approximately 58¢/gallon which is abut 25% of the cost of each gallon of gas. The more fuel efficient your car is, the less money you pay for taxes. Driving a motorcycle or scooter will cut your gas costs down even more. If you can't afford to switch cars or a motorcycle is impractical in your situation, make sure the car you do have is in top condition. By keeping the oil changed, your tires properly inflated, and keeping your air filter changed, you can increase your fuel efficiency and reduce the amount of taxes you give to the government. Even something as simple as keeping your car washed can increase your fuel efficiency by up to 7%.

2. Buy fresh, whole foods.
Though it varies from state to state (or even town to town), usually fresh whole foods meant for home consumption are not taxed. Restaurant food and convenience foods are. By eating food you cook yourself, not only will you be healthier, you will avoiding giving money to wasteful politicians.

You may even want to consider planting your own garden. Foods that are shipped in to your local store gets taxed in many hidden ways. From the fuel taxes paid on the truck that ships it, to sales taxes paid on the pesticides that were dumped on the crops, there is money being taken at every step. What happens to that tax money? According to Citizens Against Government Waste, $1,529,220 was spent last year on an Appalachian Fruit Lab. The government also spent $188,000 on a Lobster Institute in Maine.

3. Learn to use Craigslist may be best know for their colorful personal ads, but it is much more than a way to plan a "casual encounter". It is a giant local tax-free garage sale without all the sitting at the end of your driveway hoping you don't get rained on. Neither buyers or sellers pay fees to use the site or list items for sale. Most items show photos and it makes it easy to shop as well as to sell your items. There is no telling how much longer a service like this will remain tax-free, but it still is as of now so use it to your advantage. Of course, if you are a "SWM in 2 BDSM seeking same", you can always shop for true love at the same time you shop for a slightly used lawn mower.

4. Buy new online
Online sales across state lines are not subject to sales tax....yet. Sure, you will pay shipping fees, but if you shop carefully, you can find sites with flat rate shipping or reduced shipping fees for larger purchases. Two examples of sites with great shipping policies are and Netrition sells health food and charges a flat $4.95 regardless of how much you buy or how much it weighs. Overstock sells a large variety of items from furniture to clothing to jewelry, electronics and more. They often feature $1 shipping or provide free shipping options.

5. Shop thrift stores

While you still pay sales tax at a thrift store, your overall bill will be much smaller than it will be if you purchase items new. Since the bill is smaller, the amount of money you pay to greedy government spend-aholics will also be lower. Besides, thrift stores purchases also give you a chance to help the needy. The Salvation Army, Disabled American Veterans, and ARC thrift stores are all run by charitable organizations.

6. Stop smoking
Cigarettes are one of the most taxed items available. The national average with state and federal taxes is 98 cents per pack. If you stop smoking, you stop giving money away that will be blown on studying cow flatulence, or the mating habits of the Northern snail darter. If you aren't ready to kick the nicotine habit just yet, consider switching to smoking a pipe or buying loose tobacco and rolling your own. Pipe tobacco and loose tobacco is much less expensive than pre-made cigarettes, so switching to these will mean less money for programs like the $492,000 Rocky Flats Cold War museum.

7. Brew your own beer and wine
Like cigarettes, beer and wine are easy tax target for tax takers. Brewing beer and wine is a fun hobby that also lets you deprive politicians of your hard-earned money. The highest taxes are reserved for liquor. From 50-80% of the cost of a bottle of hooch is tax. Unfortunately, while brewing your own beer and wine for private consumption is perfectly legal, it is illegal to distill your own spirits.

8. Go to garage sales
In most communities, people who hold the occasional garage sale are not required to collect sales tax. While more time consuming that popping in to your local Walmart, garage sales give you the opportunity to legally avoid paying sales tax and find unique, one-of-a-kind items. Along with listings in your local paper, is a great source for garage sale listings. Since they allow posting for free and picture uploads, you can often get a more detailed list of items available at any particular sale. Veteran garage salers plan a route of 4 or 5 sales they want to hit and shop early for the best selection.

9. Shop for lower sales tax rates.
A short drive can make quite a difference in the final price you pay for an item. If you are near a state or county border, check to see what the sales tax rate are in the next taxing district. In the Security/Widefield area South of Colorado Springs, CO, shopping at Walmart means you pay 6.9% sales tax between federal, state and City of Fountain Sales tax. Shopping at Ross less than 2 minutes away you pay only 3.9% since it is located in unincorporated El Paso County. In some areas, it pays to cross state lines. While the state of Washington charges a 6.5% sales tax, you pay zero in Oregon.

10. Make less money
The more money you make in salary, the more the government wants to take away. Working overtime usually results in very little extra take home pay for you but a big bonus for the government. If you are sick and tired of being sucked dry by government vampires, you may want to take a serious look at your income and lifestyle. Are you sacrificing valuable time with your children in order to make more money and buy more"stuff"? If you are married, can you and your spouse get by on one income instead of two? By simplifying your life, not only do you give the tax monster the brush off, you may reduce your stress level, make more time for your family, and gain peace of mind. ( has a nifty "Stay at Home Calculator" that lets you figure out if having one of the spouses leave the work force is feasible. Often times the person bringing in the second income finds out that their $20/hour job is actually only netting them $1.75/hour after deducting day care costs, commuting expenses, business meals, dry cleaning bills, taxes, etc...

11. Move!
Some towns and states have moved from the category of excessively taxes to downright business and worker hostile. MSN money lists the best and worst states for taxes in this article

According to MSN, "The state in which residents pay the most in combined state, local and federal taxes, per capita, is Connecticut (38.3%), followed by New York (37.1%), New Jersey (35.6%) and Nevada (35.2%). Oklahoma residents pay the least (27.8%), followed by those in Alabama (28.0%) and Alaska (28.1%)."

Any state or town that thinks you are their own personal cash cow doesn't deserve to have you. Take yourself and your family to an area of the country that appreciates your hard work, values your individual freedoms, and realizes that while government is necessary, it doesn't have to be oppressive or intrusive.

Then What?
It would be hard to see an immediate effect of people actively engaging in a tax protest of this sort, but the economic slow down we have seen in the past six months does give us some clues. Many cities and states are reporting reduced income due to lower sales tax collections. They have cut budgets while upping traffic enforcement in an effort to generate more revenue. State governments are also conducting random sales tax inspections at business locations.

In New York City , it was recently announced that Mayor Bloomberg is considering a 15% personal income tax hike on New York City residents. Also under consideration are cutting 3,000 jobs, canceling the January Police Academy class, cutting school budgets, rescinding previously passed tax cuts, increasing fees and fines, all in an effort to address a 4 billion (Yes, BILLION...with a B) budget shortfall over the next 2 years.

According to the Daily News, "The proposed increase in personal income tax would hit the middle class, costing those who earn $50,000 to $90,000 about $116 to $356 more next year, according to City Hall's estimates.

Bloomberg's latest fiscal blueprint is the harshest since he coped with a post-9/11 budget fiasco, causing him to hike property taxes 18.5% and temporarily raise income and sales tax."

Now, higher taxes and more fees hardly sounds like a good result to a personal tax protest, but this is only a short term result. What it is really doing is forcing politicians to show their true colors. Mayor Bloomberg, who was once a Democrat, was elected to office as a Republican after switching parties in 2001. Republicans are SUPPOSED to be the party of smaller government and lower taxes. Even with a small reduction in staff, the fact that taxes on INCOME are even on the agenda shows you where he really stands.

Instead of worrying about your carbon footprint, start worrying about your tax footprint. Denying the government vampires a steady supply of taxpayer blood reduces the likelihood vampires will be running for office in the future. Like an alcoholic, you won't be able to get them to stop drinking, but you are under no obligation to continue buying them booze.

Saturday, November 1, 2008

Obama takes a jab at Rand

If you listened to one of Obama's rally speeches yesterday, you may have heard the phrase "I don't know when they decided that selfishness was a virtue...". To most, this little phrase would not strike them as anything terribly significant. But to a student of capitalism, it was an obvious burn.

Obama has two masters degrees. He chooses his words carefully. He is, no doubt, familiar with the work and writings of Ayn Rand. Rand was a champion of capitalism and authored many books, fiction and non-fiction. One of them elaborated specifically on a fundamental principal of capitalism: "The Virtue of Selfishness".

The burn is perhaps well deserved. Capitalists have done such a lousy job of communicating and selling their ideas that most people are totally unaware of the work of one of capitalism's greatest advocates. They have a vague idea of what capitalism means...sort of, but few can define it with any real clarity.

Ayn Rand did a good job of illustrating capitalist principals, but she did so in a language, tone and manner that was largely directed at academia. Her non-fiction was quite dry and employed vocabulary the average working stiff would probably not be familiar with. Her signature novel "Atlas Shrugged" was very lengthy and included a several hundred page monologue that beat the reader over the head with the point of the book, if they took the time to endure it. She also incorporated capitalism into her brand name philosophy: Objectivism, which has unfortunately evolved into a kind of cult or religion of its own, which is ironic, since she was staunchly opposed to religion. That was another error I think. She suggested that capitalists must all be atheists. Marketing to a population that is over 95% theist and telling them that to truly enjoy your product they need to abandon their religion, is a non-starter. The only principals we need to agree on are that people should be free to pursue voluntary associations and mutually agreed upon transactions in the absence of force, deception or intimidation. That no man has a right to the time, resources and/or talents of another, and that society is a convenience item, created by and for individuals to make use of when and if they so desire. It is not a super-entity to be worshiped and served.

The point here is not to dog Ayn Rand, but to emphasize that the battlefield of ideas is not in the halls of academia, but on the streets of Anytown. It's in the bowling alleys, the pizza joints, the laundramats and the cafeterias. The left realized that very early on. They have always relied on a base of disgruntled working class people who either don't have the time to leisurely pursue scholastic material or don't have access to it. They don't distribute position papers, they spotlight their constituents' lack of wealth, focus blame on their opponents and promise to fix it.

The counter-measure is to take the principals of capitalism and clearly communicate and illustrate them in a language, manner and media that everyone can understand. One of the earliest examples of this is the Ant and the Grasshopper parable. It is probably more widely known than anything Rand ever wrote. It can be read or told in less than 30 minutes, and it clearly illustrates the underlying principal.

The challenge to today's generation of capitalism's advocates: Spot opportunities to illustrate a principal. Speak to your audience, not at them. Don't try to sell the whole package in one sitting. Support one underlying idea at a time. Good ideas resonate. They just need a little reinforcement. Briefly, but effectively reinforcing a single point to a single person can have a lasting ripple effect. The truth is your friend. Be a good friend in return.

Saturday, October 25, 2008

As the worm turns...

Existing home sales were up across the country by 5% in September. Inventories were down to a 9.9 month supply, and that's based on a very lackluster pace. This took place before the bail out package was executed.

I predicted a few weeks back that the recovery in the overall economy will come from the housing market. As banks unload homes from people who couldn't afford them and sell them to people who can, we may be seeing the beginnings of such a recovery.

The model is changing from short term to long term. People with cash on hand and good credit are going to have access to assets at bargain basement prices. Flipping is out. Investment is in. Even if you rent out a home for a bit lower than your current mortgage payment, you're building equity in an asset that's very likely to increase in value while writing off capital improvements and maintenance expenses.

In reviewing the history of the stock market, I find it fascinating how money flow has an uncanny ability to find the most productive path. Like running water or electricity, it takes the path of least resistance. If the stock market proves unproductive, private venture capital will flourish. Risk takers will still take risks. They'll just move to other playing fields.

We could also see a resurgence of the small business community. New tax policy and regulation may reduce the optimum economy of scale for many industries and businesses. Smaller may well be better. Layoffs from mega-corp will also feed this trend as business professionals choose to strike out on their own rather than compete in an oversupplied labor market.

The tricky part is that government will be cash hungry. They will be quick to pounce on any perceived new source of revenue. Entrepreneurs must not only think smaller, but faster. They must be nimble and quick to adjust in an environment where the rules can change at any moment. This favors less reliance on employees and more reliance on outsourcing and strategic alliances with suppliers, distributors and network associates. Iron clad, long term commitments are not a good idea. Voluntary association with people you trust for as long as it serves both parties is where you want to be.

Wednesday, October 22, 2008

The China Syndrome

If you want to know where the US is headed economically, take a look at China.

In response to a number of small factory closings in China, their Finance minister was upbeat and stated that they will "clear those birds out of the cage" to make way for bigger and better factories. The people may suffer, but the system will survive. China is the world's poster child for the "public/private partnership" model. They call it capitalism, but it's really fascism. The government determines what will be produced, by whom and how much they will make for doing it.

On a recent episode of Donny Deutch's Big Idea, he and his "capitalist" guests agreed that a new way of thinking is needed; that people need to recognize that it's the system that is the priority, not the individual and his or her personal ambitions.

The sentiment is repeated often by both parties. We are told we need to aspire to "something bigger than ourselves". A more universal call would simply be that we should serve something, anything, other than ourselves.

To the real capitalist, the individual is the foundation for everything. Society is a tool for the convenience of the individual, when and if they decide to engage it. To the collectivist, society is a super entity that demands the devotion of individuals, who are themselves expendable.

The power brokers are attempting to create a brave new world. The system will be the end, rather than the means. The goal is order and stability, not quality of individual life. The individual is insignificant. To think otherwise would be selfish, and selfishness is the ultimate sin in the eyes of the collective.

Naturally, once you've convinced people that they should serve others (by definition, everyone except you), all you need to do is become the authority on what "others" need, when they need it, where it will be delivered, who will produce it and at what cost.

Sunday, October 12, 2008

Fixing American Capitalism

Believe it or not, American capitalists are not that far apart from American communists when it comes to the issue of concern for the individual's ability to participate in the economy. Both would like to see the individual have much more access to "means of production". The difference is that capitalists would like to achieve this by making it easier for the individual to acquire, create and deploy means of production, while the communists would simply take existing means of production from those who have it and give them to those who don't.

There are serious flaws in the American system. What we need to do is not eliminate risk, but make it easier and more rewarding to take risk. The biggest barriers exist at the bottom of the income scale. Well meaning programs and policies have made it increasingly difficult to go from poor to rich. First and most obvious is simply the paperwork, taxes and regulatory requirements involved in starting even the smallest business. This can be intimidating, even when it is affordable. The more serious problem is that the system is not seamless. When you reach a certain level of income, the rules change. You no longer qualify for this, and you are now subject to that. When you reach a certain level of employees you no longer fall under this set of rules, but that one. Taxes you were exempt from last week, suddenly apply. The result is, if you're not ready to grow by a giant leap, you're better off not growing at all.

A federal sales tax that would replace all of the existing taxes would be a great step in eliminating many of these issues. The tax rate may be steep, around 22%, but it would be predictable and consistent. Collecting and paying sales tax is also very simple. You don't have to hire an accountant or financial expert. Filling out the form and writing the check takes about 10 minutes.

Regulation must also be addressed. The rules governing business should be consistent from the lemonade stand, right up to the Cisco's and the GM's. You shouldn't have hire a team of Phd's to take your business to the next level. There is a difference between publicly traded and privately held companies however. If you're going to offer a stake in your company to the public, the public has a right to know exactly how you're deploying their investment. If you don't want to be under that kind of scrutiny, stay private.

Ironically, big powerful companies get bigger and more powerful because of legislation designed to keep them in check. Intense regulation wards off competition who either don't understand it or can't afford to comply with it. The emphasis needs to shift from paranoia toward the very big, to enabling the very small. Stop trying to reign in Big Blue and instead, take the shackles off Bob's Hardware.

The fact that a ridiculously high percentage of taxes are paid by a ridiculously small portion of the population points out the fact that we need to increase the ranks of the rich. We need to do so by making it easier to move from the bottom to the top, rather than simply trying to make the bottom more comfortable. As we are about to find out, relying on 5% of the people to produce for the rest of us is an unsustainable situation. Put the other 95% in a position to produce by really setting loose the power of the marketplace.

Saturday, October 11, 2008

Next Step? Don't Panic!

World financial markets are in turmoil. The economic future is uncertain to say the least. Our "leaders" seem clueless. What do we do? Well, first and foremost recognize that your biggest enemy is fear. Fear leads to panic and anxiety. Panic and anxiety lead to poor decisions. If you must be emotional, trade your fear for anger. Anger can at least lead to justice. Justice good. Panic bad.

How do you get past the fear and anxiety? One effective technique is to imagine the worst case scenario and accept it as a real possibility. Then, recognize that if that scenario comes to pass, you will deal with it. Work to avoid it, but don't fear it. The best you can do is the best you can do. Success tastes much sweeter when you're well aware that failure is distinct possibility.

The world economy has been fueled largely by money that didn't really exist. That reality is hitting home right now. Governments are trying to perpetuate the fraud, and they'll be somewhat successful among the companies that they view as important. Most of us don't fit the bill. We'll be left to fend for ourselves. This may make you angry, and at some point lead to calls for justice, but the truth is, fending for ourselves is what we should be doing. It would just be nicer if it applied from top to bottom.

There's only one real way to right this situation. Come up with a viable plan to pay your debts. If it can't be done, file the bankruptcy and get the fairy tale off everyone's books so we can get back to dealing with reality. There's no shame in trying and failing, only in not trying. Failure is not the end, it's a new beginning. Your real assets can never be taken away from you. Those are: the wisdom that comes from knowledge and experience, the imagination that leads to new ideas, the drive to do better and the courage to play hurt.

Now for the good news. This is not 1929. Individuals have access to more information and communication than at any time in history, by a long shot. You can choose to sit and wait for the government to save you and make you feel secure, or you can look around at the needs and wants of your family, friends, neighbors and associates and spot opportunity. Capitalism and the entrepreneurial spirit are not dependent on government. They are personal. You choose whether or not to practice them regardless of what the government does. They may change the rules and throw you some curve balls, but they can't stop you from playing.

Don't look back in despair. Don't look forward in fear. Right your ship. Get your bearings and get on with the journey. Whatever your destination, strive to enjoy the ride.

Tuesday, October 7, 2008

Where Does the Economy Go From Here?

Okay, the massive cash infusion through both the bail out plan and the Fed's new lending programs and policies is a done deal. No sense saying it shouldn't be done. It's done. So what happens next?

Well, there's a whole lot more cash in play now. What happens to it depends on government policy. Bad business models and those who loaned money to people with bad business models or unsustainable cash flow situations are still going to fail. There's a lot of short-term pain yet to come. However, if the government simultaneously eases up on taxes and regulation and actually encourages risk taking by increasing potential profit margins, competition will set in for those extra dollars and they will eventually be converted to wealth; new, valuable goods and services. If the government tightens regulation, raises taxes and creates a more hostile business environment, inflation will set it and all that cash will just be devalued to match the available goods and services. As Dan Akroyd said during a Jimmy Carter sketch on Saturday Night Live, "We'll all be millionaires!" Of course the poverty line will be somewhere around $900,000.

It's true, "The only thing we have to fear is, fear itself". If the politicians trust the free market they give lip service to, this downturn will pass in short order. If they react out of panic, things could get ugly.

Monday, October 6, 2008

The health care solution. Are you pondering what I'm pondering?

Ladies and gentleman, I've asked you here today because opportunity is knocking once again. The public is clamoring for affordable health care and the politicians are pining to give to them. Everyone is looking for a system that will enable each participant to contribute $5 and draw out $500 and by golly we're going to give it to them.

First, we'll get legislation passed that requires everyone to purchase health insurance. We don't want to have the government provide the insurance directly. That would look too much like socialism. We've got to dress this thing up so it looks like a free market. We'll have private insurers sell the policies. They'll have to cover everyone, regardless of income or pre-existing condition. The government will provide subsidies to those who can't afford it. In order to reduce the risk to insurance companies we'll set up a Government Supported Private Entity, a Health Care Insurance Funding Authority. We'll give it a catchy name like Hannah Fay.

Hannah will buy up policies from the insurers. The insurers will simply sell policies and administer claims, which will paid by Hannah, through them, to the providers. Hannah will bundle the policies together and sell bonds backed by the premiums to raise operating capital to pay claims and subsidize more low income policies. We'll sell the bonds to a new kind of financial institution, which we will help create: Health Care Investment Banks. These HCIB's will bundle the bonds and sell shares in them. We'll call those Health Care Backed Securities or HCBS's. These HCBS's will be sold to other financial institutions, pension funds, sovereign wealth funds and the like. The risk will be spread so thin, it'll hardly be noticible.

Our roles? Advisors, consultants, investors. Keep away from the cameras. Stay out of the news. I know what you're thinking. This can't possibly work. Well, that depends on your definition of work. There will be Congressional oversight, but don't worry about that. Politicians are elected on emotion. Most of them wouldn't know a proper balance sheet from the supply side of a mule. Just make sure they get their due in contributions. As for the Wall Street boys, the important ones know the game. They'll get out in plenty of time. Their replacements will be lulled in by huge salaries and bonuses. It's kind of like executive hot potato. It'll be many years before anyone figures out the HCBS's aren't worth the paper their printed on and the health care system doesn't actually have any money. I'll have you out well before then.

Alright, we've got work to do. Set up meetings with your respective politicians, activists and friendly media and let's start leaking this idea out there. Remember, don't attach your name to anything. Present it as something you heard from someone else that you think could be worth looking into. Let the camera junkies do the rest. This meeting never took place. Good luck everyone. This could be the greatest thing since Cap and Trade!

Sunday, October 5, 2008

How to Play this Market

Lessons from '29, The New Deal I and II and The Great Society

image from

This is not intended to be a definitive answer to what causes recessions and depressions and what policy ought to be. It is an observation of what the government did and when in terms of spending and corresponding moves in the stock market.

Immediately following the stock market crash of '29, then President Herbert Hoover was of a mind to let the market sort it out for itself. Most believe this was a big mistake, but in his defense, the market had bottomed and begun to recover by the time he left office. Franklin Roosevelt implemented the first New Deal in 1933. This included short-term measures like jobs creation programs, spending on infrastructure, generally getting money in the hands of the masses. The market responded very well to this. The second new deal was implemented in 1935 and 36 and included support for labor unions, the Social Security Act and the Work Progress Administration (a continuation of the jobs programs from the first New Deal). The market responded positively at first, with a big spike in the DJIA, but that was followed on shortly by just as big a sell-off. While still up substantially from 1933, the net gain in the market from '35 - '38 was nil.

Now take a look at the Great Society programs of 1964, introduced by Lyndon Johnson. This is where Medicaid and Medicare came from, as well as increased education funding. While the Vietnam War slowed down the implementation of these programs, spending on them ballooned under both Nixon and Ford. The market remained flatlined from 1964 until 1984 or so when deregulation seemed to finally spark the next big surge upward.

It seems as though putting money in the hands of individuals can actually have a positive effect. Companies must compete for this money and economic activity increases. When the government gives great big checks to specific industry groups, companies or bureaucracies, the numbers may be big, but the level of economic activity doesn't seem to be enhanced. It's essentially moving money from one account to the other and eliminating all the middle men. The problem is, all those middle men are what makes the wheels of this machine move.

Another way to look at it is in terms of something called the Marginal Propensity to Consume. Essentially, how much of each additional dollar of income is one likely to spend or invest? The answer is different depending on your circumstances. If you've gone without a working washing machine for six months and suddenly have a $500 windfall, you're probably going to go buy a new washing machine. If you're already well-to-do and see tough economic times ahead and get a $500 windfall, you'll probably tuck it away. In other words, if you give poor people money in tough economic times, they're more likely to spend it. If you give rich people money in tough economic times, they're more likely to hoard it. If your goal is to promote economic activity, it would seem to make more sense to give a little money to a lot of people than a lot of money to a few people.

The vast majority of new government spending so far is pegged for specific players in a specific industry. Don't look for a quick turnaround in the overall economy. There will no doubt be another round of "stimulus" out of Washington DC after the election. We're likely to have liberals controlling both the House, the Senate and the White House, with a mandate to spend as much as they want to "fix the economy". How this "stimulus" is doled out will be important. If it goes mainly to individuals to spend as they please, it may have a positive effect. If it goes to organizations and programs aimed at providing non-monetary assistance, it's likely to wind up in some big institutions' bank accounts and very little effect on the economy.

Of course I'd much prefer cutting taxes and spending to ballooning the money supply. Eventually, the hoarders will come out and spend. Why? Because for the real players it's not really about the money. It's about the game. If blowing a wad of cash on some crazy, labor intensive idea is what it takes to get the game going again, that's what they'll do. But it's not my call and that's not going to happen. Whichever way the government goes, the market in the short term should be very volatile. I'm going to bet on big swings up and down and try to have the discipline to periodically take some money off the table.

For the casual investor, I'd go with "dollar cost averaging". That is, put the same amount of money into a diversified fund each month over a long period of time. The only way you lose with that strategy is if the economy stays in the tank for decades, in which case your 401k will probably not be your biggest concern anyway.

Saturday, October 4, 2008

Demand Side Economics

What went wrong with the U.S. economy? Was it corrupt politicians? Greedy speculator? Irresponsible consumers? I don't think so. All of those factors are with us all the time, in good times and in bad. I believe this was a major policy mistake. We did an about face from Supply Side policy and turned to Demand Side.

After 9/11 what did the administration appeal to people to do? Go shopping. Later, to increase home ownership, policies were implemented by Congress and the administration, not to decrease the cost of the home, but to make it easier and cheaper to get the money to buy one. When the economy continued to slow, we were all sent checks from the government and told once again, "go shopping". Now, the government has decided to give banks a massive injection of cash so they can more readily loan it to us so we can guessed it, go shopping. All of these things were aimed at increasing consumer spending without any real market stimulus for doing so.

Ronald Reagan was an advocate of Supply Side economics. The idea is to reduce taxes and regulations on producers. Increased profit margins increased competition and spurred innovation. Consumers bought more because new and better products came on the market at lower prices. Demand went up naturally as the supply of things people actually wanted increased, as did value.

Today, the government will decide which businesses are worthy of a bail out and which aren't. The government will decide through subsidy and tax credits, which products it wants you to buy. The government will decide through regulation and mandate what those products will look like and how they will perform. This does not encourage innovation, it encourages compliance. Demand Side policy will only increase debt and decrease the value of the dollar. The federal government will never go broke. They'll just print more money. Interest rates will soar as lenders attempt to stay ahead of inflation. Prices will soar as retailers attempt to stay ahead of interest rates. We should have learned these lessons in the 70's, but obviously we didn't. Policy makers have gone back to the age old, tried and failed method of fixing problems by throwing cash at them.

Thursday, October 2, 2008

The Zuckerman Alternative - to the Bailout

Mort Zuckerman, magazine editor, publisher, and real estate billionaire, suggested on CNBC today that essentially giving away $700 billion by buying securities nobody else wants, is not the only answer.

If the goal is to sustain the system and inject cash flow, why not simply buy preferred shares in the companies that need it? Of course it would dilute the value of the company's stock. Preserving shareholder value isn't supposed to be the concern of the federal government. That's the company's job and they blew it. The taxpayers' interest is only in the infrastructure.

This is similar to what was done with Freddie, Fannie and AIG and similar to the deal Warren Buffet made with Goldman Sachs.

The companies could have the option to buy back the shares at a 10% premium, otherwise, the feds start selling them on the open market in five years (that bit was my idea).

Instead, the senate loaded up the bailout bill with an additional $150 Billion in special interest favors (who's going to notice a few extra hundred bil?). I hope the House kills this monstrosity so that better options, like Zuckerman's can be considered.

Wednesday, October 1, 2008

Bi-Partisan Robbery, Senate Passes Bail Out Bill

A parade of senators, Republican and Democrat are congratulating themselves and each other tonight for passing the $700 billion giveaway to "save the economy". They did throw the common folk a bone in the form of some tax relief. I guess that makes it all okay.

You may be unfamiliar with the meaning of some of the terms and phrases being tossed around in reference to this crisis. Let me clarify some.

"Sub-prime mortgage" - Loans made to people for more than they could possibly pay back, secured by assets that are now worth much less than the loan.

"Mortgage Backed Securities" (MBS) - Essentially, shares of the above mortgages, sold to banks and investment institutions in large bundles.

"The credit markets are clogged" - The banks have no cash. They spent it on these MBS's which had been carried on the balance sheet as "cash equivalents". The problem is, nobody wants to buy them so they aren't really cash equivalents.

"We must free up the credit markets" - We're going to buy these shares of subprime mortgages at a price pulled out of thin air by Henry Paulson.

"We will sell these MBS's back to the open market to redeem the taxpayers' investment" - We're going to sit on these things until the heat is off.

"Doing nothing is not an option" - Doing nothing would cause the markets to take their natural course, exposing the whole convoluted scheme that caused this mess. Politicians would be voted out. Lawsuits would be filed. Voters would be very angry if the truth were to come to light. Best to let it fester for as long as possible.

Yes, Republicans and Democrats have come together in an unprecedented manner to cover their collective behinds. Some voted against the bill, but only after its passage was assured. No member of either party made a serious effort to put a stop to this. I for one will no longer vote for the most competent stooge or the lesser of two evils.

Let me make this absolutely clear for those of you who haven't yet caught on. Your money will be given to banks, so that they can loan it back to you. You will pay your money back to the bank with interest. After the shareholders, employees and execs get their cut, some of the remaining net will be paid back, not to you, but to the government who brokered the transaction. They are, at this moment, on national television praising themselves in the highest terms for pulling this thing off (assuming it passes the House) because they are now 100% convinced that we are indeed, just as stupid as they've always hoped.

A Kinder Gentler Bailout - Why it's important that this one fail too

The argument among pundits, the administration and Wall Street is that if we do nothing, there will be dire consequences. Therefore, although they all say they hate to do it, they favor and insist on the government bail out. To make it a bit more palatable this time around, they've added increased FDIC insurance and some tax cuts. While the FDIC insurance and the tax cuts are good ideas on their own, the rest of the bill is still bunk.

The government argues that they'll make all their money back and then some. If that were true these securities would not be "toxic waste" on the banks balance sheets. The government is claiming that they, professional bureaucrats, are better suited to value these things than lifelong professional bankers. We have not been told the nature of the "mortgage backed securities". If they are backed by a random hodge-podge of mortgages, I'd say they're probably right. But if that were the case, there would be a market for them. They are obviously backed by mortgages that nobody expects to get paid. As for the underlying real estate, again: which real estate? I can tell you as someone who used to fix houses after people had been evicted, the cost of repossessing and fixing them when added to the loan balance can be far higher than the appraised value of the home, making the mortgage absolutely worthless.

The government also claims that credit will dry up if they don't "inject capital" (give away your money) to the system. In a sense that's true. A good portion of this economy has been built on people buying things they can't afford. That is in danger of coming to an end, or at least being severely curtailed. The economic growth figures aren't going to look so good for a while. People will have to work with their actual income instead of what they expect to earn over the next ten years.

It's important that we allow the market to play this one out for the simple reason that we have to see what happened. We have to unravel this thing so we can learn from the mistakes. It will not cause armageddon, we will not go back to the stone age. I've been flat broke before, it's not as bad as it's cracked up to be. Nobody takes you out back and shoots you for making honest financial bad calls. You just start again and try to be smarter about it going forward.

I don't know if Congress will have the courage to do the right thing. I hope they do. Sweeping the systemic problems under the rug just preserves the mess for another day.

Sunday, September 28, 2008

The Deed is Done. Bailout Agreement Reached

Well, it looked as though Congressional Republicans were going to step up and stand on principal, but as it turned out, they moved a couple of commas around and pretended they looked after your interests. The bailout agreement has been reached and $700 billion tax dollars are about to be given away.

Of course, the healthy banks aren't going to participate. Better to absorb the loss than face the tax and equity consequences of participating in this rip off. The government will get bogus paper, issued by the now government owned Freddie and Fannie, by giving cash to the most incompetent lenders in the market. One of the stipulations in the bill is that the government renegotiate the loans that back this paper. In other words, they've been ordered to take steps to immediately devalue the investment they just made. If you are a mortgage holder and are not behind, you keep the deal you have. If you are in default, you get to negotiate a better deal. What do think that will do to the mortgage market? The feds get warrants in the companies that do participate (again, the weakest in the industry) and they'll have you believe we're all going to come out ahead on this venture.

They may be able to hide the losses since they now will own both the issuing authority and the bogus paper they issued, but you will NEVER see a return on this investment. Recall the Savings and Loan bailout was supposed to cost us around 50 billion dollars. In the end it cost 150 billion and that involved hard assets. There are many more middle men in this deal. Lawyers are going to make money. Taxpayers are going to get squat.

It was all designed to hide the fact that the government essentially ordered the give away of homes. Obama said today that the whole mess "started on Wall Street". Wrong. Wall Street is where it ended. They were the patsies intended to take the fall from the beginning. It started in DC. Now they're all laughing, all the way to the re-election campaign. They not only got away with it. They're going to be hailed as heroes for it.

Saturday, September 27, 2008

Help! We're Being Robbed!

The proposed bail out plan is allegedly making progress this weekend. Leaders of both parties have stated they expect a deal to be voted on Sunday or Monday.

The problem stems from Mortgage Backed Securities and Credit Default Swaps. You don't have to know exactly what these things are. Here's a great analogy:

You own a business. Someone comes to you with what they claim is a great product. You buy the pitch. In fact, you like it so much you borrow against your business to buy a whole warehouse full of this stuff. As it turns out, your customers aren't the least bit interested in what you've just acquired. You have nobody to sell them to. You can't pay back the money you borrowed to purchase the garbage. Sure the garbage has some intrinsic value. The material it's made of has some value if it's recylcable, maybe a penny on the dollar or less.

Instead of allowing nature to take its course, whereby your horrendous error in judgment causes your business to fail, the government steps in and offers to buy your worthless inventory for something like 75 cents on the dollar, with taxpayer money.

The above scenario would never happen in real life. The government doesn't give a damn about the small business, the engine and the real foundation of this economy. They will do exactly what I've described above for the banking community that's currently putting the squeeze on you because the government was complicit in pushing the lousy product that's now on their books.

They will justify it by saying that after they bail out the banks who made the aggregious errors in judgment, these banks will suddenly loosen up credit, lower interest rates and offer you access to cheap money. Do you really believe that?

We're being robbed. It's a bi-partisan robbery. I will not vote for anyone who in any way supports this fraud. Of course that means in the presidential election I'll either be voting for a third party or no one at all. Neither candidate has had the intestinal fortitude to even attempt to put a stop to this.

If this country is to preserve free enterprise, we the people must get angry. The only way to get the stink of fascism off ourselves from the passage of this bill is to toss out anyone who had anything to do with it. Most politicians, including both presidential candidates are completely divorced from your interests. They must be reminded who is really in charge here.

Thursday, September 25, 2008

Unwinding the Mortgage Crisis Scheme

We were told last Thursday that the financial market were days away from collapse. That Congress must immediately pass a $700 Billion buy out plan or we'd all be doomed. That was over a week ago. There has been no such plan passed and there wont be. The financial markets are no doubt headed much lower in the short term, but we'll get over it.

You have to ask yourself: "Why was there such immediate bi-partisan support and such urgency in trying to push this deal through?" The powers that be would have you believe that it's all too complicated for the average citizen to understand. But as the information seeps out, it's becoming evident that it really isn't that complicated.

Here's the story so far:

Back in the 90's liberal members of the Congressional banking committees and the administration decided that it was not fair to demand things like ID, proof of citizenship, or even proof of income from borrowers in "disadvantaged" neighborhoods. They didn't just encourage banks to lend to people who couldn't afford it, they threatened them with lawsuits and being labeled bigots if they didn't make more money available to the poor. To alleviate the risk, Freddie Mac and Fannie Mae (government created private entities) were permitted to buy up these risky loans, combine them in kind of a mutual fund an sell shares. These are the now infamous "mortgage backed securities" that many banks are holding and are unable to sell. The new system encouraged even more liberal lending. Brokers and lenders could initiate deals, make a quick buck and sell them to Freddie and Fannie. The new name of the game was volume. Originate and sell as many mortgages as you can. Odds are most of them will be okay, and since the bad ones will be bundled with lots of good ones, the theory was, everything will be hunky dory. Mortgages were no longer long term investments, they were day trading fodder.

When the house of cards came crashing down and the social engineering experiment failed, Fannie and Freddie were bought out by the feds, but there was still that pesky "mortgage backed securities" problem to deal with. If only the federal government could get hold of those too, they'd have both the mortgages and the securities tied to them on their books. It would be years before anyone discovered how little they were actually worth and by that time, all the current players would be long gone. "I know, let's tell them the world will come to an end if we aren't allowed to buy them." they thought. The plan was put into motion.

But Congress couldn't just rubber stamp the deal. There's an election in 40 days. They have to put on a show for their constituents. "Let's debate it for a couple of days, move a few commas and announce a bi-partisan rescue package." That's when the wheels came off. It turns out, the general public wasn't nearly as frightened of the collapse of the banks in question as the administration and Congress was. To make matters worse, some Republican lawmakers came out of the capitalist closets they've been hiding in for the last couple of decades and said not just no but HELL NO! While pundits like ORielly declared, "There's no alternative. What do we do, just let them go down?" Others answered "Yes, that's exactly what we should do."

This play isn't over. Maybe the bad guys will win this one, but I'm becoming more hopeful that they wont. Lying, cheating and stealing is not capitalism, it's just lying, cheating and stealing. It should be brought to light and dealt with. There will be players left standing and they're going to get a lot of great assets for a song and a dance. There is no need to panic. We just need to take out the garbage. The government is trying to dump it on you. A free, fair and transparent market, if left to it's own devices, will drop it squarely where it belongs.

JP Morgan Chase, Washington Mutual, No Bailout Necessary

Washington Mutual was seized by the FDIC in the largest bank failure to date. JP Morgan Chase quickly swooped in and purchased the company's banking assets. As a result, the FDIC will not have to dip into its funds to cover any accounts. As for Chase

"JPMorgan Chase said the WaMu acquisition would add 50 cents per share to its earnings in 2009, and said it expects to have pretax merger costs of approximately $1.5 billion while achieving pretax savings of approximately $1.5 billion by 2010."----AP

Chase also picked up some of Bear Sterns assets when that company went down. Of course there were losers in the WaMu deal. Chase didn't buy everything. Private equity investors lost their shirts, but that's life in the fast lane. Contrary to the rhetoric in DC, Main Street came out just fine.

This illustrates why the feds need to step back and let this scenario take its natural course. Poor investment decisions will result in huge losses and once in a lifetime opportunities. The market will right itself.


No Alternative? Really?

Members and supporters of both parties have agreed that a bail out of some kind is absolutely necessary. Why? Without it they say we'll have a failure of the financial system, bank failures, recession or even depression. They say this as if facing all of those things is out of the question.

Many of our founding fathers were told that if they did not support the crown they would be imprisoned or killed, their property confiscated and their families imprisoned or killed. They stuck to their principals and all of the above came about as they knew it would. All we're being faced with is financial difficulty. Are we really ready to dispense with free markets to avoid some financial pain?

John Stassel got it right tonight on The Factor when he said "Crisis Favors the State". They're counting on your fear of hardship to enable them to sieze more control of this country's resources and its people.

Call, write, email your representatives. Do not let this happen. We can take a punch. They can't. This is not about protecting you. It's about protecting themselves. They know that the real result of a financial meltdown is that the American people will dust themselves off, run the incumbents out of town on a rail, and rebuild. That's the terror you see in the eyes of the power brokers in Washington DC. I'm not seeing it in the eyes of public. Only anger, disgust, frustration.

The market has not failed us, the government has. Fannie and Freddie got this mess rolling. Guess who invented them? I'll give you a hint. It wasn't the free market.

Gingrich to the Rescue?

Newt Gingrich called the bail out plan, "the worst economic plan I've seen in all my years in public life" and "socialism at its worst" . He added that if credit worthy banks need to borrow cash from the treasury, that's fine, but for the government to buy their bad paper at make believe prices is nuts.

Many in the public at large have expressed the same sentiment I've expressed here that if preserving the integrity of the system means that banks will fail and we'll face hard economic times, so be it. The vast majority of the fear out there is among the $4,000 suit crowd. The public is uneasy. The elite are petrified. We know the consequences of not bailing out Wall Street. We're just not as scared of it as they are.

Hopefully, Gingrich will supply some support to lawmakers who want to oppose this deal. McCain may have bolstered the opposition as well, inadvertantly. Obama's camp can't afford for McCain's decision to suspend his campaign and go to Washinton to result in a bi-partisan deal that provides even temporary stability to the markets. Therefore, Democrats are likely to oppose anything that has McCain's name on it. In this case, gridlock is what's called for.

The absolute panic I've seen in the faces and voices of Benenke, Paulson, Congress and President Bush may be an indication that they need to forestall the inevitable for a few more months, so that the new guys can take the blame. The truth is, calamity in the financial sector isn't a future possibility. It's already here. It just hasn't come out from behind the curtain yet.

Wednesday, September 24, 2008

What the President Didn't Say

President Bush addressed the nation tonight and in 12 minutes, laid out the causes of the financial calamity the market is facing and the dire consequences if we don't give the culprits $700 Billion tax payer dollars. But he assured the public, that the FDIC has been insuring bank depositers for over 75 years and nobody has ever lost a dime in an insured account (insured up to $100,000) and that noone will lose a dime in an insured account in the future. That's technically true. What he didn't mention was that if the government has to pay claims on thousands or millions of accounts, the inflation rate will skyrocket and your $100,000 will buy you a used car if you act fast. Why? Because your deposited money didn't disappear. It's just no longer in the hands of the people you entrusted to keep it safe for you and there's no legal way to get it back. The recipients were suppliers, employees, brokers, other financial institutions, etc. The bank just spent and invested more money that it had, lots more. Reimbursing depositers from the federal treasury will balloon the money supply. Supply goes up, value goes down.

So here's the essence of the proposed solution: You go to work and make money. The government takes a chunk of your money for its own expenses and now will give a big chunk to the banking community. The banks need this money so they can loan it to you. After all, you're going to need it. Taxes, inflation and interest rates are all likely about to go way up. Of course you'll be paying interest on the money, so the banks get healthy and everybody's happy. Let's review. More of your money will be taken from you, given to somebody else, who will loan it to you for a fee. This is the system we're supposed to be upset about collapsing.

If the government were really primarily concerned with protecting the taxpayer and not the infrastructure that enables the ponzi scheme, they could simply give every man, woman and child in the country $2,000 in return for a national sales tax of say, 7% (24% if you throw in the elimination of all other taxes). In other words, instead of giving the money to someone else to loan to us. Just give us the money, cut out the middle man, we'll even pay it back with interest.

I heard Joe Kernan on CNBC empathizing with a poor former CEO who's net worth went from hundreds of millions to a mere 10 million. I have no qualm with being filthy rich. If you come by it honestly, more power to you. But when I lose money due to bad luck or poor judgment, nobody from the media or the government shows up to ask if they can help, and I don't expect them to. Believe it or not, one can scrape by on $10 million dollars in this country, maybe even a little less. Let the chips fall where they may. Learn what you can. Move on. If we have to endure a prolonged recession or even depression to preserve the principals of capitalism and individual accountability, let's do it. It'll be well worth the price.

The Goldman Standard

Wall Street was at least momentarily reassured today by Warren Buffet's $5 billion investment in Goldman Sachs. He also has warrants for the purchase of $5 billion more over the next 5 years.

Wall Street seldom gets it right on the knee jerk reaction. A closer look at the deal reveals a troubling precedent. Buffet got perpetual preferred stock yielding a whopping 10% return. Goldman can buy him out at some point, but must pay a 10% premium in order to do so. His warrants give him the right to purchase more stock at $115/share. That's about a 10% premium, even over today's price.

In effect, Goldman, and some of the most experienced financial brains on Wall Street, have accepted an enormous, long term financing deal at 10% interest. If this is the current market rate, that does not bode well for interest rates or inflation. Goldman is betting both are going much higher.

Paulson Determined to Overpay for Bailout

Treasury secretary Henry Paulson in explaining the bailout plan to the House Banking Committee seemed to suggest that he feels it's imperative for the government to overpay for the mortgaged backed paper that is weighing down financial institutions.

His reasoning is that the deal must be sweet enough to entice widespread participation in order to be successful. Warren Buffet voiced some disagreement with this sentiment on an interview with CNBC this morning. He suggested the government could actually make good money on this deal if it were to devise a mechanism to discover and pay actual market prices rather than "hold to maturity" prices. He said a good approach would be to buy a few of these securities and then turn around and sell them on the open market before making further purchases. That would give them a much better idea where fair market value might be for these things.

It seems to me, that in a reverse auction situation, less participation would actually work in favor of troubled banks. The fewer bidders, the better price they could demand. Besides, if a bank is healthy enough to turn down 60 cents on the dollar, why do they need a bail out? If they think they can do better in the open market, let them go to the open market.

The government's obligation is to the depositers they have committed to insure, not to the preservation of any particular corporate structure or entity. Liquidity will come back when the market decides it makes sense. I trust the market's judgment much more than any Washington committee.

Good decisions seldom come from an atmosphere of fear and panic. The fact that Bernenke and Paulson seem to be attempting to scare Congress into action indicates to me that doing nothing might, in the long run, be the better way to go.

Friday, September 19, 2008

Federal Government Bails Out Wall Street - What's Next?

It's going to be a historic day on Wall Street. The government of what used to be capitalisms home, now owns three of the biggest financial corporations in the world and has just announced their intention to buy the troubled mortgage backed securities from more banks. The SEC has also announced a ban on short selling for 799 publicly traded banks. All this on an options expiration Friday.

Of course stocks are going to rally, to put it mildly. Everything's great now, right? Well, unless you're an options trader, hedge fund manager or in anyway connected to the above. There will be blood on the streets in the options market today. Hedge funds will be devestated. Guess who owns a lot of hedge fund securities? You guessed it, the banks. Also, the folks who made their living selling these 799 securities short aren't going to retire. They're going to take a few days, do some homework and start shorting related securities that haven't been banned.

The joy will be short lived, and when things start going south next week, what are the feds going to do? Ban all short selling? Ban selling entirely? We are in a liquidity crisis and the government just made the market less liquid. It may take a little while for the market to realize this, but when it does, it's going to be ugly.

Monday, September 15, 2008

The Government is playing Russian Roulette with the Market

Bear Sterns was too big to fail. Lehman, evidently wasn't. Taxpayers are now on the hook for Fannie and Freddie's loans. They may soon be on the hook for AIG's insurance claims. NY State has relaxed regulations to allow AIG to borrow from its subsidiaries to cover operational expenses. If CEO's made these kinds of decisions on their own, they be put under the jail.

The elephant in the room is total lack of consistency. It smells like panic. While thousands of small businesses around the country are making it day to day, the billionaires are changing the rules of the game as it suits them.

Maybe they'll dodge some bullets and the market will recover. Everything will be hunky dorey. Maybe things get worse. Companies fail. Claims go unpaid. Lawsuits get filed, perhaps even criminal cases against government officials who broke their own rules because they didn't know what else to do.

It may have been better to let the big boys fail and get on with the business of cleaning up the mess. Now the government has set and broken so many precedents, it's not clear to anyone anymore exactly how our financial system works.

I've got nothing against multi-billionaires. I'd like to be one myself someday. But why is it okay for Main Street to roll with the punches, but not for Wall Street? This is not about class warfare, it's about fairness and consistency and the equal application of the law. I'm not suggesting Main Street get bailed out. I'm suggesting Wall Street live with the consequences of their actions and judgments just like the rest of us.

Alleged capitalists do the cause no favors when they throw out the rule book for a select few. This behavior, this fear of failure only bolsters the case of the collectivists. The government's function is to enable free and fair trade, not to micro-manage it. So our 401K's take a beating. The market crashes. The dollar plummets. As long as it's transparent and just, we'll get over it. Americans are very resilient. Stability is over-rated. North Korea is stable.

Saturday, August 30, 2008

Why This May Be a Great Time to Buy a Business

Times are challenging. Consumer confidence is down. Credit is tight. You'd have to be crazy to buy a business in this environment right? Maybe not.

First, there are a few preconditions: Make sure you have enough cash on hand to do effective marketing. One of the most common mistakes of new business owners is to grossly underestimate the need to advertise. Even loyal customers need to be reminded of your existance on a regular basis, and new customers are always essential. Second, find something you're really interested in. You're going to be immersing yourself in it. You don't have to be an expert in the field. I know plenty of people who have successfully purchased businesses in fields they had little or no experience in, but you have to like what you're doing. Third, if you're going to buy an existing business, get one with a good reputation and location. The main advantage of buying rather than starting is to take advantage of an existing client base.

Why is now a good time? Recessions come and go. Seasoned business veterans have learned how to deal with them. But, it's hard work. Margins are lower, budgets are lower. Basically, you have to work your tail off for limited return until the economy recovers. People who were considering retiring in a few years anyway may well decide now is the time. Real estate values are lower and lower sales figures in recent months may justify a bargain purchasing price. The name of the game in business is buy low, sell high, but few people actually practice it. Most people wait until the economy is humming along nicely to jump on the bandwagon, setting themselves up for a rude awakening when the inevitable slowdown arrives. Getting in at the bottom of the cycle can help you develop efficiencies and good cash flow discipline habits right off the bat.

Take advantage of the seller's experience. You may have some great new ideas you want to implement. Some may work, some may not, but somebody who has kept a business running for decades through good times and bad has valuable insights and wisdom to share. Try to make at least a few weeks of consultation part of the package.

If you're shopping for a business of your own, don't wait until things turn around. You'll only be adding to the purchase price. If you're going to be in it for the long haul, you'll need to learn how to operate in a sluggish environment anyway. If you have the working capital and the drive, this could be a great time to get to it.

Tuesday, August 12, 2008

What Constitutes a Right in a free society?

The term "right" gets thrown around and misused a lot in our society. Questions frequently come up, such as "Is health care a right?" "Is education a right?" It may seem a tough question to answer, but the litmus test for rights is really quite simple.

Nobody has a right to another person, their time, their labor, or their property. A legitimate right is something one can have without any action being taken by another. In fact, in most cases rights are simply prohibitions on stopping you from doing something. You can excercise the right to free speech, free association, freedom of worship, without any action being taken on my part.

Education, health care, food, shelter, etc, are all nice things to have, but gauranteeing them for you would require that someone else provide them. Slavery is inconsistent with a free society. Therefore any product or service that requires the labor of another cannot be a "right".

You have the right to bear arms. You don't have a right to handgun. (you have to buy your own). You have the right to free speech. You do not have the right to an audience or a forum. You have the right to free assembly. You do not have a right to free meeting space. You have the right to freedom of religion. Society does not owe you a church.

Although we like to think of rights as being "inalienable" and something we are "endowed with by our creator", they really mean nothing unless/until we as a society, recognize and enforce them. We could make declarations that everyone has a right to health care, education, housing, food and other basic needs. Doing so would require that we also compel someone to provide the money, the resources, the time, the labor and everything that goes into producing and distributing these "rights". Naturally, this would require that the production and distribution of such goods and services be mandated, overseen and regulated by the government. Call such a society whatever you want, but you certainly couldn't call it "free".

Monday, August 4, 2008

Remote Storage DVR Decision - The Courts Got One Right

There are two extremes in the intellectual property rights arena. One that believes all recorded media should be free and one that believes that every time you hum a song you should pay the recording industry a royalty. Common sense got lost in the shuffle.

There is hope however. A US appeals court overturned a lower court decision barring Cablevision from developing a system that would allow users to record video from their TV on Cablevision servers. Content providers argued that it would amount to uncompensated rebroadcast of their material. The court rightly concluded that since the consumer decides what to record, when to record it and when and if to play it again, Cablevision isn't rebroadcasting anything. They're just selling storage.

We've actually taken some giant steps backward in the recorded media arena as far as consumer rights. In the good old days, before cd's and iPods and dvd's you could record just about anything you wanted and play it back when you wanted. You could record songs off the radio on your cassette tape and you didn't have to register the five tape players you might want to play it on with Steve Jobs. Incidently, if you're looking to break the chains of ITunes, Amazon now offers unrestricted mp3's at the same price.

Another, perhaps bigger concern in the industry is that people wont watch the commercials. The standard model of showing bits of content interrupted by commercials works very well. But it is not a constitutionally protected business model. Let the market find a new one. Restricting innovation to preserve the current one is counter-productive.

As for the artists, if you don't believe you're being fairly compensated for what you produce, don't produce it. When I buy a hammer, I don't pay an extra fee if I loan it to my neighbor, I'm not restricted as to how many times I get to use it, and I don't have to tell you where I'm going to store it.

There is lots of potential in the remote storage market. Artistic content is the tip of the iceberg. File storage and remote applications are the logical progression for the mass market. Google is one of the few companies that seems to understand that the future of technology is in enabling information flow, not restricting it.

Here's a hint for those who still don't get it. A typical song download costs 69-99 cents. Many companies will pay several times that per click for traffic to their sites. What if the song was free, but you had to go to an advertiser's site to download it. Hmmmm?

This case will likely wind up in the Supreme Court. Nothing is more counter to a free society and free markets than the restriction of information flow. There's more at play here than whether or not Miley Cyrus makes another 20 million dollars this year. Does a product provider or the government have the right to tell you how, when and where you're going to use the product? Hitler and Mousellini seemed to think so.

Wednesday, July 30, 2008

The Health Care House of Cards

I recently saw an estimate that health care costs are expected to rise at a rate of 10% per year for at least the next two years. The reason is simple. We have decided that everyone should have a right to health care. When a new technology, drug, treatment or aid comes out that can help people, they should have it, regardless of the cost. Of course prices are going to continue to rise. This only accelerates the push to have the government cover people who can't afford insurance. That number should grow exponentially under the current system.

At a 10% per year increase, 20 years from now, family insurance coverage would cost something in the neighborhood of $80,000 per year. Obviously this is not sustainable. Something has to give. You can cap prices and thereby halt innovation and invention, or you can change the system to where the receiver of the service pays at least a high enough percentage of the cost that they have some incentive to seek value. Right now, the incentive is to spend as much as you can. Otherwise you feel like a chump for paying all those premiums for other people's health care.

One way or another, the clock is ticking on our health care system. For better or for worse it's going to look very different in 2028.

Tuesday, July 22, 2008

The Upside of Foreign Oil

Our dependence on foreign oil has been pointed to as a national security concern, and correctly so. Our economy is dangerously vulnerable to policy decisions of other governments.

T. Boone Pickens pointed out that our purchase of foreign oil at these prices represents the biggest transfer of wealth in the planet's history. That's true, but not all bad. It's not something we want to perpetuate, but there are positives. While some are spending oil money on weapons and thugs, many are building resorts, theme parks and diversifying their economies. What they are going to wind up with is quite a bit to lose.

Kuwait, Jordan, Bahrain, UAE, Saudi and others in the region don't want to see their new found gems blown up by a madman on a mission. Tolerance for terrorism is inversely proportional to an area's wealth and the extent to which the average Joe (or Omar) benefits from it.

Fundamentally, a highly regulated market, controlled by state cartels and a group of companies kept exclusive through various barriers to entry is a bad situation and we should seek to inject free market forces into energy. But middle eastern countries acquiring wealth, in and of itself, is not necessarily dangerous. If the wealth is put to productive use it could actually help stabilize the region and save us a bundle in the long term.

AlGore's 10 year proclamation may be naive to say the least, but oil does have a limited shelf life. Not necessarily because we'll run out, but because the masses want something else and eventually the market's going to give it to them. The wiser governments in the middle east recognize that and are working toward reducing their own dependence on oil revenues. Those who do not are fools, and you know what they say about a fool and his money.

Government Action on the Economy

There's a lot of hand wringing and finger pointing going on over the state of the economy. Housing is still in trouble as is the banking sector, and business is generally slow across the board.

While it is time for the powers that be to take a good look at what they do and how it effects the markets, they should take some cues from history.

It will be a while before the events of the last few years and the coming couple of years will be carefully and more objectively analyzed. There are still aspects of the 1929 crash and the Great Depression that are vigorously debated today. Still there are a few things to remember.

You seldom see an analysis that says, the thing that pulled us out of the downturn was increased government regulation, or higher taxation, or restricting trade. There's a problem, maybe several, but I'll bet a dollar it has to do with the government trying to control too much, not too little.

I hope government officials can resist the temptation to grab headlines by offering more controls. Freedom is what fuels this train. What we need now is more fuel.

Friday, July 18, 2008

Salmonela Tomato Scare - An abundance of government

About 1200 people across the country reported getting sick due to the recent salmonela outbreak. The Food and Drug Administration, out of an "abundance of caution" approach, pointed the finger at tomatos. Not surprisingly, tomato sales plummeted. So far, it's estimated that the tomato industry is out 100 million dollars. That does not include others in the supply chain; truckers, retailers, restaraunt owners.

The estimate of small businesses that will close due to the scare is already in the hundreds and may end up in the thousands. The FDA later said that maybe it wasn't the tomatos. It might be jalepeno peppers or avacados. I guess they figured that misery would like a little company.

Today the FDA has cleared tomatos and has admitted they have no idea where the outbreak came from. The "abundance of caution" approach is really a "cover your butt" approach. It exists in any large organization where it's better to take a wild guess than to admit that you don't know.

If the FDA had simply been honest and said "There's been a salmonela outbreak. We're still unsure of the cause. We'll keep you posted." There would not have been a single additional illness, since they were giving erroneous advice in the first place, and at least hundreds of small businesses would not have been financially destroyed.

Americans want quick and decisive reaction to problems that are the legitimate concern of the government. They also want competence. That includes the wisdom to know that you don't have enough information to take a particular action, no matter how it will play with the public. When action is taken based on deliberate application of logic and reason to established facts, that's competence. When action is taken because one feels it's time to take an action, any action, that's panic.

Wednesday, July 16, 2008

It's bumpy at the bottom

I wont make a call that the economy or the stock market is ready to surge tomorrow, but the current atmosphere looks like a bottom. The bottom is not a flat line however. Look for stocks to trade wildly from one end of a range to another, as well as commodities, with stocks making higher highs and lower lows while commodities do the reverse.

What's different now from last month? Earnings are coming in stronger than expected. Oil use is dropping in the world's biggest market. The president lifted the executive order banning offshore drilling, the public is overwhelmingly in favor of more drilling in addition to alternatives, T. Boone Pickens even put forward his own energy plan.

The fed reacted quickly and decisively to the current downturn. While you may debate the actions taken, the problem was quickly acknowledged and dealt with. Stimulus checks were approved early on. Again, even if you don't agree with the method, the fact that the government was able to react so quickly to a downturn is a notable achievement. The government managed to largely stay out of the housing market. They did put systems in place for borrowers and lenders to communicate and negotiate more directly and efficiently, but did not take control.

Good news broke out. In Iraq, we may be ready to bring home as many as 100,000 troops by Spring (although 30,000 may wind up in Afghanistan, still a good net draw-down). Iran has been rattling its sabre, but behind the scenes, seems ready to deal. Oil inventories are up, consumption is down, new fields have been discovered and new technology is bringing new options online. We may not all agree on what specific action we take from here, but one thing is clear: Americans are tired of being sick, and sick of being tired. We will not sit still and simply let the world "happen" to us.

The US is poised to recover much more quickly than other parts of the world. It seems that Europe and Asia are only now beginning to feel the pain. Transparency makes all the difference. The US took its medicine at the first sign of symptoms. Interest rates came down, despite a weak dollar, banks wrote off bad debt and tightened credit requirements. In other countries, mistakes and short-comings are often covered up. Bad debt may remain on the books for years. If you don't acknowledge a problem, you can't adapt for it.

The pain may not be over, but I think the hemorraging has been contained. A lot of people lost a lot of wealth and assets, but this is America. We dust ourselves off and do it again. Hopefully a bit better prepared for the next, inevitable bumpy patch.

Tuesday, July 8, 2008

Remaking the Housing Market

The housing market is in the tank. But it's not due to lack of demand. In fact, the number of homes sold on an annual basis has fallen below the growth in the number of households. Something's gotta give.

Lenders, in general, are not in a position to loosen up just yet and most home buyers aren't walking around with $200K in their pocket. So how do you get the deal done?

First, look at what it is the home buyer is really shopping for. Why do people buy as opposed to rent? The number one reason is predictability. It's not "ownership", since, as many have discovered, if you have a mortgage, you don't own it. However, buying can give you a fixed monthly payment for a long time and as long as you make your payments, nobody can tell you to leave.

What if you worked those features into a rental or lease deal? Forget about what's standard and think about giving the shopper what they're looking for while generating good cash flow for yourself. Don't wait for the banks to get healthy. Get on with business.

Here's an example. I have a house that would normally result in a 30 year fixed rate payment or monthly rental rate of about $1000. For many would-be home buyers, making the payment is not the issue at the moment. Getting the loan is. They don't want to rent, because they don't like the prospect of renewing a lease every 3-5 years. What if they had an open-ended lease option at a fixed rate? You offer to rent them the property at $1100/month for as long as they'd like. The lease could only be terminated on your end for lack of payment or some kind of criminal behavior. In any case, as long as the customer continued to make payments in full and on time, the rate remains the same and they can't be asked to leave.

A minimum term would be in order. Say 12 months, with 60 day notification of intent to move. Details could vary (non-transferrable, no sub-letting, etc), but the general idea is giving the renter predictability and security, while still having the ability to move if/when it suits them as opposed to when their lease is up. This may seem like a big risk on the part of the owner, but in reality, people tend to move every 5-7 years anyway, so you wont necessarily be locked into a below market deal for an extended period of time. Having several rental properties dilutes that risk even more.

It's similar to "rent controlled" properties except that because it's not a government program, you could tailor it to make sense from your perspective as well as the renters, and tweak it from deal to deal. One thing you've gotta notice about rent controlled properties: they're never empty.

There is housing available. There is demand for housing. When the institutionalized, generally accepted practices aren't doing the job of putting the two together, think of another way.

Friday, July 4, 2008

Happy Birthday America

Tis the season to reflect on what it means to be an American. What is it we’re so proud of? What makes this country unique in the world?

Is it our “shared values”? That hardly seems possible since we so often and so vehemently disagree on so many of them. Is it capitalism, democracy? No, those are great things, but not unique to America.

So what can we point to and say “That’s what being an American is all about.” I would submit that America’s greatest asset is not its capacity to induce conformity to a common way of thinking, but its capacity to enable hundreds of millions of individuals with a wide variety of opinions, viewpoints, perspectives and values to live, work and play together in relative peace. Our uniquely American common value is the recognition that so long as we agree to a few fundamentals rules of engagement among individuals, we don’t need to all have the same values.

When I see political opponents going at it tooth and nail one minute and making fun of themselves and each other the next, that’s America. When I look around the grocery store and see whites, blacks, hispanics, asians, and arabs browsing and greeting each other and nobody’s throwing rocks or blowing anything up, that’s America. When I’m at a social gathering and an openly gay person is debating a fundamentalist Christian about gay rights and they agree to disagree just before moving on to discussion of the Bronco’s prospects for next year, that’s America.

In other countries around the world discontent and dissent are expressed with violence and a seeming urgency that if one group’s view doesn’t win out over the other group’s view, life as we know it will come to an end. The emphasis is on the group, whether it be a political party, a religion an ethnicity or some other entitity that has been raised above the individual.

What has made the American experiment a success is the recognition that the core of independence, the foundation of freedom, is the individual. That doesn’t mean we all agree with each other. It doesn’t mean we all accept the validity of other’s choices. In fact the word “tolerance” has become widely misused and misunderstood. If you agree with or accept something, you’re not tolerating it. When you disagree with something or someone, but allow them to be as wrong as they want to be so long as they do you no harm, that’s tolerance.

It’s an odd dynamic. We are a diverse group held together by the will to preserve our individuality. That’s what makes us strong. That’s America. That’s what our men and women in uniform put themselves in harm’s way to protect and preserve every day.

I hope we never lose sight of that. Happy Independence Day!