Tomorrow is primary election day in Colorado. The turnout is very high, and I am happy to see that.
There are 3 finance-related issues on my mind this election cycle:
- Fiscal discipline.
- Treasurer races. How does Colorado invest for pensions?
- Taxes. How does Colorado structure its tax code? Especially sales taxes and the internet.
These are the financial investment issues on my mind. What are yours?
Today the House is voting on the next round of health legislation. Today I pose a simple question. Can we afford it?
My belief is that it will be very expensive. It won’t quite break the bank, but it will result in significantly increased taxes. This in turn will be another weight dragging on the US economy. And it will be politically impossible to unload this new burden.
Today, I fear, may be the next step in ensnaring the US economic colossus. As one person amongst millions who benefits from a powerful but sagging US economy, I am sad to see such a rapid and untested scheme.
Why not a slower more thoughtful path that tests a variety of approaches in a variety of states?
I sigh thinking it is likely too late, perhaps, for such questions. Pragmatism is a sad casualty of expediency.
So it is with a sad heart that I predict another severe wound will be inflicted on our economy. Nonetheless I cling onto a faint, faint hope. I will be watching and hoping as the vote presses on tonight. Good luck America.
Its been roughly a 9 months since the $787+ Billion emergency stimulus bill was enacted. With unemployment hitting 9.8%, I’m not feeling very stimulated. When it was enacted unemployment was closer to 7.6%. I feel vindicated that I was right in my opposition, but disappointed that that is the best Obama and Congress could come up with.
I’ve been a capitalist from a very young age. I had a paper route when I was 11 years old and a bank account even longer. I’d save up my earnings from allowance and odd jobs to buy things big things… a pellet gun or even an ATV.
I’ve worked either a “real job” or summer job since I was 16. I’ve degreased deep fat fry filters, changed industrial light bulbs and ballasts, cleaned up manure, supervised inmates, helped survey roads and building sites, painted walls, and written software. All that just and more in high school and college.
When I finally got a “real job” (e.g. one that utilized my four-year degree) I was taken aback by the paltriness of my first paycheck. OMG, I’ve paid taxes on $5- to $12-dollar- an-hour jobs, but suddenly taking home only 60 percent of my salary. Not all of that missing 40% was taxes. Some was medical and dental insurance premiums. But between state, federal, Social Security and Medicare 30% of my check was just — POOF! — gone.
Once I got done with all the swearing, months later, I started to investigate where all my money was going. On the state level it was pretty obvious. Schools, colleges, roads, infrastructure, police, fire dept., etc. Actually the state stuff all seemed pretty reasonable.
At the federal level not so much. What do you mean a big part of Social Security dollars aren’t going to recipients nor are they being invested either? Its being spent on other stuff? Other than the Interstate system, National Parks, and defense where do I get squat that actually helps me or any of us working folks?! Ah, but I digress.
Capitalism has been getting some flack in the press and the political circuit the last several years. There is even talk about the failure of the capitalist system during the “Great Recession of 2008″. I do like the term Great Recession and I think its fairly apt. Historically this recession is looking like a doozy. With official unemployment flirting with 10 percent, and real unemployment/underemployment closer to 15% this one sucks. However, it is a recession and not a depression and certainly not particular failure of capitalism.
Market cycles are perhaps a failing of capitalism but not a failure. I ask you this:
Would you rather have up-and-down, dynamic system that generally goes up and creates all sorts of wonders in the process or a flatter, grayer system that goes nowhere and only creates malaise, sameness, and despair?
While I am a capitalist I am not opposed to smart regulation. Capitalism is one thing but capitalist anarchy is quite another. Basic laws and rules are necessary and even beneficial to the long-term heath of the capitalist system.
Regarding the over-the-counter (OTC) derivatives market, I believe that legislation to shine some daylight could be very helpful. I believe this OTC activity should be disclosed to the shareholders of public companies who participate in such trading. The idea of a clearinghouse is even sensible. Who is exposed to how much risk is a question that should be answered on at a least a quarterly basis.
So I’m a Capitalist. Let me end by putting out some ideas where the US [government] is not being capitalist enough:
- Making it illegal to buy prescription drugs from Canada? That’s not free trade. Let citizens buy whatever they want from whomever they want. Caveat emptor of course.
- Marijuana is illegal? While I don’t condone its use, wouldn’t a true capitalist society allow its sale and trade? Imaging how much California, alone, could make by taxing the stuff?
- “Scalping” tickets is illegal in some places? Pul-leez people! If enterprising people want to buy tickets and try to resell them for more so be it. Sounds like capitalism to me.
My girlfriend and I just got back from a lovely visit to Puerto Rico. Being me I couldn’t resist purchasing a local (English-language) paper and reading the business/finance sections. I learned that PR has about a 13% unemployment rate. Further the commonwealth government has serious economic issues.
However you’d be hard-pressed to see signs of the severe economic trouble in Old San Juan, the tourist-friendly and historic part of the capital city. It is bustling, expensive, and virtually impossible to find parking in. Expensive as in houses selling for $3-5 million! Condos for $250K+.
Get out of the big city and into the country and the unemployment is more obvious.
What was interesting to me was how laid-back and seemingly unconcerned everyone seemed to be. There was no where near the sense of economic panic that I sense so often here in the mainland US. So I’ll pose the question:
Are we in the U.S. overreacting or are the Puerto Rican people under-reacting? (Or both?)
I don’t have an economic answer, but I do have an intuitive (call it emotional) answer. It certainly feels better to be unworried. And that feeling is contagious. I’ll attempt to keep that feeling with me as I return to my “real world.”
While I certainly can’t belt it out like The Who, I can tell you freedom is one big reason the U.S. will eventually recover from this recession. Also, mindfulness of freedom can help us through tough financial times. These times are tougher on some people than others. Some folks are scraping by, some are very comfortable, and some are struggling and hurting financially.
One thing I know – I’d rather be struggling in a country where I am free to speak my mind than rich in a country where speaking “wrongly” can lead to prison or worse. (I’m also glad to be able to invest my money as I see fit… mostly. Yes, there are restrictions on what we can do with our money… that’s topic for a later day perhaps… but generally we can invest as we choose).
In the long run, freedom, notably freedom of speech is a why the U.S. will succeed financially. And it is what makes any financial success all the sweeter. The freedom to criticize, the freedom to analyze, the freedom to cheer, and to jeer. From the heart, from the mind, from the gut, from the soul. Ah… the freedom to sing badly (in my case) or beautifully (as do some others).
I hate karaoke; long live karaoke! Bloggers who regurgitate without thought, grammar, spelling, nor even proper recollection annoy me… but blog on! Bring on the inarticulate but impassioned cry! It is so much more lovely than insincere eloquence.
I’m free! I am free! Another bailout? Rescue bill or no? There is much I could criticize. But instead, today, I choose to celebrate. Like it or not the legislation will be part of our legislative process. It may be pork-laden sausage, but it is made from free-range pork. Maybe the market will like the taste, maybe it won’t.
Here we are debating, arguing, supporting, and opposing. Isn’t it great?! (Feel free to disagree!)
OK, is that a touch too cheery? OK then, here’s a dash of Angostura bitters. I think shareholders, as owners of companies, need more say. More resolutions should be binding. Mutual and index funds should be voted based on the best interpretation of shareholder questionnaires (if applicable) or simply not be voted/counted at all. Definitely the votes of fund managers (trustees, etc) should not no be bought or sold or give the appearance thereof. That’s a start of my thinking on such matters. We (small- time) stockholders should be more free rather than the serfs that we sometimes become.
Back to the main topic. T. GILLIAM. Or, Thank Goodness I Live Luckily In AMerica.
Continuation from: dear-dad-why-high-tech-matters-part-i
Here’s part of Dad’s response:
I do know this: when communication was more difficult it was less pervasive, more condensed, thoughtful, and meaningful.
I agree. There is just a lot of stuff out there. Emails are often less thoughtful, less relevant, and sometimes terribly verbose. And that’s just from email you want to receive. Spam, pop-ups, and numerous other nuisances add to the clutter.
Let me steer the subject towards the influence of high tech. It has been widely voiced that President Obama’s election win was aided by online fund raising, online advertising, and his overall command of his online presence. The ability to efficiently collect money in small amounts from millions of people [I, for example, donated $25 online to him] was a big financial boost. The efficiency of email and text messaging to contact his supporters must have saved hundreds of thousands in postage, paper, and printing. Such efficiencies are a product of technology and the web.
Example #2 of technology’s influence is Google. Currently Google’s market capitalization is $102.7 billion. That puts Google solidly in the top 20 largest U.S. companies by market cap. Not bad for a company founded in 1998 and IPO-ing in 2004.
Example #3 is the social web, or Web 2.0. For me this buzz-word heavy phenomenon encompasses everything from MP3 players (and ogg players :-) to iPhones and other PDAs to Twitter and Facebook. Starting back in IRC and Usenet and extending through Yahoo! Groups. Facebook alone claims over 150 million active users!
I could bore you (and myself) with lots more stats about the size and scope of the Web, but I won’t. Next time I’ll tackle the bigger topic about why high tech actually matters… whether or not one considers oneself a high-tech user.
Note to self: Get Buffet quote about aviation (the high-tech of the time) being a poor investment.
My Dad is a pretty excellent investor. And he’s got something else in common with Warren Buffet… He generally doesn’t grok tech.
Sure he gets how traditional tech relates to investing. Things like industrial technology, more efficient trains, hybrid cars, recycling. About high tech, however, he says “So what. It’s like everybody doing each others laundry.” In other words, there’s no net economic benefit that he can see.
Because I am deeply immersed in the high tech world, this thinking both annoys and amuses me. I’ll address some points I’ve tried to make in the past:
- Me: Technology has made phone communication cheaper and better.
- Dad: Sure, but cell phones suck. Bad reception, dropped calls.
- Me: Point taken. How about word-processing and email. These have helped business productivity and efficiency.
- Dad: Touche. I used to have a secretary who typed my mail, memos, etc. Then I got a computer. At first I hated it, but eventually I preferred it to dictation.
- Me: Great now we’re getting somewhere. How about the Internet? Surely it’s pretty useful. Online banking, online shopping, vast information!
- Dad: I can’t find useful information… just lots of noise and useless junk. I don’t bank or shop online. Email’s OK though, kinda.
- Me: What about satellite TV? You guys have that and seem to like it.
- Dad: Yeah, but what does TV and lots of channels have to do with improving business or the economy or even society?
- Me: Hmm? *sigh* How about we change the subject?
Well, I’ve put words in his mouth, but this distills some of the conversations we’ve had about high tech. And I think so far I’ve failed to make a convincing case. But I don’t give up easily. I’m going feed my “high tech” addiction by playing WoW (World of Warcraft) for awhile, but before I go here are some notes-to-self for part II of this blog:
- Tackle the transformative nature of technology first: Google, Web 2.0, President Obama’s use of the web to win the election.
- Applications of high tech that currently make a difference:
- MRIs and other medical imagery (tech: superconductors, computer analysis and visualization).
- Computer simulation for planes, trains, autos, engines, buildings, bridges, etc. (tech: computers, computer design).
- LEDs: The future of green lighting. (tech: semiconductors, physics)
I was amused to hear that even the porn kings are asking for a bailout, if only in jest. I’ve gotten a lot of feedback about my original bailout blog, and the feedback has been fairly consistent:
- Thumbs down on general stimulus and tax-loss deductibility changes.
- Thumbs up on the interest and stocks proposals (for the “average Joe”).
- Suggestions for real, meaningful infrastructure improvements.
I’ve already addressed the infrastructure feedback, to a degree, in a green power blog article. I’d like to expound on the ideas that got good feedback and traction:
- Make the first $2500 of interest earned in FDIC-insured vehicles (e.g. savings accounts) in 2009 exempt from federal tax.
- U.S. Stocks (including ETFs) purchased in 2009 and held for over 18 months would be exempt from capital gains up to $20,000. Additionally, after 12 months, dividends on such stocks would be tax-free up to $2500 per year… indefinitely.
Idea #1 was the most popular. In particular readers seems to really like the middle-class and low-income appeal of the idea. For example seniors commonly have literally some money in the bank. In addition to Social Security, they common rely heavily on interest income. A $2500/year break on interest would be very helpful to seniors.
Similarly idea #1 would be, perhaps, the most realistic investment incentive for low-income people. The are many more low-income people with savings accounts than stock portfolios. It is easy to open a bank savings account with $100, and sometimes even $10. And while there are many “unbanked” low-income earners, there are many more who do use banks or credit unions. Further, since the first $2500 of interest would be tax free there is less risk of an April 15th-surprise lurking around the corner come tax season.
Idea #1 would, of course, benefit the middle class. With inflation eating away at the value of our hard-earned dollars every year, why should we have to pay taxes on our meager interest incomes as well? Getting rid of this insult-to-injury tax on the first $2500 of interest income would be a godsend.
Idea #2 is also very middle-class friendly… at least for the investing class. If part of the government’s goal is to bolster the stock market, I cannot think of a more powerful way to realistically achieve such a result. I could invision a veritable surge of stock buying with the one-time lure of tax-free dividends for life (up to $2500/year) and the prospect of up to $20,000 of tax-free capital gains. Sure the capital gains paperwork for the 1040 would be a bit messy… but more much more so than it already is. And the the dividend paperwork… that would be easy.
So, Congress, and President-elect Obama, I urge you to consider these common-sense proposals. Please encourage savings and new investment — from the bottoms up. Help reward the savings of America’s low-wage workers. Reinvigorate and reward middle-class savings and investing in 2009.
And, readers, thank you for your feedback. Keep it up! It keeps me blogging. Cheers!
While I’m reading and hearing a lot of pessimism in the media, I am increasingly optimistic about the buying opportunities that are currently available. In fact when I hear the recession being called a possible financial depression, I think about buying more shares of SPY and VTI. In doing some research on the term depression I have seen several definitions:
- A prolonged, severe recession.
- A drop in GDP of more than 10 percent.
- A drop in GDP of more than 20 percent.
#2, a drop in GDP of at least 10% (absolute year-over-year), is my working definition. (For reference the Great Depression represented a fall of about 35%)
What we’ve seen in the first 9 months of 2008 is nothing compared a depression. There have been 2 down quarters in the 12 month period, but overall net GDP growth. Sure Q4 is likely to be bad. I’ll stick my neck out and guess it’ll come in at minus 18% annualized (about -4.5% absolute Q3 to Q4).
The popular press (or unpopular press) has covered this financial “crisis” with a stunning mix of balderdash, rubbish, and misapprehension. There, that’s off my chest. Now on to what’s making me optimistic.
- Reasonable, even occasionally cheap, stock valuations. (e.g. good, even great buys)
- My neighborhood. I’m seeing houses priced between $160K through $215K get snapped up within days; sometimes as soon as they are listed. Further I’m seeing continuing, targeted investments in real estate by folks I consider savvy. I’m seeing low mortgage rates that allow buying rental properties that immediately generate positive cash flow.
- A dose of reality. Finally some borrowers are getting the message that “debt, for the lack of a better word, is BAD”. While this insight will have a negative impact on the economy in the short term, it is likely to have an overall positive impact in the long term.
- Technology. It’s baa-aack! I’m talking about computers and the internet. I’m also talking about materials, advanced transportation (rail, aircraft, hybrid autos). I believe that technological innovation will propel the world economy forward over the next 5-10 years. And, the US economy will benefit disproportionately due to it’s innovative, entrepreneurial, and dynamic heritage.
Feel free to call me Polyanna; I’m buying stocks!
Last week the Fed shocked me a bit by lowering its target rate to “0 to 0.25″ percent. Wow! I had expected the target to be lowered from 1 percent to either 0.5 or maybe even 0.25. The fact that zero is part of their new range did surprise me.
The next day some folks I knew were on the phone with credit unions and banks trying to snap up mortages rates as low a 4.5%. These institutions were advertising rates as low as 4.5% for 30-year fixed mortgages on their websites that morning. But several unfortunate outcomes occurred:
- They filed the online application but the return call from the bank to finalize and lock in the rate did not come in time (2:00pm or 3:00pm).
- Calls to lenders were not being answered nor returned.
- Provisions to existing loan customers were revoked that day (e.g. the option and promise to re-lock in a 30-day period for a cost of 25 basis points was removed without notice).
I read about some lucky re-financers who did get the amazing morning rates, but none of the people I spoke with in person were able to secure the morning’s web-advertised rates.
I have a couple takeaways from this mini-refi frenzy. The first is a question, “What ever happened to service in financial service?” The second is more practical: that with the rate cuts and other potential Fed action, that it is again worth exploring mortgage refinancing options… despite the pain and inconvenience that is increasingly part of the process.
There is a ton of financial action in recent weeks. I’ve been slow on the blogging, and I’m sorry. I’ve got plenty of excuses including the holidays, but I’ll spare you the details. I’ve got a ton of things to explore and will do what I can in the next two weeks to blog about a number of things that are on my mind including more on interest rates, TARP, the automakers, huge currency moves, the economy, and even “Fishing with NNT”. Happy
I start with the assertion that the United States can make smart investments that are both green and ultimately profitable for the nation. The single-most effective investment we can make now is to improve the transmission efficiency of electrical power distribution. According to this grid efficiency article the U.S. loses a little under 8% of its energy in transmission and distribution (T&D). An the loss in T&D is trending upwards.
The recent electrical outages due to the ice storm in the North East and comments from Duane regarding my economic stimulus article got me thinking about energy. (During my day job I am an electrical engineer designing CPU’s.) Our productivity on Friday was cut by half or more due to our reliance on systems on the East Coast that were impacted by the power outages. Similarly, years ago, while working for Agilent Technologies our silicon wafer fab was shut down due to a local power outage, ruining millions of dollars of chips. Simply put, I have seen power outages cost a single company millions. Imagine the financial impact on, for example, on all the companies in the North East due to the recent outage.
In a nutshell, a more robust grid is good for business. Substantially upgrading and improving the U.S. grid would make it more robust and more efficient. If I were president-elect Obama, who probably isn’t reading this blog, I would issue the bold statement within my first 100 days:
“I challenge the Congress, free enterprise, and the nation to improve the US power grid efficiency dramatically. The goal I put forth today is to reduce transmission losses from 8% to 5% in the next 7 years. The reduction of wasted power by 3% will result in less power generation by coal plants resulting in fewer emissions of pollutants such as sulfur dioxide and mercury and harmful particulates. Further this will reduce CO2 emissions.
Moreover, I challenge the G7, Russia, China, and India to make similar strides in transmission efficiency. For the developing world I’m asking the G7 to contribute $200 million to provide technical assistance and loans to transmission efficiency improvements.”
Greater efficiency means cleaner power. For example, if the power produced by a coal plant loses 8% in transmission, and plant managers wish to supply a Megawatt (MW) to end users, it must supply 8.7% more to deliver that 1 MW. Improving T&D efficiency (T&DE) reduces that excess to 5.26%, resulting in a savings of 3.44%. This means 3.44% less particulates, mercury, and SO2 sent into the air.
In essence, I’m suggesting we do for our power grid what President Eisenhower did for our roads. Eisenhower spearheaded the creation of the U.S. Interstate System… transforming a mishmash of local and state roads by integrating them with a backbone of fast, efficient federal highways. I suggest Obama could integrate our mishmash of regional power tributaries and webs with a truly robust and efficient U.S. power backbone.
I’m suggesting we implement a plan to achieve these goals:
- Upgrade our grid starting with the creation and upgrade of new interstate trunks featuring an increase in underground lines (versus overhead lines which are more vulnerable to weather.)
- Make use, in part, of the railway system, the interstate system, and telecommunication systems to help find lower-impact right-of-way solutions.
- Fund scientific research into power T&D including mechanical, material, civil, computer, and electrical engineering as well as physics. Fund business, political, and legal study into T&D topics.
That is my 2 cents for now. What follows are a few nitty gritty technical details I can’t help but add as footnotes:
- Focus should be on high-voltage DC power transmission (>400KV). DC presents several advantages including virtually eliminating 60-Hz phase-matching concerns.
- Superconductors may continue to be evaluated as a portion of the program, but emphasis will be on more traditional conductors such as copper (blends, silver-plated) and aluminum which will be at the core of the initial implementation phase.
- Power conversion is another key aspect… both AC-to-DC and AC-to-AC stepping.
Finally grid monitoring, load balancing, and other command-and-control function are the third key element. Both advancing the infrastructure with existing technologies as well as researching future hardening, robustness, monitoring, and power-routing technologies are critical.
A stark title for another strange week in finance. 873.29 is the closing value of the S&P 500 Index today.
I hear that leaders from the top 20 countries in GDP are converging on Washington for a financial summit. Gordon Brown is making it his mission to push for greater regulation of the financial world. It is with the greatest reservation I follow the forceful Brown. I’m not a Brit so I haven’t followed Mr. Brown much until the last several months. I’m a big believer in financial cooperation and discussion. What chills my financial bones is the prospect of a global financial regulatory body. Treaties are good (especially if they have expiration dates). But I’m leery of international “bodies” and “agencies”. Perhaps I’m getting ahead of myself with speculation.
Having greater transparency is generally good. This is especially important in the derivatives and “counter-party” contracts. First of all there should be a market. That is the beauty of standardized options… there is a market (CBOE for example). There are standards, there are market valuations, and there are contingencies for when options traders cannot make good on their promises. Such safeguards are not as robust (or totally non-existent) for credit default swaps, ETNs, and similar derivatives.
My bottom line is…
- Greater transparency is good.
- A clearing-house requirement (open market) is potentially good.
- New disclosure regulations uniformly agreed to by treaty is good.
- Creating a new international bureaucracy is BAD!
- Oh yeah, dialog is good too. As is cooperation and short-term agreements and statements.
Enjoy the weekend. Chances are you’ve earned it.
How many white swans must you see to prove that there is no such thing as a black swan?
That is a question put forward by one of my favorite financial authors Nassim Nicholas Taleb. It is even more interesting to learn that there are black swans, though most one us have never seen one.
Arguably, one such black swan is the current “mortgage crisis”. Some are calling this a credit crunch or an issue with illiquidity of assets. Most people, until recently didn’t expect such events to ever happen. If events like this were expected, few foresaw the magnitude of bank failures.
The thing about black swans is that they do show up occasionally. The other thing is that they are not entirely unexpected (at least by some). Black swans are why people buy insurance, and the relative rarity of such occurrences explains why insurance companies sell it.
I just saw the Senate on CSPAN pass the bailout rescue bill 74 to 25. This bill gives insurance claims to those that didn’t buy insurance in the first place. Oh, there is the raising of FDIC insurance to $250,000… and the banks have paid premiums to the FDIC, but that is more window dressing. As weird as it seems to me this bill appears to be a drastically amended bill involving, of all things, mental health coverage.
There are practical considerations for this bill and practical considerations against. The argument that sways my opinion against it is ideological. Simply put I this legislation crosses the line from regulating the market over to manipulating and attempting to manage the market. Secondly, it introduces a moral hazard. In this case it takes away (some of) the consequences of failure from banks and investors. In healthy markets failed ventures fail. There is a price for failure and that gives executives and business people pause and encourages prudence. If the congress takes away the consequences in full or part, doesn’t that just encourage more imprudent risk in the future?
Look, when Wall Street loses, often Main Street does too. Like it or dislike it, that’s the way it goes. But when the government puts $700 billion on the line… its our money on the line too. If all goes well the precedent is set. And if the economy goes south again, maybe 7 years from now, will there be another bigger bailout? How many times before the tax payers lose a big, big bet? This time, or the next, or the next?
Further, what if this bailout covers over structural flaws in the US (and global) financial industry? Perhaps these flaws should be allowed to continue to crack so that industry learns and adapts and emerges stronger.
My guess is that this bill will pass the House and become law in short order. My guess is that markets will like the passage and stock will bounce up perhaps 5-6%. I’m guessing markets open up 1-2% tomorrow morning (Thur, Oct 2). But I’m guessing that, long-term, this is merely a band-aid that covers up problems that will bite us in years to come.
My 2 pesos. Adios, amigos.