Panic in the street (Wall Street) led to a sell of that dropped the markets over 2% yesterday. This was based on a Fed announcement that the economic recovery was going slower than hoped for and that they would keep interest rates low for an extended period of time.
Really? This is the reason for the sell off?
There is nothing in the Fed announcement that is surprising. What we do have is an opportunity of for market manipulation, and market manipulation is what we got. Once the selling momentum gets going, other big traders feel they have to sell to avoid being caught. The equities they sold (pretty much everything) were not any worse than they were last week and will be next week.
Now, when the manipulators smell the blood in the water they start to short everything. They know that the little bit of uncertainty caused by the Fed announcement is going to put a damper on buying and they can start the downward spiral. As it picks up, others actually dump positions with the intention of reestablishing them at a lower price point. If you look at the statistics, you find that short sales were up 200 million shares since Monday. Now there is, in today's market always a significant amount of short selling as hedge funds basically take and drop short term positions. However, when the blood is in the water we see a tremendous increase an when it is successful, as it often is, the stock market goes down.
Now, at some point these short positions have to be covered and that will theoretically lead to a market rebound. However, I think the American public is simply tired of it and as the manipulation continues they are taking money out and putting it in bonds.
In my opinion, allowing short selling serves no legitimate purpose. It is not investing, it is gambling, but gambling that impacts investors. It allows some people to make money simply by manipulating stocks that otherwise might would probably behave quite differently.
Thursday, August 12, 2010
Wednesday, August 11, 2010
The mess we're in
In a country that has as many advantages as this one does, it is hard to believe things have gotten so bad. Of course bad is a relative term, since most people in this country still have a standard of living envied almost everywhere else.
So what exactly is causing the problem? Well partly because of our past success and the development of better communications and transportation technologies, it is cheaper to offload work to other countries. So, if you were in manufacturing or a service that is now done elsewhere, what is your new role? We haven't figured that one out yet and it may take quite a while before we do.
Pretty clearly this type of transition will work itself out. However, it will be painful. If you think about it, when the American industrialization took off, we lived off the cheap labor of European and Asian immigrants who couldn't find suitable work in their native lands.
In previous blogs I have talked about the wealth equation and while we create a considerable amount of new wealth every year, it is no longer enough to offset the wealth we send overseas. This net deficit is going to result in a better standard of living elsewhere and a declining standard of living here. Now, it is certainly not impossible to return to a stable or improving standard of living, but it takes some smart policies to do so.
The first thing is to reduce the wealth being exported in exchange for energy. We need to use domestic and/or renewable energy resources more and more. Its not gong to be like turning a switch but every bit of energy changed from foreign to domestic reduces wealth being exported.
Second we need to level the playing field for jobs. If you sell products in this country, you should pay a fair share of taxes. There has to be a better relationship between the profit made and the taxes paid. If you manufacture in this country you employ workers who pay taxes. You as a company shouldn't pay taxes until you sell your product and then only if you sell the product in this country should it be taxed.
Third, we need to eliminate health insurance and pension as a business cost and accept it as a societal cost. There is no logic in making it more expensive for a company to do business here because of medical and pension responsibilities.
Three simple things that would go a long way to cleaning up the current mess.
So what exactly is causing the problem? Well partly because of our past success and the development of better communications and transportation technologies, it is cheaper to offload work to other countries. So, if you were in manufacturing or a service that is now done elsewhere, what is your new role? We haven't figured that one out yet and it may take quite a while before we do.
Pretty clearly this type of transition will work itself out. However, it will be painful. If you think about it, when the American industrialization took off, we lived off the cheap labor of European and Asian immigrants who couldn't find suitable work in their native lands.
In previous blogs I have talked about the wealth equation and while we create a considerable amount of new wealth every year, it is no longer enough to offset the wealth we send overseas. This net deficit is going to result in a better standard of living elsewhere and a declining standard of living here. Now, it is certainly not impossible to return to a stable or improving standard of living, but it takes some smart policies to do so.
The first thing is to reduce the wealth being exported in exchange for energy. We need to use domestic and/or renewable energy resources more and more. Its not gong to be like turning a switch but every bit of energy changed from foreign to domestic reduces wealth being exported.
Second we need to level the playing field for jobs. If you sell products in this country, you should pay a fair share of taxes. There has to be a better relationship between the profit made and the taxes paid. If you manufacture in this country you employ workers who pay taxes. You as a company shouldn't pay taxes until you sell your product and then only if you sell the product in this country should it be taxed.
Third, we need to eliminate health insurance and pension as a business cost and accept it as a societal cost. There is no logic in making it more expensive for a company to do business here because of medical and pension responsibilities.
Three simple things that would go a long way to cleaning up the current mess.
Saturday, August 7, 2010
Jobs again
I just get a kick out of the reactions that you read when an economic report comes out. Now I understand that the people writing have two issues they have to deal with, writing for an uncertain audience which means having to over explain things, and dealing with their own point of view, bias.
When the jobs report came out, it was generally treated as horrible since overall the economy lost 131,000 jobs. A lot of these jobs were the elimination of temporary census jobs and as much as these jobs were somewhat discounted when they were created, they should be just as discounted when they go away. Consider them a constitutional blip that comes every four years.
Now, if you take that out of the report, what you have left is the loss of local government jobs and the creation of private industry jobs. Now, I would like to see a lot more private industry jobs created but that isn't going to happen until the economy gets a lot more robust and/or the government figures out how to incentivize business in this country a lot better than they seem capable of.
But going back to the primary trend, every public job eliminated reduces to some extent a burden on the taxpayer and every private job created increases the tax base. Yes, public workers pay taxes too, I should know, but that is simply returning a bit of what they got from the taxpayer in the first place.
This was an excellent trend for the economy, although once again, not enough private jobs. Public jobs are certainly important and necessary, we need teachers, police, and firemen (of either gender) and there are many other functions that have to be performed. Still, there is always going to be some level of inefficiency in government (of course in private industry as well) but a private job is a net revenue creator while a public job is generally a net revenue loser.
It doesn't have to be this way, if we consider the value added of a public job and make sure the value provided is greater than the cost. If you consider police activity, certainly the prevention of crime is paramount. This is a high value endeavor, if the crimes are real. Certainly a crime that destroys property or inflicts bodily harm needs to be prevented if at all possible. However, what about victimless crimes?
When you consider vice and drug offenses, and to some extent traffic violations such as speeding, who is the victim and why are the police intervening? Now, traffic violations may actually generate revenue but the last statistics I saw indicated a tremendous number of people in jail for drug offenses. Why? Really, if we legalized most drugs and put them under FDA oversight, instead of being a crime it would become an industry.
Yes we would have addicts but would that be worse than the addicts we already have plus the tremendous cost of enforcement? I'm not encouraging anyone to use drugs, but in all honesty, why do I care?
You either believe in individual responsibility or you don't. The same with vice. Why do I care what consenting adults do as long as it doesn't involve minors or uninvited violence? I may not approve, but I don't approve of lots of legal things already, such as smoking. It just isn't my business and it certainly should cost society as much as it does to try to prevent it.
Lots of people would and have argued that it would cost more to ignore it. Really? If it was legal, and taxed, it would generate more than enough revenue to support rehab and education efforts. The economics are clear.
Look, less government is a good thing since it equates to less taxes. More business is a good thing since it equate to more taxes. When are we going to wize up?
When the jobs report came out, it was generally treated as horrible since overall the economy lost 131,000 jobs. A lot of these jobs were the elimination of temporary census jobs and as much as these jobs were somewhat discounted when they were created, they should be just as discounted when they go away. Consider them a constitutional blip that comes every four years.
Now, if you take that out of the report, what you have left is the loss of local government jobs and the creation of private industry jobs. Now, I would like to see a lot more private industry jobs created but that isn't going to happen until the economy gets a lot more robust and/or the government figures out how to incentivize business in this country a lot better than they seem capable of.
But going back to the primary trend, every public job eliminated reduces to some extent a burden on the taxpayer and every private job created increases the tax base. Yes, public workers pay taxes too, I should know, but that is simply returning a bit of what they got from the taxpayer in the first place.
This was an excellent trend for the economy, although once again, not enough private jobs. Public jobs are certainly important and necessary, we need teachers, police, and firemen (of either gender) and there are many other functions that have to be performed. Still, there is always going to be some level of inefficiency in government (of course in private industry as well) but a private job is a net revenue creator while a public job is generally a net revenue loser.
It doesn't have to be this way, if we consider the value added of a public job and make sure the value provided is greater than the cost. If you consider police activity, certainly the prevention of crime is paramount. This is a high value endeavor, if the crimes are real. Certainly a crime that destroys property or inflicts bodily harm needs to be prevented if at all possible. However, what about victimless crimes?
When you consider vice and drug offenses, and to some extent traffic violations such as speeding, who is the victim and why are the police intervening? Now, traffic violations may actually generate revenue but the last statistics I saw indicated a tremendous number of people in jail for drug offenses. Why? Really, if we legalized most drugs and put them under FDA oversight, instead of being a crime it would become an industry.
Yes we would have addicts but would that be worse than the addicts we already have plus the tremendous cost of enforcement? I'm not encouraging anyone to use drugs, but in all honesty, why do I care?
You either believe in individual responsibility or you don't. The same with vice. Why do I care what consenting adults do as long as it doesn't involve minors or uninvited violence? I may not approve, but I don't approve of lots of legal things already, such as smoking. It just isn't my business and it certainly should cost society as much as it does to try to prevent it.
Lots of people would and have argued that it would cost more to ignore it. Really? If it was legal, and taxed, it would generate more than enough revenue to support rehab and education efforts. The economics are clear.
Look, less government is a good thing since it equates to less taxes. More business is a good thing since it equate to more taxes. When are we going to wize up?
Monday, July 26, 2010
Wealth
Similar to when the stress tests were done for US Banks, you hear a lot of analysts taking the position that since most European banks "passes" their stress tests that the tests were "too easy". Of course that logic assumes that the banks have real problems and that there is a conspiracy to cover it up.
Honestly, the problems facing Europe and the United States are by no means insurmountable. During prosperous times, generous commitments to social programs were made that in reduce economic conditions look unsustainable. However, the basic output for these countries and their ability to sustain themselves hasn't really changed.
Ultimately the prosperity of a nation is based on how much it produces versus how much it consumes. The distribution is not in and of itself an issue. What may be an issue that is related is the fact that those receiving the benefits are no longer producing and therefore impact the actual equation.
The real equation is produced vs consumed. This is true at all levels and ultimately, at the global level. However, if an individual, a local government, a state government, a federal government or the world as a whole consumes more than it produces, it will get poorer. The only way to consume more is to use accumulated wealth or to borrow against future wealth.
There are many other factors that influence the perception of wealth. However, the value of the goods produced versus the value of the goods consumed is the ultimate determinant.
Honestly, the problems facing Europe and the United States are by no means insurmountable. During prosperous times, generous commitments to social programs were made that in reduce economic conditions look unsustainable. However, the basic output for these countries and their ability to sustain themselves hasn't really changed.
Ultimately the prosperity of a nation is based on how much it produces versus how much it consumes. The distribution is not in and of itself an issue. What may be an issue that is related is the fact that those receiving the benefits are no longer producing and therefore impact the actual equation.
The real equation is produced vs consumed. This is true at all levels and ultimately, at the global level. However, if an individual, a local government, a state government, a federal government or the world as a whole consumes more than it produces, it will get poorer. The only way to consume more is to use accumulated wealth or to borrow against future wealth.
There are many other factors that influence the perception of wealth. However, the value of the goods produced versus the value of the goods consumed is the ultimate determinant.
Tuesday, July 20, 2010
Dismal Science
If you read just a little economic news, you should be quite depressed. We have the potential for a double dip, the American consumer is not spending, industry is not hiring, real estate is falling again, and any bit of good news that does get out is immediately explained away by the dark linings around it. So your profit is up, but what about total sales? Can you maintain it if the economy falters? What if the dollar gets stronger, will exports suffer or if it gets weaker will energy prices overwhelm us.
The dismal science indeed. Like most news, there is much upside to being a Pollyanna. If you accept good news at face value, you suffer from credibility problems. Generally, you want to hedge your news with some gloom. The unemployment rate is down, but only because so many job seekers have despaired.
Then, the pundits are shocked that consumer sentiment is down. Further, real estate sentiment is down too!!
There are real problems in our economy, but company after company has found ways to make money. This profitability will lead to jobs, although we have to accept that productivity improvements are not going to be simply thrown away.
Real job growth has to come from the growth of domestic and renewable energy including the retrofitting of many structures and a reform of our tax system to make sure everyone doing business in this country is on an equal footing.
The dismal science indeed. Like most news, there is much upside to being a Pollyanna. If you accept good news at face value, you suffer from credibility problems. Generally, you want to hedge your news with some gloom. The unemployment rate is down, but only because so many job seekers have despaired.
Then, the pundits are shocked that consumer sentiment is down. Further, real estate sentiment is down too!!
There are real problems in our economy, but company after company has found ways to make money. This profitability will lead to jobs, although we have to accept that productivity improvements are not going to be simply thrown away.
Real job growth has to come from the growth of domestic and renewable energy including the retrofitting of many structures and a reform of our tax system to make sure everyone doing business in this country is on an equal footing.
Wednesday, July 14, 2010
Time to get going
We are continuing to see the development of an economy where many of the past excesses are going away. The recent crisis will have a sobering effect on many people for at least some time. Further, some of the access to easy money and easy equity loans is just not there anymore.
The good news is that the future economy will be built on a sounder footing. The bad news is that many of the jobs and other sources of income will be more difficult to come by.
A return to some frugality is a good thing but it reduces demand and businesses are not going to expand past the point where they have a high level of confidence. Further, as we see expanding technological communications, the need to visit certain establishments will continue to diminish. I haven't needed to visit my bank, except to use an ATM, for quite a while. It saves on gas but reduces the need for tellers.
The new type of online stores and services will continue to garner greater and greater acceptance. We need to build our jobs in two ways. As I've been saying for quite a while, we need to reduce our use of foreign energy and use domestic and renewable sources. In addition to keeping wealth inside the country, it will also create jobs that can't be exported or eliminated. I'm starting to see some movement in that area and it simply has to happen.
The other thing we need to do is level the playing field so that it is not automatically better to export many jobs. Our current tax system and health insurance system are problematic and penalize companies that make product in this country. If we switched to a more neutral tax system, tax consumption not production, and used that money to fund health insurance for all, we would reduce much of the motivation to export jobs. Yes, some jobs would still be more efficiently performed outside the country, but many other jobs would become location neutral and remain here.
Lets get smart and get going.
The good news is that the future economy will be built on a sounder footing. The bad news is that many of the jobs and other sources of income will be more difficult to come by.
A return to some frugality is a good thing but it reduces demand and businesses are not going to expand past the point where they have a high level of confidence. Further, as we see expanding technological communications, the need to visit certain establishments will continue to diminish. I haven't needed to visit my bank, except to use an ATM, for quite a while. It saves on gas but reduces the need for tellers.
The new type of online stores and services will continue to garner greater and greater acceptance. We need to build our jobs in two ways. As I've been saying for quite a while, we need to reduce our use of foreign energy and use domestic and renewable sources. In addition to keeping wealth inside the country, it will also create jobs that can't be exported or eliminated. I'm starting to see some movement in that area and it simply has to happen.
The other thing we need to do is level the playing field so that it is not automatically better to export many jobs. Our current tax system and health insurance system are problematic and penalize companies that make product in this country. If we switched to a more neutral tax system, tax consumption not production, and used that money to fund health insurance for all, we would reduce much of the motivation to export jobs. Yes, some jobs would still be more efficiently performed outside the country, but many other jobs would become location neutral and remain here.
Lets get smart and get going.
Monday, July 12, 2010
Transitions
I haven't posted in a while since I was in the process of changing jobs and moved my base of operations from DC to NY. I'm still getting settled in and it will take a bit longer to get fully operational, but I've worked out most of the major issues and will be able to increase my productivity on the new position.
Going through a transition is always somewhat stressful and since I maintain the economy is doing just that, the country as a whole is undergoing stress. This is not the first time a society has had to adjust to changing circumstances and generally, the stress results in all sort of dire predictions.
What is true is that those who recognize and adapt to the change will do better than those who don't.
Going into earnings season again we will see if American companies can maintain their profitability as the recovery continues to sputter along. There will come a time at some future point when the recovery will speed up but before that point there is still issues that need to be resolved as we finalize our transition from a manufacturing based society to a technological service economy.
That is quite a simplification of what is happening but I think it is reasonable accurate. I'm also quite sure that companies will continue to be profitable as the inventory, store and employee reduction cost savings will allow them to make money on reduced volume. Americans have less to spend and will have for the foreseeable future. Successful companies have recognized this and adjusted their business models accordingly.
I'm not sure if Wall Street has accepted this changed reality and I expect to hear how companies are still disappointing with gloomy forecasts and missed sales goals while becoming ever more profitable. However, profitability is what increases the value of a company. I'm a big fan of it.
Going through a transition is always somewhat stressful and since I maintain the economy is doing just that, the country as a whole is undergoing stress. This is not the first time a society has had to adjust to changing circumstances and generally, the stress results in all sort of dire predictions.
What is true is that those who recognize and adapt to the change will do better than those who don't.
Going into earnings season again we will see if American companies can maintain their profitability as the recovery continues to sputter along. There will come a time at some future point when the recovery will speed up but before that point there is still issues that need to be resolved as we finalize our transition from a manufacturing based society to a technological service economy.
That is quite a simplification of what is happening but I think it is reasonable accurate. I'm also quite sure that companies will continue to be profitable as the inventory, store and employee reduction cost savings will allow them to make money on reduced volume. Americans have less to spend and will have for the foreseeable future. Successful companies have recognized this and adjusted their business models accordingly.
I'm not sure if Wall Street has accepted this changed reality and I expect to hear how companies are still disappointing with gloomy forecasts and missed sales goals while becoming ever more profitable. However, profitability is what increases the value of a company. I'm a big fan of it.
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