Just would like to wish everyone a Merry Christmas and a prosperous New Year. I think that 2010 will have some ups and downs and unfortunately, I think we are going to enter a period of stagflation until we address the fundamental issues that prevent this country from being truly competitive.
The single most important issue is that we need to stop relying on foreign energy and need to return our balance of payments to a sustainable level. There is a very simple approach to economics that basically can determine the wealth of a country by taking wealth created, add it to wealth already in existence, subtract wealth consumed and adjust for wealth imported/exported.
Now the basic formula can get complicated depending on how you measure wealth and whether wealth can be created out of nothing (i.e. housing bubble). However, what is clear is that the amount of wealth exported in trade for an item that is almost immediately consumed such as oil has a negative impact on the wealth of the nation. It is the most obvious and potentially most easily fixed drain on the nation's wealth. Use of more natural gas and coal while we develop alternative energy resources will lead to retained wealth and more jobs. It may not be the most economical solution for any one individual or business, but as a nation it needs to be our number 1 priority.
Friday, December 25, 2009
Tuesday, December 22, 2009
Musings
If you think about things that drive the economy, it pretty much comes down to the way people feel about those things. Generally speaking, the total amount of resources and products available and the the number of people changes gradually over time. However, if a particular product is considered desirable, it suddenly demands a higher price. Conversely, if something that was desirable goes out of favor or is considered too expensive, it suddenly is in an oversupply situation.
This is in fact the primary cause of economic bubbles. If you consider housing, as long as enough people felt that they could get more for their home in a few years than they were paying for it today, the housing market was "hot". It was when prices stagnated for a period of time and started to decrease that all of a sudden people found themselves in homes they couldn't afford. You can talk about sub-prime mortgages and overbuilding as well as excessive speculation but the reason that the market came to a screeching halt was that people no longer believed that housing prices would go up.
It would take more time and data than I currently have to prove this here but I believe there is plenty of proof available. You can consider anything the is "hot" and pretty much know that at some time it will "cool" off. The contraian investors use this concept fairly successfully and if they have the time and resources to wait long enough, they will almost always be right eventually. The only real problem is the timing. Say you feel the stock market is "too hot" right now and want to short it. First, you have to be right about it being "too hot" and second you have to be able to wait out the increases.
By most historical measures, the market is not really overvalued. Of course you may question if those measures are still valid, but generally, the times people start to believe that the rules have changed, they have been wrong. There is no reason to believe that they are right now. Of course they may be, but then again, a few years ago there were some who believed the DOW was going to 30,000.
If you go back to some of the earliest recorded bubbles, you find that the Tulip bubble of the 1600s clearly demonstrates how a commodity price is dictated by people's fancy. Of course knowing what the next hot thing is going to be and when it is going to go cold is the trick.
This is in fact the primary cause of economic bubbles. If you consider housing, as long as enough people felt that they could get more for their home in a few years than they were paying for it today, the housing market was "hot". It was when prices stagnated for a period of time and started to decrease that all of a sudden people found themselves in homes they couldn't afford. You can talk about sub-prime mortgages and overbuilding as well as excessive speculation but the reason that the market came to a screeching halt was that people no longer believed that housing prices would go up.
It would take more time and data than I currently have to prove this here but I believe there is plenty of proof available. You can consider anything the is "hot" and pretty much know that at some time it will "cool" off. The contraian investors use this concept fairly successfully and if they have the time and resources to wait long enough, they will almost always be right eventually. The only real problem is the timing. Say you feel the stock market is "too hot" right now and want to short it. First, you have to be right about it being "too hot" and second you have to be able to wait out the increases.
By most historical measures, the market is not really overvalued. Of course you may question if those measures are still valid, but generally, the times people start to believe that the rules have changed, they have been wrong. There is no reason to believe that they are right now. Of course they may be, but then again, a few years ago there were some who believed the DOW was going to 30,000.
If you go back to some of the earliest recorded bubbles, you find that the Tulip bubble of the 1600s clearly demonstrates how a commodity price is dictated by people's fancy. Of course knowing what the next hot thing is going to be and when it is going to go cold is the trick.
Tuesday, December 15, 2009
Creating jobs
The simple fundamental issue that will determine how strong the economy is next year is the number of jobs created. The recent recession caused the elimination of many jobs that will never be replaced because they have been converted to technology or partially eliminated by better productivity via technological improvements. Further, because of the amount of overbuilding that took place due to the cheap credit and housing boom, it will take awhile before new construction returns to peak levels.
In order to stimulate jobs, we need to do three things. The first is to promote energy efficiency programs that stimulate remodeling and installation of renewable energy and conversion to domestic energy sources on old residential and commercial real estate. This level of effort will create construction jobs, energy jobs and to the extent we can use domestic products, manufacturing jobs.
The second thing is to truly start to work on infrastructure repair. We have many opportunities to improve roads, bridges, transportation facilities and other public structures. This work is actually necessary and has to be done before the actual structures start to collapse. Doing it on an expedited basis can jump start the economy and provide millions of jobs.
The third thing is to make sure the business environment does not discourage hiring in this country. One thing would be to reform the tax basis to one base on a tax on consumption. Another thing would be to eliminate health care costs as a concern. The actual pay given to an employee is no longer the most significant factor in hiring. It is the associated costs.
In order to stimulate jobs, we need to do three things. The first is to promote energy efficiency programs that stimulate remodeling and installation of renewable energy and conversion to domestic energy sources on old residential and commercial real estate. This level of effort will create construction jobs, energy jobs and to the extent we can use domestic products, manufacturing jobs.
The second thing is to truly start to work on infrastructure repair. We have many opportunities to improve roads, bridges, transportation facilities and other public structures. This work is actually necessary and has to be done before the actual structures start to collapse. Doing it on an expedited basis can jump start the economy and provide millions of jobs.
The third thing is to make sure the business environment does not discourage hiring in this country. One thing would be to reform the tax basis to one base on a tax on consumption. Another thing would be to eliminate health care costs as a concern. The actual pay given to an employee is no longer the most significant factor in hiring. It is the associated costs.
Monday, December 14, 2009
Furture profitability
One would like to think that someone involved in the Financial world would have rudimentary math skills. However, I hear comments that effectively convince me otherwise. Today I heard a commentator on a business channel say while companies had achieved profitability by cost cutting, the market was pricing in a 25% profit increase next year and she didn't believe sales would increase by that amount.
Now, maybe she didn't mean to express it quite like that but clearly if you have reduced costs and therefore productivity, you can achieve substantial increases in profits with relatively small increases in sales.
For example, lets say that a company is in retail and normally marks up goods 100%. It doesn't achieve a 50% profit rates because the cost of running the business eats up a significant percentage. Lets say that the profit rate is actually 10%, so for every dollar of sales, 50% goes to procure the goods and 40% goes to the cost of running the business. Now saw the total business sales are a billion dollars so profit would be 100 million. Now if sales increase by 10%, the question is would associated costs have to increase also? Probably not since the retailer would be reluctant to increase costs without a greater impetus. So theoretically the 100 million in increase sales would produce 50 million profit. Now that would increase profits by a full 50% but of course, some increases in variable costs would occur so lets assume half of the business cost is variable and, such as overtime and would increase proportionately. So profits would increase by 30 million leading to a 30% increase in profit on a 10% increase in sales.
Now, maybe she didn't mean to express it quite like that but clearly if you have reduced costs and therefore productivity, you can achieve substantial increases in profits with relatively small increases in sales.
For example, lets say that a company is in retail and normally marks up goods 100%. It doesn't achieve a 50% profit rates because the cost of running the business eats up a significant percentage. Lets say that the profit rate is actually 10%, so for every dollar of sales, 50% goes to procure the goods and 40% goes to the cost of running the business. Now saw the total business sales are a billion dollars so profit would be 100 million. Now if sales increase by 10%, the question is would associated costs have to increase also? Probably not since the retailer would be reluctant to increase costs without a greater impetus. So theoretically the 100 million in increase sales would produce 50 million profit. Now that would increase profits by a full 50% but of course, some increases in variable costs would occur so lets assume half of the business cost is variable and, such as overtime and would increase proportionately. So profits would increase by 30 million leading to a 30% increase in profit on a 10% increase in sales.
Saturday, December 12, 2009
Shorting Stocks
What would the price of investments be if the only stocks being traded were ones actually in existence? If you consider the mathematics of stock shorting, it enables a speculator to sell stock he or she doesn't actually own. Yes, the stock sold is technical a real stock since the share has to be borrowed and delivered, however, the borrowed stock takes on a double identity, one share being held in an investment account and the same share being sold on a "temporary" basis to another investor.
Ultimately, all shares shorted have to be bought and I suppose those who short stocks argue this balances things out. Maybe it does, but the allowance of short selling adds a lot of volatility to the stock market that otherwise wouldn't exist. Traders love this, and the question that has to be asked is whether the stock market is designed for the Traders or as a place for companies to raise capital by selling stakes in their company.
Lets consider short selling for a second. If a significant number of people feel that a company is overvalued, or possibly simply notice that based on the number of shares being traded, more shares on the sell side could start a price drop, then they will short the shares. The shares being shorted add supply without adding any demand. Now, you hear short sellers say they help find weak companies and expose them. Maybe, but if the company is that weak, maybe the owners of the stock should be the ones selling it. Also, remember that after the shorts drive the price down they buy the stock back at a reduced price and often artificially cause a rebound. It is certainly possible that the stock had weak fundamentals, but there are plenty of examples where despite any fundamental analysis, stocks get driven down by short sellers and then rebound as the shorts cover, often returning to the original or perhaps better price point. All that was accomplished was that some traders made money while investors potentially were scared out of a position at a loss. This is the ultimate goal of a short seller, to ignite a selling frenzy that hammers the stock price.
There are ways to bet on the future of a stock via calls and puts but short selling is the only way to potentially impact the stock directly without actually owning it.
Ultimately, all shares shorted have to be bought and I suppose those who short stocks argue this balances things out. Maybe it does, but the allowance of short selling adds a lot of volatility to the stock market that otherwise wouldn't exist. Traders love this, and the question that has to be asked is whether the stock market is designed for the Traders or as a place for companies to raise capital by selling stakes in their company.
Lets consider short selling for a second. If a significant number of people feel that a company is overvalued, or possibly simply notice that based on the number of shares being traded, more shares on the sell side could start a price drop, then they will short the shares. The shares being shorted add supply without adding any demand. Now, you hear short sellers say they help find weak companies and expose them. Maybe, but if the company is that weak, maybe the owners of the stock should be the ones selling it. Also, remember that after the shorts drive the price down they buy the stock back at a reduced price and often artificially cause a rebound. It is certainly possible that the stock had weak fundamentals, but there are plenty of examples where despite any fundamental analysis, stocks get driven down by short sellers and then rebound as the shorts cover, often returning to the original or perhaps better price point. All that was accomplished was that some traders made money while investors potentially were scared out of a position at a loss. This is the ultimate goal of a short seller, to ignite a selling frenzy that hammers the stock price.
There are ways to bet on the future of a stock via calls and puts but short selling is the only way to potentially impact the stock directly without actually owning it.
Friday, December 11, 2009
Recovery actions
As the current administration approaches the end of its first year, it seems to have grasped the key elements to economic recovery. There is still a lot of skepticism about this but in the areas that matter I believe they understand the fundamental needs to foster a true recovery.
First, having avoided economic collapse by infusing capital into the banks, it is time for the Government to consider removing that money from the economy. Now, despite what many would like you to believe, the amount of money in circulation has not actually increased, since the reserve requirements imposed on the banks led to a significant reduction in available money. Of course the banks need to be cautious in reintroducing liquidity into the economy and the Government needs to make sure that capital requirements don't allow the reckless behavior of the last few years.
Second, we need to pursue the ongoing replacement of foreign energy sources with renewable or native alternatives. The lure of cheap oil has left us in a position where we face significant export imbalances. This change in the form of numerous initiatives will expand over time and while it will face challenges as foreign oil will go down in price, we need to make sure our policies equalize the playing field. One way to assure this is to determine a price below which alternative energy is uneconomical, and make sure that imported energy costs at least that much. This could be accomplished via a tax that would also help reduce the deficit. Now the tax shouldn't be designed to drive energy prices higher than required to continue economic recovery, but it clearly can help in the transition from oil to cleaner and more available energy. Also, Cap and Trade will lead to greater use of alternative energy and lead to installation of new technology and jobs. Also, providing tax incentives for home renovations to install more efficient or alternative energy will further reduce our addiction to foreign oil.
Third, we need to replace the jobs lost due to secular changes in the economy. The two most significant changes are related to reduced need for construction and the technological changes that are eliminating entry level jobs. If we can inspire a greater amount of renovation to convert existing housing to be more energy efficient that will absorb a large number of construction skills. Also, if we are going to convert the economy to a greater use of items like Natural Gas and Alternative Energy, these infrastructure changes will create many jobs. The jobs being lost to technology, need to be replaced by an increase in health care and manufacturing opportunities. As we convert energy from foreign to domestic, we will see energy costs come down. If we can combine this with some improvements in our tax system, we can stimulate increased in manufacturing. Also as we improve health care to cover all Americans we should see opportunities in health care jobs. Of course, these jobs need to be in fields that supplement our Doctors and Nurses.
First, having avoided economic collapse by infusing capital into the banks, it is time for the Government to consider removing that money from the economy. Now, despite what many would like you to believe, the amount of money in circulation has not actually increased, since the reserve requirements imposed on the banks led to a significant reduction in available money. Of course the banks need to be cautious in reintroducing liquidity into the economy and the Government needs to make sure that capital requirements don't allow the reckless behavior of the last few years.
Second, we need to pursue the ongoing replacement of foreign energy sources with renewable or native alternatives. The lure of cheap oil has left us in a position where we face significant export imbalances. This change in the form of numerous initiatives will expand over time and while it will face challenges as foreign oil will go down in price, we need to make sure our policies equalize the playing field. One way to assure this is to determine a price below which alternative energy is uneconomical, and make sure that imported energy costs at least that much. This could be accomplished via a tax that would also help reduce the deficit. Now the tax shouldn't be designed to drive energy prices higher than required to continue economic recovery, but it clearly can help in the transition from oil to cleaner and more available energy. Also, Cap and Trade will lead to greater use of alternative energy and lead to installation of new technology and jobs. Also, providing tax incentives for home renovations to install more efficient or alternative energy will further reduce our addiction to foreign oil.
Third, we need to replace the jobs lost due to secular changes in the economy. The two most significant changes are related to reduced need for construction and the technological changes that are eliminating entry level jobs. If we can inspire a greater amount of renovation to convert existing housing to be more energy efficient that will absorb a large number of construction skills. Also, if we are going to convert the economy to a greater use of items like Natural Gas and Alternative Energy, these infrastructure changes will create many jobs. The jobs being lost to technology, need to be replaced by an increase in health care and manufacturing opportunities. As we convert energy from foreign to domestic, we will see energy costs come down. If we can combine this with some improvements in our tax system, we can stimulate increased in manufacturing. Also as we improve health care to cover all Americans we should see opportunities in health care jobs. Of course, these jobs need to be in fields that supplement our Doctors and Nurses.
Wednesday, December 9, 2009
Using TARP
It seems that many analysts and commentators are so caught up in their own political views that they have a lot of trouble with the facts. For example, their is a lot of misunderstanding about the TARP funds.
There are very clear rules concerning reappropriation of funds once used. As has been clearly stated by the administration and as is required by law, funds once used and returned, are returned to the US Treasury. The net result of that is clearly one of reducing the deficit. However, funds appropriated and not used are still available for use.
When the Administration talks about using TARP funds, it is not talking about using funds returned by the banks but about using funds that were appropriated and not used. Now, these monies are available for use and always were. Certainly, it is appropriate to use them in the time period and for the purpose appropriated. If the administration asks for and gets an extension of the times period authorized for use or if it can get the congress to change the rules regarding use, these are legal uses. Clearly, one may object to using these funds but what I find disturbing is when commentators on national TV shows don't seem to understand what they are talking about.
There are very clear rules concerning reappropriation of funds once used. As has been clearly stated by the administration and as is required by law, funds once used and returned, are returned to the US Treasury. The net result of that is clearly one of reducing the deficit. However, funds appropriated and not used are still available for use.
When the Administration talks about using TARP funds, it is not talking about using funds returned by the banks but about using funds that were appropriated and not used. Now, these monies are available for use and always were. Certainly, it is appropriate to use them in the time period and for the purpose appropriated. If the administration asks for and gets an extension of the times period authorized for use or if it can get the congress to change the rules regarding use, these are legal uses. Clearly, one may object to using these funds but what I find disturbing is when commentators on national TV shows don't seem to understand what they are talking about.
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