Republicans flexing their opposition muscles

The House Republicans have expressed themselves as the opposition today by rejecting the ill-contrived Obama Stimulus package. Under the leadership of Rep. Boehner and Rep. Cantor, the House Republicans appear to be voting en masse against the plan.

At an ideological level, Obama's plan is doing a little bit of everything to stimulate the economy, other than make the market more free and unregulated. Republicans want more tax cuts to create an immediate impact. Democrats want more spending to expand the government, which would take longer to get into the economy. Tax cuts have lasting impact year over year. Spending is a one time shot in the arm. The argument against tax cuts is that not all of the money can be guaranteed to be spent. Well, if the money is saved that money is invested or expands the assets of the fiduciary holding (i.e. banks) which gives them more leverage to borrow. Isn't credit availability the heart of the problem here?

With stimulus dollars intended for things like contraception and ACORN, who would vote for this Boondoggle part deux.

http://www.politico.com/news/stories/0109/18024.html
http://www.foxnews.com/politics/first100days/2009/01/27/republican-leaders-raise-concerns-acorn-stimulus-dollars/
http://www.usnews.com/blogs/capital-commerce/2009/1/27/10-reasons-to-nix-the-stimulus-plan.html
http://news.yahoo.com/s/ap/obama_economy Sphere: Related Content

This recession was inevitable and overdue!

In a Utopian world, we would never have recessions, depressions, or restraints. We could grow and spend and over-extend ourselves without consequence. We do not live in this fairy tale world. We are fortunate enough to live in a free market society that provides the opportunity to prosper but also the painful recourse when an opportunity is mismanaged. And rightfully so, we are now entering a time of punishment for over-extension of credit, surplus goods, and false demand-boosting incentives in the 1990's and 2000's.

Like many things in life, prosperous times come and go. Riding the flows upward are fun and the ebbs down are not. But its not with a messianic clairvoyance that one could foresee this coming. With a simple understanding of Economic principles (supply & demand, market pendulum, velocity of money, etc.) it is more of a question of "why did it take this long for the proverbial "bubble" to pop?"

Pick your bubble (housing, energy, tech, .com, etc.) and it has contributed to this downturn in our economy. When you over supply a market with a product (houses) without reducing prices, you create a surplus gap between the supply and the demand. Mortgage companies sought to remedy this gap by reducing the immediate impact of purchasing a home at the same price by deferring payments. This helped raise demand which fueled additional building. However, as the deferred payments and interest caught up with over-extended buyers, demand plummeted.

Here are some interactive S&D curves to play along:
Supply: http://www.bized.co.uk/learn/economics/markets/mechanism/interactive/contain.swf?path=demand_and_supply4.swf

Demand:
http://www.bized.co.uk/learn/economics/markets/mechanism/interactive/contain.swf?path=demand_and_supply2.swf

This is an over-simplified micro-economic view of why growth has slowed. But, apply this misalignment in the supply & demand of products to a handful of industries and you have momentum. Free markets contain tightly interwoven dependencies throughout the various supply chains. The benefit is cost efficiencies and competitiveness. If there is true competitiveness, when one entity falls or fails another can rise in its place. This does not happen instantaneously and in the time it takes for the successor to rise or enter that market there can be further decline among other associated entities. So as one grows/declines so does its dependencies, which creates an inertia. If the inertia is not controlled we get the large boom and busts. The problem is that the larger/longer the boom the larger/longer the bust and vice versa.

Looking at a macro-economic view let's go back to the Utopian idea of no recessions. Well in theory it is possible. Based on the idea that markets act like a pendulum, if you don't have a flow you won't ebb. Economists vary in there belief of the ideal growth % to avoid the rollercoaster. I've come to adopt 5% based on Ibbotson's analysis of Risk Premium in the Cost of Capital equation of the Capital Asset Pricing Model (CAPM). CAPM helps determine the rate of return for an asset and is a quantifiable measure of the value of an investment. The Risk Premium takes into account the opportunity cost of not investing the potential investment capital. Ibbotson determined that in developed countries the risk premium averaged 5% throughout history. In other words, if you invest in the market expect 5%. If your investment opportunity presents a higher percentage, seek the opportunity.

Lets look at a 5% annual growth versus the Adjusted Closings for Dow Jones Industrial Average, NASDAQ, and S&P 500 throughout each indices history.

DJIA:
The Dow, Jones & Company has existed since 1882 and has been tracking an annually chosen group of 50 predominant companies from leading industries. The companies have changed over time with General Electric being the only original company still included (except from 1902-1908). As the graph shows, the post WWII era of growth was inline with the 5% annual growth up until 1964. From 1964 the DJIA stagnated with some large swings until 1980. From 1980 to 1994 you can see a steady growth back towards the 5% line, with a few down years (1989-1990). From 1994 to 1999 the DJIA almost tripled from going 3800 to 11500!!! This unprecedented growth was the ride of rides. However, reality came back as the market started to correct itself from the overheating with the declines through 2002. President Bush and others realizing the potential magnitude of the decline following the boom used steps to change the decline (pre-9/11). Unfortunately for us today, those steps were too aggressive in my opinion and created another boom rather than a soft landing back at consistent growth. Instead the false confidence grew the DJIA to an all-time high of 14,164.53 in Oct. of 2007 and we have been sliding ever since as the market continues to correct itself.














NASDAQ:
The NASDAQ (National Association of Securities Dealers Automated Quotations) was founded in 1971 and is currently comprised of approximately 3,200 companies. It has the highest trading volume per day of any stock exchange in the world and gained its place along side the DJIA in the 1990s by focusing on technology and growth companies. The graph shows a similar trend as the DJIA against a 5% annual growth. The 1970s were a stagnant period with steady growth through the 1980s and early 1990s. Like the DJIA, the NASDAQ composite boomed in the 1990s as it gained 6 times it value from 1994 through 1999 going from 750 to +4000!!! Hurt by the .com and technology bubbles of the late 1990s, there was a resurgence from 2002 to 2007 and decline ever since.













S&P 500:
Published since 1950, the Standard & Poors (S&P) 500 index is comprised of 500 stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. The 500 companies are typically the 500 largest American stocks according to market capitalization. Similar to the DJIA and NASDAQ the S&P500 saw growth inline with 5% through the 1950s until 1964. It then stagnated until 1980 and then steadily grew until 1994. From 1994 to 1999 the S&P500 tripled its value from 450 to +1500!!! It too declined into 2002 and re-boomed until 2007 and has been down ever since.

What the 3 charts illustrate is that we are now paying the price for the boom of the 1990s. The market appeared as though it would correct itself in 1999-2002 but then falsely manipulated growth sustained until 2007. It was appropriate to attempt to control the downturn in 2002, but the errant attempts to cling to the 1990s may have caused us even more pain now. This economy was due to slow down after the 1994-1997 joy ride. 2002-2007 only deferred the slow down and may cause a deeper and longer recession because of it.

So, let's apply this lesson towards a more cautious attitude and sense or reality as we combat this recession. President-elect Obama and his team have floated the idea of large stimulus and quick return to the double-digit growth slopes of recent yore. Largely based on public demand for a return to those haydays, I argue that it is not what we need. We need to return to steady consistent growth in the single-digit percentage range. Its fun to go fast but not on the way down. Let's slow the economy for a sustainable long-term growth rather than a short-lived burst. The problem is that political figures have a shelf-life and long-term steady growth is not beneficial to them during their career. However, their legacy will be judged by the history of tomorrow's tomorrow. A strategic vision of economic growth is why we can look back and say that Presidents like Truman-Eisenhower-Kennedy and Reagan-Bush did more to advance the prosperity in American than the short-term benefits of economic times under Presidents Ford-Clinton-Bush.

Signing off...JCB

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Democrats using good old Bait & Switch tactics

For anyone who thinks that these bailouts will not nationalize in some way the private banking, auto, mortgage, etc. industries, think again!

As we hear calls for more "bailouts" to save these uncompetitive companies, we simultaneously hear Democrats clamoring for greater "oversight" of the issuing of the bailout money. It has even been suggested that we need a Car Czar.

Now I'm with all of you, there should be accountability for how the money is spent and who receives it. But I fear that the Republicans are oblivious to the bait & switch tactics at play. The Democrats are appealing to the reasonable conscience when requesting greater oversight. However, this power can be manipulated and abused.

Take the idea of a Car Czar:

• Where does his or her authority end?
• Is it solely in the administration of the money or does it extend to efficiency standards, labor contracts, product placement, green technology, etc.?
• Even if limited to the money, what are the contractual terms governing issuance?
• Can the Car Czar withhold bailout money from a car company that isn't meeting fuel efficiency targets or meeting union benefit demands?
• Can the Car Czar set precedent across the entire U.S. auto-manufacturing industry or is he or she limited to the Big 3 under the Bailout agreement?
• Can the Car Czar impose on other auto-manufacturers the uncompetitive labor requirements that the Big 3 have subjected themselves to?
• Does the Car Czar have authority over import tariffs on foreign owned auto-manufacturers?

These are all questions that need to be asked when Democrats invoke oversight privileges. This may not be a revolution, but the slow coalescing of control over market independence. Government oversight in the hands of ideological soldiers spawns into nationalized control of industry, that's Socialism. It is up to those who oppose this future to keep them in check, challenge their expansion of power, and educate the public on the subversive goals of their actions.

Signing off...JCB Sphere: Related Content

Let the Detroit 3 go Chapter 11, ASAP!!

The final test for this "lame duck" congress comes this week with the push to bailout the Big 3 U.S. auto-makers (GM, Ford, and Chrysler). I urge those in congress to vote NO.

The Democratic leadership is pushing to appropriate $25B of the approved $700B bailout for these auto-makers. It is not a bailout for the auto-makers but rather a Christmas present for the United Auto Workers (UAW) union. $25B will cover roughly 4-5 months of operating expenses and will not change their unprofitable ways. In Spring they will be back with their hands out or worse, fail regardless of the bailout and/or layoff many of its workers.

The GOP congress and President Bush have offered a compromise position, re-purpose the already approved $25B from moneys allocated to re-tool and development of hybrid vehicles into a no strings attached loan. Democrats have turned this down, and I say don't offer that up either. At most offer an extension of unemployment benefits and re-training credits to the workers if they are laid off as part of any Chapter 11 filing or actions.

The U.S. auto-makers have a defunct business model which has been propped up by their lobbying efforts. They are paying almost double in overhead operating cost per worker than the "foreign" owned auto-makers operating in the South. Their concessions to the UAW in the 1950s forward have sealed their fate.

They need to fail and go into Chapter 11 bankruptcy. That will allow them to re-negotiate union contracts, restructure, sell off failing brands, and change Management. This is what they need. For some reason people think that this will be the end of U.S. made vehicles. WRONG!

Just as the failing airlines had to go through Chapter 11 restructuring, the auto-makers need to do the same. Cars will still be built and warrantied, just as flights continued to fly. Union contracts need to be re-negotiated or eliminated. Using Northwest as a comparison, it went into Chapter 11 and was able to replace its mechanics union, restructure pilot and flight attendant union contracts, create a new fleet strategy, and revamp its routes for cost efficiency. The Big 3 need this same help.

They have tried to vertically and horizontally integrate to invoke "economies of scale" as a business model. But it is a method not a model. They have become to big to handle and change. They cannot innovate rapidly enough because changes are so grand that the only investments that generate positive ROI are the proven existing technologies. To change to a electric hybrid vehicle, they can't simply retool manufacturing. They have to retool the mfg. lines, develop the product, re-engineer the vehicles, source within their own supplier, develop distribution models for the supply chain, not to mention marketing and sales overhead. Oh, and not just for one brand or style of vehicle, but since manufacturing lines have been so inter-woven, the change will need to happen across multiple brands and or vehicles.

They have over supplied the market with cars and therefore people can't afford the prices they need to be profitable given their operating costs. Their perceptions of the demand curve are not in-line with the reality. Demand is lower than the supply they need to be profitable. Demand will drop in this economy. You can't incentivize your way to profitability. Part of the bailout is a $7,500 incentive for buyers of electric hybrids like the brainchild Chevy Volt. Congress is essentially interpreting that demand will not meet the supply curve. Think of it this way, the taxes you pay will help your neighbor buy a new car! Hope you get a ride!

Demand will not go away! There will be a demand for new cars, domestic and foreign made. Sure the foreign owned auto-makers will probably see a market share bump because of this, but there won't not be a U.S. owned auto-maker. They will breakup the conglomerates and form new partnership and establish new profitable business models.

For the companies who supply the Big 3, they will still need your products. Orders may be down and you will have to look at new companies to supply, but if you have the right product at the right price, you will recover.

Regarding the calls that we bailed out the Financial Institutions and Banks; new automobiles are a luxury, credit is essential to market operations. Like the Steel Industries in the 80s, let them roll and re-emerge as a more efficient and profitable industry.

I wonder if G. Richard Wagoner, Jr., Alan Mulally, William Clay Ford Jr., and Robert L. Nardelli are secretly wishing for Chapter 11 so they can finally loosen the iron grip of the UAW.

Signing off...JCB

Update: Romney echoes the needs for the Big 3 to restructure and how the bailout prevents that: http://www.nytimes.com/2008/11/19/opinion/19romney.html?_r=1&hp Sphere: Related Content

Anticipation for Obamanomics

More signs of the coming revolution...

As Obama has now started tying free market capitalism with the failed Bush years, he will continue to push his socialist agenda.

His friends are wringing their hands in anticipation!!

Castro has endorsed BO: http://thecaucus.blogs.nytimes.com/2008/05/26/castros-stinging-endorsement/

Iran sees the end of Capitalism: http://www.breitbart.com/article.php?id=081015152055.72llwkbo&show_article=1

The Leftist Australian PM agrees with Obama that Capitalism is a failed practice: http://www.breitbart.com/article.php?id=081015113127.9uzhf7lf&show_article=1

Obama has clearly stated his beliefs that Healthcare, College Education, etc are RIGHTS!! He has not refuted his intentions to redistributing wealth. He continues to propose additional spending and control from the Government. Because he believes that socialist-style Government is the answer to all problems. See a problem, spend. This is all intended to work towards a Dependent Society. When government is the answer, you become dependent upon it rather then yourself. If you are dependent upon it, why would you vote against anyone who advocates anything other than continue dependence and expansion of it.

Troubling times ahead if McCain can't turn this around.

Signing off...JCB Sphere: Related Content

The coming Keynesian revolution

With the election of Barack Obama, we will certainly see a dramatic shift in economic practicality by our leadership. With majorities in both houses of congress and BO at the wheel, there will be no stopping them from reverting us to New Deal-style Keynesian economics that Reagan saved us from.

Conservatives beware, a wave of modern-liberalism is coming. Big interventionist Government of which we have never seen. The Betram Scudder's of this world continue to prop up the facade that is BO. 3 weeks left until the revolution!!

McCain is the hope. He's got a fight left ahead of him, thankfully he is a warrior. Our warrior.

Signing off...JCB

http://www.nytimes.com/2008/10/14/opinion/14brooks.html?_r=1&ref=opinion&oref=slogin
http://weeklystandard.com/Content/Public/Articles/000/000/015/700zvwxt.asp Sphere: Related Content

Distinguished Economists Agree with McCain

100 Distinguished Economists from major universities, including 5 Nobel Prize Winners, agree that Obama's tax policies would be detrimental to our economy. Read all about it here!

Ladies and gentlemen, you don't need an advanced degree in economics, or to understand the intricacies of integral Calculus to comprehend the basic, fundamental flaw in Senator Obama's argument: he thinks you can 'trickle up' prosperity by taxing businesses. The same tired and old class warfare argument has been tried time and again. Unfortunately, with an ally like the mainstream media, a pragmatic approach to economic policy never gets much press. Senator McCain favors tax cuts in a time of dire economic need, while Senator Obama is playing the same old, divisive class warfare games. I've asked the Democrats time and again what they think would happen if they increase taxes here at home, and I'm still yet to hear a logical answer. The same Democrats like Colorado's Mark Udall who proclaim that Republicans reward companies for "shipping jobs overseas" are advocating the very policy that will cause businesses to look for actual business friendly places (e.g., Ireland). Small companies will first lay off millions of workers, and then the price of goods will increase. That coupled with a U.S. Government that thinks it can basically print money to solve an economic crisis will make a $100 bill worth half an extra value meal in the not too distant future. Sphere: Related Content