“Money we don’t have”

Good NYT article on deficit hysteria, with an especially illustrative quote from Rep. Cooper (D, TN):

“We have to stop spending money we don’t have,” said Representative Jim Cooper, a Tennessee Democrat who voted against the bill. “I hope deficit reduction fever is catching.”

The U.S. is in the midst of a balance sheet recession, with demographic ratios shifting an an unfavorable economic direction for several more years.  Under those conditions, deficit reduction fever will lead directly to the dreaded Japanese Disease —  another decade of stagnation, underemployment, and opportunity costs, all of which will impose greater burdens on future generations than expanded federal deficits would.

And policymakers — not to mention most members of the electorate, including analysts and the media — continue to commit two fundamental errors regarding fiscal policy:

1. They believe that all deficit spending must be financed with interest bearing debt, thus competing with the private sector for scarce financial resources.  However, judging by current Treasury rates, there’s still plenty of room for expanded federal borrowing.  And there’s a symbiosis between federal deficits and repair of balance sheets in the financial sector, as evidenced by the perfect quarters turned in by several major investment banks recently.  Politically, that relationship is almost nauseating, as it’s doing very little to relieve distressed households — but it nevertheless makes apparent the  dynamic between public sector fiscal deficits and private sector balance sheet relief.
2. They also believe implicitly that the U.S. is on a gold or similar standard, where fiscal and monetary policies are constrained by the supply of some exogenous factor, and governments can thus literally “run out of money.”  Governments can’t run out of money, as it is ’created’ by nothing more than digital ledger entries.  In other words, government (today, via operations of the quasi-private Fed) is the sole creator and supplier of high powered money.  Thus, the only constraint on money creation is inflation and a loss of confidence in the currency, and at the moment, those forces are emphatically not in play.  This too is symptomatic of Japanese Disease.

The fears of incumbent politicians like Cooper are certainly understandable.  But they’re borne of either ignorance about how these things work, or self-preservation.  Either way, it smacks of lousy political leadership. 

And given that Republicans are likely to benefit in November, we’d expect the trend towards fiscal conservatism to intensify.  Even President Obama, in a speech yesterday, promised the following:

• A three year freeze on all non-discretionary federal spending beginning in 2011
• Expiration of tax cuts via sunset provisions
• Elimination of 120 federal programs
• Reinstatement of PAYGO
• Higher fees on banks that are expected to lower federal deficits by $90B over ten years

He promised all of this as a way to force the public sector to budget in the same way that families and businesses do.  Again, this is wrong, and is borne of either ignorance or pandering.  And as with Congress, it smacks of crummy political leadership either way. 

The administration’s jawboning is also reminiscent of budget austerity measures touted by the Carter administration in the 1970s in reaction to the “tax revolt” — austerity measures that contributed to its eventual demise, even though they may have been more appropriate to the conditions prevailing at the time (e.g., baby boomers entering adulthood, global trade and financial integration, etc).   Today, austerity is far less appropriate, but even more vigorously pursued.  That almost certainly spells trouble for Obama in 2012 – assuming the GOP can field a worthy candidate and avoid blowing all of its political capital in the intervening years. 

You also have to wonder, were he to experience a change of heart, whether there’s any credible way for him to backtrack from his neo-liberal rhetoric.  The DLC, Brookings, Peterson, and all the other usual suspects have painted the guy into one hell of a corner.

In the meantime, assuming that reality will align with rhetoric, the political climate continues to be favorable to the USD and Treasuries, and rather risky to gold.  A contrarian call? You bet.  But it’s based on what we think is a well-grounded and – just as importantly – non-ideological assessment of the facts. 

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (“SCM”) is a state registered investment adviser in the Commonwealth of Pennsylvania. The views expressed by the author are as of the publication date, and are subject to change based on market and other conditions. The foregoing information is for informational, educational, or entertainment purposes only. It does not constitute an offer to buy or a solicitation to sell any security, or to engage in any investment strategy. Investors should not use this information as a basis for any investment decisions without first consulting their own financial adviser. SCM is an Amazon.com associate, and earns a commission on sales generated through links from our website. Some clients of the firm are long GLL and/or long TLT.  At the time of writing, neither the firm nor its principals owned any securities mentioned. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

URLs:

http://www.nytimes.com/2010/05/29/us/politics/29deficit.html

http://www.japanreview.net/review_bsr.htm

http://www.miraeasset.com/ourmarket/outlookView.do?board_id=1125&group_id=1&pageNo=2

http://www.investmentnews.com/article/20100602/FREE/100609973

http://seekingalpha.com/article/208174-how-deficit-hawks-will-keep-cutting-spending-until-we-re-all-on-food-stamps

Some personal Facebook ‘stats’ on healthcare reform

Some very crude sample statistics on voter reactions to the passage of healthcare reform legislation, derived from my personal Facebook account:

Percentage of connections who cared enough to comment: 1.7%

Opposed: 60%

Approving: 40%

With so few people posting, the results are not statistically significant, but they do line up with more credible poll findings: http://healthcarepolls.blogspot.com/2010/03/comparing-iwfpolling-company-and.html

More Important Than Facebook?!?

Hold your tongue, internet security expert!

A Georgia mother and her two daughters logged onto Facebook from mobile phones last weekend and wound up in a startling place: strangers’ accounts with full access to troves of private information.The glitch — the result of a routing problem at the family’s wireless carrier… — revealed a little known security flaw with far reaching implications for everyone on the Internet, not just Facebook users.

In each case, the Internet lost track of who was who, putting the women into the wrong accounts. It doesn’t appear the users could have done anything to stop it. The problem adds a dimension to researchers’ warnings that there are many ways online information — from mundane data to dark secrets — can go awry.

Several security experts said they had not heard of a case like this, in which the wrong person was shown a Web page whose user name and password had been entered by someone else. It’s not clear whether such episodes are rare or simply not reported. But experts said such flaws could occur on e-mail services, for instance, and that something similar could happen on a PC, not just a phone.

“The fact that it did happen is proof that it could potentially happen again and with something a lot more important than Facebook,” said Nathan Hamiel, founder of the Hexagon Security Group, a research organization.

URLs:

http://news.yahoo.com/s/ap/20100115/ap_on_hi_te/us_tec_facebook_at_t_glitch

Those Damn Democrats

In a marked turnaround from 2008, a lot of pundits are predicting that Democrats will take a drubbing in 2010 midterm elections. Our view is that it’s way to early to call, as the economic mood in 2H10 will depend heavily on signals given (and actions taken) by President Obama, Congress, and the Federal Reserve in the first half of the year. But being opportunistic, the conversation gives us a chance to post this wonderful old chestnut:

Conference Board: Job satisfaction at record low

Disturbing findings from the Conference Board’s latest job satisfaction survey, which reached its lowest level since the survey began in 1987. Some endpoint comparisons:

Source: Yahoo, Associated Press, Conference Board

According to the AP article, these findings imply that the American work force could become less innovative, competitive, and productive over time. Potential explanations for declining job satisfaction:

Conference Board officials and outside economists suggested that weak wage growth helps explain why workers’ unhappiness has been rising for more than 20 years. After growing in the 1980s and 1990s, average household incomes adjusted for inflation have been shrinking since 2000. Also, compared with 1980, three times as many workers contribute to the cost of their health insurance — and those contributions have gone up. The average employee contribution for single-coverage medical care benefits rose from $48 a month to $76 a month between 1999 and 2006.

It’s difficult to know what forces and factors might be driving the underlying trends (lower pay, boredom, security, unhappiness with superiors) that are manifested in higher levels of job dissatisfaction. It would be helpful to have data prior to 1987, but accepting that as is, and assuming statistically significant and unbiased results, let’s consider them in the context of major structural developments of the past two decades. Two forces that spring to mind are productivity growth and economic globalization.

• Rising productivity could have a positive or negative impact. To the extent that it raises net income and/or free time, it should raise satisfaction. However, we’d have to have some idea of how the gains from higher productivity have been shared/divided among different industries, different types of workers (including in managers’ and executives’ compensation), different stakeholders (customers, creditors, shareholders, governments, society at large), etc. Further study might try to analyze whether declines in satisfaction have coincided with changes in the rate of productivity growth.
• Globalization has been a rising force since 1987, especially since the early 1990s, with undeniable effects on the structure of U.S. employment. And while education and retraining are reasonable responses, it’s important to consider that, relative to renovating an individual’s human capital, a job can be outsourced rather easily.
• We would also toss in the declining marginal competitiveness of our corporate tax code as a factor that, if it pushes capital investment outside of the U.S., amplifies the negative impacts of globalization (admittedly, this assertion requires that some qualifications be added to the role of productivity growth). The burden of corporate taxes has also been found under certain conditions to fall disproportionately on workers’ income.

Productivity gains can be shared among owners (share value and dividends), employees (income and benefits), executives (compensation), governments (tax authorities and and regulatory bodies), and society. The following table is a highly simplified back of the envelope tabulation, based simply on the annualized after-inflation growth rates in each of the following items, using a core PCE inflation rate of 2.7% per year (it doesn’t contain any direct estimates of productivity growth). Executive compensation data is fairly slippery — the low end is based on an amalgam of sources, and the high end is based on estimates of the ratio of average CEO compensation to average employee compensation (2006 ~ $400, 1980 ~$42, 1965 ~$20). Information on data sources is provided below.

For globalization, an overly simple proxy is returns to equity owners in developing markets. Brazil’s economy and Bovespa stock market index have been among the top performers over the period in question, returning almost 16% annualized the last ten years, and over 20% annualized since 1994; against an official annualized inflation rate over the past decade, we get a real annualized return around 9%, a figure that comports well with other emerging market return statistics.

We need to emphasize that this is a back of the envelope analysis that leaves plenty of questions unanswered. A more credible analysis would consider other potential forces and factors, formalize and scrub the data, and provide some meaningful statistical insights.  However, if we can at least assume that the ordinal findings hold up, then it’s a good start, and implies that the benefits of economic growth over the past decade or two have accrued first to developing economies and markets, then to equity owners and executives, then to public coffers, and only minimally to employees, which could help to explain rising job dissatisfaction.

Please note that we are not anti-globalization. But we do believe that developed economy countries can do a better job of designing and implementing policies that, while still friendly to trade and growth, can help mitigate the negative domestic impacts brought about by global economic development. We also believe that while health care reform is an important piece of the puzzle, closing the ‘compensation gap’ domestically would ideally be resolved in the private sector. However, the issue requires some enlightened executive and board leadership, and if history is any guide, the problem is most likely to be addressed via higher tax rates on top incomes. Finally,  if corporate taxes fall disproportionately on labor income, or amplify negative impacts of globalization, then they could be an indirect factor in job dissatisfaction, along with the more direct impact of payroll taxes and benefits costs.

===

Via a tweet from Laurie Ruettiman of the Punk Rock HR blog, there’s a video version of the AP story. Ruettiman also blogged about a new CBS series, “Undercover Boss,” that might contribute towards reducing job dissatisfaction (or not…time will tell). If you get a chance to watch the trailer she linked, it’s worth it (it’s a fun site to peruse too, see especially her short and sweet employee handbook). According to Ruettiman, Undercover Boss (like The Office, The Beatles, white boy blues, and the Mini Cooper) is another clever premise borrowed from the Brits.

Judging by the trailers, the show gives executives an anonymous, and thus open, firsthand view of their company’s line operations, and more importantly, some insight into the questions we raised above. In a year when corporate profits are expected to rebound nicely, a show like this could gain quite a popular following (of course, more cynical interpretations of corporate participants’ motivations are possible). If this allows a growing ’fair pay’ movement to take root, shareholders beware. With Wall Street’s social capital at all time lows, labor costs, including non-union labor, might be due for a trend reversal in the years ahead – though admittedly, that might not happen in the face of historically high unemployment levels. If it doesn’t happen, then current job satisfaction trends are more likely to remain intact, which, over the long run, will impose unwanted costs on us all.

DATA: According to one set of estimates (http://www.pay-without-performance.com/Core_Guay_Thomas-IsUS-CEO-Compensation-Inefficient.pdf, p. 65), executive compensation increased at an annualized nominal rate of just under 13% from 1993 to 2003, and another 13% in 2004 (http://www.guardian.co.uk/business/2005/aug/04/executivesalaries.executivepay2). It declined 15% in 2007 and 11% in 2008 (http://www.forbes.com/2009/04/22/executive-pay-ceo-leadership-compensation-best-boss-09-ceo_land.html). If we interpolate conservatively (g = 0%) for the years 1987-1992 and 2005-2006, we get an annualized rate of 5.2%, which is in the ballpark of a study that found a 5.57% annualized increase from 1997 to 2004 (http://www.cfapubs.org/doi/pdf/10.2469/faj.v63.n3.4687). EBRI estimates that employee compensation costs grew at 3.3% annually from 1987 to 2004 (http://www.ebri.org/pdf/publications/facts/0305fact.pdf).

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a state registered investment advisor. The foregoing article is intended only for readers’ interest, amusement, and edification. It is not an offer to buy or a solicitation to sell any security, nor is it a recommendation to engage in any particular investment strategy. Any mention of public securities herein is purely coincidental, and no securities mentioned are owned by the firm’s clients, principals, or the firm itself. SCM participates in the Amazon.com Associates program and earns a small revenue sharing fee (~4%) on qualified merchandise for any “click through” sales from our website.

URLs:

http://finance.yahoo.com/news/Americans-job-satisfaction-apf-1483464009.html?x=0&sec=topStories&pos=3&asset=&ccode=

http://www.youtube.com/watch?v=Gps7Dx8cN4Q 

http://finance.yahoo.com/q/hp?s=%5EBVSP&a=00&b=5&c=2000&d=00&e=5&f=2010&g=m

http://www.bcb.gov.br/pec/metas/InflationTargetingTable.pdf

http://punkrockhr.com/undercover-boss/

http://www.amazon.com/gp/redirect.html?ie=UTF8&location=http%3A%2F%2Fwww.amazon.com%2Fgp%2Fentity%2FWhite-Boy-Blues-%28Series%29%2FB000AQ2MUU&tag=symmetrycapit-20&linkCode=ur2&camp=1789&creative=390957

Other Criticisms of the ‘Gloomy Narrative’

Some support for our recent assertion that the U.S. press absolutely bungled the recent meeting between President Obama and President Hu of China (TOH to Brad DeLong):

• The Atlantic’s James Fallows, “Manufactured failure: press coverage of Obama in Asia”
• Fallows’ “Manufactured failure #2: the press, Obama, Asia” in which he cited the following three stories
• Howard French interview in the Columbia Journalism Review
• Tish Durkin in The Week, “Obama in China: What the media missed”
• Interview of Ambassador to China Jon Huntsman in the AP, “US envoy criticizes coverage of Obama visit” (Obama bashers should note that Huntsman is a Republican)

Additionally, a friend who’s an expert on China agreed with us that the behavior of students at the Shanghai townhall meeting was a rather worthless piece of evidence. They also pointed out that no matter what the financial relationship between China and another country, the Chinese government was not going to listen to any outside advice regarding its internal affairs (censorship, human rights, etc).  

All in all, the press really blew this one, perhaps out of a desire to perpetuate the prevailing myth of the U.S.-China power shift. Yes, there will be ongoing shifts in the two countries’ relative power. But a sudden shift is not going to happen overnight, and it’s especially not going to happen because China has accumulated vast USD reserves and U.S. Treasury holdings. In fact, on that latter point, one could argue that China has stepped on to the same tightrope that the Fed and U.S. Treasury – and U.S. Congress and Administration – have.

The press can sometimes get things wrong without meaningful consequences. But in this particular case, they’re feeding public debt (and other) anxieties of many voters, which could lead to short and/or intermediate term policy errors, and thus raise the likelihood of the dreaded “double dip” recession. 

URLs:

http://654advisors.com/index.php/blog/2009/11/the-curiously-gloomy-narrative-continues-obamas-lack-of-leverage-over-china/

http://delong.typepad.com/sdj/2009/11/links-for-2009-11-22.html

http://jamesfallows.theatlantic.com/archives/2009/11/about_press_coverage_of_obama.php

http://jamesfallows.theatlantic.com/archives/2009/11/manufactured_failure_2_the_pre.php

http://www.cjr.org/campaign_desk/not_for_all_the_news_in_china.php

http://www.theweek.com/bullpen/column/103219/Obama_in_China_what_the_media_missed

 http://www.google.com/hostednews/ap/article/ALeqM5hopMZkJxkn_lh9AvGu2oQySbyl7wD9C35FNO0

http://prasad.aem.cornell.edu/doc/policy/ChinaReservesNote.July09.pdf

The Curiously Gloomy Narrative Continues: Obama’s ‘Lack of Leverage’ over China

The Philadelphia Inquirer has an interesting front page article on the various issues negotiated between China’s President Hu and our President Obama during the latter’s recent visit to China. The article’s title proclaimed that “Obama finds he holds little leverage in China”, noting:

President Obama today wraps up a three-day visit to China that has left him keenly aware of the limits of his administration’s leverage over this economic powerhouse on issues from currency-exchange rates to human rights.

That characterization sounds a bit too pessimistic to us, and it’s yet another example of the curiously gloomy narrative that has developed in the U.S. media around our relationship with China. We can assess the article’s assertion by comparing the issues that each President  brought to the table.

China would like the U.S. to: 

• Tighten Federal Reserve policy in order to support the value of China’s U.S. dollar and debt holdings, and lower inflation risks in China;
• Avoid raising barriers to trade between the two countries;
• And avoid seeking stringent curbs on CO2 emissions from developing economies at the upcoming Copenhagen summit.

Meanwhile, Jon Huntsman, the U.S. Ambassador to China, was quoted as saying that the U.S. was focused on “key global issues”. President Obama requested that China:

• Allow its currency, the renminbi (RMB), to strengthen against the USD, and moving closer to a floating exchange rate regime;
• Expand human rights protections and limit state censorship;
• Commit to shouldering its share of the burden in combatting climate change;
• And help “contain the nuclear ambitions of North Korea and Iran.”

Look at those two lists and ask yourself which country’s well-being was most on the line. Hu’s requests were aimed at preventing major economic burdens from being imposed on China by entities outside of China.  But other than the impacts that a stronger RMB could have on U.S. exporters, Obama’s requests were aimed at the distinctly non-U.S. issues of climate change, nuclear proliferation, and China’s dealings with its own population!

For several years now, the media’s prevailing U.S.-China narrative has hung on the fact that China is a major holder of U.S. debt, and that this is somehow “unsustainable”. While the last decade’s rate of accumulation may be unsustainable, the current situation is more benign than many assume. And even if the situation were dangerous, China’s position is just as precarious as ours. That’s especially true when you compare productivity and per capita income levels in the two countries (military strength is also a factor), as well as secular and political shifts in the U.S. economy.

The story also tried to make something out of the fact that neither President Hu nor students attending Obama’s Shanghai townhall meeting showed much emotion. If that were a cultural anomaly in China, we might make something of it. It’s not, so we don’t.

All in all, there seems to be little basis for the claim that President Hu had the stronger hand.

URLs:

http://www.philly.com/inquirer/home_top_stories/20091118_Obama_finds_he_holds_little_leverage_in_China.html

http://news.yahoo.com/s/ap/20091118/ap_on_bi_ge/climate

http://654advisors.com/index.php/blog/2008/12/