Saturday, June 30, 2012

I Need Your Help. The Country Needs Your Help.

Today marks 18 months since I started writing BeeLine.  This is also the 253rd blog post I have written since I began.  I sincerely appreciate all of the kinds words and the encouragement I have received from many of you.

Unfortunately, there are just not enough of you.  Readership is steady but it is not growing.  I need your help in spreading the word.  Please consider recommending BeeLine to your friends if you see a post that you like.  Chances are someone else will also.  I definitely see an increase in volume when one of you links BeeLine on Facebook or in other forms of social media.  It does make a difference.

I know in talking to a lot of you that you forget to check BeeLine from time to time.  You are busy and there is too much to do, too much to read and too much to keep up with.  I fully understand.

An easy way to solve that problem is to subscribe to BeeLine by email.  It is easy to do by going to the "FOLLOW BY EMAIL" box in the upper right hand corner and entering your email address.  Whenever I publish a new post you will receive it right in your email box.

You can also follow BeeLine through Google Connect that will also let you connect through Twitter or Yahoo.  You can set that notification up in the "FOLLOWERS" section that is also in the upper right hand corner.

I want to test the power of BeeLine followers so tomorrow I am going to re-post my favorite BeeLine post of the last year and a half, "Improper and Wicked Projects".   Many new readers of BeeLine may not have seen this post from last August.   There are many, many more Americans that should read it   to better understand our founding principles and how far off track we have gotten in this country.  Please consider passing this post along to others that you believe might enjoy or benefit from it.

I consider myself a pretty good student of history.  I must admit that I never had read Federalist Paper #10 before reading it last year.   After reading it, I now have a true appreciation of the genius of our Founders and their wisdom in crafting our Constitution.   I was truly awestruck when I came across the passage on "Improper and Wicked Projects".  It was almost as if James Madison was alive today and writing about what is happening right now in our country.

If there is one thing that I have learned in all the reading and research that I have done in writing BeeLine is that we invite peril when we ignore our Constitution.  It has allowed us to enjoy the longest period of governmental stability in the world.   We invite problems when we try to expand it, extend it, extrapolate from it or excuse it.

As much as we want to think that we have evolved as People, when reading Federalist #10 we can see we have not changed one iota.  Our Founders understood our flaws, fallibilities and failings.  Even more importantly, they understood that combining these human weaknesses with someone who wielded the power of government was particularly dangerous.

Our Constitution was intended to provide the protections for us to survive the "bad actors" and the "bad times".  Our Founders could not prevent them from taking office but they designed a system to limit their individual power through checks and balances

Our three branches of government and the balance of powers among them are supposed to be our primary defense against tyrants and villains.  However, the final power in our Republic is the vote of the People.  That is the last wall of defense.

Our Founding Fathers did all they could to protect us in writing the Constitution.  Most importantly, they gave the People the power to have the government they want over the long term.  It might not always work the way the People want for two year, four year, or even six year periods at a time, due to the election cycles.  However, the People can have a major impact within two years, a significant impact within four years and almost total impact within six years (those lifetime appointments to the Judiciary can continue to upset things for a long time) on what type of government they will receive.

Therefore, the bottom line is that our Constitution gives the People the power to control their own destiny like no other country in the history of mankind.  The question that will be answered this year is what kind of country do we want in the future?

One of my favorite quotes is from Benjamin Franklin right after the Constitutional Convention had ended where the deliberations had been conducted in secret and no one really knew what the Founders had created.

Outside Independence Hall when
the Constitutional Convention of 1787 ended, Mrs. Powel of Philadelphia asked Benjamin Franklin,"Well, Doctor, what have we got, a republic or a monarchy?"With no hesitation whatsoever, Franklin responded,"A republic, if you can keep it."
Keep this in mind while reading "Improper and Wicked Projects" tomorrow and send it to others.  Many people simply do not have a solid foundation of facts.  Since I began writing BeeLine my primary objective has been to give you solid content and context first and let my opinions follow the facts.  This post stands out from any I have written in giving me facts that I never expected about the thinking behind our Constitution and its relevance to today.  More need to understand and recognize the "Improper and Wicked Projects" that are among us.

I need your help.  More importantly, your country needs your help.

Thursday, June 28, 2012

A Three Branch Cop-Out

cop-out also cop·out 
n. Slang
1. A failure to fulfill a commitment or responsibility or to face a difficulty squarely.
2. A person who fails to fulfill a commitment or responsibility.
3. An excuse for inaction or evasion.
The American Heritage® Dictionary of the English Language, Fourth Edition copyright ©2000 by Houghton Mifflin Company. Updated in 2009.

The Supreme Court has ruled on Obamacare and in so doing they have completed a "Three Branch Cop-Out" in which all three branches of goverment (Executive, Legislative and Judicial) failed to fulfill their responsibilities.

In diving and gymnastics, dives and routines are scored based on the degree of difficulty. The more spins and flips that are incorporated into the performance the more credit the athlete receives.

In the case of health care reform, the task was difficult at each stage. There is no disputing that fact. However, each branch of government chose not to face the difficult decisions in front of them squarely. They failed to act responsibly. I give them each a 0.0 score for they utterly failed to execute their duties for the good of the country.

Our three branch system of government was established by our Founding Fathers because they knew the fallibilities and flaws of men (and women). Especially of those who are put in a position to govern over the rest of us. Due to this fact, they put a system of checks and balances in place.

It was considered very probable that one of the three would get something totally wrong. It was possible that two of the three would take us down the wrong path. However, they reasoned it would have to be very difficult to get something wrong from all three branches of government. I doubt that they thought that all three could successfully perform a Three Branch Cop-Out. If only James Madison could score this one himself from the judging stand!

Let's look at the individual performances that made up the Three Branch Cop-Out.

Executive (President Obama)

There is little doubt in my mind that he performed the biggest cop-out. It started when he ran for President declaring that he wanted comprehensive healthcare reform with guaranteed issue coverage but with no individual mandate. Anyone who knows anything about this issue knows that this fundamentally cannot be done. He completely misled the public on this point in the campaign. If you recall, he also continually attacked Hillary Clinton on this issue in the Democratic campaign.

He further copped-out by not funding the health care program with a broad-based tax that should be the foundational revenue source of any broad social program. There is a legitimate policy argument that providing health care coverage is a fundamental function of the federal government under its duties "to promote the general welfare". However, under this "social model" concept it has traditionally followed that general broad-based taxes should be used to fund this government spending. This is the model on which Medicare and Social Security are based. It is also the model that has always been used for local schools, police and fire protection etc. President Obama chose not to follow this proven path by sleight of hand.  He paid for the extension of "general welfare" coverage but putting the entire cost on a few taxpayers in yet another redistributive income scheme.

His final cop-out was continually claiming that the individual mandate was a penalty and not a tax. We heard that he would not raise taxes on middle class families. We heard that if you wanted to keep your current coverage you could keep your coverage. We now know the whole truth and the entirety of the cop-out.

Legislative (Democrats in the House and Senate)

The legislative branch cop-out is very straightforward in this case. They had every opportunity to draft this legislation any way they wanted. The easiest way to insure that there would be no constitutional problems with the legislation (as ultimately proven by the Court's decision) would be to enforce the individual mandate with a tax rather than a penalty. Our legislators did not want to face the voters and say they voted for a tax increase. An earlier version of the bill called it a tax and this version never was put forth for a vote because they did not believe the bill could pass. Eighteen times in the statute they called the sanction for not complying with the individual mandate a "penalty". Quite simply, it was a cop-out.

Judicial (Chief Justice Roberts and the Four Liberal Justices)

The day before oral arguments on Obamacare I predicted that the law would be upheld in my blog post "Obamacare Abomination."
My guess is the Supreme Court will uphold the law.  That opinion is not based on what I think should happen but on what I think will happen. 
It is extremely rare that the Supreme Court overturns a law that Congress has passed.  The most recent data available indicates that only 158 Acts of Congress have been ruled unconstitutional since the beginning of the Republic in 1789.   This really shows the influence of politics on the Court.  There seems to be a real reluctance on the part of the Supreme Court to get involved deeply in the politics of the day.  That is a big reason that I believe that the Court will not overturn the law. 
It is difficult to see Chief Justice Roberts' actions as anything but one of the biggest cop-outs in the history of jurisprudence.  You can clearly see the "political" aspect of the Roberts opinion with the statements he made with his opinion.  Even though his job is supposed to be to protect the rights of the people under the Constitution he pulls this cop-out.

"We do not consider whether the Act embodies sound policies. That judgment is entrusted to the Nation’s elected leaders.”
“Members of this Court are vested with the authority to interpret the law; we possess neither the expertise nor the prerogative to make policy judgments. Those decisions are entrusted to our Nation’s elected leaders, who can be thrown out of office if the people disagree with them. It is not our job to protect the people from the consequences of their political choices.”
I could agree with this logic if Roberts and the majority did not have to go through such contortions to uphold the law. For example, a strong majority agreed that the law was unconstitutional under the Commerce Clause. They agreed that it was unconstitutional under the Necessary and Proper Clause. They could only find support for the law by recharacterizing the penalty provisions in the law and calling it a tax.

Thus, in effect, the Executive and Legislative branches had every opportunity to write this law any way they wanted to.  They copped-out.  Justice Roberts and a majority of the Supreme Court simply rewrote the law to save it.  Is this not the most blatant example of legislating from the bench we have ever seen?

Consider what Justices Scalia, Kennedy, Thomas and Alito stated in their dissent.

"[W]e cannot rewrite the statute to be what it is not," the four Justices write. "[W]e have never—never—treated as a tax an exaction which faces up to the critical difference between a tax and a penalty, and explicitly denominates the exaction a 'penalty.' 
It is even more troubling when it is considered that the Constitution requires that tax bills originate in the House of Representatives.  Recall that the healthcare reform bill originated in the U.S. Senate.  Again, from the dissent in the case.

T]o say that the Individual Mandate merely imposes a tax is not to interpret the statute but to rewrite it. Judicial tax-writing is particularly troubling. Taxes have never been popular, see, e.g., Stamp Act of 1765, and in part for that reason, the Constitution requires tax increases to originate in the House of Representatives. See Art. I, §7, cl. 1. That is to say, they must originate in the legislative body most accountable to the people, where legislators must weigh the need for the tax against the terrible price they might pay at their next election, which is never more than two years off.

The Federalist No. 58 “defend[ed] the decision to give the origination power to the House on the ground that the Chamber that is more accountable to the people should have the primary role in raising revenue.” United States v. Munoz-Flores, 495 U. S. 385, 395 (1990). We have no doubt that Congress knew precisely what it was doing when it rejected an earlier version of this legislation that imposed a tax instead of a requirement-with-penalty. See Affordable Health Care for America Act, H. R. 3962, 111th Cong., 1st Sess., §501 (2009); America’s Healthy Future Act of 2009, S. 1796, 111th Cong., 1st Sess., §1301. Imposing a tax through judicial legislation inverts the constitutional scheme, and places the power to tax in the branch of government least accountable to the citizenry. [...]
Another point for consideration.  Private sector businesses are held to strict rules on truth-in-advertising, laws against bait and switch and fraudulent misrepresentation.  How does the Supreme Court square the  legal standards that would be used against a business in a similar situation and what was done in this case?  Would this not be considered fraud or bait and switch in any other case involving a private business or person?

What happens now? I wrote in my earlier blog post that if the law was sustained that it might result in public opinion finally turn in favor of the health care law.  However, it also might become a rallying call for its opponents in the upcoming election.

The Republicans and Governor Romney definitely appear to be heading down this path already.  The House has already scheduled a vote on repeal of the law for next week.   The November election now looks like it could be a referendum on both the economy and Obamacare.

If I were in charge I would take this one step further.  This is also the approach I would have taken if I were the Chief Justice.

Instead of rewriting the law as the Court did, I would have sent the law back to Congress and given the legislative branch the ability to re-do the legislation by inserting the taxing power for the penalty provision.  In effect, I would give them until the end of the year on a re-write of the law.  If they failed by that deadline, the law would be ruled unconstitutional so that the country could move on.  If they could pass it in such a way that it would pass Constitutional muster, it would stand.  This is how I believe that Roberts could have given himself political cover but also not subverted the Constitution.

There are some of you who will undoubtedly say, "How could the Supreme Court do that?"  My response is that they have shown they can do almost anything, so why would my approach have been any further outside of their powers than what was done in this case?

To House Speaker Boehner I would recommend that he follow a similar approach.  Move ahead with a repeal vote next week.  However, before that vote is taken, I would call for another vote on Obamacare that replaces the penalty language with tax language.  Do this in order to get every member of the House's (of which every one of the 435 members is up for election this Fall) vote on the record.  This would then also conform the law with what the Supreme Court has ruled is the constitutional version of the bill.  After this vote is taken, then vote on repeal of the original law.

It is time to see who cop-outs and who is truly committed to the Constitution.

The people can then take notice of the votes on the record and "fully understand the consequences of their political choices" in November.  That is the ultimate power that was given to all of us by our Founders as the final check and balance on those that govern us.  Choose wisely.

Sunday, June 24, 2012

The Changes in How We Die

This looks like it will be the week that the Supreme Court will rule on the constitutionality of Obamacare so what better way to start the week than a health care topic.

The New England Journal of Medicine recently published an article by Drs. David Jones, Scott Podolsky and Jeremy Greene on "The Burden of Disease and the Changing Task of Medicine".  Translated for mere mortals-"The Changes in How We Die".

The authors look at data from 1900-2010 to demonstrate how disease and treatment is a moving target.  You can see the changing nature of disease and death in this chart of the Top 10 Causes of Death comparing 1900 and 2010.

New England Journal of Medicine Using Data from the Centers for Disease Control and Prevention
The chart shows the considerable advances of health care over the last century.  Overall deaths per 100,000 have been cut in half.

Deaths from pneumonia and influenza, which were the largest killers in 1900, have been reduced by 90%.  TB and GI infections, the second and third largest causes of death at the beginning of the century, do not even make the chart today.  Deaths from accidents have been cut in half even though automobiles, airplanes and other complicated types of machinery did not exist in 1900.

Despite the progress on these fronts, other diseases have taken their place, as you can see from the increase in deaths from heart disease, cancer and diabetes.  The authors note this change and comment that "In many respects, our medical systems are best suited to diseases of the past, not those of the present or future.  We must continue to adapt health systems and health policy as the burden of disease evolves."

The decision involving Obamacare will have a significant impact on the future of health care in this country.  We can only hope that it is the right one.

Wednesday, June 20, 2012

The End is Nigh

At some point the money runs out.  There are only so many dollars to dole out, euros to expend, and yen to spend.  The can cannot be kicked down the road once again.  At some point the can reaches the end of the road.

We are increasingly reaching this point around the world.  The point at which the only choices left are either tough or bad, or both.

The headline in yesterday's Cincinnati Enquirer provides an example of the place we are coming to as it reported on the City of Cincinnati's choices on its fiscal problems.  Cincinnati is not unique.  There are stories like it all over this country...and in other places around the world.

CITY COUNCIL: NO property tax hike

Which means: NO swimming pool renovations .... NO new police stations ... NO new police and fire vehicles ... NO new playgrounds ... NO more money for Music Hall renovation, repaving streets or building demolition

Today's Cincinnati Enquirer turned its attention to Hamilton County's (Ohio) budget choices.

County cuts could mean 'anarchy'

Planned Hamilton County budget cuts could mean convicts will have less supervision, the courthouse may close one a day week, and mortgage paperwork could be delayed. 
Chief probation officer Mike Walton, put it this way: “It’s called anarchy.” His department faces a 30.9 percent budget cut.

Faced with up having to slash up to $24 million to balance the 2013 operating budget, Hamilton County department heads learned just how much they’ll have to cut.
Of course, California has its only challenges as reported in this Reuters story

California likely will need to cut spending more: S&P

California's $15.7 billion deficit is about 30 percent of the total gap all states face in the coming fiscal year, Standard & Poor's said in a report on Monday, saying the state likely will have to cut spending further to balance the 2013 fiscal budget.

We are all familiar with the stories out of Europe.  This headline from The Telegraph in the U.K. about Greece is just one example.

However Greece votes, there is no way out of austerity

The key fact for Greece is that it is running a current account deficit of between 7-8 per cent of GDP, and a fiscal deficit of around 7-8 per cent of GDP. Or in other words, Greece – the entire nation – is borrowing around 8 per cent of its national income from abroad every year. All in bail-out funds.
The reason for that is because between 2002 and 2010, the euro masked a fundamental loss of competitiveness; cheap money flooded in from German savings, funding a profligate and corrupt government's deficit, and pushing up wages and prices. Over the period, Greek wages increased by 30 per cent, while German ones fell by 8 per cent. In the single currency, that was unsustainable, and when it stopped, it stopped very suddenly indeed.

All roads are leading to the road where the can has been kicked down the road.   And that road is a dead end with only one way out-walk back and reverse all the excesses that led to the debt spending binge.

The time has come for government to live within its means.  Spending no more than what they take in from tax receipts and understanding that trying to increase taxes under the economic environment today is a losing proposition that few voters will accept.

Our elected officials also have to realize that the era of big benefit and retirement packages for government workers is over.  Look at the headlines above.  Voters are simply not going to accept reduced police, fire and other essential services in order to preserve the rich pension and health care benefits of government workers.

The same is true for entitlement spending.  It will not survive in its current form. We are close to only having only enough in tax revenues to pay for entitlement spending and nothing more.  It is unsustainable and people are not going to give up all of the other things that government provides to pay for entitlement spending.   There is a need for national defense, prisons, national parks, highway spending and other basic services.  

No one likes to pay taxes.  However, there has generally been a connection between these costs and some form of benefit.   We are at a point where this connection is being lost.  If I pay taxes to my city and I don't get adequate police protection, schools and paved roads but the city employees are getting a rich pension, there is a problem.  The same is true at the federal level.  Two-thirds of federal government spending is not to support government functions but is a direct payment to individuals in entitlement spending.  This is simply not supportable or sustainable over the longer term.  In the end, it will not stand.

There is little question how this will end. The difficult task to predict is when it will end.  However, the end is nigh.   

Thursday, June 14, 2012

The Private Sector Is Doing Fine

President Obama stated last week that "the private sector is doing fine."


  • The overall unemployment rate is 8.2%.  There are 12.5 million unemployed Americans.  Another 11 million are discouraged, underemployed or working part-time so are not considered unemployed.
  • The unemployment rate for government workers is 4.2%.  Compare that to private sector workers in construction(14.2%), hospitality services (9.7%), agriculture (9.5%) and professional and business services (8.5%).
  • There are 89 million million Americans over the age of 16 who are not in the labor force.  This includes students, stay-at-home parents, retirees and those too discouraged to look for work.  This number has increased by 9 million over the last 4 years.  It is up almost 6 million in the last 2 years. There are 2.7 million more Americans not in the labor force than this time last year!
  • It doesn't matter if people are not working because they are unemployed, discouraged, retired, in school, on disability, or caring for children at home. There are bills to be paid in this country. People need shelter, food, energy ,medical care whether they are working or not.  Those bills can only be paid by those who are working.  They are either paid for directly by individuals and their families, by charities (via charitable contributions) or by the government (via taxes). The lower the percentage working, the greater burden those working carry for everyone else.  
  • The average American family has seen their net worth drop 40% from 2007 to 2010 (from $126,400 to $77,300) according to a recent survey by the Federal Reserve.  
  • Average wages for federal civilian employees (using the most recent data available from the U.S. Bureau of Economic Analysis in 2010) are $83,679 compared to $51,896 for those in the private sector.
Source: The Cato Institute 
  • Total compensation (including employee benefits) for federal civilian employees in 2010 averaged $126,141-more than double the $62,757 that private sector workers earn.
Source: The Cato Institute
  • Total GDP growth since 2008 in the private sector was an abysmal 5.3% between 2008 and 2011.  On the other hand, GDP growth in the public sector over the same period increased by 7.7% according to U.S. Bureau of Economic Analysis data.  Recently, private sector GDP has improved and public sector GDP has fallen, primarily due to cutbacks in state and local budgets.  This is the data point that I think that President Obama was thinking of when he made his comment.  Of course, these state budgets are out of whack due to unsustainable government pension and benefit programs and a lagging private sector that has reduced tax revenues. 
If you have access to all of this data and information, how would anyone come to the conclusion that the private sector is doing fine?  It only occurs if your perspective is that government is the only answer to our problems. 

Tuesday, June 12, 2012

The Bubble in Bonds

I used to tell people about the story of the financial bubble involving tulips in the early 17th century and most had a hard time grasping it.  They would say something like, "That is stupid.  Why would anyone bid up the price of a tulip bulb?  What does that have to do with us today?  We are much smarter than that."

If you are not familiar with "tulipmania" as the story was popularized in Charles Mackay's 1841 book, Extraordinary Popular Delusions and the Madness of Crowds, you should be.  It is one of the most important lessons that any investor should be aware of.

In the early 1600's in Holland a man of means had to collect tulips or be considered totally devoid of good taste.  Rare species of tulips were in high demand as the rich sought to impress their friends.

It was not long before the status of owning tulip bulbs caught the attention of the middle class.  Even those of modest means wanted to own tulip collections.  As demand increased, prices increased.  As prices increased, many people made money.  As more people made money, many more people wanted to share in the wealth and tulips seemed the easiest way to do it.  There is no greater motivator than greed.  And nothing that makes one greedier than to see their neighbor become rich.

At the peak of Tulipmania, it was not uncommon for a single tulip bulb to sell for ten times the annual income of a skilled craftsmen.

Of course, the bubble burst.  As more and more got in on the tulip investment there became fewer and fewer people that wanted to buy tulips.  Slowly, and then suddenly, people came to their senses.  After all, it was just a tulip bulb and they needed money for food, shelter and clothing.  There were no more buyers, just sellers. The price on some bulbs dropped to 1/100 of its previous value in a matter of weeks.

It is easier to get people to understand "bubbles" today because many experienced the stock bubble in the late 1990's and almost everyone has seen the effects of the housing bubble of the 2000's.  However, we could be living through one of the largest investment bubbles of all time right now and very few seem to be aware of the danger.  I am speaking of the bubble involving sovereign debt securities.  We all know that Greece, Spain and Italy are in trouble.  As a result, investors want to avoid the debt of these countries but they are pouring money into the debt of other countries out of this fear.

Bonds of countries like the UK, Japan, Germany, France and the U.S.  Does any of this make sense?

Grant Williams writes an excellent weekly missive called "Things That Make You Go HMMM..."  He sees all of this activity as something similar to a Pavlovian response on the part of investors.  They are conditioned to run to safety in bonds when there is trouble.  However, are they really running away from trouble this time?  The debt of the countries they are buying are also countries that have their own fiscal challenges and will also likely have to bail-out the weaker players to avoid a total financial worldwide meltdown.

How does this make any sense?  It doesn't according to Williams.  Consider the U.K.

The U.K. Treasury has been issuing "gilt bonds" for centuries.  The U.K. government has never been able to borrow money cheaper than it can today.  That is NEVER.  Going back to 1750 based on this chart that Williams sourced from Thomson Reuters/Credit Suisse.

Britain's budget deficit is 8.24% of GDP.  Its debt as a % of GDP  is almost 90%.  Does this look like the profile of a country that should command a current 5-year bond interest rate of .704%?  That is 7/10 of one percent.  A level not seen in over 250 years of U.K. history!  I don't think so.

Germany is in better fiscal shape than the other countries we are talking about.  However, Germany is the lender of last resort for all the other European countries.  What are they going to look like if they have to pay the debts of a good part of the rest of Europe? How does Williams see all of this?

The biggest bubble in the world right now (apart from that in political incompetence) is the sovereign bond market and the bubble has inflated for PRECISELY the same reasons that all other bubbles do—investors stampeding into an asset without thinking about the underlying dynamics of the instrument they are buying. Often it’s based on greed; this time it’s based on fear. The outcome is the same in both cases I am sorry to say. It was ever thus.

To illustrate the point, let’s return to Germany and imagine you invested €1mm into 2-year bunds today. At the end of your 2 years, you would receive back from the German government €1,008,618.49. Pretty good, huh? Nobody ever got poor making a profit, right?

Well let’s see.

On the day you received your money back from the German government, a basket of goods that would have cost you €1,000,000 today will cost you €1,052,676 (assuming Eurozone CPI stays constant at 2.6%).

How’s that $8,618.49 profit looking now?

Although people are looking for safety in these sovereign debt instruments they can be anything but safe if yields rise.  For example, if a 3% 30-year bond moves to a 5% yield, the investor will lose 30% of their principal.  If long term bond rates move from 3% to 7%, they will lose half of their money.

What about U.S. Treasuries?  Roben Farzard of Bloomberg Businessweek provides some historical perspective.

Marinate your mind in this for a minute: Long-term U.S. Treasury yields are essentially at a 220-year low, says Barry Ritholtz. Mind you, 1792 was when two dozen brokers met under a buttonwood tree in Lower Manhattan to shake hands on what would ultimately become the New York Stock Exchange. And when George Washington, while test-driving his second set of experimental dentures, cast the nation’s first presidential veto. And France first successfully used its guillotine. Those 220 years traversed at least three panics, two depressions, two world wars, multiple global economic crises, a Great Recession, and “Who Shot J.R.?”

All that history be damned; on Thursday (May 31) the 10-year Treasury touched a record-low yield of 1.5309 percent. Thirty-year bonds, for their part, fell to a yield of 2.6 percent, which is just above the all-time low they set in the midst of the Panic of 2008. Apparently our times are so fraught with fear and the need to flee to safety that the Treasury market is pricing in historic amounts of misery. As the Wall Street Journal’s Dennis Berman tweeted, “Even in ancient Babylon (4%), Medieval Europe (6%), 1800s America (4%), no one was paying 1.6% for 10-year money.

James Bianco provides this long term perspective on 30-year bonds back to 1790 in the United States.  Again, we are very close to 220 year low interest rate yields.

Source: Bianco Reseach

Grant Williams puts it pretty simply in his conclusion.

At some point—and I suspect that point will arrive sooner rather than later—intellectual reasoning will overcome Pavlovian conditioning and the same people who poured trillions into the debt of bankrupt and irresponsible governments will realise the folly of their instincts and they will go looking for a real safehaven asset. When they do, they will find that, unlike government debt which, like a gas, can expand to meet any demand, trying to hide trillions of dollars in a real asset such as gold (or farmland) will prove to be singularly difficult.

Those overcoming their Pavlovian conditioning and allowing intellectual reasoning to win out first, will find themselves at a tremendous ad- vantage once reality is forced upon the masses. That day is rapidly approaching.

Buyer Beware of the bond bubble!

Sunday, June 10, 2012

150 Days and Counting

Mitt Romney has secured the Republican nomination for President.  We are 150 days until Election Day.  There is still a long way to go.  Political races have dynamics that make predictions this far out a risky proposition. I will refrain from doing so.  However, a little base level analysis seems to be in order.

John McCain won 173 electoral votes in 2008.  270 votes are needed to be elected President meaning Mitt Romney needs to pick up 97 electoral votes among states that voted for Barack Obama four years ago to win the election in November.

What are the possibilities?

First of all, since 2008, the electoral votes among the states have been reallocated.   Based on this fact alone, Romney will gain 6 electoral votes by just winning the same states as McCain.  Likewise, Obama will lose 6 votes.  This gets Romney to 179.

There were 4 states that Obama won by less than 5% of the total vote.  This means that only 1 out of every 40 voters in these states has to change their 2008 vote from Democrat Obama to Republican Romney in 2012 to alter the outcome in these states.

North Carolina         .32%                 15 electoral votes
Indiana                    1.04%                11 electoral votes
Florida                    2.82%                 29 electoral votes
Ohio                       4.59%                 18 electoral votes

If Romney can win these states he will have 252 electoral votes and be only 18 votes away from the Presidency.

Romney has the potential to pick up an additional electoral vote in Nebraska as that state allocates its 5 electoral votes by the Congressional District Method.  Two of its votes follow the statewide vote based on its two Senate seats.  The other three votes go to the winner within each Congressional District.  Obama won the electoral vote for the 2nd Congressional District in 2008 by a margin of 1.19%.  That potential electoral vote gets him to 253.

An additional 32 electoral votes are at stake in four states that President Obama won by less than a 10% margin in 2008.  This means that only one in 20 voters have to change their votes from 2008 to swing these votes to Romney.

Virginia                  6.29%                13 electoral votes
Colorado                8.95%                  9 electoral votes
Iowa                       9.54%                  6 electoral votes
New Hampshire     9.65%                  4 electoral votes

Winning Virginia and any one of the other three states will get Romney to 1600 Pennsylvania Avenue.

However, Romney still has other targets of opportunities that went to Obama the last time around.  All of these states were in the Democrat column in 2008 but have subsequently elected Republican governors indicating that they could be in play this year.  Obama won all of these by more than 10% of the vote but the margin was not greater than 16.5%.   This means that if one in 12 voters switch you could see the state move from Obama to Romney.  65 electoral votes are at stake.

Michigan               16.47%                 16 electoral votes      
New Jersey           15.57%                  14 electoral votes
New Mexico         15.13%                   5 electoral votes
Pennsylvania         10.35%                  20 electoral votes
Wisconsin              13.90%                  10 electoral votes

I would add Minnesota (10.24% Obama margin in 2008) and Oregon (16.35%) as two other states that could be in play in 2012.  Minnesota has 10 electoral votes and Oregon has 7.

This electoral map by Jay Cost does a good job of visually showing where the race is right now.  You will notice that Cost has every single state that McCain carried in 2008 as solid for Romney right now with the exception of the 10 electoral votes in Missouri.  McCain only carried this state by .14%.

Obama's problem is that he has almost no upside on his votes from four years ago but he is vulnerable in a number of states that he carried last time.  Also, it does not take a lot of voters to switch sides or stay home to hurt Obama.

Wayne Allyn Root is a political oddsmaker (and former Libertarian Vice Presidential candidate) who analyzes the Presidential race with a simple premise-he does not think there is one person in the land that voted for McCain four years ago that will vote for Obama in 2012.  However, he believes there are many millions who voted for Obama in 2008 who are now angry, disillusioned and filled with buyer's remorse.  It becomes a pretty compelling argument when you look at each voting block that was important to President Obama last time.

Here is how Root sees some of the big voting blocs.  I think there is logic in his analysis.

*Black voters. Obama has nowhere to go but down among this group. His endorsement of gay marriage has alienated many black church-going Christians. He may get 88% of their vote instead of the 96% he got in 2008. This is not good news for Obama.
*Hispanic voters. Obama has nowhere to go but down among this group. If Romney picks Rubio as his VP running-mate the GOP may pick up an extra 10% to 15% of Hispanic voters (plus lock down Florida). This is not good news for Obama.
*Jewish voters. Obama has been weak in his support of Israel. Many Jewish voters and big donors are angry and disappointed. I predict Obama’s Jewish support drops from 78% in 2008 to the low 60’s. This is not good news for Obama.
*Youth voters. Obama’s biggest and most enthusiastic believers from 4 years ago have graduated into a job market from hell. Young people are disillusioned, frightened, and broke- a bad combination. The enthusiasm is long gone. Turnout will be much lower among young voters, as will actual voting percentages. This not good news for Obama.
*Catholic voters. Obama won a majority of Catholics in 2008. That won’t happen again. Out of desperation to please women, Obama went to war with the Catholic Church over contraception. Now he is being sued by the Catholic Church. Majority lost. This is not good news for Obama.
*Small Business owners. Because I ran for Vice President last time around, and I’m a small businessman myself, I know literally thousands of small business owners. At least 40 percent of them in my circle of friends, fans and supporters voted for Obama 4 years ago to “give someone different a chance.” I warned them that he would pursue a war on capitalism and demonize anyone who owned a business…that he’d support unions over the private sector in a big way…that he’d overwhelm the economy with spending and debt. My friends didn’t listen. Four years later, I can’t find one person in my circle of small business owner friends voting for Obama. Not one. This is not good news for Obama.
*Blue collar working class whites. Do I need to say a thing? White working class voters are about as happy with Obama as Boston Red Sox fans feel about the New York Yankees. This is not good news for Obama.
*Suburban moms. The issue isn’t contraception…it’s having a job to pay for contraception. Obama’s economy frightens these moms. They are worried about putting food on the table. They fear for their children’s future. This is not good news for Obama.
*Military Veterans. McCain won this group by 10 points. Romney is winning by 24 points. The more our military vets got to see of Obama, the more they disliked him. This is not good news for Obama.

Root predicts a Romney landslide. That seems a overly optimistic.  I am not making any predictions at this point. However, based on my analysis of the race right now, I think there are three potential outcomes that we could see.

A squeaker for Obama.

A squeaker for Romney.

A comfortable win for Romney.  I do not see see the same possibility for Obama as things now stand.

We will find out in 150 days.

Thursday, June 7, 2012

The Bloom Is Off The Rose

I wrote early last year about the gathering storm on the political horizon over public sector unions.  It was inevitable that the imbalance in power between the public unions and the taxpayers who pay their way would have to be rectified.  I admit that I did not see Scott Walker being the guy to take on the unions, in of all places Wisconsin, which in 1959 became the first state to allow collective bargaining by public employees.  He did, he took everything the progressive labor movement could throw at him over the last year and a half,  and he has come out on top.

This looks to me like a significant inflection point.  Public sector union power that has been increasing for the last half-century is going to see that power wane.  They no longer will be playing offense.  It looks like they will be forced to spend all of their time on defense going forward.

Private sector workers and taxpayers are not going to put up with the rich defined benefit pension plans, early retirement packages, extended sick leave programs, vacation days that get converted into deferred compensation packages at retirement and low cost medical plans that the public sector employee unions now enjoy.   Of course, this was all paid for by the private sector workers who, if they ever got any of these bennies, don't have them anymore.

The voters are not willing to pay more in taxes for these outsized benefit programs and they are also not willing to see essential public services cut to pay for rich retirement and other benefit programs.  You don't have to come to this conclusion by just looking at the Wisconsin vote this week.  Voters in San Diego and San Jose, California also resoundingly showed that the winds have shifted against the public sector unions.

I wrote about the bleak financial situation in San Jose last October in my blog post "Because We Can Becomes Because We Can't".  At one time, San Jose had 7,450 city workers.  It now has 5,400 even though it has added 250,000 residents in the last 15 years.  They are facing a reduction  to 1.600 workers in 2014 in order to meet the retiree and health costs that are currently being provided.  Arnold Ahlert fills in a few of the details from

Voters in San Diego and San Jose overwhelmingly approved cuts to retirement benefits for city workers. San Diego voters approved “Proposition B” by a 66-34 margin. It was even worse for government unions in San Jose, where Proposition B was approved 70-30 percent. “The voters get it, they understand what needs to be done,” said San Jose Mayor Chuck Reed, a Democrat who has called pension reform his highest priority. 
It ought to be. Both cities are being crushed by soaring pension costs. From 1999 to 2012, San Diego’s contributions to the city’s retirement fund skyrocketed from $43 million to $231.2 million, an amount equivalent to one-fifth of the city’s general fund budget that pays for its day-to-day operations. From 2001 to 2012, San Jose’s pension costs vaulted from $73 million to $245, equal to 27 percent of its general fund budget.
Such expenses resulted in onerous tradeoffs. In San Diego, libraries and recreation centers were forced to cut back their hours of operation. Roads were left to deteriorate, and some fire houses were temporarily forced to share engines and trucks. In San Jose, four new libraries and a police station have never opened because the city cannot afford to operate them–even though voters approved their financing with construction bonds at the beginning of the last decade.
It is also apparent from the Wisconsin experience that the public sector workers themselves question the value of union membership.   The Wisconsin law now allows public sector employees to opt out of union membership and dues.  Previously, they were required to join the union and forced to pay union dues as a condition of employment.   Since last year when this new right was established, the Wisconsin American Federation of State, County and Municipal Employees (AFCSME) has seen its membership fall from about 63,000 to 29,000.  In addition, 6,000 of 17,000 members of the American Federation of Teachers in Wisconsin have quit the union.  That is a lot of dues money.  More importantly, that is a lot of lost political contributions and power which is the real reason for public sector unions as I explained last year in "Who Is Really Being Attacked in Wisconsin".

The public sector union argument is about one thing-political power.   The unions like the required dues and the Democrats like the money that comes from the dues.  Of the top 8 donors to political campaigns in 2010, 4 were connected with public sector unions or teachers.  They spent approximately $25 million on political campaigns.  3 of the 4 (Service Employees International Union, American Federation of Teachers and American Federation of State/County/Municipal Employees) did not give one cent to Republicans. The National Education Association gave 2% of their take to Republicans. 
The workers and teachers are merely supporting actors in this play.  The public sector union bosses and Democrats are the leading actors.  Taxpayers will be nothing but bit players as long as that continues.
Taxpayers have shown in this week's votes that they do not intend to be bit players any more.  The union bosses and the Democrats who enjoy the union money are starting to lose their leading roles.  They may still retain important supporting roles if they begin to responsibly participate in the needed restructuring of government spending, jobs and public employee benefits.  However, if they think they continue their past methods of intransigence and intimidation they may find themselves in a similar situation to an over-the-hill former screen idol doing late night infomercials.  The bloom is simply no longer on the rose.