Stone Age or Smartphones?

President Obama has made a lot of questionable statements and decisions in his time in office.  He was going to close Guantanamo and move the foreign terrorists to federal prison in the United States.  He was going to try Khalid Sheik Mohammed in federal court in New York City.  He was going to pass a costly cap and trade program that the CBO estimated would cost the average household an extra $1,600/year (in 2006 dollars).  He did ram through a health care reform bill that he claimed on the campaign trail would "bring down premiums by $2,500 for the typical family".  He has apologized to almost every country in the world based on what apparently is his view that the U.S. is a flawed nation.

However, it is hard to see that any decision or statement he has made was so misguided or illogical as his refusal to approve the Keystone XL pipeline project.  He has argued that it is because there has not been enough time to review "environmental" impacts.  However, over the last three years Keystone has  had 2 EPA reviews done, a State Department environmental review and a positive recommendation by President Obama's own energy advisors.  The project was a "go" from all concerned except the President and his environmental extremist friends.

Warren Meyer of Forbes debunks the environmental concerns and notes that the Keystone pipeline would have carried more energy to the United States than the total of all of the green energy projects funded by the Obama administration.  It also would have accomplished this with no taxpayer funds.

Local environmental concerns were merely the public pretext for a decision that is much more troubling. Opposition to the pipeline began to rally among radical environmental groups long before any of them had the first clue about the pipeline route. The real goal of these groups was not to protect water along the pipeline route, but to make it impossible to develop new sources of oil in Canada. Unable to stop Canadian oil drilling and tar sand extraction programs, environmental groups are now trying to block any pipeline that is proposed out of the oil producing regions.

Some would argue that these opponents aren’t anti-energy, they just want to shift energy use from fossil fuels to “green” energy like wind and solar. This is either disingenuous or unbelievably naive. The Keystone XL pipeline would have single-handedly carried more energy to the United States than the sum of all the green energy projects funded by the Obama Administration. And it would have done so entirely with private funds rather than the Administrations increasingly ill-fated and ham-handed attempts at venture capitalism with taxpayer funds. The fact of the matter is that, for the foreseeable future, opposing fossil fuels is equivalent to opposing energy use.

The Keystone decision only makes sense in the context of a general push to limit energy supply and roll back our industrial economy and all its amazing gifts. Part and parcel of this same effort has been the growing opposition to natural gas fracking. Fracking is an underground procedure that has been used safely and succesfully for decades to extend the life of older oil wells. Fracking is one reason that serial predictions of older fields “running out of oil” have been repeatedly incorrect.

It is as if President Obama has no interest in seeing the United States succeed unless it is the government that is funding and controlling energy projects.
Meyer makes another great point in contrasting President Obama's interest in high speed rail compared to a simple underground pipeline that is undoubtedly far less intrusive and with fewer environmental negatives than a rail line in California.

Does anyone doubt that had this exact same route been for high speed rail, rather than a pipeline, it would already have been approved and President Obama likely would have been proposing to throw a pile of taxpayer money at it to boot? This despite the fact that high-speed rail almost certainly has more environmental negatives than an underground pipeline. The route has always been a red herring — the real goal is reducing energy supply.

I find the contrast between the California High Speed Rail line and the Keystone XL pipeline to be simply amazing. In the case of the rail line, the Obama administration continues to try to perform CPR on an infrastructure project that makes no sense, is way to costly, and will likely bankrupt the state of California with all the taxpayer money required. In the case of the pipeline, the Obama administration killed a private infrastructure project that is widely supported, covers its own costs, and requires no taxpayer money.

It really comes down to a simple question.  Do you want your smartphone or the stone age?  As I wrote in "It Is Not A Pipe Dream" it is energy that makes our economy go.  We need it for anything we want to do.  It needs to be available and it needs to be affordable.  Energy is the engine for jobs and jobs growth.  Without it you are going nowhere in creating jobs.

You also need energy to blow dry your hair, surf the internet and charge up your iPhone and Prius.  The extremists who oppose projects like Keystone want the stone age.  Alternative energy only accounts for about 1% of total energy sources.  Hydroelectric is another 6%.  The remaining 93% is from oil (38%), coal (26%), gas (23%) and nuclear (6%).   I am all for developing all forms of energy including all forms of alternative energy.  However, we would be in the stone age without carbon based energy and this is not going to change for the foreseeable future.

The irony is that as the liberals blog away on the evils of carbon-based and nuclear energy on their iPad (recently charged by power supplied by a nuclear power plant), drinking an herbal tea (the water boiled on a natural gas stove), before they drive their child to school (of course, they could not put precious Asher on a school bus) in their Volvo (recently filled up at their neighborhood Citgo station), they are oblivious as to what really makes the world work.

The Debt Bomb

I love graphs, charts and PowerPoint slides.  They are the most effective way to convey complicated data and numbers.  A picture is really worth 10,000 words.  Or rows of numbers or columns of statistics.

Here are five I came across this week that are a little sobering.  Compliments to the team at JP Morgan Asset Management's Outlook 2012 Report for getting me started on some of these charts.

The first is a chart which shows the percent of federal revenue that is available after taken account of all mandatory spending (Social Security, Medicare, Welfare, Federal Government pensions etc).  In the mid-1960's, almost 2/3 of federal revenues was available after paying for mandatory programs.  The last few years mandatory programs have absorbed almost all ( and sometimes more than all) of available federal revenues.  That means all of the money being spent on everything else has to be borrowed. It doesn't look any better going forward either.  Something has to give, and it will eventually.

The second chart shows gross US federal debt as a percent of  GDP.   US debt is now over 100% of GDP although the chart below just shows data through 3Q, 2011.  Four years ago it was barely over 60% of GDP.  The level of debt we have taken on is both stunning and sobering.  Of course, this is Bush's fault if you listen to Democrats.

US Debt as a % of GDP
FRED database-Federal Reserve Bank of St. Louis
Oregon Office of Economic Analysis

The final chart (from Zero Hedge) illustrates why the economy is not moving forward and jobs are not being created.  The economy needs risk capital.  It needs investors to risk capital in new ventures and it needs banks to make loans.  It is not happening.  It is really shocking to see the disconnect between banks deposits and loans.  These have traditionally moved in tandem.

This connection was broken in the Fall of 2008 when the Federal Reserve started intervening.  At that time the Federal Reserve started paying banks interest on reserve balances for the first time.   That rate is currently .25%, which is higher than 3-month Treasury bills.  They also increased the money supply substantially.  This is a chart of the excess reserves at banks produced by Donald Coffin, an Economics professor at Indiana University Northwest.  It shows that the amount of excess reserves pretty closely matches the disconnect between deposits and loans

Where did the deposits come from?  Most of that money is a result of increases in the monetary base that came from the Federal Reserve's quantitative easing program.  More simply put, the money printing the Fed has done the last few years.  You can see from the chart below from Monetary Choice that the base of money has increased by about $1.8 trillion in the last 3 years.  This also is about the same amount of the the increase in deposits and the amount of the excess reserves.

I don't know where it all ends but these charts are not pretty.  They are scary in addition to sobering.

There is a lot of well-founded concern about Iran getting a nuclear weapon.  However, when you look at these charts you have to wonder what type of ticking debt bomb we are sitting on right here in what used to be the good old United States of America.  I hope someone knows what they are doing.  Looking at the evidence, I have serious doubts.

Bombast, Ballast and The Bet

One year from today is Presidential Inauguration Day.  Will President Obama be able to overcome the economy and a high disapproval rate to win re-election?  Or will the Republicans be able to successfully challenge for the Presidency from the current field of candidates?

I think Romney, Gingrich and Santorum would all be worthy challengers to President Obama.  I stated well before the Iowa caucuses that I thought they were the best candidates in the field based on their debate performances.  They have each showed that they have the depth and breadth of experience to be President. I like all of them.  I am pleased that they are still standing.

Ron Paul is also still standing but recent polling data shows that only 29% of Republicans and Republican-leaning voters view him as an acceptable candidate.  By contrast, 59% of Republicans view Romney as acceptable in the same poll.  Ron Paul's support is passionate but it is narrow.  I see no path for him forward in the Republican primary process.  He is in the race to influence the policy debate and the direction of the party platform.

Tomorrow's vote in South Carolina is make or break time for Gingrich.  If he wins, he gains some valuable momentum going into Florida and he stays alive.  If he loses to Romney by double digits, he is probably done.  His feisty debate performance on Thursday night has created a lot of positive buzz.  However, if it does not translate to a victory it could actually hurt him.  Expectations have increased for Newt.  If expectations do not become results he will be hurt and Romney will benefit.

Santorum continues to be steady.  Gingrich provides the bombast for those seeking that idealized conservative candidate. Santorum is the ballast.  He is stable and unwavering and he has been the candidate that has most exceeded expectations.  Either Bombast or Ballast will likely continue beyond South Carolina and Florida to challenge Romney.  Who that is will depend on who can raise the money.

Money is the name of the game right now for everyone but Romney.  He can go the distance.  No one else can move forward unless they can attract money.  Neither will be able to attract money unless they win some states.  There is a very limited supply of money for candidates who cannot win.

Speaking of money, if you had to put down money on this race right now the only bet is Romney.  He is bringing in high profile endorsements almost every day.  The smart money that was on the sidelines is moving to him as well.

Watch South Carolina's results and then watch any endorsements leading up to Florida.  If he wins South Carolina, it would surprise me if we don't then see Jeb Bush and Marco Rubio jump on the bandwagon and endorse The Bet before the Florida primary.  In that case we could very well know the name of the next President 364 days before Inauguration Day.

Broad, Flat and Simple

If we are to get our country back on track I believe it is critical to reform our tax system.  I speak with some experience having practiced as both a CPA and tax attorney.  I have prepared and reviewed hundreds of tax returns.  It is time to tear the current system out by its roots and take a completely new look at the tax landscape.

On the individual income tax system we should be making the tax base as broad as possible by eliminating as many deductions, credits, preferences, exclusions and exemptions as we can.  The rate structure should also be as flat as possible to eliminate the cross currents of class warfare that divide us.  It should also be as flat as possible to provide as much incentive for future work, investment and capital formation.  Finally, it should be simple enough that anyone can comply with the tax law without an accounting or law degree.

There were 145 million tax returns filed last year.  More than 3/4 of all returns are now filed electronically.  However, almost 2/3 of those returns are prepared and filed by tax preparers.  Our tax system should not be so complex that taxpayers need to pay someone else to properly file their tax returns.  It also should not have to be necessary for most everyone else to need a computer program to file their taxes to have any chance of filing correctly.

All of this complexity is not needed to raise revenue.  It is only necessary for government to have the power to legislate, regulate and stipulate what its citizens should and should not do.  Picking winners and losers. Redistributing income.  Promoting and protecting special interests rather than promoting the public interest.  You don't need a massive and complex tax system to protect, defend and serve the general welfare.  You do need one to manage, control and serve special interests.

Therefore, if we are to turn America around then the critical first turn of the wheel must come in reforming the tax system.

The current individual income tax system generated $1.1 trillion in the last fiscal year.  The most recent IRS Statistics of Income data is from 2009.  In that year, total adjusted gross income was almost $8 trillion.  The exclusion for employer-paid health care amounts to another $1 trillion.  When all is said and done, we have a individual total income tax base (adjusting the numbers forward to 2011) that is around $10 trillion.  However, after subtracting for the exemptions, exclusions and deductions in the Internal Revenue Code, what is considered to be taxable income is only around $5 trillion.   Almost half of the tax base is being dissipated through special provisions in the law that favor one group or another.  This means that the potential exists to cut tax rates in half if the tax base was broadened.

A good starting point in discussing tax reform would be to start with the underlying principle that our tax system should be used to raise revenue.  It should not be a tool for supporting and promoting Big Government policies and philosophies.

If I was designing a starting point for reform, I would suggest a flat tax rate of 15% or lower. It would apply to all income.  No special rates for capital gains, dividends or carried interest.  I would provide an exemption on the first $10,000 for every adult.  This is approximately the federal poverty level for a single person.  I would also provide an additional $5,000 for every dependent child and for citizens 65 years of age or older.    I would eliminate all other exemptions, deductions, credits and exclusions except for retirement savings.  No mortgage interest, charitable contributions, state and local taxes or medical deductions.  There should be no sacred cows.

How does this play out for someone concerned that our tax system needs to be progressive to be "fair"? The substantial tax exemption provides progressivity in the effective tax rates as shown below.  This assumes a 15% flat tax rate.

Family of Four                     15% Tax                   Effective Tax Rate
Income


$20,000                                     $0                                  0%

$40,000                                   $3,000                            7.5%                        

$60,000                                   $6,000                            10%

$80,000                                   $9,000                            11.2%

$100,000                                 $12,000                          12%

$250,000                                 $34,500                          13.8%                      

$500,000                                 $72,000                           14.4%

$1,000,000                               $147,000                        14.7%

If this is still not considered progressive enough there are two options to remedy it.  You can increase the exemption amount which would also require an increase in the overall tax rate.  This would lower the effective rate at lower incomes.  Or you can move to a split rate.  For example, 15% on income below $100,000 (pick your number) and, say, 20% on income above $100,000. This would increase effective rates at higher incomes.  These are not ideal tax models but either approach would still be vastly superior to the tax system we have now.

Reforming the tax system is the foundational issue which must be won if the restoration of America is to be successful.  It should be the centerpiece of any Republican platform in 2012 and its legislative strategy for dealing with the impending expiration of the Bush (and Obama!) tax cuts at the end of this year.  Making taxes simpler has enormous political appeal and that should be the primary mantra of Republicans on this issue.  Herman Cain almost single-handedly propelled his campaign forward on one issue-his 9-9-9 tax platform.

I believe we are entering an era in which simple trumps complex, broad public interest defeats narrow special interests, and united beats divided. Now is the time to go broad, flat and simple in our tax policy as it is on the right side of the three major popular political trends I see in our future.

INTERESTing Insights

When someone loans you money they expect it to be paid back.  They also expect to receive a return on the loan (interest) while the loan is outstanding.  Details, details, details.

Europe is staring straight into the reality of what occurs when potential lenders start to get concerned with getting their loans repaid.  First and foremost, it makes them unhappy to think that a loan will not be repaid.  Second, they tend to not want to extend another loan if they are uncertain about getting their first loan repaid.  Third, if they do provide funds they want to be paid a very large risk premium in the form of a much higher interest rate.

There are some $7 trillion sovereign loans that need to be repaid and refinanced this year by the G-7 countries (U.S, Japan, U.K., Germany, France, Canada and Italy) that appears in this article in Zero Hedge.    That is a sizeable sum of money.  Additional amounts are needed by Greece, Spain, Portugal and other countries that have been living beyond their means. Where are the funds going to come from?

The risk profile of sovereign debt has changed a lot over the last year.  The United States lost its AAA debt rating last summer and on Friday nine European countires that included France, Spain, Italy and Austria were also downgraded.  John Mauldin points out the risks of peddling goverment bonds that are perceived as risky in his most recent newsletter, "The End of Europe?".

Now, government bond investors are a curious breed. They invest in government bonds because they actually think there is not supposed to be any risk. They want their money to be safe.

If they wanted risk, there are lots of opportunities to invest with the potential for more reward.

The moment that government bond investors begin to think they might be at risk, they leave. And history suggests they tend to leave seemingly all at once. It is the Bang! moment. Someone fires the starting gun, and they all head for the exits. They start selling their bonds to speculators at discounts, which makes the effective interest rates in the market rise, sometimes by a lot.

That means that if a country wants to borrow more money, it will have to pay the effective price in the market, or maybe as much as 15-20% IF – a big IF – it can even get someone to buy the bonds, which of course makes it even more difficult to pay their debt as interest costs rise.

This brings us to the United States which is living on borrowed time as well as borrowed money. See my earlier post "Living on Borrowed Money and Borrowed Time. The Federal Reserve bailed us out of what could have been a day of reckoning with its QE2 program last year.  Just as that ended, Europe fell apart and provided another reprieve.  We may have our problems but Europe's are much more visible right now.  A lot of scared money has moved to US government debt as a result.  All the while time is running out to get our fiscal house in order.

On December 31, 2011 we had federal debt outstanding of just over $15 trillion.  $10.5 trillion of this debt is held by the public and the remainder is held in intragovernmental accounts (the largest amount of which is owed to the Social Security Trust Fund).  The average interest rate on all this borrowed money was 2.826% at year end.  For the fiscal year ended September 30, 2011 the total interest cost was $454.4 billion.  This chart from the Viable Opposition blog shows the trend in the average interest rate on federal debt since 2000 (as of September 30 of each year).

If we went back to September 30, 2000, the average interest rate was 6.639%.  However, debt outstanding was a mere $5.7 trillion at that time. It cost the federal government $362 billion in interest cost to service that debt.  Therefore, even though we have added almost $10 trillion of federal debt over the last 11 years, the interest costs on that debt has increased by less than $100 million over that time! ($454 billion this year on $15 trillion in debt compared to $363 billion on $5.7 billion in debt in 2000.

This is why we are living on borrowed time.  Historically low interest rates are effectively giving the federal government what amounts to a free ride on its borrowing needs right now.  It is as if they have gale force winds at their backs.  Our policy makers have unprecedented breathing room to get something done and yet they do nothing.  The wind at our backs can just as easily start blowing in the opposite direction.

If we had the same average interest rates today as in 2000, the annual interest cost to the federal government would be almost $1 trillion-an additional $550 billion over current costs.  This is equal to what we paid for Medicare in 2011.

Let me put $1 trillion in interest costs in perspective for you.  In 2011, total individual tax collections only amounted to $1.1 trillion.  In other words, we are just a few interest rate increases away from needing all individual income tax collections just to pay for interest on the federal debt each year!  This also means that we would be in the position of paying all of our hard earned taxes today (and tomorrow) for borrowed federal government costs of yesterday.  Bear in mind that this also assumes the federal debt is static.  In reality, it is increasing at $100 billion a month.

We are very close to the point of no return in dealing with our deficits and debt.  Keep a close eye on what is happening in Europe.  We have the good fortune of being able to see someone else have to storm up the hill first.  I hope we are paying attention.  It is going to be a very hard climb from where we are today and it is likely to be right into the teeth of the gale winds of increasing interest rates.

Mitt, Marilyn and Mr. Paul

I am a numbers guy.  Forget the anecdotes, opinions and subjective judgments.  Give me facts, hard numbers and objective evidence.

One of the knocks we keep hearing about Mitt Romney is that he is not conservative enough for Republican voters and he will suppress enthusiasm in the Fall election.

We also hear that Ron Paul would be an utter disaster as a nominee in that he would not appeal to anyone beyond fringe Republican voters.

Consider those perspectives and match that up with this recent CBS News poll (January 9) in hypothetical match-ups between the Republican hopefuls and President Obama.   Romney is the only candidate right now who is shown as leading the incumbent.  Ron Paul is surprisingly competitive head-to-head with the President.  What I find most interesting are the internal splits on preferences by party affiliation.

Mitt Romney polls better among Republicans than any of the other candidates.  He polls almost 10 points better with Republican voters than Ron Paul, Newt Gingrich and Jon Huntsman.  How is this possible if Romney is not conservative enough for Republican voters?  I think the answer is that he is still viewed as the strongest candidate to beat Barack Obama and that is the most important issue with most Republicans.

Each of the candidates has about the same appeal to Democrats.  They all draw 8-10% of the vote.  It does not seem to matter who the Republicans nominate insofar as this group is concerned.  It is a non-factor.

However, Romney is favored by Independents by 6 points.  Ron Paul does even better by beating Obama by 7 points with Independent voters.  All other Republican candidates lose this group of voters. Santorum and Huntsman are down 2-3 points but Gingrich and Perry trail by 7 points in these important swing voters. 

Looking at the hard numbers of this polling is very favorable to Romney.  He polls the best among Republican voters and he also polls well with Independents.  That is a winning combination.

On the other hand, the candidate that really needs to court Republicans voters is Ron Paul.  He is actually polling better among Independents and Democrats than Romney is.  However, he has to convince a lot more Republicans or he will never get through the primaries.   

A Gallup poll (January 10, 2012) provides another perspective that is different than the opinions that are often circulating around on television.  Mitt Romney is the only candidate right now that is viewed as "acceptable' by a majority of Republicans or Republican-leaning Independents.   59% state that he is acceptable (31% say he is unacceptable).  On the other hand, only 29% of Republican say that Ron Paul is acceptable and a staggering 62% find him unacceptable.  This shows just how steep the climb will be for Ron Paul to vie for the Republican nomination.

One final poll that puts it all in perspective is this US News and World Report poll in which the question was asked of Americans what news event they most feared in 2012.   The most feared headline was Obama is Re-elected with 33%.  By contrast, only 16% feared the opposite result-Obama Defeated.  31% stated that Taxes Will Increase was their worst fear.  Therefore, 64% either fear Obama being re-elected or taxes are going to increase.  Does this sound like a good year to be running as a Democrat?  In the final analysis, it might not make a big difference who is the Republican nominee looking at these numbers.

The complete list of most feared news events from the poll.

As we enter the presidential election year of 2012, what potential news event do you fear the most?
President Obama wins reelection 33%
Taxes will increase 31%
Iran will get a nuclear weapon 16%
Obama will lose reelection 16%
North Korea will attack South Korea 4%

Source: The Synovate eNation Internet poll was conducted December 29-January 2 among a national sample of 1,000 households by global market research firm Synovate for US News and World Report.

34-22-$5.66million

On the subject of data, I also came across these interesting facts about Marilyn Monroe recenlty.  A number  of her personal effects and wardrobe were auctioned off in two separate auctions. One by her own estate and second by the estate of Debbie Reynolds who had an extraordinary collection of Hollywood costumes of Marilyn and other stars.   These are summarized in this article from Bloomberg and this one from Slate.  The facts on Marilyn from the Bloomberg article..

We should never again hear anyone declare that Marilyn Monroe was a size 12, a size 14 or any other stand-in for full-figured, zaftig or plump. Fifteen thousand people have now seen dramatic evidence to the contrary. Monroe was, in fact, teeny-tiny.

 The auction’s top-ticket item was Monroe’s famous white halter dress from “The Seven Year Itch,” the one that billowed up as the subway passed. It sold for almost $5.66 million (including the buyer’s premium) to an unknown phone bidder. Sharing a rotating mirrored platform with Hedy Lamarr’s peacock gown from “Samson and Delilah” and Kim Novak’s rhinestone- fringed show dress from “Jeanne Eagels,” Monroe’s costume was displayed on a mannequin that had been carved down from a standard size 2 to accommodate the tiny waist. Even then, the zipper could not entirely close.

But that’s just one dress. Perhaps the star was having a skinny day. To check, you could look across the room and see that Monroe’s red-sequined show dress from “Gentlemen Prefer Blondes” was at least as petite, as were the saloon costume from “River of No Return” and the tropical “Heat Wave” outfit from “There’s No Business Like Show Business.”

In fact, the average waist measurement of the four Monroe dresses was a mere 22 inches, according to Lisa Urban, the Hollywood consultant who dressed the mannequins and took measurements for me. Even Monroe’s bust was a modest 34 inches.

That’s not an anecdote. That’s data.

The Slate article by Simon Doonan who inventoried and auctioned all of the clothes in her personal estate sale puts it all in perspective.

When you look at Marilyn on-screen and—armed with the information I have just provided—you realize that the busty, ample gal brimming over Tony Curtis in Some Like It Hot is literally one-third your size, you have every right to become suicidal. If she looks like that—zaftig, almost chubby—what on earth would you look like under similar circumstances?

Conventional wisdom says that the camera adds five pounds. After my Marilyn experience, I would say it’s more like 500 pounds.

On second thought, perhaps it is sometimes better not to be a facts guy.  Having no facts make life much easier.

Believe!

 "For God so loved the world that he gave his one and only Son, that whoever believes in him shall not perish but have eternal life."  (John 3:16)

Tim Tebow and the Denver Broncos beat my Pittsburgh Steelers on Sunday.  It was a great performance by a young man I have a lot of admiration for.  I read his autobiography several weeks ago and he is undoubtedly someone who has God-given athletic talents.   However, he also is someone who has worked incredibly hard and is a true competitor.  He has also proven that he is a winner.  Florida won two national championships in his four years at the school.  He now has gotten Denver into the playoffs for the first time since 2005 and led them to a first round win.

He is a young man who has also not been afraid to fully embrace and demonstrate his Christianity in a very public manner.  He wore eye black with Bible messages when he was in college.  The photo above is from the 2009 BCS Championship game.  The NFL bans eye-black messages but I found it pretty interesting to see some of the statistics from yesterday's game.  It seems that Tim still got his message across even without the eye black.  Yahoo Sports summarizes Sunday's Tebow Time.

Tebow's passing yards    316 yards

Tebow's average yard per completed pass    31.6 yards

Final quarter tv rating for the game   31.6

Don't Shoot the Messenger-Hire More of Them!

New unemployment numbers were released last week and at first glance it appears we are heading in the right direction.  However, as I have written before in "Employed or Unemployed?", the important statistic is not how many are unemployed.  What is really important is how many Americans are actually employed.

The following chart shows the labor participation rate.  That is the % of Americans working compared to the total working age population (ages 18-64).  The unemployment rate just considers those who are actually seeking work currently.  It excludes students, housewives, retirees and those that have just become discouraged and are no longer even trying to get a job.  For example, a 55 year old who is laid off is counted as unemployed as long as her unemployment benefits are paid but is considered retired when the benefits stop.  Even though she may be interested in continuing to work she would be considered retired by the statisticians in calculating the unemployment rate.

The labor participation rate was actually at its lowest point in 27 years in December at 64.0%.   Last December it was 64.3%.   The long-term average is 65.8% since 1980 (the dotted red line above).  This would seem to be fairer measure of the level of those who actually are interested in participating in the labor force.  Using this as the baseline, the real implied unemployment rate is 11.4% rather than the 8.5% that was reported last week as Zero Hedge points out.

What is particularly interesting is that the labor participation rate for men is down to almost 70%.  This is probably the lowest level of employment by working age males in U.S. history.  This chart from the Bureau of Labor Statistics tracks the labor participation rate since 1948 by gender with males (blue), females (pink) and the overall rate (black).

Labor Participation Rate by Gender

1948-2011

The official stats state that about 13 million Americans are unemployed.  Zero Hedge calculates that the real number of unemployed is probably closer to 18 million if you assume the historical average labor participation rate since 1980.  That is a big difference.  In fact, as Tyler Durden of Zero Hedge points out, America would officially have a 0% unemployment rate based on the way the Bureau of Labor Statistics is calculating the unemployment rate if the labor participation rate dropped to 58.5%.  Such is the lunacy of the way the unemployment rate is being presented.  Keep your eye on the labor participation rate rather than the unemployment rate to determine whether things are improving.

James Pethokoukis of The American Enterprise also cautions that we should be very cautious in thinking that we have turned the corner on unemployment.

Those headline economic numbers are terribly misleading, hardly reflecting the devastation most Americans still see every day. An 8.5 percent unemployment rate? Please. If the size of the U.S. labor force was as large as it was when Barack Obama took office, the unemployment rate would be 10.9 percent. But since so many people have gotten discouraged and stopped looking for work– and thus disappeared by government statisticians — the jobless number has been artificially depressed. A better gauge of the jobs picture is the broader U-6 rate, which includes part-timers who would rather have full-time jobs. It stands at a whopping 15.2 percent.

This chart from ShadowStats.com shows the official unemployment rate, the U-6 rate (gray line) and the estimate of ShadowStats of what the unemployment rate would be if all long-term discouraged workers were included in the labor base pool (blue line) compared to the official rate (red line) .

Another interesting statistic buried in the job numbers was that out of the increase in 200,000 jobs in December, 42,000 were in one job category---"couriers and messengers".  There must have been a lot of helpers hired by Santa during the month.  Can this trend continue?

We need to create at least 120,000 jobs per month just to accommodate new entrants into the workforce going forward.  The 200,000 new jobs that were created in December is encouraging but there is a long way to go.  I am going to remain cautious until I see the labor participation rate increasing rather than get excited about a declining unemployment rate.

America the Beautiful

I came across some awesome photographs this week and I thought that BeeLine could use a little beauty this weekend.

Here is a great image of MacCracken Hall at my alma mater, Miami University, taken by a Mike Zatt who is a junior at the school.  You can view more of Mike's work here.  Miami is undoubtedly one of the most beautiful college campuses in the world and this photo backs it up.

Even more spectacular is this photo taken by Angela B. Pan of the Vietnam Veterans Memorial in Washington, D.C.  You can view more of Angela's work at her blog.

Visiting the VVM is a powerful experience at any time.  However, I have never seen it captured more powerfully.

For those of you are younger, you probably have no idea of the controversy that was created when the design for the VVM was originally announced.  The design for the memorial was chosen from entries in a national contest.  Maya Lin, an architecture student at Yale who was only 21 years old, won the competition.  This is how Wikipedia describes the opposition to the design.

The unconventionality of the selected design was very controversial, especially among veterans. Many publicly voiced their displeasure, calling the wall "a black gash of shame."^[5] Two prominent early supporters of the project, H. Ross Perot and James Webb, withdrew their support once they saw the design. Said Webb, “I never in my wildest dreams imagined such a nihilistic slab of stone.” James Watt,Secretary of the Interior under President Ronald Reagan, initially refused to issue a building permit for the memorial due to the public outcry about the design.^[6]

Lin believes that if the competition had not been "blind", with designs submitted by number instead of name, she "never would have won". She received harassment after her ethnicity was revealed^{[citation needed]}. Lin defended her design in front of the United States Congress, and eventually a compromise was reached. A bronze statue of a group of soldiers and an American flag was placed off to one side of the monument as a result.

Once the design was realized, the overwhelming majority of the design's critics came to appreciate the simple beauty and emotional power of the wall, and such controversy quickly evaporated. In the words of Scruggs, "It has become something of a shrine."^[5]

Lin was an iconoclast.  To that point, memorials were statutes.  They were not long stone walls that blended into the earth with 58,195 names etched into the stone.  However, when it was completed, the VVM probably captured the very essence of what a memorial should really be.

A few more photos by Angela.  A great shot from the Lincoln Memorial looking down to the Washington Monument at sunrise.

A nature shot at Great Falls Park in Virginia.

Finally, a view of the Roebling Bridge in my hometown of Cincinnati, Ohio.

O beautiful for spacious skies...America is truly beautiful.  Thanks to Mike and Angela for capturing it.

Iconoclast

I`con`o`clast/ n / A person who does something that others say can't be done.

Iconoclast is my most favorite word for 2012.  We need more inconoclasts.  We need them in business.  We need them in education.  We need them in science. We most certainly need them in government.  We need people who will challenge the status quo and can bring fresh thinking and ideas to solve problems.  I like Albert Einstein's quote in this regard.

"We can't solve problems by using the same kind of thinking we used when we created them."

I am currently reading a book titled "Iconoclast" by Gregory Berns who is a Professor of Neuroeconomics at Emory University.  Berns delves into the reasons that inconoclasts are so creative and successful.  He also explains how we can all become more inconoclastic by learning to see things clearly for what they are and not being influenced by other people's opinions.  By not letting fear rule our decisions and by learning the necessary social networking skills so that other people will eventually come to see things the same way as the inconoclast.

Berns introduces the book with a story about Howard Armstrong.  That is a name I was not familiar with but he was quite a man, and quite an inconoclast.

More than any other person, Armstrong was responsible for the three basic technologies that make radio and television possible.  In addition to his first discovery, called regeneration, which is the technique that allows radio signals to be amplified, Armstrong invented the superhetererodyne receiver, which transforms high-frequency waves into audible sound waves.  But his crowning achievement, and his ultimate undoing, was the creation of FM radio-a technology that the entire radio industry had dismissed as inferior.

We all know now that the sound quality of FM radio is vastly superior to that of AM radio.  However,  Armstrong was alone in his belief of the superiority of FM in the 1930's when he developed the first FM receiver.  He was discredited and disparaged by the AM adherents who only knew what they knew.  He ultimately took his own life in 1954 not knowing that his iconoclastic views would eventually be fully accepted after his death.

I have been thinking a lot about inconoclasts this year which led me to an interesting article in today's Wall Street Journal about 13-year old Aidan Dwyer from Northport, NY.  This young man looks to me like a budding iconoclast.

This past summer, Aidan won a national science competition with what seemed to be a bright idea: His research appeared to show that solar panels arrayed like the leaves on a tree collect sunlight more efficiently than traditional setups.

Many people on the Web called the Long Island teenager a "genius" who had achieved a true "breakthrough" in solar power. Others praised him for proving that nature's own designs are superior to man's.

But there was one little problem: To prove his hypothesis, Aidan had measured the wrong thing. 

As readers figured out the mistake, the Internet went supernova. Commenters and bloggers attacked Aidan with vitriol usually saved for political enemies and the Kardashians. Blogs decried his experiment as "bad science" and "impossible nonsense." Someone called him "an alien—a cool one, though."

Aidan and his family watched in amazement as strangers around the world debated his intelligence and abilities, as well as his opinion of subjects generally beyond the scope of a suburban boy his age: politics, evolution and the state of modern society, for example.

Does that sound somewhat similar to the experience of others like Howard Armstrong who advance a new and novel idea?  How did Aidan see something new and what got him cross-wise with so many others?

On a recent afternoon, Aidan and his parents admitted they were somewhat baffled by the attention for a project that began two years ago on a winter hiking trip through the Catskill Mountains.

Aidan, then 11, stared at the tree branches denuded of leaves and noticed they looked alike; he wondered why. Back home, his parents encouraged him to research the subject. Google searches uncovered that a mathematical concept called the Fibonacci number sequence underlies the structure of tree branches. 

His parents had been hoping to install solar panels on their Long Island house, but their yard was too small and their roof wasn't suitable. There was, however, enough room for a tree. Perhaps, Aidan postulated, trees arranged their branches to improve the collection of sunlight. If he used the Fibonacci sequence to imitate that design with solar panels replacing leaves, maybe the structure could fit his family's limited space, look pretty—and power the house.

He did chores to earn the money to buy about $75 worth of materials. With help from his father—and after many mistakes—Aidan ended up with two models: a traditional flat-panel array and a tree-shaped solar collector designed to mimic the branch sequence of an oak tree. Over the course of months he compared measurements. To his delight, the tree structure's numbers were higher. 

Exuberantly, he submitted the results to the Young Naturalist Awards, a national contest run by the American Museum of Natural History. Of 700 entries, his was picked as one of 12 winners.

"Then," Aidan said with a slight smile, "things got out of hand."

As the report went viral, attacked and championed in hundreds of comments, museum officials became worried. "We do think it's really important that information that we put forth is scientifically accurate," said Rosamond Kinzler, senior director of science education at the museum. They were also concerned for Aidan, she said.

Critics had a point: Aidan had recorded voltage, when he needed to calculate power. It is a serious flaw, explained Jan Kleissl, an assistant professor of environmental engineering at the University of California, San Diego.

Imagine a water pipe, he said. Voltage is equivalent to water pressure. Current is the size of the pipe. Power is equal to the flow of water out of the pipe, which depends on both variables.

Aidan has not been deterred.  He has listened to the constructive advice he got, ignored the critics and the vitriol, and gotten back to work.  A true inconoclast.

On a recent afternoon, Aidan showed a visitor his newest model, tweaked to respond to his critics: a towering seven-foot tree form adorned with solar panels and painted green. He is now measuring current and power. So far, he said, the tree continues to outperform the traditional panel. "I'm thinking that it could actually change the world."

Aidan may or may not be proven right in the end.  However, it is people like Aidan, Florence Nightingale, Henry Ford, Walt Disney, Jackie Robinson and Bill Gates that move us forward as a society.   My fervent wish for 2012 is that we will send some inconoclasts to Washington.  We need them so that people like Aidan can pursue their dreams and ideas for the betterment of us all.

Hawkeye Cliffhanger Hangover

The first round of the battle for the Republican Presidential nomination is over.  A few thoughts and observations on the race.

• I previously wrote that I thought that the three strongest candidates were Romney, Gingrich and Santorum based on their past records and performance in the debates thus far. That evaluation seems to have been endorsed by the caucus voters in Iowa where these candidates took three of the top four spots.

• Ron Paul came in third place but I don't see him as being able to move much beyond this level of support in subsequent primaries.  He probably has the most committed base of supporters but his support is deeper than it is broad. However, many of his positions, particularly on foreign policy, are far out of the Republican mainstream.  His ability to raise money and his loyal support could allow him to stay in the race until the end. This would give him a greater ability to influence the GOP platform this year than he did four year ago especially on the domestic side with his economic and monetary policy positions.  
• I continue to believe there is one overriding issue for Republican primary voters. It is not the economy, the budget, health care, Iran or abortion. It is the ability to beat Barack Obama. When all is said and done I am convinced that this is the issue that will be the deciding factor for most Republican voters.  At this point, Romney polls the best against Obama.  This is his biggest asset. It provides him a lot of protection against uncertainty about his conservative credentials. If the anti-Romney candidate that emerges (Santorum?) can show that he has comparable polling numbers against Obama it could spell a big problem for Romney down the road.  For this reason Romney needs to finish this off as quickly as he can. The longer the process continues the greater risk to him that someone will begin to convince voters that they can also beat Obama.

• The other factor favoring Romney at this point is his substantial war chest.  He has the most money on hand and he also has access to more money going forward than the other candidates. Do not forget that he also could choose to fund his campaign from his considerable wealth.   In 2008, he kicked in almost $50 million of his personal funds to his campaign. He has not put any of his money into this race as of the last reporting period.

• Rick Santorum emerged from the Hawkeye Hangover as the most likely anti-Romney in the race. He follows Bachmann, Perry, Cain and Gingrich in taking this lead in this challenging position. To be a long-term player he needs to be able to do 3 things.   First, he needs to be able stand up to the increased scrutiny and also be able to make a connection with national voters. Second, he needs to raise the money to compete and do it in a very short period of time. Third, he needs to be able to make the case to Republican voters that he can beat Barack Obama.  None of these are easy tasks especially in the short period of time he needs to do it in.

• I was asked by someone today if I thought Rick Santorum could beat Barack Obama.  I think he definitely can and I think he is in a much better position to do so than any of the other candidates except for Romney right now.  In this respect, Santorum is a much stronger candidate than Gingrich. Newt  came to this race with so much baggage that he was like a horse carrying 150 lbs in a race when everybody else was only carrying 125 lbs.   

• If you have not seen Rick Santorum on the stump I urge you to view his speech last night in Iowa. I think it pretty well summarizes his strengths as a candidate. Santorum is not to be taken lightly.  He is a poised and attractive candidate on the campaign trail.  He is a good retail politician which he proved in Iowa. He also has a fire in the belly.  You don't travel to 99 counties in Iowa in a pick-up truck unless you do.  He has a proven record in attracting independents and Democrats in his past races. In this way, he is very similar in having the potential to attract blue collar Democrats much like Ronald Reagan did.  He beat a 7-term Democrat in his first Congressional race in a heavily Democratic district 1990. His district was redrawn in 1992 and he won re-election with 61% of the vote in a district with a 3:1 Democrat registration advantage. He beat a Democrat incumbent Senator in 1994 and was re-elected in 2000 with a 52%-46% margin. George W. Bush lost Pennsylvania to Al Gore the same year by 46%-51%.

• New Hampshire is next up and Mitt Romney is the prohibitive favorite.  As a result, it becomes an expectations game.  If he does not win big, it will hurt him.  If he meets expectations, it will give him momentum heading to South Carolina.  If he wins there he will be hard to catch in Florida and beyond.  It is difficult to see where the money is going to come to keep the other players in the game if that occurs.  Expectations will also be working for and against Santorum. If he can get into the mid-teens or above in N.H. he will begin to look like a serious contender. If he can follow this with a first or second place finish in South Carolina it will truly be Game On! in Florida and beyond.

• The wild cards are Perry and Gingrich.  Perry is done as a potential nominee but has the money to continue to play it out in South Carolina. How much his presence will hurt Santorum in this critical state is the big question. Gingrich was still the leader in the last Real Clear Politics poll average in South Carolina so he should not be written off just yet. However, these polls were done in mid-December and a lot has changed.  In addition, no candidate in this primary process has been able to recover once they fell from grace.  South Carolina will be make or break time for Newt. If Santorum overtakes him there, Newt will be effectively done.  

Presidential politics is great entertainment. The best reality show going this Winter.  Stay tuned!

Look Out Below!

I wrote about ten-baggers last year.  Ten-baggers are stocks that increase in value ten-fold and create great wealth for you along the way.

Now the flip side.  Stocks that drop like a rock and destroy wealth in the process.  Look out below!

Even with great investment returns it is difficult to overcome the loss of your capital.  Therefore, you should always be concerned first with how secure your original capital is before considering how much you are going to make on top of it.  The noted humorist Will Rogers probably said it best when he quipped,

"I'm more concerned with the return of my money than the return on my money."

Look at the chart below and you can see how difficult it can be to recover from a bad investment.

% of Investment Lost     % Gain Needed On Next Investment To Break Even
          10%                                                     11%
          20%                                                     25%
          25%                                                     33%
          50%                                                   100%
          75%                                                   300%

The mathematics above should lead you to follow a rule of cutting your losses early when you invest.  Losing 10% of your money on an investment only requires you to make 11% on your next investment to get your money back.  This is generally achievable in many circumstances.  However, if that loss continues and you are down 20% , it is going to take a 25% gain to make yourself whole.  That starts to become a real stretch with a much different risk/return profile.  A 50% loss requires you to find another investment that will double to get you even.  Good luck!  You are going to need it.  In fact, only one stock in the S&P 500 had a return in excess of 100% for 2011.  Cabot Oil & Gas led this year's list of top performing stocks with a 101% total return for the year.

What were the big-name stocks that were on the other side of the ledger in 2011?  These are three examples of where you needed to "Look Out Below!".

Eastman Kodak
Kodak lost 88% of its value for the year.  It closed 2011 at .65 per share. That's right, 65 cents!  In 1997, Kodak's stock was trading at $95 per share.  In the mid-1970's, Kodak had a 90% market share of photographic film sales in the United States.  Digital cameras have killed Kodak's business.  It has not made a profit since 2007.  It has spent the last few years trying to generate revenues from its vast portfolio of patents.  This company is probably past the point of no return. Bankruptcy is undoubtedly in its future.

Research in Motion
RIM is the Canadian company that is famous for its BlackBerry product.  RIM's stock price declined 75% during the year.  2 years ago the stock traded at almost $86 per share and it ended 2011 at $14.50.  The  iPhone has hurt RIM but the iPad has been far more devastating.  RIM's Playbook tablet has been a disaster.  RIM recently took a $500 billion charge for excess inventory of the Playbook.

RIM is a stock that could come back.  It is currently trading at about 75% of book value.  The current price is also only about .37 times total sales.  You don't find that often.  It has no debt and $2.50 of cash per share.  They have taken a beating but companies with this type of balance sheet can recover if they don't make more mistakes.  They still have 75 million subscribers worldwide but they need to be able to match up with the iPhone or they will start to lose customers.  Its next operating system, the BlackBerry 10, will be important to RIM.  They cannot afford another clunker in the competitive mobile wireless space. The future of this company might be as an acquisition target.  This stock might be a sleeper for a comeback in 2012 if the BlackBerry 10 meets expectations.  It not, look out below.

Netflix
Netflix paid the price for one of the biggest customer faux-paus of the year.  It announced on September 18, 2011 that it was going to split its DVD and Streaming services and customers would be charged separately with the DVD rental business becoming a separate company.  In the wake of the loss of almost 1 million subscribers, on October 10, 2011 the company reversed course and cancelled the planned separation.

Netflix stock lost 60% of its value for 2011 dropping to $69.30 at year end from $175 per share to start the year.  However, it lost 77% of its value from July, 2011 to the end of the year.  The stock had gotten as high as $300 per share in July, 2011 shortly before management decided they had ideas that could make even more money for its shareholders.  Bad move.

Netflix is another stock that may be a comeback candidate for 2012.   However, its long term prospects are going to depend on how well it can take advantage of its brand position with streaming content and be able to convince content providers that its flat rate pricing model is the way to go.  Beware Apple, Amazon and Google invading its space.  It might also be an acquisition candidate by someone in 2012.

Disruption
We often hear that technology is a disruptive force.  There was certainly disruption in the stock prices of all three of these companies in 2011.  Technology was an important factor in the success of these companies. These companies all were built around improved technology. They are now threatened by it, or are being disrupted by it, right now.  In the end, technology will not make or break these companies.  Management will.  The jury appears to already be in on Kodak.  Its management did not adapt to new technology and it will die in its present form.  The future of RIM and Netflix will ultimately depend on how their management's manage technology and its impact on their companies.  2011 was a good lesson on how brutal the market can be, even with big names and well known brands.

My advice for the New Year is simple.  Keep your head up in 2012 and always look out below when you invest.  Think about the upside in any investment but make sure you know how far the basement floor is below you.