Category: Markets, Business, and the Economy

To listen to various Bush Administration representatives, everything is fine with the economy. Granted, Friday we found out that 110,000 jobs were created in March — less than half what the experts expected, and less than what is required to absorb new entries to the job market, more than the 86,396 announced layoffs — but that’s “good” because it means there is less inflationary pressure and therefore Agent Greenspan will be able to keep interest rates low, low, low. Of course the international currency markets think interest rates are going up. The parade of bad economic news continues, and Bloomberg is nice enough to summarize for us: personal spending rose faster than personal income; first time unemployment claims “unexpectedly rose to 350,000”; factory orders did not meet the levels forecast in February; gas prices keep rising; disposable income up, but not as much as it was down the previous month; oh, and that may only be because of tax refund checks. It might also have to do with the fact that consumer debt outstanding rose $7.5 thousand million, and $11.5 thousand million the previous month.

Here are figures from the Bureau of Labor Statistics This page may be updated with new information in the future, so let me give you some of the meaty bits. There are officially 7.7 million unemployed people by the narrow, Department of Labor definition, 21.5% of whom have been unemployed at least half a year. This does not count the 1.6 million people who are “marginally attached to the labor force.” The number of employed people, 140.5 million, remained unchanged despite our growing population. Although the official average hourly wage was $15.95 — a figure which is distorted by small numbers of high wage individuals — the average weekly wages were $537.32. That’s a typical workweek of 33.7 hours.

So wages aren’t changing much, employment is barely keeping pace with layoffs let alone new workers. Expenses are rising. Oil has been over $50 per barrel for a while now, and even Greenspan is concerned about the effect that will have on the energy markets and the economy as a whole. Inflation isn’t a risk; it is here. Gas prices are at a new high at a time when Americans are spending at least 20 minutes getting to work. So much for saving money by living farther from work.

That house “a little farther out” may still be at the outer reaches of the family budget, making the gas prices a far bigger deal. Mortgage companies have been bending over backwards to make home-ownership happen for people who can barely afford it. Some of the tools they have been offering, in particular Adjustable Rate Mortgages (ARMs) and “interest-only” loans, are going to bite these people in the wallet in the next few years. Here’s two takes on the subject, from the L.A. Times and The Christian Science Monitor. For goodness sake, if you have an ARM call your mortgage company today about locking in a permanent rate!

Between the mortgages preparing to implode and the fact that personal debt is rising by billions of dollars a month, that bankruptcy reform bill will be a real disaster for the working class if it passes.

In closing, I’d like to say something to my Texan readers. Your junior Senator went on record as saying something so jaw-droppingly mind-bendingly stupid that you cannot and should not ignore it. You remember Tom DeLay saying the judges involved in upholding the Constitution (to say nothing of doing what most Americans thought they should) would “answer for their behavior”? And do you remember Senator Lautenberg politely reminding Mr. DeLay that threatening a judge is a federal offense? Now Senator Cornyn of Texas has said, in veiled language, that violence against judges is their own darn fault because they make bad decisions. That Federal Judge in Illinois who came home to find her family slaughtered? She was asking for it (by putting bad guys in jail)! If that’s true, then we are all doomed. Texans, this guy is a first termer. Replace him before he gets any kind of seniority. The nation depends on it.

And I thought Phil Gramm said stupid things.

One thing that struck me about the attack on the World Trade Center was the number of financial firms whose offices were destroyed. Granted, the towers were walking distance from the NYSE (Maria Bartiromo ran the distance backwards in heels so as to not miss anything. Now that’s a serious reporter). When I heard that the International Monetary fund and the World Bank had offices there, I thought surely that was the real reason for the attacks: disrupt the global bankers; disruption to the American economy was bonus. If you think this is preposterous, then you don’t understand how many people think that the World Bank and the IMF do more harm than good.

Fast forward to today’s news that Bush’s pick for head of the World Bank is none other than Iraq campaign “architect” Paul Wolfowitz. Please be so kind as to ignore last week’s news that he wasn’t even in the running, that maybe they would support someone like incompetent ex-CEO Carly Fiorina. Maybe they had to find someone whose lack of qualifications was more subtle.

This is not a done deal, however. Apparently — although the President of the United States traditionally gets his way — there are 24 directors who have to arrive at some kind of consensus. And Reuters is willing to make a headline out of the truth that Wolfowitz is a “magnet for criticism.” That is an understatement.

Oh, and why is that? For good reason! Bottom line, he made Iraq into a bigger mess than it already was, and now we want to make him head of the World Bank. Given his record — here are four biographies — I wouldn’t hire him as the shift manager in a Dairy Queen. I certainly wouldn’t buy a used car from him.

As this comes on the heels of appointing a UN Ambassador who has publicly called for the disbandment of the UN, I am forced to wonder what President Bush is thinking: That America is so powerful as to force its will upon the world? That the European Union really ought to have more influence in the world? Or maybe that it just doesn’t matter, since the Apocalypse is coming any day now.

Or, is this a smoke bomb designed to make us look away from all the truly insidious things happening in our nation’s capital these days?

Maybe I am feeling cynical today, but I just have to wonder what SEC Chairman William Donaldson is up to. What’s his angle?

He is calling for a “markets overhaul,” including investigation of mutual fund fees and credit rating agencies. Now, he is not talking about the folks like Experian who keep track of whether you are a good credit risk, but rather companies like Moody’s and Standard & Poor (the folks who come up with the S&P 500) who come up with corporate credit ratings. These ratings control the rates at which companies can issue corporate bonds.

In an administration that wants to get rid of “unnecessary regulation” he wants to issue a whole bunch of new regulations.

But, Mr. Donaldson warns, there’s only so much he can do unless Congress gets involved. Ah, now it becomes clear. He would like to crack down on market timing schemes and excessive fees and ways to make sure the traders get the best available prices, and for some reason corporate bond ratings, but he just doesn’t have enough raw power.

Strangely enough, Eliot Spitzer seems to have plenty of authority to deal with most of this stuff. Except the corporate credit rating guys, and frankly I seem to be missing the part where it’s a problem.

Follow up items: Government Official Admits there is No Social Security Crisis: seriously think about the pending bankruptcy reform bill before deciding it is a Bad Thing.

I don’t normally do miniature posts, but I just saw this Christian Science Monitor item on Social Security that spells things out so nicely. I especially like these excerpts:

Q: Are things really so bad that the program will go bankrupt, as Bush has said?

A: That depends on the meaning of the word “bankrupt.” [snip]

Q: Speaking of private accounts, would they solve Social Security’s woes?

A:No. [snip]

Q: Could private account money be invested in anything?

A: Probably not. [snip]

Q: Could workers withdraw private account money before retirement?

A: No. [snip]

Q: If you opt to invest in a private account, would your traditional benefit be reduced?

A: Yes. [snip]

There you have it in a nutshell. Maybe that’s why support for the plan is spotty even among Republicans.

Those of us who have not been living in exclusive gated communities are probably aware that all is not wine and roses in America. Sure, the official unemployment rate is low –kept artificially so by the narrow definition of “unemployment” — but homeless shelters and food banks are working at capacity.

How can this be?

Well according to the experts cited in this article, it has to do with the high price of housing. When a family spends “too much” on housing, they don’t have enough money for food. And why is housing so expensive?

Among the concerns listed by HUD Secretary Alphonso Jackson were slow permitting procedures and complex environmental regulations that can significantly increase the length and cost of home building review and approval processes.

That’s right. The official government stance is that this is the fault of states and local governments that want to make sure that new housing meets certain standards. Burdensome standards, like that they meet building codes. That a housing development won’t overwhelm local road and utility capacities. That developers don’t pave over a wetland and create a perennial flooding problem for miles around.

Mr. Jackson’s office calls many of these standards onerous and “archaic.”

Now, one thing that Mr. Jackson is right about is that affordable housing is necessary if we are to have people in our neighborhoods like teachers and nurses and firefighters. I will not dispute him on that point. But he is wrong that the same regulations which ensue safe, stable communities prevent these people from having affordable housing. Nor does Mr. Jackson address the issue of poverty, despite the fact that affordable housing is an even bigger problem to the poor than to the not-highly-paid professionals he speaks of. This is no surprise, since Mr. Jackson is on record as saying, more or less, that he doesn’t believe in systemic poverty.

But back to the issue of affordable housing. Why does this housing have to be owned? What is wrong with making sure there is adequate stock of “safe,” affordable, well-managed apartment housing? And why does this report not address other issues which undeniably drive up housing prices, such as rent controls (which artificially guts the supply of rental housing and thereby drives up the cost of owned housing)?

I will be utterly shocked if the HUD solution to the problem of affordable housing supply does not include “deregulation,” by which they will mean taking away the abilities of local governments to control local construction in any way shape or form. In the meantime, they will do everything possible to avoid looking for the real reasons real estate is experiencing double digit increases. Las Vegas house prices rose 47% last year. It had little to do with regulation, a lot to do with the fact that the city is gaining thousands of residents every month, and even more to do with the fact that the Las Vegas valley has a finite amount of buildable land.

In closing, Questions and Answers on Social Security and dispelling Social Security Myths. Seriously, it boils down to one question: if the problem is that Social Security will not have enough money, how is giving it less money going to help? Speaking of questions nobody will ask, what is more relevant, the percentage of kids who get a high school diploma, or the percentage of those kids who actually have the knowledge and skills to function in the job market? Oh, and here’s the latest in universal health care.

Today, after much posturing and theorizing, the 2006 Federal Budget has been released. You can get your very own copy! Isn’t the internet great?

Now, don’t get to thinking this budget is set in stone. It’s as malleable as a Word document at this point. The Congress still has to wrangle over each line item, alternately decrying what is there and demanding what is not there. The President’s proposal is described as “a tough sell.” Although the 2006 fiscal year starts on October 1, recent history tells us not to expect the final version to pass until next January. It must really be nice to be able to let financial decisions slide for three months; it’s certainly not anything most people can get away with.

Now, the numbers we are talking about are big, big numbers, and most people kind of fuzz over numbers than end in “illion,” so go ahead and start thinking of “a billion” as “a thousand million.” “A trillion” becomes “a million million.” This should help add perspective as you read information about this budget. The overall budget is two and a half million million dollars. That is nevertheless several hundred thousand million less than expected tax revenues.

This budget includes a facade of fiscal conservatism. President Bush’s stated goal is to reduce the budget deficit by half as compared to GDP, a sufficiently vague figure that allows economists plenty of room to argue. Oh, and that figure, estimated at a 2009 deficit of $230 thousand million, “do not take into account some big-ticket items: the military costs incurred in Iraq and Afghanistan, the price of making Bush’s first term tax cuts permanent, or the transition costs for his No. 1 domestic priority, overhauling Social Security.” That’s like writing your household budget without accounting for electricity and the credit card bills.

Just about everything but military spending is supposed to be cut if not eliminated. Farm subsidies top the list, a controversial measure long demanded by the international community, but one must wonder if this is being done in a manner which helps family farms, or whether this is another favor to agribusiness. More cuts will occur in the Department of Education, despite the fact that states and school districts are already screaming about unfunded federal mandates and the expenses associated with No Child Left Behind. Other Big Big Cuts include public health and housing for the poor. Just think how much money this nation can save by making sure there are plenty of chronically ill homeless people. Why, that just makes me want to read some Dickens novels!

Oh but wait, America’s big cities aren’t going to be happy with that arrangement. We both know that the States and cities will not have much choice but to suck up expenses the Feds won’t pay for. Governors on both sides of the political spectrum are not happy. Most of them must balance their budgets every year by law, most of them have cut everything they can, and some of them have raised taxes as high as they dare. Even radical conservatives like The Heritage Foundation say it’s time for the Feds to be honest about their budgetary obligations.

And you know what we haven’t even talked about yet? The cost of President Bush’s Social Security plans. Over the weekend, Cyborg Vice President Dick Cheney admitted that the Bush plan would cost $754 thousand million over the next 10 years, and unknown millions of millions after that. He claims this is still better than the alternatives. Or is it? The money Mr. Cheney is talking about appears to be more than the cost to shore up the current Social Security System. It would be more intellectually honest to say they would like to shut down the Social Security Administration altogether. Supply Siders would have to grudgingly accept this as a good thing because it would have the net effect of a 12% tax cut to most Americans and the businesses that pay them. Fiscal conservatives would have to grudgingly accept this as a good thing because it would allow the government to retire $1.6 million million in federal debt. Many Baby Boomers and younger Americans would grudgingly accept it because it’s at least honest, and many of them never expected to see a dime anyway.

Of course it would really suck for the millions of Americans who need that money to pay the rent. You remember, the ones for whom the Safety Net was built in the first place?

Today’s big business news is that Dow Component SBC, the company that used to be known as Southwestern Bell, is in talks to buy former parent company, none other than Ma Bell herself, former Dow Component AT&T.

Oh wait, that’s yesterday’s big business news.

Today’s big business news is that Dow Component Proctor and Gamble is planning to buy Gillette for about $57 Billion in stock, creating the world’s biggest consumer product firm. It is a rich valuation. If you happened to own shares of Gillette yesterday and the deal goes through as planned in a timely fashion and you hold until the end, you stand to make a cool 18% on the deal, not too shabby. The second richest man in the world, Warren Buffett thinks this is a great idea, partly because he stands to make a lot of money on the deal.

It is a safe bet that unless you are actively boycotting these companies, you have their products in your home. P&G’s complete product list includes Alldays and Allways feminine hygiene products, Attends incontinence products, Aussie hair-care, Bold, Dash, Era and Cheer detergents, Hugo Boss clothing, Bounce and Downy fabric softeners, Bounty paper towels, Charmin toilet paper, Cover Girl cosmetics, Crest toothpaste, Dawn and Cascade dish detergents, Eukanuba pet food, and that only takes us through the letter E. By my count, there are over 15 kinds of clothes detergents –add in fabric softeners and it’s hard to do laundry without them — about 10 varieties of dish detergent, over 25 hair care lines, a dozen kinds of makeup, fragrances, and toiletries, a half dozen kinds of toothpaste, another half dozen body soaps, and 2 different lines of toilet paper and dog food. Gillette is primarily known for their shaving products, but don’t forget they own Duracell, Oral-B, and a line of skin care products. Just think for a moment about how much of your local grocery store is devoted to their products. Now consider what would happen if they decided to take advantage of this position –ooops, I mean “leverage” their “market advantages.”

Of course, to pull this deal off, they are planning on laying off 6000 people. This deal will also have an impact — mostly negative — on advertisers, suppliers, and of course competitors. In short, the gorilla in the kitchen is rapidly approaching 800 pounds. Will you benefit from any of this? Probably not.

I mean, not unless you are a shareholder.

I leave you with economic growth is slowing while exports drop, the law of unintended consequences, and finally don’t dare think in a crisis.

There is so much wrong information about Social Security and Social Security Reform and Social Security Privatization that even people who should know better are saying things that don’t make sense.

I will say this one more time: Social Security is not a savings account, it is not a pension plan; it is an insurance policy; it has no returns.

The fact of the matter is that Social Security will take in more money than it hands out in benefits until about 2018. Furthermore, the extra money that has been taken in over the years has been put in nice, safe United States Bonds and Treasury Bills. Yes, that’s right, the Social Security Administration owns a big chunk of the National Debt, and that’s not necessarily a bad thing. The Feds can’t default on this obligation without either defaulting on bonds held by private holders, banks or other nations, or by special, politically suicidal act of Congress. Either way, worldwide economic chaos would ensue. Yes, these bonds earn less over the theoretical long term gain in the stock market, but frankly that is irrelevant. Benefits paid are not linked in any way to performance of the trust fund. Putting the returns on trust fund investments into the argument is a big, fat, red herring. Aren’t you glad these funds haven’t been invested in the NASDAQ Composite for the last 5 years?

If nothing at all is done, there is still no problem until sometime between 2042 and 2052. Even then, Social Security would be able to pay something between 75% and 81% of promised benefits. For “flat broke” and “busted,” that’s not too shabby.

There is no consensus that major changes need to be made. Republicans are daring to ask for details before they pledge support. The religious right is threatening to link support of this to a Gay Marriage Ban Amendment. The AARP opposes major changes, perhaps because enough of their members remember why the program began: a stock market crash plunged the economy into a depression and wiped out many people’s retirement savings.

The idea that a Private Retirement Account would be “your” money to invest as you wish is being exposed as a lie. There would be an approved list of investables, and thus an approved list of Wall Street firms that stand to make a lot of money, particularly since we are talking sums of money that will initially fall under “small accounts” rules. So much for controlling “your” money. Seriously, if the goal is to have more people invested in the stock market, then increase the maximum IRA contribution, maybe loosen 401K requirements. Don’t pretend that a maximum of $1,000 per year, invested in much of anything, is going to provide a decent retirement. Even if you do manage to get 7% a year — which frankly involves a lot of really good luck, skilled investment choices, and no fees whatsoever — we are talking about a PRA nest-egg of less than $200,000 at the end of 40 years. (Note: this figure is from Microsoft Excel’s investment calculator). How long do you expect to live past retirement age? Ten years? More?

And no-one has yet answered the underlying question: If the problem is that Social Security won’t have enough money, how will giving it less money help?

President Bush has said there will be no benefit cuts, and maybe that’s true for the next 4 years. But then again, members of his administration said they knew exactly where Saddam Hussein’s Weapons of Mass Destruction were.

In closing, Fannie Mae Follow Up and Meat Packing Plants Aren’t Just Bad for Livestock.

December of 2004 added 157,000 jobs to the American economy, for a 2004 total of 2.2 million jobs, short of the 2.6 million new jobs the Administration predicted for 2004. This is still described as “Another employment report, another month of mediocre job gains.”

It has been a while since I have sung this particular tune, but the song remains the same. It still takes 150,000 new jobs a month to take care of new entries to the workforce. Remember that when the AP says ” With Friday’s report, Bush is close to closing the gap in job creation that has plagued him since taking office in 2001. There are now just 122,000 fewer jobs.” The economy isn’t just short 122,000 jobs, it is short that plus 150,000 jobs for every month of this Administration. That comes to about 7.3 million jobs. The Administration has also revised its estimates of 2005 job creation downward from 3.6 million to 2.2 million. About 1.8 million would be break-even.

The Bush Administration has yet to hit, let alone exceed, a yearly job creation target.

Then why is the unemployment rate so low? Partly because of the way the unemployed are counted. Partly because, as the AP points out in that same article, “Separately, labor force participation is trending down…. The participation rate has declined sharply in the past several years among younger workers, with economists speculating that a weak labor market is causing those people to stay in school, including seeking higher degrees. But the number of people age 55 and older working or looking for employment has risen in the past four years. ”

As if this is not bad enough news, there is anecdotal evidence that there are fewer job listings. In short, fewer jobs to be had. Competition is stiff enough that CNN put out this handy list of job-seeking tips today. Elsewhere, CNN points out that “The average work [week] edged up a tenth of an hour to 33.8 hours last month.” “Average” is still part time, at a level such that most employers do not provide benefits. Still another article today, CNN points out that wage growth is less than inflation, and payroll data suggests that actual wages decreased almost 5% at the small firms that created 2/3 of the new jobs.

So, small firms are hiring, but at lower pay levels. Big firms are continuing to lay off more workers each month. In fact, over one million lay-offs were announced in 2004.

In closing, I join others in asking Where are the insurgents coming up with the materials and know-how to blow up a tank? Granted, the Bradley is not the greatest tank in the world, but it is still a tank. It is not a Hummer with a couple of trash can lids welded to the doors. A Tank.

What the heck is going on here?

May 2005 find you happy and healthy, and may there be Peace on Earth.

One thing a lot of people do at this time of year is review their financial situation. As you know, this is not a joyous thing for many people. Way, way back, I wrote a little piece on Investing. Not only do I have a lot more readers now, but it bears repeating anyway.

Investing (n.) spending money with the reasonable expectation of receiving more money in return at a later date.

Please notice, there has to be money spent, and it has to be reasonable to get more money back. Thus, neither lotto tickets nor insurance are investments. If someone comes to your house to talk to you about investments and starts talking about life insurance, throw them out; you have to die to collect.

The other thing to remember about investments is that you are falling behind if your return is less than the interest you are paying on your debts. It’s one thing to say real estate is an investment with 6.34% average annual return since 1968 and 10% in 2004 when the interest rate on a standard 20 year mortgage is 5 7/8%. If, however, interest rates continue to slowly rise — as economists expect — this may no longer be obvious. I do not include the mortgage deduction when figuring this because a deduction is not money you receive, but rather a discount on the taxes for money you have already spent.

Using similar logic, you should really look closely at the brokerage statement if you have returns of 9.3% (assuming you matched the S&P 500) and are paying more than that on your credit card balances. This is a big, common problem, and if you can get rid of some debt, that is better than having underperforming “investments.”

In closing, I bring you the 25 Dumbest Quote of 2004, a thoroughly bipartisan list including President Bush, John Kerry, and even pop star Jessica Simpson. Or, this account of the Christmas Tsunami and the scientists who didn’t know who to call from the New York Times. I must say, it reads better than the script to last spring’s awful made-for-tv movie, “10.5.” Finally, the BBC tells us about something that might actually be evidence of climate change near the arctic circle, if not global warming.