1 March 2011

Return to Stupidland: Ten Years After the Dotcom Boom, The Independent

Very interesting article about the dotcom boom and the new wave of aggressively valued dotcom companies that have become endemic in the past few years.  Highly recommended!

Yemen to Declare Unity Government, Al Jazeera

Difficult to say how this will go, but at least Yemen seems to be taking a different tact than Libya.

GOP Spending Plan to Cut 700,000 Jobs, Washington Post

I’d love nothing more than to get our Federal budget balanced, but both parties are going are going about it the wrong way.  Moreover, both are focusing in on things that are popular to members of the other party; and ignoring about 90% of the Federal budget where the real problems exist.  Those areas:  defense, Social Security, Medicare/Medicaid, and transportation.  Until politicians address these issues, this is nothing more than a sideshow.

Regardless, my current thinking on this is that it’s dangerous to cut too many Federal jobs right now.  It makes more sense to focus on the state budget crises for now and let the states get their books in order, before the Federal government gets too aggressive on cutting Federal jobs. The Feds really should start to clamp down sometime in the 2014 – 2016 timeframe and the cuts should focus on the budgetary items mentioned above, rather than trying to gut some minor programs the other party’s members like.

Taco Bell Unveils New Ads in Beef Image Campaign, Associated Press

Only worth mentioning, because it seems like such a stupid move on Taco Bell’s part.  Nothing good can come from calling attention the quality of Taco Bell’s meat. Well … nothing good for the company; maybe for the rest of us. 

Iran Claims 2012 Olympic Logo is Racist, ESPN.com

And in the stupid news story for the day, Iran might boycott the 2012 London games because they claim the logo is racist and actually spells “Zion.”  Wow; this is more proof that isolated regimes tend to get nuttier over time.

The Public Pension Plan Debate

The Wisconsin Lie Exposed:  Taxpayers Contribute Nothing to Pension Plans, Forbes.com

This article has been making the rounds.  The basic thesis behind it is that public employees contribute 100% of their own contributions and that it’s a myth that the taxpayers contribute to the funds.  Therefore, the author concludes, the Wisconsin governor is trying to lower the wages of the Wisconsin public employees.

There are a ton of flaws with the author’s reasoning.  It’s true that the public workers contribute 100% of the proceeds into the defined benefit plan, but the author completely ignores the fact that the funds guarantee some sort of expected return, regardless of the underlying reality behind the returns.   This is why the private sector has shifted to 401(k)s and IRAs; private companies realized that these defined benefit plans were created with an unsustainable premise.  This might not be that big of a deal if the expected returns were set at a reasonable level, but as history has told us, politicians have tended to set absurdly high numbers for this guaranteed return.   In effect, these pension funds have acted as patronage for the public sector unions.

I’m not sure what the figures for expected returns are in Wisconsin, but I know in some states, the expected return is in the 8% – 9% range, which is significantly higher than the long-term returns on the US stock market indexes, which tend to be closer to 5% – 7%, depending on the time frame. Also, keep in mind that it’s likely that the pension funds have some amount invested in lower-yielding bonds, as well, which means they should expect a lower return than the stock market.

If you take that math as a guide, 3.5% – 5% is probably a more reasonable expectation of return, yet, politicians are promising out twice as much and expecting future taxpayers to pick up the slack. Over the course of a few decades, these discrepancies add up. Workers aren’t expected to contribute more to make up for these ridiculous expectations embedded in the assumptions, either, so the “unfunded liabilities” that the taxpayers are on the hook for have become massive.

The author admits to this after criticism, but then falls back upon the flawed idea that the workers ‘fairly bargained’ for these returns. He seems to conveniently gloss over the fact that this is precisely why the governor wants to eliminate “collective bargaining” for the public sector unions. To call this a fair negotiation is laughable; in reality, these were one-sided negotiations where the unions looked out for their own self-interest and the politicians looked out for the unions’ interests, as well.

This is why there are major problems with the entire idea behind public sector unions. Private sector unions have to deal with corporate shareholders, so there are legitimately two sides in the negotiation. Public sector unions, on the other hand, are often on the same side as the politicians and simply decide to take all the money they want and pass the burden on to future generations.  Politicians, who are elected for 2- and 4- year terms, are normally long gone before the final bill is due.

This is precisely why we need to end public employee defined pension plans and replace them with something more analogous with the private sector, such as 401(k)s and IRAs.   These pension funds are not remotely sustainable.   And public sector unions are not economically useful, since they often end up being “on the same side” as the people they negotiate against.   In other words, it’s a patronage system, and we need significant reforms.

28 February 2011

Pressure for Change Builds Across Arab World, Washington Post

The pressure is unlikely to go away any time soon.  The world has fundamentally changed in the past two decades and it’s because the Internet has transformed communication.  Long-time oppressive governments are no longer able to hide their secrets. Thank Al Jazeera, Wikileaks, and the blogosphere. The Internet is the modern day equivalent of the printing press.

How Chris Christie Did His Homework, New York Times

This is a spectacular New York Times article.  While the article deals with New Jersey Governor Chris Christie and his quest to bring public employee expenses under reign, it is also very informative and lays out a lot of the problems associated with the nationwide state pension crisis.  Politicians have been giving the public unions “handouts” for years; except, they did it by promising money later, so that they would be long gone by the time the bills were due.   Our generations will have to deal with the mess created by others, unfortunately.

Gays Who Don’t Want Gay Marriage, The Daily Beast

While I have nominally supported gay marriage, this has been my long-standing issue with it, as well.  I say this as a heterosexual man, who has a partner, and neither of us have any desire to be “married.”  From my perspective, marriage is a religious affair and I don’t understand why we bother to entangle state marriage (recognition of certain legal rights and obligations) with religious marriage (a spiritual union between two people under a certain religious tradition).

Libyan Chaos Stirs Global Panic Over Oil Supplies, Associated Press

The idea that the absence of Libyan oil supplies will radically harm supply is misguided.  In reality, Libyan, by itself, probably will not have a major impact on oil.  Therefore, oil speculators might be making a poor bet.  All the same, other Arab world disruptions, particularly one in Saudi Arabia, could have a significant impact.  That said, with oil hovering around $100/barrel, there’s very little to stop new supply from North America from pushing into the market at some point, so any spike to $120/barrel will not be long-term IMO.

Chinese Police Clamp Down on Protests, Washington Post

It’s unlikely that protesters in China will be able to topple their government in the same way that Tunisians and Egyptians did, but this is significant all the same.  The Western world has developed a mythical view of China as this unstoppable locomotive that will overtake the United States.  The U.S. certainly has its share of problems and will have to share its power more in the future with other parts of the world, but the conclusion that China’s growth is built upon anything other than a house of cards should be re-examined.  While China did experience major economic gains in the ’90s and the ’00s due to liberalization, it’s making the same mistakes that Japan and the Soviet Union did.  In the past decade, it has built itself up mostly through massive government spending and currency manipulation; not real economic progress.  Rising inflation and housing prices ares a testament to this and a real estate collapse could cause a global re-evaluation of China.

That’s all for this edition of the Hunnish News Invasion.  We hope you continue to come to us, as we ruthlessly share news from across the world and conquer the world with our own unique commentary!

North African Revolutions, Mining, and the Great Eurozone Depression?

North African Revolutions

This is one of the more positive developments in the world over the past decade.  Tunisia (before the revolution), Egypt, Algeria, and Yemen are all home to some of the most corrupt and authortarian regimes in the world.  People in these nations have been alienated by these governments for decades, and it’s all finally hit a breaking point.  The Tunisian government was essentially ousted and Mubarrak in Egypt has a very tenuous grip on power (at best) right now.

The markets are punishing Egypt and the Mid-East/North African area for this, but I think it’s a potentially very positive development.  The people were prevented from realizing their ambitions and this stymied economic growth and innovation.  It created widespread poverty, while the government essentially “stole” the peoples’ wealth.

There is certainly a frightening aspect to this.  Revolutions result from widespread discontent with the regime in power, but the resulting power vacuums don’t always create entities that are much better.  Iran replaced a brutal regime in 1979 with another heavy-handed regime that has stymied progress.  France replaced a wasteful, corrupt regime in the French Revolution with a militaristic one.  Russia replaced a brutal, authoritarian regime, with a weak, ineffectual regime, followed by another brutal, authoritrarian (but more economically egalitarian) regime in 1917.

It remains to be seen what will result from all this.  Let’s hope it’s open government, open markets, and a society that allows its people to realize their ambitions.

 

The Great Eurozone Depression?

My continued position over the past 8 months or so has been that the US economy will slowly improve, China is at risk for a giant crash, and the Eurozone is actually the most frightening and dysfunctional part of the world economically.  My view has not changed on this at all.  And in fact, I believe time is proving my views on the Eurozone correct.

Since the Greek crisis, we’ve seen Ireland slink back into near-default.  Now, Portugal is in danger and the spreads are rising on Spanish bonds.   Meanwhile, we’re seeing austerity hailed as some great solution to the problem.  Yet, austerity during such a situation actually exacerbates the crisis.  The problem is price convergence and so long as price convergence is not allowed to occur, then the PIIGS will continue to bleed, while the Germans, Austrians, Dutch, and Finns get fat.   This is not to blame the latter group; rather, it’s to suggest that the currency distortions created by the Euro are the actual cause of the Eurozone crisis; not sovereign debt (save perhaps in Greece, where it was definitely a contributing factor).

Until the distortions inherent in the Euro are fixed, Euro will continue to suffer.  The UK is now in stagflation mode with negative GDP growth and positive inflation.  Spain and Portugal will probably see growth weaken, as well, which will further exacerbate their debt problems (not solve them!).  Ireland and Greece are living on EU life support.  This could very well turn into a sort of “Great Depression of Europe” if it’s allowed to continue.

Angela Merkel can continue blaming Ireland and Spain and Portugal, but the problems are more of her doing than anyone’s.  I’d keep away from Europe until some clarity is reached in regards to the Euro; otherwise, this can go on for another decade.

The Potential Mining Bust?

I’d also be very worried about a mining bust, as well as a China bust.  Chinese equities are already priced for a recession, so it doesn’t necessarily make sense to bet against them in the aggregate, but a lot of US machinery companies (e.g. CAT) and miners could suffer greatly.  Silver, gold, palladium, platinum, copper, and many other commodities are all in boom phase again.  The floor could fall out in the next two years.

There are more signs of stress in China.  Inflation is still rising.  Real estate prices are accelerating again in Tier 2 cities.  Banks are having a liqiudity crunch right now.  Things could fall apart rather quickly at some point.

That said, I have ended my bets against gold.  Not because I’m bullish on gold; but rather, gold is an uncertainty hedge and I see the Eurozone crisis creating more near-term uncertainty.  Long-term, however, gold is still overvalued and should probably trade closer to $1000/oz.

I do think silver, copper, and platinum/palladium are much more vulnerable than gold.