Archive for the ‘U.S. Congress’ Category

“It’s the Economy, Stupid.”

Friday, November 7th, 2014

In this week’s election, Democrats attempted to label Republicans as “the party of ‘no.’ ”  Instead, voters labeled Democrats as the party of no jobs, no growth and no clue.

As a political strategist for Bill Clinton, James Carville coined the now over-used phrase, “The economy, stupid.” (which more commonly appears as “It’s the economy, stupid.”).  By focusing on the economy, Bill Clinton won the 1992 presidential campaign, defeating President George H.W. Bush. barack-obama

More than 20 years later, it’s still the economy, stupid.  According to Bloomberg, “The economy was voters’ most pressing concern as they cast their ballots in the midterm election, with seven of 10 rating conditions poor, preliminary exit polls showed.”

Apparently, voters didn’t realize that 2% annual growth and a workforce participation rate of 62.7% represent an economic boom.

In a Gallup poll, climate change, the Democrats’ raison de vivre, ranked 14th out of 15 in a poll about issues that worry voters.  It finished just ahead of “race relations” and just behind “the quality of the environment” – two other big issues for Democrats.  Meanwhile, in the real world, the top voter worries were “the economy,” followed by “federal spending and the budget deficit.”

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Solving Our Problems By Executive Order

Friday, January 31st, 2014

Why didn’t he think of this sooner?

President Obama announced during this week’s State of the Union address that he is going to bypass Congress and issue more executive orders during the last three years of his presidency.

You might think that sounds like a dictatorship. After all, our government was formed around a foundation of checks and balances, with Congress and the judicial branch of government keeping the President from acting on his own. He’s not a king, a tyrant or a despot. He’s president of a democratic republic, not a banana republic.Obama

But think about it. We’ve been waiting for years for Congress to handle tough issues like immigration reform, tax reform, Social Security reform, Medicare reform, trade reform and budget reform. Nothing ever happens. When Congress does handle tough issues, we end up with laws that run more than 2,000+ pages long, that no one understands and that bear little resemblance to their original intent.

Do we really want another Affordable Care Act or another Dodd-Frank Consumer Protection Act? Do we really want all of those milquetoast compromises? And what about the billions in pork that have to be added to even the most basic bill before Congress approves it?

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No, We Can’t

Thursday, October 17th, 2013

Someone had blunder’d:
Theirs not to make reply,
Theirs not to reason why,
Theirs but to do and die.

                                          From “The Charge of the Light       Brigade”

Take pity on the can.  It’s been kicked so far down the road, it could circle the globe a dozen times.  It’s been battered more than the New England Patriots’ starting lineup.  It’s been kicked harder than an Adam Vinatieri football.

And still it persists.

This week, Congress and President Obama reached a deal that reopens the government through January 15 and suspends the debt ceiling through February 7.  Calling it a deal, though, is an exaggeration.  One side, the Democrats, refused to negotiate.  The other side, the Republicans, asked for something it had no hope of getting.  So everyone agreed to kick the can three months down the road.free-the-fowl-games-photo-420-1196-FF11015_0

Beyond that, according to The Wall Street Journal, “The bill includes one minor change to the health law sought by Republicans, setting new procedures to verify the incomes of some people receiving government subsidies for health-insurance costs.  It also provides back pay for all federal workers who were furloughed during the government shutdown.”

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The Unnoticed Recovery

Friday, July 26th, 2013

It seems that every day we hear about a stronger economy with real jobs, a recovered housing market and renewed manufacturing strength being just ahead.

We hear about it.  We just don’t see it.

The economy’s been growing for four years now, yet its growth has been so stunted, most of the country still thinks we’re in a recession.  The McClatchy-Marist Poll this week found that 54% of adult Americans think the U.S. in still in a recession, while only 38% think it’s not.

In an economy with a 7.6% unemployment rate (but really more than 14%), any sign of improvement is good news, so we can be thankful that the number of people who think we’re still in a recession is down from 63% in March and 75% in 2011.

Only 29% of those surveyed think their family finances will improve in the coming year, while 19% think they will worsen.  More than half think they will remain the same.

Lee M. Miringoff, Director of The Marist College Institute for Public Opinion, treats the poll results as good news and notes that “President Obama plans to refocus his second term agenda on the economy.”

Well, that should save the day.  Except that a separate poll finds that Americans have little faith in their political leaders.

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U.S. Without a Budget for Four Years and Counting

Friday, April 12th, 2013

As of April 29, the U.S. government will have operated without a budget for four years.  Based on the budget he proposed this week, President Obama intends to keep the streak going.

Even the smallest mom-and-pop businesses develop a budget each year and stick to it.  Yet the world’s largest enterprise – the U.S. government – has operated without a budget for more than 1,400 days.  Of course, the mom-and-pop business wouldn’t spend $1.4 trillion more than it takes in every year, either, but that’s another matter.

Nitpickers would say that the government is operating with a budget; Congress just has not passed a budget resolution since 2009.  But it’s the job of Congress to pass and approve a budget – and it has not done so for four years.

As just one example of the absurdity of the Congressional budget process in recent years, consider that when President Obama proposed his budget for FY ’12, the Senate voted it down 97–0.  Every Senator in the President’s own party – even Senate Majority Leader Harry Reid — voted against the budget, even though many had praised it when it was proposed.

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Sequestration: The Crisis Du Jour

Friday, February 22nd, 2013

It’s crisis time again in Washington, D.C.  Having just barely avoided a swan dive off the fiscal cliff, the leaders of our country are now locked in battle over the pending sequestration.

“Locked” is the operative word here, as the deep freeze that’s hit New England this week is likely to thaw well before the freeze in progress over sequestration.

If nothing else, this standoff has added to our vocabulary.  “Sequestration,” as we’ve learned, is a procedure that triggers automatic spending cuts.  It also means “the seizure of property for creditors,” as in, “China will begin sequestering U.S. property if we can’t control our debt and pay our bills.”  That definition may be more appropriate in years to come, but for now, let’s concentrate on the immediate future.

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From Goldfinger to Groundhog Day

Friday, December 21st, 2012

Tick.  Tick.  Tick.

It’s like that scene in “Goldfinger,” where the seconds are ticking down and James Bond is trying to defuse the bomb.  He succeeds, of course, just in time.

Of course, John Boehner is not James Bond and real life is far more complicated than the movies.

Tick.  Tick.  Tick.

The real problem is not a cliff, but a chasm.  The degree of separation between Democrats and Republicans in Congress has never been wider.

On one side, President Obama and his Democratic supporters are hell-bent on raising taxes on the wealthy, which may not do much to tame the deficit, but may achieve the goal of moving toward class equality.  Democrats believe that more spending is needed to stimulate the economy, even though spending is at an all-time high and the economy is still in dismal shape.

On the other side, Republicans are dead set against raising taxes, and want spending cuts, tax reform and entitlement reform.  Medicare, Social Security and government employee pensions have created unfunded liabilities of more than $86 trillion, but the chances of working out a rational reform before the end of the year are about the same as the chances of winning Powerball.  Maybe less.

Tick.  Tick.  Tick.

Congressman Boehner’s “Plan B,” which would have raised taxes on millionaires, did not even make it to a vote.  He could go through the entire alphabet and the results would likely be the same.

Republicans in Congress would rather go over the fiscal cliff than approve taxes on the wealthy, who are viewed as job creators.

Democrats would rather go over the fiscal cliff than approve major spending cuts, as spending is viewed as an economic stimulant.

Tick.  Tick.  Tick.

Maybe Gary Cooper in “High Noon” provides a more appropriate comparison.  The clock on the wall ticks down and you know that confrontation is unavoidable and blood will be spilled.

Take a look at the futures market and you’ll see that it’s already spilling.  Last night, S&P 500 futures dropped from 1437.25 to 1391.25 as soon as Congressman Boehner’s plan was scrapped.  The value of the dollar also tumbled, as witnessed on the EUR/USD, which pairs the dollar with the euro.

Tick.  Tick.  Tick.

Another movie that comes to mind is “Groundhog Day,” where Bill Murray’s day is endlessly repeated until he gets life right.

The déjà vu is appropriate to today’s negotiations.  Consider the U.S. Macro Surprise Index, which quantifies the extent to which U.S. economic indicators exceed or fall short of consensus estimates.  This year’s path is almost identical to last year’s, when Congress put off making tough decisions by extended tax breaks for another year.

Then again, “Groundhog Day” had a happy ending.  Maybe “The Day the Earth Stood Still” is a better comparison.

Looking Over the Fiscal Cliff

Tuesday, November 27th, 2012

You’ve heard plenty about the fiscal cliff.  But little attention has been paid to what’s beyond it.

What’s beyond it is another higher, steeper cliff.

The federal debt now exceeds $16 trillion and Congress will need to vote shortly to raise the debt ceiling in order to keep the government operating.  We’re running an annual budget deficit exceeding $1 trillion, so the debt will only get higher.

The longer we try to maintain the status quo, the more difficult it will be to bring the debt back in line.  We’re reaching the point where every dollar in the federal budget will be needed just to service our debt.  That means your taxes will no longer go toward building new highways, helping the poor or protecting the United States.  They will be needed to pay off the enormous debt that the President and Congress have incurred.

The only way to keep the government functioning under those circumstances, even if we cut spending and raise taxes, will be to incur more debt.

The bigger issue, though, is the unfunded liabilities from government entitlement programs.  According to The Wall Street Journal, we have already incurred $86.8 trillion in liabilities for Medicare, Social Security and future retirement benefits for federal employees.  If we could freeze time and incur no further liabilities, we would still need to pay out $86.8 trillion.

Both Medicare and Social Security are “pay as you go” systems.  As baby boomers retire, payment for these two entitlements will come from those who are still in the workforce.  As they are a much smaller population than the baby boomer generation, they will need to pay more or both Medicare and Social Security will collapse.

But how much more will be needed?  A commentary in The Wall Street Journal, “Why $16 Trillion Only Hints at the True U.S. Debt,” includes the following glum assessment:

“When the accrued expenses of the government’s entitlement programs are counted, it becomes clear that to collect enough tax revenue just to avoid going deeper into debt would require over $8 trillion in tax collections annually.  That is the total of the average annual accrued liabilities of just the two largest entitlement programs, plus the annual cash deficit.

“Nothing like that $8 trillion amount is available for the IRS to target. According to the most recent tax data, all individuals filing tax returns in America and earning more than $66,193 per year have a total adjusted gross income of $5.1 trillion. In 2006, when corporate taxable income peaked before the recession, all corporations in the U.S. had total income for tax purposes of $1.6 trillion. That comes to $6.7 trillion available to tax from these individuals and corporations under existing tax laws.

“In short, if the government confiscated the entire adjusted gross income of these American taxpayers, plus all of the corporate taxable income in the year before the recession, it wouldn’t be nearly enough to fund the over $8 trillion per year in the growth of U.S. liabilities.”

The Good News: No More Election Ads

Friday, November 9th, 2012

In the wake of Tuesday’s re-election of President Obama, the Dow Jones Industrial Average fell 434 points in two days, a drop of 3.3%.

That’s better than when he was first elected.  After a 305-point rally on Election Day 2008, the DJIA fell 486 points, or more than 5%, on the day after, which was the largest post-election drop ever.

In 2008, the housing bubble had burst and we were dealing with the biggest financial crisis since The Great Depression.  Today, we still have not recovered from the financial crisis, but face a “fiscal cliff” and continuing troubles in Europe.

The fiscal cliff, which combines $800 billion in tax increases and government spending cuts, has investors spooked for many reasons.  Unless action is taken:

  • Corporate dividends will be taxed like earned income, increasing the tax from 15% to a top rate of 39.6%.
  • The Affordable Care Act adds a 3.8% on investments, so the tax on dividends could nearly triple overnight.
  • The top tax rate on capital gains will increase from 15% to 20%.
  • Income taxes and estate taxes would also increase, and many more Americans would be subject to the alternative minimum tax (AMT).
  • The re-election of President Obama, who favors tax increases, makes it more likely that the increases will take place.
  • With Republicans controlling the House and Democrats controlling the Senate, Congress is divided and it will be difficult to reach an agreement that would avoid or reduce the impact of the fiscal cliff.

Of course, there’s plenty of time between now and the end of the year to deal with the issue.  But Congress will be on holiday for much of the time between now and the end of the year.

Meanwhile, in Europe

While Europe’s sovereign debt crisis received little attention during the busy election season, it’s not because the crisis has abated.

Once again, Greece is the little country that can’t, as it increasingly appears that “the Greek ‘austerity’ vote was merely theater,” as Zerohedge put it.  The resulting news in Europe this week is that European finance ministers may delay approval of the next bailout payment for Greece from November 16 to late November, when they will hear a full report on Greece’s compliance (or lack thereof) with the terms of the bailout.

The unveiling of the Outright Monetary Transactions (OMT) program in September by the European Central Bank (ECB) boosted market confidence that Europe was doing something about its problems.  But, like America’s ongoing quantitative easing, Europe’s OMT won’t eliminate economic problems.  Lower interest rates just make it less expensive to keep borrowing more and more money.

Maybe that’s why economic confidence in Europe has sunk to a three-year low.

So the economic misery continues, but at least we won’t have to see or hear any more election ads.

The Truth about High-Frequency Trading

Friday, September 21st, 2012

We’ve been critical before about high-frequency trading.  While regulation sometimes makes matters worse, it’s encouraging that he U.S. Senate Committee on Banking, Housing and Urban Affairs held a hearing this week to discuss potential regulation of computerized trading.

While it is unlikely to take action anytime soon, testimony given at the hearing was enlightening.  Here are a few excerpts:

David Lauer, Market Structure and HFT Consultant, Better Markets, Inc.:

“The sophistication of your trading strategy is no longer a defining characteristic of its success, rather the number of microseconds that it takes your software to react to a piece of market data has become one of the most important factors of success in the HFT industry.”

“The traditional mantra of the high-frequency trading industry is that HFT has helped to decrease trading costs by providing tighter spreads and lower volatility. One of the oft-cited studies in support of this claim was authored by employees of RGM Advisors, LLC, a prominent HFT firm. Another study was done by an employee of Credit Suisse, a major proponent of HFT. However, an increasing number of independent academic papers have demonstrated the opposite:

– the structural inefficiencies present in the market have created a massive misallocation of resources into technology that provides no social benefit, and structural deficiencies in market structure have allowed for nefarious or accidental actions to disrupt the market.”

“The increasing fragmentation of the marketplace and the advent of pay-for-order-flow deals have led to a phenomenon called adverse selection. This means that profitable trades (from a marketmaking perspective) never reach the market. Retail and institutional order flow pass through a gauntlet of internalizers and high-frequency trading desks, which pick off any profitable order flow before it ever reaches the public market. While these orders are filled within the NBBO, meaning that the originator of the order is no worse off on that particular order, market quality as a whole suffers. Natural buyers and sellers are virtually nonexistent under this structure, and the majority of the volume on the exchanges becomes ‘toxic flow’ an industry term for orders that nobody wants to interact with.”

Larry Tabb, CEO, The Tabb Group:

Have the high-profile computer trading failures over the past year, such as the recent trading problem at one firm that sent stocks sharply higher and then lower over a period of minutes, discouraged ordinary investors from participating in the stock market?  Have these failures and recent volatility with initial public offerings discouraged companies from taking advantage of the capital markets?

Of 260 market professionals surveyed by the Tabb Group two weeks after the recent Knight Trading meltdown, 34% rated their confidence in the markets as being either poor or very poor.  That’s up from 15% following the “Flash Crash.”

According to Tabb, HFT is just one of many factors, including “the long-term trend of decreasing equity ownership, a reduction in IPOs and lack of trading volume across virtually all financial products.”  Consider the other factors he cites:

The election – going back over previous election cycles from 1950, third-quarter equity trading volume during election years is down an average of 17% compared to the first half of the year. In non-election years, it is down only 4%. Volume in the fourth quarter during election years is down 5% from the first 3 quarters, while fourth-quarter volume during non-election is only down 3%.

Washington unease – the debt ceiling, the fiscal cliff, tax rates, and credit rating downgrades have investors uncertain about how to plan for the future.

Regulations – with Dodd Frank and many European regulatory initiatives in the works, it is hard for financial institutions to know how to plan.

Sarbanes-Oxley – raises the cost of becoming a public company.  This was addressed in the JOBS Act for smaller organizations.

Research settlement/research business model – Because of the Spitzer Research Settlement, it becomes harder to fund equity research, and without equity research (even biased research), it becomes harder to discover opportunities in smaller companies.

Basle III – new capital requirements increase the cost of capital, and with interest rates so low it is hard for banks to generate an adequate return. This makes it harder for banks to provide capital to the market.

Europe – with the Euro zone threatening to break up, investors do not know how to react or invest.

Risk on-Risk off/high correlations – with all of the macro risk in the market, investors are not investing in companies, they are investing in sectors and geographies via ETFs. So investors are not worried about

Coke or Pepsi or Ford or GM, they are worried about US or China, technology or health care. They are then using ETFs to express those strategies. Because ETFs are generally index-driven, they don’t buy undervalued assets and sell overvalued assets – they buy all the assets in an index in relation to the weighting of stocks in the index. Those trading strategies then drive the correlation of assets within the index toward 1.00.  Instead of one stock appreciating and the other depreciating, both begin to move in the same direction.  This hurts single-stock investors who then switch their investing strategy away from single names to trading sectors, or global macro themes.

Low interest rates – with interest rates so low, and declining over the past 30 years, at some level it becomes more beneficial to borrow money instead of issuing stock and diluting owners’ capital.

Demographics – baby boomers are retiring and want to secure their retirement by moving assets out of equities into fixed income or into savings accounts

Bank consolidation – with bank/broker/investment bank consolidation, the fees generated on smaller IPOs become immaterial. As banks get bigger, they need bigger transactions to move the dial.

Private equity – is tapping institutional money to invest in private companies because the return on public companies is so low and interest rates are so low. Tax treatment of PE firms may also play into this.