Little Enterprise, But Plenty of Free

America’s free enterprise system was built on enterprise. Now, all that’s left is “free.” Not free, as in the freedom to work hard and prosper, but “free,” as in free money, free time, free drugs and free entitlements.

But, of course, there’s no such thing as a free lunch; when something is free for some, others have to pay for it. That would be middle-class taxpayers, of course. And yet they not only allow it to happen, they often encourage it by re-electing the same politicians and voting against real change.FF491_1

Much of the bill won’t go to today’s middle class. It will go to our children. Baby boomers, who are so into nurturing and providing the best for their kids, have stuck them and their grandchildren with a whopping bill.

Quoting Lacy Hunt, an economist with Hoisington Investment, The Wall Street Journal noted that debt in the U.S. now totals more than $69 trillion. It’s more than doubled since 2000, when Fed statisticians recorded the debt as being $30 trillion.

A doubling over more than 16 years may not seem so bad, but the economy hasn’t grown along with the debt. In 2000, debt was 294% of GDP. Today, it’s 370% of GDP. Debt will not improve the quality of life for your children as they grow and try to raise families.

Consider what’s happening.

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Our Christmas List

Christmas is coming and we’re just happy that, in today’s post-politically correct world, we feel safe using that word again.

“Happy Holidays” was such a blah, generic pronouncement, it was impossible to say it and sound sincere. So “Merry Christmas” to all, even if you’re offended by the mere mention of the most joyful holiday ever created.trump-santa-2

In the spirit of Christmas, I’ve made a list.  It’s a wish list, and I understand that it may takes years to deliver everything on it, but I’m patient. And I’ve waited a long time, so a little more waiting won’t hurt.

1. A Growing Economy. Throughout the Obama administration, we heard predictions of strong growth, but it never happened. It should be clear to anyone now, except maybe Paul Krugman, that Keynesian economics doesn’t work.

Hopefully, the Trump administration will not rely on stimulus spending and loose monetary policy as President Obama has, but we’re somewhat concerned that he’s bringing in talent from Goldman Sachs, which tends toward Keynesian thinking.

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An IOU World

Investment performance made most investors a bit grumpy by the end of 2015, given that virtually every asset closed the year down a bit.  During 2016, grumpiness is giving way to fear.

Here’s how the year began:

  • On the first trading day of the year, China’s Shanghai index fell 7% intraday. Traders fled, triggering circuit breakers after China reported a fifth consecutive month of weak manufacturing data.
  • Saudi Arabia severed diplomatic ties with Iran in response to the storming of its embassy in Tehran. Bahrain also cut ties with Iran. Oil prices rallied on the news, but stock prices fell.
  • Bad news in China plus bad news in the Middle East equals bad news everywhere and a sharp selloff in equity markets. European markets dropped more than 2% across the board, Dow futures were down nearly 300, and S&P futures were trading down more than 1.6%. Global Debt

Things have only gotten worse since then.  By the time the market closed on Thursday, the Dow Jones Industrial Average was down 911 points – a drop of more than 5% in just four days.  That’s the worst four-day percentage loss to start a year on record, according to FactSet stats that go back to 1897.  The Nasdaq index, meanwhile, was down more than 6%, its worst start since 2000. 

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Why Worry About Climate Change When You’re $18 Trillion in Debt?

Which crisis scares you more – climate change or our growing debt?

Climate change certainly receives a lot more attention in the media and a lot more attention from politicians, even if they’ve done little about it.

Last week, as one small example, President Obama said in an interview that his push to address climate change was influenced by an asthma attack his daughter Malia had when she was a four-year-old.  Asthma is a medical condition that has no connection to climate change.  It would be as logical to suggest that climate change cured her asthma, since she no longer has it and the climate has continued to deteriorate since she was four. National Debt and Interest 1 Wallace

We’re not suggesting that climate change doesn’t merit serious attention, but even if it’s as big a deal as environmental activists would have us believe, the U.S. is going to have little impact unless China, India and other ozone-busters get on board, too.

Debt, though, which President Obama and most members of Congress rarely talk about, just keeps rolling along. 

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Too Much Interest in Interest Rates

There has been much market panic of late over the possibility that the Federal Reserve Board will be raising interest rates sometime in the not-too-distant future.

Small cap stocks were the first casualty.  As September ended, the S&P 500 was still up 7.3% for the year, while the Russell 2000 was down 3.8% and off 7.4% from its high in July.  Even after being up more than 40% year-over-year at the end of December, the Russell 2000 was negative year-over-year on Wednesday before having its best day in six weeks on Thursday. 
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As The Wall Street Journal explained, “Given that periods of market turmoil tend to buffet small stocks more than their larger counterparts, many investors in small companies are fearful as the Federal Reserve moves toward raising interest rates.  Even investors hopeful for small stocks are proceeding with caution.”

But should the markets be this skittish over interest rates?

In September, Fed Chair Janet Yellen announced that interest rates will remain low for “a considerable time” even after quantitative easing (QE), the Fed’s bond-buying program, ends.  QE is scheduled to end this month, but could be extended.

Economic data continues to be mixed.  The official U-3 unemployment rate dropped to 5.9%, but the percentage of Americans participating in the workforce is at a 36 year low.  Jobs are increasing, but four out of five of them are for low or minimum wages.  So QE could be extended, since its alleged purpose is to help the economy grow.

Even if QE ends this month, the “considerable time” Ms. Yellen cites could, indeed, be considerable, given the consequences of raising interest rates.

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Only a Half Trillion Dollars

It’s a sign of how much trouble we’re in when a budget deficit of a half trillion dollars seems like fiscal restraint.

It is progress, given that annual budget deficits were running above $1 trillion a year throughout President Obama’s first term and have been as high as $1.4 trillion.  And it could have been worse.  Recall the effort made by President Obama to stop the automatic spending cuts that took place when sequestration was adopted.

But a half trillion dollars is still a mountain of money.  It helps to give the number some context.CBO Chart

To reach a half trillion dollars, you would have to spend $8 per second beginning with the year 0 and continue spending through today.  If you had a stack of $1 bills adding up to $500 billion and were able to put them one on top of another, the stack would be 34,000 miles high.

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Attention Deficit Capitalism

“Democracy would not be democracy, rule of the people, without at least a modicum of political attention and activity from its citizens.”                                                                                                                                                                                              James Bovard, Attention Deficit Democracy

Is anyone paying attention?

It seems as though the faster the world moves, the shorter our attention span becomes.  And today, speed is measured in nanoseconds.

Many have become complacent as technology has taken over.  High frequency trading, in which computers make the decisions, accounts for the majority of trades today.  HFT is based on arbitrage.  Computers look for discrepancies in pricing and take advantage of them, and that’s how money is made.  A company’s performance is irrelevant.

Humans created computers, but can’t compete with them.  They can try to produce a better algorithm, but the computers will make the decisions.epi_college_unemployment.png.CROP.promovar-mediumlarge

Technology has affected much more than just trading, of course.  Consider communications.  The telephone made it possible to communicate almost instantly.  The Internet, though, has made communications even faster.  Anyone with a computer can send a message to a database of thousands with the click of a mouse.  We can not only hear, but see people anywhere in the world while we talk to them, and our smartphones guarantee that we remain virtually connected at all times.

These and other technological developments have been a big boost to productivity, but they remove the human element.  Life in real time is also life on auto pilot.  We’re connected electronically, but disconnected socially and emotionally.

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We’re All Debtors Now

You’ve probably heard that corporate America is swimming in cash.  Something like $4 trillion worth of it.  And once corporate America starts spending it, the economy will boom again, jobs will be created, GNP will soar and the stock market will boom ever higher.

Corporate cash is the good news.  Corporate debt is the bad news.

While cash is at record levels, corporate debt now exceeds the level it was at in 2008 and 2009.  In case your memory is really short, that’s when America was wondering whether its financial system would survive.Corporate Debt

But temper your nostalgia for those bad old days.  When we say “exceeds,” we mean that corporate debt is 35% higher than it was then.

Net debt – what you get when you subtract cash from total debt – has been climbing steadily for American companies since 1998, as the chart shows.  It doesn’t mean corporate America is insolvent (not yet, anyway), but it does have nasty implications for future corporate growth, profitability, unemployment and income growth.

Given all of that cash on hand, some are making heady predictions about accelerating capital expenditures.  Goldman Sachs’ David Kostin predicted that capex spending will grow 9% in 2014, compared with 2% growth in 2013.

He may be right, given the need to replace aging and outmoded equipment, but a prediction is only a prediction.  And more capex spending will mean less cash for paying down corporate debt.

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Breaking China

If the United States relies on China as its main lender, what happens when China is having difficulties with its debt?

We may soon find out.  As the Financial Times reported, “several banks have had to delay or dramatically reduce Chinese bond issues as the impact of a tight onshore credit market begins to be felt.”China

Zerohedge noted that Chinese bond issuers are dealing with the drying up of interbank market liquidity, increased competition from wealth management and trust products, and other problems.  At the same time, one analyst said, “China is much more funding dependent than in the past.” read more

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