Even France Rejects Socialism

Many American voters lamented that our election choices came down to two highly unlikeable candidates – Hillary Clinton and Donald Trump.

But France’s recent election wasn’t much better. The two leading candidates were Emmanuel Macron and Marine Le Pen. Macron is a “centrist,” which, by French standards could be someone to the left of Fidel Castro. Le Pen is described by media as “far right,” the term used for anyone with views that are not widely accepted by the media, such as not endorsing socialism.

Le Pen might also be described as a crazy racist anti-American, but wouldn’t someone who chooses Russia over the U.S. be far left, not far right?

Center-right Republican François Fillon might have been the new president if he hadn’t been “formally charged in a widening embezzlement investigation” due to allegations that he paid his wife and children “hundreds of thousands of euros from the public payroll for little or no work.” Even in often-forgiving France, nepotism is unpopular.

Macron France’s Youngest Leader

Macron, who was decisively elected president, is France’s youngest leader ever, having been elected at age 39. He is “an outspoken EU supporter who wants to establish a command center for the Continent’s defense, create a border police force, loosen France’s rigid labor rules, cut payroll taxes and reduce French public-sector employment by 120,000,” according to The Wall Street Journal.

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Freeing the Internet

For nearly two decades, the Internet has been capitalism’s engine, driving the creation of the country’s largest and most successful companies.

Amazon, Google, Uber, Airbnb, Facebook, Twitter, Pinterest, LinkedIn and thousands of other companies wouldn’t exist without it. In fact, pretty much all of the 176 companies on Fortune’s unicorn list of startups valued at $1 billion or more wouldn’t exist without the Internet.

The Internet has improved our quality of life, providing us with entertainment, online shopping, directions when we’re lost and the ability to communicate with anyone, anywhere at any time. It’s beginning to improve healthcare and should save lives and lower costs – if we let it.

Libertarians would point to the Internet as the most compelling example in history of how businesses can grow, create jobs, contribute to the economy and produce tax revenue when left practically untouched by government regulation.

Net Neutrality

But lovers of government regulation are protesting at the home of Ajit Pai, chair of the Federal Communication Commission, because he’s attempting to “destroy net neutrality” by overturning rules adopted by the FCC in 2015 under his predecessor, Tom Wheeler.

Net neutrality supporters have also crashed the FCC website with negative comments, and created organizations with noble-sounding names like Fight for the Future and Save the Internet.

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Ben Bernanke Invents Supply Side Keynesian Economics

Ben Bernanke is back, having been interviewed during the past month by The New York Times, NPR, CNNMoney, The Hill, Bloomberg, CNBC and other media. That his book, The Courage to Act: A Memoir of a Crisis and Its Aftermath, is out in paperback could have something to do with it.

When the hardcover version was released, Bernanke, former chair of the Federal Reserve Board, wrote a piece for The Wall Street Journal titled, “How the Fed Saved the Economy.” Having taken credit for saving the economy after the financial crisis, he’s now giving advice about how to continue saving it. His comments, in which he poses as a supply sider while advocating for still more Keynesian stimulus are almost as unintentionally humorous as his Journal op-ed.

In an interview with The Hill, he said, “What we want to do is try to improve the supply side of the economy, make it grow faster, have greater potential. And I think that probably that to do that, I would think that on the fiscal side, that infrastructure spending that improves our roads, our bridges, our schools, and tax reform, not necessarily tax cuts, but reform that makes the system simpler, more efficient, those would probably be the highest-return fiscal actions in terms of getting higher growth.”

We’re not sure how you can reform the massive federal tax code without cutting taxes for someone, but supply side stimulus spending is an oxymoron. Supply siders would deregulate and cut taxes to encourage business investment.

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Why Home Ownership Is At a 50-Year Low

After eight years of historically low interest rates, and with the unemployment rate having fallen to a point near what experts consider to be full employment, it would be logical for home ownership to be at an all-time high.

It’s not. In fact, it was recently at its lowest level in 50 years.

In 2016, there were nearly a million fewer homeowners in the U.S. then there were in 2006, even while the number of households rose by 7.5 million, according to “Homeownership in Crisis: Where are We Now? a new report from Rosen Consulting Group and the Fisher Center for Real Estate & Urban Economics.

If the housing market had returned to normal levels by 2016, according to the report, more than $300 billion would have been added to the national economy, which would have boosted growth in gross domestic product by 1.8%. In other words, instead of the anemic 2% growth we’ve experienced over the past eight years, growth could be exceeding the 3.3% average.

As recently as 2004, 69.2% of Americans owned homes. As of 2016, only 63.4% were homeowners. While there are recent signs of improvement, why has home ownership been so low?

The Housing Bubble

Many factors had an impact, as we noted when we wrote about the housing market a couple of years ago. Ironically, a major one was the government effort to increase home ownership.

The Community Reinvestment Act (CRA), which became law in 1977, was meant to encourage lenders to make more mortgage loans to low-income Americans. While the CRA initially helped many struggling Americans become homeowners, over time it morphed into an abandonment of lending standards.

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Pick One: More Government or Lower Taxes

What’s the best way to boost economic growth – more government spending or lower taxes?

Government spending is the Keynesian approach, which was taken over the past eight years. Build a road, start a war or buy lots of bonds and the spending allegedly will stimulate the economy. In addition to the government jobs created, the money spent will work its way through the economy and create additional jobs while the economy grows.

But the economy doesn’t necessarily work that way. Government spending has to be paid for with higher taxes or more debt. If taxes are higher, consumers have less to spend, which slows economic growth. If the government accumulates more debt without raising taxes, interest on the principal accumulates. Interest must be paid off regularly to keep the country’s credit rating high, so it can continue borrowing at low rates.

Ironically, the only way to keep interest from becoming overwhelming is to cut spending, raise taxes or both, which can stunt economic growth. So, long term, the impact of stimulus spending can be negative.

Another problem with government stimulus programs is that jobs created with government funding disappear if and when the funding expires. It rarely does; instead it becomes an added cost on an ongoing basis, increasing government spending permanently.

How Money Is Spent Matters

How the government spends your money also matters. The American Recovery and Reinvestment Act of 2009, passed to overcome the financial crisis, was the largest stimulus effort ever, but much of the money went to programs that may have had either no positive economic impact or hampered economic recovery.

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Trump vs. the World

During the presidential campaign, President Trump often came off as a bully. Now that he’s president, the bullying is coming from others.

The “resistance,” the media, academics, celebrities and others have not accepted him as their president. On any given day, you’re likely to read more favorable reporting about North Korean leader Kim Jong-Un than you are about President Trump.

Granted, his statements often accentuate the negative and eliminate the positive. His tweets, at least the ones that catch the attention of journalists, are sometimes crude or unpresidential and many of his braggadocious claims, at best, exaggerate the truth.

But with 100 days gone, is the widespread criticism warranted? How is he really doing as president? And how does his presidency compare with previous presidents?

Before considering his performance to date, keep in mind that judging a president based on such a short period is like judging a corporation based on its performance for a quarter. A presidential term is 1,461 days, so the first 100 days account for about 7% of the president’s term.

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What’s Good for Tesla Is Good for Elon Musk

It’s not surprising that I don’t know anyone who owns a Tesla, given that total sales since the company was founded in 2003 barely top 200,000 vehicles (and all but 12 were sold in Hollywood).

In contrast, General Motors typically sells more than a half million vehicles in a quarter. Worldwide, there are more than 907 million consumer vehicles and 329 million commercial vehicles in use, leaving Tesla with a market share of just above 0%.

What is surprising is that Tesla is now the number one auto manufacturer in America, based on market cap (although its rank has recently been floating around between one and two).

How can a company that’s unprofitable and that sells vehicles that almost no one owns be the country’s top auto maker? Granted, GM and Ford aren’t the companies they used to be, but Tesla isn’t even close to what GM and Ford are now.

Tesla’s high market cap is a result of America’s love affair with all things considered to be green, media hype, Hollywood hype and Elon Musk hype. It’s appropriate that the company is named after Nikola Tesla, whose alleged invention of an electric car in the 1930s turned out to be a hoax.

Having never owned or even driven one, I can’t say whether Tesla vehicles should be the next big thing. Online reviews aren’t very helpful, either. Car and Driver gives the sleek Tesla Model S five stars, while the first review on Consumer Affairs gives his Tesla one star and says, “It’s worse than you can possibly imagine … ”

But it’s really not about cars, is it?

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Rates Rising, Yet Bond Buying Sets Record

Rising interest rates, higher inflation and tighter monetary policy should be bad news for bonds. Yet investors have been buying record volumes of new bonds.

  • Highly rated U.S. companies issued $414.5 billion of debt during the first quarter, a record for any quarter.
  • Dealogic reported that companies and governments in emerging markets sold $178.5 billion of dollar-denominated debt in the first three months of the year, the best first quarter on record.
  • U.S. companies with junk-bond ratings issued debt totaling $79.6 billion, double from a year earlier.

Why are bonds so popular now?

Economic growth remains uncertain. There’s been plenty of good economic news of late.

The unemployment rate fell to 4.5% in March – or 8.9% if you use the U-6 rate, which even Fed Chair Janet Yellen seems to finally agree is more accurate. The labor force participation rate, which was 62.6% on November, has nudged up to 63%. New orders are up, capital expenditures are up and housing starts are up.

Yet there’s still plenty of uncertainty about the economy, which could be affected by actions in the Middle East, Russia, Korea or elsewhere.

Syria’s use of chemical weapons and President Trump’s response, for example, have created geopolitical uncertainties. While former Secretary of State John Kerry said in 2014 that “we got 100 percent of the chemical weapons out” of Syria as a result of an agreement brokered by Russia, that clearly wasn’t the case. It Read more

The Fed Thinks Higher Prices Are Good For You

The Federal Reserve Board’s quantitative easing program was an unprecedented monetary experiment that dumped trillions of dollars of new money into the economy.

Historically, adding that much money to the economy should have caused hyperinflation, but the economy was so weak, it took the Federal Reserve Board eight years of loose monetary policy to boost the U.S. inflation rate to 2%.

Now, though, some Fed members think that 2% isn’t enough.

Readers old enough to vote during the Carter and Ford years remember when the Fed’s role was to lower inflation, not raise it. In 1974, inflation hit 11.03%, and from 1979 through 1981 inflation reached 11.22%, 13.58% and 10.35%. In the Ford era, Whip Inflation Now (WIN) buttons were created. They did little to control rising prices.

We haven’t seen any Boost Inflation Now buttons, fortunately, but helping the economy by increasing inflation is the dumbest idea since negative interest rates. Given the Fed’s recent history, that may be its appeal.

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RIP High-Frequency Trading?

“It’s like a perfect storm. The cheats are going away, the volatility is going down and the costs are going up.”

Haim Bodek, former head of electronic volatility trading, UBS AG

You could conclude, as Credit Suisse has in a new report, that high-frequency trading is so influential, it “has reshaped the financial industry in its image.”

Or you could conclude, as The Wall Street Journal has, that high-frequency trading is a failing niche on Wall Street.

High-frequency trading uses algorithms and technology to make trades at mega-fast speeds to take advantage of price inefficiencies. Author Michael Lewis brought public attention to high-frequency trading when he published his book Flash Boys in 2014, which claimed that the stock market is rigged.

We’ve railed against HFT as far back as 2011, noting that the majority of trades taking place were being driven not by company performance, but by “tiny inefficiencies that only computers can detect.”

At the time, HFT accounted for 73% of all equity trading in the U.S., up from 30% four years earlier, based on research from TABB Group.

By 2016, though, high-frequency trading accounted for just under half of all stock trading. That was about even with the previous three years, but more than double what it had been in 2006, Credit Suisse noted.

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