First, we had the "PIGS" (Portugual, Ireland, Greece and Spain). Then, with the addition of Italy, the acronym for troubled European countries becames PIIGS. Hold on a second. Hungary has applied for membership to this very elite group. Get ready for PHIIGS. PHIIGS?
Fears escalated yesterday that Europe's debt problems were spreading beyond the core Euro-Zone after Hungarian officials warned for a second day that the country was at risk of a Greek-style fiscal meltdown.
A government spokesman for new prime minister, Viktor Orban, said on Friday that even default was possible given the economy’s problems. This sent Hungary's currency, the Forint, tumbling and credit default swaps surging by more than 100 basis points to 425.
The latest comments are likely to increase skepticism of the new administration among investors. Markets initially welcomed the center-right party's election victory in April. However, they have been unsettled by repeated government clashes with the central bank and calls for foreign-currency loans to be converted into Forints.
Hungary's debt last year was 78% of Gross Domestic Product (GDP), the highest among the European Union's newest members. But it remains very close to the 74% European Union (EU) average, and well below Greece's 115%.
Budapest has yet to draw down all of a €20 billion support package with the International Monetary Fund (IMF) and the EU in October, 2008. The previous Socialist-backed government last year cut the deficit to 4% of GDP and stopped drawing on the credit line when market conditions improved.
Hungary’s cabinet met for a third day on Monday to discuss a range of fiscal measures designed to trim an estimated 1-1.5% of GDP. The government promised to announce its action plan today at the latest.
European problems don't stop there. Let's not forget Romania. Analysts have talked down the relevance of Hungary’s problems to others in the region, but neighboring Romania, a fellow recipient of a €20 billion credit line from the IMF and the EU, is suffering from its own set of fiscal problems.
Prime Minister Emil Boc has presented a bill in parliament that would cut public sector wages by 25% and pensions and unemployment benefits by 15%.
The austerity measures are among the most severe in the EU and have unleashed a maelstrom of protest in one of the bloc’s poorest members. The package will face a vote of confidence next week that could bring down the government, which holds a razor-thin majority.
The government insists that the wage cuts are necessary if Romania is to meet its revised 6.8% deficit target agreed with the IMF and the EU.
Another day, another country in crisis. Where will it end? Not with more debt, not with bail-outs. Only a return to a market-based system with incentives for people to work, rather than retire, will prove to be a permanent answer. Sadly, all the civil servants, who have enjoyed a cushy ride, are loathe to make the changes necessary.
Marko's Take
Want more background on the Euro-Zone's problems? Use our search engine at the top-right of this site to obtain the latest information on everything financial and political. And, if you have a more political bent, we will be expanding the You Tube videos. You can access them by clicking here http://www.youtube.com/markostaketv. Bone up on topics such as The Federal Reserve, Peak Oil, Personal Income Taxes and Social Security.
Tuesday, June 8, 2010
Monday, June 7, 2010
Economy Turns Lower
The Second Dip of the "Double-Dip Hyperinflationary Depression is now here. Economic data, which had pointed to a weak recovery, is now showing renewed signs of falling off a cliff.
This downturn was not too difficult to anticipate. We have reapeatedly pointed out how the unprecedented annual drop in money supply aggregate M3 would, with virtual certainty, lead to a more severe and aggressive downturn. Despite all the stimulus and near ZERO interest rates, the horrendous worldwide debt levels are keeping consumers and business in check.
The April retail sales report was the first sign of a sputtering economy. While sales showed a gain of 0.4%, the pace of gain slowed from February and March. The April weakness was naturally blamed on factors such as the weather and an early Easter, which had the effect of pulling sales into March.
The upcoming report for May is scheduled for release on Friday, June 11th. Consensus data for May is indicating a gain of 0.2% versus an earlier estimate of 0.5%.
Topping off the disappointment parade was Friday's jobs report, which had a headline number of 431,000 added to payrolls. On the surface, a pretty good number. Unfortunately, all but 20,000 of these were temporary census workers who will be laid off at the end of the month.
The household survey, which counts the number of people with jobs, as opposed to the payroll survey that counts the number of jobs, showed a seasonally-adjusted monthly employment contraction of 35,000 in May, after adjusting for the census increase.
The Bureau of Labor Statitistics (BLS) has made a science of creating completely obfuscating employment data. One of their assumptions is that jobs created by start-up companies in this downturn have more than offset jobs lost by companies closing down. So, if a company fails to report its payrolls because it has gone out of business, the BLS assumes it still has its previously-reported employees and adjusts those numbers for the trend in the company’s industry. Huh?
The additional jobs created by start-up firms, which get added on to the payroll estimates each month, were revised lower in the most-recent benchmark revision. According to the econometric work of Dr. John Williams of ShadowStats (http://www.shadowstats.com/), this monthly bias should be negative by approximately 200,000 on average. Therefore, in Dr. Williams' estimation, the BLS continues regularly to overestimate monthly growth in payroll employment by roughly 200,000 jobs.
The one bright note is the recent jump in both new home sales and existing home sales. Reported numbers showed some increase in activity in April relative to March. Unfortunately, this appears to have been due primarily to the April 30th expiration of tax breaks for home buyers. A similar, but larger spike, was evident for existing home sales with the November 2009 expiration of initial tax incentives. To the extent this stimulus has pulled in sales from the future, monthly sales should fall off in the months ahead, starting with May 2010 reporting.
Of great concern, despite the blip in home sales, is foreclosure activity. The National Association of Realtors (NAR ) estimates that 33% of new home sales for April were in the "distressed" category. With foreclosures on the rise, price pressure remains on the pricing of new and existing homes.
The Obama Administration, despite their cheerleading of the April jobs gains, is busily preparing yet ANOTHER stimulus package. Reportedly being pushed by economic adviser Larry Summers, the new package is expected to be $200 million. The Federal Reserve has done all it can. The only remaining weapon is more fiscal spending, which, given a deficit already in the $1.5 Trillion range, will have some very nasty side effects.
Marko's Take
The top Federal personal tax rate is scheduled to increase to 39.6% from 35% in early 2011. For an interesting review of the consitutional issues regarding the income tax, we invite you to check out our You Tube video on "The Legality Of The Personal Income Tax" by clicking here http://www.youtube.com/markostaketv#p/u/2/1TInKnCIikg.
This downturn was not too difficult to anticipate. We have reapeatedly pointed out how the unprecedented annual drop in money supply aggregate M3 would, with virtual certainty, lead to a more severe and aggressive downturn. Despite all the stimulus and near ZERO interest rates, the horrendous worldwide debt levels are keeping consumers and business in check.
The April retail sales report was the first sign of a sputtering economy. While sales showed a gain of 0.4%, the pace of gain slowed from February and March. The April weakness was naturally blamed on factors such as the weather and an early Easter, which had the effect of pulling sales into March.
The upcoming report for May is scheduled for release on Friday, June 11th. Consensus data for May is indicating a gain of 0.2% versus an earlier estimate of 0.5%.
Topping off the disappointment parade was Friday's jobs report, which had a headline number of 431,000 added to payrolls. On the surface, a pretty good number. Unfortunately, all but 20,000 of these were temporary census workers who will be laid off at the end of the month.
The household survey, which counts the number of people with jobs, as opposed to the payroll survey that counts the number of jobs, showed a seasonally-adjusted monthly employment contraction of 35,000 in May, after adjusting for the census increase.
The Bureau of Labor Statitistics (BLS) has made a science of creating completely obfuscating employment data. One of their assumptions is that jobs created by start-up companies in this downturn have more than offset jobs lost by companies closing down. So, if a company fails to report its payrolls because it has gone out of business, the BLS assumes it still has its previously-reported employees and adjusts those numbers for the trend in the company’s industry. Huh?
The additional jobs created by start-up firms, which get added on to the payroll estimates each month, were revised lower in the most-recent benchmark revision. According to the econometric work of Dr. John Williams of ShadowStats (http://www.shadowstats.com/), this monthly bias should be negative by approximately 200,000 on average. Therefore, in Dr. Williams' estimation, the BLS continues regularly to overestimate monthly growth in payroll employment by roughly 200,000 jobs.
The one bright note is the recent jump in both new home sales and existing home sales. Reported numbers showed some increase in activity in April relative to March. Unfortunately, this appears to have been due primarily to the April 30th expiration of tax breaks for home buyers. A similar, but larger spike, was evident for existing home sales with the November 2009 expiration of initial tax incentives. To the extent this stimulus has pulled in sales from the future, monthly sales should fall off in the months ahead, starting with May 2010 reporting.
Of great concern, despite the blip in home sales, is foreclosure activity. The National Association of Realtors (NAR ) estimates that 33% of new home sales for April were in the "distressed" category. With foreclosures on the rise, price pressure remains on the pricing of new and existing homes.
The Obama Administration, despite their cheerleading of the April jobs gains, is busily preparing yet ANOTHER stimulus package. Reportedly being pushed by economic adviser Larry Summers, the new package is expected to be $200 million. The Federal Reserve has done all it can. The only remaining weapon is more fiscal spending, which, given a deficit already in the $1.5 Trillion range, will have some very nasty side effects.
Marko's Take
The top Federal personal tax rate is scheduled to increase to 39.6% from 35% in early 2011. For an interesting review of the consitutional issues regarding the income tax, we invite you to check out our You Tube video on "The Legality Of The Personal Income Tax" by clicking here http://www.youtube.com/markostaketv#p/u/2/1TInKnCIikg.
Sunday, June 6, 2010
Outlook Brightens For Madoff's Victims
So, I took off my "the world is falling" hat and found something upbeat to write about today.
Once upon a time, things looked like the victimized investors in Bernie Madoff's trading programs would be completely wiped out. Now, it appears virtually certain that a material recovery of assets is in the offing.
Last month, the estate of Jeffry Picower, an investor in Bernard Madoff's Ponzi scheme, who died last fall, is expected soon to pay at least $2 billion to other Madoff investors burned by the fraud, according to a court order.
The potential recovery from the settlement would more than double the $1.5 billion gathered so far by trustee Irving Picard, who represents investors.
A lawyer for Mr. Picard previously said in court that he might be able to recover as much as $10 billion for investors, or about half the amount they collectively lost from the fraud. Of course, that assumes that the total size of claims is NOT the $50-$60 billion originally estimated, but closer to $20 billion as the trustee maintains.
William Zabel, a lawyer for the Picower estate, previously said the estate would hand over at least $2 billion. That is approximately the amount Mr. Picower and other entities associated with him withdrew from Mr. Madoff's investment firm in the six years before it collapsed, in December 2008, Mr. Zabel said. The trustee has a strong claim to that money under bankruptcy law.
As a result of the virtual certainty that assets will be available to distribute, the free market has now created a mechanism for victims to get liquidity in advance of the final settlement, which still may be years in the offing.
ASM Capital, a firm which makes markets in various contingent claims, is offering either to make an immediate payment of 20% of claims in exchange for the full claim, or make an upfront payment of 16% of the claims, with the investor keeping 33% of future recoveries. For those with claims less than $1 million, the payout could be slightly less, ASM says.
For an investor with a claim of $1 million, for example, ASM will write a check for $200,000 in exchange for the full claim; or the investor could take $160,000 plus 33% of future proceeds ASM receives above that amount. Those sums would be in addition to any $500,000 payouts made by Securities Investor Protection Corporation (SIPC) to investors. Any amounts covered by the SIPC, however, are thought to apply to very few investors and are expected to be limited.
If all works to Mr. Picard's plan, investors might see as much as 50 cents on the dollar. Mr. Picard acknowledges that this is far from certain, but it is giving some investors hope.
ASM says it is working on deals with about a dozen or so Madoff investors, including individuals, charities and foundations.
As for losses, Mr. Picard has said they could top off at $20 billion or less. But, litigation currently under way challenges Mr. Picard's methodology determining which victims of Mr. Madoff should be entitled to claims. So far, a court has affirmed Mr. Picard's view, which yields a smaller pool.
Given these factors, victims could see anywhere from around 50 cents on the dollar (if the recovery is $10 billion and the pool $20 billion) to less than 15 cents (if the pool is considered $60 billion), Mr. Picard says.
Either way, a verified claimant today could receive a guaranteed 20% and forego the timing uncertainty. While this is a far cry from a complete recovery, it is a far better outcome than investors could expect even a few months ago.
Marko's Take
Speaking of Ponzi schemes, there is no one bigger than our very own "Social Security". For a 7-step solution to fix this problem, please visit our latest You Tube video blog, entitled "Social In-Security: The Solution", by clicking here http://www.youtube.com/markostaketv#p/u/0/7Rl6XtobFpE.
Once upon a time, things looked like the victimized investors in Bernie Madoff's trading programs would be completely wiped out. Now, it appears virtually certain that a material recovery of assets is in the offing.
Last month, the estate of Jeffry Picower, an investor in Bernard Madoff's Ponzi scheme, who died last fall, is expected soon to pay at least $2 billion to other Madoff investors burned by the fraud, according to a court order.
The potential recovery from the settlement would more than double the $1.5 billion gathered so far by trustee Irving Picard, who represents investors.
A lawyer for Mr. Picard previously said in court that he might be able to recover as much as $10 billion for investors, or about half the amount they collectively lost from the fraud. Of course, that assumes that the total size of claims is NOT the $50-$60 billion originally estimated, but closer to $20 billion as the trustee maintains.
William Zabel, a lawyer for the Picower estate, previously said the estate would hand over at least $2 billion. That is approximately the amount Mr. Picower and other entities associated with him withdrew from Mr. Madoff's investment firm in the six years before it collapsed, in December 2008, Mr. Zabel said. The trustee has a strong claim to that money under bankruptcy law.
As a result of the virtual certainty that assets will be available to distribute, the free market has now created a mechanism for victims to get liquidity in advance of the final settlement, which still may be years in the offing.
ASM Capital, a firm which makes markets in various contingent claims, is offering either to make an immediate payment of 20% of claims in exchange for the full claim, or make an upfront payment of 16% of the claims, with the investor keeping 33% of future recoveries. For those with claims less than $1 million, the payout could be slightly less, ASM says.
For an investor with a claim of $1 million, for example, ASM will write a check for $200,000 in exchange for the full claim; or the investor could take $160,000 plus 33% of future proceeds ASM receives above that amount. Those sums would be in addition to any $500,000 payouts made by Securities Investor Protection Corporation (SIPC) to investors. Any amounts covered by the SIPC, however, are thought to apply to very few investors and are expected to be limited.
If all works to Mr. Picard's plan, investors might see as much as 50 cents on the dollar. Mr. Picard acknowledges that this is far from certain, but it is giving some investors hope.
ASM says it is working on deals with about a dozen or so Madoff investors, including individuals, charities and foundations.
As for losses, Mr. Picard has said they could top off at $20 billion or less. But, litigation currently under way challenges Mr. Picard's methodology determining which victims of Mr. Madoff should be entitled to claims. So far, a court has affirmed Mr. Picard's view, which yields a smaller pool.
Given these factors, victims could see anywhere from around 50 cents on the dollar (if the recovery is $10 billion and the pool $20 billion) to less than 15 cents (if the pool is considered $60 billion), Mr. Picard says.
Either way, a verified claimant today could receive a guaranteed 20% and forego the timing uncertainty. While this is a far cry from a complete recovery, it is a far better outcome than investors could expect even a few months ago.
Marko's Take
Speaking of Ponzi schemes, there is no one bigger than our very own "Social Security". For a 7-step solution to fix this problem, please visit our latest You Tube video blog, entitled "Social In-Security: The Solution", by clicking here http://www.youtube.com/markostaketv#p/u/0/7Rl6XtobFpE.
Saturday, June 5, 2010
The H1N1 Virus: The Audacity Of Hype... Part 2
Last January, we first wrote about the tremendously over-hyped "Swine Flu" http://markostake.blogspot.com/2010/01/h1n1-virus-audacity-of-hype.html. The irresponsible handling of this virus has now ensnared the World Health Organization (WHO).
European criticism of the WHO's handling of the H1N1 pandemic intensified yesterday with the release of two reports that accused the agency of exaggerating the threat posed by the virus and failing to disclose possible influence by the pharmaceutical industry on its recommendations for how countries should respond.
The WHO's response caused widespread, unnecessary fear and prompted countries around the world to waste millions of dollars, according to one report. At the same time, the Geneva-based arm of the United Nations relied on advice from experts with ties to drug makers in developing the guidelines it used to encourage countries to stockpile millions of doses of antiviral medications, according to the second report.
A spokesman for the WHO, along with several independent experts, however, strongly disputed the reports, saying they misrepresented the seriousness of the pandemic and the WHO's response, which was carefully formulated and necessary given the potential threat.
The second report criticized 2004 guidelines developed by the WHO which were based in part on the advice of three experts who received consulting fees from the two leading manufacturers of antiviral drugs used against the virus, Roche and GlaxoSmithKline.
Despite the proclamations from the WHO, H1N1 has been a non-event with the exception of the extraordinary attention received by the media and public health organizations, such as the Center For Disease Control (CDC).
What is a pandemic? There is no official "death toll" criteria, but it is generally thought of as an epidemic over a widespread area. To some extent, H1N1 qualfies, but if we look at some statistics, we can see that the "swine flu" was really nothing.
There are several excellent precedents for flu pandemics. The "Spanish Flu" pandemic lasted from March 1918 to June 1920, spreading even to the Arctic and remote Pacific Islands. Between 50 and 100 million died, making it the deadliest natural disaster in human history. There were less deadly outbreaks of various flus in 1968-69 and 1957-58, from which 1 million and 2 million people died, respectively. So how does "Swine Flu" rate? The WHO estimates 18,000 deaths worldwide, of which 12,500 have occured here in the United States.
To put 18,000 in perspective, that represents about 5% of all annual influenza deaths. For the United States, the Swine Flu was responsible for less than 20% of all influenza-related deaths last year which are believed to be approximately 66,000. What pandemic?
The WHO was equally irresponsible in its predictions of deaths from the "Avian Flu", also known as SARS (Severe Acute Respiratory Syndrome). That flu was predicted to kill 750 million people. To date 744 deaths worldwide and NONE in the United States. Oops! Only exaggerated by 1 million times!
The United States has reportedly spent more than $1 billion to procure vaccines. While no official count exists, the vaccine itself has proven deadly to some people who have taken it. Sweden, however, has looked into the efficacy of the vaccine in some detail.
There have been more than 350 reports of vaccine side-effects reported to the Swedish government. It is reported by DN.se, a Swedish health organization, that side effects are more common with the swine flu vaccine compared to the regular flu vaccine.
Unfortunately, both the WHO and CDC must justify their funding and existence based on the need to monitor and control deadly inflectious viruses. This gives them an incentive to dramatically over-hype any possible concerns about an outbreak. Still think the government should run healthcare as in Obamacare?
Marko's Take
Interested in a 7-step solution to fix Social Security? If so, our latest video blog entitled "Social In-Security: The Solution", can be accessed by clicking here http://www.youtube.com/markostaketv#p/u/0/7Rl6XtobFpE.
European criticism of the WHO's handling of the H1N1 pandemic intensified yesterday with the release of two reports that accused the agency of exaggerating the threat posed by the virus and failing to disclose possible influence by the pharmaceutical industry on its recommendations for how countries should respond.
The WHO's response caused widespread, unnecessary fear and prompted countries around the world to waste millions of dollars, according to one report. At the same time, the Geneva-based arm of the United Nations relied on advice from experts with ties to drug makers in developing the guidelines it used to encourage countries to stockpile millions of doses of antiviral medications, according to the second report.
A spokesman for the WHO, along with several independent experts, however, strongly disputed the reports, saying they misrepresented the seriousness of the pandemic and the WHO's response, which was carefully formulated and necessary given the potential threat.
The second report criticized 2004 guidelines developed by the WHO which were based in part on the advice of three experts who received consulting fees from the two leading manufacturers of antiviral drugs used against the virus, Roche and GlaxoSmithKline.
Despite the proclamations from the WHO, H1N1 has been a non-event with the exception of the extraordinary attention received by the media and public health organizations, such as the Center For Disease Control (CDC).
What is a pandemic? There is no official "death toll" criteria, but it is generally thought of as an epidemic over a widespread area. To some extent, H1N1 qualfies, but if we look at some statistics, we can see that the "swine flu" was really nothing.
There are several excellent precedents for flu pandemics. The "Spanish Flu" pandemic lasted from March 1918 to June 1920, spreading even to the Arctic and remote Pacific Islands. Between 50 and 100 million died, making it the deadliest natural disaster in human history. There were less deadly outbreaks of various flus in 1968-69 and 1957-58, from which 1 million and 2 million people died, respectively. So how does "Swine Flu" rate? The WHO estimates 18,000 deaths worldwide, of which 12,500 have occured here in the United States.
To put 18,000 in perspective, that represents about 5% of all annual influenza deaths. For the United States, the Swine Flu was responsible for less than 20% of all influenza-related deaths last year which are believed to be approximately 66,000. What pandemic?
The WHO was equally irresponsible in its predictions of deaths from the "Avian Flu", also known as SARS (Severe Acute Respiratory Syndrome). That flu was predicted to kill 750 million people. To date 744 deaths worldwide and NONE in the United States. Oops! Only exaggerated by 1 million times!
The United States has reportedly spent more than $1 billion to procure vaccines. While no official count exists, the vaccine itself has proven deadly to some people who have taken it. Sweden, however, has looked into the efficacy of the vaccine in some detail.
There have been more than 350 reports of vaccine side-effects reported to the Swedish government. It is reported by DN.se, a Swedish health organization, that side effects are more common with the swine flu vaccine compared to the regular flu vaccine.
Unfortunately, both the WHO and CDC must justify their funding and existence based on the need to monitor and control deadly inflectious viruses. This gives them an incentive to dramatically over-hype any possible concerns about an outbreak. Still think the government should run healthcare as in Obamacare?
Marko's Take
Interested in a 7-step solution to fix Social Security? If so, our latest video blog entitled "Social In-Security: The Solution", can be accessed by clicking here http://www.youtube.com/markostaketv#p/u/0/7Rl6XtobFpE.
Thursday, June 3, 2010
Oil Spill Exploited For Political Gains
The tragedy in the Gulf of Mexico is bad enough. The reaction, or OVER-reaction by the political community, is the real crime.
Let's take an objective look at the situation. The worst oil spill in history has been nothing short of an ecological disaster. First, was the death of the 11 platform workers when the well exploded. Then came the destruction of wildlife, whose cost is immeasurable. What should the Obama Adminstration do?
Punish British Petroleum (BP)? The marketplace has already taken care of it. Currently trading at $38 per share, BP has lost nearly $100 billion dollars in market capitalization since news broke of the spill in just a few weeks. The stock has lost more than 40% of its value. Could any penalties imposed by Washington do anything more than merely pandering to all the constituents calling for BP's death?
Add to that the tremendous public relations hit that BP is taking, and, for that matter, the entire oil industry. It's easy to hate oil companies. In the view of the public, oil companies make obscene profits, manipulate energy prices, block the creation of alternative fuels and enter into deals with governments that sponsor terrorism.
Oil companies are owned by shareholders like you and me. So, punishing them just places economic costs on a different set of constituents. Of course they are after profits. So, are the shareholders. So am I. So are you. They have never claimed to be altruistic any more than Big-Pharma, the auto companies or the financial sector.
The other response has been to call for severe restrictions on offshore drilling. What would that accomplish? Higher energy prices and higher profits for all the OTHER oil companies! Less supply for Americans. More dependence on the Middle East. Bad approach.
But, we have to do SOMETHING! Really? Why? Uncle Sam can't cap the well. Uncle Sam has been a miserable failure when it comes to interfering in the energy business. Remember the "Windfall Profits Tax"? That was an unmitigated policy disaster which only drove oil prices higher and led to the famous gasoline lines in the 1970's.
Politicians everywhere are using the public outcry to gain political footing by creating a policy issue where none exists. It's politically popular to wring your hands and claim that things should have been handled differently. How would you have prevented this, Mr. Senator? Mr. President? Mr. Candidate?
The liability for the damage, which will easily run into the tens of billions, clearly belongs primarily to BP and Transocean Ltd. (RIG). Since the explosion on Transocean's platform on April 20, the company has lost nearly HALF its value, or $15 billion.
Undoubtedly, each of these companies carries insurance which will be employed to cover some portion or the majority of the costs.
Regulate future oil drilling activity? Not necessary. The entire oil industry has taken a hit. Even stalwarts such as ExxonMobil (XOM) have suffered massive losses in value in anticipation of a much less friendly business environment. XOM's market value has dropped by 10% or about $30 billion. If one were to factor in the entire oil industry including drillers, the losses would certainly exceed an additional $100 billion.
Clearly, any company NOT involved is working overtime to make sure a similar disaster does not occur in one of their wells. The last thing any oil company wants right now is to be responsible for some other disaster while the world's microscope is analyzing every step they take.
There is no place for public policy here, despite the cry for penalties, regulations and restrictions. The marketplace has imposed HUGE penalties, as has the forum of public opinion. We can either choose, as a society, to encourage more oil supplies at the cost of an occasional disaster, or we can reduce the probability of this kind of problem by imposing massive costs on society. Oil is highly combustible, therefore, we can not possibly eliminate the risk in this industry any more than we can eliminate traffic deaths by imposing more penalties on the automobile manufacturers.
No solution to this situation exists. You want more nuclear? Prepare for the occasional reactor radiation leak. You want less production of oil here? Prepare to be more beholden to Saudi Arabia and other nations that sponsor terrorism.
What we have to understand is that life comes with trade-offs. These can't be legislated away despite the self-serving proclamations of our elected officials and those that seek to be elected. Cry about it, but don't make it worse by over-reacting. Let the market take care of it.
Marko's Take
Our 7-Step solution to fixing the ponzi scheme called Social Security is now available on You Tube. Entitled "Social In-Security: The Solution", the video can be accessed by clicking here http://www.youtube.com/markostaketv#p/u/0/7Rl6XtobFpE.
Let's take an objective look at the situation. The worst oil spill in history has been nothing short of an ecological disaster. First, was the death of the 11 platform workers when the well exploded. Then came the destruction of wildlife, whose cost is immeasurable. What should the Obama Adminstration do?
Punish British Petroleum (BP)? The marketplace has already taken care of it. Currently trading at $38 per share, BP has lost nearly $100 billion dollars in market capitalization since news broke of the spill in just a few weeks. The stock has lost more than 40% of its value. Could any penalties imposed by Washington do anything more than merely pandering to all the constituents calling for BP's death?
Add to that the tremendous public relations hit that BP is taking, and, for that matter, the entire oil industry. It's easy to hate oil companies. In the view of the public, oil companies make obscene profits, manipulate energy prices, block the creation of alternative fuels and enter into deals with governments that sponsor terrorism.
Oil companies are owned by shareholders like you and me. So, punishing them just places economic costs on a different set of constituents. Of course they are after profits. So, are the shareholders. So am I. So are you. They have never claimed to be altruistic any more than Big-Pharma, the auto companies or the financial sector.
The other response has been to call for severe restrictions on offshore drilling. What would that accomplish? Higher energy prices and higher profits for all the OTHER oil companies! Less supply for Americans. More dependence on the Middle East. Bad approach.
But, we have to do SOMETHING! Really? Why? Uncle Sam can't cap the well. Uncle Sam has been a miserable failure when it comes to interfering in the energy business. Remember the "Windfall Profits Tax"? That was an unmitigated policy disaster which only drove oil prices higher and led to the famous gasoline lines in the 1970's.
Politicians everywhere are using the public outcry to gain political footing by creating a policy issue where none exists. It's politically popular to wring your hands and claim that things should have been handled differently. How would you have prevented this, Mr. Senator? Mr. President? Mr. Candidate?
The liability for the damage, which will easily run into the tens of billions, clearly belongs primarily to BP and Transocean Ltd. (RIG). Since the explosion on Transocean's platform on April 20, the company has lost nearly HALF its value, or $15 billion.
Undoubtedly, each of these companies carries insurance which will be employed to cover some portion or the majority of the costs.
Regulate future oil drilling activity? Not necessary. The entire oil industry has taken a hit. Even stalwarts such as ExxonMobil (XOM) have suffered massive losses in value in anticipation of a much less friendly business environment. XOM's market value has dropped by 10% or about $30 billion. If one were to factor in the entire oil industry including drillers, the losses would certainly exceed an additional $100 billion.
Clearly, any company NOT involved is working overtime to make sure a similar disaster does not occur in one of their wells. The last thing any oil company wants right now is to be responsible for some other disaster while the world's microscope is analyzing every step they take.
There is no place for public policy here, despite the cry for penalties, regulations and restrictions. The marketplace has imposed HUGE penalties, as has the forum of public opinion. We can either choose, as a society, to encourage more oil supplies at the cost of an occasional disaster, or we can reduce the probability of this kind of problem by imposing massive costs on society. Oil is highly combustible, therefore, we can not possibly eliminate the risk in this industry any more than we can eliminate traffic deaths by imposing more penalties on the automobile manufacturers.
No solution to this situation exists. You want more nuclear? Prepare for the occasional reactor radiation leak. You want less production of oil here? Prepare to be more beholden to Saudi Arabia and other nations that sponsor terrorism.
What we have to understand is that life comes with trade-offs. These can't be legislated away despite the self-serving proclamations of our elected officials and those that seek to be elected. Cry about it, but don't make it worse by over-reacting. Let the market take care of it.
Marko's Take
Our 7-Step solution to fixing the ponzi scheme called Social Security is now available on You Tube. Entitled "Social In-Security: The Solution", the video can be accessed by clicking here http://www.youtube.com/markostaketv#p/u/0/7Rl6XtobFpE.
Wednesday, June 2, 2010
Euro-Zone Defies Phillips Curve
Once upon a time, many economists ascribed to the notion that unemployment and inflation were trade-offs.
The notion of an inverse relationship between inflation and unemployment was first put forth by William Phillips, a New Zealand born economist, in a paper in 1958 entitled "The Relationship Between Unemployment and the Rate of Change of Money Wages in the United Kingdom 1861–1957". Phillips describes how he observed an inverse relationship between wage changes and unemployment in the British economy over the subject period.
In 1960, Paul Samuelson and Robert Solow took Phillips' work and made explicit the link between inflation and unemployment using some statistical analysis. When inflation was high, unemployment was low and vice-versa.
Milton Friedman concluded that there is a SHORT-term correlation between accelerating inflation and employment. He observed that when an inflationary surprise occurs, workers are fooled into accepting lower pay because they don't see the drop in real wages right away. Firms hire them because they see inflation as generating higher net income for a given level of wages. Eventually, as workers discover that real wages have fallen, they push for higher pay.
Further studies of the Phillips Curve have demonstrated that any relationship is short-term at best. In the long run, the relationship is likely direct rather than inverse. Once inflation takes hold, the economic distortions that result are more likely to contribute to economic weakness and add to, as opposed to subtract from, unemployment. History has shown that hyper-inflation can exist alongside high unemployment, so the theory's limitations have been accepted.
The situation today in the Euro-Zone demonstrates how fallacious this theory is. Unemployment is now at a 12-year high of 10.1%, while inflation appears to be moving upward. Even Germany, considered the strongest economy, has unemployment approaching 8% - a very high level in normal times.
Producer prices posted their sharpest gain for 21 months in April fueled by higher prices for energy and intermediate goods, data from the European Union's Eurostat statistics office showed this morning.
In March, factory level prices rose 0.6% on the month and 0.9% on the year. The data showed producer prices for energy jumping 1.9% in April, while prices for intermediate goods gained 1.3%, the strongest monthly rise since January 1995. On a year-to-year basis, intermediate goods prices gained 2.7% and energy prices jumped 7.7%, both the strongest annual increases since October 2008, Eurostat said.
Both unemployment and inflation are strongly influenced by the money supply. In general, spurts in growth of money are typically followed by an "output effect", in which economic growth accelerates. About a year later, the "price effect" takes over as upward pressure is put on inflation. Initially, unemployment and economic growth get a boost which is then followed by prices increasing. Thus, the appearance of an inverse relationship.
Of course, over time, price increases become worrisome. With a background of a strong economy, financial authorities will act to cool inflation. The result is the opposite. The "output effect" is felt immediately, the economy slows and perhaps goes into a recession. About a year later, price increases start to cool as people lose their jobs.
While the Phillips Curve itself is no longer advocated as a methodology for making economic adjustments, the Keynesian notion that government spending should be used as a policy tool remains in force. Most of the top economic and financial advisers in the Obama Administration ascribe to Keynesian thinking which is at the heart of the notion of the Phillips Curve.
While Keynes and Phillips had plenty of data to support their ideas, neither are appropriate as a basis for making policy decisions today. As long as these continue to get "air time", our economic and financial problems will remain most difficult to solve.
Marko's Take
Ready For a 7-step proposal to fix the FRAUD/Ponzi Scheme called Social Security? If so, our new video blog entitled "Social In-Security: The Solution" is now posted. It can be accessed by clicking here http://www.youtube.com/watch?v=7Rl6XtobFpE.
The notion of an inverse relationship between inflation and unemployment was first put forth by William Phillips, a New Zealand born economist, in a paper in 1958 entitled "The Relationship Between Unemployment and the Rate of Change of Money Wages in the United Kingdom 1861–1957". Phillips describes how he observed an inverse relationship between wage changes and unemployment in the British economy over the subject period.
In 1960, Paul Samuelson and Robert Solow took Phillips' work and made explicit the link between inflation and unemployment using some statistical analysis. When inflation was high, unemployment was low and vice-versa.
Milton Friedman concluded that there is a SHORT-term correlation between accelerating inflation and employment. He observed that when an inflationary surprise occurs, workers are fooled into accepting lower pay because they don't see the drop in real wages right away. Firms hire them because they see inflation as generating higher net income for a given level of wages. Eventually, as workers discover that real wages have fallen, they push for higher pay.
Further studies of the Phillips Curve have demonstrated that any relationship is short-term at best. In the long run, the relationship is likely direct rather than inverse. Once inflation takes hold, the economic distortions that result are more likely to contribute to economic weakness and add to, as opposed to subtract from, unemployment. History has shown that hyper-inflation can exist alongside high unemployment, so the theory's limitations have been accepted.
The situation today in the Euro-Zone demonstrates how fallacious this theory is. Unemployment is now at a 12-year high of 10.1%, while inflation appears to be moving upward. Even Germany, considered the strongest economy, has unemployment approaching 8% - a very high level in normal times.
Producer prices posted their sharpest gain for 21 months in April fueled by higher prices for energy and intermediate goods, data from the European Union's Eurostat statistics office showed this morning.
In March, factory level prices rose 0.6% on the month and 0.9% on the year. The data showed producer prices for energy jumping 1.9% in April, while prices for intermediate goods gained 1.3%, the strongest monthly rise since January 1995. On a year-to-year basis, intermediate goods prices gained 2.7% and energy prices jumped 7.7%, both the strongest annual increases since October 2008, Eurostat said.
Both unemployment and inflation are strongly influenced by the money supply. In general, spurts in growth of money are typically followed by an "output effect", in which economic growth accelerates. About a year later, the "price effect" takes over as upward pressure is put on inflation. Initially, unemployment and economic growth get a boost which is then followed by prices increasing. Thus, the appearance of an inverse relationship.
Of course, over time, price increases become worrisome. With a background of a strong economy, financial authorities will act to cool inflation. The result is the opposite. The "output effect" is felt immediately, the economy slows and perhaps goes into a recession. About a year later, price increases start to cool as people lose their jobs.
While the Phillips Curve itself is no longer advocated as a methodology for making economic adjustments, the Keynesian notion that government spending should be used as a policy tool remains in force. Most of the top economic and financial advisers in the Obama Administration ascribe to Keynesian thinking which is at the heart of the notion of the Phillips Curve.
While Keynes and Phillips had plenty of data to support their ideas, neither are appropriate as a basis for making policy decisions today. As long as these continue to get "air time", our economic and financial problems will remain most difficult to solve.
Marko's Take
Ready For a 7-step proposal to fix the FRAUD/Ponzi Scheme called Social Security? If so, our new video blog entitled "Social In-Security: The Solution" is now posted. It can be accessed by clicking here http://www.youtube.com/watch?v=7Rl6XtobFpE.
Tuesday, June 1, 2010
China's Problems Intensify
The great economic miracle called China is slowly coming unwound. Beset by a host of converging economic and financial problems, Beijing is about to face the ultimate test.
Front and center is the housing bubble and an economy that is rapidly overheating.
The problems in China’s housing market are thought to be more severe than those in the U.S. before the financial crisis. They combine the potential housing bubble with the risk of social discontent, according to an adviser to the Chinese central bank. In the last 12 months, property prices have appreciated by 11.7%.
China initiated limitations on property speculation recently as economic growth accelerated to 11.9% in the first quarter from the same period last year. The State Council said anyone buying a second home would be required to put up a 50% deposit, up from 40%, while the mortgage rate for second homes was also raised. The downpayment for first homes bigger than 90 square meters was increased to a minimum of 30%.
The economy expanded at its fastest rate in nearly 3 years and more quickly than economists had expected, putting new pressure on the financial authorities to consider tougher tightening measures, including an appreciation of the exchange rate and interest rates.
Despite rising fears of overheating, consumer price's dipped to an annualized 2.4% in April from 2.7% in February, according to recently published data. Inflation at the factory level continued to accelerate, increasing half a percentage point to 5.9%.
Asia’s soaring factory output appeared to have slowed this morning as production data from China, Taiwan, South Korea and Australia showed a decrease in the pace of growth in output in May.
The official Purchasing Managers’ Index (PMI), compiled by the China Federation of Logistics and Purchasing, fell to 53.9 in May from 55.7 in April. Concurrently, the unofficial but closely watched HSBC China Manufacturing PMI fell to 52.7 from 55.2. An index reading above 50 indicates an increase in output.
Beijing has been the main driver of commodity prices in the past year, but the markets have been hit in recent weeks by concerns that measures to cool growth will temper the country’s appetite for raw materials. As a result, oil prices have stalled.
Add to that China's exposure to the dismantling of the Euro-Zone and belligerent neighbor North Korea to the south and the ingredients are in place for an early termination of the China miracle. As a result, investors need to be careful about taking on too much exposure to Chinese interests.
Marko's Take
Interested in learning more about that ponzi scheme/FRAUD known as Social Security? Our new video blog series addresses not only the problems but will present a market-based solution to fixing this mess.
To access "Social In-Security: The Problem", click here http://www.youtube.com/markostaketv#p/u/0/twFn9XyP2rI.
Front and center is the housing bubble and an economy that is rapidly overheating.
The problems in China’s housing market are thought to be more severe than those in the U.S. before the financial crisis. They combine the potential housing bubble with the risk of social discontent, according to an adviser to the Chinese central bank. In the last 12 months, property prices have appreciated by 11.7%.
China initiated limitations on property speculation recently as economic growth accelerated to 11.9% in the first quarter from the same period last year. The State Council said anyone buying a second home would be required to put up a 50% deposit, up from 40%, while the mortgage rate for second homes was also raised. The downpayment for first homes bigger than 90 square meters was increased to a minimum of 30%.
The economy expanded at its fastest rate in nearly 3 years and more quickly than economists had expected, putting new pressure on the financial authorities to consider tougher tightening measures, including an appreciation of the exchange rate and interest rates.
Despite rising fears of overheating, consumer price's dipped to an annualized 2.4% in April from 2.7% in February, according to recently published data. Inflation at the factory level continued to accelerate, increasing half a percentage point to 5.9%.
Asia’s soaring factory output appeared to have slowed this morning as production data from China, Taiwan, South Korea and Australia showed a decrease in the pace of growth in output in May.
The official Purchasing Managers’ Index (PMI), compiled by the China Federation of Logistics and Purchasing, fell to 53.9 in May from 55.7 in April. Concurrently, the unofficial but closely watched HSBC China Manufacturing PMI fell to 52.7 from 55.2. An index reading above 50 indicates an increase in output.
Beijing has been the main driver of commodity prices in the past year, but the markets have been hit in recent weeks by concerns that measures to cool growth will temper the country’s appetite for raw materials. As a result, oil prices have stalled.
Add to that China's exposure to the dismantling of the Euro-Zone and belligerent neighbor North Korea to the south and the ingredients are in place for an early termination of the China miracle. As a result, investors need to be careful about taking on too much exposure to Chinese interests.
Marko's Take
Interested in learning more about that ponzi scheme/FRAUD known as Social Security? Our new video blog series addresses not only the problems but will present a market-based solution to fixing this mess.
To access "Social In-Security: The Problem", click here http://www.youtube.com/markostaketv#p/u/0/twFn9XyP2rI.
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