Friday, April 15, 2011

Economic Gibberish On CNBC

I really wish there was an effective competitor to CNBC in the field of business and financial news.

As it is, while viewing/listening to the network for news, I am forced to hear a lot of nonsense which the producers evidently feel passes as 'debate.'

For example, for the past 5-10 minutes, I've listened to a largely meaningless exchange among a few minor economists, an anchor, and one moron.

The moron, of course, is the network's senior economic idiot, Steve Liesman. Just how many compromising pictures of how many CNBC executives does that guy have? How else could he continue to do such a horrific job and remain employed there?

Today, the subject was this morning's inflation measures. The predictable wrangling involved the Fed's preference for a measure which ignores food and fuel price changes.

Michelle Girard, a senior or chief economist at a second-tier bank, was largely confused. I checked her bio, and noticed that she has no PhD in the field. You would think, with all of the economics PhD minted from decent programs, large banks could at least manage to have one of those on staff.

Besides Girard's meandering coments, it was pretty clear from the content of some of her remarks that she doesn't fully comprehend the manner in which the phenomenon of commodity price rises can suddenly effect the US economy. I recall living through the Ford-Carter inflation era. I think Girard only read about it and, thus, has an incomplete appreciation for how quickly the nation's economy can be mismanaged into misery indices well above the mid-teens.

Liesman continued his Fed ass-kissing from the morning's debate with Rick Santelli. Displaying his usual lack of intelligence, the economic moron confused Santelli's point about excluding food and energy with the different concept of replacing items in an index to ostensibly capture higher values in more modern goods or services. But, whether misunderstanding someone else's point, or making an illogical one of his own, Liesman steadfastly defended whatever the Fed does. It doesn't take a genius to figure out why. This guy has become the Fed's notional outside publicity hack. He seems to be on a non-stop tour of Fed banks, interviewing chairmen with softball questions. Thus, any comments from him that seem out of step with Fedspeak might cut off his access.

Sadly, the result of the multi-person exchange a few minutes ago was more heat than light. And nothing in the way of conclusive points.

Too bad some real heavyweights like John Taylor, David Malpas or Brian Westbury couldn't be assembled for a really interesting discussion of this topic.

Thus the irony that one of the co-anchors thanked all involved for such a productive 'debate.'

Bad Economics On CNBC

It never fails to astonish and amuse me when Keynesians claim that cutting federal spending will send the US economy into a nosedive. Specifically, now, with our economic recovery still fragile, is not the time to contemplate serious federal budget cuts.

No, if anything, taxes must be raised in order to allow more spending without unduly increasing the deficit.

What nonsense.

But this is what you heard from Byron Wien on CNBC Wednesday morning. Wien was, at Morgan Stanley, a perennial investment bear. Almost as gloomy as the legendary Salomon Brothers chief economist, Henry Kaufman.

After hearing Wien spout this widely-heard nonsense, I checked his biography to see where his PhD in economics was from. Apparently, he doesn't have one. I found him credited only with a BA and MBA from Harvard.

Later in the morning, CNBC gave North Dakota Democratic Senator Kent Conrad its platform to repeat Wien's concerns. Conrad, too, has no advanced economics degree that I could find among his bios.

As I've written in prior posts, it seems that many pundits and, certainly, free-spending members of Congress, cannot acknowledge that economies have naturally-occurring cycles. That money not appropriated by or borrowed in the name of taxpayers, to be spent by Congress, will still exist on private balance sheets.

Government spending doesn't create long term employment, nor, per se, businesses. The same money, in private hands, does.

I understand why Conrad can't comprehend this, being a conventional tax-and-spend liberal Senator. But Wien, with his long tenure at Morgan Stanley, should know better. Much better.

If anything, recent economic research has shown a clear dampening effect on private consumption when federal spending is seen as increasing taxes via interest on debt.

The notion that federal spending can't be replaced by private sector spending, or that, if the money is saved by the private sector, rather than spent, it is a mistake, is just bad economics.

But it seems that many of the carefully-screened pundits you'll see on CNBC don't know this, and, basically, could care less.

Thursday, April 14, 2011

Jamie Dimon's Chase's Revenue Challenges

Today's Wall Street Journal's Heard On The Street column took Chase CEO Jamie Dimon to task for talking up a one-time loan loss reserve reduction while presiding over anemic revenue growth.

 Specifically regarding revenues, the article states,

"Finally, a big portion of the outperformance came from stronger-than-expected fixed-income revenue in the investment bank, but these can be lumpy. Shareholders want recurring revenue growth. And on this point, J.P.Morgan remains a show-me story."

So true. This has been a subject on which I've written before. Chase gets credit by pundits for performance it doesn't actually exhibit.

Just to be sure, I went to my Compustat data and looked at the annual total revenues as of March, from 2005-2011. They rose from $64B to $115B, for a 10% annualized growth rate. But the annual revenue growth rates, at March of each year, were actually:

Mar-06    Mar-07     Mar-08     Mar-09    Mar-10    Mar-11
30.9%      26.3%      7.3%         -8.2%       12.0%     -1.2%

Several things become clear from this data.
First, the pre-recession revenue growth rates of healthy double-digits is gone. For the last two years, the best the bank could manage was 12% in 2010. Revenue actually declined at Dimon's Chase in the past twelve months.
Second, as is typical with commercial banks, revenue growth has been volatile.
Third, if Dimon has any special skills, it sure isn't in revenue growth management. More likely, as I've always contended, what he learned from his mentor, Sandy Weill, is how to slash expenses.
Thus, we don't see long term, consistent revenue growth which would underpin consistently superior total returns. And the nearby chart of Chase's and the S&P500 Index's price series for the past five years so indicates.
Chase has barely outpaced the index. Certainly not to an extent necessary to offset the risk of a single equity in comparison to the S&P.
Once again, Dimon's so-called leadership comes up short when you actually examine the data.

Inflation, Commodity Prices & US Debt

Kelly Evans wrote on Tuesday, in her Wall Street Journal Ahead Of The Tape column, about M2's relatively slower growth in February. Her point was that, from Friedman's perspective ("inflation is always and everywhere a monetary phenomenon"), we aren't actually experiencing rampant inflation.

I've written in prior posts about the confusion between concepts such as that embodied in the misnamed CPI and monetarily-defined inflation. There's no question that the broadly-defined price indices are measuring a rise in the prices of commodities such as food and energy. But this isn't Friedman's view of 'inflation.'

But after reading Evans' column, I began to reflect on how Friedman would view the overall US monetary policy situation today.

The Fed's balance sheet is obscenely bloated. Some pundits are seriously discussing whether there would be a QE3 in light of the still-struggling US economy.

The Fed is monetizing US Treasury debt on a previously unheard of scale.

In this context, is it really sensible to limit the measure of monetary-based inflation to relatively-narrowly-defined concepts such as M2? What is velocity? Surely overall velocity of money and near-money is, on average, higher today, with increased use of electronic fund transfers, than it was in Friedman's prime. What has it been lately- rising, steady or falling?

With the Fed so queering the markets for money with its post-2008 easy money and excessive asset purchase policies, it seems silly to only look at the conventional monetary base growth and pronounce it tame.

Surely, amidst such huge amounts of net external US debt holdings and discussions of raising the debt limit, the notion of possible deflation seems contradictory.

Perhaps it's instructive to consider the past three years. With the US having been in a recession, while the Fed embarked on a program of propping up US financial institutions and the value of many of their assets, it's unlikely that monetary value growth during the period was slower than GDP growth.

While some prices remained fairly tame, due to recession-related lower demand, that seems to have ended, at least for agricultural and energy commodities. Meanwhile, GDP remains tepid.

So it's hard to believe that the net effect of the past several years has been US GDP growth that has outstripped that of US government money and credit creation. This situation does not seem to be changing now, or in the near future. Federal spending continues at levels which are increasing net external debt, while recent GDP growth was just scaled back the other day..

That would seem to me to qualify, from Friedman's perspective, as inflationary.

Wednesday, April 13, 2011

The Tepper-QE2 Rally

Just quick confirmation of something that occurred last September. In that post, I wrote of David Tepper's bullish equity market call on CNBC. On the prior day, the S&P500 closed near 1125.

Even with the recent backsliding of the index, as I write this, it's at 1310.

That's a 16.5% gross return in just over six months.

I still wonder, though, whether it was a good call by Tepper, or simply self-fulfilling prophecy because a well-regarded fund manager talked up his book?

Another Reason Why Business Fears Government

Back almost a month ago, the Wall Street Journal published a staff editorial entitled President Warren's Empire. It dealt with the tortured details of Warren's position as head of the newly-created Consumer Financial Protection Bureau.

If you want to understand why job creation and investment are growing so slowly in the US, this story is instructive.

Given the politics of the moment last year, Democrats wrote the unnecessary Dodd-Frank regulatory legislation in such a way as to shield Warren and her agency from possible Republican legislative retribution, should they have, as they did, retake control of the House.

Warren's agency is funded mandatory out of the Fed's budget, and the Fed's chairman can't object. So Congress has no budgetary authority over the agency. And Warren dodged confirmation hearings because she was appointed as a White House staffer.

The overall effect has been for Democrats to organize the agency and treat Warren in such a way as to leave both effectively without any oversight or restraints by Congress.

As the editorial observes at its close,

"This is no way to run a government, especially not one that Madison envisioned. The consumer bureau is essentially a bureaucratic rogue....But at the very least Congress should remove it from the Fed, make it part of the Treasury and subject it to annual appropriations. No one elected- or even nominated' Elizabeth Warren."

Meanwhile, from this bureaucratic tangle, Warren and her fellow appointees have already begun to coerce and shake down banks to forgive mortgage principle, or face further harassment.

Indeed, this was not the sort of federal government the Framers had in mind. With such capricious, deliberately-opaque and unresponsive design of so-called regulatory agencies, you can't blame business managers for withholding investment due to uncertainty of government intervention and coercion, disguised as 'regulation.'

Tuesday, April 12, 2011

"From Nixon to Obama"

That was the title of a staff editorial in last Thursday's edition of the Wall Street Journal. It's ironic, because every time I've heard some pundit wail about the lack of a US energy policy, I think back to my youth, watching Nixon unveil his "Project Independence," or whatever it was called, which promised US energy independence by, I believe, 1980. Back then, it seemed like a good idea, and 1980 seemed a long way off.

Since this isn't my political blog, I'll leave aside the parts of the editorial dealing with the president's lies involving current energy options.

Rather, it occurred to me that something which eight presidents have promised over more than 40 years may well be something that isn't going to, and shouldn't, happen.

For example, the new, promising, large-scale US energy source is shale oil. In Canada, tar sands oil has made remarkable progress in terms of being affordable and reasonably environmentally friendly.

How would the US Department of Energy have foreseen these developments 40 years ago? Aside from dedicating a substantial amount of what could be food supply for animals or people, and thus driving up food prices, how has ethanol beneficially affected the US?

When you subsidize a specific technology, you'll get a lot more of it, regardless of its standalone economic rationale.

Better, it would seem, for the federal government to simply offer a standing bid for energy on a btu or some other energy-equivalent basis, relative to markets, and declining over time. Thus, any new energy source developer would have maximal knowledge of the size and duration of federal subsidies for its products. If, over some timeframe during which it would qualify for subsidies, it cannot improve the economics of its energy source to make economic sense on its own, it would die.

But the US has never done this. Instead, whole industries have grown up around technology-specific subsidy boondoggles, like wind, solar and ethanol. I learned this weekend that GE actually owns a substantial portion of a Texas wind farm. Somehow, the company has managed to wade into the federal subsidy trough to a degree it has kept hidden from the general public. It doesn't simply sell wind turbines. It seems to be making some more money, or garnering extra subsidies, by dint of its unpublicized ownership position. And, of course, having that position goes a long way to explain GE's large-scale involvement with alternative energy. Nevermind that most of them can't compete without subsidies, meaning that taxpayers are funding uneconomic projects which provide corporate welfare.

Over 40 years after Nixon's first bogus federal energy policy, I not only remain sceptical of such efforts. I'm more jaded and pretty much disbelieve that any of these campaigns will do US consumers and taxpayers any good whatsoever. There's always a corporate boondoggle angle to them. Whenever the public sector, with its ability to coerce via laws, enters into the economic arena, you can bet that favors will be bought and sold. That uneconomic decisions will be made due to graft, corruption and the usual things which occur when government funding are available through hard-to-measure programs.

Just the fact that government departments are choosing wind and ethanol, while casting doubt on natural gas, coal and shale oil, makes me sense that the reverse is probably the way we ought to go. But with as few directed subsidies and laws as possible.

Let's face it. Our best and brightest don't generally work in Washington. Not for long, anyway. And, if and when they do, it's typically to be in a position to be hired afterward for much more money by firms with which they had dealings, and probably dispensed favors, when they were in government.

In that sense, the only energy source I can see always being favored in Washington should be solar, i.e., sunlight , transparency and total public disclosure of energy policy subsidies and deals.

Monday, April 11, 2011

Another Reminder That The S&P500 Is Not The US Economy

Kelly Evans wrote an unassuming piece in Friday's Wall Street Journal discussing the strength of US corporate earnings, despite anemic job growth.

I won't go into the details of her article, but Evans presented some interesting evidence on capital stock shrinkage in the US, while large US corporations, represented in the S&P500 Index, have moved much investment offshore. Remember, too, the large amounts of cash on balance sheets which remains unrepatriated, due to relatively higher US tax rates.

I believe I wrote about this topic at least once since the recent recession. I know I've discussed it with business colleagues. For some time, I've argued that if one owns the S&P500 Index, or components thereof, you are already globally diversified. But without the risks of local exchanges, timing, and liquidity in various foreign equity markets.

That's essentially at the heart of Evans' contentions. The S&P and/or US equity markets can prosper while the nation's GDP struggles, because owning the S&P is a bet on global markets, not solely the US.

Something to remember as one ruminates over how US economic troubles affect its equity markets. They simply are not identical.