In yesterday's post I discussed my views on the stupidity of every major nation's defined-benefit pension and/or healthcare schemes over the past 120 years, beginning with Germany under Bismarck.
Doug Dachille, a fixed-income maven and occasional guest on CNBC, has articulated several times that overly-indebted governments have a choice between whom they will disappoint/stiff.
They can default on their bonds, being legal debt obligations, in order to favor citizens who vote for members of the government. Or they can pay their bonds and enact combinations of more/higher taxes and benefits cuts for citizens.
A Wall Street Journal editorial in Wednesday's edition echoed Dachille by pointing out that there is no real need for a default, regardless of what happens by August 2nd or, potentially, the date on which Congress recesses for the summer, August 8th.
That is because there is more than sufficient tax revenue every month to pay the nation's debt interest.
Therefore, to Dachille's point, thanks to badly-designed and overly-optimistic social welfare programs passed by less-than-stellar intellects in Congress throughout the last eighty years, the more logical solution to America's spending and debt problems is to cut benefits in these programs.
Yesterday, on CNBC's noontime program, David Stockman was enlisted to push the network's liberal agenda. A perennial favorite of the network's due to his combination of serving in Reagan's administration, but actually being a big-tax-and-spend liberal, Stockman didn't fail his hosts. He immediately decried the current debt limit debate as really about deficits, which, of course, require new and higher taxes to close them.
He then bemoaned, several times, that Senate Democrats had regrettably and inexplicably thrown in the towel on demanding new taxes.
Apparently Stockman isn't familiar with Hauser's Law, or the fact that federal tax revenues as a percentage of US GDP average 18% over the long term, no matter what the composition of tax rates and bases.
Amazing as it may be, Stockman, too, confuses tax rates with tax revenues. He evidently continues to fail to understand that lower rates, which accommodate economic growth and higher GDPs, lead to higher total tax revenues on lower tax rates.
On Greta Van Sustern's Fox News program Wednesday night, GOP House Budget Chairman Paul Ryan discussed the current debt limit debate, noting, in answer to a question from the program's host, that various national debt estimates don't typically include the off-budget programs such as Social Security, Medicare and Medicaid. Further, he explained, those aren't like bonds which have been issued, and must be retired. The terms, conditions and costs of the entitlement programs can be changed and, thus, do not represent formal, fixed claims on the federal Treasury.
While some US states, such as Illinois, California, Michigan and New Jersey, pre-Christie, may flirt with defaults, exhibit government denial of their inability to tax their way out of their fiscal nightmares, and, ultimately, appeal to the federal government to bail them out, the US government has no ultimate guarantor.
It doesn't take a genius to see that fixed debt obligations in the form of bonds will have to be honored and serviced.
Given that tax receipts can't be expected to rise above about 18% of US GDP, the growth of which has been anemic due to recent newly-increased levels of federal spending and regulation, the only remaining variable in the equation to eventually shrink the US federal deficit has to be spending.
Quaint Washington games like automatic 7%-per-year baselines budget increases have to be ended. Eventually, Social Security, Medicare, Medicaid and all other off-budget programs should be brought on-budget, to reflect a consolidated balance sheet of federal liabilities.
Perhaps only then will most voters finally understand that they have allowed their elected federal officials, for some eight decades, to enact promised social benefit programs which will simply never be payable on a sustained basis.
One only has to revisit the Greek situation, with the many stories and jokes about the short working careers, easy work rules and lavish retirement benefits, to understand that much of the developed world's economies have the same tough challenge ahead- to shrink their once-promised federal-provided social benefits back to affordable levels. Probably involving, at some point, individual defined contribution accounts paid annually out of government receipts, so that there will never be generationally-shifted debts for the consumption of social welfare programs.
A chance remark in a recent Wall Street Journal editorial noted that, just now, as many governments need to borrow heavily to plug budget deficits, many of said governments are finding it convenient to excoriate debt rating agencies and dismiss requirements for using their ratings.
Regardless of how badly S&P, Moodys and Fitch mis-rated mortgage-back structured finance instruments earlier in this decade, or how badly they may err in rating sovereign debt, that chance comment caused me to speculate that global economic growth and debt may be about to reach a tipping point together.
Specifically, with so much borrowing occurring for so much deficit spending among so many nations, while growth among the developed economies has slowed, thanks to ill-advised taxation, spending and regulatory policies, we may well see a sustained period of lower global demand as a result.
The reason for this would be as follows. As governments realize that promised social benefits must be trimmed, they spark a realization among their citizens that savings must rise to offset diminished future government-provided retirement and healthcare subsidies. With government spending reduced, and private-sector spending among consumers reduced to save for future retirement and medical spending, we may well witness a global shrinkage of demand as the final consequence of the deleveraging which began with the financial crisis of 2008.
To me, it seems obvious that after nearly a century of unaffordable social benefit schemes, many governments are now having to rectify those unsustainable promises, cut them, and trigger heretofore unexpected and unseen changes in savings and consumption patterns among consumers across many developed economies. Such economic behavioral changes among consumers may last for decades, and result in permanent changes in savings and consumption rates and, for years, if not decades, slower national economic growth rates.
For, having realized that promised pension and healthcare benefits simply won't be forthcoming as promised by many governments over past decades, individuals will return to pre-mid-twentieth century habits of high savings rates and markedly lower consumption, to prepare for self-financed medical and retirement needs. I believe that will drive discontinuous changes in individual economic behavior not seen in the lifetimes of most economists currently engaged in modeling, estimating and forecasting such behaviors.
Friday, July 29, 2011
Thursday, July 28, 2011
Rethinking Pension and Benefit Schemes
My July 4th post concerning America's Porkiest Generation was my first organized plunge into the mess that is the modern global entitlement society in any so-called developed nation.
Among the passages I feel most represent the core ideas of that post are these,
"What astounds and confounds me is that, for forty years, from 1935-75, apparently no economist of standing bothered to note that it was a mistake promise defined benefits, over time, from the proceeds of a national economy subject to the vagaries of recessions, depressions, monetary crises, global competition and occasional wars. After 1945, the same economists should have warned Congress not to use a temporary period of US economic hegemony as the baseline from which to forecast the availability of lavish wealth for decades hence, from which to pay ever-growing defined benefits of health insurance, care, and retirement pensions.
My point for today's patriotic post is to highlight how the generation that deserved credit for fighting and dying to win WWII promptly rewarded itself, through unionism and Democratic control of Congress, by promising itself defined levels of health care and old-age pensions which were never going to be affordable. The mistaken belief that a brief period of unrivaled American economic supremacy would endure and fund such lavish promises should have been challenged and crushed before it could become cemented into the American workers' expectations.
Can it really be that nobody was smart and courageous enough throughout the 1930s-1970s to point out this folly? That no society in history had ever managed the trick of working for about 30-40 years, then being paid near-working wages in retirement for another 20-30 years? That the mechanics of actuarial math and compounding wouldn't sustain those promises without economic assumptions never before seen in global economics?
What a Ponzi scheme, eh? You get control of unions and Congress, you pass laws to promise wildly unrealistic and unaffordable benefits to be paid by subsequent generations, then retire and complain when the next generation realizes what the Porkiest had done.
In my opinion, enacting foolish and economically impossible legislation and promises is no defense to simply stripping them away- now- totally- and reverting to defined contribution schemes."
As I understand it, the original social pension concept originated in Bismarck's Germany before 1900. FDR gave the concept a gigantic push with America's own Social Security program.
To be blunt, Michael Spence's recent Wall Street Journal article observing how Germany engaged in "wage and salary restructuring" for the period 2000-05 in order to attempt to regain some measure of global competitiveness, caused me to wonder whether Germany's social pension scheme has ever really worked? And whether America was profoundly misguided to look at Germany and attempt to replicate its program?
Let's admit that the fundamental reason for such so-called social safety nets is that people living in the most economically-advanced societies, with the highest GDPs/capita, are embarrassed to see people in their 60s, 70s and older going hungry, homeless, or suffering debilitating illness due to a lack of medical care. They instinctively think,
'Gee, our society is so wealthy in the aggregate. Surely we can allocate some money to provide for indigent old people, can't we?'
It sounds good in theory. But, as I wrote in that earlier linked post, consider these aspects of that "solution,"
"When you think about it, most of the intent of dedicated health care and old-age pension benefits have more to do with societally-enforced saving for these needs, and necessarily less to do with societal funding of them.
If all Social Security had ever been was a law to mandate workers and employers to dedicate defined percentages of the formers' wages to individual, single-use accounts, it's not clear that federal assistance would have ever been necessary.
After all, using federal funds to augment such accounts is simply a wealth-transfer from those making higher incomes to those making lower incomes. But if actuarially-determined amounts were deducted from compensation, federal funding never would have been required. Besides, society pays, either way. It's just that when the government is involved, it is taking from some to give to others, rather than have those others behave responsibly and live within their means."
You see, what we're really discussing here is a part of the social compact that nobody wants to, or has, to my knowledge, express simply like this,
'To be part of our society, along with obeying our laws, you must agree to save a socially-mandated amount while you are younger and working, so that the rest of us won't have to support you when you are old and no longer working.'
Instead, that got turned on its head, and became Social Security, Medicare and Medicaid. And now ObamaCare. Rather than force individuals to save from their earnings, in designated individual accounts to fund their post-retirement life, we somehow decided to just promise certain levels of payments to everyone from one big pot, or, really, four big pots now. This had the perverse effect of making people feel wealthy, because the government was going to magically give them defined sums of money when they got old.
How did these people consequently behave from the 1930s onward? Why, they saved less and adopted unhealthier lifestyles, of course, because some disembodied 'government' was going to pay for their older, sicker years. Meanwhile, they bought boats, more cars, second homes, and spent lavishly on themselves while younger.
Now multiply this by several times, to reflect the various economically richer, developed countries in Europe, South and North America and Asia which have followed this model.
See the problem? Actuarially, on a global basis, this concept of government funding defined cash or in-kind benefits for older people, was never going to be sustainable.
By failing to mandate individuals saving sufficiently from their own earnings to fund actuarially-determined amounts, and making clear that no government funds were going to be available to augment these, governments invited hyper-consumption by their populations while working, often including lifestyles leading to higher healthcare costs when retired.
The result is slow-growth, sclerotic European economies overloaded with debt, and America finally reaching its own fiscal tipping point.
Just because Bismarck's concept may have worked for whatever period of time it did, or that it took about 80 years, with periodic fixes along the way, for America's Social Security system to become bankrupt, does not mean those programs "worked."
It simply means that those of us around now to bear the cost of the long term unsustainability of these ill-conceived and -designed programs are the victims of a multi-generational Ponzi scheme.
That's why I see no reason whatsoever why any living American not already on Social Security, Medicare or Medicaid, should be shy about terminating those programs and putting their recipients on defined contribution replacements, funded annually out of tax receipts. With absolutely no time-shifting of funding of any sort.
The whole notion of lavish pensions and benefits appearing magically out of government coffers decades or centuries into the future is just foolish and impossible.
Monday's Wall Street Journal contained an editorial by Arthur Brooks, currently head of the American Enterprise Institute, entitled The Debt Ceiling and The Pursuit of Happiness. In it, Brooks argued that America's current deficit, debt and entitlement woes aren't simply economic in nature- they have have a moral component which involves the erosion and corruption of the Framers' original notions of liberty and freedom in America. Too much guaranteed this and entitlement that have caused people to look to the federal government as the source of their retirement and medical care.
It didn't have to be that way, and never should have been that way. Considering the fraudulent manner in which Social Security, Medicare, Medicaid and ObamaCare have been perpetrated on American voters, there is every reason to simply strip these programs out and move to defined contributions from the federal government's annually fluctuating tax receipts.
Despite various pundits' and politicians' constant claims that Americans currently on these programs "earned" those benefits, they did not. They never paid sufficient amounts of their incomes to fund the lavish benefits they now receive.
We have to redress that fraud now. That's really what the debt limit debate is about. I'll discuss that in tomorrow's post.
Among the passages I feel most represent the core ideas of that post are these,
"What astounds and confounds me is that, for forty years, from 1935-75, apparently no economist of standing bothered to note that it was a mistake promise defined benefits, over time, from the proceeds of a national economy subject to the vagaries of recessions, depressions, monetary crises, global competition and occasional wars. After 1945, the same economists should have warned Congress not to use a temporary period of US economic hegemony as the baseline from which to forecast the availability of lavish wealth for decades hence, from which to pay ever-growing defined benefits of health insurance, care, and retirement pensions.
My point for today's patriotic post is to highlight how the generation that deserved credit for fighting and dying to win WWII promptly rewarded itself, through unionism and Democratic control of Congress, by promising itself defined levels of health care and old-age pensions which were never going to be affordable. The mistaken belief that a brief period of unrivaled American economic supremacy would endure and fund such lavish promises should have been challenged and crushed before it could become cemented into the American workers' expectations.
Can it really be that nobody was smart and courageous enough throughout the 1930s-1970s to point out this folly? That no society in history had ever managed the trick of working for about 30-40 years, then being paid near-working wages in retirement for another 20-30 years? That the mechanics of actuarial math and compounding wouldn't sustain those promises without economic assumptions never before seen in global economics?
What a Ponzi scheme, eh? You get control of unions and Congress, you pass laws to promise wildly unrealistic and unaffordable benefits to be paid by subsequent generations, then retire and complain when the next generation realizes what the Porkiest had done.
In my opinion, enacting foolish and economically impossible legislation and promises is no defense to simply stripping them away- now- totally- and reverting to defined contribution schemes."
As I understand it, the original social pension concept originated in Bismarck's Germany before 1900. FDR gave the concept a gigantic push with America's own Social Security program.
To be blunt, Michael Spence's recent Wall Street Journal article observing how Germany engaged in "wage and salary restructuring" for the period 2000-05 in order to attempt to regain some measure of global competitiveness, caused me to wonder whether Germany's social pension scheme has ever really worked? And whether America was profoundly misguided to look at Germany and attempt to replicate its program?
Let's admit that the fundamental reason for such so-called social safety nets is that people living in the most economically-advanced societies, with the highest GDPs/capita, are embarrassed to see people in their 60s, 70s and older going hungry, homeless, or suffering debilitating illness due to a lack of medical care. They instinctively think,
'Gee, our society is so wealthy in the aggregate. Surely we can allocate some money to provide for indigent old people, can't we?'
It sounds good in theory. But, as I wrote in that earlier linked post, consider these aspects of that "solution,"
"When you think about it, most of the intent of dedicated health care and old-age pension benefits have more to do with societally-enforced saving for these needs, and necessarily less to do with societal funding of them.
If all Social Security had ever been was a law to mandate workers and employers to dedicate defined percentages of the formers' wages to individual, single-use accounts, it's not clear that federal assistance would have ever been necessary.
After all, using federal funds to augment such accounts is simply a wealth-transfer from those making higher incomes to those making lower incomes. But if actuarially-determined amounts were deducted from compensation, federal funding never would have been required. Besides, society pays, either way. It's just that when the government is involved, it is taking from some to give to others, rather than have those others behave responsibly and live within their means."
You see, what we're really discussing here is a part of the social compact that nobody wants to, or has, to my knowledge, express simply like this,
'To be part of our society, along with obeying our laws, you must agree to save a socially-mandated amount while you are younger and working, so that the rest of us won't have to support you when you are old and no longer working.'
Instead, that got turned on its head, and became Social Security, Medicare and Medicaid. And now ObamaCare. Rather than force individuals to save from their earnings, in designated individual accounts to fund their post-retirement life, we somehow decided to just promise certain levels of payments to everyone from one big pot, or, really, four big pots now. This had the perverse effect of making people feel wealthy, because the government was going to magically give them defined sums of money when they got old.
How did these people consequently behave from the 1930s onward? Why, they saved less and adopted unhealthier lifestyles, of course, because some disembodied 'government' was going to pay for their older, sicker years. Meanwhile, they bought boats, more cars, second homes, and spent lavishly on themselves while younger.
Now multiply this by several times, to reflect the various economically richer, developed countries in Europe, South and North America and Asia which have followed this model.
See the problem? Actuarially, on a global basis, this concept of government funding defined cash or in-kind benefits for older people, was never going to be sustainable.
By failing to mandate individuals saving sufficiently from their own earnings to fund actuarially-determined amounts, and making clear that no government funds were going to be available to augment these, governments invited hyper-consumption by their populations while working, often including lifestyles leading to higher healthcare costs when retired.
The result is slow-growth, sclerotic European economies overloaded with debt, and America finally reaching its own fiscal tipping point.
Just because Bismarck's concept may have worked for whatever period of time it did, or that it took about 80 years, with periodic fixes along the way, for America's Social Security system to become bankrupt, does not mean those programs "worked."
It simply means that those of us around now to bear the cost of the long term unsustainability of these ill-conceived and -designed programs are the victims of a multi-generational Ponzi scheme.
That's why I see no reason whatsoever why any living American not already on Social Security, Medicare or Medicaid, should be shy about terminating those programs and putting their recipients on defined contribution replacements, funded annually out of tax receipts. With absolutely no time-shifting of funding of any sort.
The whole notion of lavish pensions and benefits appearing magically out of government coffers decades or centuries into the future is just foolish and impossible.
Monday's Wall Street Journal contained an editorial by Arthur Brooks, currently head of the American Enterprise Institute, entitled The Debt Ceiling and The Pursuit of Happiness. In it, Brooks argued that America's current deficit, debt and entitlement woes aren't simply economic in nature- they have have a moral component which involves the erosion and corruption of the Framers' original notions of liberty and freedom in America. Too much guaranteed this and entitlement that have caused people to look to the federal government as the source of their retirement and medical care.
It didn't have to be that way, and never should have been that way. Considering the fraudulent manner in which Social Security, Medicare, Medicaid and ObamaCare have been perpetrated on American voters, there is every reason to simply strip these programs out and move to defined contributions from the federal government's annually fluctuating tax receipts.
Despite various pundits' and politicians' constant claims that Americans currently on these programs "earned" those benefits, they did not. They never paid sufficient amounts of their incomes to fund the lavish benefits they now receive.
We have to redress that fraud now. That's really what the debt limit debate is about. I'll discuss that in tomorrow's post.
Wednesday, July 27, 2011
The Debt Limit & Downgrade- So What?
Occasionally, CNBC co-host Gary Kaminsky will say something simple and insightful when others miss the point. He did so earlier this week on David Faber's noontime program.
When asked about the potential impact of a rating agency downgrade of US debt, Kaminsky said that it didn't really matter, because nobody believed the US is a AAA credit anymore, and the downgrade is already priced in. Not because of the debt limit debate, but because of the nation's profligacy.
I believe Kaminsky is entirely correct and echoes my sentiments in this post from earlier this month,
"Druckenmiller contends that no serious change at all in federal spending and disposition regarding its habits would be the worst outcome. And if the GOP rushes to capitulate after a government shutdown, there won't be such change. Obama will declare political victory, many Tea Party voters will be disgusted with the GOP.
But if Obama faces a GOP House whose members are willing to force a shutdown and, then, after it is clear there won't be capitulation, an ordered payment of federal obligations, while some functions are shuttered, everyone- global investors, voters, onlookers- will understand that things have changed.
In the meantime, the US would have lost its AAA rating. No matter which party gained relatively greater power among Congress and the White House in 2012, a return to borrowing and spending for new programs would no longer be an option. Interest rates would be too high on Treasuries to borrow much more money, if investors would even lend it. Slow economic growth and joblessness would make higher taxes on anyone a non-starter.
In short, a default now will bring forward what I believe would be the eventual outcome of political business as usual in Washington, which will continue without a default.
Whether it's this group of Republicans, or another, after a brief return to Democratic control of the House, Senate, and Oval Office, and the final orgy of unaffordable deficit spending, it will likely now take some catastrophic event such as a credit rating downgrade and default to wake up Washington politicians to what is understood by many American voters and most global investors, to wit, no small change in American federal government fiscal policy will suffice any longer."
Just this morning, I heard a fund manager from Loomis Sayles say essentially the same thing.
What seems to escape the grasp of many pundits, and certainly Congress and the president, is that America doesn't have an inalienable right to a AAA credit rating, even as it debauches its currency and has spent, for most of 80 years, more each year than it receives in tax receipts.
Ironically, sophisticated capital markets combined with a dearth of investment alternatives post-WWII to leave the dollar and US Treasuries in the position of becoming the world's reserve currency.
Much like Rome after the fall of Carthage, the US has been, in the long run, ill-served by the absence of competitors to it as a reserve currency and general free world economic superpower. We've gradually picked up momentum, post-WWII, spending and promising to spend, on entitlements, consistently more than tax receipts were funding. It took about three-quarters of a century, but we've finally exhausted the investment appetites of the rest of the world for our securities.
On recent fiscal policy course, the US has become a discredited government. If the Fed weren't artificially pegging rates so low, and monetizing Treasuries' borrowings to the great extent that it is, does anyone really believe interest rates on Treasuries would be so low, or that the dollar wouldn't be even cheaper?
An official rating cut from AAA for America is warranted, debt limit agreement, or not.
One pundit predicted a partisan 'blame game' among federal elected officials.
Well, American voters need only look in the mirror for whom to blame. They consciously elected and re-elected generally inept spendthrifts since 1932, then wonder why the country has amassed so much net external debt.
It's time for Americans to wake up to the consequences of their poor political choices for the last eight decades.
And when the rating downgrade happens, the resulting increased funding costs will help put a stop to excessive spending and bad tax policies, only from outside, uncontrollable forces, rather than internal, political ones.
When asked about the potential impact of a rating agency downgrade of US debt, Kaminsky said that it didn't really matter, because nobody believed the US is a AAA credit anymore, and the downgrade is already priced in. Not because of the debt limit debate, but because of the nation's profligacy.
I believe Kaminsky is entirely correct and echoes my sentiments in this post from earlier this month,
"Druckenmiller contends that no serious change at all in federal spending and disposition regarding its habits would be the worst outcome. And if the GOP rushes to capitulate after a government shutdown, there won't be such change. Obama will declare political victory, many Tea Party voters will be disgusted with the GOP.
But if Obama faces a GOP House whose members are willing to force a shutdown and, then, after it is clear there won't be capitulation, an ordered payment of federal obligations, while some functions are shuttered, everyone- global investors, voters, onlookers- will understand that things have changed.
In the meantime, the US would have lost its AAA rating. No matter which party gained relatively greater power among Congress and the White House in 2012, a return to borrowing and spending for new programs would no longer be an option. Interest rates would be too high on Treasuries to borrow much more money, if investors would even lend it. Slow economic growth and joblessness would make higher taxes on anyone a non-starter.
In short, a default now will bring forward what I believe would be the eventual outcome of political business as usual in Washington, which will continue without a default.
Whether it's this group of Republicans, or another, after a brief return to Democratic control of the House, Senate, and Oval Office, and the final orgy of unaffordable deficit spending, it will likely now take some catastrophic event such as a credit rating downgrade and default to wake up Washington politicians to what is understood by many American voters and most global investors, to wit, no small change in American federal government fiscal policy will suffice any longer."
Just this morning, I heard a fund manager from Loomis Sayles say essentially the same thing.
What seems to escape the grasp of many pundits, and certainly Congress and the president, is that America doesn't have an inalienable right to a AAA credit rating, even as it debauches its currency and has spent, for most of 80 years, more each year than it receives in tax receipts.
Ironically, sophisticated capital markets combined with a dearth of investment alternatives post-WWII to leave the dollar and US Treasuries in the position of becoming the world's reserve currency.
Much like Rome after the fall of Carthage, the US has been, in the long run, ill-served by the absence of competitors to it as a reserve currency and general free world economic superpower. We've gradually picked up momentum, post-WWII, spending and promising to spend, on entitlements, consistently more than tax receipts were funding. It took about three-quarters of a century, but we've finally exhausted the investment appetites of the rest of the world for our securities.
On recent fiscal policy course, the US has become a discredited government. If the Fed weren't artificially pegging rates so low, and monetizing Treasuries' borrowings to the great extent that it is, does anyone really believe interest rates on Treasuries would be so low, or that the dollar wouldn't be even cheaper?
An official rating cut from AAA for America is warranted, debt limit agreement, or not.
One pundit predicted a partisan 'blame game' among federal elected officials.
Well, American voters need only look in the mirror for whom to blame. They consciously elected and re-elected generally inept spendthrifts since 1932, then wonder why the country has amassed so much net external debt.
It's time for Americans to wake up to the consequences of their poor political choices for the last eight decades.
And when the rating downgrade happens, the resulting increased funding costs will help put a stop to excessive spending and bad tax policies, only from outside, uncontrollable forces, rather than internal, political ones.
BofA, Merrill Lynch & Counterparty Risk
I saw an unbelievable story on Monday's CNBC noontime program.
Merrill Lynch is offering a 4-year bond which pays, if I remember correctly, according to the following conditions:
S&P500 down 16% or more: 99% of principal
S&P500 down 0-16% : 100% of principal
S&P500 up 0-15% : 100% of principal plus 15%
S&P500 up 16%+ : 100% of principal plus S&P gain
A quick look at the structured payoffs reveals that an investor appears to get all the S&P upside and virtually no downside, thus competing with simply buying the S&P.
However, Gary Kaminski asked the correct question, which is, if a herd of investors bought this offering and the S&P rose, say, 50% in four years, how will Merrill Lynch, a unit of the too-big-to-fail BofA, hedge its exposure? What if it doesn't or can't?
Isn't an investor assuming a large amount of counterparty risk of the sort that counterparties to AIG effectively assumed? Yes, an investor is assuming an immense counterparty risk on the part of a firm which imploded in 2008 due to risk mismanagement.
How can our new, souped-up, fancy, so-called-smarter Dodd-Frank regulators be allowing this to occur at the subsidiary of one of the nation's four largest commercial banks? One currently viewed probably as third weakest, in front of Citi, but behind Chase and WellsFargo?
Isn't this the sort of risk-taking that isn't supposed to be funded or subsidized by taxpayers anymore?
Merrill Lynch is offering a 4-year bond which pays, if I remember correctly, according to the following conditions:
S&P500 down 16% or more: 99% of principal
S&P500 down 0-16% : 100% of principal
S&P500 up 0-15% : 100% of principal plus 15%
S&P500 up 16%+ : 100% of principal plus S&P gain
A quick look at the structured payoffs reveals that an investor appears to get all the S&P upside and virtually no downside, thus competing with simply buying the S&P.
However, Gary Kaminski asked the correct question, which is, if a herd of investors bought this offering and the S&P rose, say, 50% in four years, how will Merrill Lynch, a unit of the too-big-to-fail BofA, hedge its exposure? What if it doesn't or can't?
Isn't an investor assuming a large amount of counterparty risk of the sort that counterparties to AIG effectively assumed? Yes, an investor is assuming an immense counterparty risk on the part of a firm which imploded in 2008 due to risk mismanagement.
How can our new, souped-up, fancy, so-called-smarter Dodd-Frank regulators be allowing this to occur at the subsidiary of one of the nation's four largest commercial banks? One currently viewed probably as third weakest, in front of Citi, but behind Chase and WellsFargo?
Isn't this the sort of risk-taking that isn't supposed to be funded or subsidized by taxpayers anymore?
Tuesday, July 26, 2011
Will The UAW Never Learn?
Yesterday's Wall Street Journal carried this headline for its Marketplace section's lead article,
For UAW, Jobs Trump Pay
Will this union never learn?
The article begins with comments from a Flat Rock, Michigan Ford employee who asserts,
"We know that we need more product in the contract because that will mean more jobs and job protection for the rest of us."
Job protection. What a quaint notion, eh? Especially in a company in a sector, which had to be rescued by the federal government, so badly was it mismanaged due to management's ineptitude in dealing with the UAW's egregious demands.
The article goes on to list some comparative hourly wage rates:
$58 for Ford
$58 for GM
$49 for Chrysler
$27 @ Volkswagen in Chattanooga, TN & Hyundai in Montgomery, AL
Those Ford and GM numbers equate to a rough gross annual cash compensation of $111,360. Chrysler is paying about $94K/year. Obviously, the right-to-work Tennessee and Alabama compensations are about half that, or just under $52K.
Meanwhile, the UAW is pushing hard, with German labor officials, to unionize Volkswagen's Tennessee operation. Interviews reported in the Journal with employees at the plant aren't particularly enthused and, at best, are open to hearing why they should join the UAW.
Not so promising for the union guys, is it?
Let's consider what's really going on here. Foreign auto makers locate their plants in Southern, right-to-work US states so they can be competitive with cars and trucks which they hope to sell to Americans.
Unfortunately for GM, Ford and Chrysler, their legacy plants leave them stuck in closed shop states in which they are forced to pay about twice as much per employee. Those cars and trucks, too, are destined for US consumers. With Boeing's recent attempt to open a second Dreamliner assembly plant in South Carolina under union attack, the Big 3 can't ever hope to simply move production south of the Mason-Dixon Line.
I'm guessing Ford, GM and Chrysler build as few vehicles as possible in Michigan and other northern plants. In an ideal world, they'd shut them and locate near their competitors' plants in the South. But that's obviously impossible.
From that perspective, what could the UAW possibly offer to get any of those assemblers to commit to more jobs, in a contract, at those sky-high wage rates? No wonder Ford, GM and Chrysler all want to move to more profit-sharing for union workers, and, I'm sure, in time, health care premiums more in line with their white-collar workers.
Is it really possible that rank and file UAW workers at Ford, GM or Chrysler, having witnessed the carnage in their sector in the past three years, really believe any of those managements can offer 'more jobs,' let alone 'job protection?' Hell, they're lucky that the Democratic administration repaid the UAW's election efforts by stiffing legitimate bondholders, short-circuiting a conventional Chapter 11 bankruptcy for GM and Chrysler, and handing over significant chunks of the companies to the UAW.
If a reorganization had put the profitable parts of those two companies up for bid, it's not even clear any of the buyers would have retained the Michigan plants. They may have just bought machinery, licenses to IP and various trademarks and patents, and re-opened production somewhere in the South.
It's truly comical that UAW members think that, global trade and competition notwithstanding, they should earn north of $100K/year for fastening subassemblies together for commodity cars and trucks selling in a hotly-competitive US market.
When will they learn?
For UAW, Jobs Trump Pay
Will this union never learn?
The article begins with comments from a Flat Rock, Michigan Ford employee who asserts,
"We know that we need more product in the contract because that will mean more jobs and job protection for the rest of us."
Job protection. What a quaint notion, eh? Especially in a company in a sector, which had to be rescued by the federal government, so badly was it mismanaged due to management's ineptitude in dealing with the UAW's egregious demands.
The article goes on to list some comparative hourly wage rates:
$58 for Ford
$58 for GM
$49 for Chrysler
$27 @ Volkswagen in Chattanooga, TN & Hyundai in Montgomery, AL
Those Ford and GM numbers equate to a rough gross annual cash compensation of $111,360. Chrysler is paying about $94K/year. Obviously, the right-to-work Tennessee and Alabama compensations are about half that, or just under $52K.
Meanwhile, the UAW is pushing hard, with German labor officials, to unionize Volkswagen's Tennessee operation. Interviews reported in the Journal with employees at the plant aren't particularly enthused and, at best, are open to hearing why they should join the UAW.
Not so promising for the union guys, is it?
Let's consider what's really going on here. Foreign auto makers locate their plants in Southern, right-to-work US states so they can be competitive with cars and trucks which they hope to sell to Americans.
Unfortunately for GM, Ford and Chrysler, their legacy plants leave them stuck in closed shop states in which they are forced to pay about twice as much per employee. Those cars and trucks, too, are destined for US consumers. With Boeing's recent attempt to open a second Dreamliner assembly plant in South Carolina under union attack, the Big 3 can't ever hope to simply move production south of the Mason-Dixon Line.
I'm guessing Ford, GM and Chrysler build as few vehicles as possible in Michigan and other northern plants. In an ideal world, they'd shut them and locate near their competitors' plants in the South. But that's obviously impossible.
From that perspective, what could the UAW possibly offer to get any of those assemblers to commit to more jobs, in a contract, at those sky-high wage rates? No wonder Ford, GM and Chrysler all want to move to more profit-sharing for union workers, and, I'm sure, in time, health care premiums more in line with their white-collar workers.
Is it really possible that rank and file UAW workers at Ford, GM or Chrysler, having witnessed the carnage in their sector in the past three years, really believe any of those managements can offer 'more jobs,' let alone 'job protection?' Hell, they're lucky that the Democratic administration repaid the UAW's election efforts by stiffing legitimate bondholders, short-circuiting a conventional Chapter 11 bankruptcy for GM and Chrysler, and handing over significant chunks of the companies to the UAW.
If a reorganization had put the profitable parts of those two companies up for bid, it's not even clear any of the buyers would have retained the Michigan plants. They may have just bought machinery, licenses to IP and various trademarks and patents, and re-opened production somewhere in the South.
It's truly comical that UAW members think that, global trade and competition notwithstanding, they should earn north of $100K/year for fastening subassemblies together for commodity cars and trucks selling in a hotly-competitive US market.
When will they learn?
Monday, July 25, 2011
Another Slant On The AMR-Boeing-Airbus Deal
Holman Jenkins, Jr., wrote an informative column in this past weekend's edition of the Wall Street Journal.
There's considerably more behind AMR's mega-order than was reported by either CNBC or Bloomberg, at least when I was watching.
Specifically, Jenkins portrays the deal as not so much AMR making a bold bid to acquire new jets and lessen the average age of its fleet, than Boeing and Airbus to fend off coming competition from new entrants into their industry from Canada, Brazil, China and Japan.
I recall Boeing dismissing the re-engining of the 737 a year or so ago. Well, that's exactly what the 737s they are selling to AMR will be. According to Jenkins, Boeing's salespeople sold a jet which the board hasn't even approved for development as yet.
Then Jenkins explored the financing end of the deal, in which a large part of each vendor's order is seller-financed, essentially giving AMR leases rather than forcing them to further weaken their balance sheet.
So let's review what appears to have really occurred.
Boeing and Airbus want to foreclose competition from new entrants into the large commercial jet segment from vendors such as Embraer and Bombardier. So they rushed out retooled existing jets to sell,with lavish financing and pricing that, in Boeing's case, can't even yet be costed on the still non-existent 737 variant.
So Boeing and Airbus are taking the financial risks for the deal. And, as Jenkins notes, essentially stuffing the airline industry with several hundreds of new jets whose sale will soon reduce the value of other jets on order but not yet delivered. Thus, global consumption of new airliners is being pumped by existing plane manufacturers.
Someone has to fund these planes. And, like it or not, the flying public will be using/consuming more expensive, newer jets. And other airlines may now rush to replace more of their fleets, too, creating more demand.
One would like to believe this will all stimulate production in a healthy manner, leading to more or longer-lasting jobs, various national economic growth, etc.
But will it, when the massive deal is more aptly seen as two entrenched manufacturers underpricing their new wares and pushing such expensive equipment onto their customers, and the customers of those airlines?
Jenkins thinks it's a new bubble, and I'm inclined to agree with him.
What financing institutions are at the bottom of this new mess? Who's holding the paper on these questionably-needed new jets?
Will the federal government in the US, and the EU in Europe, soon be bailing out Boeing and Airbus for this deal? As well as the associated financing entities?
There's considerably more behind AMR's mega-order than was reported by either CNBC or Bloomberg, at least when I was watching.
Specifically, Jenkins portrays the deal as not so much AMR making a bold bid to acquire new jets and lessen the average age of its fleet, than Boeing and Airbus to fend off coming competition from new entrants into their industry from Canada, Brazil, China and Japan.
I recall Boeing dismissing the re-engining of the 737 a year or so ago. Well, that's exactly what the 737s they are selling to AMR will be. According to Jenkins, Boeing's salespeople sold a jet which the board hasn't even approved for development as yet.
Then Jenkins explored the financing end of the deal, in which a large part of each vendor's order is seller-financed, essentially giving AMR leases rather than forcing them to further weaken their balance sheet.
So let's review what appears to have really occurred.
Boeing and Airbus want to foreclose competition from new entrants into the large commercial jet segment from vendors such as Embraer and Bombardier. So they rushed out retooled existing jets to sell,with lavish financing and pricing that, in Boeing's case, can't even yet be costed on the still non-existent 737 variant.
So Boeing and Airbus are taking the financial risks for the deal. And, as Jenkins notes, essentially stuffing the airline industry with several hundreds of new jets whose sale will soon reduce the value of other jets on order but not yet delivered. Thus, global consumption of new airliners is being pumped by existing plane manufacturers.
Someone has to fund these planes. And, like it or not, the flying public will be using/consuming more expensive, newer jets. And other airlines may now rush to replace more of their fleets, too, creating more demand.
One would like to believe this will all stimulate production in a healthy manner, leading to more or longer-lasting jobs, various national economic growth, etc.
But will it, when the massive deal is more aptly seen as two entrenched manufacturers underpricing their new wares and pushing such expensive equipment onto their customers, and the customers of those airlines?
Jenkins thinks it's a new bubble, and I'm inclined to agree with him.
What financing institutions are at the bottom of this new mess? Who's holding the paper on these questionably-needed new jets?
Will the federal government in the US, and the EU in Europe, soon be bailing out Boeing and Airbus for this deal? As well as the associated financing entities?
Friday, July 22, 2011
The iPad, The Laptop & Schumpeterian Dynamics
This week has seen some interesting fireworks between Intel and various analysts concerning the future of personal computers and laptops.
Specifically, upon learning of Apple's blowout quarter and torrid pace of iPad2 sales, many pundits have pronounced he laptop effectively dead. With a generally-acknowledged 2% p.a. growth rate, the former desktop killer has been itself eclipsed by X-pads of several varieties.
I had the occasion recently to assist a friend in buying an iPad2. What I saw caused me, prior to the flurry of this week's analyst and pundit remarks, to conclude that the laptop as a home device has seen its best days.
It began with a visit to Barnes & Noble. My friend picked up a Nook, sneered and asked why she'd ever want to read books like that? A few minutes later, she wanted to buy one! When I saw the $249 price of a color screen Nook, I told her to wait and visit the nearby Apple store to check out an iPad.
Specifically, per my prior posts, I suggested that she buy a pad made by the firm selling it, and that she choose one with more applications than simply ebook reading. I had in mind that she could replace a laptop's functionality at a fraction of the price, with much greater ease of use.
How right I was.
She asked me to accompany her to the local Apple store a few days later. After steering the Apple rep to some specific topics of interest for my friend, we left the store and discussed what we'd heard. We returned about an hour later and she bought an iPad2 without the cellular modem.
As expected, the post-sale support to configure her iPad was superb. She left the store with iTunes, a web browser, text writing and ebook apps on her device, plus a few books to start. It took no effort for the iPad to recognize my friend's home wireless network and connect.
Since then, she's been attached to the device whenever possible.
And, just as I expected, she no longer needs to use a laptop, with its long bootup time, operating system and hard drive. Instead, the solid state, unbelievably small and thin iPad does everything she needs as a casual user who does not run a business on a laptop. Whatever questions she has can be answered during the store's afternoon workshops held, for free, just for that purpose.
It's no surprise to me that Apple is selling all the iPads it can assemble. And why laptop sales have faltered.
I doubt I'd buy another laptop, except for business purposes. For home use, traveling and general non-business daily use, it would be difficult to see why an expensive laptop would be necessary.
Despite Intel's attempts to rebut the analysts' 'death of the laptop' theme this week, I believe the latter are correct. Schumpeterian dynamics are hitting laptops with a vengeance.
Just as lighter, cheaper and better laptops eventually made consumer desktop computers obsolete, so, too, are the many X-pads, particularly the iPad, rapidly cannibalizing laptop sales growth.
Yet another reason not to sell Apple short, literally, just yet. But I wouldn't want to be caught holding equity in HP or Dell.
Specifically, upon learning of Apple's blowout quarter and torrid pace of iPad2 sales, many pundits have pronounced he laptop effectively dead. With a generally-acknowledged 2% p.a. growth rate, the former desktop killer has been itself eclipsed by X-pads of several varieties.
I had the occasion recently to assist a friend in buying an iPad2. What I saw caused me, prior to the flurry of this week's analyst and pundit remarks, to conclude that the laptop as a home device has seen its best days.
It began with a visit to Barnes & Noble. My friend picked up a Nook, sneered and asked why she'd ever want to read books like that? A few minutes later, she wanted to buy one! When I saw the $249 price of a color screen Nook, I told her to wait and visit the nearby Apple store to check out an iPad.
Specifically, per my prior posts, I suggested that she buy a pad made by the firm selling it, and that she choose one with more applications than simply ebook reading. I had in mind that she could replace a laptop's functionality at a fraction of the price, with much greater ease of use.
How right I was.
She asked me to accompany her to the local Apple store a few days later. After steering the Apple rep to some specific topics of interest for my friend, we left the store and discussed what we'd heard. We returned about an hour later and she bought an iPad2 without the cellular modem.
As expected, the post-sale support to configure her iPad was superb. She left the store with iTunes, a web browser, text writing and ebook apps on her device, plus a few books to start. It took no effort for the iPad to recognize my friend's home wireless network and connect.
Since then, she's been attached to the device whenever possible.
And, just as I expected, she no longer needs to use a laptop, with its long bootup time, operating system and hard drive. Instead, the solid state, unbelievably small and thin iPad does everything she needs as a casual user who does not run a business on a laptop. Whatever questions she has can be answered during the store's afternoon workshops held, for free, just for that purpose.
It's no surprise to me that Apple is selling all the iPads it can assemble. And why laptop sales have faltered.
I doubt I'd buy another laptop, except for business purposes. For home use, traveling and general non-business daily use, it would be difficult to see why an expensive laptop would be necessary.
Despite Intel's attempts to rebut the analysts' 'death of the laptop' theme this week, I believe the latter are correct. Schumpeterian dynamics are hitting laptops with a vengeance.
Just as lighter, cheaper and better laptops eventually made consumer desktop computers obsolete, so, too, are the many X-pads, particularly the iPad, rapidly cannibalizing laptop sales growth.
Yet another reason not to sell Apple short, literally, just yet. But I wouldn't want to be caught holding equity in HP or Dell.
Thursday, July 21, 2011
Goldman Sachs' Earnings
It's beginning to get positively humorous listening to various bank sector analysts and fund managers discuss recent earnings and hoped-for future performances of six large US financial institutions: large commercial banks Citigroup, Chase, WellsFargo, BofA, and the one-time investment banks MorganStanley and Goldman Sachs.
Nearby is a price chart for the six, plus the S&P500 Index, for the past two years. Some results surprised me, while others did not.
The S&P outperformed all six banks, which I expected. That Citi was next best was a shock. I suppose it's because of a rebound effect of coming out of government ownership. Careful examination reveals that the formerly-insolvent bank has headed downward in terms of shareholder value since the beginning of the year.
The next pair of banks tracked each other closely- Wells and Chase. Neither one was close to failing, but, then again, neither was ever really a stellar bank, either. Solid middling finishes below the Index.
Last come BofA, MorganStanley and Goldman.
BofA I would have expected, as well as MS. Goldman has been declining all year, along with the other two.
Yesterday, I listened to some pundit on CNBC declare that he confused Goldman's results with MorganStanley's, so mediocre were they. Much was made of Goldman's pullback from risk, thus causing a precipitous drop in trading earnings. That the firm is not diversified and balanced, like Chase or Wells, so it's suffering from the misfortunes of only one business. The Wall Street Journal carried a prominent piece critiquing the firm's quarterly performance, as well.
Noises are being made about Goldman tightening its belt for a lean year, cutting staff and riding out the near term markets.
However, stepping back a bit to study the price chart above, I think something else is finally occurring.
The most significant feature of the chart, for me, is that the S&P500 has outperformed all six banks over the two years. Further, all six are generally in decline since January, while the Index has flattened or been slightly positive.
Here we are, two years after the recent global market lows, and the largest US financial firms haven't been able to outperform the broad market.
One-time thoroughbreds MorganStanley and Goldman Sachs are slumping, likely the victims of intended consequences of the Dodd-Frank regulations. Ordinarily, I'd say bet on monoline financial service firms. But given the punitive nature of Dodd-Frank, and the reasonable effort to separate risky trading activities from government-insured businesses, that probably no longer holds for these two firms.
As for the other banks, well, I think it boils down to this. Sector analysts like Tom Brown and Dick Bove have to make a living, so they'll be calling an eternal horse race among the four. But BofA remains poorly-run and generally expected to splinter at some point in the near future. Citi remains a wreck, too. Once the various capital market effects of its brush with death fade, it can return to being a large, poorly-run, badly-designed large bank. Perhaps, like BofA, it, too, will finally shed some of the more cumbersome businesses in its portfolio.
Which leaves the two mediocre leviathans, WellsFargo and Chase. Neither is anything to write home about. They will likely remain timing plays for the analysts to use as fodder for their cable television appearances as the banks rise and fall over the ongoing quarters. If BofA and Citi become less horrific, they can rejoin that short list.
Whether Goldman or MorganStanley return to private partnerships is unclear. With the former's downward vector, it would be a classically bold, yet sensible move for the firm to buy itself when others see little value in owning it.
But what's pretty clear is that we are witnessing the last stages of consolidation and stagnation of publicly-held private financial sector firms in the US. Conventional commercial banking among the large players has become predictable, overly-regulated, costly and uninteresting. Investment banking looks to be suffering as intended under Dodd-Frank.
The US banking sector, at the large end, is nearly at the point of being appropriately uninteresting as a home for long term, consistently superior total return performers.
The S&P outperformed all six banks, which I expected. That Citi was next best was a shock. I suppose it's because of a rebound effect of coming out of government ownership. Careful examination reveals that the formerly-insolvent bank has headed downward in terms of shareholder value since the beginning of the year.
The next pair of banks tracked each other closely- Wells and Chase. Neither one was close to failing, but, then again, neither was ever really a stellar bank, either. Solid middling finishes below the Index.
Last come BofA, MorganStanley and Goldman.
BofA I would have expected, as well as MS. Goldman has been declining all year, along with the other two.
Yesterday, I listened to some pundit on CNBC declare that he confused Goldman's results with MorganStanley's, so mediocre were they. Much was made of Goldman's pullback from risk, thus causing a precipitous drop in trading earnings. That the firm is not diversified and balanced, like Chase or Wells, so it's suffering from the misfortunes of only one business. The Wall Street Journal carried a prominent piece critiquing the firm's quarterly performance, as well.
Noises are being made about Goldman tightening its belt for a lean year, cutting staff and riding out the near term markets.
However, stepping back a bit to study the price chart above, I think something else is finally occurring.
The most significant feature of the chart, for me, is that the S&P500 has outperformed all six banks over the two years. Further, all six are generally in decline since January, while the Index has flattened or been slightly positive.
Here we are, two years after the recent global market lows, and the largest US financial firms haven't been able to outperform the broad market.
One-time thoroughbreds MorganStanley and Goldman Sachs are slumping, likely the victims of intended consequences of the Dodd-Frank regulations. Ordinarily, I'd say bet on monoline financial service firms. But given the punitive nature of Dodd-Frank, and the reasonable effort to separate risky trading activities from government-insured businesses, that probably no longer holds for these two firms.
As for the other banks, well, I think it boils down to this. Sector analysts like Tom Brown and Dick Bove have to make a living, so they'll be calling an eternal horse race among the four. But BofA remains poorly-run and generally expected to splinter at some point in the near future. Citi remains a wreck, too. Once the various capital market effects of its brush with death fade, it can return to being a large, poorly-run, badly-designed large bank. Perhaps, like BofA, it, too, will finally shed some of the more cumbersome businesses in its portfolio.
Which leaves the two mediocre leviathans, WellsFargo and Chase. Neither is anything to write home about. They will likely remain timing plays for the analysts to use as fodder for their cable television appearances as the banks rise and fall over the ongoing quarters. If BofA and Citi become less horrific, they can rejoin that short list.
Whether Goldman or MorganStanley return to private partnerships is unclear. With the former's downward vector, it would be a classically bold, yet sensible move for the firm to buy itself when others see little value in owning it.
But what's pretty clear is that we are witnessing the last stages of consolidation and stagnation of publicly-held private financial sector firms in the US. Conventional commercial banking among the large players has become predictable, overly-regulated, costly and uninteresting. Investment banking looks to be suffering as intended under Dodd-Frank.
The US banking sector, at the large end, is nearly at the point of being appropriately uninteresting as a home for long term, consistently superior total return performers.
Wednesday, July 20, 2011
No Inflation, Huh?
So there's no consumer price (for want of a better word, because this isn't the technically correct one) inflation, huh?
Last night I dropped by a Starbucks location on my way home to buy a pound of espresso beans. For as long as I can recall, it's been a $10.95 purchase.
Except last night. It suddenly jumped to $12.95.
An 18.3% price increase!
To be honest, I'd read over a month ago that the chain was going to be raising prices soon. I'd expected it last time I bought my espresso beans.
I rarely buy coffee drinks at Starbucks, preferring, instead, to brew my own espresso for cappuccinos and iced lattes at home. A pound of beans probably lasts about a month. So you'd think that $24/year more for coffee shouldn't matter.
And maybe, to me, it won't, very much. Perhaps two fewer inexpensive dinners out in a year will cover the cost.
But what about the poor schmucks who are addicted to their daily Starbucks fix? Are they going to head to Dunkin Donuts or McDonalds now? Or just spend less on something else each day?
Either way, I call this a definite food price increase. If I had a word that didn't mean debauching the value of our money (inflation), that's what I'd call this.
Last night I dropped by a Starbucks location on my way home to buy a pound of espresso beans. For as long as I can recall, it's been a $10.95 purchase.
Except last night. It suddenly jumped to $12.95.
An 18.3% price increase!
To be honest, I'd read over a month ago that the chain was going to be raising prices soon. I'd expected it last time I bought my espresso beans.
I rarely buy coffee drinks at Starbucks, preferring, instead, to brew my own espresso for cappuccinos and iced lattes at home. A pound of beans probably lasts about a month. So you'd think that $24/year more for coffee shouldn't matter.
And maybe, to me, it won't, very much. Perhaps two fewer inexpensive dinners out in a year will cover the cost.
But what about the poor schmucks who are addicted to their daily Starbucks fix? Are they going to head to Dunkin Donuts or McDonalds now? Or just spend less on something else each day?
Either way, I call this a definite food price increase. If I had a word that didn't mean debauching the value of our money (inflation), that's what I'd call this.
Taxes, Economics, Rawls & Nozick
In the current fight between Democrats and Republicans concerning the debt limit increase, one hears the former primarily focus on the notion of 'fairness' of taxation.
That is, the president and his party's members of Congress will take a few favorite elements of the existing tax code, such as existing rates for higher-income earners, reduced under President Bush in his first term, and grudgingly extended last year, or special provisions for private business aircraft, and hold them up as 'unfair' to lower-income earners.
Of course, from a purely objective perspective, the reason for taxes is to raise money to fund governmental operations. As these posts on taxes that I've written discuss, tax policy has consequences on taxpayer behavior, regardless of whether politicians believe it to be so, or the CBO models such affected behavior.
It's common knowledge that the CBO uses what is known as 'static scoring,' wherein simple arithmetic changes are modeled for tax policy changes. That is, an hypothetical change is modeled as ex post on pre-existing incomes, spending, investing, etc., with no assumption that such a change may have, in reality, changed prior behavior.
Along with this myopic scoring goes the misguided concept of 'paying for tax cuts.' This peculiar view assumes that some tax revenue level is due to the government, so any change in tax law that results in the static scoring showing lower total tax revenues must be 'paid for' by either new taxes or higher rates elsewhere.
Of course, any fool who reads that second sentence instantly realizes its idiocy. You get less of what you tax, so trying to raise more tax revenues through higher rates or new taxes is, overall, self-defeating.
This is why, among the 22 tax-related posts I've written, you will find a couple detailing economic research leading to Hauser's Law, wherein, over time, a fairly consistent 18% of US GDP is collected via taxes, regardless of tax rate structures.
Once you understand and accept that relationship, it becomes obvious that the way to increase gross federal tax receipts is to set rates at levels that maximize GDP.
But this assumes one uses tax policy primarily as a means to fund government. And it distinguishes between tax rates, and tax receipts, which may be inversely related.
But many liberal elected federal government officials in Congress and the White House choose to discuss tax policy primarily as a tool to enforce "fairness."
Unfortunately, when you attempt to make a single policy, such as tax policy, serve two objectives, such as raising maximal or sufficient government funding, and enforcing some undefined notion of "fairness," you get, well, a mess. Especially when measures of fairness are not obvious.
Yes, there are various indices of differences between high and low incomes or taxes paid. As with the subject of concentration of market share in sectors, one can design various measures purported to indicate relative uniform distribution or distortions of any variable.
However, the basic notion that there is some "fair" amount of tax receipts, or their income, which "the rich" should pay, doesn't seem to be any sort of bedrock, fundamental Constitutional principle.
In fact, if you read the Constitution, as I did this morning, it was originally written rather vaguely and imprecisely on the subject of taxes. The only thing that was fairly clear about taxes in the original, pre-1912 Constitution, was that taxes were levied on business activity, not people.
Even today, one could choose to replace the income tax with a spending tax, if one so chose. There isn't really anything special, per se, about income-based taxes, except that it appears to penalize those who earn more.
By the way, which should be the subject of fairness- tax rates, or tax revenues, or percentage of toal taxes paid? Or is it subjective, i.e., whichever soaks the rich more is "fairer?"
On that subject, and this one, it so happened that I stumbled upon a discussion of this topic yesterday morning on CNBC. Due to the loss of Erin Burnett to CNN, and Mark Haines to death, the network has switched its co-anchor lineups, replacing Carlos Whathisname in the 6-9AM slot with Andrew Ross Sorkin, a NY Times liberal media darling.
At issue, with Michele Caruso-Cabrera defending the conservative viewpoint, was whether high-income taxpayers are "giving back" to the nation by paying a lot of gross dollars in taxes. Apparently the president recently called out Apple's Steve Jobs, by name, for failing to "give back" sufficiently to America via charity, as his rival, Bill Gates, has done.
This is an excellent example of why it is dangerous to allow government to begin to use concepts such as "fairness" in taxation policy.
Who is to be our arbiter of what is "fair" for anyone to pay in taxes, or charity, to the nation? Why is it necessary that tax rates even rise with income level? Surely, if there were one flat rate of, say, 10%, then a person earning $1MM would already be paying 10 times the amount paid by someone earning only $100K.
Isn't that "fair?"
The Constitution is notably silent through most of its original language on the topic of citizens having direct relationships with the federal government. One surely does not get the idea, when reading it, that the Constitution had as any of its purposes to enshrine a climate of punishing those Americans who either earned high incomes or amassed large amounts of assets.
How odd, now, to hear one party continually beat a drum for all conversations involving government debt, deficits and spending, to immediately become about "the rich" paying "their fair (meaning higher) share" of taxes.
I find it helpful to step back and recall studying, as a graduate student, two well-known Harvard philosophy professors- John Rawls and Robert Nozick.
At the time, being young, I was enamored of Rawls' concepts as stated in A Theory of Justice. Being a good social liberal, Rawls was big on equity of distribution. I thought this was important at the time.
In contrast, Nozick, a libertarian, concentrated on minimalist states which provided the barest necessary levels and tools of government, in order to leave individuals with maximal liberty and responsibility for their own destinies, as he wrote about in Anarchy, State and Utopia.
I suspect because it's easier for most people to grasp the notion of dividing up an existing pie of resources, or tax obligations, they do not pay as much attention to the notion that some tax and government schemes create substantially larger pies of resources, such that either smaller assessments raise as much tax revenues, or equal assessments raise even more.
It seems that our current Democratic office-holders can't grasp the notion that the US economy would grow faster with simpler, lower tax rates, thus providing even more tax revenues than much higher rates which distort economic resource allocation and retard economic growth.
Besides the purely subjective nature of class-warfare style polemics characterizing whatever "the rich" pay in taxes as "insufficient" or "unfair," such approaches ignore the more basic, pressing function of tax policy, i.e., to fund our government.
And nowhere in the Constitution is there any language concerning what is "fair" about treating high income earners or the wealthy differently than anybody else.
That is, the president and his party's members of Congress will take a few favorite elements of the existing tax code, such as existing rates for higher-income earners, reduced under President Bush in his first term, and grudgingly extended last year, or special provisions for private business aircraft, and hold them up as 'unfair' to lower-income earners.
Of course, from a purely objective perspective, the reason for taxes is to raise money to fund governmental operations. As these posts on taxes that I've written discuss, tax policy has consequences on taxpayer behavior, regardless of whether politicians believe it to be so, or the CBO models such affected behavior.
It's common knowledge that the CBO uses what is known as 'static scoring,' wherein simple arithmetic changes are modeled for tax policy changes. That is, an hypothetical change is modeled as ex post on pre-existing incomes, spending, investing, etc., with no assumption that such a change may have, in reality, changed prior behavior.
Along with this myopic scoring goes the misguided concept of 'paying for tax cuts.' This peculiar view assumes that some tax revenue level is due to the government, so any change in tax law that results in the static scoring showing lower total tax revenues must be 'paid for' by either new taxes or higher rates elsewhere.
Of course, any fool who reads that second sentence instantly realizes its idiocy. You get less of what you tax, so trying to raise more tax revenues through higher rates or new taxes is, overall, self-defeating.
This is why, among the 22 tax-related posts I've written, you will find a couple detailing economic research leading to Hauser's Law, wherein, over time, a fairly consistent 18% of US GDP is collected via taxes, regardless of tax rate structures.
Once you understand and accept that relationship, it becomes obvious that the way to increase gross federal tax receipts is to set rates at levels that maximize GDP.
But this assumes one uses tax policy primarily as a means to fund government. And it distinguishes between tax rates, and tax receipts, which may be inversely related.
But many liberal elected federal government officials in Congress and the White House choose to discuss tax policy primarily as a tool to enforce "fairness."
Unfortunately, when you attempt to make a single policy, such as tax policy, serve two objectives, such as raising maximal or sufficient government funding, and enforcing some undefined notion of "fairness," you get, well, a mess. Especially when measures of fairness are not obvious.
Yes, there are various indices of differences between high and low incomes or taxes paid. As with the subject of concentration of market share in sectors, one can design various measures purported to indicate relative uniform distribution or distortions of any variable.
However, the basic notion that there is some "fair" amount of tax receipts, or their income, which "the rich" should pay, doesn't seem to be any sort of bedrock, fundamental Constitutional principle.
In fact, if you read the Constitution, as I did this morning, it was originally written rather vaguely and imprecisely on the subject of taxes. The only thing that was fairly clear about taxes in the original, pre-1912 Constitution, was that taxes were levied on business activity, not people.
Even today, one could choose to replace the income tax with a spending tax, if one so chose. There isn't really anything special, per se, about income-based taxes, except that it appears to penalize those who earn more.
By the way, which should be the subject of fairness- tax rates, or tax revenues, or percentage of toal taxes paid? Or is it subjective, i.e., whichever soaks the rich more is "fairer?"
On that subject, and this one, it so happened that I stumbled upon a discussion of this topic yesterday morning on CNBC. Due to the loss of Erin Burnett to CNN, and Mark Haines to death, the network has switched its co-anchor lineups, replacing Carlos Whathisname in the 6-9AM slot with Andrew Ross Sorkin, a NY Times liberal media darling.
At issue, with Michele Caruso-Cabrera defending the conservative viewpoint, was whether high-income taxpayers are "giving back" to the nation by paying a lot of gross dollars in taxes. Apparently the president recently called out Apple's Steve Jobs, by name, for failing to "give back" sufficiently to America via charity, as his rival, Bill Gates, has done.
This is an excellent example of why it is dangerous to allow government to begin to use concepts such as "fairness" in taxation policy.
Who is to be our arbiter of what is "fair" for anyone to pay in taxes, or charity, to the nation? Why is it necessary that tax rates even rise with income level? Surely, if there were one flat rate of, say, 10%, then a person earning $1MM would already be paying 10 times the amount paid by someone earning only $100K.
Isn't that "fair?"
The Constitution is notably silent through most of its original language on the topic of citizens having direct relationships with the federal government. One surely does not get the idea, when reading it, that the Constitution had as any of its purposes to enshrine a climate of punishing those Americans who either earned high incomes or amassed large amounts of assets.
How odd, now, to hear one party continually beat a drum for all conversations involving government debt, deficits and spending, to immediately become about "the rich" paying "their fair (meaning higher) share" of taxes.
I find it helpful to step back and recall studying, as a graduate student, two well-known Harvard philosophy professors- John Rawls and Robert Nozick.
At the time, being young, I was enamored of Rawls' concepts as stated in A Theory of Justice. Being a good social liberal, Rawls was big on equity of distribution. I thought this was important at the time.
In contrast, Nozick, a libertarian, concentrated on minimalist states which provided the barest necessary levels and tools of government, in order to leave individuals with maximal liberty and responsibility for their own destinies, as he wrote about in Anarchy, State and Utopia.
I suspect because it's easier for most people to grasp the notion of dividing up an existing pie of resources, or tax obligations, they do not pay as much attention to the notion that some tax and government schemes create substantially larger pies of resources, such that either smaller assessments raise as much tax revenues, or equal assessments raise even more.
It seems that our current Democratic office-holders can't grasp the notion that the US economy would grow faster with simpler, lower tax rates, thus providing even more tax revenues than much higher rates which distort economic resource allocation and retard economic growth.
Besides the purely subjective nature of class-warfare style polemics characterizing whatever "the rich" pay in taxes as "insufficient" or "unfair," such approaches ignore the more basic, pressing function of tax policy, i.e., to fund our government.
And nowhere in the Constitution is there any language concerning what is "fair" about treating high income earners or the wealthy differently than anybody else.
Tuesday, July 19, 2011
Tom Brown At It Again
Just last week I wrote this post discussing Tom Brown's gung ho, self-serving talking of his bank sector equity portfolio book on Bloomberg.
Unbelievably, he was back at it again this morning on the same network. This time it was to bemoan Goldman Sachs' disappointing earnings announcement, specifically its trading revenues.
Facing obviously uneven results in the banking sector, Brown had to act fast on air to try to convey why investors should remain interested in banks with such earnings problems.
What came next was something for which I was unprepared- old fashioned Wall Street sell-side hucksterism.
Brown harked back over 20 years to when, he so modestly disclosed, he had coined a now-famous meaning for BofA's ticker, BAC- "Buy All you Can."
Wow. I mean, how much more distilled can Brown's brilliance get? And it's so long-lived, too! Over twenty years!
I first heard this sort of nonsense years ago when I briefly dated a stock broker. She repeated the apocryphal phone patter for me by rote, in her thick Brooklyn accent,
"If you liked it at 60, you'll love it at 50 and you marry it at 40."
In short, declines are always and only opportunities to buy before the equity swings ever-upward again. Colossal management mistakes which led to current losses are surely one-time gaffes. These same managers, or their successors, will never- never- make another mistake of similar size. Really. Trust him. It's safe now. This time, it'll be different.
This morning, Brown went on to forecast, somewhat murkily, that in six quarters, BofA would be doing just fine, so load up on it now.
Funny thing about those pesky investors- they actually don't like to be told to wait six quarters for a return. They prefer constant, positive returns, when possible. And when you're counseling investors to buy and wait for a stock in a sector that cratered so badly in 2008 that it had to receive a federal bailout of unprecedented proportions, it is not a comforting recommendation. A lot can happen in six quarters.
But consider Tom Brown's dilemma.
If he tells the truth- that the large-bank sector is moribund, populated by slow-moving, heavily-regulated financial leviathans which are only good as very risky timing plays, retail investors will leave his fund.
If he tells the truth that right now just isn't the best time to buy large-bank stocks, retail investors will leave his fund.
Brown's objective is to say things, preferably on air, appearing as an objective analyst, rather than an interested portfolio manager, which keep his investors in his bank stock portfolio fund.
Once investors sell out of his fund, they may never return, captured by some other manager's line about some other sector. Perhaps technology, or cloud investing, or even gold and other commodities.
So Brown must act quickly to prevent such redemptions and departures.
In this light, BofA's recent large losses become an opportunity to buy low. Goldman's lower trading revenues? You should love it even more at its new low price!
Witch hunts on Wall Street come and go. New regulations, like Dodd-Frank, come and go.
But basic, unvarnished sell-side Wall Street hucksterism of Tom Brown's variety never, it seems, goes out of style.
Unbelievably, he was back at it again this morning on the same network. This time it was to bemoan Goldman Sachs' disappointing earnings announcement, specifically its trading revenues.
Facing obviously uneven results in the banking sector, Brown had to act fast on air to try to convey why investors should remain interested in banks with such earnings problems.
What came next was something for which I was unprepared- old fashioned Wall Street sell-side hucksterism.
Brown harked back over 20 years to when, he so modestly disclosed, he had coined a now-famous meaning for BofA's ticker, BAC- "Buy All you Can."
Wow. I mean, how much more distilled can Brown's brilliance get? And it's so long-lived, too! Over twenty years!
I first heard this sort of nonsense years ago when I briefly dated a stock broker. She repeated the apocryphal phone patter for me by rote, in her thick Brooklyn accent,
"If you liked it at 60, you'll love it at 50 and you marry it at 40."
In short, declines are always and only opportunities to buy before the equity swings ever-upward again. Colossal management mistakes which led to current losses are surely one-time gaffes. These same managers, or their successors, will never- never- make another mistake of similar size. Really. Trust him. It's safe now. This time, it'll be different.
This morning, Brown went on to forecast, somewhat murkily, that in six quarters, BofA would be doing just fine, so load up on it now.
Funny thing about those pesky investors- they actually don't like to be told to wait six quarters for a return. They prefer constant, positive returns, when possible. And when you're counseling investors to buy and wait for a stock in a sector that cratered so badly in 2008 that it had to receive a federal bailout of unprecedented proportions, it is not a comforting recommendation. A lot can happen in six quarters.
But consider Tom Brown's dilemma.
If he tells the truth- that the large-bank sector is moribund, populated by slow-moving, heavily-regulated financial leviathans which are only good as very risky timing plays, retail investors will leave his fund.
If he tells the truth that right now just isn't the best time to buy large-bank stocks, retail investors will leave his fund.
Brown's objective is to say things, preferably on air, appearing as an objective analyst, rather than an interested portfolio manager, which keep his investors in his bank stock portfolio fund.
Once investors sell out of his fund, they may never return, captured by some other manager's line about some other sector. Perhaps technology, or cloud investing, or even gold and other commodities.
So Brown must act quickly to prevent such redemptions and departures.
In this light, BofA's recent large losses become an opportunity to buy low. Goldman's lower trading revenues? You should love it even more at its new low price!
Witch hunts on Wall Street come and go. New regulations, like Dodd-Frank, come and go.
But basic, unvarnished sell-side Wall Street hucksterism of Tom Brown's variety never, it seems, goes out of style.
Monday, July 18, 2011
Pity Poor Citi?
The weekend edition Wall Street Journal's Heard on the Street column was actually laughable.
David Reilly argued that Citigroup's market/tangible book value is too low. Specifically, it's below that of BofA. Thus the title of Reilly's piece, Let Citi Out of Doghouse.
Let's see.....a bank run by a guy who's never done commercial banking, nor run anything large, which operated itself into insolvency under the guy's predecessor, a lawyer, should now be treated as a brand new bank?
I don't think so.
Mediocre as it is, BofA at least didn't technically need to be rescued by the Fed, while Citi would have been in Chapter 11 without the government's stay of execution.
As an example of corporate cronyism, poor board performance and overall ineptitude, it would be difficult to find a better one than Citigroup during and after the Weill-Rubin years.
Meanwhile, novice CEO Vik Pandit has done nothing appreciably significant but ride out the resulting storm and manage to cling to his job. The government and financial markets did the rest.
And this is reason to suddenly improve its valuation?
Hardly. Look at the nearby price chart of the four large US commercial banks and the S&P500 Index for the past five years. Performances since the financial crisis are, to me, expectedly similar. A few minor differences, with BofA recently diving. But, for the most part, all four are pretty much flat since the beginning of 2009, as is the S&P.
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Like all four of the largest US commercial banks, Citi is simply a government-backed financial utility that wouldn't even actually need a CEO to run it anymore. Any investments in the equity of Wells, Citi, Chase or BofA is, at best, a timing play. Nothing more.
Their total return performances are all, to varying degrees, depending upon their specific business mixes, more vulnerable and dependent upon market conditions, rather than the micro-management of the banks themselves.
David Reilly argued that Citigroup's market/tangible book value is too low. Specifically, it's below that of BofA. Thus the title of Reilly's piece, Let Citi Out of Doghouse.
Let's see.....a bank run by a guy who's never done commercial banking, nor run anything large, which operated itself into insolvency under the guy's predecessor, a lawyer, should now be treated as a brand new bank?
I don't think so.
Mediocre as it is, BofA at least didn't technically need to be rescued by the Fed, while Citi would have been in Chapter 11 without the government's stay of execution.
As an example of corporate cronyism, poor board performance and overall ineptitude, it would be difficult to find a better one than Citigroup during and after the Weill-Rubin years.
Meanwhile, novice CEO Vik Pandit has done nothing appreciably significant but ride out the resulting storm and manage to cling to his job. The government and financial markets did the rest.
And this is reason to suddenly improve its valuation?
Hardly. Look at the nearby price chart of the four large US commercial banks and the S&P500 Index for the past five years. Performances since the financial crisis are, to me, expectedly similar. A few minor differences, with BofA recently diving. But, for the most part, all four are pretty much flat since the beginning of 2009, as is the S&P.
Their total return performances are all, to varying degrees, depending upon their specific business mixes, more vulnerable and dependent upon market conditions, rather than the micro-management of the banks themselves.
More Economic Nonsense from Alan Blinder
Only last month Princeton's Alan Blinder was in the Wall Street Journal espousing discredited economic theory. On the subject of his views, and Alan Meltzer's comments thereon, I wrote,
"Specifically, Meltzer discussed more recent economic work showing that investors and consumers take note of government actions and develop expectations as a result which then affect their behavior.
These reactions involve several of the points I made in yesterday's post, i.e., expectations by consumers and investors regarding future tax and interest rates affect their behavior in a very dynamic and sensible manner. Some of that effect can result in a sort of palsy, in which both spending and investment await less government intervention and more predictable behaviors.
Meltzer's comments added an interesting dimension to the exchange because, without appearing mean-spirited, he basically characterized Blinder, Krugman and their kindred economists as rather backward and primitive, clinging to a discredited, eighty-year-old theory which has been eclipsed by new theory based upon empirical research."
Blinder was at it again last week in the same paper. This time Blinder was castigating businesspeople for not hiring, and advancing his own personal remedy involving some sort of payroll tax credit.
Sadly, he demonstrated the same, well, to use a pun, blindness to how business managers react to uncertainty. Specifically, in the face of slack or uncertain demand, they don't rush out to hire more people. Blinder couldn't seem to fathom that his model of cost-push hiring isn't how the real world operates.
Yes, for non-perishable end-use products in a grocery store, lowering the final cost will spur demand, according to conventional microeconomics.
But hiring workers to produce goods or services isn't the same thing at all. When revenue growth is in doubt, making incremental workers cheaper isn't relevant and won't affect hiring decisions.
It's more evidence of how far removed from the realities of business many economists are. And Blinder is clearly one of them.
"Specifically, Meltzer discussed more recent economic work showing that investors and consumers take note of government actions and develop expectations as a result which then affect their behavior.
These reactions involve several of the points I made in yesterday's post, i.e., expectations by consumers and investors regarding future tax and interest rates affect their behavior in a very dynamic and sensible manner. Some of that effect can result in a sort of palsy, in which both spending and investment await less government intervention and more predictable behaviors.
Meltzer's comments added an interesting dimension to the exchange because, without appearing mean-spirited, he basically characterized Blinder, Krugman and their kindred economists as rather backward and primitive, clinging to a discredited, eighty-year-old theory which has been eclipsed by new theory based upon empirical research."
Blinder was at it again last week in the same paper. This time Blinder was castigating businesspeople for not hiring, and advancing his own personal remedy involving some sort of payroll tax credit.
Sadly, he demonstrated the same, well, to use a pun, blindness to how business managers react to uncertainty. Specifically, in the face of slack or uncertain demand, they don't rush out to hire more people. Blinder couldn't seem to fathom that his model of cost-push hiring isn't how the real world operates.
Yes, for non-perishable end-use products in a grocery store, lowering the final cost will spur demand, according to conventional microeconomics.
But hiring workers to produce goods or services isn't the same thing at all. When revenue growth is in doubt, making incremental workers cheaper isn't relevant and won't affect hiring decisions.
It's more evidence of how far removed from the realities of business many economists are. And Blinder is clearly one of them.
Sunday, July 17, 2011
Is A US Default Is A Good Thing?
Over on my political blog, I've been writing in partisan terms about the current standoff between the GOP-controlled House and the president regarding the soon-to-be-reached US debt limit.
In this post, I'm going to attempt to be non-partisan, and, instead, engage in a thought experiment concerning the US debt limit and default.
Everyone seems to believe that a real US default would be bad. Two months ago, I wrote this post discussing Stanley Druckenmiller's weekend interview in the Wall Street Journal. He contended,
"A financial crisis is surely going to happen as big or bigger than the one we had in 2008 if we continue to behave the way we're behaving," says Stanley Druckenmiller, the legendary investor and onetime fund manager for George Soros. Is this another warning from Wall Street that Congress must immediately raise the federal debt limit to prevent the end of civilization?
No—Mr. Druckenmiller has heard enough of such "clamor and hyperbole." The grave danger he sees is that politicians might give the government authority to borrow beyond the current limit of $14.3 trillion without any conditions to control spending.
"I think technical default would be horrible," he says from the 24th floor of his midtown Manhattan office, "but I don't think it's going to be the end of the world. It's not going to be catastrophic. What's going to be catastrophic is if we don't solve the real problem," meaning Washington's spending addiction.
"Here are your two options: piece of paper number one—let's just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years . . . and one of my interest payments is going to be delayed, I don't know, six days, eight days, 15 days, but I know I'm going to get it. There's not a doubt in my mind that it's not going to pay, but it's going to be delayed. But in exchange for that, let's suppose I know I'm going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured," he says.
Then there's "piece of paper number two," he says, under a scenario in which the debt limit is quickly raised to avoid any possible disruption in payments. "I don't have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we're going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it's a no-brainer. It's piece of paper number one." "
I think Druckenmiller is correct, and generally on the right track.
Suppose the GOP has dug in its heels and will only raise the debt limit with associated, larger spending cuts, and the Senate won't pass such a bill. Or, if it does, Obama won't sign it, daring Congress to allow a government shutdown.
We've all had the last week's worth of presidential press conferences to digest, let's take Obama at his word- that he will tell Geithner to stop writing any checks whatsoever if the debt limit isn't raised.
I think this would actually be a good thing. But to believe it, you have to also believe, as Druckenmiller does, that US fiscal policy for the past few decades has been seriously wrong. That running chronic large deficits since the 1930s has become a habit that cannot be sustained for more than the next few years.
Druckenmiller contends that no serious change at all in federal spending and disposition regarding its habits would be the worst outcome. And if the GOP rushes to capitulate after a government shutdown, there won't be such change. Obama will declare political victory, many Tea Party voters will be disgusted with the GOP.
But if Obama faces a GOP House whose members are willing to force a shutdown and, then, after it is clear there won't be capitulation, an ordered payment of federal obligations, while some functions are shuttered, everyone- global investors, voters, onlookers- will understand that things have changed.
In the meantime, the US would have lost its AAA rating. No matter which party gained relatively greater power among Congress and the White House in 2012, a return to borrowing and spending for new programs would no longer be an option. Interest rates would be too high on Treasuries to borrow much more money, if investors would even lend it. Slow economic growth and joblessness would make higher taxes on anyone a non-starter.
In short, a default now will bring forward what I believe would be the eventual outcome of political business as usual in Washington, which will continue without a default.
The United States is currently governed, for the most part, by a Democratic control of the executive branch, with its veto, and the Senate. Like it or not, the House can really only frustrate Democratic attempts to pass legislation, but it cannot, on its own, make policy.
Whether it's this group of Republicans, or another, after a brief return to Democratic control of the House, Senate, and Oval Office, and the final orgy of unaffordable deficit spending, it will likely now take some catastrophic event such as a credit rating downgrade and default to wake up Washington politicians to what is understood by many American voters and most global investors, to wit, no small change in American federal government fiscal policy will suffice any longer.
There must be wholesale changes in entitlement spending, the tax code and routine spending. Even leaving Social Security and Medicare untouched for the generation that concocted those Ponzi schemes won't suffice anymore, either. To truly fix what ails America, the coming fiscal pain must be shared by all, not only those victimized by the Porkiest Generation's self-interested entitlement scams.
Thus, I welcome a government shutdown, default and even a credit rating downgrade sooner, rather than later. Because it's coming, and later simply means more borrowed trillions for all of us to repay, with much higher interest. I don't believe most federal elected officials, nor Americans, truly comprehend the scope of the fiscal hole into which we've allowed our Congress and presidents to dig us since 1935. But it will probably require the economic equivalent of wartime belt-tightening for at least a decade to rectify it. By that I mean a near-total shift to defined contribution entitlements, retroactively changing Social Security, Medicare and Medicaid to such bases, large-scale elimination of federal spending on non-essential, non-common-good services, lower, globally-competitive tax rates, tax-preference item eliminations, and overal federal spending at or below 18% of GDP. Period. No more deficits.
To do otherwise, in my opinion, is like giving a self-confessed alcoholic more to drink, agreeing that he can always stop drinking tomorrow. Well, tomorrow will never come in that scenario.
And it won't in Obama's current fiscal scenario of off-limit programs for cutting, higher taxes, and modest, future spending cuts in exchange for the debt limit increase.
I know this seems to be a gloomy, dark scenario. But after decades of warnings of the insolvency of Social Security and Medicare, the continued unsustainable deficits spent by both parties, and a lack of awareness that there simply isn't time to avoid sharp spending cuts, I'd rather have external, uncontrollable fiscal consequences shut the door on liberal, big-spending American government starting in August, than rely on conventional, internal-to-America political swings to do it later.
In this post, I'm going to attempt to be non-partisan, and, instead, engage in a thought experiment concerning the US debt limit and default.
Everyone seems to believe that a real US default would be bad. Two months ago, I wrote this post discussing Stanley Druckenmiller's weekend interview in the Wall Street Journal. He contended,
"A financial crisis is surely going to happen as big or bigger than the one we had in 2008 if we continue to behave the way we're behaving," says Stanley Druckenmiller, the legendary investor and onetime fund manager for George Soros. Is this another warning from Wall Street that Congress must immediately raise the federal debt limit to prevent the end of civilization?
No—Mr. Druckenmiller has heard enough of such "clamor and hyperbole." The grave danger he sees is that politicians might give the government authority to borrow beyond the current limit of $14.3 trillion without any conditions to control spending.
"I think technical default would be horrible," he says from the 24th floor of his midtown Manhattan office, "but I don't think it's going to be the end of the world. It's not going to be catastrophic. What's going to be catastrophic is if we don't solve the real problem," meaning Washington's spending addiction.
"Here are your two options: piece of paper number one—let's just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years . . . and one of my interest payments is going to be delayed, I don't know, six days, eight days, 15 days, but I know I'm going to get it. There's not a doubt in my mind that it's not going to pay, but it's going to be delayed. But in exchange for that, let's suppose I know I'm going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured," he says.
Then there's "piece of paper number two," he says, under a scenario in which the debt limit is quickly raised to avoid any possible disruption in payments. "I don't have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we're going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it's a no-brainer. It's piece of paper number one." "
I think Druckenmiller is correct, and generally on the right track.
Suppose the GOP has dug in its heels and will only raise the debt limit with associated, larger spending cuts, and the Senate won't pass such a bill. Or, if it does, Obama won't sign it, daring Congress to allow a government shutdown.
We've all had the last week's worth of presidential press conferences to digest, let's take Obama at his word- that he will tell Geithner to stop writing any checks whatsoever if the debt limit isn't raised.
I think this would actually be a good thing. But to believe it, you have to also believe, as Druckenmiller does, that US fiscal policy for the past few decades has been seriously wrong. That running chronic large deficits since the 1930s has become a habit that cannot be sustained for more than the next few years.
Druckenmiller contends that no serious change at all in federal spending and disposition regarding its habits would be the worst outcome. And if the GOP rushes to capitulate after a government shutdown, there won't be such change. Obama will declare political victory, many Tea Party voters will be disgusted with the GOP.
But if Obama faces a GOP House whose members are willing to force a shutdown and, then, after it is clear there won't be capitulation, an ordered payment of federal obligations, while some functions are shuttered, everyone- global investors, voters, onlookers- will understand that things have changed.
In the meantime, the US would have lost its AAA rating. No matter which party gained relatively greater power among Congress and the White House in 2012, a return to borrowing and spending for new programs would no longer be an option. Interest rates would be too high on Treasuries to borrow much more money, if investors would even lend it. Slow economic growth and joblessness would make higher taxes on anyone a non-starter.
In short, a default now will bring forward what I believe would be the eventual outcome of political business as usual in Washington, which will continue without a default.
The United States is currently governed, for the most part, by a Democratic control of the executive branch, with its veto, and the Senate. Like it or not, the House can really only frustrate Democratic attempts to pass legislation, but it cannot, on its own, make policy.
Whether it's this group of Republicans, or another, after a brief return to Democratic control of the House, Senate, and Oval Office, and the final orgy of unaffordable deficit spending, it will likely now take some catastrophic event such as a credit rating downgrade and default to wake up Washington politicians to what is understood by many American voters and most global investors, to wit, no small change in American federal government fiscal policy will suffice any longer.
There must be wholesale changes in entitlement spending, the tax code and routine spending. Even leaving Social Security and Medicare untouched for the generation that concocted those Ponzi schemes won't suffice anymore, either. To truly fix what ails America, the coming fiscal pain must be shared by all, not only those victimized by the Porkiest Generation's self-interested entitlement scams.
Thus, I welcome a government shutdown, default and even a credit rating downgrade sooner, rather than later. Because it's coming, and later simply means more borrowed trillions for all of us to repay, with much higher interest. I don't believe most federal elected officials, nor Americans, truly comprehend the scope of the fiscal hole into which we've allowed our Congress and presidents to dig us since 1935. But it will probably require the economic equivalent of wartime belt-tightening for at least a decade to rectify it. By that I mean a near-total shift to defined contribution entitlements, retroactively changing Social Security, Medicare and Medicaid to such bases, large-scale elimination of federal spending on non-essential, non-common-good services, lower, globally-competitive tax rates, tax-preference item eliminations, and overal federal spending at or below 18% of GDP. Period. No more deficits.
To do otherwise, in my opinion, is like giving a self-confessed alcoholic more to drink, agreeing that he can always stop drinking tomorrow. Well, tomorrow will never come in that scenario.
And it won't in Obama's current fiscal scenario of off-limit programs for cutting, higher taxes, and modest, future spending cuts in exchange for the debt limit increase.
I know this seems to be a gloomy, dark scenario. But after decades of warnings of the insolvency of Social Security and Medicare, the continued unsustainable deficits spent by both parties, and a lack of awareness that there simply isn't time to avoid sharp spending cuts, I'd rather have external, uncontrollable fiscal consequences shut the door on liberal, big-spending American government starting in August, than rely on conventional, internal-to-America political swings to do it later.
Friday, July 15, 2011
Bank Stock Portfolio Manager Tom Brown Talks His Book On Bloomberg This Morning
I happened to catch bank sector portfolio manager and long-ago bank stock analyst Tom Brown's appearance on Bloomberg television this morning. The occasion was apparently yesterday's Chase earnings release.
Listening to/watching Brown was fascinating, in that he was questioned, and answered, as if he were simply a bank stock analyst, as he once was.
But, in reality, the entire episode was Bloomberg's way of doing bank stock portfolio manager Tom Brown a big, big favor, letting him talk his book without advertising it.
For example, Brown kept downplaying the capital inadequacy of the big four US banks- BofA, Chase, Citi and WellsFargo. He continually claimed that they have "til 2017" to reach then-required capital levels, and would do so with so much extra capital that they'll 'have to buy back stock' with the surplus.
Then he decried those who would worry that Chase used significant loan loss reserves to boost this past quarter's profit.
Brown also excelled at turning the anchors' questions to topics he wanted to highlight, such as his forecast that all the major banks would be growing loans and business volumes in 2012, thus making now a great time to buy before the profits roll in.
I've been following Brown's comments on Bloomberg for a few months now, and the last word you'd use to describe them is objective.
The truth is, Brown has to have a reason to push owning bank stocks, so no news is ever bad. Good earnings mean jump on the bandwagon, while lackluster results mean buy before performance improves.
Never mind that Brown evidently piled into BofA before its shares plummeted on higher capital concerns and the expensive mortgage loan distribution settlement it announced recently.
No, the bank sector is just wildly attractive, in Brown's view. No chance that a faltering economy could cause renewed credit problems, slow loan growth and generally stagnant performance.
As I listened to him predict how much profitable growth would occur at the four large banks from now until 2017, I considered how much trouble those same banks had managed to run into just from 2006-08. A fraction of the timeframe over which Brown is forecasting such bountiful banking profits.
But I'm sure such losses like those recent mortgage problems will never recur, will they Tom?
Listening to/watching Brown was fascinating, in that he was questioned, and answered, as if he were simply a bank stock analyst, as he once was.
But, in reality, the entire episode was Bloomberg's way of doing bank stock portfolio manager Tom Brown a big, big favor, letting him talk his book without advertising it.
For example, Brown kept downplaying the capital inadequacy of the big four US banks- BofA, Chase, Citi and WellsFargo. He continually claimed that they have "til 2017" to reach then-required capital levels, and would do so with so much extra capital that they'll 'have to buy back stock' with the surplus.
Then he decried those who would worry that Chase used significant loan loss reserves to boost this past quarter's profit.
Brown also excelled at turning the anchors' questions to topics he wanted to highlight, such as his forecast that all the major banks would be growing loans and business volumes in 2012, thus making now a great time to buy before the profits roll in.
I've been following Brown's comments on Bloomberg for a few months now, and the last word you'd use to describe them is objective.
The truth is, Brown has to have a reason to push owning bank stocks, so no news is ever bad. Good earnings mean jump on the bandwagon, while lackluster results mean buy before performance improves.
Never mind that Brown evidently piled into BofA before its shares plummeted on higher capital concerns and the expensive mortgage loan distribution settlement it announced recently.
No, the bank sector is just wildly attractive, in Brown's view. No chance that a faltering economy could cause renewed credit problems, slow loan growth and generally stagnant performance.
As I listened to him predict how much profitable growth would occur at the four large banks from now until 2017, I considered how much trouble those same banks had managed to run into just from 2006-08. A fraction of the timeframe over which Brown is forecasting such bountiful banking profits.
But I'm sure such losses like those recent mortgage problems will never recur, will they Tom?
NetFlix Announces New Pricing Strategies
Netflix made news this week for announcing new pricing strategies aimed at incenting (not incentivizing- which is not a word) customers who don't use DVDs to migrate to the firm's streaming service.
It's a bold move, but may mitigate the ongoing criticisms of the firm's financials by CNBC analyst Herb Greenberg. He's complained about the way Netflix accounts for the costs of their content deals. This new pricing approach may moot those complaints.
I received an email a few days ago informing me that my combined 2 DVDs/month + free streaming plan was discontinued, effective September. Instead, my formerly $15/month service would be replaced by two separate plans, the total price for which is $20/month.
Various business media have reported a customer uproar over this move. I confess to not being entirely sure why. Well, I mean, yes, I understand no customer writes to a service provider to say thanks for a price increase.
But, that said, it's not a big deal. In my case, I simply went online this morning and cut my DVD plan to 1/month, returning my monthly fee to what it was before, give or take a few pennies. Fact is, I want the ability to order DVDs, but rarely use them. The first two discs for the HBO series Rome have lain on my living room floor for about four months now, unwatched. But as some pundits have noted, the Netflix instant streaming library of movies is still pretty spare.
However, for the under-30 set, who watch a lot of television series seasons via Netflix streaming, this plan will allow the firm to better-control its physical distribution costs while separating streaming and teaching customers to pay for it, rather than expect it as a free luxury with the DVD service.
As an equity portfolio investment, Netflix's move will probably draw fire from analysts and lose some value initially as a result of the pricing moves. In my own portfolios, it shows a not-too surprising $10 drop by mid-Thursday (when I am writing this) on a roughly $300 stock price at the day's open. Never the less, the issue is up 25% since early May- not too shabby, with the S&P negative by almost 2% over the same period.
Yesterday's Wall Street Journal carried a piece arguing that Netflix's new pricing structures, which will push more users to streaming, will eventually create so much more bandwidth demand as to push internet access providers to price said access into basic and higher-usage components.
As I wrote in a post several months ago regarding my equity portfolios' recent holdings, most are pretty robust and less-vulnerable to recent economic shocks. I believe Netflix continues to be.
After all, what might look like a 25% increase in service price to me was still only $5/month. Less than $100/year. And my reaction was what Netflix probably wanted- the same revenue at lower costs to serve.
Meanwhile, most younger users are now paying $8/month for streaming-only, which is minimal and, I think, less than the prior lowest-cost plan.
One of the aspects of Netflix's business which I admire is how inexpensive it is for what it offers. In an era of $10 movie tickets as the local dump of an art house theatre, $55/month cable television bills for a basic bundle, having online streaming of Netflix offerings to any device is a bargain.
A few bucks a month, more or less, won't change that anytime soon.
It's a bold move, but may mitigate the ongoing criticisms of the firm's financials by CNBC analyst Herb Greenberg. He's complained about the way Netflix accounts for the costs of their content deals. This new pricing approach may moot those complaints.
I received an email a few days ago informing me that my combined 2 DVDs/month + free streaming plan was discontinued, effective September. Instead, my formerly $15/month service would be replaced by two separate plans, the total price for which is $20/month.
Various business media have reported a customer uproar over this move. I confess to not being entirely sure why. Well, I mean, yes, I understand no customer writes to a service provider to say thanks for a price increase.
But, that said, it's not a big deal. In my case, I simply went online this morning and cut my DVD plan to 1/month, returning my monthly fee to what it was before, give or take a few pennies. Fact is, I want the ability to order DVDs, but rarely use them. The first two discs for the HBO series Rome have lain on my living room floor for about four months now, unwatched. But as some pundits have noted, the Netflix instant streaming library of movies is still pretty spare.
However, for the under-30 set, who watch a lot of television series seasons via Netflix streaming, this plan will allow the firm to better-control its physical distribution costs while separating streaming and teaching customers to pay for it, rather than expect it as a free luxury with the DVD service.
As an equity portfolio investment, Netflix's move will probably draw fire from analysts and lose some value initially as a result of the pricing moves. In my own portfolios, it shows a not-too surprising $10 drop by mid-Thursday (when I am writing this) on a roughly $300 stock price at the day's open. Never the less, the issue is up 25% since early May- not too shabby, with the S&P negative by almost 2% over the same period.
Yesterday's Wall Street Journal carried a piece arguing that Netflix's new pricing structures, which will push more users to streaming, will eventually create so much more bandwidth demand as to push internet access providers to price said access into basic and higher-usage components.
As I wrote in a post several months ago regarding my equity portfolios' recent holdings, most are pretty robust and less-vulnerable to recent economic shocks. I believe Netflix continues to be.
After all, what might look like a 25% increase in service price to me was still only $5/month. Less than $100/year. And my reaction was what Netflix probably wanted- the same revenue at lower costs to serve.
Meanwhile, most younger users are now paying $8/month for streaming-only, which is minimal and, I think, less than the prior lowest-cost plan.
One of the aspects of Netflix's business which I admire is how inexpensive it is for what it offers. In an era of $10 movie tickets as the local dump of an art house theatre, $55/month cable television bills for a basic bundle, having online streaming of Netflix offerings to any device is a bargain.
A few bucks a month, more or less, won't change that anytime soon.
Thursday, July 14, 2011
Glenn Beck's & Oprah Winfrey's New Media Strategies- Which Will Work?
Back on July 1st, the day after Fox News lost Glenn Beck's program, I wrote this post on my political blog discussing Beck's next act.
This week, I read that Ophrah Winfrey's nascent cable network is having teething problems, prompting the networks namesake co-owner to step up as its new CEO.
As I wrote in that linked post, I think Beck has gone Winfrey one better. He's simply moved to the web with his entire non-radio empire.
Perhaps the most notable phenomenon is that both media moguls have departed their former homes- one broadcast network, the other a major cable network- to own their own operations. Or, in Winfrey's case, co-own with Discovery Network.
According to yesterday's Wall Street Journal, Winfrey's new network, OWN, is "struggling" amidst the departure of several senior execs and the firing of the CEO. So she's taking over and moving members of her production company's staff into those senior business management slots.
I'm not clear on why Winfrey partnered with Discovery, rather than going it alone. Perhaps it had to do with the cost and ability to access a slot on cable distributor systems like Comcast and Cablevision. Or perhaps it was to piggy back on Discovery's existing production and management assets.
Either way, Winfrey is still mired in the world of quasi-regulated communications, cable system distributors and advertising. Not to mention the need to pay carriage fees to distribute her network.
Just because Winfrey found a sweet spot with her own long-running talk show and amassed a fortune from the spinoffs and such doesn't mean she really belongs among the Allen & Co. conference attendees. It seems to remain to be seen if her one-hit talent will translate into the acumen to run an entire network and demonstrate what amounts to master-programming skills.
In contrast, Glenn Beck leapt from cable giant Fox News to his own website-based streaming video channel. Like the actors who broke away to found 7Artists studio, simply took advantage of modern technology such as the internet, smart phones and tablets, offering access to his video site for about $5/month or $100/year, with free upgrade to a 'plus' membership through the fall.
I have no idea what the approximate revenue numbers may be for Beck, because I am not familiar with what his actual average daily viewership on Fox was. I know he consistently won his 5-6PM time slot against news programs. It's reasonable to expect that he's looking at several million dollars/month of direct membership fees he can pocket, while drastically simplifying and cutting his total operations costs.
Meanwhile, Beck took the opportunity of his departure from Fox to air a long infomercial on GBTV, showcasing his senior executive team, new on-air personalities and various associated business initiatives.
I gathered from a chance remark on one of Beck's programs that he spends "about a million dollars a year on security." That would suggest he's making tens of millions of dollars per year from his radio program, paid website access, books, and associated businesses.
If so, I think he'll have no problem funding his new website-based media empire on his own. The credentials of his new staff were impressive, e.g., the woman who 'put The Huffington Post on the map,' a senior executive from CNN, and other accomplished managers. And he's clearly had them on staff and working for many months.
It seems to me that, regardless of how you feel about his views and content, Beck took the more sensible route to his own media empire, than Winfrey. With a direct streaming website to any medium of the subscriber's choice, there's no potential for boycotts from advertisers or cable systems. No FCC concerns. I'm not even sure that Beck is counting on advertising for much of his revenues.
As I mentioned in my linked post, the various initiatives which Beck unveiled in his infomercial suggest an anti-Soros type of hydra-headed businesses which include John Doe-like clubs, charitable onshore production efforts, like Paul Newman's enterprise, and more political-action-oriented projects directly addressing liberal-leaning US college campuses.
In short, Beck is putting his fortune where his mouth is, hiring top talent to get him there, and choosing a venue which is at the leading edge of technology, with the fewest regulatory constraints possible.
Beck's move finally proves my point concerning the relative disutility and ability to be easily disintermediated of cable media distribution. And, of course, broadcast networks. Rather like what I wrote about in yesterday's post.
Beck made sure his new venture is easily found, cheap to join, and ubiquitous. By emphasizing smart phones and tablets, plus political action projects, he's opened up his venture to younger audiences, as well as older ones.
Whether Winfrey or Beck proves to be more financially successful might be less important for the old media world, in the long run, than that both former conventional media stars bolted their former homes to control their future media destinies with so much apparent ease. How they fare may vary, of course, as Winfrey's management headaches attest. But their example may begin to sink in with more conventional entertainment creators who, until now, have sold their television series to broadcast and cable networks.
How long will it be before Glee, MadMen and Psyche simply go to websites and enjoy 100% of subscriber fees, selling by the episode, season or more, via credit cards and PayPal?
This week, I read that Ophrah Winfrey's nascent cable network is having teething problems, prompting the networks namesake co-owner to step up as its new CEO.
As I wrote in that linked post, I think Beck has gone Winfrey one better. He's simply moved to the web with his entire non-radio empire.
Perhaps the most notable phenomenon is that both media moguls have departed their former homes- one broadcast network, the other a major cable network- to own their own operations. Or, in Winfrey's case, co-own with Discovery Network.
According to yesterday's Wall Street Journal, Winfrey's new network, OWN, is "struggling" amidst the departure of several senior execs and the firing of the CEO. So she's taking over and moving members of her production company's staff into those senior business management slots.
I'm not clear on why Winfrey partnered with Discovery, rather than going it alone. Perhaps it had to do with the cost and ability to access a slot on cable distributor systems like Comcast and Cablevision. Or perhaps it was to piggy back on Discovery's existing production and management assets.
Either way, Winfrey is still mired in the world of quasi-regulated communications, cable system distributors and advertising. Not to mention the need to pay carriage fees to distribute her network.
Just because Winfrey found a sweet spot with her own long-running talk show and amassed a fortune from the spinoffs and such doesn't mean she really belongs among the Allen & Co. conference attendees. It seems to remain to be seen if her one-hit talent will translate into the acumen to run an entire network and demonstrate what amounts to master-programming skills.
In contrast, Glenn Beck leapt from cable giant Fox News to his own website-based streaming video channel. Like the actors who broke away to found 7Artists studio, simply took advantage of modern technology such as the internet, smart phones and tablets, offering access to his video site for about $5/month or $100/year, with free upgrade to a 'plus' membership through the fall.
I have no idea what the approximate revenue numbers may be for Beck, because I am not familiar with what his actual average daily viewership on Fox was. I know he consistently won his 5-6PM time slot against news programs. It's reasonable to expect that he's looking at several million dollars/month of direct membership fees he can pocket, while drastically simplifying and cutting his total operations costs.
Meanwhile, Beck took the opportunity of his departure from Fox to air a long infomercial on GBTV, showcasing his senior executive team, new on-air personalities and various associated business initiatives.
I gathered from a chance remark on one of Beck's programs that he spends "about a million dollars a year on security." That would suggest he's making tens of millions of dollars per year from his radio program, paid website access, books, and associated businesses.
If so, I think he'll have no problem funding his new website-based media empire on his own. The credentials of his new staff were impressive, e.g., the woman who 'put The Huffington Post on the map,' a senior executive from CNN, and other accomplished managers. And he's clearly had them on staff and working for many months.
It seems to me that, regardless of how you feel about his views and content, Beck took the more sensible route to his own media empire, than Winfrey. With a direct streaming website to any medium of the subscriber's choice, there's no potential for boycotts from advertisers or cable systems. No FCC concerns. I'm not even sure that Beck is counting on advertising for much of his revenues.
As I mentioned in my linked post, the various initiatives which Beck unveiled in his infomercial suggest an anti-Soros type of hydra-headed businesses which include John Doe-like clubs, charitable onshore production efforts, like Paul Newman's enterprise, and more political-action-oriented projects directly addressing liberal-leaning US college campuses.
In short, Beck is putting his fortune where his mouth is, hiring top talent to get him there, and choosing a venue which is at the leading edge of technology, with the fewest regulatory constraints possible.
Beck's move finally proves my point concerning the relative disutility and ability to be easily disintermediated of cable media distribution. And, of course, broadcast networks. Rather like what I wrote about in yesterday's post.
Beck made sure his new venture is easily found, cheap to join, and ubiquitous. By emphasizing smart phones and tablets, plus political action projects, he's opened up his venture to younger audiences, as well as older ones.
Whether Winfrey or Beck proves to be more financially successful might be less important for the old media world, in the long run, than that both former conventional media stars bolted their former homes to control their future media destinies with so much apparent ease. How they fare may vary, of course, as Winfrey's management headaches attest. But their example may begin to sink in with more conventional entertainment creators who, until now, have sold their television series to broadcast and cable networks.
How long will it be before Glee, MadMen and Psyche simply go to websites and enjoy 100% of subscriber fees, selling by the episode, season or more, via credit cards and PayPal?
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