Saturday, November 3, 2012

A Look At Obamanomics Through The Eyes Of A Business Owner

As a business owner that employs workers I have to pay very close attention to the charade taking place in Washington over new taxes, employment laws, regulations, etc. that may impact any business decision.

The following video is a succinct look through the eyes of an "evil" business owner such as myself, who has put up a tremendous amount of time, personal capital, and risk to try and grow the total size of the economic pie in America.

To help balance the view, I will say that being a business owner allows many tax advantages not discussed in the film. The most important being that expenses are incurred first and then taxes are taken out of what is left - the exact opposite of what occurs as an employee. That one simple tax advantage is one of the many reasons I spend my life focused on learning how be a better business owner vs. learning how to be a better employee.

For those that have not read the book or seen the movie Atlas Shrugged (part 2 was just recently released in theaters), I recommend you take the time to do so. It provides a fictional tale of what happens when the government tries to control every portion of all business - hint; business owners give up trying to build companies and just walk away.

Friday, November 2, 2012

Putting Life Into Perspective

The person I roomed with through my college years passed away unexpectedly yesterday at just 30 years old. When events like this happen it makes you step back and really appreciate every day and moment you have as a gift. It also puts things into perspective - money and business mean nothing in comparison to your health, family, and loving relationships.

While I do my best to stay in touch with all my friends and be there as much as possible, it makes me wish I had spent one or two recent nights that I would normally spend reading or watching sports and instead picked up the phone to call and talk to him.

Think about that for anyone that you haven't talked to in a while and you keep pushing it back because you always have tomorrow.

Thursday, November 1, 2012

The Argument For More Government Spending & Higher Taxes

The following video I came across today is a concise and well put together video that argues the case for higher taxes and more government spending. Just as I re-posted a similar argument from a reader of the site yesterday in Rebutting The Broken Window Fallacy: Reader Comment Discussed, I want to post the video here today as another view on economic policy. It is important to hear from both sides of the argument, and this is almost 180 degrees opposite of what I personally believe is the correct economic policy a country needs to create long term strength.

The video begins by saying that the greatest period of economic growth came at a time when tax rates in the US hovered close to 90% for the wealthiest portion of the country. The producers appear to argue that America grew at an amazing clip during that period because of these high tax rates.

America at that time was a global manufacturing powerhouse, with a strong sound currency, composed of a nation of savers. Due to these factors I believe the country grew in spite of the higher taxes, not because of them. If the government had stepped out of the way, it is almost unimaginable to think about how much more the US could have accomplished during that period.

They next go on to discuss the evil "savings" of the rich. I discussed this topic in detail yesterday. A country strengthens because of its savings and weakens because of its spending, something that unfortunately has become lost on this generation of economists.

They then go on to say that a business that produces an economic good would never "survive" on an island by itself without a government. I hope I do not need to take the time to explain this laughable notion. A young child could explain to someone why someone producing a tangible good or service on an island is more beneficial than an entity that feeds off that production. That a grown adult could say such a thing is a travesty and an embarrassment to to the country.

They finish by saying that we need to look to Europe to see the terrible impact of austerity. I look at Europe and see the region beginning the first stages of withdrawal from their government spending drug addiction, something the United States has not even begun to do. There is always pain in the short term when you stop pumping the in the drugs. Right now it appears that the US is making the "brave" decision to spend and print more. In the long term it will show that it is only setting up the country for a far greater disaster.

The Bottom Line: Jobs from Softbox on Vimeo.

Money For Nothing: The Coming Documentary On The Federal Reserve

The following is a trailer for a movie called Money For Nothing, which is expected to be released by year end and provides a documentary on the Federal Reserve. It is different from other films in that many current and former members of the Federal Reserve were interviewed for the film.

I find it interesting that many of them (based on the preview) admit that the Fed made some major mistakes leading up to the financial crisis that were directly linked to its cause. What is not shown in the preview, although it most likely is covered in the move, is that not only are these same exact mistakes being repeated today - but they are now implemented on a much, much larger scale. This is setting the stage for the next financial crisis, something that is discussed here on a daily basis in hopes that many readers are more prepared, that will make the 2008 collapse seem like a warm up.

Wednesday, October 31, 2012

Rebutting The Broken Window Fallacy: Reader Comment Discussed

A reader posted a comment on my article yesterday, Hurricane Sandy Breaks Windows Throughout New York: Economic Stimulus?, which I began commenting on and as usual it turned into a lengthy response. I have decided to re-post a portion of the comment here and then provide my response. His view is the main crux of the Keynesian argument and was very well spoken and written. It is always good for readers of this site to hear thoughts outside my own. .

"The Citizens would have spent their tax dollars on other goods and services". Attempting to generalize the broken window fallacy to government spending fails because this statement is false. This statement is only true for citizens who spend all their income. When citizens have so much income that much of it is not spent, but instead gets invested (or saved and then invested by banks), then it's possible (and eventually likely) for that saved income to be mal-invested - that is invested in a way that creates production overcapacity or the wrong production capacity - "wrong" in the sense that the production capacity created just perpetuates unsustainable economic growth. Eventually, such overcapacity or unsustainable growth will collapse economic activity. Now, all this is not to ignore that the government can also spend or invest the money (as tax dollars) in similar unproductive ways. However, when the broken window fallacy is extended to government spending, it ignores the potential economic stimulative effects of the governments redistribution of "excess" income - which can potentially increase the net velocity of money or (if spent on useful infrastructure, like the electric grid, for example), increase the productive capacity of the economy as a whole.

First, let's simplify the discussion to make it easier to follow. Let's remove deficit spending (financed by a central bank) for a moment and say that the government decides to spend $100 less per individual in the country and that is seen in $100 less in taxes taken out of their paychecks every month.

Your point was that these people may not spend this $100 and "stimulate" the economy. Ironically, not spending the money (under a normal economic environment) actually stimulates the economy more. Here's how:

The money can be put into purchasing stocks or bonds of corporations. These companies then have the ability to use this money and grow their business - leading to additional hiring, which leads to these new workers earning money and saving (then investing again in stocks or bonds).

The second option for the more risk adverse investor would be to just put the money in the bank and hold it as cash. In a normal economic environment this would lead to additional reserves the bank now has which can be used to lend out to businesses. This lending would create jobs, which would lead to additional savings, which would lead to additional bank deposits.

In this scenario we are assuming these are the only two options for investors because the government is not running deficits (therefore there are no government bonds to purchase).

The next question is then whether you believe the government (keeping the $100) can invest the money in a more effective manner than the private sector. I assure you that after hundreds of years of researching this subject with endless amounts of data, economists have found that this is never the case. The private sector has an incentive to invest to obtain maximum profits (we will see in a moment why this is important) - the government has far less of an incentive to do so.

Let's now take it full circle. What if the major corporation was "greedy" and they did not reinvest their capital into new hiring or the new building of plants? Before I answer that let me ask you why they might not re-invest the money? Most likely it is because there is not sufficient demand to grow. The money will not be invested in an efficient profitable way, therefore it will not be invested at all.

So this "greedy" business owner decides to keep the money in cash at the bank. What happens then?

The money then has the ability to be lent out to another business that has sufficient demand in their sector to grow. The growth in this sector then leads to additional hiring.

This is how a healthy economy grows and looking at this simple example hopefully helps open your eyes to how sick our economy is. We live in an economy now where savings is discouraged (due to artificially lowered interest rates) and investors put their money into government bonds where we hope it will be invested as efficiently as possible and perhaps create some new jobs.

We have moved so far away from the spectrum of a natural healthy economy that people cannot even see how damaging the policies are today to the foundation of the underlying economy. This has been temporarily masked by the low yields and unlimited spending ability of the government as well as the currently low levels of inflation incurred after the Fed's most recent money printing barrage.

Both of these temporary masks have the ability to be removed very quickly, and when they do it will expose the true "health" of the American economy as an emperor with no clothes.

I could continue to write for pages and pages on this topic providing multiple examples of how a healthy economic society functions and compare it to the bizarro world we live in today. For those that want to further their understanding of these issues, and I highly recommend you do, please read the following:

Economics In One Easy Lesson - Henry Hazlitt

How An Economy Grows & Why It Crashes - Peter Schiff

Austrian economics (real economics) is the exact opposite of what you will hear in almost every mainstream publication and in most economic books released today. America's temporary strength due to the most recent injection of heroin/stimulus into the economy only further feeds the Keynesian poison into the minds of the public. Take a moment to step back and really try and understand what is happening.

Some Charts That May Scare You

Happy Halloween! The market exchanges open back up in the United States today, which means buyers again have the ability to push US stocks and bonds further upward into over priced territory. I'll be providing some charts throughout the day for Halloween that could be quite scary for some.

We'll begin with the change in revenue for the S&P 500's 10 largest companies from a year earlier. Stock valuations are ultimately based on price to earnings. Right now stock prices are rising and earnings are falling. This trend will continue until it stops, then reverse (with either share prices falling or earnings rising significantly).

Another look at the long term S&P 500 price to earnings ratio. The market historically tops out in the low 20's (red line) and bottoms around 8 - 10 (green line). To say, based on valuations, that we are at the beginning of a long term secular bull market is a stretch based on the chart below.

The following chart shows the CPB world trade volume index heading into the red with the year over year percentage change. This has led to a recession in the recent past (grey line).

Think housing is scary in your neighborhood? Try taking a trip to Spain where the index has been in a steady downward decline since late 2006. The price drops over the past year have begun to accelerate downward. This is a nightmare for the loans held on the Spanish bank's balance sheets. The Spanish banks which continue to be backstopped by the Spanish government, which is backstopped by......? Hopefully someone soon.

The following graphic shows the number of Google searches for "Euro Crisis" over the past few years. This is worrisome because you can see that people are losing interest in the subject and becoming more complacent, just as things are moving into the far more gruesome stage with the Spanish, Italian, and French bail outs around the corner.

A nice look into the very scary realm of high frequency trading whose dominance in the daily movement of the market is only beginning to be understood by the general public. The following chart shows the high frequency traders at work during the inventory data releases for natural gas. Click for larger image:

For those that invest through mutual funds (the primary fund type of the average 401k plan), the stair steps below take you through the scalping investors take as they buy and hold these funds.

Next up we have the magical year of 1980 when some argue that we reached the point of peak prosperity in the United States. The country since that point has been stimulated first through deficit spending (1980's), then through Alan Greenspan's money printing at the Federal Reserve (1990's), and now through both combined (2000's). While we have had boosts in the economy through asset bubbles (stocks in 1990's and real estate in 2000's) under the surface the real economy is breaking down. The following four show this occurring. Click for larger image:

Want to see something real scary? Take a look at the monsters roaming through New York City and living in the suburbs of Connecticut  The following shows the number of regulator criminal referrals during the 2008 financial crisis compared to the S&L crisis in the early 1990's (the size of the S&L crisis was tiny in comparison). Regulators have completely looked away setting the stage for the next crisis where there is now no fear in breaking the law or hurting as many people as possible.

Tuesday, October 30, 2012

Hurricane Sandy Breaks Windows Throughout New York: Economic Stimulus?

Before you get a chance to read anything in the mainstream media this week about how a natural disaster such as the one taking place in the northeast United States is good for the economy, let me try and step in quickly with some Austrian economics.

I have posted the video below in the past, but at times like this it is more important than ever to understand the Broken Window Fallacy.

While this concept is simple to understand for most (usually younger children or anyone that has not been brain washed through Keynesian economics - what is currently taught to students in America)  the follow on concepts are when most people began to get confused.

As I have discussed in the past in great detail, the simple Austrian free market model for economics is much more difficult to see in practice today because there is now a third variable: central banks which have the power to temporarily push back the force of gravity.

Their influence makes the markets almost impossible to understand for those that did not enter their financial study with a firm foundation in Austrian economics. Case in point was last night's most recent quantitative easing program from the Bank of Japan designed to weaken their currency and boost exports. The BOJ announced a 10 trillion yen purchase program and following the announcement the currency immediately strengthened. This was due to the market's expectations that they would come with at least 15 trillion yen.

The same occurrence has been taking place in the United States over the past few years. When the Federal Reserve announced a new quantitative easing program the currency has gone through periods of strength. This once again makes all Austrian textbooks appear to be incorrect in their teachings.

Students leaving college in 2009 and looking out into the global economy have found that countries that employ the largest level of federal government stimulus in tandem with the largest levels of quantitative easing programs (the United States) have been rewarded with the lowest government bonds yields and the highest stock markets!

This is toxic for many reasons beyond the fact that these students are growing up in a country that is destroying itself from within, like termites silently eating through the foundation of a home.

This has confirmed the Keynesian studies they left college with as fact. Many of these younger US citizens will be voting on the person who will promise more government spending. Unfortunately, it will also set up their portfolio for the greatest amount of destruction when gravity finally enters the market.

It is similar to the graduating classes of 2003 - 2004 who entered a world where real estate prices never fell. That graduating class, most of which purchased a home as soon as possible, was decimated. The same occurs today only across all asset classes. Students graduating after 2009 have entered a world where the stock market has doubled in value, most bonds have doubled in value, the currency has strengthened, and mortgage rates only get lower every month.

"My grandfather tells me about buying something called gold back in the 1970's," they say at internet cafes. "What a weird old man he is."

Here is the introductory primer into Austrian economics: the Broken Window Fallacy. For those that want to began building their foundation in this field, which I would do before studying anything else in the financial realm, I highly recommend reading Economics In One Easy Lesson & How An Economy Grows And Why It Crashes. The second is told in story form with pictures - give it to your children.

Monday, October 29, 2012

Markets Closed As Sandy Rips Through Northeast

The US stock and option exchanges are closed today due to Hurricane Sandy marking the first unscheduled market wide shutdown since since the September 11 attacks. Many of my friends living in the northeast will be enjoying a day off of work today.

I am in the process of moving out of the downtown part of Charlotte, North Carolina and into a new home in the suburbs. While moving is never fun, for a nerd like me it is not so bad. I just strap on the headphones and listen to both radio shows and audio books for hours and hours.

It has given me a chance to get caught up with this past month's excellent interviews on Financial Sense Newshour. I have been listening to their program for 6 years now. The show originally aired only on the weekends, but they have expanded the program (keeping the free hours of weekend radio) and adding week day interviews that you can enjoy for only $10 a month. The cost is well worth the amount of info you will receive.

If you are someone that does a lot of driving or traveling, listening to radio shows and audio books are a tremendous way to gain an advantage in the markets or just stay current on the best new books released. For audio books I use Audible (recommend having some sort of Apple device to listen).

Enjoy your day off traders. The best advice I can leave you with today while you are out driving is to never honk at old people.

Sunday, October 28, 2012

Rise Of The Machines

A look at the use of drone technology, which is essentially ready to launch and becomes legal to use in the US in September 2015. It will usher in the next stage of the US police state through the use of "cop drones."