Sunday, March 29, 2015

Payday Loans and Predatory Politicians

Payday Loans and Predatory Politicians


"Populist politicians argue that they’re trying to “protect” poor people from “predatory” lenders. But what they’re really doing is taking away the last recourse -- from the already severely limited options -- for poor people in urgent financial need.
Before seeking to regulate payday lenders into submission — or oblivion — it’s important to ask: what’s the alternative?"

Saturday, March 28, 2015

Higher Minimum Wage Leaves Working Poor Without Childcare

Key Excerpt:

"So when its main expense (labor) increases by more than 36% overnight (from $9 to $12.25 per hour), Cold Hard Facts say: Increase Revenues or Decrease Expenses.
For a non-profit early childhood development center in Oakland which had recently garnered the highest rating in the county, the only way “out” is decreased costs. Parents of the 63 children cared for there—all working poor—pay little to nothing for the care provided five days a week, every week of the year. Because it is a nourishing environment—providing professional care, guided recreation, stories, socialization and pre-school instruction—it is by definition very labor intensive. And much of that labor is provided by minimum-wage teachers’ aids. The immediate, first-year budget shortfall to meet the mandated wage increase: $146,500."

Thursday, March 26, 2015

Progress Report on Obamacare

Progress report on Obamacare. As predicted, it has shrunk the number of firms in the marketplace, raised premiums, and etc

Key excerpt:
"A recent report by HealthPocket, an online insurance marketplace, has revealed that premiums for individual Americans skyrocketed after Obamacare became law.
Drug costs have jumped, too, despite promises to the contrary from the Obama administration. The majority of health plans offered on the exchanges have shifted costs for expensive medications onto patients, according to a study by Avalere Health. In 2015, more than 40 percent of all “silver” exchange plans – the most commonly purchased – charged patients 30 percent or more for specialty drugs. Only 27 percent of silver plans did so last year. Part of the problem is that the health law has quashed market competition.
The president promised in 2013 that “this law means more choice, more competition, lower costs for millions of Americans.” But that hasn’t turned out to be true. According to the Heritage Foundation, the number of insurers selling to individual consumers in the exchanges this year is 21.5 percent less than the number that were on the market in 2013 – the year before the law took effect.
The Government Accountability Office reports that insurers have left the market in droves. In 2013, 1,232 carriers offered insurance coverage in the individual market. By 2015, that number had shrunk to 310.
With competition in the exchanges on the decline, quality is going down, too – just like President Obama said in 2013: 'Without competition, the price of insurance goes up, and the quality goes down.'"
Article: "Looking At Obamacare, Five Years On"

Wednesday, March 25, 2015

Does a Growing Economy Require an Expanding Money Supply?

Frank Shostak analyzes if the money supply needs to be expanded when the economy expands. It is mainstream economic theory that as the economy expands, that the Central Bank must print more money. Read the article below and provide your thoughts!

Mises Wire | Mises Institute

Wednesday, March 18, 2015

Musk and Tesla

Mention Elon Musk or Tesla, and a myriad of responses are given. Regardless of the responses, the fact is that Musk is attempting to shake up the auto industry. This article from the Daily Bell titled, "Tesla's Musk Continues to Restyle Himself as a Tech Visionary. But Why" is an example of this.

Many states are attempting to ban the sale of Tesla autos in their state. Some states have been successful, as New Jersey comes to mind. This is not because of the fact the cars are electric, but because the cars are sold directly from the manufactures. This is smart by Mr. Musk because the cost of building an electric auto will be higher than its combustion engine equivalent. In an attempt to cut down on costs, selling the car directly from the manufacture is a brilliant move. However, the auto dealers association is lobbying to push for enforcement of the rule of not allowing Tesla to sell cars in those markets. Now, in New Jersey, the current Governor Chris Christie is pondering if Tesla can be allowed to be sold in New Jersey. Read up on this here from this article titled, "Chris Christie will decide if Tesla can sell directly to consumers in New Jersey" 

All of these developments demonstrate how this is quite intriguing, as we Americans pride ourselves in "Free Enterprise".  In a market where buyers and sellers are free to exchange goods and services, it is very efficient--provided that there are no cost, hurdles or barriers of entry(e.g Regulations, increased taxes, fees, etc) that are imposed by the Government. How does Governor Chris Christie know what all the consumers prefer? How does anyone know this? No human can. If the Governor is determining the fate of Tesla, and not the consumers, can we honestly state this is "Free Enterprise"? 

The most effective way to determine if Tesla is a viable auto maker is this:  Allow them to sell their vehicles in the marketplace, and allow the competition with other auto makers to determine the winner. In this situation, the consumer, drives the preference; as it will not be determined by the Governor. 

Friday, March 13, 2015

Sports Stadiums Throw Taxpayers for a Loss

Sports Stadiums Throw Taxpayers for a Loss

Key Excerpt:

"Team owners, however, can always find some city or state willing to fleece taxpayers in the fallacious hope that prosperity will follow. It's a play fake that never fails."

Thursday, March 12, 2015

Should College Athletes Be Paid? (w/ Art Carden)

Art Carden provides a short critique on why College Student Athletes should be paid. My analysis states that they currently are being compensated, and they are being compensated at the market rate. Currently, student athletes are being compensated with room, board, books, travel, etc etc. The argument should be framed: Should college student athletes get more compensation?

Wednesday, March 11, 2015

The End of the Great Debt Cycle

A good read by author Bill Bonner on "The End of the Great Debt Cycle". Excerpt:

"In the past 20 to 30 years, credit has grown to such an extreme globally that debt levels and the ability to service that debt are at risk. […] Why doesn’t the debt supercycle keep expanding? Because there are limits."

Tuesday, March 10, 2015

Thanks for the Corporate Bond Bubble, Fed

By David Stockman

(Original article here:)
Once upon a time businesses borrowed long term money—-if they borrowed at all—-in order to fund plant, equipment and other long-lived productive assets. That kind of debt was self-liquidating in the sense that it usually generated a stream of income and cash flow that was sufficient to service and repay the debt, and to kick some earned surplus into the pot as well.

Today American businesses are borrowing like never before—-but the only thing being liquidated is there own equity capital. That’s because trillions of debt is being issued to fund financial engineering maneuvers such as stock buybacks, M&A and LBOs, not the acquisition of productive assets that can actually fuel future output and productivity.

So it amounts to a great financial shuffle conducted entirely within the canyons of Wall Street. Financial engineering deals invariably shrink the float of outstanding stock among the companies visiting underwriters. Likewise, they invariably leave with the mid-section of their balance sheets bloated with fixed obligations, while the bottom tier of shareholder equity has been strip-mined and hollowed out.

At the same time, none of this vast flow of capital leaves a trace on the actual operations—-such as production, marketing and payrolls—of the businesses involved. Instead, prodigious sums of debt capital are being sold to yield-hungry bond managers and homegamers via mutual funds and then recycled back into windfall gains for stock market gamblers who chase momo plays and the stock price rips that usually accompany M&A, LBO or stock buyback announcements.

Needless to say, central bank financial repression is responsible for this destructive transformation of capital market function. It has made the after-tax cost of debt tantamount to free for big cap corporations——while fueling equity market bubbles that makes stock repurchases and other short-term financial engineering maneuvers irresistible to stock option obsessed inhabitants of the C-suites.

In this context, today’s WSJ saw fit to herald the $21 billion of quasi-junk bonds (BBB-) issued by Actavis PLC to fund its $66 billion acquisition of Allergen, a company which famously supplies Botox and similar life-enhancing products. Whether this mega-merger will result in any sustainable economic efficiency gains only time will tell, but the odds are not high. The overwhelming share of today’s red hot M&A deals fail to earn back the huge takeover premiums invariably paid. And, not infrequently, they are subsequently reborn as equally trumpeted corporate restructurings, spin-offs and other “value unlocking” maneuvers a few years down the road. It’s Wall Street’s version of “you stab ‘em and we slab ‘em”.

Yet there can be no doubt that funding the Allergen deal with $21 billion of freshly minted debt did accomplish the actual purpose of the financial engineering maneuver in question. Namely, it enabled Actavis to pay a bountiful premium to the selling shareholders without diluting its own shares.

And why not? The after-tax cost of the new debt will amount to a miniscule 2.4%. Consequently, the C-suite at Actavis acquired what amounts to a quasi-free option on the spread-sheet merger synergies and economies of scale postulated for the deal by Wall Street and its in-house financial engineers.

If these projected profits do not materialize or, as in the more usual case, if they are off-set with diseconomies of scale or operational and commercial dysfunction, the carry cost of the acquired assets will be negligible until they can be disposed in a “restructuring” event. No wonder CNBC celebrates Merger Monday and gets giddy when CEOs purportedly exhibit “confidence” in the future by launching new M&A deals.

Does this imply that the overwhelming share of M&A deals in this age of central bank financial repression amount to pointless financial engineering ploys designed to goose stock prices and stock option values, while substituting for genuine organic growth strategies? Yes it does.  And the systematic resource misallocations and anti-growth consequences are profound.

Since yesterday’s Actavis deal was the second largest bond deal ever, it induced the WSJ to trot out the historical statistics. And they scream financial engineers at work.

As shown in the graphic below, the granddaddy of debt deals was last year’s $49 billion Verizon issue. This colossal obligation most definitely had nothing to do with the acquisition of plant, equipment and technology assets or even other people’s second hand assets.

Instead, it amounted to an internal LBO in which the parent company bought in the stock of its own subsidiary. That’s right—–a cool $49 billion of holding company debt was issued to change exactly nothing at Verizon except to shower public shareholders of a second tier subsidiary with a 50% windfall against their pre-deal trading price.

It goes without saying that no one except Wall Street analysts has lately mistaken Verizon for a  value-producing enterprise. It is actually a serial deal machine—– a place where corporate value goes to die.

At the end of 2007, for example, it was already well down the slippery slope with tangible net worth at negative $10 billion. Today that figure stands at nearly negative $95 billion. Destruction of $85 billion of tangible equity value in just seven years is no mean feat——-even for a giant lumbering utility that has roughly 80 million quasi-captive customers to gouge.

There is no mystery to how Verizon navigated its way to the $100 billion negative (tangible) equity club. It borrowed itself silly funding “restructuring” charges and making vastly over-valued acquisitions. Thus, at the end of 2007 it had $31 billion of debt and today that metric stands at a staggering $113 billion.

What did Verizon get for the $82 billion in incremental debt that was on offer at bargain rates in the casino?  It certainly wasn’t any explosion of current earnings; since 2007 its EPS has only inched forward at about 3.3% per year. And it wasn’t an old-style burst of investment capable of turbo-charging future profits. Its CapEx  amounted to $140 billion over the last seven years, but 90% of that was needed to cover the DD&A charges on existing assets.

Viewed more broadly, Verizon and Actavis are at the top of the list, but they are merely super-sized versions of the generic syndrome. As shown below, the Fed’s massive money printing spree since the September 2008 crisis has fueled a massive increase in corporate debt issuance—–funds which have overwhelmingly been absorbed by non-productive financial engineering maneuvers.

The five largest debt deals of all-time shown in the graphic total $104 billion, for example, but every penny went to financial engineering and tax ploys. Sitting on $180 billion of cash, Apple most surely did haul coals to Newcastle with its $17 billion debt offering last year; and the other deals were more of the same debt financed M&A.

So far this year corporate bond issues total $241 billion. That’s a staggering $1.4 trillion annualized run rate—-or nearly double the run rate prior to the financial blow-off in 2008. Yet virtually all of this massive debt issuance has been cycled into after-burner fuel for the rocketing stock market. During the month of February alone, stock buybacks for the S&P 500 were a record $104 billion.

Is it any wonder that Wall Street threatens a hissy fit upon even a hint that the Fed’s rotten regime of ZIRP might be ended after 80 months? After all, it has amounted to free money for carry trade speculators and a cattle prod driving bond fund managers into corporate debt.

But here’s the thing. This entire massive capital market deformation appears to be invisible to the paint-by-the numbers Keynesian apparatchiks who run the Fed and their fellow travelers and cheerleaders in Washington and Wall Street. And the reason for this egregious blindness is not all that mysterious.

These folks do not understand capitalism nor the true ingredients of wealth creation and sustainable economic prosperity. They are simply glorified econometric modelers who pay no attention to balance sheets, economic history or enterprise level economic efficiency and investment. Accordingly, all borrowed dollars are the same; they are assumed to fuel the fires of “aggregate demand”, whether they are used to fund pyramids or machine tools.

Likewise, as long as the seasonally adjusted rate of spending—in this case for business CapEx—-during the current quarter is measurably higher than the prior period all is well. Never mind if it is merely a upward blip in a longer trend of decay or that the “spending” components of GDP do not even capture the ingredients of true wealth generation.

US household consumption spending surged during the housing and mortgage boom between 2002 and 2008, for example. Yet upwards of $3 trillion of that “spending” boom was funded with “MEW”. Needless to say, “mortgage equity withdrawal” was not a sustainable ingredient of economic growth or main street prosperity—even if it did temporarily flatter the quarterly GDP figures.

Indeed, at least the mortgage debt explosion during the Greenspan housing bubble did confer some transient prosperity on the middle class. By contrast, the corporate bond bubble this time around has been strictly a boon to the top 10% of households, which own 85% of equities, and especially the top 1%, which are heavily invested in the hedge funds and family offices which capture a lions share of the deal-driven windfalls in the stock market.

Here are the baleful facts. Total corporate and non-corporate business debt outstanding has been on a tear since the pre-crisis peak in late 2007. At that time, business credit outstanding totaled $11 trillion—–a figure which has now ballooned to $14 trillion. So despite the propaganda about a healthy post-crisis deleveraging, its been full steam ahead with debt issuance in the business sector.

But the overwhelming share of that $3 trillion has gone into financial engineering including trillions of stock buybacks during the last six years. By contrast, business CapEx has been tepid at best, and a downright disaster in reality.

Thus, during Q4 2007 the annualized rate of business spending on structures and plant and equipment totaled $1.447 trillion in constant dollars. Seven years later in Q4 2014—after massive monetary stimulus and endless Wall Street cheerleading about a rebound in CapEx—– the figure was $1.496 trillion at an annual rate. If you do not have a hand calculator, that miniscule difference amounts to a 0.4% annual rate of gain. Given the dubious inflation measures embedded in the governments price deflators, the “real” rate of gain since 2007 could easily be zero or even negative.

Self-evidently, whether the seven year trend of CapEx growth is 0.4% or even lower it reflects at drastic deterioration from prior business cycles—-notwithstanding the Fed’s massive financial repression designed to jump start investment spending, and the incremental $3 trillion that US businesses actually borrowed during this period.

During the 7-years after the business cycle peak of 2000, by contrast, real spending on structures and equipment increased by nearly 2% per annum or at 4X greater rate than during the current so-called recovery. And during the 1990-1997 cycle, the annual rate of gain in real business CapEx was 4.3%. Stated differently, during that seven year period, cumulative real business investment rose by 31% compared to the tiny 3.4% gain during the equivalent cyclical period since 2007.

Once upon a time in the pre-Keynsian world, economists and practical men of finance knew something else, as well. Namely, that what counts for long-term growth and genuine prosperity is the level of the capital stock, not merely the gross rate of business investment spending in any given quarter or other short-run period.

The fact is, our Keynesian GDP accounts do not account for capital consumption or depreciation of the existing capital stock in the famous reckoning of GDP. But if new CapEx does not replace current depreciation the productive capacity of the macro-economy is falling—notwithstanding the positive number for the “I” (investment) component in the GDP equation.

In fact, business sector depreciation is currently running at a $1.1 trillion annual rate for the US economy, meaning that gross spending on structures and plant and equipment barely covers the capital resources used up in current production.

Here is where the record boom in corporate debt issuance hides the true decay of productive capacity in the US business sector. During Q4 2007, real net investment after capital consumption in the US business sector was about $400 billion at an annual rate. By contrast, during Q4 2014 the comparable number was about $300 billion.

That’s right. Real net investment in the US business sector is now 25% smaller than it was before the crisis; and before it was “solved” with massive money printing, false interest rates at the zero bound and the explosion of corporate borrowing that resulted therefrom.

This drastic shrinkage is something totally new under the sun, and not in a good way at all. During the 7-years after the 1990 peak, for example, real net business investment expanded by 50%.

In fact, during Bill Clinton’s last year in office, the balance sheet of the Fed totaled $500 billion and real net business investment that year came in at $450 billion.

Let’s see. The Eccles Building has grown its balance sheet by 9X since the turn of the century, but real net investment in the business sector has plunged by 33%!

So thanks for the corporate bond bubble, Fed. Its just one more nail in the coffin of capitalist prosperity in America.

Copyright © 2014 Conyers LLC . All Rights Reserved.

Maximumly Misleading on Minimum Wages

Key Excerpt from the article  from Dr. Boudreaux:

"Until and unless a compelling reason is found to conclude that low-skilled labor, apparently alone among all goods and services, is not subject to this economic reality (and neither the alleged monopsony power of employers nor the presumed ability of higher minimum-wages to spark sufficiently greater consumer demand comes within light-years of “compelling”), wise economists will and should continue to warn that minimum wages inflict disproportionate harm on the very workers who they are ostensibly meant to help."

An excellent read.

Saturday, March 7, 2015

The Natural Rate of Interest: What is it?

Recently, I have participated in some excellent discussions surrounding the notion of interest. During these discussions, there are various notions tossed around with the concept of interest. Many think it is immoral, or its a scam created by the banking class.

What is Interest?

Many people believe that interest relates only to the loan market. While is interest is in the loan market, its not exclusive to the loan market. The notion of the natural rate of interest impacts everything we do! The notion of the natural rate of interest is rooted in the principle of marginal utility, or preference ranking of goods/services.

Some articles and readings that explore the notion of interest in more detail:

Money and Interest 

Interest on Money and Its Causes

Friday, March 6, 2015

Debasing the Currency: The Central Banker's Way

The ECB is participating in their version of QE, or Quantitative Easing. They feel this will prevent the perils of "deflation".  Savvy economists know that deflation is not necessarily "bad".  A key excerpt from the article:

"Draghi’s faith in quantitative easing, which he pushed through against German-led opposition, was reflected in the ECB’s new economic forecasts. After consumer prices fell 0.3 percent in February, the central bank now sees a deflationary spiral averted."

Read the rest of the article HERE... 

Monday, March 2, 2015

Who Is Harmed by Insider Trading?

This is an interesting perspective on Insider Trading. Is it really immoral to engage in "insider trading"?  This article does an analysis of this topic.

Charles L. Hooper, Who Is Harmed by Insider Trading? | Library of Economics and Liberty