What a week.  If you’ve even glanced at this blog you know this decline has been expected.  A quick look at the charts shows some areas where we might start to consolidate — the drop must stop first.  I’ll post this weekend with some long term charts so we can get a perspective on where we’ve been and where we might go.  I’m going to try and have some trading ideas, too.

Cheer up — the weekend is here and we don’t have to get ready to do battle until Monday!

Update:
President Obama “spoke candidly” in an interview with Fox News Wednesday, (November 18) from China, warning about the risks of spending money to “stimulate” the economy without increasing the already astronomical deficit.

He also spoke about tax incentives for businesses to reverse the rising unemployment rate.

“There may be some tax provisions that can encourage businesses to hire sooner rather than sitting on the sidelines. So we’re taking a look at those,” Obama told Fox News’ Major Garrett.

“I think it is important, though, to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession.”

A double-dip recession is when gross domestic product (GDP) growth slides back to negative after a quarter or two of positive growth. It refers to a recession followed by a short-lived recovery, followed by another recession.

The causes for a double-dip recession vary but often include a slowdown in the demand for goods and services because of layoffs and spending cutbacks from the previous downturn.

A double-dip (or even triple-dip) is a worst-case scenario. Fear that the economy will move back into a deeper and longer recession makes recovery even more difficult.

Obama should be cutting taxes, not raising them.

Obama’s health care bill threatens businesses and working individuals with a new battery of taxes but taxes won’t be enough to help offset its costs. To help offset costs, the bill takes away tax incentives designed to encourage businesses to invest into the economy in certain ways, such as investing in solar cell technologies.

As if this weren’t bad enough, the Cap and Trade bill looms on the horizon. If passed into law it will further tax industry. Economics 101 tells us that tax burden will be passed to the consumer.

At this point it would appear America is on the verge of being taxed to death and suggests President Obama’s tax and spend policies will continue to exacerbate America’s anemic economy even further.

Take A Page From History, Mr. Obama

In 1924, Secretary of Treasury Andrew Mellon wrote,

“It seems difficult for some to understand that high rates of taxation do not necessarily mean large revenue to the Government, and that more revenue may often be obtained by lower rates.”

Mellon pushed for a reduction of taxes on the rich, which were pegged at 73% and eventually it was reduced to 24%. The resulting decrease in these taxes, as well as tax breaks for lower brackets, saw personal income-tax receipts rise from $719 million in 1921 to over $1 billion in 1929, which many attributed to the rate cut.

According to economists out of UCLA, after scrutinizing Roosevelt’s record for four years, Harold L. Cole and Lee E. Ohanian conclude in a study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

“Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump,” said Ohanian, vice chair of UCLA’s Department of Economics. “We found that a relapse isn’t likely unless lawmakers gum up a recovery with ill-conceived stimulus policies.”

In their article in the August 2004 issue of the Journal of Political Economy, Ohanian and Cole blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933.

A more recent article in the Wall Street Journal reaffirms the findings of the Journal of Political Economy article.

From the Joint Economic Committee Report of 2006, “The Reagan Tax Cuts: Lessons for Tax Reform”,

The 1993 Clinton tax increase appears to having the opposite effect on the willingness of wealthy taxpayers to expose income to taxation. According to IRS data, the income generated by the top one percent of income earners actually declined in 1993. This decline is especially significant since the retroactivity of the Clinton tax increase in that year limited the ability of taxpayers to deploy tax avoidance strategies, temporarily resulting in an increase in their tax burden. Moreover, according to the FY 1997 Clinton budget submission, individual income tax revenues as a share of GDP will be lower during the first four years of the Clinton tax increase, which include the effects of the 1990 tax increase, than under the last four years of the Reagan tax changes (FY 1986-89). Furthermore, according to a study published by the National Bureau for Economic Research,[2] the Clinton tax hike is failing to collect over 40 percent of the projected revenue increases.

Incidentally, the claim that unrealistic supply side Reagan Administration revenue projections caused large budget deficits during the 1980s is false. Nonetheless, this false allegation is often used against current tax reform proposals. The official Reagan revenue projections immediately following enactment of ERTA did not assume huge revenue increases, and were actually quite close to the CBO revenue projections. Even the Democrat-controlled CBO projected that deficits would fall after the enactment of the Reagan tax cuts. The real problem was a recession that neither CBO nor OMB could foresee. Even so, individual income tax revenues rose from $244 billion in 1980 to $446 billion in 1989.

Even President Clinton’s economic advisers understood this economic fundamental. Looking back to the the Economic Recovery Tax Act (ERTA) of 1981, President Clinton’s Council of Economic Advisers in 1994 summarized the economic benefits of ERTA, the Reagan tax cuts, by saying,

“It is undeniable that the sharp reduction in taxes in the early 1980s was a strong impetus to economic growth.”

New shackles upon America’s economy

How does America effectively compete with the rest of the world when the cost of doing business shackles America’s economy? How will Americans be able to pump their discretionary income into the economy when they have less money in their pockets?

I doubt most are aware of this one, but Americans now have to think about their new $2,631.00 tax increase (per year) brought upon them by the 2007 Senate Budget, described as the largest tax increase in America’s history.

If this additional tax burden has you worried, consider too that America’s business leaders will be looking for new ways to compete with the rest of the world, unshackled by the expenses associated with new health care taxes and taxes upon business brought to them (and us) via the looming Cap and Trade bill. It will probably result in American businesses sending more jobs off-shore to take advantage of a more hospitable business climate. This will no doubt add to the already rising rate of unemployment which will further reduce the level of discretionary income to be pumped into the already anemic economy.

It doesn’t take a rocket scientist to figure out that when consumers are over-burdened with taxes, it means less discretionary income to spread onto the economy. Without that revenue, businesses will report a smaller tax basis to the federal government and to their surprise, their tax revenue doesn’t increase, it actually decreases. What is worse is that business will not be able to replenish an inventory which doesn’t move and so factory orders will diminish as well. This will lead to more unemployment, factory closings and will leave this Obama administration believing they didn’t raise taxes enough.

It’s a death spiral for America.

Today, the U.S. government reports the federal deficit has reached $1.42 trillion dollars, the largest since World War II. We have 2 more months left in the year so we can expect this number to go up a bit more. Contrast this against the budget deficit for 2008 which was $455 billion.

The Obama administration projects the deficit will total $9.1 trillion over the next decade unless corrective action is taken.

As a portion of the economy, the budget deficit stood at 10 percent, the highest since World War II, according to government data released Friday.

For 2009, the government collected $2.10 trillion in revenues, a 16.6 percent drop from 2008. The plunge reflected declining income tax collections as millions of Americans lost their jobs or saw their wages cut. Corporate taxes also plummeted as the recession squeezed companies’ profit margins.

Government spending last year jumped to $3.52 trillion, up 18.2 percent over 2008. The $700 billion financial bailout fund and increased spending and tax relief from the $787 billion economic stimulus program that Obama pushed through Congress in February drove the increase.

For September, a month when the government usually records surpluses, the deficit totaled $46.6 billion. That’s a sharp contrast to the $45.7 billion surplus in September 2008, the last time the government’s books were in the black.

Failure to curb runaway deficits could push interest rates and inflation higher, and send the dollar crashing if foreigners suddenly started dumping their holdings of Treasury securities.

None of those problems are evident now as the worst recession since the 1930s has depressed borrowing by consumers and businesses, giving the government a break on the interest it paid this year on the record debt. Net interest payments actually fell by about $10 billion in 2009 from 2008.

But economists worry investors will grow fearful of the nation’s ability to repay all the debt unless the administration and Congress begin developing credible plans to deal with the deficit problem once the recession has ended and unemployment has begun to come down.

this is good news…just hope it doesn’t crash market in process ;0.

excerpt: ““If they’re too big to fail, they’re too big,” Greenspan said today. “In 1911 we broke up Standard Oil — so what happened? The individual parts became more valuable than the whole. Maybe that’s what we need to do.””

http://www.bloomberg.com/apps/news?pid=email_en&sid=aJ8HPmNUfchg

The data show government transfers and rebates have not increased consumption at all.

Is the American Recovery and Reinvestment Act of 2009 working? At the time of the act’s passage last February, this question was hotly debated. Administration economists cited Keynesian models that predicted that the $787 billion stimulus package would increase GDP by enough to create 3.6 million jobs. Our own research showed that more modern macroeconomic models predicted only one-sixth of that GDP impact. Estimates by economist Robert Barro of Harvard predicted the impact would not be significantly different from zero.

Now, six months after the act’s passage, we no longer have to rely solely on the predictions of models. We can look and see what actually happened.

Consider first the part of the package that consists of government transfers and rebates. These include one-time payments of $250 to eligible individuals receiving Social Security, Supplemental Security Income, veterans benefits or railroad retirement benefits–and temporary reductions in income-tax withholding for a refundable tax credit of up to $400 for individuals and $800 for families with incomes below certain thresholds. These payments, which began in March of this year, were intended to increase consumption that would help jump-start the economy. Now that a good fraction of these actions have taken place, we can assess their impact.

Read the Wall Street Journal article here.

Incoming data will reveal more in coming months, but the data available so far tell us that the government transfers and rebates have not stimulated consumption at all, and that the resilience of the private sector following the fall 2008 panic–not the fiscal stimulus program–deserves the lion’s share of the credit for the impressive growth improvement from the first to the second quarter. As the economic recovery takes hold, it is important to continue assessing the role played by the stimulus package and other factors. These assessments can be a valuable guide to future policy makers in designing effective policy responses to economic downturns.

Capitalism in Crisis

CAPITALIST CRISIS

 

FALL-SPRING STUDY GROUP ON CAPITALIST CRISIS

Following our (just concluded) summer class, Howie Seligman and I (Loren Goldman) will again be doing a study group in the New York City area on Marxian theory and the current crisis. If you are interested, read on.

All applicants welcome.

TENTATIVE PLAN

Loren Goldner and Howie Seligman will be organizing a study group, starting in October,  for New York City-area people on Marx’s Capital (and other writings), linking Marx’s critique of political economy to the current crisis of the world capitalist system.

The group will meet twice a month (day to be determined, based on people’s availability) , through May-June of next year, in a convenient Manhattan location (to be determined).

Space will determine the number of participants, but we aim for between 10 and 25 participants, depending on interest.

If you wish to participate, please contact Loren Goldner asap at: lrgoldner@yahoo.com

Participants should be committed to regular attendance and to keeping up with 50-100 pages of reading per meeting. Barring a need to change venues, the class will be free of charge, except for occasional contributions for photocopy expenses, refreshments, etc.

Readings will consist of selections from Marx’s Capital, and articles (to be decided in consultation with the group) on contemporary developments.

The events of the past two years in particular have re-awakened a serious interest in both Marx’s critique of political economy and in “current events” in the world economy. Goldner and Seligman will cooperate in putting the crisis into a Marxian theoretical perspective (Goldner), as well as providing insight into the more technical side of world market meltdown (CDO’s, hedge funds, Ponzi schemes, etc.) (Seligman). The approach will not be merely “economic” (the Marxian CRITIQUE of political economy is not another variant of “economics”) but will elucidate the impact of the crisis on ordinary working people, on developing actions against capitalist austerity in the US and around the world, and on the solution: abolition of the capitalist mode of production.

If successful, the study group will continue through May-June 2010.

In order to put together a viable group, we would like interested people to write something brief (200-300 words) about their background, the level of their knowledge of Marx and of the world economy,  where they are coming from politically, and anything else they might consider relevant.

We are oriented above all to educating present and future activists, and will give such people priority in participation. We also hope to have a predominance of young people who are new, or relatively new, to Capital and Marxist theory generally, but that will of course be determined by the response.

Loren Goldner is a long-term independent writer and political activist. His work is available on the Break Their Haughty Power web site at: http://home.earthlink.net/~lrgoldner   He has spent much of the past four years in South Korea, involved in the workers’ movement there.

Howie Seligman recently taught a course on Taxation and Finance at the NEW SPACE in New York City. Here is the course description and a biography.

Taxation and Finance: Howard F. Seligman:

The course will begin with a brief tutorial on conventional accounting, bookkeeping and financial theory.  This will involve some hands on practical training, although the main emphasis will be on the history of the evolution of the theory from its original conception to the current methodologies. This will be followed by an examination of basic economics (price theory) and its use and abuse of (accounting/ finance) statistics. Again, the history of the theory from its roots in philosophy and the social sciences to its current state of being applied mathematical models will be scrutinized. We will then survey the U.S. Income Tax System beginning with its history and moving on to its current state (of change) today. The focus will be on the behavioral implications of changes in the tax code and alternate systems being used in other countries (and being proposed by Congress today.)

Applying the building blocks of finance and taxation, we will then look at the American financial markets and the culture of the corporation.  Particular attention will be paid to ‘Wall Street’ and the ‘entertainment industry’ due to their growing influence in our everyday lives via the ‘information society.’

Emphasis will be placed on economic and non-economic forces that drive the markets and facilitate manipulation by the use of abstract numerical concepts. Finally, the natural symbiosis of private industry and governments will be the subject of specific anecdotes and case studies.

No requirements other than potential enthusiasm/interest.
 
Howard F. Seligman has been a self employed financial and tax consultant since 1984. Howard’s practice specializes in the arts and entertainment fields, and he serves as the treasurer to more than fifteen arts and cultural organizations. Howard has taught accounting and finance at The Pratt Institute. His hobbies include playing Howie Solo, a singer and stand up comedian who can host your local fundraising event. He is currently researching a book on the history of the Jewish gangster in America.

You can also see Howie in action at: http://www.blip.tv

search HOWIE SOLO

Posted here by Glenn Rikowski

The Flow of Ideas: http://www.flowideas.co.uk

MySpace Profile: http://www.myspace.com/glennrikowski

“I don’t think that we anticipated how steep the decline would be,” Obama said in the 60 Minutes interview on CBS television.

The reason is simple – the Capital Investors knew when Obama got elected it sounded the death knell for Capitalism. 

We can do something about pollution without using Cap & Trade to cripple the fuel industry.

We can address health care without nationalizing health care – a move that would drastically lower the level of care for everyone.

In the present day Labor Unions only help themselves and drive up costs as opposed to helping workers.  But they do give very large campaign contributions to politicians in exchange for their votes.

Corporate BOD and not the GAO should be responsible for setting corporate incentive structure.  If you want to earn more the American way is to WORK FOR IT – don’t be envious of what someone with more drive and more ambition than you earns…they negotiated their compensation and therefore it is theirs – not yours.

So, Mr. President, if you are having a hard time understanding why it is that the economy has tanked to the level that it has — it’s because the Capital Investors knew that you would pursue the agenda and policies that you along with the democratically controlled Congress are, in fact, pursuing. – Melody Scalley

Want a clear, understandable explanation of the credit default swap market — the unregulated insurance/gambling market that brought our economy to the brink of disaster? The Anonymous Liberal has one with a great title, to boot: How AIG Destroyed the World.

Jon Stewart’s Jim Cramer Smackdown

Stewart, Cramer square off over market meltdown

Comedian Jon Stewart and financial commentator Jim Cramer squared off on Thursday night over the CNBC TV network’s reporting of Wall Street ahead of the market meltdown, and Cramer conceded he — and others — gave some bad advice.

“The financial news industry is not just guilty of a sin of omission but a sin of commission,” Stewart said. Full Story

Interesting to note the recent divergence in outperformance of Growth stocks to Value stocks.  The chart below is a year to date view, using the IWF (iShares Russell 1000 Growth Index) and IWD (iShares Russell 1000 Value Index) ETF’s as proxies for index performance.  Note that ETFs are not perfect proxies for index performance, but for this purpose are close enough.

I am beginning to wonder if we might finally be at the dawn of a growth cycle again.  Growth stocks which have underperformed value for a long time now, breaking historical trends, are emerging as cash rich defensive names today.  To date the IWF is outperforming the IWD by over 1200 basis points or over 12% where the IWF is down -7.61% versus -20.33% for the IWD.

iShares Russell 1000 Growth & Value Index ETFs (IWF & IWD) 2009 YTD

On a one year basis (Trailing Twelve Months), growth still leads value, but as you can tell from the chart below, outperformance of the IWF that began in May 2008 collapsed during the meltdown in November.

iShares Russell 1000 Growth & Value Index ETFs (IWF & IWD) TTM

The TTM out performance is attributable to performance since January 2009 as outlined in the 3 month and 6 month charts below.  Interesting to note that Value held up over growth as markets tumbled the most through September, October and November last year.

iShares Russell 1000 Growth & Value Index ETFs (IWF & IWD) 3 Month

iShares Russell 1000 Growth & Value Index ETFs (IWF & IWD) 6 Month

The charts below show longer term 5 year and 9 year trends.  The 9 year is just shy of nine years based on the inception of the ETFs themselves.

iShares Russell 1000 Growth & Value Index ETFs (IWF & IWD) 5 Year

iShares Russell 1000 Growth & Value Index ETFs (IWF & IWD) 9 Year

There are a number of factors that may be affecting this trend, and giving more support to growth companies in the years ahead.  1. Many Growth companies today are cash rich and light on debt, a powerful combination during a massive deleveraging.  2. With multiples in compression today’s markets offer growth names at very reasonable prices (GARP).  3. The Bush administration tax cuts on dividends promoted ownership of dividend paying stocks, which generally are Value companies.  The repeal or lapse of that tax legislation may reduce the appeal of dividend payers for a sustainable period. 4. Herding. Investment managers frustrated by the excess years of outperformance of Value stocks are drooling at the chance to call the Growth story right even if they are early.  It is hard to know how much of 2009’s out performance of Growth stocks has been a function of investment managers overweighting growth companies and bolstering their share prices. 5. Many growth companies are in the sectors poised to benefit from Obama’s infrastructure investments including technology, energy and healthcare.

Regardless of whether any of these reasons are accurate or not, or whether this trend will sustain itself, its is something to keep an eye on in the months ahead.  The kind of divergence we’ve seen so far in 2009 might be more than an aberration.  For more reading on a good discussion of Growth and Value try this recent Forbes article: Growth Vs. Value Re-Examined

Sources:
All charts from Google Finance

Growth Vs. Value Re-Examined
Emily Schmitt, Forbes.com, February 12, 2009

http://www.forbes.com/2009/02/12/growth-value-sector-intelligent-investing_0212_style.html

Nouriel Roubini discussing the market meltdown.  I’m less sanguine than he is about Neo-Keynesian stimulus spending.  US infrastructure needs re-building so badly, but I don’t think that is what is going to slow down the recession/mini-depression.  It may halt it somewhat (maybe), but it’s too long by the time Obama gets into office and before the projects will really get going.  Paulson & Crew have not surprisingly known what the f–k to do with the monies so far given in the bailouts.  Nor the  CEOs of said firms who have their heads up their back sides.

Even someone like Roubini or Nassim Taleb, as well as Peter Schiff & George Soros, correctly predicted the housing bubble collapse, which then exposed a much deeper bubble (a super-bubble in Soros’ terms) that was the entire solvency/credit trap that has taken over and the failure of 30 years of economic policy.  Black swans in Taleb’s language can not be predicted.  Both he and Roubini correctly predicted that said market was built on sand and would eventually collapse, but neither one of them got right precisely when it would happen (they both thought in 2003). And now after the fact, as Taleb would say, we create a story—a narrative fallacy in his words–that Bear Sterns was the presenting cause of the collapse.  But say Bear Sterns had been bailed out, maybe something else would have caused it, or rather simply exposed what was shoddy construction. Eventually a house built on shifting sands is going to fall down.  Predicting exactly when or why is not really the issue.  The issue is the poor choice of construction.

But looking back over my blog, I noticed these comments to a post of mine from my friend Daniel O’Connor.   He wrote the following on Jan 23rd of this year.  That’s January of 2008.   That’s as the sub-prime bubble is beginning to burst, but before bailouts, market crash, the “r” word, unemployment hitting big, the credit crunch really coming to the fore.  His predictions are beyond prescient.  I’ve highlighted the relevant portions on specific points of pinpoint accuracy in his predictions and added some bracketed comments for contextualization/translation:

The market economy is now very clearly in the midst of a deflationary-recessionary system dynamic wherein money-credit and productive output are both contracting. This is what the early stages of a depression look like in this unique new era. [ed: Credit Crunch, Global 1-2 yr Recession/Mini-Depression]. It may not come to pass as a full-blown deflationary-recession, but the basic system structure is in place and the dynamics are working in predictable ways.

The Feds already are and will continue to do everything possible to inflate money-credit and GDP over the next several years, fighting the market system’s natural drive to reduce asset prices (primarily housing, but also stocks [Stock Market Crash in Fall 2008] and soon enough commercial real estate) and write-off the associated debt [See bailouts of AIG, Citigroup, etc. via TARP, .

They did this with surprising effectiveness beginning in 2000, but at that time they had a balanced budget and a housing sector not yet maxed out in terms of debt and asset prices. Now they are in a desperate situation, far worse than the 2000 scenario and about all they have left in their conventional policy arsenal is to maintain massive budget deficits that are monetized by the Federal Reserve (i.e., the Fed buying new treasury securites to fund the deficits as a way to automatically create new money and thereby inflate GDP via excessive government spending). If they were to spend this extra $300B a year on domestic infrastructure and clean technology [Obama's Fiscal Infrastructure Stimulus], rather than weapons that are destroyed in their use to destroy other people’s capital structure, then the deficits might not be nearly so bad for the economy.

Beyond this, look to the Fed to start systematically buying Treasury securities on the open market [see Roubini's statement on this very point in the video above] as a way to lower long-term interest rates–very unconventional, though I suspect they are already doing this now. They are also likely buying stocks through their secret accounts on Wall Street in order to preclude a crash.

This is serious game time for these guys, so from their perspective another 4 years of deficits is not only not a problem, but a key part of the short-term solution to a bigger problem than they will ever admit publicly.

If I ever run for office (not gonna happen), then I’m asking Daniel to be my economics adviser.   If  you want to check out some more of his stuff, his website is here (Catallaxis).  He has some recent posts from the summer more fully fleshing out his views on Integral Theory of Praxis.  Some really brilliant stuff.  I hope to have some time to comment on some of it in the next few weeks.

]]> http://rightamerican.wordpress.com/2008/12/09/former-fannie-mae-freddie-mac-executives-ignored-warnings/ Tue, 09 Dec 2008 23:56:52 +0000 Ben http://rightamerican.wordpress.com/2008/12/09/former-fannie-mae-freddie-mac-executives-ignored-warnings/ http://rightamerican.wordpress.com/2008/12/08/a-watershed-moment/ Mon, 08 Dec 2008 23:00:54 +0000 Ben http://rightamerican.wordpress.com/2008/12/08/a-watershed-moment/