Category Archives: Red Tape

Trump One Step Closer to Quitting


I believe Donald Trump will quit the Presidency of the United States. I forecasted Trump would win (see April 2016: Trump Will Eat Clinton Alive), and in that article last Spring I suggested that he would quit. He will quit due to the inability for politicians in Washington to be rational and negotiate. He will quit with acrimony and bolshiness. About the only thing that will prevent this situation from taking place is tax reform.

Let me first state that I think that Obamacare was the wrong tool for the job. It was a rushed, Ill-focused, partisan and socialist effort to undermine the best parts of America. Its namesake and his supporters suggested that the Affordible Care Act (ACA) it helps those that need most help (the uninsured), and it does (in some way) but at a system-wide cost that is unacceptable and unaffordable.

The free market is anything but that; regulation is like a strangling vine; prices remain untouched and high; big pharmaceutical remains unfettered; patient outcomes remain anathema to healthcare. This country continues to spend ever more on healthcare, more than any other developed nation per capita, and yet our outcomes and their improvement reman poor and lacking, even on a good day. Obamacare was the wrong tool for the job.

The bad news is the Republican approach to Obamacare has split its own party. Worse, the repeal and replacement was in their reach. Yet last week the chance for correction was thrown out.  

There were even votes against the Republican policy from folks like Ron Paul who didn’t want the ‘Obamacare Lite’ but who wanted a full repeal. So he withheld his support. The Freedom Caucus, apparent fiscal hawks, had a chance to budget-fence Medicaid, yet they withdrew support in the mad hope of a perfect policy sometime in the future.  

This is madness. This is political suicide. The Democrats have been handed a free ticket and Trump must be mad. This is Washington at its worst. There will likely never be a perfect policy or time enough to develop it.

Now the movement shifts to tax reform. If an overhaul is not executed Trump will feel like quitting and he may yet do so. The Republicans need to realize that they have a rare opportunity but only if they unite. If they play party politics and splinter again, change will not be forthcoming. The Democrats, not in power of any sort, will be in power in all but name.

Obama won on the promise of change and socialists alike all rammed through their left-leaning, redistributive, anti-business and anti-free market policies. We are slowly bleeding to death now under the weight of ignorance and self feeling. Our polices cannot be paid for without printing money since we are all too happy to free-ride the masses and garrote the rest. The rest who are free and employed folks who work for a living, who want to improve their lot with their own blood, sweat and tears, not from hand-outs from Uncle Sam.

Trump also won on an argument for change. Alas the Republicans have forgotten how to govern.    


US Government Sets Up Next Financial Crisis & Brexit Not the Risk at All

Two articles came accross my desk this week – one caused consternation on my part and the other seemed to offer a sanity check.  The former concerned the US economy and specifically how there are signs that consumers, and lenders, are returning to the same behavior that led to the financial crisis at the source or our current economic challenges.  The latter concerned the hype and over blown concern with Brexit and its impact on Britain’s economy.

In the US print editions of the Wall Stree Journal (Wednesday January 11th) there was an article titled, “New Loans, Same Old Dangers“.  This front page article described a government-led initiative (Property Assessed Clean Energy) that provides subsidies loans to encourage homeowners to buy energy saving devices.  The article gives an example of a homeowner who is not able to afford the loan is still encouraged to take it out.  As is common practice this loan is then sliced up with other loans and sold on as a bond – what is called securitization in the financial industry.  This is analogous to the risky mortgage loans offered, and taken up by people who should have known better, and sold on to governments in Iceland as “AAA” opportunities.

The market is very small – the article suggests around $3.4bn of loans have been made so far – but the model is just damning.  FIrst you have big government trying to force its policies on a free market.  With the housing issues that triggered the financial crisis this was Government demanding ever greater home ownership among poor people and those that could not afford it.  Second you have the lowering of standard for the setting up of loans.  This is identical to what happened with dubious sales efforts of mortgage brokers during the 1990’s and early 2000s.  Finally you have the build up of risky loans and owners of the loans not knowing where the real risk is.

The popular uprising that has brought Trump to the White House would do well to heed these stories.  After all people will be people and when offered a bad apple that looks and smells sweet, many will take it.  Perhaps we should not fault those that do – or should we expect a stronger moral aptitude?  Either way we need to get big government out of the way.  It should not seek to foist its social or political wants on you and me – we should be free to do what we want, how we want, when we want, as long as it does not harm our fellow citizen.  Innovation and opportunity will drive improvement in the energy sector.  And perhaps tax credits would be a safer way to encourage small changes in behavior that do not create risky loans.  

The other article, a commentary piece in the US print edition of the Financial Times (Thursday Janary 12th) was titled, “The City has nothing to fear from Brexit“.  It was penned by Stanislas Yassukovich who is a former chief executive officer of European Banking Group.  The article is a breath of fresh air since it refutes many of the risks and issues that most other “specialists” report in the press.  For example we have heard a lot about “passporting” – the idea that a financial institution authorized to trade in one country of the EU can freely trade in another country.  It turns out that non-member states can use this capability quite easily – so it’s not even needed as a negotiation.  The article goes further.

Passporting was a means to try to level set the complexities of rules across what was meant to be a single market.  It turns out that even with passporting there remains complex and different rules that still need to accommodated when trading across the member-states.  As such, “core retail financial activities – residential mortgages, deposit and savings products and so on – remain almost entirely national, and highly protected.”   This whole think stinks to me.  

The recent news that PM Thresa May fired her senior most civil servant who worke with the EU was greeted in the press as bad news.  It seems he kept repeating to the PM that it was not going to be possible to complete all negotiations in time before the two year window closed for leaving the EU.  Why is this?  He may have had a practical view on things but he certainly did not have a positive view on what is possible.  I think we need clean out the cupboard and get a fresh new look at everything.  Good for PM May to do so.  If the author of this article is right, there is little we should fear from Brexit.   

When Connecting the Dots Disagrees with the Data: Something Fishy in the Housing Market.

My original title for this blog was going to be just, “Something Fishy in the Housing Market”. But I changed the title once I realize that this blog was more about how conclusions, based on data change, once triangulation of that data is sustained.
First the good news from the Global Dailty Economic News alert from the World Bank’s Economic Prospects Group October 26, 2016:  Advanced Economies, US:

“New U.S. single-family home sales rose 3.1 percent (m/m, saar) to 593,000 in September, from downwardly revised 8.6 percent decline to 575,000 sales in August, and above the market expectations of a 1 percent decline. On a yearly basis, new home sales jumped 29.8 percent in September, according to the Commerce Department. Demand for new homes remains strong, reflecting employment growth, wage gains, positive demographics and mortgage rates near all-time lows.”

So it seems good news. The economy is functioning well, yes? 

Now the bad news Bloomberg July 28, 2016: Homeownership Rate in the U.S. Drops to Lowest Since 1965.  

The U.S. homeownership rate fell to the lowest in more than 50 years as rising prices put buying out of reach for many renters.

The share of Americans who own their homes was 62.9 percent in the second quarter, the lowest since 1965, according to a Census Bureau report Thursday. It was the second straight quarterly decrease, down from 63.5 percent in the previous three months.

Now the analysis that emerges when you overlay the two data points.

Per the World Bank, it seems that demand for housing is up. But per Bloomberg, the new housing is not actually housing that is sold. It so happens that many new (and old) houses are being acquired – that’s true. But who is buying them? It turns out, according to Bloomberg, that large swathes of the housing sector are being snapped up by cash rich organizations that are then renting the property. 

Actual home ownership is down – which is caused by a number of factors. One is that many cannot afford the first-time costs, either through lack of a job, low wages, or a bad credit score. And as more and more housing is purchased and turned into rental property, the pricing for those houses increasing, making the challenge harder.

So the increased demand for new housing is not a sign of increased wages and strong employment, as the World Bank suggests. It’s very likely the investor class, flush with cash from quantitive easing and cheap loans (due to historic low interest rates), are snapping up property and then renting them.

The two articles, taken separately, lead to one conclusion. But when you link the two, a new analysis comes forth. What will happen next? I can foresee several items.

We should now expect socially progressive typesto suggest that the market is working against the middle-class, and that government should force mortgage firms to lower standards and let those with weaker credit scores and low paying jobs to obtain loans for these new houses. The problem is with QE and near-zero interest rates. It is ruining numerous markets and distorting all manner of normal investor practices, such as capital investment for future productivity and now the housing market. 

There is a possible silver lining to all this rental action going on. A third factor is dragging the US economic growth down. It is the reduction in the American worker’s willingness to move to where the jobs are:

“Census Bureau data show that the annual rate at which people relocated to a different state — which is often an indicator of job changes — fell to between 1.4% and 1.7% of the overall population since the Great Recession. That contrasts to interstate migration rates at or close to 3% from 1947 through the middle of the last decade, with only a few exceptions.”  LA Times, June, 2016

If more and more people set up shop in a rental property, it might lead to an increased ability to move. It is possible this may happen and this should help the labor market and the economy – that is assuming there are jobs worth moving for.

But there is also a cloud related to the drop in home ownership. It will likely lead to more instability in the nuclear family, the so called bedrock of modern society. The nuclear family has been under attack since the 60’s as wave after wave of progressives have taken up power and decided they know what’s best for us, even more than we do ourselves. The declines in home ownership will likely undermine the nuclear family again. But we cannot afford, we must not, adjust policy to accommodate the need to encourage the proportion to middle class. We should focus on opportunity and growth instead and let the invisible hand do its work.

The Myth of the Rational Voter, and the Honest Economist

There is an excellent “Opinion” piece in today’s US print edition of the Wall Street Journal.  It is titled, “A Vote for Trump Is a Vote for Growth“.  It is written by Wilbur Ross, a private equity investor, and Peter Navarro, a business professor at the University of California, Irvine.  Both are senior policy advisors to the Trump Campain. So we can assume that they are in Trumps’ camp.  However, the article is not political per se and actually discusses the economic differences between Trump and Clinton.

As we have all heard via the initially exciting, then later boring, presidential debates, Trump is looking to lower taxes, cut regulation, and overall encourage enterprise.  Clinton wants to raise taxes (on the “rich”), increase regulation, and otherwise beat out of us all the desire and even natural need for enterprise.  Yet Clinton told us all that “economists have looked at both plans and Trump’s adds 3m unemployed and Clinton’s plan adds 10m new jobs.  For all the rhetoric, which is the right answer?  Does increasing taxes and regulation create more growth?  No, never in a million Sunday’s.  So why are these economists all in favor of Clinton’s plan?

First we have to ignore the temptation that such economists are in the Clinton camp and are therefore inclined to support the status quo.  We gave the same credit to Messers Ross and Navarro so we should do the same for the “other side”.  Second, perhaps there is some truth in data that we are missing?  And this is where the article comes in.  The authors suggest, with some credibility and some additional data, that the scope of the analysis is the key.  For example, if you only look at tax revenue as an indicator of fitness, a simple tax reduction will reduce receipts, and a tax increase will lead to an increase in receipts.  At least that’s the theory.  The scope of this point is the issue – it only looks at tax receipts.  What happens to the money? Where is it invested?  What returns does it get?  What kind of multiplier is involved?

Tax cuts tend to create, over the long term, increased tax receipts.  This is somewhat counter intuitive. It takes place since with more money in our pockets and business balance sheets, all other things being equal we tend to spend more.  Private industries multiplier effect, the knock-on spend that follows from an initial saving or investment, tends to be larger than that seen in the public sector’ not least since public sector tends to “pick winners” and investment based on ideology and policy, whereas the private sectors invests based on performance criteria and is more objective. 

Tax raises tends to reduce tax receipts over the long haul.  Again, this might seem counter intuitive.  As tax rates increase we are all motivated less to work harder and seek that promotion since more of what we earn will be taken by Uncle Sam (or Auntie Hilary). As such the marginal volume of work as a result of the tax hike tends to fall.  Overall then the tax receipts fall. 

So the key to the argument over which plan – Clinton’s or Trump’s – will actually grow the economy and lead to more jobs – depends on the scope of the analysis.  Some economists, noted in the article, take a long view and they argue convincingly that Trump’s plan is economically viable, and Clinton’s is not.  From experience in the UK where the same diametrically opposed plans have been promoted and tried, over and over, it is self evident that Trump’s plan is better.  Yet the mass population does not understand the details, and worse it is being fed a diatribe by so-called “experts”.

Alas the innocent vote is being hood winked.  And worse, the real experts, such as the Federal Researve, are complicit in this issue.  I can’t include “Treasurery” here as that is political role, not an economic or independent role.  If only we couldn’t the facts out; and if only we can get Trump to be a little more humane.

Note to Federal Reserve on Regulations: Step Down

News September 23rd in the US print edition of the Wall Street Journal reinforces how our mad love of regulation will ruin us. In “Fed to Curb Commodity Trading“, we hear of proposed rules that would impose massive capital charges in banks that trade in commodities. The problem being solved is that banks take risks and under excessive condition (i.e. black swan events) such financial firms might put the financial system at risk.

The problem here is that two forces are pitted against each other:

  • The need for risk taking which promises high returns drives innovation and productivity
  • The desire to reduce risk in order to preserve stability and avoid huge loss

Risk involved loss, and not all losses are bad. In fact some would say loss is good (i.e. creative destruction). The current government seems bent on destroying our ability to grow our economy in the name of such regulations. They say these rules are for our own benefit: the result being slower growth, increased inequality, lower wages, and now greater threats from afar.

If you add to this the inexorable growth in government spending, you can see that capitalism is being throttled and socialism is alive and well. The challenge is that no politician today will run on a ticket stating what needs to be done: they would not be reelected.  But I wonder: would the electorate reward a politician that shuts down half the government, for good?  

Against the Gods: Obamacare Comes Up Short

Against the Gods: The Remarkable story of Risk is a classic. It seems the Democrat, President Obama did not read it. Greg Ip’s article in today’s US print edition of the Wall Street Journal, titled “Obama Health Law’s Instability Is Intrinsic” does a nice job exposing the fallacy of the Affordable Care Act. And it has nothing to do with the social need to offer healthcare to those that can’t afford it.

Mr. Ip shows clearly how the ACA distorts the insurance market and limits how insurers price risk. Insurers are no longer allowed to differentiate as much across different risk groups. For example, if you have a teenager at home your motor vehicle insurance goes up; if you are elderly your health care risks tend to be higher so your insurance goes up. They still do differentiate but now are limited in the scale that used to work and fund the market. Now those limits are forcing risk premiums to be neutralized and the result is two fold:

  • The healthy are paying more than their risks warrant 
  • The sick are flocking to the insurance system (though mainly due to the use of pre-existing conditions being waived)

The unintended consequences are that the healthy are now leaving the system or downgrading health coverage. And costs are going up as the number of healthy to non- healthy members declines.  Insurance companies have no choice but to leave the system, which just reinforces the cycle.  We don’t need more policy and red tape to tinker with the system.  We need a rethink.  And it’s not that hard.

Insurance is broken. The market has been massively distorted. The problem is Obamacare. It was a policy focused on breaking the market and forcing government intervention. It created increased governmental costs, and so larger government. The system is broken.

Knowing what we now know, and if we had listened to some of the economists back then, we should never have passed Obamacare. We should have done two other things:

  1. Focused on changing how established programs like Medicare and Medicaid reward patient wellness, rather than focus on workload.  This would have helped address the big issue of costs in healthcare indirectly by focusing on the most important outcome.  Too many politicians want to create new rules and overheard to control costs directly (which is another fallacy – think Freakonomics).
  2. Establish a funded healthcare safety net for those that cannot afford private insurance through taxation and the money since spent on red tape and healthcare administration. This could even have been a federally devolved system funding a state-level safety net.  It did not need anything as large, complex, costly or disruptive as Obamacare.

Alas we have another example for how capitalism has been abused, under the guise of what some might call progressive and socialist policy. Again it is not capitalism that is broken; it is the ideas of the people that get into a position of power on the backs of The Myth of the Rational Voter (another classic well worth reading).

Interest Rates are a spent force – and Uncreative Destruction

The US weekend print edition of the Financial Times carried an interesting Comment by Eric Lonergan, macro fund manager at M&G investments. His piece, “Interest rates are a spent economic force,” suggests that since the consumer and industry have not responded to low and now negative interest rates as expected by central banks, the relationship assumed by bankers and economists between spending and interest rates is kaput. I disagree.

I agree that consumers and private industry have not responded as they have in the past (and increased spending as they should) with low interest rates. But what Mr. Lonergan is missing in his article is the role the environment plays in this relationship. It is not that the relationship between interest rates and spending is broken, it is more likely that there are other factors that were not present in the past that suppress the relationship we thought was pure.

Worryingly though some of the behaviors have been talked about for some time and worse they are quite logical. As such one wonders about the assumptions our economists made all along. For example, lowering interest rates should encourage private industry to increase capital investment. This long-established assumption pre-supposes that firms have capital investments lined up ready to go. This is where the current economic conditions are quite different to what has gone before.

It seems CEO’s do not, as a rule, go looking for new capital acquisitions when interest rates are lowered; or even at rock bottom levels. If you think about it the reality is that CEOs and their boards develop business strategies. These are more likely based 0n the state of the business, their competitors and the clients they serve. Interest rates primarily impact the aspect of the strategy focused on sourcing of funds to pay for that strategy’ funding is not a business strategy per se. Firms have as  many effective shovel-ready capital investments than public sector agencies had with their crisis funds.

So why are not a plethora of capital investment strategies today just waiting to be funded?  It is believed that there are a range of reasons and a number of them reinforce each other.

  • Regulation: many forms, banks are a good example as they are in the business of risk management, are subject to huge increases in red tape; more and unpredictable levels are coming as some rules have been passed without the details drafted: e.g. Dodd-Frank
  • Political instability: The very real complexity that derives from unstable, extreme or radical political leadership is rife. The US, UK, Western and southern Eastern Europe, and the Middle East are all subject to huge disruptions
  • Quantitive easing: another policy gone array has pumped millions of dollars into, it turns out, into the investor class. As such inequality has worsened and a stock market bubble has formed. Flush with cash, and this is where low interest rates help, CEOs and boards are approving share buy-backs galore. This ‘improves’ earnings per share (EPS) without doing anything material to the business. This negates the need for a more risky long term investment approach to meeting EPS growth targets.  M&A is running at all time highs too – and much of this activity has little to do with natural competitive forces and more to do with cheep money.  This the effort post M&A ends up being much less productive (i.e. uncreativedestruction). 

Firms are thus leveraging logically what has been offered them. Now central banks have egg on their face while business leaders have a wry smile.

The Unintended Consequences of Low Interest Rates

Since capital investments are depressed and have been for some, the long term impact is that productivity will be hampered for years to come. The flat or even declining productivity is a sign. Is quite common in developed economies. The problem is that this is not a quick fix and the harm is being baked into our systems and practices.

Our economy is walking along as in a stupor and we can’t see forward clearly enough. We have to eliminate the over burdening red tape; we need political stability and a simple, private sector friendly and small government minded leadership. We need central banks to sell off their balance sheet assets, reduce QE, and raise interest rates in order for firms to return to making rational investment decisions.

If they do not, the hole will only get bigger and the rope needed to get out of it even longer.