Mr. President: This budget won’t work.


I remain a fan of President Obama but it has been painful to watch him and congress move to adopt the most reckless example of massive and excessive government spending since the founding of our remarkable American experiment.    The founders knew that solutions spring not from large and cumbersome governments, but from the hard work and inspired innovation of a free and vibrant people.

The budget problem is another great example of how chickens tend to come home to roost, and expensively.    After inheriting a spectacular financial situation from the Clinton years, GW Bush managed to drive up the national debt by about $6,000,000,000,000,  doubling this critical measure of our future prosperity potential even as Republicans whined about how “tax and spend” liberalism was ruining the country.   Note also that only a small part of this was war spending and war is not a legitimate economic  excuse for long term deficit spending.     As they shifted our costs to the far future rather than balanced the bloated budgets  Republicans adopted a “don’t tax, just spend!” philosophy that  is now …. wait for it …. being used by Obama and the Democrats to speciously justify spending of  far-greater-than-biblical proportions.    Meanwhile, having lost almost all of their “fiscal responsibility” credibility over the past 8 years Republicans *very correct* concerns about the new budget are reaching a lot of deaf ears.

Republican Senator Judd Gregg, who turned down a major administration appointment probably due to these differences –  has been one of the most articulate critics.   He notes that the proposed budgets for the next decade will create a massive wall of debt – probably an insurmountable debt  – such that our children will have to choose between massive taxation levels or dangerous inflationary measures such as printing money to repay the huge sums we are borrowing now from other governments.

Senator Gregg is right on with this, and it will be tragic if he does not become a key architect of the solutions needed.

Democrats, who tend to choose optimism over realism, suggest that we’ll jump start the flailing economy and restore the prosperity train and live happily ever after.    It’s probably true that the current budget and high spending will help keep the economy from tanking.  Most economists agree we need a massive injection of Government money to stimulate things.     However I think few experts – and even fewer real people (who often have at least as good a power of prediction) would make the case that we aren’t heading for major trouble down the line.

Much of the solution is clear:

Stimulus should be smaller, more targeted, and eliminate the tens of billions in costly projects with dubious benefits.

Health Care cost reductions should be massive, aggressive, and all options must be kept on the table.   Europe and Canada have vastly superior models to our system with comparable care at half the cost.    Whining about the relatively small numbers of underserved patients isn’t convincing anybody anymore.   If free market enthusiasts can come close to Canada / Europe health costs then propose plans that do this NOW.     Otherwise shut up and adopt a single payer or nationalized health care system.    The “quality of care” arguments are largely bogus and designed to scare people into opposing cheaper solutions.   The current system is not sustainable and we have alternative cheaper and viable models.

Defense cost cuts should be massive and aggressive.   We’ve massively overspent on defense since WWII and both parties refuse to view this spending rationally, where ROI is measured in logical terms of achieving objectives.  Simply eliminating the military pork projects will cut *tens of billions*  We need to use our highly effective targeted strike capabilities, humanitarian assistance, and public relations to gain far more international support at a fraction of the cost.     Note to Republicans – stop your knee jerk nonsensical support of indefensibly massive defense spending.

Entitlements should be cut gradually but eventually massively and as soon as the economy shows clear signs of stability.    We’re living on the money of future workers, not our own, and if this does not stop soon it could be the greatest case of intergenerational theft of all time.     With respect to many entitlement programs we are all little Bernie Madoffs, pushing the Government to pay us from money they are borrowing from America’s children.
Note to Democrats:  stop your knee jerk nonsensical support of excessive entitlements.

These three measures would allow a balanced budget as soon as the economy stabilizes.   

We must end the era of  tribal thinking and “political finance” where the government – to please constituents and party hacks – keeps running things wrong and not in the long term best interests of the country.

Economy: Are we there yet? Yes, we are. The Jim Cramer $25,000 Challenge


Update:  Thursday saw a big DOW drop of about 300 where Friday was up a bit so I continue to think we are near the bottom unless we see some strong indications that the stimulus will fail.    I think traders are basically waiting for new details on the stimulus and economic plans and trading quickly as that information filters in.   I suppose the coming challenges with consumer debt may not be fully factored in yet but one would think they probably are and the new news will be along the lines of whether the stimulus is stimulating or not.     I understand consumer debt sits at 4.5 trillion as people lose their jobs and home values and thus ability to repay.   I am concerned that the stimulus is directed at bureaucracy rather than powerfully targeting lower and middle classes with massive jobs and debt relief and the upper class with innovation incentives, but I ain’t no economist.    Of course the economists don’t have much of a track record…either!

With the DOW up about 150 points today [Wed] at the close, and optimism flowing about how China’s Government will pump up their economy soon, it is very tempting to think the worst is now behind us. Tempting because it’s probably true, at least for the next several years. My view (as usual with the caveat that you are as likely to gain trading insights from me as from the worthless punditry on CNBC (Yes, I’m talking to YOU Jim Cramer and I’m happy to bet you $25,000 you can’t outperform me in stock picking over any future period you choose). Don’t get me wrong Jim – you are very *entertaining* and I’m sure a fun guy and I enjoy your ….BOOYA! Silly TV show.

I’m just saying that you just have no more insight into picking stocks than a deranged chimpanzee picking stocks by urinating on a copy of the Wall Street Journal. * * *

Pessimists and doomsayers are pointing to the great depression where the initial 1929 market dive was followed a few years later with the DOW all time low = 41, some 80% lower than the *day after the 1929 crash*. This model of market behavior suggests we are in for a lot more trouble, but I think conditions now are so different that we cannot use that history as much indication of what lies ahead. The most important difference in my view is that the Government now is much more prominent and economically powerful than it was in 1930s, and even more importantly our Government is about to inject more money into the system than at any time in human history – more money than anybody can reasonably imagine.

Despite the inane and irrelevant rantings of the Four buffoons of the Republican Apocalypse – Rush Limbaugh, Sarah Palin, Sean Hannity, and Joe the Plumber – the stimulus is very likely to at least have something of a positive short term effect on the economy, and the new role of Government as more of an economic babysitter than before is hardly sending us down some slippery socialistic slope from which we’ll never recover. In fact look for China to recover *first* from the recession for the very reason that when the going gets tough, China’s CapitalCommunist style economic system allows much faster and simpler implementation of the kinds of intervention that the Obama administration is struggling with now.

Thoughtful conservatives are suggesting there are likely better ways to stimulate the economy than pour hundreds of billions into state and federal government infrastructure projects and that’s certainly true, but we’re hearing very little about constructive alternatives to the contruction projects that will form the backbone of this initial stimulus.  Rather, Republicans are now so busy trying to tear down the stimulus and (absolutely moronically) blame Obama for the crisis as if his 40 days in power somehow trumps the past 8 years of fiscal mismanagement and massive government spending which itself was only a part of the current problems.    As I’ve noted before there is far too little attention on the single biggest group of culprits in the whole fiasco – everybody with a mortgage on their house who borrowed money, responsibly or not.   It was this flush of paper wealth and the lure of more that provided the fuel for the derivatives and banking excesses.     Many of us did not act irresponsibly or irrationally when we took advantage of the massive consumer lending boom with cheap and easy loans, but we also can’t claim that we have nothing to do with the problem just because we are not defaulting on the mortgages.    Sure I’m for punishing irresponsible people and businesses – that’s a major part of what keeps our system better than others –  but I also understand that I’m going to have to foot some of the bill for this mess even though I didn’t do anything wrong.

So, have we hit the bottom on the indexes?   I say *yes*.   We hit it yesterday and we now have more reasonable values for our fine American companies.    Will things soon bounce back to their former glory?    No way.  The recovery will be slow and I think slower than the optimistic numbers we heard from Obama’s team yesterday.    I’d guess it will take a decade or more before we see a DOW at 14000 again, with the caveat that we may see some spectacular, game changing innovation  (e.g. conscious computing, near-zero cost energy) that would change everything very fast, leaving our entire global economic infrastructure in the dust.   However I doubt we’ll see anything like that for many years.

*** Yes this is a real offer of a $25,000 wager subject to any legal restrictions that would restrict it. Money would be held by an escrow service of Jim Cramer’s choosing. Period would be picked by Jim Cramer. “Better performance” would be defined as a greater total return on the portfolio over the period without regard to fees or expenses.

Tracking TARP Bailout Money … not!


Nobody has nearly enough information to know with any degree of certainty if Bush’s massive 700 billion bailout and Obama’s approximately 800 billion dollar  stimulous packages are going to help or hurt us in the long term.  Clearly in the short term this will make the economy look better, but it will also leave us with all the unintended bailout consequences money can buy.   Big money means big unintended consequences and when you are talking trillions of dollars you are talking about Government spending unlike anything we have ever seen.

The New York Times has a good spreadsheet summary of who got the money, though I always hate it when charts use the smaller number “in millions” to reflect huge numbers.   e.g. on this chart the number is a million times greater than the number.

TARP Chart at NYT

Although the extravagance and fervor of CES 2009 made the economy look pretty good to me,  it was a huge contrast to  the barren corporate landscape in the rest of Las Vegas where commercial real estate is on hold, visitation is down, and you can begin to sense the trouble brewing throughout much of the economy there.   More significantly the broad numbers suggest we are firmly in the grips of recession and I think no responsible voices are suggesting things are going to spring back anytime soon.    In my view the markets are now waiting for Obama to take office.   If I had to try to call the shot here I think I’d predict we’ll something of  a “fake rebound” in the markets when Obama takes office and announces plans.   The high optimism will lead to higher prices but this will soon fade as more and more bad news pours in and millions more lose their jobs in 2009.    In my opinion the *best case scenario* in this economy is that we’ll have a bad 2009 and start to recover in 2010.    The *likely* scenario is that we’ll have a very bad 2009 and 2010 as the entire global economy shrinks, shredding the excess home values and company valuations of the past decade, and in 2011 or so we’ll start to stabilize.

However even though it appears the bailout money is not doing much so far I think the stimulous package will change the game very much in favor of public spending and companies that do infrastructure work.   We’ll see more bridge repair than at any time in history and a lot of spending on energy innovations, education, and health.   How this will filter into the broader economy nobody knows and the failure of the first $350,000,000,000 bailout to do much is not a positive sign.

Robert Rubin on Zakaria GPS


Today on Zakaria GPS we have Robert Rubin, Citibank and Wall Street megamoneymeister and Clinton’s Secretary of the Treasury.

Rubin is always one of the most impressive observers of the economy, and distinguished as one of the few Secty’s of treasury who presided over a Federal balanced budget.  He articulates complexity well and also avoids the partisan nonsense that clouds these debates.  For example he was complimentary of Paulson’s efforts

Main point was that we need to do more to address mortgages at home and bank level to stabilize things and that he wanted a *huge* stimulous package – probably not in the form of tax rebates because they don’t tend to hit economy fast enough and are often saved.

Rubin is Obama’s economic advisor (along with Volker, Buffett, Summers).  Rubin was very complimentary of Obama’s style and intellect, pointing out that at the meetings Obama is always quick to divorce the campaign considerations from the economic solutions, and to listen to those who agree and disagree.

The bad news is that Rubin sounded like he was not willing to go back to Washington and take the position of Secretary of the Treasury again even though many (certainly I) would like to see him there again.

Newsweek’s Zakaria on the Economy


Fareed Zakaria, one of the best observers of the global landscape, suggests that if we curb some of our bad borrowing and spending habits we may emerge better and stronger from the current fiscal crisis:

If we wanted a bigger house, a better TV or a faster car, and we didn’t actually have the money to pay for it, no problem. We put it on a credit card, took out a massive mortgage and financed our fantasies. As the fantasies grew, so did household debt, from $680 billion in 1974 to $14 trillion today. The total has doubled in just the past seven years.

I’m not as optimistic as Zakaria that after the current crisis ends we’ll return to the what appeared to be a vibrant economy because of the other issue he discusses – failing to address the herd of elephants in our finanacial room – a 10 Trillion and growing budget deficit with an annual deficit that continues to skyrocket after the disasterous spending recklessness of *every administration* since Reagan with the possible exception of Bill Clinton (when we did not borrow nearly as much as we had been, I think largely thanks to the huge increasee in Tax revenues that came from the positive investment climate.)

My take is that our economy has been challenged for some time, with prosperity manufactured to some extent by simply pushing expenses forward to our kids.    McCain’s call for a balanced budget in four years is admirable in this respect, and it is unfortunate that so few truly think that is realistic.    It is actually realistic but would require massive cuts in military spending- the sacred cow of fake conservatives who are (correctly) willing to slash entitlements but (stupidly) think that military money is spent wisely (news alert fake conservatives – it is NOT spent wisely and this is *totally* well documented). Not only have we been living on debt as individuals, but we’ve been living on debt as a society.   This is not sustainable for the long term, and we may be seeing the early signs of the massive challenge we’ll face if the world starts to lose faith in the US economy.

That won’t happen anytime soon, but unless we bring debt and spending into focus both individually and collectively it’s going to happen eventually. It’s easy to predict we won’t change our habits all that dramatically, but hopefully enough for a soft landing as we come down from our lofty heights as the world’s key economic and power player.

Fareed Zakaria in Newsweek

Sequoia’s Slide Show on the Economy


Sequoia’s Advice to startups has been the subject of speculation for the past few days, but now VentureBeat has posted the actual slide show from a recent major meeting where startups were told to prepare for some seriously bad economic stuff and a recession that could last for many, many years.

Sequoia Slide Show

———————–

I was particularly glad to see the slide noting that people have been using home equity as a “piggy bank”.

My current take on the huge Government actions trying resurrect the prosperity economy is subject to change faster than you can say “The Dow’s Down 500”.  However I would like to hear more talk about how the economy got too big for it’s britches and most of us, and certainly the country as a whole, have been living pretty large for no good reason, fueling both economic growth and personal living off of home equity that …. ain’t … here …. no …. more.     We’ll need to work harder and get less for awhile, and perhaps forever as the rest of the world catches up to our levels of prosperity.    Welcome to the new global economy.

Another factor I’m confident about is that the banks are going to act very opportunistically with the new sources of funding, though I’m not sure what form this will take.  Assume, for example, that you run a totally solvent bank and have managed risk appropriately.   Yet you know the feds are about to absorb disproportionate risks in order to get the macro economic juices flowing.    Your best play is to lay low for awhile, waiting for potential free money, lower risks, and most importantly saving up the benefits of your solvency so you can scoop up smaller banks and deals as they become available.    Although I assume there are some safeguards in place I think one of the Fed’s miscalculations right now is that the big bank players *want to play* when in fact the best of them *want to hang out and make a killing* as the insolvencies rip through the system and are removed at taxpayer expense.    This behavior by solvent banks *also* increases uncertainties because nobody currently knows who is good to go and who will be dead later in the month.   I *absolutely* agree with those calling for a massive increase in financial transparency throughout the banking sector – e.g.  requiring banks to place much more itemized information about assets and liabilities online for all to see.   This should be a condition of *doing business with the Federal Government*, which means every bank would be required to do it.   The initial effect would probably be a massive shift in resources toward the healthier banks but this is where the Government, again with total transparency, could balance things out to avoid potential catastrophic failures.

Hello UK, and welcome to the bail out club…


I’m not seeing enough about the 500 billion pound UK Bailout (that’s $865 Billion US) on US Financial news.

That’s more than our USA bail out despite the fact that our economy dwarfs that of the UK.  Probably a sign that here in the US we are in for massively more bail out spending before the financial bloodbath is over.

The scale of this measure suggests to me what the markets already seemed to know – the situation is worse than we’ve been told.

So, market activity remains jittery and unhappy even though we’ve now got a massive global bailout in progress with the global .5 rate cut combined with 700 billion here and 865 billion there and the large global rate cut.  Gee whiz, pretty soon this could add up to real money.

I’m uncertain about this but I think the only remaining certainty is uncertainty, and that’s … for sure!