Who Shredded My Cheese?

It is the “Game” and we are all players.

Once there was a company in Northeast Ohio that made vacuum cleaners.  Time after time the salary negotiations for the workers went something like this:

The Union:  “Give us more money and benefits or else!"

The Company:  “Or else, what?”

The Union: “Or else we will go on strike and you will have no vacuum cleaners to sell!

The Company: “Okay, here you go.”

The union’s goal was to maximize the salary and benefits for its members.  The company played along and paid higher wages and benefits because it could raise prices and still make profits. 

But one day the salary negotiations went like this:

The Union:  “Give us more money and benefits or else!”

The Company:  “Or else, what?”

The Union: “Or else we will go on strike and you will have no vacuum cleaners to sell!”

The Company:  Sorry, you are not getting an increase.  In fact, this time you aren’t getting anything.  The Mexico plant can now make and assemble quality vacuum cleaners so we are expanding capacity there and closing this plant.

The Union:  “What?  Wait, why would you do that?  Okay, okay, let’s negotiate.” 

The Company:  “There is really nothing to negotiate.  You drove your compensation up so much over the years that it is three times higher than the Mexicans.  We can’t raise prices anymore because of increased competition.”

The Union: “But this is not fair.  You cannot do this!”

The Company:  “Oh yes we can.  Here we go. Adios.”

The company closed the plant and over a thousand workers lost their jobs.  Most of the people worked in assembly.  Many of them had worked for the company for over 20 years.

Unfortunately the skill these people had developed over the years was “vacuum cleaner assembly”.  In the new world economy, this is not a very valuable skill because Mexicans can assemble vacuum cleaners, Guatemalans can do it, and of course the Chinese. 

In this new world economy, you are not competing for work with the people in your city.  You are competing with everyone in the world.  It therefore is very important to have or be developing skills that are of increasing value in the world economy.

The people who assembled the vacuum cleaners were at one time winning the Game.  They had a marketable skill, but then the Game changed.  Somebody didn’t just move their cheese, they ground it up and scattered it around the world.

The “world economy” has had a significant impact on personal incomes in this country.  If you have a competitive skill, your value rises.  If you don’t, your value, and income, falls.  Even if you are not competing directly with foreign workers, you may be competing for domestic jobs with workers who have been displaced by foreign labor.    This means there is a surplus of workers for the “lower skill” positions and this drives salaries down.  As some workers rise up from the center and even more workers get pushed down from the center, the “middle class” shrinks.  Nobody caused this to happen, it’s the Game that changed and these are the results. 

Two weeks ago I said I supported the Occupy Wall Street protests because of legitimate outrage over unethical behavior of banks and financial firms.  However since then, OWS has taken a distinct “left-turn” and the focus has been on “income inequity”.  If this is now the rallying cry, it is no surprise the movement is producing more violence, more crime and basically more anarchy.

In a free-market economy there will always be income inequity.  The people who are risk takers, entrepreneurs and have exceptional skills will always be able to make more money than your average manual worker. The problem is that winning the Game has become tougher because the competition got larger, worldwide larger. Camping in the street and complaining about the Game may make you feel good, but it does nothing to change the rules of the Game, or to help you win it.  To win today, you have to work harder and the protesters don’t seem to want to do that.

And you may complain that the Game isn’t fair.  But guess what, few things in life are fair.  Today a baby will be born in Bangladesh and may not survive the week.  Another baby will be born in the Hamptons and will be wealthy his entire life.  The Game is not fair and sorry comrade, you cannot make it fair.  Karl Marx thought you could, but the reality is, that you can’t.

It doesn’t make sense to tax the successful people excessively and give the money to the least successful.  That would be punishing, not rewarding success.  In addition, the manager of this redistribution of wealth is Big Government, which means most of the new tax money will disappear down a rat hole.

However, our society must determine how much support the people at the top of the Game need to contribute to provide basic life services to the people that have been squeezed by the Game.  And due to changes in the Game caused by the world economy, they probably need to contribute more than they do now.  And you cannot ignore this issue.  Remember, the revolutions of the “Arab Spring” were all economic in nature and were a result of the people at the top hoarding too much of the wealth.  We must figure out a way to make the "new" Game work for everyone, but the solutions will not be easy.

Interesting Side Note:  The closed vacuum cleaner factory mentioned above was remodeled and is now used for light production and assembly work for several different companies.  A new company just rented space in the building to assemble, get this --- vacuum cleaners.  The product was previously assembled in China, but was redesigned to make assembly much easier.  This change made domestic assembly cost competitive so the vacuum cleaner will now be assembled here.  The jobs pay much less that the old jobs, but I would make the argument that the new jobs are paying the competitive wage for that skill, just as the old jobs paid the competitive wage at the time.    

Occupy This Thought

When there are people protesting in the street, something is wrong.

Last year people took to streets to protest the expansion of Big Government. Big Government growth had been a problem for years, but the increased spending and governmental intrusion of the new healthcare plan was enough to push people over the edge.

This protest became know as the Tea Party Movement (it’s a movement, not a political party!). The movement was very effective, working through the political system in stopping (maybe just slowing) the growth of Big Government and changing the attitude and actions of many politicians. It also raised awareness of the issue in the general population.

Now Occupy Wall Street has caused many people to protest what I will refer to as Big Money. While it is easy to criticize and any find reasons to discredit many facets of this movement, I repeat:

When there are people protesting in the street, something is wrong.

At first I thought of these people as misguided hippies who were acting very stupidly. Now no one dislikes hippies more than me (except Eric Cartman), but the protesters do have some legitimate concerns even if they have problems communicating them.

It took awhile to figure out, but the issues driving the protests are: The lack of accountability of banks/financial firms for causing the housing market/financial system collapse, the cozy relationship between Big Money and Big Government, and the growing inequality between the “rich and poor”. The first two issues are very valid. The third raises some complicated factors which I plan to address in a future post.

The main issue is that Big Money made billions promoting the use and abuse of sub-prime mortgages. It also used derivatives, insurance abuses and anything it could to exploit the situation. Corporate profits are good, corporate greed is bad. Remember greed is a sin, one of the seven “big ones” by the way. Sometimes profit and greed are divided by a thin, gray, line, but in this case Big Money went way over the line.

Sin always has a cost. In this case because of Big Money greed, millions of people lost their jobs, millions more are underemployed, many college graduates are working at Mc Donald’s and many people have lost their houses. And millions of unemployed people are still suffering from the sins of Big Money.

Taking in one step further, from lower wages and benefits, lower home values, lower stock values, higher taxes, etc., it is difficult to find someone who has not been negatively impacted by the Great Recession.

And what is the punishment for Big Money for being so irresponsible, for being so greedy? Not much. No one has gone to jail for their role in this fiasco. Remember that Bernie Madoff and the other Ponzi pals did not do anything to cause the financial crisis; their crimes were merely exposed by it. They were the super-greedy, so their penalties were either jail, or in one case suicide. Sometimes the wages of sin are indeed deadly.

Sure, some corporate CEO’s lost their jobs. They had to take their million dollar separation settlements and go sit idly by the pool. Ouch! That’ll teach ‘em.

So the banks took all these great financial risks. The banks raked in enormous profits. The executives all collected huge bonuses. And then it all fell apart and we all had to pay for it all through blood, sweat, tears and bailouts. But the bankers got to keep their big bonuses. It makes you so mad, so mad, that you just want to run out in the street and well, scream. Which I guess is the whole point.

This brings us to the friendly relationship between Big Money and Big Government. Big Government was way too willing to bailout Big Money and become its savior by paying for Big Money’s sins. Big Government was supposed to be watching Big Money, but it clearly saw what was happening and looked the other way.

Yes, this time Big Money was making so much big money that it had enough loot to buy off both the Democrats as well as the Republicans. We expect Big Money to buy off the Republicans and for the Democrats to serve as the watch dog. This time the watch dog had a big bone stuck in its mouth and did not bark.

I don’t know what the penalty should be for the people who caused the financial crisis at this point. The Democrats are now trying to punish Big Money for its actions, but that is resulting in the industry (even the banks that were “sinless”) having problems functioning effectively. And we need the financial system to heal and to be able to function well to get us out of this mess.

And then we read that not enough has been done to safeguard the system (still too big to fail!). More important than anything, laws should be written to ensure that this never, ever, comes close to happening again. Please use some common sense and just fix it! These guys were stealing cookies from the cookie jar, got caught, but received no penalty from grandma for doing so. What are the chances they will go for the cookies again since there were no consequences last time? We must make sure that grandma puts the cookies on the top self where Big Money can’t get them (joke to hockey fans, eh).

There are serious problems in how the Occupy Wall Street protesters are behaving. However peaceful, lawful, protests are protected by the First Amendment. You may disagree with their methods, their politics, etc, but on substance, in the words of that great philosopher M.C. Hammer: “Too legit, too legit to quit”

The Scariest Monster This Halloween

Mad political and dismal scientists worked behind closed doors in a fervent rush to create it. We were told we had to commit to the creation before we could see it. Now the work is finished and it is apparent that instead of formulating something good, they have created a very scary monster. This monster, Frankenturd, threatens to cause all sorts of terror and pandemonium.

Of course I am talking about the Patient Protection and Affordable Care Act (PPACA) – the Healthcare Bill. I am not going to refer to it by its more popular name because I want to keep the politics out of it. Nancy Pelosi said that we would have to pass this bill to find out what was really in it. This is similar to buying a mystery gift bag, but in this case when we opened the bag what we found is a turd.

It is an ugly, terrifying, monster, of a bill. The more we see of it , the uglier it becomes. The closer it gets to us, the more it smells.

Because many people have much political capital invested in the PPACA, they still try to convince us (and themselves) that it really isn’t that bad. But that doesn’t change the fact that it is still a turd. Yes it’s a turd, but it’s their turd.

Almost every week some new analysis of a provision of the PPACA finds something that is either unworkable, very expensive, or will wreak havoc on the current system. It is rumored that the authors of the bill wrote the provisions to be excessive because they expected them to be reduced in the final negotiations. Because the bill was rushed through, there were no changes. It just shot through untouched. In addition, there are some errors in the bill that have created bad loopholes. If people would have actually had time to read the bill (all 2,409 pages worth), these would have been corrected.

I don’t think anyone read (or understood) the entire bill before it was passed. And now we have some politicians that are screaming in horror because they voted to create a turd. A turd so hideous, so destructive, and so odorous.

This Frankenturd is so bad that two weeks ago they had to remove one of the smelliest parts. The CLASS program was supposed to have healthy young workers plow hundreds of dollars per month into a fund that would eventually pay nursing home bills for sick, old, people. This had absolutely no chance of working, unless of course you assigned Bernie Madoff to run the program.

The reason it made it into the PPACA to begin with is that it provided an accounting gimmick that made the bill appear more financially positive. They would collect all these great contributions ($70 billion worth) from the healthy, young people in the first five years, but not pay anything out in benefits. In Washington accounting speak that equals a $70 billion savings! Ba Ching! There are several more of these types of financial gimmicks in the bill.

Now that CLASS (what a classy name for a piece of turd) has been taken out, I do think that the true cost of PPACA should be recalculated. This should not be too difficult or costly. Step one: Take the existing number. Step two: subtract the $70 billion.

Secretary of Health and Human Services Kathleen Sebelius had to explain why CLASS was being stopped. I feel sorry for her every time she has to defend the PPACA. Her job has been reduced to a turd salesperson. She basically is married to the PPACA. Yes, she has become the bride of Frankenturd. I hope she showers after every press conference.

Of course all the Republican presidential candidates have promised to kill Frankenturd. But this is not good enough. Everyone knows this turd must be flushed. Even its creators understand it can’t live in its present form, but they don’t have the heart to kill it, after all it is their turd baby.

I do think the candidates need to tell us what plan they would come up with to improve the healthcare situation. The problems still remain: High costs, lack of coverage, pre-existing conditions, Medicare/Medicaid reform. These problems need solutions now.

Who would have imagined that we would need protection from something called the Patient Protection and Affordable Care Act? And who would have ever thought that tax payers can’t really afford it either? Sounds like a “1984” double play to me.

So far we have only gotten a whiff of what the PPACA will truly do. Unfortunately Frankenturd is the scariest thing you will encounter this Halloween. And no, that isn’t a Tootsie Roll in your beggar’s sack.

Look Out Elizabeth, Here Comes the Small One!

Recently ECRI (Economic Cycle Research Institute) announced that the U.S. economy was soon going into recession. This is a huge prediction. ECRI has the best business cycle model in the world. They are very accurate in predicting economic downturns. This negative forecast is supported by several other analysts citing various economic indicators that are signaling an imminent recession.

So this means the economy is definitely headed for recession, right? Not so fast “bear-boy”. There are other indicators that should be much more negative now if we are headed for a dip. And most importantly, the greatest investor in the world, Warren Buffet, says we are definitely not going into recession.

ECRI says definitely yes and Buffet says adamantly no. This is an economic smack down of epic proportion. The best model versus the best mind --- It’s on!

This is the mother of all mixed signals. To gain perspective it is important to remember how we got to this point. There was significant damage to the financial structure and credit markets. The housing industry suffered severe calamity. Layoffs spiked and the economic collapse created a structural unemployment problem. Because of all these problems and the severity of the recession, the recovery was expected to be long and slow.

We are getting exactly the recovery that was expected and the recovery that we deserve. This isn’t good enough for many commentators and news outlets that report a steady stream of negative economic news. The problem is that recessions have a psychological aspect. If you constantly tell people that the economy could go into recession, they stop spending money and it results in a recession. Consumer confidence numbers right now are terrible. So if we do go into recession, the negative atmosphere is probably was a contributing factor.

As I have previously stated, our slow recovery was further hurt by bad weather (snow, rain, hurricanes and tsunamis), bad gas (high prices), world uncertainty (the Arab Spring) and my big, fat, Greek default (possible). And we are being guided through the most tenuous economic situation in over 70 years by a president with no business experience, no business acumen and no business skills. Worse yet, he is either very stubborn or a slow learner (you make that call).

The recent stock market correction appears to be a payback for the extraordinary actions taken to stabilize the economy in 2008-2009. Most models (including the Model T) indicated the stock market should have gone lower than it did. While the magnitude of this correction was unexpected, the stock market dip is not a big concern. The Model T indicates that the stock market will be back to its July 2011 peak in Q3 of 2012 – a long, slow, climb.

So which of the economic titans is going to be correct? I have stated in previous posts how this unique economic situation, with the extreme actions of the Fed, has caused usually reliable indicators to be wrong. Could this be happening to the stellar model of ECRI? We will soon find out. The Model T, which is supposed to be a predictive model, is currently moving in tandem with the stock market. It is possible that the ECRI model is reflecting what is currently happening (a slowing economy) instead of a future slower economy. And Buffet? You don’t make billions by being very wrong in key situations.

My Call

My panel of economic experts is forecasting GDP growth of 1.9% in Q1, 2012 and 2.8% in Q2. However, the panel has been too optimistic by 1.5 to 2 points for the past several quarters. Therefore, expect a GDP of near 0% (could even be negative) in Q1, 2012 and near 1% in Q2. Not technically a recession, but oh so close. This would mean that Buffet would be correct, but there would be no reason to celebrate.

I am working on a new model based on non-commercial transportation (call in Model-T Jr.). This model says we are on the edge of a recession, but the next data inputs will determine if it indicates recession or just near 0% growth. The Model T is now predicting moderate, instead of robust, growth in 2012.

The good news is that the economy is moving so slow, we don’t have very far to fall. That’s right; the recovery has been so anemic we can’t even have a decent recession! If we do have a recession, it will be like when Dick Cheney has a mild heart attack. Yes it’s bad, but we will hardly notice it and may not even feel a thing.

Fred Sanford -- The Big One!

Sex, Drugs and Investments

I previously wrote that when investing you should act like a “Vulcan”, using pure logic and no emotion. Based on that premise you would expect that men (kings of logic) would be much better investors than women (queens of emotion). And if you believe that to be true, you are wrong, very wrong.

A recent study showed that women hedge fund managers averaged more than 3% higher yearly returns than their male counterparts. The men tended to hold on to losing stocks too long while the women took their losses and moved the money into better places. The study concluded that testosterone may cause men to take more investment risks and to stick with loser stocks rather than to admit their mistakes. (At this point my female readers are wondering why I had to state the obvious and my male readers are totally in denial) It seems the presence of testosterone can cause poor investment decisions.

Now what does this “testosterone factor” mean for us average people when choosing an investment advisor or broker. Should you drop your male broker and look for a female one? Because the study is based on averages, this would be a much too simplistic approach. However it does mean that if you are looking for a new financial advisor you should not hesitate at all in choosing a woman. And if you have two people of different genders that you regard as equal in ability, the study would say that you should pick the woman.

But men should still be careful when selecting a female broker. You do not want to be sexually attracted to her at all. The goal is to maximize the return on your assets and to do that you can not be influenced by her assets. Be aware it doesn’t matter if she achieves a 10% return on your investment, if you end up losing 50% of your net worth in divorce court. And just as you don’t want your mutual fund to be “front-loaded”, you don’t want your financial advisor to be so either. Some guys (okay most guys) brains turn to jello when in the presence of a buxom lady. No, you want your investments to be “A” rated and your broker to be “A” cupped. You see testosterone is still a problem in this situation also.

The study does have implications for choosing male brokers and financial advisors. If you trust the study, too much testosterone is not good for making wise investment decisions. Since older men have less testosterone than younger men, this plus the experience factor should favor older advisors in general. If your broker is a young guy named “Mike Machismo”, then maybe you should worry. Several of the men recently caught running Ponzi Schemes had very macho personas. And there is no riskier financial venture than a Ponzi scheme.

But now there is another problem to worry about. Perhaps you have seen the commercials warning about a condition known as “Low-T” which is short for low testosterone. Yes, now there is a prescription medicine that will quickly boost a man’s testosterone. Do you understand what this means? One trip to the pharmacy could turn your mild-mannered broker Mr. Feebles into “The Tradinator”. I vill pump up ya portfolio and crush da mawket”. One day your money is in a nice, stable, large-cap mutual fund and the next day it could be invested in a yak farm in Pakistan.

We can’t have this, so I am advocating (sounds so Obamaese) regular testosterone testing for all brokers and financial advisors. If we test athletes for steroids, we should test these people for “T” levels. And when we have this data, the investment firms can publish it along with average return rates for each broker. For example: Greg Morris has averaged a 9.3% rate of return while maintaining a “T-level” of 2.8.

I wouldn’t worry too much about the T-level of your female broker unless of course she is a former member of the East German swim team. But maybe you should check for an Adam’s apple just in case.

The Tale of the Beer Parties

- It’s story time children, with a parable so simple even a child (but not some congress people) can comprehend.

Dan is owner of Wonderful Widget Company. His brother-in law Ron is a major source of financing for the business. Dan has made a request for “emergency” funds to pay several bills that are past due. Ron is making an unannounced visit to Wonderful Widget to determine the nature of the request.

Dan: Hey, what are you doing down here?

Ron: You sent me an e-mail about needing more money and I thought I would stop by and see how things are going.

Dan: Aw man, you didn’t have to do that. You should have just transferred the cash like you always do.

Ron: But I sent you “emergency” funding last month and now you are requesting even more money. Is business that bad?

Dan: Sales have been alright, but it’s those darn extra expenses that are really eating up all the profits.

Ron: What expenses are you talking about?

Dan: You know. The stuff that you don’t plan for, but you still have to pay for it. That stuff.

Ron: This “stuff” doesn’t have anything to do with throwing beer parties, does it?

Dan: Beer parties? Are you serious? Beer? Frankly I’m very offended that you would even consider that. What makes you think that there have been any beer parties?

Ron: Well, the dumpster in the parking lot is overflowing with beer cans. And look over there in your meeting room. There are pretzel bits all over the tables and beer stains on the floor.

Dan: Okay look, the beer is needed because it makes everyone happy, the people really love me for buying the beer, and most importantly, the chicks dig it.

Ron: But you don’t have enough money for these parties. You can’t continue to do this wasteful spending.

Dan: Hey, I didn’t “waste” it. I bought good beer with it. Now just write me another check and I will pay my bills.

Ron: If I write you a check, how do I know you will not spend it on beer?

Dan: Come on man. I will use that money to pay my bills unless something more pressing comes up.

Ron: Such as?

Dan: You know. If there is a very hot day and people need some refreshment. Or if the employees eat too many salty pretzels and need relief. Or if some very thirsty ladies show up here unexpectedly. Then I might need to immediately respond to these critical situations.

----- Just then one the secretaries walked by and called to Dan, “Hey Beer Man. I think I’m going to very thirsty this afternoon. Do you think you can satisfy me?"

Ron: That’s it. I am not giving you any more money. You can’t buy any more beer.

Dan: But you can’t cut off my beer money. The people are very accustomed to having beer. I mean they feel entitled to it.

Ron: That shouldn’t matter. Your main focus should be producing wonderful widgets, not making everyone happy. You have to cut off the beer.

Dan: I think you must hate Bavarians to just cut off their beer. Bavarians are huge beer drinkers and it is very mean spirited to deprive them of beer. You are a Bavarian bigot!

Ron: Wait, this has nothing to do with the Bavarians. I don’t hate Bavarians. How am I a bigot? You are the one talking about the Bavarians as a separate group and associating certain behaviors with them. Doesn’t that make you the bigot?

Dan: That’s not how it works. How can I be the bigot when I’m the one that is pointing out your obvious hurtful behavior towards the Bavarians?

Ron: I’m sorry, but the Bavarians are going to have to get their beer somewhere else. I’m not giving you the money.

Dan: But you have to. If you don’t, I will default on my bank loans and I won’t have money to pay my suppliers and other creditors and they will cut me off. This will have horrible consequences for the business and will personally cost you money and respect.

So Ron was still very hesitant to provide Dan with any more money because he was concerned that Dan would spend the money on beer instead of paying down his debts. And Dan was in danger of defaulting on his debts unless Ron provided him with more money.

What will happen next?

Life In The Slow Lane

(Eagle economics – cue Joe Walsh on guitar)

He was a bright-headed man
He was always in fashion, his team ivy-league degreed
He had a plan and he put it in action
There was no doubt that it would succeed

He had a stellar reputation as a cool guy
They said he was brilliant, they said he was wise
He had a stimulus deal, backed by the Fed
He said “Faster, faster. The charts are turning red.”

Life in the slow lane
Surely make you lose your race
Life in the slow lane

(Are you with me so far?)

Eager for job growth and hot for some votes
He said things were better, but never took notes
He had all the right slogans, He made terrible bets
He took dangerous chances, he ran outrageous debts

There were lines at the job fairs, confidence screeched
He pretended not to worry, he just made another speech

Quarter by quarter, until it was bleak
GDP going nowhere, unemployment too steep

And it was
Life in the slow lane
Surely make you lose your race
Life in the slow lane, nothing works, all the time
Life in the slow lane

Dropping and stalling, blinded by pride
He didn’t see the bad signs, took a turn, then a slide.
They said, “Listen man. What is it do you bring?
You’ve spent all our freaking money
Haven’t changed a ***damn thing”

He said “Call the Chinese, I think we’re going to crash
Chinese say they’ll help us, but you gotta pay in cash.
He went running round in circles, got confused and looked tired
His numbers tanked, but he was trying to stay hired

And it was life in the slow lane

Life in the slow lane
Life in the slow lane
Life in the slow lane