What will tomorrow bring? Trump baseball

This week is inning 8 in the meltdown story. The 9th inning may be ugly.

Nik's Laws: Don't Spit in Eyes

Hey, Bibi.

Nik's Laws: Don't Arm your Future Enemy

Hey world (and Barack and the useless heap of Congress) are you listening?

That moment when terrorism becomes guerrilla warfare

Are we all clear on what's happening here?

http://www.reuters.com/article/2014/12/23/us-northkorea-cyberattack-idUSKBN0K107920141223

http://theweek.com/article/index/274145/why-america-would-be-foolish-to-wage-a-cyber-war-against-north-korea

http://www.bbc.co.uk/news/world-asia-30587837

http://www.usnews.com/news/articles/2014/12/23/china-likely-irked-by-north-koreas-sony-hack

Finally.

Yes, finally.

Yeah, What HE Said: Obama on Israel and Palestine

Per the Guardian:

"In what was billed as the most important public speech ever made by an American leader on the issue, Obama delivered a tough message to Israel."

Which basically was :

"Put yourself in their shoes - look at the world through their eyes. "

Which is what I've tried to advocate in countless debates on the issue. Understand your opponent's motivation. Find common ground. What seems self-evident to me, and I dare say most Americans, is all too frequently mocked and dismissed as psychobabble by people close to the issue. This makes me struggle to put myself in their shoes. I just don't get it. Mutually-assured misery seems like the least-best alternative, yet it is the de-facto choice by virtue of inaction. 

Obama is just as guilty as the leaders in the region and the lobbyists on the Hill. As I argued in a prior blog, lack of leadership is akin to murder in this situation. 

"Hey Bibi, Hill, Abu! Hey nationalists! Hey settlers! Hey martyrs! Hey donors-to-the-cause! Hey talking heads! You're all wrong. You're all culpable. You're all criminally negligent. Let history reflect that as your true legacy."

Perhaps he finally read my blog, because what Obama said this week was real leadership:

"You can be the generation that permanently secures the Zionist dream, or you can face growing challenges to its future … The only way for Israel to endure and thrive as a Jewish and democratic state is through the realisation of an independent and viable Palestine ... Israelis must recognise that continued settlement activity is counterproductive to the cause of peace"

Greasy Thinking

I love to hate Krugman's one-size-fits-all big-government answers to every problem but today through clenched teeth I have to agree with his op-ed yesterday (partially). Europe and the Euro need to put their big boy pants on and learn some bladder control. Fast. Diapers just aren't appropriate anymore. As he said in the NY Times today:

For the past two-and-a-half years, European leaders have responded to crisis with half-measures that buy time, yet they have made no use of that time.

Not sure how that jives with this first sentence, but anyway I agree with him: The Greece problem is not new. The Economist summarizes well this week:

Greece really has suffered: between 2007 and 2012 its economy is expected to have shrunk by almost a fifth. The economy is being strangled by a severe credit and liquidity crunch, with more budget cuts and tax rises to come. Even if all goes well, Greece’s debt will be 161% of GDP next year.

The Spanish, Portuguese, Italian and Irisih problems are not new either.

The facts about Europe (and especially these retarded countries) which have created the current situation are not new. The EC, the EU, the EMU, the European Parliament, the European Presidency - all impotent, except for farm policy (huh?). National governments, all ineffective, focused on pandering, philandering, scandal (either chasing or running away from). Citizens feel emasculated (at best), despondent and dependent (especially those just out of school), and generally pessimistic. Employers are hamstrung on everything from employment/firing to compensation to innovation to outsourcing. Consequently, employees are lazy (not dumb) and inefficient. The governments have pissed away more than enough livelihoods. They need to get busy.

As Reagan put it,

There are no easy answers but there are simple answers. We must have the courage to do what we know is morally right.

The answer to Europe's issues is simple. It may seem odd to use the phrase "morally right" in this case, but it IS a moral issue for Europeans. It should be if they care about their children, their nation, their place in the world. 

Krugman's focus yesterday was on inflation, but the price level is not the core problem, nor is inflating your way out of debt a silver bullet. Happily, it will make European products less expensive. Here's to more Bordeaux and aged Gouda and European vacations! This, however, just corrects an existing price misalignment. A croissant and coffee shouldn't cost the equivalent of $20. That's just nuts. The reason Krugman is wrong is simple:  prices go up, but productivity per worker doesn't change. Every European becomes poorer. Fewer car/house/consumer loans/credit cards are available. House prices go down. Companies can't as easily justify borrowing to invest or launch new products. Which means less innovation and growth.

And that's exactly what Europe needs, particularly in the south: GROWTH. Even Krugman will agree with that usually. 

The only ways to get there are through INNOVATION, PRODUCTIVITY, and/or DEBT.

The last one is Europe's current favorite: beg, borrow, and steal. From the rich. From the companies. From each other. From the future. Money flows from northern countries through the EU/ECB to southern countries without compensation or realistic ability to earn enough to pay it back. Money flows out of companies' profits and employees' income through high taxes but is not set aside for their own social welfare. Instead, it is used to buy votes from those without jobs and/or those with political power. Quoting Krugman again:

Europe’s central bank is, in effect, financing this bank run by lending Greece the necessary euros; if and (probably) when the central bank decides it can lend no more, Greece will be forced to abandon the euro and issue its own currency again ... This demonstration that the euro is, in fact, reversible would lead, in turn, to runs on Spanish and Italian banks

It's just not sustainable. History is littered with examples of failed currencies and governments who thought they could just borrow their way to success. 

Instead, the core issues of low productivity, low innovation, and perverse incentives need to be addressed. Europe needs to start acting like a single community rather than a bunch of clans of grumpy neighbors. Europe needs to recognize the limits of socialism in the face of globalization. Europe needs to acknowledge global realpolitik. Protectionism and nationalism are luxuries they can no longer afford. The Euro cannot be a fiat currency - it needs backing based on the power of taxation and reserves.

On Productivity and Innovations:

• Ya just gotta free up the labor market, folks, or productivity is never going to get better. People/roles/trades/companies/industries/countries (including those abroad) which are more productive than others should be allowed to crowd out the less-productive. Languages can be a barrier, but to the extent that, for example, a smart and/or ambitious Pole can speak enough Italian or German to work abroad, this should be enabled, not discouraged. Even in "protected" industries. Spanish companies should be able to put callcenters and operations in, for example, Guatemala.
• Extending that point, you also need to accept that people/trades/industries/countries which are less productive are going to be less wealthy. Socialism hates inequality, but if a Finn can produce 4 cars a day while an Italian can only produce 3, the Finn should make more than the Italian. Similarly, if a Greek or Bulgarian (gasp!) is willing to earn EUR10 an hour to grow grapes while an Austrian insists on EUR25, the Greek and Bulgarian grapes should be trucked to Austria, crowding the Austrian farmers out of the business or forcing them to take a pay cut. 
• Extending the above: Learn from the US (both what to do and what NOT to do) about immigration and foreign workers. Let 'em in! Create a controlled and net-positive process (as explained in my prior blog post) and then open the gates. For one thing, allowing younger immigrants into the workforce is the only way you will be able to pay for your pensions and healthcare systems going forward. There should be no prohibitive barriers against Uruguayans moving to and working in Spain, for example. Just make sure you charge them for it.
• Aside from the ability to hire/fire the people they want and the ability to pay a market-clearing wage, companies need the ability to offer both contract and full-time work. They also need to be able to offer various tiers of benefits for interns, new-to-the-workforce, tradespeople, professionals, executives, etc. It can't be just the one-size-fits-all government-dictated (tarnishing) gold-plated package. A hundred years ago, Hayek correctly described where that road leads.
• Moreover, you can't have your cake (of national champion companies in every industry) and eat it too (expecting them to be globally competitive and profitable without being able to scale). Accept that you are a common market and allow Euro-wide champions to arise in whatever Euro country they may. No longer can the Portuguese government spend money it doesn't have to promote and protect their own national paper, airline, or cell phone companies. It's ridiculous for richly-paid Italians, French, and Germans to produce nearly 10% of the world's steel ... at a loss when all governmental supports are factored in. Buy Turkish or even Indian steel!

On Perverse Incentives:

• Government borrowing needs a revamp. Existing sovereign bond markets need to be priced based on country risk, not currency risk. Separately, the ECB should introduce Eurobonds which are guaranteed by all countries in the monetary union. Individual countries would buy SDR-like rights by either depositing collateral at the ECB or by legislating pledges of future tax receipts. They would then be allowed to request that the ECB issue bonds on their behalf, most of the proceeds going to the national government, but with an adequate reserve withheld by the ECB as collateral against future payment. Overall Eurobond issuance would be capped by the ECB based on market conditions and European Parliament votes.
• More radically, impose, by irrevocable treaty, a 5% Eurozone value-added tax. Simultaneously reduce national VATs by the same amount such that there is no impact to consumers or businesses. These funds go to the ECB and are distributed according to agreed rules. In other words, taxes collected in Spain are sent to the ECB but might get sent right back to Spain if all's well. However, if one country is circling the fiscal drain, this provides a cash buffer to protect the ECB and the other Eurozone countries from getting sucked into the vortex. Most importantly, this creates a "lever" of power by the ECB over individual countries. If you don't live up to your commitments, you don't get your 5% back. The bank NEEDS this power to protect and defend the currency. It also needs it to enforce compliance with treaties and commitments.
• Enforcement of the monetary union's and European Parliament's targets (ex. Growth and Stability) must be strict. Greece has NEVER met the very friendly targets they negotiated. Never intended to, I'm sure. They should be fined. They should not get their 5% back. Their voting rights in the European Parliament should be suspended. ECB transfers should be suspended. International remittances and account balances should be frozen.
• While you're at it - fix the banking system's capital adequacy rules. Sovereign debt is NOT risk free.  

All graphics from Economist.com. 

Fear Rick's Vest

No, really. Be afraid!

Nik's Laws: Mortgage Interest Deductability

Eliminating the mortgage interest deductability on income taxes will have the effect of instantly reducing all house prices by 10-30%. Such an attempt to increase federal tax receipts would have the inverse effect, as it would push the economy soundly into a double-dip recession, would degrade the capital stock of most US financial institutions at a time of increased capital requirements, would push a new tier of homeowners underwater, and would trigger a new round of bankruptcies for those on the margin.

Staged.

Does the White House really think that all it takes to control public opinion is having the US people watch Congress clap for the President for 3 minutes straight? Last time I checked, the only people less liked than the President were the Congressmen.

Yeah, What HE Said: Limited Government

Quote shamelessly borrowed from the Cato Institute's blog today:

"Limited government is one of the greatest accomplishments of humanity.
It is imperfectly enjoyed by only a portion of the human race, and, where
it is enjoyed, its tenure is ever precarious. The experience of the last
century is surely witness to the insecurity of constitutional government
and to the need for courage in achieving it and vigilance in maintaining it."
- Tom G. Palmer, Cato Institute Fellow and Humanitarian

What Will Tomorrow Bring: Financial Utilities

The story of the financial industry is a breathless one. With all that money sloshing around, smart people know that there is profit to be made. Unfortunately, due to that same money (=liquidity) and profit potential, financial products and services get commoditized very quickly. Competitive advantage is fleeting. It's textbook hyper-competition. Constant, hostile, explosive innovation is necessary to survive.

Unfortunately, that also leads smart, sensible people to do horrifically stupid, risky, nonsensical things which relieve immediate (financial or political) pressures but which have been entirely "un-thunk" in terms of their end-state consequences.

Hyper-competition also intrinsically conflicts with hyper-regulation.

Last year I predicted that the weight of new regulations (written and unwritten), political instability, and economic realities would force financial institutions to give up their for-profit status to become utilities:

Financial Institutions will once again be lobotomized. Divided into two classes:
- Utilities (aka retail banking)
- Casinos (aka everything else)

"Utilities" are done for as a for-profit enterprise. Just like Amtrack and Con Ed, they will require permanent and heavy subsidy verging on nationalization to survive the tonnage of regulations which will be piled on.

Evidence continues to pour in to support this including:

• More than 8,000 entries in the OCC's list of sanctions here. They are just one of a half-dozen governmental agencies which take enforcement actions against banks
• 111 bank collapses in the past 12 months per the FDIC's Bank Failure website. Twenty-six banks collapsed between 2000 and the end of 2007
  
• Voluntary closure of a regional bank this week "in an extreme example of the frustration felt by many bankers as regulators toughen their oversight of the nation's financial institutions"
• According to a Marakon report (source of the chart above), "only four US banks, or 10% of banking equity capital, are expected to generate returns above the cost of equity; a staggering 90% of banking capital is not performing"

But you ain't seen nothing yet. The above are mostly smaller institutions. The financial titans (Titanics?) are better at fighting and delaying, but trust me they are also bending under the weight. Their stock prices are beginning to reflect it.

UCSD professor Frank Partnoy yesterday published his opinion in the Financial Times with a piece titled "The coming world of smaller banks." He highlights not only the unavoidable reductions in share prices and headcounts, but more damningly, the unavoidable extinction (or drastic evolution) of the standard banking business model:

If all of the world’s major banks had failed during 2007-08, and regulators had permitted Apple, Facebook, Google and Microsoft to take over the economy’s capital allocation function, how would employment numbers have changed? Surely any neo-bank would hire smart lenders, traders, analysts and advisers, the people who have the strongest relationships with, and knowledge of, the institutions that demand or supply capital. But would they have hired all of them? Half? How many people would a new bank really need? Hedge funds take on traditional bank functions with a fraction of the employees.

He concludes:

[Banks] will occupy a smaller place in the economy and they will be less profitable. In a decade, there will be fewer professionals working on Wall Street than there are today.

If I map his comments onto my own, it becomes clear where the job losses will be. The "Financial Utilities" will be characterized by a low-skill, low-innovation, low-margin, high-volume business model. Since capital and information are almost entirely digital these days, there is nary a barrier to massive automation. The remaining jobs will be the folks keeping the computers humming and the 'relationship' people in high-touch areas like customer complaints and regulatory relations.

Yeah! What HE Said: Smart is as Smart Says ... Hopefully History Repeats

Allow me to quote myself quoting someone who has every right to give Uncle Sam a big ole "told ya so" right now.

"Experience hath shewn, that even under the best forms of government those entrusted with power have, in time, and by slow operations, perverted it into tyranny." - Thomas Jefferson

"And to preserve their independence, we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude." - Thomas Jefferson

"That government is best which governs least." - Thomas Jefferson

Time for Timmy to Take a Page from the Dick Nixon Book

Three months ago, on April 19, Timmy G flashed that charming nose-flair and scowl as he proclaimed "no risk" of credit rating downgrade. With a Treasury Secretary like that, who needs enemies?




That incredible foresight has created quite a bank of political capital and immense credibility for Timmy. Knowing that his fatherly tone alone can instill confidence in the most dubious heart, he decided today to leverage a bit of his capital, saying, in effect, 'trust me - China will continue to support borrowing habit.' No need to get our fiscal houses in order. That's just too hard. Too confusing. Too complicated for the average dumb voter. Better to just distract everyone by attacking the ratings agencies ... for ... um ... our fiscal mess?


Also based on his incredible Volcker-like, Lula-like track record of securing our country's fiscal future, he shared some friendly advice with his colleagues in Europe, admonishing those pre-pubescent countries to make sure they don't spend more than they make. If only they were as fiscally responsible as we are. If only they were lead by such world-class minds as we.


Investors are expressing their immense appreciation for Timmy's FDR fireside chat moment by voting with their feet ... from equities, debt, swaps, and even energy straight into gold.

Talk Amongst Yourselves: US Government Spending as a Percentage of GDP

The Zeitgeist of the BearDogs

Sometimes Simple IS the best way to communicate. Here's to the simpletons.

The Word about The Fed and The Plan for the Change

The Fed is powerful. I'm a fan of a good Fed. We currently do not have a good Fed. I'm horrified.

Be horrified.

Yeah, What HE Said: The Blasphemy of Expressing Opinions

“I mean, look, Bill, I’m not a bigot, but when I get on the plane, I got to tell you, if I see people who are in Muslim garb and I think, you know, they are identifying themselves first and foremost as Muslims, I get worried. I get nervous.”

ALARM! ALARM! BIGOT ALERT! PSYCHO ALERT! INSANE RADICAL CONSERVATIVE RIGHT-WINGER ALERT! CRUCIFY WHOEVER SAID THIS! SEVER ALL TIES TO AVOID GUILT BY ASSOCIATION! ABANDON SHIIIIIIP!

OK, OK, probably ... maybe ... peut-être I'm over-reacting a bit. I mean, it WAS an opinion show, so ... maybe ... but eek - what will people think? That's it. Out he goes!

Apparently that's NPR's idea of a defensible argument for firing one of their most renowned, long-standing employees. That's exactly what they did to Juan Williams for his O'Reilly Factor quote ... or for something ambiguously "larger" as several have suggested.

And therein lies the rub. Juan Williams has long been a bridge across many political worlds. He worked for NPR (for many years) but was happy to participate in political discussions live, in print, on air, and on TV with just about anyone, on just about anything. He has always been willing to try and expand mutual understanding. Problem: Conservative nuts don't understand the real world? Juan's Solution: Go on Conservative shows and explain the opposing viewpoint in refreshingly clear, even-keeled, non-inflammatory terms.

Was his line culturally-insensitive? Yes. Did it reflect a true bias that he ... and many others have? Yes. Did he specifically preface it with the caveat that he's not bigoted? Yes. Did he mis-represent opinion as fact? No. He clearly stated a fact: he gets nervous. In doing so, did he betray his insensitive opinion? Yes.

Even journalists are allowed to have opinions ... even insensitive ones.

In his own words (on Good Morning America this week)

"This is one of the things in my life that's shocking. I grew up on the left. I grew up here in New York City and I've always thought the right wing was the ones who were inflexible and intolerant. Now, I'm coming to realize that the orthodoxy at NPR, as it's representing the left, is just unbelievable," he said. "And especially for me as a black man, to somehow, you know, say something that's out of the box. They find it very difficult... I think they were looking for a reason to get rid of me. They were uncomfortable with the idea that I was talking to the likes of Bill O'Reilly or Sean Hannity."

NPR's differentiating advantage is that they're like Juan: Clear, non-inflammatory, diverse, and comprehensive, if a bit left-leaning, in their reporting. When I want to get a (much) deeper understanding of an issue than I can get from the talking heads on TV ... and a (much) clearer understanding than I can get from the cacophony of the internet ... I turn to NPR.

And I want to hear Juan.

Yeah! What HE Said: Inspiring Government to Be All It Can

Government is the great fiction through which everybody endeavors to live at the expense of everybody else.
- Frederic Bastiat, French Economist (1801-1850)

A government big enough to give you everything you want, is strong enough to take everything you have.
- Thomas Jefferson, US President (1743-1826)

Image: Despair.com

Talking People to Death

From this week's NY Times:

"[Netanyahu's offer to freeze colonization of contested Palestinian territories] was aimed either at keeping talks with the Palestinians alive and his right-wing coalition partners in check, or at seeking to shift the burden of failure to the Palestinians and escape blame should the talks wither and die. - NY Times 10/12/10

They said "should" but clearly they meant "when." Why the hell did they re-start colonization anyway?? Oh, yeah, so they could offer to stop ... again.

This, to me, summarizes the whole problem. The involved parties, including the Israeli, Palestinian, and US governments as well as the Jewish diaspora, the militant mullahs, the Syrian and Iranian militaries, the arab-royals, the money-siphoning nonprofit organizations, and all the other agents provocateurs have no intention of saving the patient. They just want to make sure they're not blamed for it's death.

Lest they forget among all their strategic positioning (in soft chairs at fancy resort hotels), ego-stroking (whilst sipping tea on private jet they didn't pay for), and diplomatically chortling (while enjoying 5-star cuisine on finer china), there are people dying because of their delays. Some of those people are starving in camps. Others are getting blown to bits during their daily commute. Others are so hopeless and angry about their future that they're letting Bin Laden's clowns whip them into homicidal/suicidal furies. Others still are dying atop Humvees.

Yet everyone just continues talking. One step left, then one step right. Never moving forward lest they accidentally resolve the issue and lose their relevance. If that happened, who would pay for their fancy limos and massive security detail? Who would fund their next European vacation?

Hey Bibi, Hill, Abu! Hey nationalists! Hey settlers! Hey martyrs! Hey donors-to-the-cause! Hey talking heads! You're all wrong. You're all culpable. You're all criminally negligent. Let history reflect that as your true legacy.