The test of courage comes when we are in the minority. The test of tolerance comes when we are in the majority.
Ralph W. Sockman
Obama's Moderate Makeover Political Edition
If He Fools You Twice, Shame on You
I was listening to the pundits on Saturday's Fox News talking about Obama and his upcoming State of the Union address. From leaked details to date, he's retooling his education, health care, green energy, and infrastructure pitch. That's right: at a time we have a $14T debt and climbing, he's talking about spending AGAIN. It's not an expense: it's an asset, an investment. What part of businesses sitting on $2T in cash do Obama and Fed Reserve chief Ben Bernanke NOT understand? Businesses are not investing because the perceived costs exceed benefits. And fiscal and monetary policies are part of the problem: uncompetitive tax rates, convoluted, high-cost, obtrusive tax and regulatory systems (including new mandates, such as health care), trade barriers, obsolete immigration policies, government debt competing with the private sector for investor dollars, etc. And don't get me started on monetary policy: we can't rely on uncertainty in foreign markets (e.g., the euro or the yen) to stabilize the dollar. "Beggar Thy Neighbor" is a prescription for a vicious circle global depression.
What a true leader would be doing is promoting a long-term perspective, both for government and for business. Unfortunately, we are stuck with Barack Obama. Oh, don't me wrong: Obama talks the talk: but his goals (e.g., doubling our exports) are impractical and/or inconsistent with his other policies (e.g., high business and investment taxes, environmental and trade policies, etc.) When I'm talking about "long term", I'm talking about an aging population, with the largest generation starting to retire, leaving a permanently smaller workforce to grapple with the implications of longer-timespan senior citizens' pension and medical needs, with inadequate reserves. I'm talking about a huge debt, the servicing of which will soon crowd out necessary federal operational spending. I'm talking about an economy slanted more to consumption than savings and investment, with governments and households having spent or obligated themselves into unsustainable obligations.
But what a wise leader knows--and Barack Obama does not--is to realize what is not working and to distinguish between what is and what is not feasible. Let us take, for instance, the likely discussions of education and infrastructure. When we talk about education, we really to focus on a few salient points:
- Massive amounts of money (local, state, and federal) have already poured into our educational system. A number of prescriptive solutions (e.g., teacher/pupil ratios) have not worked (i.e., students from foreign countries with lower ratios outperform us), but we've been saddled with dysfunctional union rules which make it impossible to fire ineffective, union-protected longer-tenured teachers, reject merit-based systems reflecting supply/demand within a discipline (e.g., math and science) and objective criteria, not to mention unsustainable compensation packages (in particular, pensions) and an uncompetitive, agrarian school year. The bottom line, I disagree with the President's likely talking point that we need more federal money in education. If anything, we need to look at reallocating national educational resources on a cost-benefit basis--and certainly not taking the morally hazardous step of encouraging states and municipalities to become dependent on the overextended federal dollar to patch unsustainable business models.
- We need to rethink what makes sense for federal involvement in education. I think we need to look at states or cities which have weaker economies and tax bases where federal dollars have the greatest impact. For instance, I do not see a need to sink federal dollars in high-funding states like New Jersey, Maryland, and Massachusetts while poorer schools in Mississippi and South Carolina barely cover the basics. But I would like to encourage resource sharing, e.g., virtual classrooms including remote attendance from gifted students in more limited systems (e.g., a high school which lacks the scale to add specialized classes), and have the federal government in establishing independent baselines and data collection.
- We need more visionary leadership, not someone tied with vested interests to teacher unions. The inconvenient truth is that Catholic and other private schools have routinely outperformed (and, yes, I've heard the typical defensive response that Catholic schools cherry-pick the "best" students). We need someone to note that in the rest of the world, parents are much more closely involved with their children, knowing that in a very competitive economy, the key to a good job is a good education, and limit the amount of unproductive time outside of school and tolerate no excuses. We have an uncompetitive, short school year, and teachers whom all too often expect too little (not too much) of students, grade too liberally, and socially promote undeserving students, passing the buck onto society. I also see more of a pyramid of autonomous instruction resulting in a citizen's independence/self-actualization. In other words, we put more resources into ensuring a rigorous foundation in English, math and science during the early years of education. Again, we need to rethink education in terms of free market principles: we need to reform the protectionist, monopolistic public education system. But the absolute last thing we should do is bail out incompetent local school administrations unwilling to make the tough decisions of cutting bloated budgets or teacher unions selling out the students' best interests to protect their compensation, regardless of classroom performance.
As to infrastructure: the rub is in the details. Making a national commitment to railways, canals, pipelines or highways made far-flung parts in America more accessible and efficient (in the long run) to transport people and supplies. Barack Obama has a particular affinity for projects like high-speed railways. It's not clear to me (I made this clear when I criticized proposed links in southwest-central Florida or Richmond-DC) what the economic boost was. (I do understand why politicians in Tampa Bay and Richmond like it, but it's not clear to me what the business case is: will there be enough premium-priced passenger or cargo fares to recoup the investment (not to mention operational costs), versus, say, conventional rail or highways? Why aren't there private investments beating the politicians to the door to set up private sector solutions to this concept?
I also want to differentiate between infrastructure building and ongoing maintenance. I think there are other issues President Obama needs to address--like raids on the highway fund; also, we should not be using federal mismanagement in the upkeep of existing infrastructure to cost-justify new projects. All that does is reinforce negligence of maintenance. When you are $1.4T in the hole like Obama is, he should be ensuring current operations and maintenance are being done efficiently; homeowners in the middle of an economic downturn don't look at building new houses but go to fix-it superstores and keep their existing properties in good order.
But, going beyond the State of the Union speech rumors, the President has recently chosen Bill Daley (a politically-connected career lawyer and yet another Clinton Administration crony), whom even conservative commentators call a banker; he spent roughly 2 years as CEO of a small politically-connected bank and more recently as a JP Morgan executive lobbyist. Then he's chosen GE CEO Jeff Immelt to succeed ex-Fed Reserve chair Paul Volcker as chair of the Economic Advisory Council. (Among other things, GE is an American producer of wind turbine products, a key Obama green energy priority.)
I'm not convinced that this is anything more than just a cynical symbolic makeover; it's not clear that the Democrats have a cohesive message other than to defend the legacy of the last Congressional term. It's clear that the era of massive deficits is over. I suspect that Obama will resort to paying lip service to the GOP bad cop objectives but then resort to his familiar pattern of straw man arguments, no matter the nature of GOP budget cuts, just like he voted against raising the federal debt ceiling, before he ran for President and the Democratic-controlled Congress added $5T to the national debt, over one third of the national debt in just the last 4 years. He did not get elected to a 4-year term to spend the last two years governing on a GOP agenda. I suspect that he will resort towards a more stealth agenda, e.g., the way that the FCC has attempted to assert unauthorized authority on so-called net neutrality, the EPA has broadly hinted it may assert in lieu of climate change legislation, etc. In turn, I expect the House GOP to challenge any policymaking by administrative fiat.
No Longer Your Grandfather's Safe Munis:
Were Fannie Mae/Freddie Mac Just the First Act?
We have seen several shocks in the financial markets over the past decade: the Nasdaq meltdown, Enron and other corporate scandals (taking along employee "all-or-nothing" nest eggs), the real estate market collapse and related economic tsunami, etc. Now prospective retirees are facing potentially a different, disturbing issue; probably anyone who invests for retirement knows the typical lifetime investment formula: you start off as a young adult investing primarily in common stocks, say, growth-oriented (vs. stable, slow-growing businesses with steady dividend payments, like utilities), which traditionally have shown the greatest return (but with more volatile prices). Generally, as middle-aged people approach retirement, we see a transition from growth stocks towards blue chip dividend stocks and local and/or state bonds. Public sector bond interest often has certain tax-related benefits. In particular, local and state bonds are generally considered safer investments because they have to run balanced budgets and are implicitly backed by the US government. The reason I bring that up is because if "implicit backing" sounds familiar, it's because the mortgage government-sponsored duopoly (Freddie Mac and Fannie Mae) had the same, and we taxpayers are still stuck covering losses from loans made in a real estate bubble.
We are seeing some disturbing signs in the municipal bond market as cities, struggling under the weight of recession-based lower tax revenue and unsustainable pension funding, are, in some prominent cases, failing, or at least seeing their pristine credit rating downgraded by credit bureaus. In fact, less than two weeks ago, Chicago's bond rating was downgraded. A downgraded credit rating results in higher interest rates (to accommodate investor risk), which further constrains the city's finances. (In Chicago's case, the downgrade complicates the picture for O'Hare's planned expansion; O'Hare is a major cash cow for the city.)
The below chart reflects in part the exodus of money moving out of municipal bonds to other forms of investments; in part, CBS' 60 Minutes last month featured a prominent financials guru, Meredith Whitney, whom predicted the municipal market will be far more volatile than anyone is predicting. In the meanwhile, we have been seeing investors liquidating positions and/or buyers staying away from the market. In part, municipal bond ETF's (see chart below), a popular sector-index mechanism, are showing the results of net sells, which reflect partial liquidation of underlying bonds. Some market observers scoff at Whitney's warnings, claiming that the rotation out of municipal bonds reflects other factors (e.g., chasing the hot returns of the rallying stock market or perhaps into ultra-safe Treasuries, anticipating T-bill price appreciations as Bernanke and the Fed engage in quantitative easing); they claim the bond dumping is undeserved and represents a historic buying opportunity.
I will simply point out that most of the net 1M employment pickups under the Bush Administration were in the public sector--specifically state and local employees. The Obama stimulus simply postponed the day of reckoning for states and c
ities to get their finances in order. Any faithful reader knows I've been beating the public pension issue for weeks, if not months, and warning against bailouts to fiscally irresponsible states, like California, Illinois and New York. I'm not writing a financial blog, and I will not advise you on how to invest your money. (Personally, I do not have investments in dedicated bond issues.) My real concern is what the President and the Congress will do to bail out states and cities: call it TARP v. 2.Chart courtesy of Google Finance
SUB:iShrs S&P ShtTrm Ntnl AMTFr MncplBnf ETF
SUB:iShrs S&P ShtTrm Ntnl AMTFr MncplBnf ETF
Past year's Price Chart
Musical Interlude: One-Hit Wonders/Instrumentals
M, "Pop Musik"
Musical Interlude: One-Hit Wonders/Instrumentals
M, "Pop Musik"
