There are hopeful signs that a bottom is forming in the battered stock market. The market surged upward yesterday when the vice chairman of the Federal Reserve hinted that the Fed would be more open to additional rate cuts than had been previously communicated.
Perhaps most positive the market traded "even" today in spite of two big up days in a row. Tonight Chairman Bernake, speaking at the Charlotte Chamber of Commerce, more broadly confirmed that additional rate cuts are likely.
Other signs of a bottom is that several banks have received significant capital infusions. Other well regarded "big investors" are starting to take advantage of beaten down shares in companies like E-Trade. UBS made a decision to more their SIV's onto their balance sheet.
Financials have strengthened. Oil is backing away from $100, for now. Big tech growth stocks have quickly bounced back and are trading close to their previous levels.
There is still a long way to go, but signs are promising. Tomorrow's debate will be between those that are inspired by the prospect of rate cuts and those that fear that the need for more substantial cuts means we are headed for recession.
Thursday, November 29, 2007
Hell Freezes Over
http://www.post-gazette.com/pg/07333/837824-100.stm
John Murtha, Democrat Party thug in residence, just returned from a Thanksgiving trip to Iraq. Congressman Murtha has been one of the most vocal critics of the Iraq war and has led many of the behind the scenes shenanigans to undermine our troops.
Now he is reporting back that "the surge is working"! I never thought I'd hear those words from the congressman. Nancy and Harry have to be so disappointed.
John Murtha, Democrat Party thug in residence, just returned from a Thanksgiving trip to Iraq. Congressman Murtha has been one of the most vocal critics of the Iraq war and has led many of the behind the scenes shenanigans to undermine our troops.
Now he is reporting back that "the surge is working"! I never thought I'd hear those words from the congressman. Nancy and Harry have to be so disappointed.
Sunday, November 25, 2007
Housing's Wealth Effect - I'm Skeptical
There is no question that home prices are pulling back. This pullback is most pronounced in parts of the country that say the most rapid price appreciation, such as Florida and California. Many other parts of the "heartland" did not experience the same degree of price run-up and not see the same amount of depreciation.
There have been lots of stories in the media about how the run-up in housing prices, facilitated by record low interest rates, has fueled a wealth effect. In other words, people felt more wealthy due to the appreciation in their houses. There has also been a lot of commentary about homeowners using the increased equity as an "ATM", funding spending and lifestyle changes. Now that home prices are headed down, the worry is that consumers will spend less - pushing the U.S. into recession.
I am skeptical of the the whole wealth effect argument and the effect to which the majority has been using their house as a "piggy bank". This skepticism is purely anecdotal and based on my own musings. I have friends that made a lot of money flipping beach property during the bubble. I also have friends that made money but also got caught holding Florida real estate they cannot afford to sell.
But for the average family that was not speculating in an overheating market, I don't see the ATM argument - that surplus home equity was the driver of the consumer economy. Yes, if you bought a house in an inflated market in the last 18 months, it is possible to be upside down. But the majority of homeowners have held their homes longer, or sold a home at an inflated price and bought another at a similarly inflated price, the angst is just not there.
I just don't buy the fact that people are spending more or less based on home values being up or down. Plus, if you've had your home for a while it is likely that you have an equity line of credit that can be drawn on anyway - no cash-out refinancing required. More than half of all homeowners own their homes outright.
Yes, you can refinance and take cash out of your house. But homes are mostly illiquid. Jobs and rising income and stock market gains have a much greater impact in people feeling wealthy - and therefore the money they spend. In other words, if people have a decent job with rising wages, they are going to spend that money regardless of the value of their home.
It is the American way.
There have been lots of stories in the media about how the run-up in housing prices, facilitated by record low interest rates, has fueled a wealth effect. In other words, people felt more wealthy due to the appreciation in their houses. There has also been a lot of commentary about homeowners using the increased equity as an "ATM", funding spending and lifestyle changes. Now that home prices are headed down, the worry is that consumers will spend less - pushing the U.S. into recession.
I am skeptical of the the whole wealth effect argument and the effect to which the majority has been using their house as a "piggy bank". This skepticism is purely anecdotal and based on my own musings. I have friends that made a lot of money flipping beach property during the bubble. I also have friends that made money but also got caught holding Florida real estate they cannot afford to sell.
But for the average family that was not speculating in an overheating market, I don't see the ATM argument - that surplus home equity was the driver of the consumer economy. Yes, if you bought a house in an inflated market in the last 18 months, it is possible to be upside down. But the majority of homeowners have held their homes longer, or sold a home at an inflated price and bought another at a similarly inflated price, the angst is just not there.
I just don't buy the fact that people are spending more or less based on home values being up or down. Plus, if you've had your home for a while it is likely that you have an equity line of credit that can be drawn on anyway - no cash-out refinancing required. More than half of all homeowners own their homes outright.
Yes, you can refinance and take cash out of your house. But homes are mostly illiquid. Jobs and rising income and stock market gains have a much greater impact in people feeling wealthy - and therefore the money they spend. In other words, if people have a decent job with rising wages, they are going to spend that money regardless of the value of their home.
It is the American way.
Year-end Market Resistance and Support
The market bounced a bit Friday across the board in a holiday shortened session. The S&P 500 is close to the August lows. If it can build on Friday's boost then the next major resistance level is 1490. If it breaks below about 1410 there could be some real damage on technical selling. Between here and 1490, expect professional traders to by dips and sell into strength. In a solid breakout above 1490 expect more sustained buying into strength.
The Nasdaq bounced Friday after hitting almost exactly a 10% decline to 2575 from the highs. I believe that when stocks do begin a move up tech will recover the fastest - especially big tech that is leveraged to international growth. Certainly there will be some buying of techs if they stay above the 2575 level.
This week will contrast economic data confirming that the economy is slowing with the usual year-end optimism and holiday retail sales that appear to be off to a strong start.
Recessions typically occur when consumers significantly reign in spending or when credit markets seize up. We certainly have a long ways to go before the credit markets can regain a robust level of liquidity. The consumer is the wild card. However, Americans have an ability to spend any money they have and then some, regardless of the economic conditions.
The subprime mortgages that will default is not enough to cause a recession on its own. But if it causes the above to take place then it certainly can happen. Aside from the lack of fully functioning credit markets, the most important drivers of the consumer will be jobs and income. I will be watching these two items closely.
Disclosure: at the time of this posting the author was long SPY.
The Nasdaq bounced Friday after hitting almost exactly a 10% decline to 2575 from the highs. I believe that when stocks do begin a move up tech will recover the fastest - especially big tech that is leveraged to international growth. Certainly there will be some buying of techs if they stay above the 2575 level.
This week will contrast economic data confirming that the economy is slowing with the usual year-end optimism and holiday retail sales that appear to be off to a strong start.
Recessions typically occur when consumers significantly reign in spending or when credit markets seize up. We certainly have a long ways to go before the credit markets can regain a robust level of liquidity. The consumer is the wild card. However, Americans have an ability to spend any money they have and then some, regardless of the economic conditions.
The subprime mortgages that will default is not enough to cause a recession on its own. But if it causes the above to take place then it certainly can happen. Aside from the lack of fully functioning credit markets, the most important drivers of the consumer will be jobs and income. I will be watching these two items closely.
Disclosure: at the time of this posting the author was long SPY.
Saturday, November 24, 2007
Why Are Government Schools So Expensive?
One average, private elementary and secondary schools spend about a third less than government run schools while achieving superior education outcomes. Spending on public schools as a percentage of personal income has soared from 2.3% in 1950 to 4.5% in 1999. Why are the government-run schools so expensive?
First, the growth of personnel in the public school systems is nothing short of astounding. During the period from 1979 to 2000 student enrollment increased by 13%. But education personnel increased by 61%! Even worse, only 40% of school employees are actually teachers.
Second, government school employees are paid on average 35% more than private school employees. Government school teachers' benefits also far exceed their private school counterparts. These differences are largely due to the stranglehold the teacher unions have on our public school system.
Third, it is common to offer tenure to public school teachers. This tends to concentrate teachers in the highest salary levels. Private schools typically do not offer tenure and as such have a more normal distribution of salary levels and attrition.
First, the growth of personnel in the public school systems is nothing short of astounding. During the period from 1979 to 2000 student enrollment increased by 13%. But education personnel increased by 61%! Even worse, only 40% of school employees are actually teachers.
Second, government school employees are paid on average 35% more than private school employees. Government school teachers' benefits also far exceed their private school counterparts. These differences are largely due to the stranglehold the teacher unions have on our public school system.
Third, it is common to offer tenure to public school teachers. This tends to concentrate teachers in the highest salary levels. Private schools typically do not offer tenure and as such have a more normal distribution of salary levels and attrition.
Why Do Only the Wealthy Have School Choice?
The elementary and secondary public school system remains the only exclusive government monopoly in America. Milton Friedman, a brilliant economist, strongly advocated abolishing the public school system in favor of private education funded through vouchers.
Liberals and the Democrat Party have resisted school choice for decades. The teacher unions (who largely vote Democrat) are one of the largest and most powerful unions in the U.S. They seem more concerned with preserving their monopolistic status and expanding their membership than on what is best for educating our children.
The liberal argument against school choice, whether facilitated through vouchers or through tax credits, can be summed up with three points:
Interestingly, a recent court decision mean that children requiring special education can move their child to a school that can best serve him. So the wealthy and special education children have school choice. The middle and lower class majority do not.
Unfortunately, like all monopolies, the government elementary and secondary school system provides results that are mediocre at a very high cost. The average cost per child has soared to more than $9,000 annually for government schools. Private schools on average spend far less than this - more on the order of a little more than $6,000. Success of Catholic schools in producing excellent educational outcomes while spending much less than government schools is well documented. This is especially significant because the demographics of Catholic schools includes a large percentage of lower and middle income students.
Providing 100% funding through vouchers for families to send their children to private schools would save money. The cost of the private schools would be less than educating the student in a government school - and the cost of educating the student in the public school would not be incurred. So if the government monopoly schools were shut down the cost of providing elementary and secondary education to America's children would be reduced by a third.
It turns out that there is a wildly successful model in the U.S. for 100% school choice. Our nation's higher education system of colleges and universities is the envy of the world. Students from all over the world strive to come to the U.S. to take advantage of this educational excellence. Students can choose to apply to any schools they desire. Hillary Clinton's current proposal to provide tax credits to help fund college educations is essentially the same as a voucher or tax credit to enable school choice for a larger number of students.
The requirement that all children of a certain age have to attend school should be retained. If schools choice was implemented in full, what would develop is a range of educational options with different price points and different special offerings. All schools would be accredited and would have to cover a certain core curriculum.
If schools execute poorly and don't meet minimum requirements, they lose their accreditation and eventually get shut down. Government monopoly schools are never shut down. They just continue to fail a new generation of students.
Education is too important to leave it as a government monopoly. The costs are too high and the performance unacceptably low. Providing a constant amount of funding per child for families to choose their schools would create a robust and diverse set of educational options just as our higher education system does today. Wealthy families could still chose to pay more for higher priced educational options. But at least they would not be paying twice. For everyone else a better education with options for all types of students and talents at a lower cost would be achieved.
Liberals and the Democrat Party have resisted school choice for decades. The teacher unions (who largely vote Democrat) are one of the largest and most powerful unions in the U.S. They seem more concerned with preserving their monopolistic status and expanding their membership than on what is best for educating our children.
The liberal argument against school choice, whether facilitated through vouchers or through tax credits, can be summed up with three points:
- Providing vouchers or tax credits to families who send their children to private school amounts to subsidizing private education at the expense of public schools.
- There is a limited amount of money available to fund education. Our public schools are already squeezed financially and diverting money to school choice vouchers or credits means that less money can be spent for children in public schools.
- Education is too important to leave to private enterprise.
Interestingly, a recent court decision mean that children requiring special education can move their child to a school that can best serve him. So the wealthy and special education children have school choice. The middle and lower class majority do not.
Unfortunately, like all monopolies, the government elementary and secondary school system provides results that are mediocre at a very high cost. The average cost per child has soared to more than $9,000 annually for government schools. Private schools on average spend far less than this - more on the order of a little more than $6,000. Success of Catholic schools in producing excellent educational outcomes while spending much less than government schools is well documented. This is especially significant because the demographics of Catholic schools includes a large percentage of lower and middle income students.
Providing 100% funding through vouchers for families to send their children to private schools would save money. The cost of the private schools would be less than educating the student in a government school - and the cost of educating the student in the public school would not be incurred. So if the government monopoly schools were shut down the cost of providing elementary and secondary education to America's children would be reduced by a third.
It turns out that there is a wildly successful model in the U.S. for 100% school choice. Our nation's higher education system of colleges and universities is the envy of the world. Students from all over the world strive to come to the U.S. to take advantage of this educational excellence. Students can choose to apply to any schools they desire. Hillary Clinton's current proposal to provide tax credits to help fund college educations is essentially the same as a voucher or tax credit to enable school choice for a larger number of students.
The requirement that all children of a certain age have to attend school should be retained. If schools choice was implemented in full, what would develop is a range of educational options with different price points and different special offerings. All schools would be accredited and would have to cover a certain core curriculum.
If schools execute poorly and don't meet minimum requirements, they lose their accreditation and eventually get shut down. Government monopoly schools are never shut down. They just continue to fail a new generation of students.
Education is too important to leave it as a government monopoly. The costs are too high and the performance unacceptably low. Providing a constant amount of funding per child for families to choose their schools would create a robust and diverse set of educational options just as our higher education system does today. Wealthy families could still chose to pay more for higher priced educational options. But at least they would not be paying twice. For everyone else a better education with options for all types of students and talents at a lower cost would be achieved.
The Triumph of Conservative Free Market Capitalism
The age of monarchs and a peerage economy ended with the French Revolution. The age of empire was largely past by the end of WW II. The 20th century saw a fierce competition of economic and political models to determine the answer for our time. The three most prominent models were free market capitalism, socialism, and communism.
Communism is a rejection of the individual for total collectivism. All parts of the economy are owned collectively by "the people". As such, the representatives of the people, the "Party" and its government centrally planned and controlled every aspect of production and trade. Theoretically everyone shared equally in the success and failure, with no bourgeois capitalists to accumulate a larger portion of the country's wealth. Politically all discourse and commentary was completely controlled by the state. The implementation of Communism was a totalitarian state; individual civil rights did not exist.
Socialism favors heavy government intervention and control of key aspects of infrastructure and the economy. While not as centrally planned as Communism, there is a large degree of state ownership and control of key sectors. Socialism relies on heavily regulating companies and many aspects of production and trade to achieve social goals such as massive entitlements for the population. While typically democratic in nature, Socialism still favors collectivism over individual responsibility and success.
Free market capitalism promotes less regulation, low taxes on savings, investment and capital, and minimal government intervention in the economy. Free market capitalism is most often combined politically by political conservatives who favor individual rights and responsibility. When combined together an operating model emerges that encourages entrepreneurship and investment and rewards success. Capitalism relies on the fact that "markets" are more efficient that government planning to achieve economic success.
The failure of Communism's central planning model has been universal. One of the last holdouts, Cuba, is economically devastated. Buildings and infrastructure are crumbling. Most of the cars are patched together models from the 1950s that were there when Batista was overthrown.
But throughout the world conservative principals combined with free market capitalism are exploding. The world watched closely as America emerged from WWII as the greatest economic power ever known. As the 2oth century progressed the dominant success of free market capitalism as the surest path to prosperity became undeniable. The implementation and refinement of supply-side principles during the Reagan administration capped a century of economic and political success.
Today, this amazing phenomenon is transforming the world. Free market capitalism and conservative principles are being implemented in country after country. In fact, only in the U.S. are these conservative, free market principles not considered highly progressive.
France has elected a conservative President intent on reforming an economy and society that have stagnated for so long under the shackles of socialism, unionism and protectionism. Supply side tax policy is being implemented throughout the world. 18 countries now have a flat tax. Poland has announced its intention to implement a 15% flat tax. Germany, France and the U.K. have slashed their corporate tax rates. The "Irish Miracle" speaks for itself. A new National Bureau of Economic Research study has found that countries with low tax rates on business have statistically significant higher rates of new business formation, investment and income.
Capitalism is transforming Vietnam in a way that Johnson, McNamara and Westmoreland could not. China continues to be a totalitarian state, but capitalist reforms have resulted in an exploding economy that is building a middle class that is demanding greater individual rights. The market capitalization of the global stock market stood at about $13 trillion in 1994. Today, it is over $50 trillion! Free market capitalism has created a synchronized global economic boom that is unprecedented.
Conservative, progressive free market capitalism has become the greatest agent for positive change in the world. Let's call it "Market Liberalism". Only in the U.S., where the Democratic Party and its liberal surrogates wage war daily on prosperity and individual success, do we risk retreat from the most successful political and economic model ever seen.
Communism is a rejection of the individual for total collectivism. All parts of the economy are owned collectively by "the people". As such, the representatives of the people, the "Party" and its government centrally planned and controlled every aspect of production and trade. Theoretically everyone shared equally in the success and failure, with no bourgeois capitalists to accumulate a larger portion of the country's wealth. Politically all discourse and commentary was completely controlled by the state. The implementation of Communism was a totalitarian state; individual civil rights did not exist.
Socialism favors heavy government intervention and control of key aspects of infrastructure and the economy. While not as centrally planned as Communism, there is a large degree of state ownership and control of key sectors. Socialism relies on heavily regulating companies and many aspects of production and trade to achieve social goals such as massive entitlements for the population. While typically democratic in nature, Socialism still favors collectivism over individual responsibility and success.
Free market capitalism promotes less regulation, low taxes on savings, investment and capital, and minimal government intervention in the economy. Free market capitalism is most often combined politically by political conservatives who favor individual rights and responsibility. When combined together an operating model emerges that encourages entrepreneurship and investment and rewards success. Capitalism relies on the fact that "markets" are more efficient that government planning to achieve economic success.
The failure of Communism's central planning model has been universal. One of the last holdouts, Cuba, is economically devastated. Buildings and infrastructure are crumbling. Most of the cars are patched together models from the 1950s that were there when Batista was overthrown.
But throughout the world conservative principals combined with free market capitalism are exploding. The world watched closely as America emerged from WWII as the greatest economic power ever known. As the 2oth century progressed the dominant success of free market capitalism as the surest path to prosperity became undeniable. The implementation and refinement of supply-side principles during the Reagan administration capped a century of economic and political success.
Today, this amazing phenomenon is transforming the world. Free market capitalism and conservative principles are being implemented in country after country. In fact, only in the U.S. are these conservative, free market principles not considered highly progressive.
France has elected a conservative President intent on reforming an economy and society that have stagnated for so long under the shackles of socialism, unionism and protectionism. Supply side tax policy is being implemented throughout the world. 18 countries now have a flat tax. Poland has announced its intention to implement a 15% flat tax. Germany, France and the U.K. have slashed their corporate tax rates. The "Irish Miracle" speaks for itself. A new National Bureau of Economic Research study has found that countries with low tax rates on business have statistically significant higher rates of new business formation, investment and income.
Capitalism is transforming Vietnam in a way that Johnson, McNamara and Westmoreland could not. China continues to be a totalitarian state, but capitalist reforms have resulted in an exploding economy that is building a middle class that is demanding greater individual rights. The market capitalization of the global stock market stood at about $13 trillion in 1994. Today, it is over $50 trillion! Free market capitalism has created a synchronized global economic boom that is unprecedented.
Conservative, progressive free market capitalism has become the greatest agent for positive change in the world. Let's call it "Market Liberalism". Only in the U.S., where the Democratic Party and its liberal surrogates wage war daily on prosperity and individual success, do we risk retreat from the most successful political and economic model ever seen.
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