Collective Stupidity

November 25, 2012

First, my apologies for not getting on the writing stick sooner.  I've been collecting some thoughts since the elections, trying not to compose a knee-jerk reaction piece to what happened in my once flourishing homeland of California.  In case you're not familiar, there was once a time when California was the Golden State, the land of opportunity, a place where people across the country (and the world) aspired to move in an effort to forge a better life for themselves and their family.  Today California is but a shadow of its former self.  Yes, we still have amazing weather, natural beauty that rivals anyplace on earth, and of course an attitude that allows for a true melting pot of cultural backgrounds to harmoniously coexist.

Despite the mess in Sacramento, the people of California always seemed to have a common purpose of ruling for the greater good through our ballot initiative process.  The perfect example was Proposition 13.  As real estate prices were soaring, homeowners were being priced out of their homes by unaffordable property taxes.  The solution?  Cap those taxes.  Who capped them?  Not the imbeciles in Sacramento, but the people.  There have been countless initiatives passed in California over the years-some good, some bad, but many reflective of two realisms.  First, they benefited the State's overall well-being, bypassing the socialist-leaning state legislature.  Second, they were often well-intentioned, with a goal of fairness.  Consider the proposition that attempted to eliminate political influence in the redistricting process.  While it passed, and its intentions were clear, the ruling party in this state high jacked the process and tilted the playing field more in their favor. 

The national election of 2010 took an extreme, conservative tilt across the country as voters rebelled for the second consecutive election against the status quo incumbents.  In California the opposite happened, and this should have been a warning sign to all of us that something was amiss with the process, or even the people of our fine state.  You see, the country was heading not towards a conservative agenda, but instead looking for a balance that is now lacking amongst both parties, and found the only way to do so was to elect one extreme wing in the House to offset the other extreme wing in the White House.  This resulted in today's gridlock many are now bemoaning.

In California, one extreme wing tightened their grip on power in 2010, and in 2012 it became apparent that the inmates are now ruling the asylum.  In a state that is desperate for jobs, every initiative that burdens business with unnecessary regulations and taxation was passed by the populace.  Every initiative that penalizes financial success passed, yet there was nothing in those initiatives that addressed the real problem-runaway spending from Sacramento. It's now official, the brainwashing has worked.  The people of California are now convinced that the only path out of their doldrums is to take away from those who have achieved either business or financial success, give that money to Sacramento, and pray that somehow it ends up in their pockets.  I call this group think "Collective Stupidity."

We have put ourselves in this position by allowing the wrong people to decide school curriculum.  Why focus on STEM or economics when we need to make sure every student, including those at state sponsored universities, are taking the right humanities courses?  There are only two ways this many people could vote against job creation-ballot stuffing or a lack of understanding of basic economics.  It's probably the latter because in the state of California students are required to take just one semester of economics in their senior year of high school-one class in 13 years of education. That is shameful, and we are now asking these voters to make economic decisions via the ballot box that will impact our state for decades.  Do the politicians attempt to educate this part of the populace?  No.  Instead, those who support and run Big Government have engaged in the Big Lie, convincing voters that the success of others has come at their expense, and that government is the answer.  This is Collective Stupidity.  

Those of us who understand economics and business are also to blame.  We've allowed the leadership to run this ship off course without fighting back.  Now, as the realization occurs that the state is being set on a path to becoming a perpetual bankrupt state, we are in no position to enact changes because we've allowed ourselves to be villified.  The leaders have systematically under-educated the populace, and convinced them that anyone who runs a business is evil.  Instead of targeting government as the problem, the populace has targeted business, and along with it will destroy the middle class.  This is Collective Stupidty. 

I have met with numerous business owners, board members, and wealthy individuals since the election (remember, that's my job), and three themes were consistent.  First, many business owners who have delayed hiring until the uncertainty in Sacramento and Washington gets settled, are leaning towards moving their businesses, if possible, out of California.  That's a real job creator.  Second, many are moving the majority of their investment dollars from riskier assets into tax free municipal bonds to minimize the 60%+ incremental tax rate now faced by Californians (BTW-this didn't work very well in Europe, why are we trying it here?).  Finally, a number of business owners have discussed downsizing their businesses in an effort to pull capital out of the business because the reward no longer justifies the risk.  If I need to explain that risk/reward dynamic to you, my guess is you voted for many of these ridiculous initiatives.

What do we do now?  There are still investment opportunities out there, however, its time to be more selective.  Wait for another financial crisis in the state, which should occur in about two years, and then watch the dominoes fall.   Bumping tax rates and penalizing those who are willing to put capital at risk has NEVER resulted in sustainable higher tax receipts.  As businesses and earners adapt (or move) to the new tax regime, tax receipts decline as businesses relocate to states that are more business friendly.  Job creation declines, and an ever increasing percent of the population hungers for meaningful jobs.  The basics of supply demand tell us that when there is a surplus of labor, labor prices will decline.  In our state they'll decline to the level of minimum wage, which will be bumped due to voter dissatisfaction.  At this point even more businesses will flee and the cycle will repeat.  One thing is for sure-California now has more in common with Greece than just great weather and beautiful geographic features. 

There are still opportunities in this state, but the door is closing for those who haven't yet achieved success-which I believe is the opposite of what the voters intended.  Voters just wanted a better chance at success, and were convinced by those in power that taking from business was the best way to become successful.  Nothing could be further from the truth as we've seen in numerous communist and heavily socialist countries.  Remember, history doesn't repeat, but it often rhymes.  It pays to study the mistakes of others, and it appears that California is about to become a case study. 

Collective Stupidity

Capitalism vs. Socialism

Capitalism vs. Socialism

This is the week when Americans finally make their decision about who will be running this country for the next four years.  The decision is relatively easy, however, the media and the political machinery have muddied the issues.  In reality it boils down to a single decision-do you prefer a President who believes in free markets and capitalism, or do you prefer a President who feels that government should own the means to production and can solve all problems?  Personally I favor capitalism-it will be interesting to see how America casts its ballots.  Good luck to us all.

The equity markets were rained out for the first time since 1985, and were closed for both Monday and Tuesday, the first multi-day closure due to weather since 1887.  Good luck to all those impacted by the storm.  Damage estimates are closing in on $50 billion-and the devastation has been incredible.  

OK, someone finally said it.  QE-4 is now being discussed.  I thought that given the permanent nature of QE-3, we wouldn't hear the term “QE-4”, but I read about it over the weekend. QE-4, permanent QE-3-they are both frightening indictments on the state of the economy.  It's even more frightening to think that if the US government approached their debt financing like a prudent manager of capital, and began locking in some of these low rates for the long term, that the deficit would soar by another $320 billion per year.  In other words, these artificially low rates are keeping the $1 trillion budget deficit from being worse by 30%!

What is the impact to US citizens of the Fed's easy money policy?  Ever hear of the Cantillon Effect?  The Cantillion Effect describes how the inequality in wealth surges because of “artificial and iniquitous re-distribution of wealth” caused by monetary debasement.  Artificially created money redistributes wealth towards those closest to it, to the detriment of those furthest away.  

What is the end result?  Those who benefit from the newly created money drive the price of goods higher.  Those who don't benefit from the new money suffer because they can't afford the desired goods.   Where better is this demonstrated than in the battle between the 99% and the 1%?  The 99% blame the 1%, the 1% blame the 47% not paying taxes, business blames government, government blames business, the old and young point fingers at each other, yet no one blames the source of the problem.  Who blames the Fed besides Ron Paul?  Why aren't they held to a higher standard?  It's frustrating, and hopefully we will take the steps to resolve this inequality on Tuesday. 

German legislators generally were positive about the European Central Bank's bond-buying program after ECB President Mario Draghi gave them a two-hour explanation of how it works. "His answers were very convincing, and so I think we can send the message to German citizens that the worries about inflation that have been expressed here and there are unfounded," said Norbert Barthle, a member of the Democratic Union.  Really?  

The Federal Reserve's Open Market Committee said it will continue stimulus efforts, saying the U.S. economic recovery is too weak to significantly reduce unemployment without help from the central bank. "The committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions," the committee said.  Is anyone surprised by this?  This Fed thinks that low rates are the cure for all problems.  

Those currency manipulators, China, famous for “undervaluaing” their currency, may have some fodder to fight those accusations being made by a country (the US) so irresponsible with their own currency that they make a drunken sailor on shore leave look responsible.  The Yuan reached a 19 year high against the dollar last week, and has been rising steadily since QE-3 was launched.  Watch out for an impact on Chinese exporters.  

In a turn of events not unexpected, China has now replaced the US as the top desintation for foreign investment.  Direct foreigin investment of $59 billion for the first half of 2012 represeented a 3% decline in investments to the Red Giant. The US received $57 billion, down 39% over the same period.  Is anyone surprised that when your leadership makes a direct assault on free enterprise that investors will decide to direct their capital elsewhere?  If this trend continues, the US will have a difficult time funding their budget and trade deficits.  

Sales of new single-family homes last month reached their highest level in 2½ years, the U.S. Census Bureau said. Reversing a decline in August, sales increased 5.7% in September, to a seasonally adjusted annual rate of 389,000.

The Washington Post is reporting that nearly 1 million jobs have been lost in the US due to lay offs, delayed purchases, etc, due to the uncertainly around the fiscal cliff. The National Association of Manufacturers is estimating job losses of 6 million through 2014 and a jobless rate of 12% if the issue isn’t addressed rapidly.  

Here's another chart from my friend Bob Rezaee, who has been spitting them out like crazy lately.  The chart shows that last year we "sent" $60K to each of the 17 million households living under the poverty line.  Between direct payments, food assistance, welfare and other programs, we spent over $1 trillion to support these families.  My guess is most didn't receive anywhere near $60K, which not surprisingly means we are wasting quite a bit of money at the government level.

Let's talk football, after all, the season is almost over.  I went to the USC-Oregon game yesterday, against the advice of most of my friends (BTW-they were right).  It was the worst defensive performance I've ever seen.  All I can say is that Layne had better seriously consider firing his Daddy or he's going to find himself looking for another job.  Oh, and how about San Diego State pulling off an upset of Boise, in Boise?  Nice job Aztecs. 

I also heard a rumor the Bruins are now in first place in the Pac 12 South, sporting new uniforms that finally make them look and apparantly act like a football team.  Alabama squeaked past LSU, and Kansas State kept their title hopes alive.  

Have a great day

Ned