Mauldin Makes the Supply-Side Pitch

John Mauldin's latest newsletter, entitled "Debt Be Not Proud", examines a couple of recent studies linking larger government ot lower economic growth. The first study is by Bergh and Henrekson; Mauldin observes,

The first study we'll look at shows a clear inverse correlation between the size of government and growth. This really confirms common sense, as government only takes from private production to fund its spending. And while one can make a case that some government spending is productive, much of government spending, including transfer payments, does not contribute to that case. That is not the same as arguing that those transfer payments should not be made. It simply points out that there is a cost to society to increase the size of government. And that cost is in jobs, hence the ugly employment numbers.
Bergh and Henrekson find a 'significant negative correlation.' Specifically, 'an increase in government size by 10 percentage points is associated with a 0.5% to 1% lower annual growth rate.'" (bold emphasis is Mauldin's)

Mauldin also quotes a paper by Reinhart and Rogoff:

"Consistent with other more recent research, the authors confirm that public debt overhang episodes are associated with growth over one percent lower than during other periods. ... duration of the average debt overhang episode across all 26 episodes lasted an average of 23 years.... Growth effects are significant even in the many episodes where debtor countries were able to secure continual access to capital markets at relatively low real interst rates. That is, growth-reducing effects of high public debt are apparently not transmitted exclusively through high real interest rates.

We see where this is going. John is in favor of government austerity based on the correlation between higher government debt and lower economic growth. He has confused cause and effect, in my opinion. Low growth (or negative growth) causes high unemployment, which in turn causes lower tax revenues and higher spending on unemployment insurance, government-provided medical care, and even disability insurance.

This is exactly opposite from John's claim that bigger government causes lower growth. This makes no sense to me, but it's the classic supply-side Republican argument. In this view, government spending "crowds out" private investment, channeling resources into non-productive government pursuits. Unfortunately, the current economic malaise represents a demand problem, not a supply problem. Government is not crowding out private spending; there is literally trillions of dollars sitting in corporate coffers and private accounts looking for a productive place to invest money. Unfortunately, at the end of the pipe, the consumer is tapped out worldwide, and has no money to spend!

They call economics the "dismal science" because it's not really science at all. The world is not a laboratory, and we seldom have the luxury of testing two possible solutions to the same problem, to see which works better. In this sense, we have been extraordinarily lucky; lower government spending ("austerity programs") have been tried in a number of countries (such as the U.K. and Greece). The short-term results have been unanimously bad: lower government spending leads to lower GDP (duh!). Long-term, it may lead to higher GDP, but there's no evidence of that.

On the other hand, spending programs (like the 2009 U.S. stimulus) have shown good short-term results, though there's no evidence of long-term benefits (unless the money is spent on long-term projects, like roads and bridges).

John Mauldin is generally a balanced, thoughtful commentator whom I generally agree with. But he really blew it on this one!

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What Really Matters This Fall

In my last post, I suggested that Medicare was a phony issue in the 2012 Presidential Election.  What, then, does matter?

Let's start with the premise that neither party will achieve a filibuster-proof 60 votes in the Senate. Nate Silver's last prediction had the Senate at 50R/49D/1I. The Democrats currently hold an effective 53 seats (including two Independents who caucus with them); they will be really lucky to hold this majority as 21 of 33 seats up for grabs this fall are theirs. Unless Mitt Romney is revealed to like live boys or dead girls, the Senate will not return to the 2009 60-vote Democratic majority.  On the other hand, Republicans would need to win every closely-contested race to get to 57 votes. It's hard to imagine where they'll find three more; the GOP would have to win all the lean-Democrat seats (FL, OH, NM), the likely-Democrat seats (WA, NJ, WV, MI, CT, HI), then somehow find one more from the safe-Democrat seats (CA, PA, NY, MN, MD, DE, VT, RI).  Very unlikely, barring death, retirement, or scandal; and even then, not likely.

It's therefore safe to stipulate that the Senate will be gridlocked once again.  Nothing important from either party will get to the President's desk.  We'll see another session like the last one: brave lawmakers reached across the aisle to name post offices and reaffirm pizza's status as a vegetable.  And that's about it.

What difference does it make, then: Obama or Romney? Here are the things that the President can do, with or without Congress:

1. Foreign policy.  Before Harry Truman, Congress and the President took the War Powers Clause of the Constitution seriously.  The country would not go to war without a Declaration of War by Congress. Faced with a recalcitrant Congress, Truman set a regrettable precedent by involving us in a "Police Action" in Korea. Since then, the U.S. hasn't declared war, but has been involved in multiple foreign adventures: Vietnam, Kuwait, Kosovo, Grenada, Iraq, Afghanistan.  And maybe some that I'm forgetting. Each of these has been initiated and driven by the White House, with cover from a timid Congress in the form of non-binding resolutions. Here's a nice piece by Michael O'Hanlon detailing how a Romney foreign policy might differ from Obama's. And here's an analysis by George Friedman (via John Mauldin) on the intellectual differences between the two.
2. Regulation. The President has considerable discretion to set government regulations. For example, Obama has expanded fuel economy standards to cover trucks, and set lofty new goals for passenger cars going forward. Aggressive environmental and financial regulations are liable to be casualties of a Romney administration.
3. Law Enforcement. President Obama has set a dangerous precedent by choosing which laws to enforce, and which to ignore. Congress was unable to reach agreement on the Dream Act, so the president acted unilaterally and decided to stop deporting young illegal immigrants. The Democrats will live to regret this precedent, in a Romney administration and down the road.
4. Supreme Court nominations.  This is the big one. There's a really good chance that the next president will appoint at least one justice.  Ruth Bader Ginsburg is the oldest, unhealthiest, and most liberal of The Nine. Were she to die or resign in the next four years, her replacement would be absolutely critical.  Obama would appoint a replacement who would hold the liberal line and preserve the center-right orientation of the court. Romney, on the other hand, would appoint a conservative who would swing the court even further to the right, conservative to overturn Roe vs. Wade if they chose to fight that battle. For this reason, Ginsburg's replacement is likely to elicit a filibuster, no matter who our next president is.

Don't be fooled by the millions of words wasted on taxes, social security, Medicare, Medicaid, welfare, the economy, education, defense spending, gay marriage, trade, and health care reform. The Executive Branch can do little to directly affect these issues. When voting for President, this short list is the only thing you need to worry about.

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Why Medicare Plans Don't Matter

The candidates and pundits are spending a lot of time and energy talking about Medicare Reform.  Polls suggest that 4/5 voters want to leave Medicare and Social Security alone. Even among the Tea Party, 70% of respondents want to leave this popular program untouched. (The Tea Party, of course, wants to cut the size and reach of government; but they don't want to touch Medicare or Social Security, which makes the whole thing a head-scratcher to me.)

So, regardless of how much Obama, Romney, and Ryan talk about it, Medicare won't shrink; indeed, it's likely to get much bigger (a huge majority of ex-hippies didn't heed Pete Townshend's advice and are still coming down for breakfast). If Romney wins, and proposes some version of Ryan's Medicare plan, it has no chance of getting past Congress. Indeed, if the GOP sweeps this fall's election (we're now ten weeks out, and it looks extremely unlikely), they won't even propose Medicare cuts.  If they do, the cuts will get just a trickle of votes in the House, from safe Republican seats.

Rest your grey heads easily, Medicare isn't going anywhere.


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Are the World's Great Newspapers Finally Getting it Right?

Just finished this excellent expose on the Financial Times' strange and inconsistent pricing. Apparently, the offered price differs greatly, depending on when you hit the site, which browser you use, and even where your IP address is located (a commenter notes that you can reduce the price to $50 per year by VPN-ing to India, and buying it from there).

The article got me thinking about other members of the "World's Great Newspapers" club, and how they are trying to monetize their reputation, world-class reporting, and editorial prowess in today's fast moving web-based world.  They New York Times (ticker NYT) stumbled on a pretty damned good model: 10 free articles per month (recently tightened to 5, I think), and between $15 and $20 per month for all-you-can-eat, depending on which platform you'd like to use (e-reader, web browser, mobile phone).  I like to browse articles occasionally, so I'm signed up for the $15 web-based version.  The price is a bit high, but the quality of their news, and especially the terrific insights on their editorial page, are worth the money to me.  Apparently, the rest of the world agrees, as their model has been a big success.

(I do quibble a bit with one aspect of NYT's paywall. They have erected an artificial barrier between nytimes.com and the Kindle version; I like to read the latter in bed sometimes before dozing off. But, this is not a freebie under their plan, or even a low-cost add-on; it's an additional $20 per month! So rather than paying for the same news twice at $35 per month, I use Calibre to "scrape" nytimes.com and transfer it to my Kindle. One extra step that I'd love to avoid, and would be happy to pay two or three bucks a month to avoid.)

The New York Times has learned the wrong lesson from their successful paywall, however. They think that it means that average readers will pay for news. So they recently erected a paywall on boston.com, the web site for the wholly-owned Boston Globe. We live near Boston, and got the Globe (Dead Tree Version) delivered 7 days a week for over 20 years. We were part of a declining demographic, however; to stay in business, the Globe fired most of their veteran (read: expensive) sportswriters. At one time, in fact, they had the (what some considered) the best sports page in America. From http://forums.celticsblog.com:

From the 70s-early 00s, the Boston Globe had 'the best sports section' in the nation.  Some of the Globe's writers over those years were Ray Fitzgerald, Bud Collins, Will McDonough, Ron Borges (pre-2001), Dan Shaughnessy (pre-98), Peter Gammons, Bob Ryan, Jackie MacMullan, Leigh Montville, Charlie Pierce, Kevin Paul DuPont, and I'm sure I'm missing some.  A lot of those are in the Hall of Fame of their respective sport.  With Ryan's retirement, it is the official nail in the coffin of the 'best-in-the-nation' sports section of the Globe (although, I'd say it pretty much lost that title in earlier part of this decade, as its probably not even as good of a sports section as the Herald now.)

One Sunday a few years ago, I woke up ready to spend a couple of hours reading the Globe and enjoying a bagel and coffee, and  instead found myself finishing in about half an hour. To paraphrase Gertrude Stein, there was no longer any there there. There was no content left that was worth paying more than $30 per month for. (That was another survival move on the Globe's part, they continually raised the price.) So, we canceled the subscription.

Late last year, the Times started charging $4 per week to read boston.com.  Since then, I've occasionally followed a link there, but have no intention of paying to read boston.com regularly. They have almost no original content, and certainly none that's worth paying for.

The inevitable conclusion: people will pay for quality content, but you can't charge for crappy content. Out of habit and brand recognition, boston.com was a top destination for millions of readers, but those habits can change overnight if there is no value added. There are plenty of place to find Celtics scores, game analysis, local concert news, and the like.  So, aided by it's Manhattan masters, the Boston Globe is slowly circling the drain. Tweet

Why I Love Trading the Retailers

This morning, in a generally strong market, and especially strong market for retailers, Zumiez (ZUMZ) has been dropping like a stone.  Here's a two-week chart (30 min. bars) of XRT, the SPDR S&P Retail ETF:

Here's Zumiez (ZUMZ), same scale:

There's no hard news on the tape for ZUMZ, but Piper Jaffray (PJC) has a research note out, and has downgraded ZUMZ to neutral from outperform.  I haven't seen the note, but for the stock to be down big in a good market, the opinion must be pretty bad, and the data must be pretty solid.

Ever since August 2000, when the SEC instituted Regulation FD, it has been exceedingly difficult to be a consistent winner as a purely technical trader. Prior to that, it was possible to figure out what the "smart guys" were doing by reading the charts, and looking for clues in price and volume action. The charts gave us a graphical picture of big money psychology and information flow. A savvy trader could piggyback on the big money by trading the charts (moving ahead of the public), and make nice profits by "selling the news" when important announcements (earnings, patents, FDA approvals, etc) were made.

This selective information flow has been completely cut off by Regulation FD. Corporate insiders are a weaselly bunch, but they're not going to risk a big fine or jail time by "spilling the beans" on earnings to a buddy over a 3-martini lunch. So, analysts, street touts, mutual funds, and other "wise guys" are in the same boat that the public is; they're left to read the tea leaves by pawing through publicly available information such as SEC filings, newspaper and magazine articles, online news sources, message boards, and rumors. It's still possible for smart guys (big and small money) to beat the market, but you can no longer do it with non-public information. (Except for crooks like Raj Rajaratnam, Roger Blackwell, Joe Nacchio, Martha Stewart, and U.S. Congressmen.)

There is one exception: the retailers. If you are a low-paid manager of a Zumiez store in Smallville Mall, you have some pretty valuable information at your fingertips: sales, margins, comparisons to last year for your store. And if you are a hard-working analyst at Piper Jaffray who has a network of fifty of these managers in his Rolodex (does anybody really use Rolodexes anymore?), you have a pretty damn good picture of how the company is doing, with no need for information from the CEO. In fact, you may have better information than the CEO! Look for ZUMZ to close down a few percent today on higher than average volume, and for the company to be down even harder on the next same-store sales or earnings announcement.

Consequently, if you read your charts closely, you will notice that the average stock tends to show big moves on heavy volume, and lots of sitting around on light volume in between...no follow-through. Retail stocks, on the other hand, tend to be better behaved, moving in gentle arcs and holding their trend lines for longer periods. These stocks do follow through on breakouts and breakdowns. This is why I love trading the retailers, it's still possible to beat the market using pure technical analysis. Tweet

Queen Elizabeth I Formed World's First Franchise 350 Years Before Ray Kroc

Fascinating history lesson in last week's Economist on The East India Company. Queen Elizabeth I chartered the company in 1600 as a way to facilitate British trade around the Cape of Good Hope to Asia. The Economist says this event marked the beginning of the modern world:

The East India Company foreshadowed the modern world in all sorts of striking ways. It was one of the first companies to offer limited liability to its shareholders. It laid the foundations of the British empire. It spawned Company Man. And—particularly relevant at the moment—it was the first state-backed company to make its mark on the world.

I found this passage particularly interesting. It sounds like QE1 invented the modern franchise.

The Company improvised a version of what Tom Peters, a management guru, has dubbed “tight-loose management”. It forced its employees to post a large bond in case they went off the rails, and bombarded them with detailed instructions about things like the precise stiffness of packaging. But it also leavened control with freedom. Employees were allowed not only to choose how to fulfil their orders, but also to trade on their own account. This ensured that the Company was not one but two organisations: a hierarchy with its centre of gravity in London and a franchise of independent entrepreneurs with innumerable centres of gravity scattered across the east. Many Company men did extremely well out of this “tight-loose” arrangement, turning themselves into nabobs, as the new rich of the era were called, and scattering McMansions across rural England.

How is this arrangement different than owning a McDonalds restaurant? You own the property, but  the french fries and Big Macs must be made precisely as the company says. And, if you work hard and keep the place clean, you're almost guaranteed to get rich. 
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Why the Republicans are Right on Payroll Taxes

News flash: the rich are getting richer, the rest of us are sucking wind. What should Washington D.C. do about it?

The Democrats want to raise taxes on the wealthiest 1%, the Republicans cry "class warfare" and decry any tax on "job creators". Meanwhile, our deficit is enormous and growing nearly $4b per day. How can we square these differing views?

How about a surtax on the rich, as the Dems have proposed. But, these lucky folks could recoup their tax dollars if they really do create jobs...anybody who employs Americans should be able to claim a tax credit of 1% of U.S. payroll against their personal income tax. This credit should be distributed to shareholders for publicly traded companies.

The net effect would be similar to a Republican proposal to reduce employers' share of payroll taxes, but doing it my way would make it more palatable for Democratic constituencies. It would also provide more of a boost to the economy than the Democrats current proposal to extend the payroll tax cut for employees into next year. That tax cut doesn't help the unemployed one whit, while giving the cut to employers encourages them to hire jobless Americans. While folks with jobs would certainly appreciate a tax cut, our biggest problem is folks without jobs! If we could fix that, the rest would take care of itself. Tweet