Dan Dorfman: The Return of the Brothers Grimm

Fairy tales are supposed to be the province of the young. Not anymore. The brothers Grimm wrote their first volume of them in 1812. And now, nearly 200 years later, they seem to be making the trek to Wall Street.

Here’s the story. If I told you that the overseas uprisings are almost kaput, that rising oil prices (now around $100 a barrel) are hardly a big deal since the price is still well below its July 2008 high of $147, that European debt woes are history, that our housing and job problems should soon take a decided turn for the better amid an improving economy, that inflation fears are way overdone and that higher interest rates are simply out of question in a struggling economic environment, what would you tell me? Probably, that I ought to rejoin the real world.

In other words, leave the fairy tales to the brothers Grimm.

Well, these rosy views, in a nutshell, are what a fair number of Wall Streeters are pitching and what London money manager Raymond Stahler suggests investors seem to be swallowing by continuing to bid up U.S. stock prices in the face of a giant 86 percent rebound from their March 2009 lows (roughly 6,500 to 12,100 in the Dow Industrials) and a bevy of risks and uncertainties.

A couple of weeks ago, I caught up with Stahler, who told me he thought investors were recklessly ignoring the negative ramifications of the sudden outbreak of revolutions and the clear and present danger of them spreading.

Now he’s taking it one step further, noting, “Nero fiddled while Rome burned and U.S. investors appear to be doing the same thing when it comes to the stock market.” In effect, he thinks they’re blinded by the signs of economic improvement, accordingly seeing only sunshine and no clouds. “There’s just too much euphoria,” he says, “totally unjustifiable.”

Some of those euphoric signs: heavy leveraging by many hedge funds to be as fully invested in stocks, a lively pace of corporate buybacks a growing risk appetite, very low institutional cash reserves and inflows of nearly $25 billion worth of U.S. equity mutual funds the past couple of months (although there has been some recent outflows due to the riots in Egypt and Libya and the rising price of oil).

You may be one of those struck by the euphoric wave, but it’s worth knowing that one of the more respected investment and economic minds around, David Rosenberg, the chief investment strategist and economist at Glusken Sheff, a leading Canadian-based wealth management firm, is hoisting cautionary flags. In a weekend note to clients, he kicked off with six of them: declining home prices, contracting bank credit, listless jobs market, soaring oil prices, accelerating spending cuts and tax hikes at state and local government levels and policy tightening overseas.

Granted there are tailwinds, such as quantitative easings, strong corporate balance sheets, manufacturing renaissance and the lagged impact of last year’s stimulus announcement. But Rosenberg notes, “If I was keeping score, headwinds are in the lead by six to four.”

It also seems clear to our worrywart that the tenor of the global economic recovery is undergoing a bit of change here, and not for the better unfortunately. But U.S. growth projections, he observes, have almost doubled to nearly 4 percent for current quarter GDP even though data on new home sales, real estate prices (resale values are down to 2002 levels) and durable goods orders offer some cause for pause.

Rosenberg also takes issue with what he regards as another fairy tale — the emerging view that Saudi Arabia can just step in and replace Libyan oil, which strikes him as totally off base. The reason: Libya’s crude is a perfect feed for ultra low sulfur diesel. The oil the Saudis would use to replace it is not. Apparently, you need three barrels of Saudi crude to get the same number of barrels of diesel sulfur you get from one Libyan barrel. Further, Saudi crude is very high in sulfur and the refineries that process the Libyan crude cannot remove the sulfur.

Rosenberg also raises the question of what happens if we lose Libyan crude (an estimated 1.8 million barrels a day) and strategic stocks are not released? Then, as he sees it, $150 a barrel oil would certainly not be out of the question. And that, he points out, is not factoring in Algeria, which has also experienced recent protests.

Rosenberg figures the rent rise in oil from $80 to $100 a barrel will subtract 1 percent off real GDP growth. He went on to note that about half of this quarter’s fiscal stimulus from the payroll tax cut has been wiped out by what’s happening at the gas pump.

Another economic revelation that he believes is worth thinking about centers on the Federal Reserve Bank of Chicago’s monthly National Activity Index (NAI) that covers the entire economy and is viewed as close to a GDP proxy as you can get. The index has been negative for eight straight months and came in below zero in five of the last six months. The NAI swung from 0.18 in December to 0.16 in January. One has to view these numbers with alarm since Rosenberg says anything below 0.70 and the chances are good the economy is heading back into a recession.

“Illusion is the most dangerous thing,” wrote Ralph Waldo Emerson. As far as Wall Street goes, so too may be the return of the brothers Grimm. But just maybe they never left since fairy tales are a good part of what Wall Street is all about.

What do you think? E-mal me at Dandordan@aol.com.

Read more: Oil Prices, Rising Oil Prices, Oil Prices Up, Sulfur Diesel, Stocks, Wall Street, Business News

Michael Brenner: Demystifying Our Economic Predicament

Transcendental mystery is of a bygone era. Yet our profane secular world also contains extraordinary things that are baffling and defy logical comprehension. Economics is especially rich in these mystifying puzzles. This despite the omnipresence of the experts who declare themselves wizards of the premier social science. Here are a few bewitching mysteries that bedevil us.

Number one is the gross discrepancy between a reviving national economy and public penury. Unprecedented deficits are exacting a painful price in austerity. Budgets of states and municipalities across the land are under the knife. Libraries have become luxuries, schools stepchildren, and even police and fire departments are endangered. In aggregate, the 50 states are running deficits of $175 billion.

Cities in aggregate suffer a deficit of between $30-40 billion. In Washington, tax revenues are flat so that the deficit continues to mount despite the curtailment of stimulus spending and other austerities, e.g. a freeze on federal employee salaries. However, the numbers tell us that our stuttering recovery has succeeded in bringing GDP very close to where it was before the financial crisis broke in 2008. At that time, governments at all levels enjoyed fiscal good health. How is this possible? Doesn’t GDP today measure what it measured three years ago? Aren’t local and state tax rates set where they were three years ago? Haven’t the one-time federal tax cuts of 2009 expired? ‘Yes’ to all those questions. Indeed, real estate taxes in most jurisdictions have been kept level or actually increased — as in N.Y.C. and in Austin where they were raised by 10% despite stable housing prices.

So what’s going on? Intervention by the capricious gods on Mount Olympus? Looking for an answer from the community of economists is frustrating. Rare is the specialist who addresses the question squarely. Certainly, a scouring of the financial press in a fruitless hunt for edification.

No need to consult either the Delphic Oracles or the economic seers. For there are clues that point to the solution of this mystery — a deeply unsettling solution. One glaring truth is that those who pay taxes in a manner commensurate with income now are reduced in number relative to those who routinely elude tax by means fair or foul. That latter category includes corporations and very wealthy individuals. Warren Buffett’s secretary is in a higher tax rate than the maestro of Omaha — as he himself has pointed out.

Of the Fortune 500 companies, 123 pay less than 23% on corporate revenues even though the official corporate tax rate is 35%. (Tim Geithner urges that the nominal rate drop to 25%). Those taxable earnings themselves represent only a fraction of profits given all the dodges built into tax code that invite accounting antics to hold official profits to a minimum. Then there are the special tax breaks for the oil and gas industry. Then there are the off-shore tax havens that allow corporations to locate their fictive headquarters in places with low or no taxes, Cayman Islands. Those havens are also available to the super rich. Then there is the infinite variety of financial shenanigans that befuddle underfunded, under motivated so-called regulators. The games that have shifted so much national wealth into the accounts of the top 2% are almost all still permitted despite their having brought the global economy to the brink of the precipice.

Then there is ever more extensive outsourcing of jobs and facilities abroad. GE, whose former CEO Mr. Jeffrey Immelt is now one of Mr. Obama’s chief economic advisors, cut its payroll by some tens of thousands over the past decade. Its revenues have soared over this period because more and more of its corporate activity takes place in other countries. According to the numbers, much of the ensuing GE revenues are recorded as increases in national GDP. But foreign workers don’t pay taxes to the IRS (nor do they or GE contribute to FICA). The downward effect on government tax revenues if twofold: GE is in a better position to ‘hide’ earnings by showing the greatest profits in whichever of its locations have the lowest tax rates; and the earnings of American employees (who do file IRS returns) have become a smaller and smaller fraction of GE’s corporate wage bill. A similar logic applies to the growing practice of raising ‘productivity’ by forcing white collar workers to work uncompensated overtime and by the reliance on part-time workers who are paid less and receive few if any benefits. Consequently, the inflation-adjusted income of the median household — smack in the middle of the populace — fell 4.2% between 2007 and 2010 (even worse than the 1970s, when median income rose 1.9% despite high unemployment and inflation).

GDP numbers themselves are distorted. The methodology for their calculation is a simple tabulation of transactions. Every time players in the financial money game trade ‘products’ of dubious value to the ‘real economy,’ like the notorious CDSs and Collateralized Debt Obligations (CDOs) or Credit Default Swaps (CDSs), the national cash register records the transaction as an addition to GDP. Those sorts of pseudo financial transactions have increased as a fraction of all financial dealings. The financial sector as a whole has grown to about 20% of the overall national economy and an even larger share of corporate profits. If we were to assume that 50% of financial transactions fall into the fictive category, then 10% of nominal GDP growth is also fictive. The American economy that allegedly grew at an annual rate of 2.8% in the fourth quarter may actually have grown by only 2.5%. There are other distortions of this kind that tend to overstate the rate of increase in GDP.

All of this could be inferred from the stubbornly high rate of unemployment coincidental with record corporate profits. Too, those profits are coincidental with a continuing decline in mean hourly wages for American workers — another telltale sign. Moreover, connivance with the 1990s reformulation of unemployment measures masks the fact that today’s unemployment as stated in 1980 terms is more like 15% than the official 9%. These disparities are incomprehensible if we insist on taking at face value the numbers that are thrown at us about the state of the national economy.

A related mystery in embedded in the headline stories about the dire budgetary straits in which the country finds itself. The ‘age of austerity’ has become a commonplace in our public discourse on why America can no longer afford this, that or another thing. The concrete referents are everything from social services for the poor and elderly, to school counseling services, to public transportation on par with any other reasonably prosperous country, to unemployment benefits, to decent health care.

By any logical standard this is literally nonsense. The United States today is as rich as it ever has been — according to the numbers. And far richer that in earlier periods when we could afford most of those things — not to mention that other developed countries can afford them. Yet our political life accepts these apocalyptic assertions as Gospel Truth.

Indeed, the economics priesthood provides the added reassurance of a scientific laying on of hands. Some of its luminaries actively proselytize in promotion of this creed. They are the intellectual mainstays of think tanks that go a step further to send forth the Word that we cannot even afford some basic things that we’ve had for 75 years — like Social Security. These numerologists are so deft that the obvious is cast into oblivion and the unreal is sealed in supposedly incontrovertible algebraic equations. The cultural equivalent of shamans speaking in tongues.

The United States does not pay for things of social value because IT chooses not to — not because it cannot afford them. IT has multiple antecedents: society as a whole; elected representatives; government officials; political parties; all those powerful interests that distort the process in every facet to their own advantage. The choices made in recent years include expending $1 trillion to $2 trillion to hunt spectral terrorists in the far corners of the globe to little effect. It includes the $87 billion spent annually on our intelligence agencies. It includes the huge tax breaks given by the Bush administration concentrated on those in the upper 2% income bracket. Between 2002-2010 that diverted approximately $2.7 trillion dollars out of the Treasury into the pockets of the wealthy (adding the debt servicing of resulting deficits).

Barack Obama’s ready acquiescence in their extension means that over the next decade another $3.1 trillion will be similarly diverted. As someone said, “a trillion here, a trillion there, and soon you’re talking about real money.” $7-8 trillion could pay for all the state/municipal budget cuts, the rebuilding of the country’s infrastructure, a serious energy program, environmental clean-up, aid to the elderly. (As for health care, we could pay for first rate coverage of every citizen at a cost one-third lower than what we now spend were we to switch the kind of single payer system that works nearly everywhere else in the developed world — freeing another trillion or so for other purposes).

Think of higher education. When I began graduate school at Berkeley, I paid $105 per annum. That was not even tuition; it was a fee that covered maintenance of the student union and the pool complex in Strawberry Canyon. My total debt after receiving my PhD was $300 owed to the federal government for an interest free loan that I wisely invested in a vintage Pontiac convertible. Today, students at state universities pay tuition of between $10,000-16,000 per annum. They accumulate heavy debts on which they pay market rates. The Obama administration now has declared that Perkins Loans grants will start accumulating interest from day 1 rather than upon graduation — adding to students’ financial burden. No wonder that the percentage of American high school graduates attending college is declining to the point where we rank below most developed countries. This did not happen because of ‘hard times’ or inexorable economic forces. Rather, it is due to social choices that the country has made.

This also is why the last subway system of any consequence in the United States was built when Nixon and Ford were presidents (D.C. and the San Francisco Bay area). So we suffer dilapidated transport while the residents of better endowed places ride efficient, clean trains in Calcutta, New Delhi, Recife (Brazil), Medellin (Columbia), Cairo, Baku (Azerbaijan); Tashkent (Uzbekistan), Yerevan (Armenia), Busan (South Korea), Izmir and Yekaterinburg — not to speak of the state of the art systems that speed on their way residents of every major city in China. It is concrete realities like this, and those noted above, that should be the starting point for serious intellectual and political discourse about the American economy — not the supposed economic verities that require ‘fiscally responsible’ government officials to make draconian teacher layoffs and to deprive the aged of a decent life.

Reality based assessments of the United States’ economic predicaments should begin with a set of bedrock questions. What is the country’s actual wealth? How is it distributed? Why is it distributed in this way? What is the role of government in producing that distribution? What are the consequences of that distribution? What are the reasons for a possible reallocation of national resources? How might it be done? Is that a desirable or undesirable goal? How could the transitions be made at minimal cost while maintaining a smooth functioning of the economy? Some economic tools are useful to refine the answers. Most of the rest is ritual, theoretical filigree for scholarly archives or mere distraction?

Read more: U.S. Economy, Economics, Corporations, Budget Cuts, Economy, Economic Crisis, Tax Cuts, Business News

State Budgets Unlikely To Get Federal Assistance

Even as widening state budget deficits are becoming a potential stumbling block for economic recovery, Federal assistance seems unlikely.

With Washington lawmakers focused on getting the Federal budget in order, the prospect of aid for struggling states has all but left the conversation, the Washington Post reports. States and local governments face a fiscal crisis, experts say, since the Great Recession withered their revenue. Finding it increasingly difficult to meet their basic obligations, governments across the nation have had to lay off thousands of workers and will likely have to lay off many more, just to keep their fiscal houses in order.

With the unemployment rate around 9 percent, the economic recovery remains fragile. State budget cuts could make the situation worse, the Associated Press reported. As governments cut spending on education, jobs and safety net programs, average Americans, who are already contending with rising fuel prices, could see their economic situation worsen.

The present state budget dilemma would likely be far more severe without the Federal dollars that are currently propping up state budgets. As part of the stimulus package, states received Federal money to compensate for weakened revenue streams. Currently, that assistance covers about a third of state budget shortfalls, according to a recent report from the Center on Budget and Policy Priorities.

Federal assistance is quickly running dry. Next fiscal year, a total of about $6 billion will remain. State budget deficits will have grown to a combined $125 billion, according to the report.

As spending outpaces revenue, states have few solutions. State tax collection is currently 12 percent below pre-recession levels, according to another report from the Center on Budget and Policy Priorities. As the appetite for tax hikes remains virtually non-existent, savings will come from the other side of the ledger.

Already, states have cut 400,000 workers since 2008, the Washington Post notes. If they were to balance their budgets solely by laying off employees, another 850,000 workers would be dismissed.

State pain impacts budget troubles on the municipal level. Newark, New Jersey, for instance, has seen aid from the state drop by 40 percent between 2008 and 2010. As a result, Newark has had to make some difficult cuts, including laying off 13 percent of its police force.

New Jersey is expected to have a budget shortfall equal to about 37.4 percent of its current budget, according to the Center on Budget and Policy Priorities. Other states face bigger deficits: Illinois’ projected shortfall is 44.9 percent of its current budget. Nevada’s is 45.2 percent.

Federal lawmakers deprived states of one potential source of revenue when they allowed the Build America Bonds program — which used Federal money to make it cheaper for states to borrow money — to expire in December.

Read more: Layoffs, State Budgets, Municipal Bonds, Build America Bonds, States, State Budget Crisis, Economic Crisis, Business News, Public Workers, Municipal Debt, Business News

Government shutdown unlikely, but budget battle continues

WASHINGTON (Reuters) – A short-term deal taking shape in Congress to avert a government shutdown is only a temporary respite from a bitter debate over the federal budget as Democrats and Republicans clash over spending cuts.

U.S. says $30 billion of Libyan assets blocked

WASHINGTON (Reuters) – Banks froze a record $30 billion of Libyan assets over the weekend in response to an Obama administration order aimed at pressuring the regime of Libyan leader Muammar Gaddafi.

Ventas adds senior housing muscle with $5.8 billion buy

BANGALORE (Reuters) – Ventas Inc is to buy Nationwide Health Properties (NHP) for $5.8 billion in a stock deal that strengthens its position as the biggest U.S. owner of senior housing and assisted…

U.S. moves warships closer to Libya, freezes assets

WASHINGTON (Reuters) – The United States began moving warships and aircraft closer to Libya on Monday and froze $30 billion in Libyan assets, ramping up pressure on leader Muammar Gaddafi after calling on him to step down.

Wisconsin’s Walker to absent Democrats: 24 hours to return

MADISON, Wisc. (Reuters) – Wisconsin’s Republican Gov. Scott Walker said on Monday that absent senate Democrats have 24 hours to return and vote on a measure to reduce the power of public sector unions or the state will miss out on opportunity to refinance its debt.