"The most significant threat to our national security is our debt," Admiral Michael Mullen, Chairman, Joint Chiefs of Staff, August 27,2010


Tuesday, March 31, 2009

The Bubble Machine - Part III

The US of A is in the midst of a market based correction of too many years of excessive spending, excessive credit availability and massive deficits which have accumulated into destructive levels of US dollar denominated debt. TheFundamentals refers to this destructive behavior as The Bubble Machine. The last opportunity the US had to engage in a market based correction of this unsustainable pattern of economics was after the dot.com stock market bubble burst in 2001. The appropriate market based corrective measures would have been a combination of sensible tax policy and spending limitations to avoid massive deficit spending coupled with sensible interest rate policy to restrain excessive credit lending activity. Instead we got unnecessary tax reductions, dramatic increases in government spending and ridiculously low levels of interest rates that could be characterized as leaving the bank vault doors open 24/7. The result was a feeding frenzy of bad lending practices, bad regulation by those paid to oversee and prevent bad lending and a general sense from the President, the Congress and the Federal Reserve that everything was go and everything was A-OK. Deficits and debts skyrocketed to unimagined levels.
Here are some observations from that time period when the country had an excellent opportunity to take a bit of corrective and preventative medicine.

“We must do all we can to keep the days of deficits in the past. Budget deficits
force the Government to borrow money in the private capital markets. That
borrowing competes with (1) borrowing by businesses that want to build
factories and machines that make workers more productive and raise
incomes, and (2) borrowing by families who hope to buy new homes, cars,
and other goods. The competition for funds tends to produce higher interest
rates.”

“Deficits increase the Federal debt and, with it, the Government’s obligation
to pay interest. The more it must pay in interest, the less it has available to
spend on education, law enforcement, and other important services, or the
more it must collect in taxes forever after.”

Source: Budget of the United States Government Fiscal Year 2001. Yes folks that was your government speaking then. Before Bush and his disastrous policies followed now by the junta of Obama, Reid, Pelosi, Geithner and Bernanke. The junta should follow the advice of their fiscally responsible predecessors. Their wasteful spending, based on scare tactics of threatened financial doom, will extend the bubbles in government services, health care, education, state deficits and excessive pension plans and result in a continuation of reduced private sector employment in real wealth producing entities. Pension plans, health care, public sector unions, education and government bureaucracies are wealth destroyers. They must be limited in an environment that promotes and rewards wealth creation. The current debt based expansion of the balance sheet of the United States will come to be known as “The Mother of all Bubbles.” Watch the junta run for cover when this bubble bursts.

Thursday, March 26, 2009

The Bubble Machine - Part II

Here are some more bubbles that have failed to find a solution. The US Government and its willing partners in various state capitols has been running a spectacular Ponzi scheme designed to make sure that the American taxpayer keeps funneling a good portion of their income into government sponsored entities (GSE’s) that dwarf the lending and compensation plans at FNMA and FHLMC, or AIG for that matter. These GSE’s include some household names such as American Federation of Teachers (AFT), National Education Association (NEA), Service Employees International Union (SEIU), American Federation of State, County and Municipal Employees (AFSCME) and countless police and fire fighters unions. Look at the result below:
Bubble: US Education Costs
Problem: US Education Cost Index reaches an all time high of 187.256 in Feb 2009 (Dec 1997 = 100)
Solution: NONE. US Education Cost Index has risen steadily over the last 10 years
Bubble: US Medical Costs
Problem: US Medical Cost Index reaches an all-time high of 372.405 in Feb 2009 (1982-84 = 100)
Solution: NONE. US Medical Cost Index has risen steadily over the last 10 years
Bubble: US Government Spending
Problem: US Government budget reaches an all-time high of $3.6 trillion for the fiscal year 2010
Solution: NONE. Government spending, deficits and debts rise almost geometrically!
Bubble: Unfunded Government Pension Costs
Problem: State and Local Government Unfunded Pension Costs are estimated to exceed $1 trillion
Solution: NONE. Until and unless these pensions are changed to defined contribution plans the unfunded pension costs will be a huge real and contingent liability to all taxpayers.
Bubble: State and local government debt
Problem: Debt totals $1.18 trillion in 1999
Solution: NONE – debt has grown to $2.2 trillion in 2008
Bubble: US Sovereign Debt
Problem: US Debt outstanding reached an all-time high of $11,042,553,971,450.47 on 03/17/2009
Solution: NONE. US Debt continues to rise each hour of each day thereafter
The cost of these bubbles is spectacular; way beyond the cost of AIG and subprime lending. On Tuesday, TheFundamentals detailed bubbles that corrected under market forces. Government has replaced market forces in the above bubbles. Governments sustain these bubbles for many reasons but mostly for self interest. Consequently these bubbles are not solved. They expand and are paid for by taxpayers current and future. The stimulus and bailout spending plans and other efforts masquerading as ploys to save the system are solely designed to save these self interest groups. Where are the sacrifices made by these interest groups? Where are the layoffs in the bubbles in education, health care and bureaucracies at all levels of government? Where are the forces to correct these bubbles? When will these price/cost/spending/deficits/debt bubbles burst and decline as in the case of the bubbles subject to market forces?

Tuesday, March 24, 2009

The Bubble Machine - Part I

Bubbles and Solutions
Here is a quick recap/overview of some recent price/cost bubbles and solutions:
Bubble: Dot.com Stock Prices
Problem: NASDAQ reaches a frothy 5132.52 on 03/10/2000 (1971 = 100.00)
Solution: NASDAQ reaches a low of 1108.49 on 10/10/2002 (current = 1457.27)
Bubble: US Residential Real Estate Prices
Problem: S&P/Case-Shiller Index reaches a high of 189.93 in Q2 2006 (Q1 2000 = 100.0)
Solution: S&P/Case-Shiller Index falls to 139.14 in Q4 2008 (appears to be still dropping)
Bubble: US Stock Prices
Problem: Dow Jones Industrial Ave reaches all time high of 14164.53 on 10/09/2007
Solution: Dow Jones Industrial Ave closes at 7278.38 on 03/20/2009
Bubble: Crude Oil Prices
Problem: Barrel Price of Crude reaches an all time high of over $145.00 in July 2008
Solution: Barrel Price of Crude closes at $52.07 on March 20, 2009
Please note that these indexes are market based. In other words, there is a fairly unregulated, government free market at work determining price levels, with the exception of the oil cartel’s attempts to control supply. In many cases, the market influence is global. The prices and the costs reflect market factors such as speculation, manipulation, politicians yapping, bureaucrats fretting and supply and demand. Usually the time period to adjust speculative bubbles is measured in months. It pretty much works.
On Thursday, March 26, TheFundamentals will look at some other price and cost indexes where factors other than market influences impact price movements and the resulting impact upon price/cost bubble adjustment.

Friday, March 20, 2009

Banana Republic

The Federal Reserve Bank is buying US government bonds and mortgage backed securities.
What does this mean?
Usually the Fed adjusts interest rates and buys/sells short maturity securities. In this way it disrupts the market in its futile efforts to manage the economy to price stability and full employment. Remember when Bernanke’s predecessor, AGreenspan, lowered interest rates to result in a negative real cost of borrowing? The result was massive credit extensions and ultimately led to the collapse of many of our large banking entities. That “maestro” move was also for price stability and full employment.
Back to the present. The US Department of Treasury funds the government’s stimulus/bribe voters wasteful spending programs through the issuance and sale of US Treasury securities. The Fed is responsible for the nation’s money supply. When the Fed buys the US Treasury securities we can attribute that action to several possibilities. One, no other buyers are interested in the securities at the rates being offered. Two, the Fed is seeking to dilute the value of the dollar by printing and distributing dollars without an economic event occurring (see 3/16/2009 essay on Wealth creation.)
Is this Brazil? Is this Argentina? Is this Iceland? Is this Botswana?
What about inflation? What about the total politicization of the Fed. AGreenspan sure started it, Bernanke just plain does it as SOP. PVolcker, what the heck are you doing while the Fed is supporting Obama’s promiscuity? Who voted the Fed the power to print money under the canard of price stability? Where are the people’s representatives when government bureaucrats are acting like banana republic fools?
In the opinion of TheFundamentals, THE ONLY REASON THE FED BUYS US TREASURY SECURITIES AND US MORTGAGE BACKED SECURITIES IS THAT NO ONE ELSE WILL BUY AT THESE COUPON RATES. Stated another way, the risk is too high given the reward.
Citizens and taxpayers, we must remove these banana republic fools (congressmen, senators and bureaucrats) from office ASAP!!! They are destroying our wonderful country.

Wednesday, March 18, 2009

Please send cash

Empty the jails. We’re going to need a larger boat. The end is near.
Is that really a tsunami wave out in the distance or just a mirage?
A Ponzi scheme, as we must all know by now, is a mirage. It’s a manufactured appearance of a successful enterprise based on paying returns to early investors with the funds provided by later investors. The operator drains off funds to support an excessive lifestyle. For years observers have suggested that the US Social Security system is a Ponzi scheme because it is not possible to achieve enough new investors to maintain the payments to the growing recipient list.
TheFundamentals has been suggesting that the US Government has now entered the business of taking in monies from any and all sources to maintain an unsustainable spending and deficit building pyramid (see charts to the left.) In the distant past the US borrowing capacity was either underutilized or managed with some care as to keep its money raising capabilities intact. The government let the banks and other financial entities engage in the excesses and was able to maintain a protected sideline post always ready to jump in and issue press release from the US Attorney’s office or some other regulatory bureau. Mr. Bernanke is threatening that status and now he has Mr. Obama and Ms. Clinton running around giving assurances to investors that their money is safe with us so keep it coming. His allies in this scheme include the beady eyed TGeithner, the failed academic LSummers and the inexplicable participation of PVolcker. Any day now expect to see the addition of ASoprano. Playing locally in your state and municipal governments are folks like RDaley and ASchwarzenegger and, frankly, most any member of the IL state legislature. Click on this link to read about the Ponzi scheme in Chicago, TX, CA and IL. http://www.bloomberg.com/apps/news?pid=email_en&refer=exclusive&sid=alwTE0Z5.1EA
The current edition of Newsweek actually suggests that we all had better start spending or the scheme/pyramid/mirage will collapse. This magazine is stretching the limits of the First Amendment, using words to run its own Ponzi scheme. Keep promising more, write more ridiculous articles and maybe a few new readers will pop up.
So, who’s buying this nonsense? That is the $64 question. A lot of Americans are not. Hopefully even more will curtail their spending, save more, pay down debt and return to the fundamentals. Good leadership would encourage such steps in these times. The US of A is lacking good leadership at all levels – government, business, unions, education, pension funds and medicine. All want the scheme to go on for another day, week, month, maybe even a year or two. All want to cash in before it collapses.
Just as there are frugal families and individuals who will make it through this mess (please refer to the fairy tale, “The Three Little Pigs” for a better understanding of who survives the arrival of the wolf) so there are cities and states that build brick houses. You ask, “Can we survive this mess?” Who knows? For now ask, “Is my house built of straw, sticks or brick?” In the meantime, China, please send cash.

Monday, March 16, 2009

Wealth Creation v. Wealth Destruction

Wealth creation is pretty simple and it is the foundation, the Golden Goose, or the source of the largess that the US free enterprise system makes available to all. The source is wealth creation.

How is wealth created? Three primary sources. Wealth is created by growing something from the ground for food and lumber and thousands of other valuable natural items. Around the globe wealth creators grow corn and beans and olives and oranges and raise cattle and fish. The more you tax and the more you regulate these activities the more you limit this wealth creation process.

Wealth is also created by extracting something from the ground. Things like gold, iron ore, petroleum, gas, and other minerals and metals. Tax it and regulate it and others who buy these products will be glad to go where there are lower taxes and regulations.

The third key source of wealth creation is to make something that people want to buy with the harvested items and the extracted items. We, in the US of A, used to be quite good at making things. We not only made things we made the tools, the machines, the technology that made making things easy. We still make the things that make things. And we tax and regulate the dickens out of it so that non wealth creators can engage in their wealth destruction activities.

All wealth creation requires labor. Each and every one of us has a skill or a labor component that is needed to support extraction, growing/harvesting and manufacturing. Labor is needed for wealth creation.  Grow/harvest, extract, manufacture/produce/ labor. Wealth is created.

Now, what destroys wealth? In no particular order but real wealth destroyers are:

1. Anyone who does not engage in growing, harvesting, extracting, manufacturing and offering their labors to support these activities is a burden on the wealth creation process.

2. A growing service economy model is flawed; big time. Government does not create wealth. That’s why government must be limited. Also, lawyers, bankers, bureaucrats at the licensing bureau, teachers, doctors, stock brokers, lottery tickets; it goes on endlessly – none of them create wealth. They need wealth creation to survive. Try to eat a legal contract or fly in a plane built by an accountant! Try keeping your food chilled in a refrigerator running on electricity produced by the Energy department or live in a house built by federal or state bureaucrats.

What to do?

IF YOU WANT TO DEAL WITH THE PROBLEM, KNOW THE SOURCE OF THE PROBLEM.
IF YOU JUST WANT TO ACT LIKE YOU ARE DEALING WITH THE PROBLEM, FULL SPEED AHEAD.

THERE IS NO GOVERNMENT SOLUTION TO THIS PROBLEM, NO UNION SOLUTION TO THIS PROBLEM, NO POLITICAL LEADERSHIP/SAY THE RIGHT THING SOLUTION TO THIS PROBLEM.  TO FIX THE PROBLEM WE MUST GROW/HARVEST/EXTRACT/MANUFACTURE = WEALTH CREATION.

THE ALTERNATIVE PATH WE ARE ON IS:  SPENDING = DEFICITS = DEBT = WEALTH DESTRUCTION

The previous administration did not have a clue about the above. The new Obama policies are not encouraging wealth creation.  Spending, deficits and debt destroy wealth. Our economy is sick because we are infected with wealth destroying viral agents known to us all as underworked/overpaid unions in both the private and public sector and government supported inefficient entities in health care, education and public services.  The US of A can grow/harvest/manufacture all that it needs and buy any resources it is lacking.
GOVERNMENT SPENDING MUST BE CUT DRASTICALLY. TAX POLICY MUST SUPPORT WEALTH CREATION AND DISCOURAGE WEALTH DESTRUCTION.

The reason TheFundamentals goes to basic cause and effect issues is that the solutions lay therein and there is no evidence of any political will to address the basic issues.  Virtually all of our existing government policies and spending programs do the exact opposite of supporting wealth creation and discouraging wealth destruction.  Our competitors see this situation and are taking great advantage of it.

Thursday, March 12, 2009

Curious George

TheFundamentals was wondering what GWB was doing. Here is an update from George:

"Hello folks. I thought I would write down some notes for my ghostreader who is writing my memories. I was thinking of calling it “The Oil’s in Texas but the Dipsticks are in DC.” But the bookman thought maybe something a bit more serious and then recounting all the really good things we did to the folks. Well, here goes –
On January 20, 2001 I took the pledge and here is how things looked:
Dow Jones was 10,587; GDP was $10.0 billion; unemployment was 4.2%, debt was $5.7 trillion and the budget of the country was $1.86 trillion.
On January 20, 2009 when the kid took over the Dow Jones was 8,281; GDP was $14.2 billion; unemployment was 7.2%; debt was $10.6 trillion and the budget of the country was $3.5 trillion. Pretty good huh? 2 out of 4 up big time; that’s the same as batting .500 in the big leagues. We were big league guys all the way. Go get ‘em was our slogan. Don’t hold back. No sirree bob.
I don’t know what some of them complainers are complaining about. After all I was the decider and the decider did pretty good. That first budget was a doozy. We called it “A Blueprint for New Beginnings.” Pretty catchy, huh? We sure got that one right. History will see it all clear like a..a…window.
Here’s some more good news. We all got rid of that Hussein guy and the other 50 decks in the card. I think we got ‘em all. Not two many remember that they was some really bad dudes. We chased them bastard Al Queda into the hills in Afghanistan where they can eat sand forever. That’ll teach them. We fixed them good.
Now we’re cleaning up the bad guys on Wall Street. Remember we started to spank those greedy bastards. Did most of the heavy lifting. The new kid can clean up the scraps. No big deal. That Madoff guy will be good and sorry he cheated some folk. I don’t get how all them people don’t start wondering why he was doing so good for so long. What’ya gonna do. People need to watch their money; can’t always trust the guy next store.
Got you two good judges. Too bad we couldn’t get Harriet a position. She woulda shown some of them New Yorkers pansies how to make a decision or two.
Stock market was up real good the last few days. See I knew we fixed the banking problem. Economy is fine. We told you that those deficits jus don’t matter. Sometimes it jus takes the folk a little longer to fully grasp how much good we did ‘em.
So, I’m off on making some speeches. Make me a few dollars and make up my stock market losses. Laura said Bushie "it’s about time you put some coffee in the can." It’s hard work flying around and explaining to people that these last eight years are gonna look pretty good in a few more months. Send letter to my library if you want to. We need to build some files of the good folk telling us how much they appreciate what we did to ‘em. You can send in some donations to and we will send you a nice note for framing up on your wall. I think they call that a keepsuck or something likes that.
I am also thinking about taking up the game of chess. A lot of folk think I'd be a natural.
God bless."

Tuesday, March 10, 2009

Is my money safe?

Is my money safe?
The new president says put it in stocks – the “profit and earning ratio” is pointing to a potentially good deal for buying stocks. Wha??? Where is Saturday Night Live when we need them? TheFundamentals is familiar with an important stock evaluation tool – price/earnings ratio. Could our Harvard educated, high IQ kid mean the price earnings ratio? How can you spend trillions, assure the public that you are the one, jet around the country making nice-nice and then drop a Bushie on us when we are worried about our money?
But what about the money invested in my house, the money in my Fidelity Account (or maybe in Schwab or Vanguard or CA bonds or US Treasuries and so forth?) Is it safe? What about my IRA or 401k or my life insurance policy? Maybe you don’t get a big government pension. At least you get to pay for others to get those pensions. Is the little bit of money I have left safe?
In 1934 the Securities and Exchange Commission was created. Hallelujah. They even appointed one of the most honest, law abiding citizens to run it back then – Joseph P. Kennedy. Yep the same guy who made a killing in bootlegging. Holy cow is this a great country or what?
Here’s the purpose of the SEC as gloriously posted on their website http://www.sec.gov/
“The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”
Oh boy, at least someone is going to protect me! They go on to say, “The world of investing is fascinating and complex, and it can be very fruitful. But unlike the banking world, where deposits are guaranteed by the federal government, stocks, bonds and other securities can lose value. There are no guarantees. That's why investing is not a spectator sport. By far the best way for investors to protect the money they put into the securities markets is to do research and ask questions.”
Wow, stocks and bonds can lose value. Not a spectator sport. Sounds like BHO talking. So the SEC says it will oversee “the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds… …maintaining fair dealing, and protecting against fraud.”
In the fiscal year 2008 that wisdom, research, asking questions, overseeing advisors (now that’s a rich one) protecting against fraud and so forth cost the American taxpayers $974,000,000.00. Yes folks, almost one billion dollars. To reward this fine effort, BHO (aka profits and earning ratio guy) is raising the budget by a modest 13%! That’s more than just change folks. That’s serious money.
Is my money safe? Well an honest answer from the SEC would be, "It sure as all hell isn’t safe with us!! But, at least it’s been pretty darn “fruitful” for our employees. So, thanks."
Here are two questions TheFundamentals would like to ask. “Who protects us from government employees who don’t do their job?” “Why aren’t these people ever fired?”

Friday, March 6, 2009

March Madness

S. O. L.

Si y no?

It’s quite a bet. I inherited it.

Borrow trillions to save a house of cards built on borrowed trillions.

Mirrors lined up in perfect symmetry to create the appearance of appearance.

Bloated whales on the beach. Self destruction. Free lunch. 2 for 1’s.

Cure cancer. Why not? Cure greed? Tomorrow, tomorrow…..

Raise taxes. Spend more. Borrow. Fiscal restraint. Tomorrow, tomorrow…

Head of IRS. Pay taxes? Won’t look you in the eye. Sneaky little guy.

Rich man gonna pay. I’m movin’ on up. Get me a piece of the pie. Vote for me.

Cure cancer. Gonna get your guns. Secure the homeland. Fix the schools.

Fix health care. You’re living too long. Fix your knees/hips/droopy eyes.

Fix. Fix. Fix. The fix is in. Chicago politics. Where’s mine? Gimmee.

Trade you a missile shield for some plutonium. Such a deal. Up yours.

What, me worry? Early bird specials. Rich man gonna pay.

Lose weight fast. Grows hair. Cures ingrown toenails.

Make a deal. Such a deal. Deal or no deal.

It’s March Madness folks.

S. O. L. Baby.

Wednesday, March 4, 2009

The Golden State and The Golden Egg

TheFundamentals has focused its attention on deficits and debt at the national level. Deficits and debt are destructive forces usually following their handmaiden greed. Greed is one of the seven deadly sins. It is part of the human condition and it destroys dreams.

Read about the destruction of the American Dream in California at http://www.newsweek.com/id/185791 and http://www.latimes.com/business/la-fi-jobs28-2009feb28,0,7903208.story

The first article is replete with a litany of the destructive forces in the Golden state.
A key destructive force is public-sector unions. To read about some other examples of public-sector unions and their inflated wages, benefits and pensions that are being paid by working/taxpaying Americans who have no likelihood of ever receiving any such largesse, just click on the links listed under the heading Feeding at the Public Trough located in the left margin of this page.

What can we do about this situation? First, DO NOT GIVE UP. Second be aware that the apparent first act of Messrs. Bush and Greenspan and now the second act of Messrs. Obama and Bernanke to bankrupt the US of A will ultimately stop at the boundary of well run states. Take action locally to stop the spending, stop the public-sector union greed and elect officials who will vow to balance budgets, pay down debt and limit public employee compensation and implement defined contribution retirement plans (more in the future on this topic.) Emigration to states with these responsible policies is already underway. These states will have the new jobs because business is stifled in the other states.

A brief lesson in greed was captured by Mr. Aesop centuries before the birth of Christ. His fables include the lessons of life that withstand the changes of the modern era. The lesson of the Golden Egg is available at http://www.tumbletales.com/stories/story3.html or your library.

The bodybuilder from Austria should have spent some time in the library.

Sunday, March 1, 2009

Caveat Emptor

Messrs. Obama/Bernanke and Geithner are betting the country on the assumption voiced by Bernanke Wednesday that the bond buying market “seems to be accepting” the borrowing needs of the US.

Bernanke went on to say that such a situation would be dependent upon the lenders detecting a “sustainable fiscal path…” for the US going forward. I think “sustainable fiscal path” means cooling it on building sovereign debt. Where is that path?

On Wednesday, TheFundamentals asked for specific projections of US Debt for the three anniversary periods of BHObama’s inauguration. Until and unless this group of people is willing to issue and be measured against specifics it may be imprudent to finance these ever increasing deficits.

Is the US government engaging in the act of taking in borrowed funds without providing adequate information to lenders to permit them to make a prudent decision regarding such financial transactions? Further, how will this government and its successors be able to meet the servicing obligations of this debt and meet the other financial commitments it has made via entitlement programs and other obligations?

Are folks who permit their funds to be invested in US government obligations doing so at their own risk? This government has burdened us all with literally mountains of debt which means servicing obligations measured in the hundreds of billions as far as the calendar can see. How will they service the debt and repay the principal? Will they end up monetizing the debt? Print money?

There was a time when the King’s men showed up and took your cattle, your crops, perhaps even, your sons and daughters and the folk stood helplessly by. How is this different? The taxpaying folks have no control over this massive debt buildup. We are in a horrible mess because this government has spent money it did not have on unnecessary and nonessential purchases and programs. And the citizenry does not know where to turn. When will the madness stop? What will stop it?

Caveat Emptor.