Friday, September 14, 2012

U.S. Stock Market Euphoria is Insane as Europe Economy Crumbles

A friend just returned home from a trade show in Europe. Attendance at the show was down and the mood was downbeat. While it may be rash to jump to a conclusion based on an anecdotal report from a single trade show, I judge a good case can be made that this weak trade show offers a pretty good  indication that the downward trending economic situation in Europe is on its way to becoming a vicious cycle. European purchasing managers are holding back on purchases. The reduced purchasing by retail stores will ripple through the entire economy. European income will continue to slip and tax revenues will continue to fall.

There is no way the European debt crisis can possibly be fixed while the member nations' economies continue to shrink. Europe will continue to stumble from crisis to crisis in a worsening cycle, until the ECB's money printing pronouncements can no longer save the markets.

My forecast back in December that the problems in Europe would begin to pull the U.S. stock market down was woefully premature, and obviously dreadfully wrong given the gains by the stock market . However, European kicking the can down the road can not go on forever as sovereign debt continues to grow and money flows out of the banks in Greece, Italy, and Spain.

Eventually, the European recession (soon to be depression?) will have a horribly negative impact on the U.S. stock market. The biggest question in my mind is whether it will be before or after the huge declines in U.S. stocks that are likely as we march along the calendar toward the fiscal cliff and bumping up against the debt ceiling. Given that these events will occur in about 3 1/2 months, the Europeans may well be able to keep kicking the can down the road until next year, and the approaching year end fiscal cliff and debt ceiling may be a bigger short term risk.

The risk to the U.S economy and stock market from Europe's declining economies is so large, that just this alone leads me to judge that U.S. stocks are overpriced. Add in the upcoming fiscal cliff and debt ceiling, and the potential for a spike in oil prices if war breaks out in the Mideast, and the euphoria in the market seems very difficult to justify. Seems like this might be a good time for me to take capital gains at the current rates.

Wednesday, September 12, 2012

Chicago Taxpayers are the Big Losers From Teachers' Strike

Lost among the sound bites arising the Chicago teachers strike is the fact that local taxpayers are getting hosed. Chicago's schools are broke. The Chicago Public Schools would have run a $665 million deficit even if the school board had only had held firm on the originally proposed 2% raise for this year. They certainly do not have a revenue stream that supports paying teachers 16% more in pay, even with the raises spread over 4 years. Thus, future tax increases will be the results of giving in to teacher's outsized salary demands. 

The school board folded on the pay raise issue almost immediately. Thus, future tax increases will be required to pay for the higher teacher salaries, unless Chicago's tax base miraculously increases. The widely publicized strike preparations of the Chicago Teachers Union over the summer led to an exodus of many families to the suburbs. The teachers actions have diminished an already shrinking tax base. Given the fact that taxpayers do not have a seat at the in these negotiation, decisions by upscale families to move out of the city are understandable.

On the public relations front, the Chicago School Board has failed miserably to communicate to taxpayers in Chicago how much a 16% raise translates into as a tax increase per household. Thus, for now Chicago's taxpayers are seem oblivious to the tax implications of the teachers' raises.

According to the Windy City Young Republicans, the total base salary/pension per year: $74,798 which if calculated into pay/per hour for the year would add up to about $34.50/hour assuming the teacher used all of their sick days.

Additionally, CPS teachers receive health coverage and are required to pay a minimal contribution from their base salary toward the plan. Currently the average contribution for a CPS teacher with a family is 1.8% of their base salary. Thus, the average teacher pays $1,282 toward the cost of their health plan. The range in employee contribution is from 1.3% - 2.8% depending on the level of coverage selected.

As long as teachers and public service unions continue to hold leverage that leads to their getting outsize raises, the downward spiral to economic calamity in cities like Chicago and states like Illinois will continue. The immense political contributions of the public unions keep politician under their control. The playing field has to be leveled if cities and states are to avoid bankruptcy. While it won't happen in Democrat party controlled Chicago, it would be a welcome development to see a school board decide to fire overpaid striking teachers and replace them with the 1000's of teachers that are out of work. 

Another teachers' strike is taking place in a suburb to the north of the city, Lake Forest. Time will tell whether the school board in this more conservative town holds the line in salary negotiations with the teachers. However, it will be challenging for the school board volunteers who care about their student to stand up to teachers that shamelessly hold students hostage.

Tuesday, September 4, 2012

Burning More Coal Due To Shutting Down Nuclear Plants

The environmental movement in Germany is so deeply brainwashed that its members fail to realize that shutting down nuclear plants leads to burning more coal. The naive assumption of the Greens that nuclear plants can be replaced via clean energy sources is ridiculously misguided. In reality, coal will be a primary source for electricity if Germany goes ahead with its plans to shut down all its nuclear plants.  The Germans are building over 20 coal-fired power plants to offset the shut down of nuclear power. Thus, shutting down nuclear plants increases air pollution and CO2 emissions. Some researchers even judge that the soot from burning coal is a bigger factor in the increased arctic temperatures than are CO2 emissions.

Germany drew some 20 percent of its total power from wind, water, solar and thermal energy sources in 2011. Even at this level there were increased costs as well as huge problems distributing power from the windy northern sections of Germany to the southern part of the county. On particularly windy days, some wind turbines had to be switched off because the current network cannot cope with the quantity of wind power being generated. It will require years, if not decades, to get all the permits required to build new power lines across the country that would make the goal of 50% of electricity from renewables feasible. 

Germany has already experienced a 10% increase in the cost of electricity. The costs will sky rocket if they close all their nuclear plants, as the country will go from being an exporter of electricity to being an importer. In addition to the increased number of coal fired plants within Germany, some of the imported energy will come from coal fired plants outside of German borders. Further, the intermittent nature of wind power requires wildly expensive backup power plants being built to fill in the gaps during periods of light wind, making significant increases in wind energy a form of economic suicide for Germany's energy intensive manufacturers.

Thus, the anti-nuke Greens in Germany are leading to increased soot and CO2 emissions due to forcing the country's utilities to burn more coal.