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.
Friday, September 14, 2012
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.
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.
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.
Wednesday, August 22, 2012
Retail Sales in August 2012 Will Be Disappointing
The consumer in the U.S. is hurting. The large bills for air conditioning this summer, high priced gasoline, and the high cost of food are combining to hit consumers with a triple whammy. Disposable income is increasingly scarce in many households that are skimping to get by and pay for inflated food and energy costs.
Within my household, the battle over use of the air conditioner is becoming a major source of family conflict. We kept the house relatively cool during the record breaking heat wave in July (in my opinion, ridiculously cool), and the bill from ComEd is astronomical. We will be substituting macaroni and cheese for steak this month to cover the cost of this bill. This substitution of lower priced products and reductions in spending will be replicated in households across the country
Retail sales during August in the U.S. will be negatively effected by the reductions to discretionary income due to higher food and energy costs. The 0.8% increase in July sales came “after three very weak months and consumers had not yet felt the bite of higher prices that are just beginning to work through the production chain,” says economist Chris Low of FTN. “Because the food price increases are the result of a supply shock, not stronger demand, they will weigh on consumption down the road.”
Thus, my prediction is that the economists predicting another month of positive retail sales growth in August are going to be dead wrong. If there is any increase in sales at all, it will be due to higher costs, not increased demand. Be prepared for a disappointing retail sales reports when the August reports from are released by retailers and the Commerce Department.
Within my household, the battle over use of the air conditioner is becoming a major source of family conflict. We kept the house relatively cool during the record breaking heat wave in July (in my opinion, ridiculously cool), and the bill from ComEd is astronomical. We will be substituting macaroni and cheese for steak this month to cover the cost of this bill. This substitution of lower priced products and reductions in spending will be replicated in households across the country
Retail sales during August in the U.S. will be negatively effected by the reductions to discretionary income due to higher food and energy costs. The 0.8% increase in July sales came “after three very weak months and consumers had not yet felt the bite of higher prices that are just beginning to work through the production chain,” says economist Chris Low of FTN. “Because the food price increases are the result of a supply shock, not stronger demand, they will weigh on consumption down the road.”
Thus, my prediction is that the economists predicting another month of positive retail sales growth in August are going to be dead wrong. If there is any increase in sales at all, it will be due to higher costs, not increased demand. Be prepared for a disappointing retail sales reports when the August reports from are released by retailers and the Commerce Department.
Sunday, July 15, 2012
Will The French Be Able To Tax Their Way To Prosperity?
The newly elected Socialist government in France plans on taking a path that seems almost certain to fail. Increasing the tax rates on the rich and upon big businesses seems like an unlikely route to prosperity. The tax increases include extra levies on those who pay the wealth tax, a 75% rate for households earning over €1m, higher inheritance tax, an extra 3% tax on dividends, heavier charges on stock options, higher taxes on financial transactions, banks and oil firms, and a 5% extra tax on big companies.
The increased revenue is needed in order to meet deficit reduction targets of 4.5% of GDP this year and 3% next. Yet France desperately needs to grow their economy. The unemployment rate is about 10% and trending upward and business activity is flat. Increasing taxes is almost certain to restrain job creation and economic growth.
Among the various methods of reducing the deficit, the Socialist Party is taking the most politically palatable. Given how poorly reducing spending has worked out for Greece, it is no surprise that politically unpopular austerity measures have not even been put upon the table by the new government. Increasing taxes on the middle class would be equally unpopular. Thus, while the French increases in taxes on the rich and big business are likely to send the country into recession, the new government did not have a lot of other politically palatable options for reducing the deficit.
As the demographic time bomb of aging baby boomers explodes in economically developed democracies across the globe, voters will have to choose between: 1) continuing to run up unsustainable deficits; 2) cutting entitlements, 3) increasing taxes, or 4) making structural changes such as increasing the work week and pushing back retirement ages. It seems unlikely that France will be the only country to choose to increase taxes on the rich and big business. Despite the fact that increasing taxes on the rich and big business will fail in France, that lesson is unlikely to be learned as deficit problem worsen in every country with generous entitlement problems for aging baby boomers.
The increased revenue is needed in order to meet deficit reduction targets of 4.5% of GDP this year and 3% next. Yet France desperately needs to grow their economy. The unemployment rate is about 10% and trending upward and business activity is flat. Increasing taxes is almost certain to restrain job creation and economic growth.
Among the various methods of reducing the deficit, the Socialist Party is taking the most politically palatable. Given how poorly reducing spending has worked out for Greece, it is no surprise that politically unpopular austerity measures have not even been put upon the table by the new government. Increasing taxes on the middle class would be equally unpopular. Thus, while the French increases in taxes on the rich and big business are likely to send the country into recession, the new government did not have a lot of other politically palatable options for reducing the deficit.
As the demographic time bomb of aging baby boomers explodes in economically developed democracies across the globe, voters will have to choose between: 1) continuing to run up unsustainable deficits; 2) cutting entitlements, 3) increasing taxes, or 4) making structural changes such as increasing the work week and pushing back retirement ages. It seems unlikely that France will be the only country to choose to increase taxes on the rich and big business. Despite the fact that increasing taxes on the rich and big business will fail in France, that lesson is unlikely to be learned as deficit problem worsen in every country with generous entitlement problems for aging baby boomers.
Wednesday, July 4, 2012
How Will French Plan to Reduce Budget Deficit By Soaking The Rich Work Out?
Wealthy individuals in democracies across the world had better keep a close eye on what is happening in France. While governments in the U.S,, U.K., and Japan continue to run up unsustainable public debts. the government in France is taking measures to reduce their deficit. The newly elected socialist government is doing so by implementing the only solution that is politically feasible in the age of entitlements -- soak the rich and big business.
There is little appetite in the U.S. for the type of deep cuts that would be required to balance the budget. Thoughtful plans to for deep budget cuts, such as those proposed by Paul Ryan or the Simpson-Bowles Commission are brushed aside by knee jerk attacks by the left. The Tea Party talks a good game about balancing the budget, but has too much that is off limits to make doing so feasible, including their inflexibility on taxes. Proposals to reduce medical spending are met with demagoguery on the Right about "death panels", and defense spending cuts are off the table among the favored candidates of conservative voters.
In the age of entitlements, voters want ever more benefits, but are deeply reluctant to pay more in taxes. The only type of taxes that voters will approve are those that are imposed upon the rich and big businesses. Thus, the wealthy had better hope that the French plan to soak the rich fails miserably, otherwise they are next on the docket for big tax increases in democracies running big deficits.
The following is a summary from the The Guardian of the French plan to soak the rich
There is little appetite in the U.S. for the type of deep cuts that would be required to balance the budget. Thoughtful plans to for deep budget cuts, such as those proposed by Paul Ryan or the Simpson-Bowles Commission are brushed aside by knee jerk attacks by the left. The Tea Party talks a good game about balancing the budget, but has too much that is off limits to make doing so feasible, including their inflexibility on taxes. Proposals to reduce medical spending are met with demagoguery on the Right about "death panels", and defense spending cuts are off the table among the favored candidates of conservative voters.
In the age of entitlements, voters want ever more benefits, but are deeply reluctant to pay more in taxes. The only type of taxes that voters will approve are those that are imposed upon the rich and big businesses. Thus, the wealthy had better hope that the French plan to soak the rich fails miserably, otherwise they are next on the docket for big tax increases in democracies running big deficits.
The following is a summary from the The Guardian of the French plan to soak the rich
Over half the measures target households, mainly the country's richest, and just under half target big business. They include lowering France's wealth-tax threshold, which had been raised by Nicolas Sarkozy. France's wealth tax is unique in the EU and Hollande will now add a one-off higher levy on those with net wealth of more than €1.3m. Inheritance tax, which had been loosened by Sarkozy, will be tightened.
• Banks will face higher taxes, as will petrol giants through a new tax on energy firms holding oil stocks. A 3% "dividend tax" must be paid by companies on dividends distributed to shareholders. This aims to encourage firms to use cash flow for investment as France seeks to close the competitiveness gap with its industrial powerhouse neighbour, Germany.
• The tax on financial transactions will be doubled to 0.2%.
Wednesday, June 27, 2012
Global Warming May Lead to Food Shortages within Months, Rising Sea Level Decades Away
Much of the doomsday messaging about global climate change is focused on the potential impact of rising sea levels. However, the potential problems from rising sea levels are seemingly easy to disregard because it may be decades before the consequences become devastating. On the other hand, it may only be a matter of months before the world is facing serious food shortages. Drought conditions across the globe are reducing crop yields and food shortages could become serious before long. There is an immediacy to the near term impact of extreme weather that is more worrying than the long term problem of rising sea levels.
The U.S corn belt is facing the worst drought since 1988. Only 56% percent of the U.S. corn crop was in good-to-excellent condition as of June 24, a 20-year low for this point in the season according to the USDA. Korea is suffering its worst drought in recorded history. In Europe, crop yields are likely to be reduced by drought in Spain, northern Germany, eastern Italy, Ukraine and southern Russia. In China, severe drought is parching the eastern Anhui province and the central Hubei province. In Africa, due to the combination of drought and armed conflict, more than 17 million people are facing possible starvation in the Sahel region, the zone skirting the southern portion of the Sahara Desert. In South America, the drought during the last growing season resulted in low yields in Brazil and Argentina--both major players in the global grain market, and the two largest producers of soybeans after the United States.
Are the drought conditions in many parts of the world due to global climate change, or are they just normal variations in weather? The fact that the decade long shortage of rain in Australia has come to an end, and the drought has moderated in some parts of Texas demonstrates that weather and rainfall are variable from year to year. However, it is not very challenging to connect the dots and come to a conclusion that there is a connection between global warming and the increasingly frequency of droughts. According to meteorologist Jeff Masters.
Related Post
Should We Worry About Extreme Weather Causing Inflated Food Costs?
The U.S corn belt is facing the worst drought since 1988. Only 56% percent of the U.S. corn crop was in good-to-excellent condition as of June 24, a 20-year low for this point in the season according to the USDA. Korea is suffering its worst drought in recorded history. In Europe, crop yields are likely to be reduced by drought in Spain, northern Germany, eastern Italy, Ukraine and southern Russia. In China, severe drought is parching the eastern Anhui province and the central Hubei province. In Africa, due to the combination of drought and armed conflict, more than 17 million people are facing possible starvation in the Sahel region, the zone skirting the southern portion of the Sahara Desert. In South America, the drought during the last growing season resulted in low yields in Brazil and Argentina--both major players in the global grain market, and the two largest producers of soybeans after the United States.
Are the drought conditions in many parts of the world due to global climate change, or are they just normal variations in weather? The fact that the decade long shortage of rain in Australia has come to an end, and the drought has moderated in some parts of Texas demonstrates that weather and rainfall are variable from year to year. However, it is not very challenging to connect the dots and come to a conclusion that there is a connection between global warming and the increasingly frequency of droughts. According to meteorologist Jeff Masters.
The stunning extremes gives me concern that our climate is showing the early signs of instability. I suspect that crazy weather becomes the normGlobal climate change is highly controversial, as are the steps that are appropriate to be taken to minimize its impact. However, it seems to me that for those that want to raise an alarm about the consequences of global warming, is much more compelling to claim that food costs will go up 25% within the next couple of years and that millions will suffer from food shortages, than declaring that the sea level will rise in future decades. It will be harder to ignore a problem that confronts us on every trip to the grocery store than one that is decades off. While the science connecting drought to global climate change is far from settled, the correlation is strong enough that it seems probable that it is only a matter of time until additional evidence of direct causation is found.
Related Post
Should We Worry About Extreme Weather Causing Inflated Food Costs?
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