Retail Woes Ahead...Tax Cuts Will Help

Retail sales were up modestly in January…0.5%... driven mainly by discount retailers and on-line merchants. Consumers are hunting for bargains. The practical reason is that there is really no job growth occurring and therefore no broad gains in income. But there is also a second reason…an emotional one: consumers are very uncertain about the economy; they are not sold on the news that a recovery has taken hold and will be sustainable. And for good reason…as the recent facts and news back their doubts:

• The Greek debt woes even though European nations vow a rescue;
• The stock market has been notably fragile in the last 30 days;
• Toyota’s alleged cover up of its knowledge for almost a decade of the accelerator pedal problem obviously dents trust in our large corporations;
• Small banks in particular are still not lending even modestly.
  

And when you’re not sure…you don’t spend much.

In war, uncertainty gets you killed, which is what happened at Fort Hood. In the economy, it gets you little or modest spending, which is what has happened in the last couple of months. And since consumer spending accounts for two-thirds of economic activity, an uncertain or uncomfortable consumer means lackluster growth.

What is really needed to promote sustainable retail sales is a bold new move on Washington’s part: stimulus aimed directly at American households in the form of tax cuts. Not token tax cuts, significant cuts. This is the one type of fiscal stimulus that has always jump-started economic growth in the past. And it can do it again.

State of the Union Jitters

Tonight will be President Obama’s first State of the Union address since taking office. It couldn’t come at more challenging times.

The backdrop has to appreciated: (1) a sluggish economy and shaky stock market – many think this is the “Eye of the Storm” not the beginning of a recovery; and (2) government spending that is producing mountains of debt; (3) weak consumer confidence; and (4) a popular voting base that just sent a shock wave to Washington last week from of all places: Massachusetts!

The President will propose a new focus on jobs, help for small business in the form of new tax breaks, and a freeze on Federal Budget spending.

Let’s address the latter. To quell concerns about the staggering federal deficits – and notice that I did not say “solve” the deficits, because you simply can’t in the short run – the President will propose limits on discretionary spending…that’s spending other than for military, veterans, homeland security, international affairs, Social Security, and Medicare and Medicaid.

Although a laudable step to control spending, there are several problems with this strategy: (1) it only affects 17% of the Budget; (2) it doesn’t cut discretionary spending, it just limits increases; and, most importantly (3) the savings will be more than offset by planned increases in help for middle class families for child care, education, elder care, and other programs.

The upshot is simple: the promise that the Government can fix the problems of a huge, complex, free enterprise economy is simply impossible. What it takes is all players pulling on the rope: consumers, businesses, and foreign participants. What the government needs to do is provide good rules and regulations and let the players play the game – not the referees.

Lots of Talk…But Little has Changed - January 6, 2010

A slow start in the stock markets so far this year is not surprising. One reason is a looming question: After governments around the world saved the global financial system from collapse in 2009, can the markets and investors stand on their own in 2010?

The reason this is such a critical question is that while so much has changed over the past year, so much has not. On the heels of the most harrowing financial market ride since the Great Depression, the key players – politicians, investors, regulators, and Wall Street executives – all agreed on one thing: this won’t happen again. All vowed reforms and changed behavior.

Some changes have been made…on the compensation front, simplifying some products, and increasing surveillance…but it is striking how little Wall Street behavior has changed. We have identified, debated, and agreed upon the big systemic issues, but we’ve done very little to protect the integrity of the future global financial system.

Here’s a case in point…a story that got little media attention in the past few weeks. YRC – a $9 billion trucking company best known for its yellow and Roadway-branded big tractor trailers, with 55,000 employees – nearly went out of business recently because a New York based hedge fund held credit default swaps on the company that would be more valuable to the hedge fund if the trucking company went bust than if it survived. It survived only after the Teamsters threatened a Park Avenue protest and the Pennsylvania state Treasurer whose pension fund is an investor in the hedge fund intervened.

If products like credit default swaps are not seriously regulated or eliminated and other reforms enacted to tighten up irresponsible Wall Street practices, the little economic optimism with which we enter 2010 will be short lived.

“Job Review Time…for Bernanke” - December 3, 2009

Lots of job interviews going on in the country today. And unless it’s for you, the most important one happening today is in Washington for Ben Bernanke. The FED Chairman will be in front of the Senate Banking Committee for his conformation hearing to keep his job.

Bernanke has been a lightening rod for a lot of anger that Wall Street got bailed out and Main Street didn’t. In fact, Senator Bernie Sanders, an Independent from Vermont, and a long-term critic of the FED, has placed a “hold” on Bernanke’s nomination for a 2^nd term to try and block his reappointment.

He claims that “Bernanke has failed at every task assigned to the FED.”

Let me tell you why, in Mr. Sanders case, “I” stands for ignorant not independent.

(1) The FED had little choice last year but to pump enormous amounts of capital into the financial markets…which helped to avert an even greater global crisis than occurred.

(2) The FED did not cause this crisis. Wall Street and Congressional policies did. The FED was forced into the task of sweeping up the effects of greed and incompetence. And it did a good job. Maybe not the best, but Bernanke helped to pull the economy out of the deepest ditch since the Great Depression.

The Chairman will prevail in these hearings after some tough challenges. He will be reappointed, and that will be good for the economy and the country

“Job Review Time…for Bernanke” - December 3, 2009

Lots of job interviews going on in the country today. And unless it’s for you, the most important one happening today is in Washington for Ben Bernanke. The FED Chairman will be in front of the Senate Banking Committee for his conformation hearing to keep his job.

Bernanke has been a lightening rod for a lot of anger that Wall Street got bailed out and Main Street didn’t. In fact, Senator Bernie Sanders, an Independent from Vermont, and a long-term critic of the FED, has placed a “hold” on Bernanke’s nomination for a 2^nd term to try and block his reappointment.

He claims that “Bernanke has failed at every task assigned to the FED.”

Let me tell you why, in Mr. Sanders case, “I” stands for ignorant not independent.

(1) The FED had little choice last year but to pump enormous amounts of capital into the financial markets…which helped to avert an even greater global crisis than occurred.

(2) The FED did not cause this crisis. Wall Street and Congressional policies did. The FED was forced into the task of sweeping up the effects of greed and incompetence. And it did a good job. Maybe not the best, but Bernanke helped to pull the economy out of the deepest ditch since the Great Depression.

The Chairman will prevail in these hearings after some tough challenges. He will be reappointed, and that will be good for the economy and the country

“Bring on the International Soccer Federation…” - December 2, 2009

The ADP jobs report this morning showed more deterioration in the jobs market, but that was not unexpected and the markets should not react much at all to this report.

The real drama du jour today will be when Treasury Secretary Timothy Geithner testifies this morning before the Senate Agricultural Committee on OTC derivatives.

On the surface, this doesn’t sound as sexy as yesterday’s drama where the Chairman of GM seized the wheel from CEO Fritz Henderson. But there will be a lot of people watching to hear what he has to say about regulating these instruments…and instruments of its type.

Here’s why this is important.

The Washington policy focus of the past year has correctly been on bailouts and stimulus programs. But very little has been done to prevent a similar crisis from happening again – to regulate what Goldman Sach’s Chairman Lloyd Blankfein has called irresponsible and damaging products created by Wall Street over the past decade, and for which he has even apologized for publicly.

We need to take a lesson from the International Soccer Federation who is meeting in Cape Town, South Africa today to consider adding more referees to World Cup matches to prevent blown calls from determining outcomes…which happened last month in a game between France and Ireland.

Geithner’s comments will be a barometer as to whether this Administration is willing to do to add more referees to the capital market playing field so that blown judgments don’t create a second crisis.

“Let the Games Begin…” November 20, 2009

This week has raised a lot of eyebrows about whether the recovery is sustainable…or even real. Here’s what we learned this week:

· Excluding the jump in car sales, retail sales are modest.

· Core producer prices are in sharp decline.

· Outside of energy, inflation in consumer prices is not happening.

· Industrial production has slipped to a slower pace.

· And most disappointing, new housing starts were way off from what was expected.

Not the kind of week we wanted prior to Thanksgiving. And not the kind of news that will boost confidence.

But there was one very interesting and positive news item that has a lot of potential for helping economic growth: Warren Buffet and Goldman Sachs have teamed up to boost financing and lending programs for underserved small business owners.

This is significant – for two reasons:

(1) Small businesses have been most affected by the credit crunch, and still find it very difficult to get loans.

(2) Although it is only a $500 million initiative, it is a private sector initiative not a government one.

Capitalism is about private initiative and entrepreneurship, not about government run businesses. Also, large corporations do not create the jobs; job creation comes from new and small businesses.

One of the world’s wealthiest and most successful individuals has combined with one of world’s wealthiest and most successful businesses to cast a loud vote for capitalism. This Buffet-Goldman initiative is a real example of real stimulus that could provide real help.