San Juan Mountains

San Juan Mountains
San Juan Mountains: Grenadier Range

Friday, January 20, 2012

Consumer Spending Is A Meaningless Economic Indicator

Every year around Christmastime we hear somber media gurus warn us that if consumer spending is not higher than it was the previous December we are all doomed to economic Armageddon.  Patriotic, civic minded citizens immediately rush out and max out their credit cards.  After all, they tell themselves, if we don't spend the economy will collapse.  The entire notion of consumer spending as a driver of economic growth is utter nonsense.
There are three, and only three, things you can do with any dollar that you earn.  First, you can spend it on something.  Second, you can save it in order to spend it on something later.  Third, you can invest it into some productive enterprise that creates the goods and services you are spending your money on in the first two options.  Yet, it is important to note that even in this third option, the reason most folks invest is to earn even more money that will eventually be spent sometime in the future.  Hence, we can conclude that practically every dollar you ever earn will end up being spent by you, at one point or another during your life.  It is also interesting to note that what does not get spent during your lifetime will be passed on to your heirs as capital assets.  In today's world of immediate gratification, inherited capital assets will generally be quickly converted to cash  and spent on debt reduction (previous consumer spending by the beneficiary) or present goods and services.  Every dollar earned is eventually spent.  No money is wasted. There is no need to worry about consumer spending because everything a consumer earns is eventually spent.
Why should economists and their media mouthpieces continually drone on about how important consumer spending is when, in reality, consumers will eventually spend everything they earn?  The source of this malady is Keynesian economic theory.  Under Keynesianism we are told that wealth is created by consumer spending.  We are further informed that if consumers do not spend, producers will have no incentive to produce and we will all revert to living in caves and engaging in barter transactions.  Keynesianism is totally wrong.  Wealth is created by production, not consumption.  A consumer cannot consume unless a producer has previously produced something he wants to buy. A producer cannot produce until he has sufficient capital to produce his particular good or service.  That capital cannot be obtained until some person makes the decision to invest a part of his income.   Capital comes from the investments of consumers, who choose the third option listed above for their money.  Rather than making the silly assertion that there is no economic growth without consumer spending we ought to be saying that there is no economic growth without consumer investment.  Want to help the economy?  Go out and make an investment into something.  You will be doing yourself and everyone else a lot of good.
By the way, if we must increase consumer spending (although I do not know why it matters one way or the other), it can only be accomplished by first increasing consumer production.  Since a consumer will spend everything he earns, he must earn more in order to spend more.  In order to earn more he must produce more.  This is, as they say, Say's law.

Thursday, January 19, 2012

So What If The PIIGS Default

2011 has been dominated by headlines filled with dire warnings about the consequences of a possible default on the sovereign debt of Portugal, Ireland, Italy, Greece and Spain (the PIIGS).  Much of the stock market drop in August is attributed to greater awareness by US investors of the European threat.  Much of the yo-yo volatility since then is similarly attributed to the PIIGS debt problems.  I say, so what if they all default?  What is the big deal?
The GDP of the World is $63.0 trillion.  The GDP of Italy is $2.0 trillion.  The GDP of Spain is $1.4 trillion.  The GDP of Greece is $0.3 trillion.  The GDP of Portugal is $0.2 trillion.  The GDP of Ireland is $0.2 trillion.  The combined GDP of the five PIIGS countries is $4.1 trillion or 6.5% of the GDP of the world.  So what if they all default?  Double "so what" if Greece defaults.  It is only 0.3% of world GDP!
Real GDP for the United States declined by 6.4% annualized in the first quarter of 2009.  The real GDP decline for the entire 2008-09 recession was 3.8%.  If the decline realized in the first quarter had continued for the entire year, we would have experienced the equivalent of the complete annihilation of the PIIGS nations.  That would have been less than ideal but hardly lethal to the economy and markets of the US and the world.  So what if the PIIGS default?
The long term historic average PE ratio (forward) for the S & P 500 is 16.  If the S & P 500 were presently valued at 16 times forward earnings it would be sitting at approximately 1500.  If the S & P 500 was presently at 1500 and immediately dropped by 6.5% (to reflect the 6.5% decrease in GDP around the world if the PIIGS default) it would be sitting at 1400.  1400 is 11% higher than where we are today.  So what if the PIIGS default?

Wednesday, January 18, 2012

The Impossibility of Defining "Insider Trading"

The FBI (see yesterday's post...I wonder how these agents found the time to do this...) announced today that several arrests have been made in an insider trading investigation.  CNBC reported that "Today’s arrests are part of a four-year investigation by the FBI of insider trading in the hedge fund industry dubbed 'Perfect Hedge'.  The first trial in the investigation involved billionaire hedge fund mogul Raj Rajaratnam, who was found guilty and sentenced to 11 years."
By now, of course, we are all aware of the fact that members of Congress routinely flaunt their violations of the insider trading laws and garner massive profits from their illegal investment activity.  Were it not for the fact that they are members of Congress, and thus exempt from all the laws they create,  they would be prosecuted and sentenced to prison like poor Mr. Rajaratnam.  Maybe he should have obtained a seat in Congress first, then he would have been receiving praise (and a lifetime pension) for his fine work as a public servant rather than wasting away in a prison cell. 
But, this post is not about Congress.  It is about the fact that "insider trading" is impossible to define and should, therefore, be impossible to prosecute.  Here is the Securities and Exchange Commission's definition of the term: "Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security."  The key concept here is the definition of "material, nonpublic information".  Just what constitutes material, nonpublic information about any company?
Company X has a finite amount of information about itself.  Let's posit there are 100,000 individual pieces of factual information about Company X.  By definition, every person who thinks about investing in Company X is going to have somewhere between 1 and 100,000 of those pieces of information.  At what point along that continuum of information does a potential investor become an insider trader?  The CEO of Company X will most likely have a far greater number of pieces of information about the company than somebody who just thought he might want to invest in the company. Does that constitute "insider trading"?  What percentage of the total information about Company X must be known by every potential investor in order to avoid an unfair advantage?  The SEC never tells us that percentage because it is impossible to calculate.
Another huge problem is, what is "material" information?  One person's material fact may be another's material trash.  One person cares about the sales volume of the company and another does not.  Who determines what is material and what is not?  Furthermore, how is it possible, in a world in which every investor subjectively analyzes the prospects for Company X, to determine what must be objectively  known by every investor in order to avoid running afoul of the insider trading rules?
Another huge problem is how to define the concept of "nonpublic" information.  The SEC requires quarterly financial reports be filed with them for investors to examine.   Is all other information nonpublic?  If so, then I could be arrested and jailed under the insider trading rules if I trade on a hunch, intuition, or the recommendation of my barber (unless, of course, my barber tells all of his customers to buy Company X). How much of the public has to know one of those 100,000 facts about  Company  X before it becomes a public fact?  Conversely, if only 5.32% of the public is aware of one of the 100,000 facts about Company X, am I guilty of insider trading if I invest based upon that one fact?
The point is this, everybody has more or less information about any company.  It is impossible to disclose all information about a company because nobody knows what all information is.  Should those who do their research about a company be jailed because they knew more when they invested in that company?  Simply put, insider trading is impossible to define and nobody should ever be prosecuted for it.  Caveat Emptor.
(Please Note:  I am not defending fraud.  Fraudulent reporting of "facts" about Company X should be prosecuted.  There is a huge difference between fraud and insider trading.)

 

Tuesday, January 17, 2012

The FBI Should Imprison Themselves

The "Financial Crimes Enforcement Network" (FinCEN) is a branch of the federal government created by the Patriot Act designed to greatly expand the scope of government surveillance of your financial transactions.  The Federal government had been tracking your banking transactions for years prior to the establishment of FinCEN.  Banks are required to disclose any transactions involving cash in excess of $10,000.  Under the Patriot Act a wide variety of other financial transactions became subject to government scrutiny.  All financial institutions are required, under penalty of law, to report, in addition to large cash transactions, any transactions involving foreign banks or financial institutions as well as anything deemed "suspicious" under the terms of the Patriot Act.  All reports are sent to the FBI for processing.
Failure on the part of a financial institution to comply with the terms of the Patriot Act are severe.  The FinCen website states that "the unauthorized disclosure of an information request or the content of a request is subject to a criminal fine of up to $250,000 and a term of imprisonment of up to five years." 
I just found a copy of the Annual Report of the Financial Crimes Enforcement Network.  On page 8 of that report they boast that they received in excess of 17 million bank secrecy act filings in 2011.  Like most branches of government, FinCEN has no way to measure success.  So, FinCEN has decided that the greater the number of filings, the more they are accomplishing their stated goal of combating the war on terror. 
Now here is where it gets interesting.  The FBI, where these reports are sent, employs 35,704 people.  Of those 35,704 employees, 13,864 are agents.  If every agent at the FBI worked exclusively on bank secrecy act filings each agent would be responsible for 1226 reports per year.  Assuming that each agent works 2000 hours per year, each agent would be required to complete an investigation on each filing every one hour and thirty eight minutes.  Anybody believe that is getting done?
Let's assume that the FBI investigates none of the currency transaction reports and only examines the suspicious activity reports.  After all, that is where terrorist activities are most likely to be found.  Each agent would now be responsible for 104 separate investigations per year.  Assuming that each agent works 250 days per year this works out to roughly one investigation every two and a half days.  Does anybody believe that even a tiny percentage of these filings are being checked out?  Is it not immediately obvious that, despite the fact financial institutions are criminally liable for not submitting these reports, the FBI is investigating almost none of them?  The FBI should imprison themselves for this gross violation of the Patriot Act.
Two sidelights of interest:  1)  If each filing was for a different citizen of this country (probably not the case), it would follow that one out of every 19 citizens of the US had a secret report about their finances filed with the government in 2011 and, 2) As far as I am aware, no arrests for terrorist activity have come out of any of the 17 million plus filings in 2011.  If 17 million filings leads to no arrests for terrorism, maybe the government is wasting its time and our money.

Monday, January 16, 2012

Call Me A Racist, If You Must

Today is the day the United States Government has declared that all citizens must celebrate the birth of a man who was a plagiarist, a socialist, and a serial adulterer.  Failure on the part of any citizen to acknowledge that this man was, arguably, the greatest American citizen ever born will immediately subject one to charges of racism.  The man was Martin Luther King and, in addition to being a plagiarist, an adulterer, a socialist and a Christian minister who denied that Jesus was God,  he was black.
I am sick and tired of being labeled racist simply because I believe that anyone who practices plagiarism is immoral.  I am fed up with being called a racist because I do not admire men who are serial adulterers.  I have had it up to here with those who call me a racist because I believe that the coercive redistribution of wealth and income by the government (aka "socialism") is a vile and reprehensible activity and that anyone who advocates socialism is a moral reprobate. I will no longer stand being called a racist because I believe a man who is ordained as a Minister of the Gospel and yet denies the virgin birth and bodily resurrection of Jesus should be excommunicated and thrown out of his church.
In an article on MLK in today's Denver Post it is stated that "Many never learned about King's crusade for a guaranteed annual income" and that King's "Poor People's Campaign" "demanded that the American President and Congress help the poor get jobs, health care and homes.  The concept of the government providing a "guaranteed annual income" is one of the most ridiculous ideas ever conceived.  Has anybody ever heard of the story of the Little Red Hen?  Are we all really so stupid we believe that marginal producers will continue to work if they are guaranteed an annual income for not working?  Are we so filled with envy that we believe it is morally proper for the government to forcefully extract the income of those who work and hand it over to those who do not?  Are we so economically ignorant that we actually believe that the President and Congress have the ability to create jobs, produce medical services and build homes?
I have a dream.  I have a dream in which each person is paid for the work that he does.  I have a dream in which each person is allowed to keep what he earns.  I have a dream in which  I keep my mind on my own affairs and leave others alone.  I have a dream in which the citizens of this country mind their own business.   I have a dream where, when I do think of my neighbor,  it is to rejoice in his success or privately assist him in his poverty.  I have a dream in which I live in a world without the destructive effects of envy.  I have a dream that I live in a land in which men who dedicate their entire lives to expanding the power of government to forcibly transfer the wealth and income of one group to another are not deemed to be national heroes.  I have a dream that I live in a land where I can believe that a man who repeatedly commits terrible immoralities can be pronounced to be an  immoral man without my being labeled a racist.  Oh yes....it is a dream.  When I wake up I will be back in the real world where I will find, not surprisingly, I am being called a racist.