Thursday, January 17, 2013

To be young....

The Philly Fed and Empire Index were weaker than expected but housing is holding up (thank you 4% mortgage rates). Markets have the sense that the weaker economic data means that the Fed is going to keep propping up the banks which means green markets.

I'm going to paraphrase a great article I read last week on the state of America for the young.  In this case, we're talking about the millenials and their prospects for the next 40 years.  Much of this will sound negative on the surface but to the young this should serve as a wake up call and hopefully provide them with some inspiration to strive for a better outcome.

The ugly....

* unemployment for young people is about double the national average. Student debt is now the single largest contributor to the nation’s credit delinquencies and it's growing by the month.  Unfortunately, it's also one of the few debts you can never erase, even with a bankruptcy.

1) Make don't speculate - The world has changed and it's never going back to the world of 1998 no matter how much some software sales reps wish it would :)

One of the key reasons unemployment is high but corporate profitability is higher?  Companies trimmed the fat in 2007 and realized they never need much of that bs to begin with.  Young lawyers, finance and marketing gurus can't sniff a job in the traditional corporate world right now because they are cost centers not revenue generators.  The take away?  Build something, write code, break apart your dad's old iphone and figure out what's inside there because understanding how to build something of value will never go out of style.

2) More education?  This one is hard for old-timers like me to realize but the traditional model of go to college, get a job sounds like it's toast.  I've seen this argument three times in recent weeks - if you can get into a truly top-tier school (The top 10 only + McGill) then go - otherwise, consider alternatives.  Get online. NOW.  Not the bs from DeVry, University of Phoenix, etc, but check out what Codecademy is doing, or Udacity or Minerva or Coursera.  We're approaching a day where the quality of FREE online education is going to exceed what is taught in a normal private university.  Companies are also looking for people that understand things and they are ignoring the paper on the wall. 

3) Ignore old people like me - I want my kids to go to a great college, learn something, then maybe go grad school and onto a career.  Unfortunately, that's 1995 thinking.  Oh, and China has launched an initiative to generate nearly 200 million college graduates by 2020.  Good luck competing with your 2 yr associates degree in Sports Management. 

So can everyone be an entrepreneur?  Well, maybe not but you're going to have to try.  Build something someone wants - homes, cars, zumba classes - and people will beat a path to your door but the traditional pathways for success in the US are changing. 

This past week I read a book with my daughter about young inventors and she is now on a mission to have a patent before the age of 12.  While that is highly unlikely, at least I have her thinking like an Edison.  America of tomorrow will need more Edisons, Gates and Jobs and fewer attorneys, bankers and marketing managers.

Friday, January 04, 2013

Charts to read over the weekend

#1 It's good to be in the top 1/100th Percent

While it's been widely understood that the 1% have done well in recent years the degree to which income gains skewed to the 1% in 2010 was stunning.  For 93% of all gains to go the top 1% of income earners is unusual, but more eye-catching is that 37% of all income gains in 2010 were realized by the top 0.01% which represents just 15,000 American households!!

#2 Congress is the definition of Fail

The 112th Congress set a new standard for "doing nothing".  In two years, they passed just over 200 bills or 31% of the average of the # of laws passed by the preceding 32 sessions of Congress.

charts via NY Times

Have a great weekend!

PS - You can keep tabs on the progress of NNY Math at

Thursday, January 03, 2013

T-57 days and counting...

What is left of the market kicked off the year with a buying orgy yesterday on the heels of the fiscal cliff avoidance plan.   Most of Wall Street expects the stock market to go up about 8% in 2013 and we got about 25% of that gain yesterday.

So we put Francine the Fiscal Fiasco (hey, if the weather channel can name every snowstorm, it won't be long before CNBC starts naming DC dramedies) behind us but forming in the Caribbean is is Debbie the Debt Debate when we hit the debt ceiling at the end of February.  The reality is that the micro-deal that was reached does little to address the long-term financial situation in our country.  This was evidenced by the fact that the rating agencies are now looking at the implications of this deal on our long-term outlook.

I don't recommend that anyone digs in their heels over the debt ceiling.  It's an artificial threshold that has no real meaning, but if a resolution is not reached the impacts on our country would be significant.  I think however, that this debate plays well on main street so even if it is a flawed debate expect plenty of 2016 Presidential contenders (yes, Sen. Rubio I'm talking about you) to line up on the Sunday talk shows to say "Look, you can't keep spending more than you take in...".

Again, this is a flawed concept because our debt issuance is due in part to demand.  Despite huge jumps in our total debt, people around the world are still clamoring to buy our debt.  I'm concerned that the dysfunction in Washington will only grow over the next two months as we get closer to the debt ceiling.

After the debt ceiling, there will be more drama coming including ----  A) determining the sequestered amounts, B) determining cuts in entitlement spending, C) additional taxes and finally, D) the President needs another Continuing Resolution.

Yeah, happy days are here again!
While I lightheartedly poked fun at the NASCAR tax breaks in the bill, it should be noted that the big winners in this bill are really American multinational corporations.

While there was a great deal of hand wringing over tax breaks for green energy and region-specific credits like the post-9/11 incentives to keep firms in lower Manhattan, ultimately the fear was striking any of these items from the bill could sink the whole ship.  While the word "uncertainty" was tossed around CNBC like a hacky sack in Boston Commons, the reality was that business leaders weren't obsessed with the uncertainty of their business prospects, but rather the uncertainty of whether their tax giveaways would be renewed.

Ultimately, the big boys got what they wanted. 1) US companies operating foreign subsidiaries can passive income (think interest payments) into lower-tax “active” investments which benefits big multinationals with financing arms like GE or Caterpillar.  2) Tech and Pharmaceutical companies will continue to be allowed to move intellectual property to subsidiaries in low-taxed or no-tax countries.

Aren't you glad we avoided that cliff?


Tuesday, January 01, 2013

Corporate SNAP

Just in case you are feeling all giddy about Congress reaching an agreement and helping to save you $30/week keep in mind who really benefits from the Congressional panic sessions. 

Minds far sharper than mine have torn through the draft legislation and found these 8 giveaways....from Matt Stoller -

NASCAR Bailout - Sec 312 extends the “seven year recovery period for motorsports entertainment complex property” build a racetrack and get tax breaks on it. This one was projected to cost $43 million over two years.

Railroads maintenance - Sec. 306 provides tax credits to certain railroads for maintaining their tracks. Tax credits for doing something they should be doing anyway?  Juicy. This is worth roughly $165 million a year.

Disney’s Gotta Eat - Sec. 317 is “Extension of special expensing rules for certain film and television productions”. It’s a relatively straightforward subsidy to Hollywood studios, and according to the Joint Tax Committee, was projected to cost $150m for 2010 and 2011.

Help a brother mining company out – Sec. 307 and Sec. 316 offer tax incentives for miners to buy safety equipment and train their employees on mine safety. Taxpayers shouldn’t have to bribe mining companies to not kill their workers.

Subsidies for Goldman Sachs Headquarters – Sec. 328 extends “tax exempt financing for York Liberty Zone,” which was a program to provide post-9/11 recovery funds. According to David Cay Johnston’s The Fine Print, Goldman got $1.6 billion in tax free financing for its new massive headquarters through Liberty Bonds.

$9B Off-shore financing loophole for banks – Sec. 322 is an “Extension of the Active Financing Exception to Subpart F.” This allows American corporations such as banks and manufactures to engage in certain lending practices and not pay taxes on income earned from it. According to this Washington Post piece, supporters of the section include GE, Caterpillar, and JP Morgan.

Tax credits for foreign subsidiaries – Sec. 323 is an extension of the “Look-through treatment of payments between related CFCs under foreign personal holding company income rules.” It’s a provision that allows US multinationals to not pay taxes on income earned by companies they own abroad.

Bonus Depreciation, R&D Tax Credit – These are well-known corporate boondoggles. The research tax credit was projected to cost $8B for 2010 and 2011, and the depreciation provisions were projected to cost about $110B for those two years, with some of that made up in later years.


The problem with predictions

Well, it sounds like most of my expectations for the "fiscal cliff" drama have played out according to plans, but like Bill Parcells always says, the losses hurt way more than the wins.  The market rallied on every hint of a deal on Monday with no let up.  Every headline pushed the market forward and that led the computers to jump in on the fun. 

I think the market's reaction will influence the House's willingness to compromise.  Every hint from a Congressman that could derail the deal will likely swipe 15 points off the Dow and that will really weaken the resolve of the Republicans (don't you love the fact that we govern based on ticks of Apple's stock price?).

**** As I was typing this it sounds like the House has agreed in principle to vote for the Senate Fiscal Cliff plan.

To address our run up to the "Cliff" we needed to build a bridge across the ravine.  Instead, it sounds like we will get an agreement to put up a sign that says "Bridge out ahead".  This is the ultimate band-aid solution.  The proposed agreement appears to avoid the most strict aspects of the fiscal cliff but in the end it does very little to address the medium and long-term structural issues facing our economy.

Remember for all of the bluster about the cliff it was established to help reduce our long-term budget deficits.  The mini-deal will actually boost our total debt over the next 10 years by up to $4 trillion. 

Is it any wonder we couldn't accomplish a grand bargain with a Congress that is more partisan than at any point in the past 130 years?

Here's to a great 2013!