Jan 08

There’s been much discussion in the news recently regarding the minimum wage, currently $7.25, and the efforts to raise it to a level which would at least keep pace with inflation. You’ll hear nonsense that if the minimum wage is raised, jobs will be lost. After all, if you raise the cost of something, the demand goes down, right? Even if this were true, it’s rhetoric with no data behind it. There’s more to supply and demand than the simple result of ‘less.’ That something is called elasticity of demand. Simply put, if you raise the price of an item by 1%, you look to see how much the demand goes down. If it goes down a very tiny amount the relationship is considered inelastic.

minwageelas

What’s interesting to note is that this experiment has already been performed for us, by states that raised their minimum wage above the federal minimum. Data accumulated, graphs made, truth exposed. Stores have already cut back on employees. Ever go into a Home Depot where there’s one clerk monitoring 4 self check registers? Or the local supermarket that has multiple self-check lanes, and a few full-service? Will an increase of 39% from $7.25 to $10.10, the current democrat goal, have zero impact on jobs? No, probably not. But the loss in jobs is likely to be quite small compared to the positive effect on the millions working at minimum wage.

The next issue is that trickle down economics doesn’t work. Corporations are sitting on over $2Trillion and for various reasons, still aren’t hiring or repatriating this money to the US. On the other hand, the extra $5700 this wage bump would give to the minimum-wager will be spent almost immediately. An immediate boost to the economy. There are nonsensical arguments out there such as, “if $10 is good, why not raise the wage to $25, or a $50K salary?” These arguments are red herrings, and should be called out  as such. At the start of this past holiday season, I heard the National Retail Federation CEO Matthew Shay say,”Since most of 2M min wage workers are young, it’s ‘more like a starting wage.’” Sir, you are out of touch with reality. Granted, slightly more than half are 16-24 years old, but this leaves the other half, adults that are trying to making a living on this wage. What I don’t see in the mix is a discussion of a lower wage for those under 25. It would make sense for the teen and students to stay at the current wage and would dismiss the notion that minimum wage earners aren’t those who are supporting themselves and their families. I offer such a proposal as compromise, not a position I’d otherwise push.

Now, let’s get to the punchline, the true transfer of wealth. It’s simply a matter of following the money. Wal-Mart has long history of establishing stores in neighborhoods and driving out the local stores. No wonder when Walmart submits a permit for a new location, there’s nearly always pushback and protests if the permit is approved. Given the low wages, their employees are typically reliant on some type of public assistance programs to help make ends meet. This assistance doesn’t come from thin air, it’s from the taxes that you and I are paying. You see where this is going? Our tax dollars are directly subsidizing Wal-Mart shareholders, more than half of which are members of the Walton family. The data shows that Wal-Mart’s net earning were $17.2B this past year. I wonder how much of this can directly trace itself to the subsidies its employees received. Yes, it’s time to raise the minimum wage, not as a means of redistributing wealth, just the opposite, as a way of stopping our collective wealth from going to this one family.

written by Joe \\ tags: , ,

Oct 30

Earlier this year, three American Economists were awarded the prestigious Nobel Prize in Economic Sciences. It’s a bit curious to me that these men did not come to the same conclusion, on the contrary, their views contradict each other. Let’s spend a few minutes and look at their work so the next time you walk into a bar or cocktail party, you’ll be able to talk about these guys as if you knew them.

Eugene Fama – The developer of The Efficient Market Hypothesis (EMH), Fama’s work is well known to anyone who has taken even an introductory economics course. In simple terms, EMH states that the current price of a stock reflects all that is known about the company and investors cannot consistently earn excess returns over a long period of time. Fama even explained that with the huge number of fund managers around the world that there’s going to appear to be a number of star performers, but in the aggregate, they are going to lag the average market return.

Robert Shiller – Author of “Irrational Exuberance,” and one of the relative few who saw the mid 2000 housing bubble, Schiller  studied market movements and concluded that the volatility of the stock market was greater than could be explained by any rational view of the future. This view is in conflict with EMH, and further suggests that a mechanism exists to understand the market relative valuation, namely PE/10 the trailing ten year price to earnings ratio. Shiller’s name is frequently mentioned in the news as reporters discuss the valuation of the Case-Shiller index, a measure of relative housing prices.

ShillerPE10

Lars Peter Hansen – Hansen has focused on statistical models, creating ways to test competing theories of why asset prices move as they do. Of the three winners, Hansen’s work is lesser known, in a sense his work served as referee between te views of Fama and Shiller.

In sum – Fama – Efficient Market; Shiller – Irrational Exuberance; Hansen – Referee

Now you know. And the punchline to the title? I believe it’s, “and everyone in the bar walks out.” If you’ve hear a better finish, please let me know.

written by Joe \\ tags: ,

Sep 26

We talked about the Taper, today, I’ll share my bigger concern, the potential wave of inflation. We first need to understand a couple things. First, a look at M1 -

2013M1

From the end of the recession, M1 (Defined as “M1 includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler’s checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts.”) has gone up by a Trillion Dollars, or over 60% in just about 4 years. This doesn’t tell the whole story. We need to look at Velocity -

2013Velocity

Velocity is the reason why the required money supply doesn’t need to equal an entire year’s GNP. It’s defined as the average frequency with which a unit of money is spent on new goods and services produced domestically in a specific period of time. The time unit is nearly always defined as one year. So, we stare at the growth of M1, but see that velocity has tanked. We exited the recession with about $1.6T in ‘cash’ times about 9 giving us a result of $14,4T. Now, M1 is nearly $2.6T, but velocity has dropped to 6.5 resulting in $16.9T. Barely a 17% increase over 4 years time. (Note, GNP is running at just over $16T for the year, so my eyeballing the numbers here is resulting in a bit of rounding error.)

I don’t know when the economy will gain some steam, but it will happen eventually. When that happens, velocity will go back to more normal levels, and that will potentially create a wave of inflation that will catch many by surprise. But just as the banking crisis was predictable, so is this. The only way to avoid a highly damaging level of inflation is for the Fed to quickly drain excess liquidity. So as we move forward, the money supply is an important part of the equation, but don’t take your eye off velocity. It’s the indicator that will tell you whether the Fed has to act, and act fast.

written by Joe \\ tags: , ,

Sep 24

We are living in interesting times. The Fed Funds Rate is targeted at 0-.25%. The last time it was this low was in the late 1950′s, so it’s fair to say that for most of us, these are the lowest rates we’ve ever seen. As I became interested in finance in the late 80′s, fed funds rose from 6% to 10% before starting its long decline to where we are today. In a grad school economics class I recall a discussion on monetary policy, and the question came up – If the Fed Funds Rate ever went to zero, what tools would the Federal Reserve have to push the economy out of a recession?

We saw the answer. It’s called quantitative easing. Instead of simply driving interest rates down, the Federal Reserve began buying mortgage backed securities, 40 billion per month in the early rounds, now, also long term treasury bonds for a total of $85 billion per month. In effect, this is money being printed and pumped into the system, in the hope that this money will help to spur the economy. The results appear to be a bit questionable. Last August, I wrote Cash Hoarders – QE3 won’t help, in which I discussed the enormous cash hoard that U.S. companies have in their coffers. If their $2 trillion dollar nest egg isn’t encouraging them to expand their businesses and hire more workers, why would QE cause them to behave any differently?

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Interest rates on mortgages are also at near record lows, but many who desperately need to refinance to take advantage of these rates are unable to secure a new loan. The banks are requiring higher FICO scores than they did years ago, and people are still stuck with under water mortgages at rates far higher than they should be paying. The money that’s pouring our of the Fed appears to be propping up the stock market, but doing little to help the economy.

Now, for the Taper. When the Fed is satisfied that the economy is on track, as measured by a lower unemployment rate and improving GDP, they will reduce the purchases. Not bring them to a halt, not reverse their position, just Taper a bit. For some reason, the prospect of this happening freaks the market. To be clear, QE which the Fed says is needed because the economy isn’t really as healthy as it should be, and will slow down as the patient improves. But the market prefers the bitter medicine instead of a healthy economy?

Next (on Thursday) – The Velocity of Money. This little understood phenomenon is part of the potential wave of inflation that may occur after QE ends.

written by Joe \\ tags: , ,

Aug 09

If you have a child in your family, you’re probably familiar with the work of Laura Numeroff. She authored the books If You Give a Mouse a Cookie, If You Give a Moose a Muffin, and If You Give a Pig a Pancake. The premiss in this series is simple, one thing leads to another in a fashion that brings us right back to the beginning.

I couldn’t help but think how the same thing applies in the economy. There’s a cycle of companies hiring, people feeling secure in their jobs, spending on new homes, bigger homes, and other goods which drives up demand in all sectors and keeps those companies profitable. Of course, you might say there’s a bit of chicken and egg going on, the companies aren’t hiring because demand isn’t there.

We are now looking at companies having a cash hoard of over $2 Trillion. There are times that interest rates are too high and the cost of money keeps investment down. That’s when the Fed (The Federal Reserve Bank, the Central Bank of the US) typically lowers rates in order to encourage businesses to expand. We are at a very strange juncture in this economic cycle. Mortgage rates are at an all time low but housing is still stagnant. The current 3.75% 30 year fixed rate means that a $1000 per month mortgage payment can cover a mortgage of just under $216,000. That $1000 is below the amount a median income family can budget to the mortgage, while the $216,000 is well above the median home price in much of the country. Why is no one buying? Uncertainty. People are not secure in their jobs, and are afraid to spend. Businesses are waiting to see the results of the election and understand the costs they’ll have over the next year for health care, taxes, etc.

Former Federal Reserve Chairman Alan Greenspan was interviewed last month by CNBC’s Larry Kudlow regarding this issue with the economy and he offered, “The best way I would describe it is to think in terms of two separate economies,” he said. “One is probably 90, 92 percent of the GDP and is doing actually reasonably well. The other 8 percent is largely structures or more exactly, long-lived assets. The attitude of business and households against committing to long-lived assets is extraordinarily suppressed.” This is a great observation, much of the behavior of both the consumer and corporations seems to be similar in this regard, little in the way of long term spending. It’s as though capital itself is on strike.

This brings me right back to today’s title, the fact that Quantitative easing won’t help. That’s not where the problem is. I have banks willing to lend me money short term at 2.5% (my HELOC) and even 1% for just a year (a credit card’s cash advance deal) but I’m not likely to take advantage of either. You’ll note, I don’t have answers, just observations. Something needs to give the economy a needed jump start (imagine Uncle Sam using a defibrillator on the economy) to get out of the strange cycle we are in.

written by Joe \\ tags: , ,