Reality Check

Government dependence has reached epidemic levels.

• The number of Americans getting benefits from the federal government each month exceeds the number of full-time workers in the private sector by more than 60 million
• 69 percent of all federal money is spent either on entitlements or on welfare programs

Bank regulators earn twice as much as bankers.

• Before the Dodd-Frank Act, the average employee of a federal bank regulatory agency received 2.3 times the average compensation of a private banker. By 2013 this ratio increased to more than 2.7—and in some cases considerably more.
• The average compensation at the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corp. (FDIC) and the Consumer Financial Protection Bureau (CFPB) exceeded $190,000 in 2012. The staff at the Federal Reserve is likely even better compensated, but the Fed refuses to release employee salaries.You might think high-paying jobs at these agencies require special skills. Not so. At the OCC, secretaries make on average $79,182 per annum. Motor vehicle operators (the agency’s limo drivers) at the FDIC earn $82,130. Human resources management trainees at the CFPB make $110,759 a year.Averages tell only part of the story. In 2012, 68% of FDIC and CFPB staff—and 66% at the OCC—earned above $100,000 a year. Nearly 19% of the CFPB and OCC staff earn more than $180,000 a year. At the OCC, 10.5% of workers earn above $200,000 a year, at the FDIC 9.3%.

David Einhorn sees the second tech bubble here and now.

• We decided to short a basket of bubble stocks.
• When the last internet bubble popped, Cisco (the best of the best bubble stocks) fell 89%, Amazon fell 93%, and the lower quality stocks fell even more.
• Our criteria for selecting stocks for the bubble basket is that we estimate there to be at least 90% downside for each stock if and when the market reapplies traditional valuations to these stocks.

Twittering

The Twitter IPO prices after the close tomorrow, orders close at noon today. Doubtless all the stops will be pulled out to make things look good. After all, what could be better than selling a company that makes huge losses and has no obvious business model for profitability at a multi-billion valuation? UFB.

Meanwhile, 15 IPOs and 16 secondaries this week. Busiest since 2006. That’s a bell you hear.

Don’t be a twit.

It’s That Time Again

The manic phase is clearly upon us. Twitter is planning in an $11 billion valuation based on quarterly revenue of $168 million and a quarterly loss of $64 million. Amazon surged after hours on yet another loss report, despite losing more money this quarter than last. Ah but Amazon is the queen of Internet 2.0. Give me a break. Meanwhile the economy is quietly rolling over, all talk of tapering has vanished and now even rumors of increased QE are circulating.

Facebook Day

Last night Facebook reported they had sold advertising placed on mobile devices. The stock is up 30% as I write at $34.43.

Some data points: Price/earnings – 753.7, Price/sales – 11.7, Price/book – 5.4. If you are buying shares at this price I have no idea what you are thinking.

Insane.

Little Misses

A row of little misses was observed today.

• Fedex down 7%. Mothballing aircraft due to slumping international air cargo traffic.
• Oracle big revenue miss. Down 7%.
• Caterpillar reports sales down 13% y-o-y for the last three months.

Nothing to see here. Always a good time to buy stocks. Oh, by the way:

 

(thanks to zero hedge)

Accountability

The Dow is down 250 or so as I write. Earnings reports seem to have injected a little reality into the Keynesian fantasy. Even the prospect of a smaller iPad, which propped up the stock market yesterday,  may not be enough to save the world, it seems. Say it isn’t so.

Complacency is everywhere. The Fed has our back, say the bulls. The problem is that the Fed is unarmed. Ben might as well hold his breath until unemployment reaches 5% as buy bonds – neither will be effective. Although if he holds his breath long enough, market morale might actually improve, come to think of it.

An Italian court sentenced a panel of scientists to long jail terms for giving bad advice about the likelihood of a major earthquake following swarms of small quakes. People took their advice, stayed in the quake area, and many died when a large quake resulted. The scientists protested, in vain, that there was no way to accurately forecast quakes. In which case, they should not have given advice, the court held. This verdict has been widely derided. But not by me. People giving advice should be held accountable for their advice. Engineers are. Lawyers are. Doctors are. Why not economists? If their advice ruins lives, should they not be sent to jail? Particularly when they base their advice on dogma, rather than evidence? The lesson from the Italian convictions is that you shouldn’t take money to make a prediction (negative or positive) when you know that the event is unpredictable.

Mr Bernanke is perfectly willing to make predictions and experiment with other people’s lives. He has no basis to make predictions – his track record is abysmal. But he does it anyway, shameless and secure in the knowledge that his little world of yes-men, private dining rooms, tennis courts and limos will continue serene, regardless of the hardship that results from his economic advice.

Economics is largely bogus. No epistemological analysis is ever applied to economics, so we don’t know what is true or not. To our cost. More reliable forecasting methods exist – crystal balls, tarot reading, I-Ching all come to mind. Then we would have at least random  rather than pathological forecasts.

Oops

Google dropped a Lincoln Log on the market as its earnings release was inadvertently published early. The stock was hurriedly halted, but not until it had dropped about 9%. The news was bad – but then so was the news from IBM, Intel and others and there was no market effect. Maybe it was the surprise release that caught the pumpers flat-footed. I’m sure that the Obama campaign will have the pumps running shortly. Anyway, just more confirmation that all is not well.

Sustaining The Unsustainable

Pimco’s El-Erian made a remark a little while ago that is worth a little analysis:

In the last three plus years, central banks have had little choice but to do the unsustainable in order to sustain the unsustainable until others do the sustainable to restore sustainability!

Of course, the problem is that politicians want “recovery.” This implies a return to the previous economic environment. Which unfortunately collapsed because it was – unsustainable. So politicians are also doing the unsustainable to sustain the unsustainable. And yes, we’re getting the same symptoms.

One might well ask, what needs to happen for sustainability? Well, a few things. I’ll focus on the U.S., but the ideas are generally applicable.

1. Trade balance. Imports and exports must be in a long term balance. Deficit one year, surplus another is fine, but we can’t run a trade deficit indefinitely as we are presently doing. Our economy must generate tradeable goods and services that other countries will buy in roughly equal value to what we import. The U.S. has exported most of its manufacturing industry, but has failed to offer goods and services to trade for imported manufactured goods.
2. Debt. Growing debt faster than GDP is unsustainable. That’s what made things look good during the bubble years, and the consequences of that will show up in a reduced standard of living in years to come. We’re still mortgaging the future – just look at the building boom in universities, funded by student loans. Debt needs to be  reduced to a level where interest costs are affordable at interest rates that reflect reasonable time preferences, and then future growth must be tightly controlled. The debt reduction will require a massive reduction in consumption. Deflation, inflation, pick your poison, but the material outcome will be the same.
3. Savings. The flip side of debt is savings. Savings is, in essence, a voluntary reduction in consumption which frees up income to be allocated to investment – or, of course, debt reduction. Reducing debt and then building the infrastructure and industry to generate exports will require household and government savings to generate investment. Note that we have to look at business and household savings separately, in essence government and households will have to fund business investment. Business will have to run at negative cash flow as it spends. Right now the reverse is happening.

Being Evil Is Now OK

Google shares have been getting spanked ever since the founders’ plan to withdraw voting rights for, well, anybody other than the founders (and Schmidt) was revealed.

This kind of dual-class strategy was common until it was outlawed in the 1920s. It was permitted again after 1986, but is generally regarded as evil. So much for “Don’t be evil.” Coincidentally, Google was also fined for obstructing a federal investigation. $25,000 – wooee. I guess the founders figure the company has become big enough that it is able to do whatever they want.

Common shareholders have not been given any opportunity to resist the taking of their rights other than to cease being shareholders. Which option, it seems, is being exercised by more than a few of them.

Apple Mania

A headline-seeking analyst put out a target price of $1,001 on Apple shares  this morning. If you ever needed evidence of a bubble, then here you are. And of course Apple is up big, because of course it is going to make everyone rich. Sigh. Tell me another one, Scheherazade.

This is one for the “What were they thinking?” file. Actually, I know what they are thinking and the best way to explain it is the story of the two guys who go hiking into the Alaska back country. As they get out of the truck and pick up the gear, one of the guys looks at the other one and says “I see you are wearing running shoes.” The other guy looks at his feet and says, “Yup, there are bears around here and I might need to get away.” The first guy looks at him and responds “You can’t outrun a bear, they’re too fast.” “Yes, I know that,” he says. “But I don’t have to outrun the bear, I just have to outrun you.” That’s what the traders are thinking. When the turn comes, they’ll be first out of the door. Good luck with that, the door will be real crowded.

Extrapolating Apple’s rate of ascent since the first of the year (about 0.5% per day) would give a price of $1,000 by early June. Just saying.