Has it been long enough that you miss me?  I didn’t think so.

 

First, I received so many emails when I said that I was going to stop my weekly writing – I wasn’t able to respond to any of them.  But, I read them all and I really appreciate all of your comments.

 

Second, here’s a link to a pdf file that contains the resumes of three of my MBA students.  They all were members of The MBA Investment Fund, a $17 million investment fund that I oversee with Keith Brown.  They are all willing to move anywhere for the right opportunity in asset management (sell side or buy side).  Don’t hesitate to email them or me if you’re interested.

 

Now, on to an issue that a lot of people have written to me about…Reinhart and Rogoff’s paper and their mistakes.  Here’s a quick summary of the situation and my thoughts about it.

 

Summary:

Reinhart and Rogoff (“RR”) are two Harvard professors who have written extensively about our current situation (high debt ratios, financial crises, etc.).  Probably their most influential paper was “Growth in a Time of Debt.”  The paper’s primary finding was that when debt-to-GDP exceeded 90%, the median country experienced a slowdown in growth of 1% and the average was a 4% slowdown.  (In other words, the middle country experienced slower growth, but there were some real disasters that really dragged the average down.)

 

Remember, a 1% slowdown in growth might not sound like much, but it’s huge!  Imagine that you take the U.S. growth rate from 3% down to 2%.  As a simple example, if we have 2% productivity growth, that means that we don’t need any more employees.  (In other words, our current workers produce 2% more and that’s how much we grew.)  In reality, our productivity is lower than 2%, but our growth isn’t that much higher than productivity.  So, it takes a long time to return to full employment.

 

A month ago, a doctoral student (and some faculty) at UMass – Amherst wrote a paper arguing that the RR paper contained errors and, as a result, had some incorrect conclusions.  The new paper is titled, “Does High Public Debt Consistently Stifle Economic Growth?  A Critique of Reinhart and Rogoff”.  The authors are Thomas Herndon, Michael Ash and Robert Pollin.

 

The new paper argues (among other things) that:

 

1. There was a spreadsheet error in the RR paper;

 

2.  RR selectively excluded some data (countries with high debt and growth that didn’t slow much); and

 

3. The weighting system that RR used was not justified.

 

As a result of these issues, the new paper argues that the average growth rate does not drop nearly as much as RR had said and that there is little discernable difference in growth at a 90% debt-to-GDP ratio.

 

Many people now argue that the RR paper was the basis of the austerity movement and that the paper has now been disproved.  Reinhart and Rogoff have admitted that there was a spreadsheet error but argue that their main finding was based on the median country (not the average country) and that their findings still hold.  Let me tell you my thoughts…

 

My Thoughts On This Issue

1.  The idea that there is one magical debt-to-GDP ratio (e.g., 90%) that will cause a country’s growth to slow is far too simplistic.  I think most of us knew this.  Certainly, in my policy class, I always spoke about this and I spoke about this in presentations I’ve given.

 

All countries are different and the amount of debt (relative to GDP) that they can handle differs.  Does a country issue the debt in its own currency or in a foreign currency?  How much of the debt is held by its own citizens as opposed to foreigners (who may flee)?  Is the country’s currency a reserve currency?  Does the country have growth opportunities?  These are just a few examples of other factors that also matter.

 

Relying on one single factor (like debt-to-GDP) is like saying that the home team will always win in a sporting event.  The home-field advantage is one factor (and it’s very important), but other issues are also important.

 

2. I’m always going to be wary of an empirical study that would have significantly different results if a few data points weren’t included.  (The new paper argues that RR left out some data points from New Zealand, Australia and Canada.)  Rather than relying on empirical findings (and arguing about whether New Zealand’s data should be included in these calculations), you should really be thinking about intuition.  Here’s my intuition:

 

If debt-to-GDP = 100%, that means debt is the same as GDP.  If interest rates return to their 30-year average (prior to the Fed’s zero interest rate policy), that would put rates around 5.7%.  That would mean our interest would equal 5.7% of GDP each year. Our tax revenue has averaged 18% of GDP for the past 60+ years.  So, if interest is eating up approximately 1/3 of our tax revenue, we’re not in a sustainable position.

 

3. The real problem (that much of the historical data misses because this problem didn’t exist in many of the past years) is that we have huge unfunded liabilities.  If they’re not changed, we will always be running a deficit.  If we’re running a deficit (and the “primary deficit” that we all discuss does not even include our interest expense!), when you add in our interest, we will have huge problems.  As our baby boomers start to retire in force, we’ll see this get worse.

 

4. To me, these numbers are pretty simple and pretty obvious.  But, just as simple and obvious is that we can’t just cut everyone’s Social Security and Medicare and think that it won’t affect anything.  First, we need to give people time to plan (and change the amount they save – and this will impact consumer spending).  Second, we need to recognize that this will impact retirement for millions of people.

 

The Social Security Administration says that among Social Security beneficiaries, 53% of married couples and 74% of unmarried persons receive 50% or more of the income from Social Security.  Among elderly Social Security beneficiaries, 23% of married couples and about 46% of unmarried persons rely on Social Security for 90% or more of their income.

 

5. Any of these changes will impact our growth.  Obviously, if we increase taxes (or the amount of income subject to Social Security payroll taxes), this will also impact our growth.  Add in the political issue (of cutting Social Security or raising taxes on an already-progressive program) and I’m going to have to take issue with anyone who says that Social Security is easy to solve.

 

6. Even this new paper, which criticizes RR, comes to a similar conclusion: that growth is impacted by debt.  This new paper shows that the average growth for countries with debt-to-GDP below 30% is 4.2% — just like RR.  With a ratio at 90% – 120%, the average growth is 2.4% (significantly higher than RR).  But, move above 120% and the average growth rate is 1.6%.  This might be more optimistic than RR, but this is still an ugly scenario.

 

7. I’ve read other research that came to similar finding about a slowdown in growth when the debt-to-GDP ratio exceeded 90%.  I’m curious as to whether these papers also had errors.

 

8. Reinhart and Rogoff had been seen as the heroes of the conservative fiscal movement.  As a fiscal conservative and social liberal, I would argue that their errors have done more harm than their research did good.  People are now (mistakenly in my view) using their errors to argue that the debt-to-GDP ratio doesn’t matter.  I believe it matters, we just don’t know when.  But, we never did know when and the biggest mistake was when people thought that there was a specific number that created a fiscal landmine.

 

Talk to you sometime in the future…

 

Have a great week.

If you enjoy this blog, please forward it to others who may be interested.

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First, I want to point out a 90-second piece that I did with Kris Maxwell.  It’s about “too big to fail”.  Here’s the link.  Obviously, the creative work is all Kris – and I think it’s really impressive.

 

Now, on to my news.  After approximately 5.5 years of writing (first an email service and then this blog), I’m going to hang it up for a while.  Yes, I’m breaking up with you.  But, it’s nothing you did.  It’s me.  I’ve changed.

 

The blog has been lots of fun for me.  It’s been a place to share things that I’m reading and thinking about.  I’ve learned a lot and I’ve met so many people.  With that said, the reality is that the blog takes a lot of time. And unfortunately, there’s really not a good business model in a blog.  So, it’s hard to justify the time that I find myself devoting to the blog.  I need to turn my attention to other work.  (I recently found out that my kids haven’t been saving for college and they’re somehow expecting me to pay.)

 

I hope to occasionally (a few times each year) send out something I find interesting or an article that you might be interested in.  I may also start an education-type business and will send out information if I do this.  In effect, I’m hoping that we can remain friends with benefits.

 

Thanks for supporting the blog.

Sandy

First, thank you to everyone who clicked over to www.prayingforpeyton.com.  Here’s the link.  Jim and Kate were thankful for all of the interest and were especially grateful to everyone who made contributions to organizations that pursue research for childhood cancer.  Obviously, I’m also very appreciative of what you did.

 

Now, on to today’s blog.  Today, I want to hit two quick subjects: the employment participation rate and Howard Marks’ view about the future of equities.

 

The Employment Participation Rate

As most of you know, the unemployment rate would be significantly higher if the participation rate had not dropped.  The participation rate shows the number of working age adults who either have a job or are searching for a job.  If you’re not searching for a job, you don’t count as unemployed.

 

For the twenty years prior to the Great Recession, the participation rate had been above 66%.  Now, it’s below 64%.  If the participation rate were 66%, the unemployment rate would be 11.2%.

 

But, here’s what I found interesting.  One thing I had been hearing was that the participation rate was dropping because of demographics – baby boomers are starting to retire.  Well, that may be true, but if you look at the participation rate of people aged 55 or older, it tells another story (relatively steady to increasing over the past few years) (see chart below):

 

 

You see drops in the participation rates of other groups, such as people with a high school degree (no college) and people with some college (but no degree).

 

 

Howard Marks

Howard Marks shared his views on the future of equities.  Here are some of his thoughts that I found most interesting:

 

1. The better that returns have been in the recent past, the less likely that they will be good in the future (all other things being equal).  (Simply put, you’ll have better returns buying stocks before the run-up, not after.)

 

2. When prices appreciate faster than cash flows grow, it’s safe to assume that some of the undervaluation has been reduced.

 

3. The 1990s had high returns due to economic growth, corporate performance, technological and productivity gains, declining interest rates, low inflation and relative peace in the world.  We also benefited from a naïve view of the debt-fueled expansion, the profit potential of e-commerce companies and the extent to which equity gains could be perpetuated.

 

4. After stocks run up, expectations of future returns increase.  This is opposite of what our expectations should be.

 

5. Earnings yields (the inverse of the P/E ratio) are high relative to interest rates.  While that’s a positive for stocks, it also reflects interest rates that are artificially low.  When rates go higher, stocks will be less attractive.

 

6. Future growth will be slower due to challenges in restarting growth and the dire prognosis for the federal deficit.

 

7. Profit margins are unusually high right now.  If they return to historic levels, stocks would seem more expensive.

 

8. Corporate cash is high – implying safety, potential for stock buybacks and possible dividend increases.

 

9. Investors still aren’t enamored with stocks – although they’ve had a very good run.  Many institutions are under-allocated to stocks – there is still relative disinterest.  This is a positive for stocks.

 

10. If we have another good year or two, sentiment on stocks would turn (and become positive)!  At that point, we’d switch from the fear of losing money to the fear of missing opportunity.

 

11. There are three stages of a bull market:

 

A. the first, when a few forward-looking people being to believe things will get better

 

B. the second, when most investors realize improvement is actually underway

 

C. the third, when everyone’s sure things will get better forever.

 

12. Howard Marks thinks we’re somewhere in the first half of stage two.

 

13. If he’s wrong, it’s not like you’ll be sorry that you didn’t pile into Treasuries (with their low yields).

 

Have a great week.

If you enjoy this blog, please forward it to others who may be interested.

If you want to receive these emails, here’s how:

 

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IMPORTANT: if you don’t receive the email in step 3 or you don’t click on the link, you won’t be on the list.  Sometimes, people who use corporate emails get blocked (it’s probably 50% of the time).  So if you don’t get the email, you know you need to use a personal email.

 

 

 

Today’s blog is a little different – it’s a short personal story and a request that you follow this link to read an entry posted on another site.

 

Approximately seven weeks ago, the son of one of my really close friends was diagnosed with cancer.  Peyton is 13-years old and has an aggressive form of cancer.  I’m very close with his parents, Jim and Kate.  I visited Peyton last week (in Tulsa).  Fortunately, he’s a strong kid with a strong family.

 

Jim started studying how little money is spent researching childhood cancer.  Together, we gathered some statistics about childhood cancer and we put them on a website.  Jim’s goal is two-fold: to educate people about this issue and to raise money.

 

I simply ask that you click on this link and read the stats.  Be sure to scroll down the page to see the stats.  (The website is called “PrayingforPeyton.com.)  It would have been a good blog entry on leedsonfinance.com.  I think you’ll find it interesting.

 

In addition, I encourage everyone to pray for Peyton, other kids in his situation, their families and all of the people who take care of these kids.

 

Have a great week and appreciate your health.

 

If you enjoy this blog, please forward it to others who may be interested.

If you want to receive these emails, here’s how:

 

1. click on this link (or type www.leedsonfinance.com into your browser)
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3. you will receive an email which will require you to click on a link to confirm that you want to be on the list

IMPORTANT: if you don’t receive the email in step 3 or you don’t click on the link, you won’t be on the list.  Sometimes, people who use corporate emails get blocked (it’s probably 50% of the time).  So if you don’t get the email, you know you need to use a personal email.

 

 

Austin or San Antonio finance job needed!  I have a former student who is moving back to Austin because her husband is joining that faculty at UT.  She’s done really well.  She has significant experience in corporate banking, customer relations and quantitative research.  She’s progressed rapidly in her career and her current responsibilities include providing data-driven strategic direction to the CFO and other executives of a large US-based bank.  I know her well and highly recommend her.  If you want her resume, send me an email.

 

Two parts to today’s blog…(1) summary of a recent paper that received some press; and (2) a few great stories and videos.  If nothing else, you MUST watch the one from CBS Sunday Morning.

 

I recently read an interesting paper that was presented at a Fed Conference.  It was titled, “Crunch Time: Fiscal Crises and the Role of Monetary Policy” and was written by David Greenlaw (Morgan Stanley), James D. Hamilton (UCSD), Peter Hooper (Deutsche Bank) and Frederic S. Mishkin (Columbia University).  (No need to email me – I’m aware of Dr. Mishkin’s role in “Inside Job”.)  It was a long paper (90 pages), but I want to share some of the ideas that I found interesting.  As usual, these are their ideas (and often their wording).

 

 

1. High borrowing costs can make fiscal policies unsustainable (if a country already has high debt).  Monetary accommodation can lead to a tipping point in inflation and currency flight.

 

2.  In order to maintain a consistent debt-to-GDP ratio, a country must run a surplus (as a percentage of GDP) that is equal to the difference between the nominal interest rate minus the nominal GDP growth rate.  (If growth > interest rate, a country can run a deficit in that amount.)  See figure 3.2.

 

3. As the debt-to-GDP ratio increases, the cost of borrowing can increase.  At some point, creditors may fear inflation in the U.S. (rather than default).  This could happen if the market decides that fiscal reforms (necessary to return to a sustainable path) are unlikely to occur.

 

4. Emerging market countries can handle less debt because their debt is often denominated in foreign currencies.  Currency depreciation increases the debt burden and can lead to crisis.

 

5. When the Fed buys debt, the Treasury no longer has to pay interest to the private sector.  But, when the Fed buys the debt, they take on a liability: either reserves or currency.  Currency does not have an interest cost.  Reserves do.  When the Fed buys debt and creates a liability (reserves), the government has effectively swapped long-term debt for short-term debt.  This increases the risk of a financial crunch – where money flees and the government has trouble rolling over their debt.

 

6. The greater the current account deficit, the greater the potential problems from high debt levels.  Typically, this means that the government is financing their debt by borrowing from abroad.  The more debt held by foreigners, the greater the likelihood to default (and this threat should raise the cost of borrowing).

 

7. Gross debt is more indicative of the cost of borrowing than net debt.  In other words, when thinking about how much debt we have, you should include the debt held by the trust funds.  It may be that net debt is easier to manipulate.

 

8. Japan has very high gross debt (230%) and lower net debt (126%).  But, they seem to benefit from their citizens’ bias to invest domestically.

 

9. The U.S. benefits from being a reserve currency (resulting in great demand for our Treasuries).  In addition, approximately one-fourth of our outstanding debt is in the form of short-term T-bills with a cost close to zero.

 

10. The CBO assumes that our long-term rates will return to 5.2%.  But, rates could go much higher and cause huge problems.  See Figure 3.11

 

11. Our current account deficit should not be a huge problem because we will become energy independent.

 

12. If Congress eventually engages in fiscal consolidation (balancing the budget), the question is what the Fed should be doing during this process.  Some people think expansionary policy increases future expectations (helping growth) and makes it more likely that fiscal consolidation will succeed.  Others think that expansionary policy reduces the incentives for fiscal consolidation.  They also argue that tight monetary policy will limit inflation expectations (which could be a risk since debt is high).

 

13. Simple “across-the-board” spending cuts are typically short-lived because it does not engender sufficient political support.  We need permanent, structural changes.

 

14. If Congress does come up with a “Grand Bargain” of entitlement and tax reforms, the Fed would probably slow their exit from their current extraordinary accommodation.

 

15. In the extreme, unsustainable fiscal policy means that the government will either have to issue monetary liabilities (known as fiscal dominance) or default.  The U.S. is unlikely to default.  Ultimately, the central bank has no power to avoid the consequences of unsustainable fiscal policy.

 

16. The duration of the Fed’s portfolio will peak at 11 years in 2013.  (As a really rough estimate, you can think of this meaning that if interest rates increase 1%, the value of the Fed’s portfolio will decrease by 11%).  While the Bank of Japan and the ECB have expanded their balance sheets, they’ve kept their durations close to 3 years.  (One reason that our duration has increased is Operation Twist.)

 

17. If interest rates increase or if the Fed incurs losses from the mortgage-backed securities that they hold, the Fed will not be able to remit payments to the Treasury (as the Fed has been doing recently).  (The Fed remits earnings to the Treasury.)

 

18. The inability to remit payments to the Fed could create political pressure or could impact Fed policy (timing of shrinking their balance sheet).

 

 

 

Part 2: Videos / Articles

 

I’ve got three videos / articles for you.  You might want to close the door to your office if you don’t want anyone to see you cry…

 

3. Husband sinks shot to help pay wife’s cancer bill.  This is a good video.  (You should read the short article – it will make more sense.)  This video could have been higher in my rankings if the guy had hugged his wife after hitting the shot!  (On average, it costs me about $20K to get Jenny to hug me, so maybe that’s what I’m thinking about.)  Here’s the link.

 

2. We all get frustrated with the airlines.  We don’t hate them like we hate Time Warner Cable, but we do get frustrated with them.  (I’m now with AT&T U-Verse and pretty happy.  Now, Jenny tells me to watch Cinemax and leave her alone.)  Lest I digress, this is a really cool story about United.  Here’s the link.

 

1. This is just an absolutely awesome video.  If you don’t like this one, there’s something wrong with you.  Here’s the link.

 

Have a great week.  It’s Spring Break in Texas.  Yes, I still get Spring Break.  Woo hoo!

 

Have a great week.

If you enjoy this blog, please forward it to others who may be interested.

If you want to receive these emails, here’s how:

 

1. click on this link  (or type www.leedsonfinance.com into your browser)
2. toward the top right corner is a place to click on for email service — click and enter your email address
3. you will receive an email which will require you to click on a link to confirm that you want to be on the list

IMPORTANT: if you don’t receive the email in step 3 or you don’t click on the link, you won’t be on the list.  Sometimes, people who use corporate emails get blocked (it’s probably 50% of the time).  So if you don’t get the email, you know you need to use a personal email.

 

 

 

Help a young guy out!  One of my close friends has a son who is a junior at Princeton.  He’s on Princeton’s basketball team, is a great young man and he’s looking for a summer internship.  He’d love to work at a sports-related business but would be excited to have any other great opportunity.  If you’d like his resume, just send me an email.

 

Now, on to today’s blog…

 

Warren Buffett published his annual letter to his shareholders.  Here were some of the most notable comments:

 

Small acquisitions.  “Bolt-on” purchases (where small companies are bought to add on to existing businesses) are low risk, don’t burden the headquarters and expand the scope of proven managers.

 

What uncertainty?  There was a lot of hand-wringing last year among CEOs who cried “uncertainty” when faced with capital allocation decisions (despite many of their businesses having enjoyed record levels of both earnings and cash).  Yet, Berkshire spent a record $9.8 billion on plant and equipment in 2012 – 88% of it in the U.S.

 

Ignore the doomsayers.  Regardless of what the pundits are saying, “every storm runs out of rain”.

 

The future is always uncertain.  A thought for my fellow CEO’s: Of course, the immediate future is uncertain; America has faced the unknown since 1776.  It’s just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them.

 

U-S-A, U-S-A.  American business will do fine over time.  And stocks will do well just as certainly, since their fate is tied to business performance.

 

We’ve been through hard times before.  Investors and managers are in a game that is heavily stacked in their favor.  The Dow Jones Industrial Average advanced from 66 to 11,497 in the 20th century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and many recessions.  And that gain didn’t include dividends!

 

Don’t try to time the market.  Charlie (Munger) and I believe it’s a terrible mistake to try to dance in and out of it (the market) based upon the turn of tarot cards, the predictions of “experts” or the ebb and flow of business activity.  The risks of being out of the game are huge compared to the risks of being in it.

 

How Berkshire creates value.  Berkshire builds intrinsic value by (1) improving the earning power of our subsidiaries; (2) further increasing their earnings through bolt-on acquisitions; (3) participating in the growth of the companies that we invest in; (4) repurchasing shares when they are selling at a meaningful discount to intrinsic value; and (5) making an occasional large acquisition.

 

Insurance companies have problems.  Insurance company earnings are still benefiting from bonds that were purchased with higher yields than are available right now.  In effect, today’s bond portfolios are wasting assets.

 

EBITDA is not cash flow.  Our definition of interest coverage is pre-tax earnings / interest, not EBITDA/interest, a commonly-used measure we view as deeply flawed.

 

Accountants aren’t nearly as interesting as us finance guys.  After discussing accounting issues, he said, “and that ends today’s accounting lecture.  Why is no one shouting, “More, more?””

 

You have to pay for quality.  A common Buffett comment: It’s far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price.

 

Buying newspapers.  Interestingly, Berkshire is buying some newspapers right now (which doesn’t necessarily sound consistent with buying “good businesses”).  While he says that industry profits are certain to decline, he’s buying papers in small cities and towns where there is a real sense of community.  He argues that people want to know local news and there’s no substitute for a local paper.  He’s looking for papers in tightly bound communities and he’ll only buy papers that have a sensible internet strategy.

 

Investing in a public company.  Buffett mentioned recent the recent purchase of $1.15 billion of DIRECTV, saying he only discusses investments that have meaningful size.

 

We don’t need no stinkin’ dividend.  Buffett addressed the issue of dividends (Berkshire doesn’t pay dividends).  He made the case that the best thing to do with earnings is:

1. reinvest in the business (projects to become more efficient, expand territorially, extend and improve product lines or to otherwise widen the economic moat separating the company from its competitors);

2. search for acquisitions unrelated to our current businesses – need to be meaningful and sensible

3. repurchase shares – this is sensible for a company when its shares sell at a meaningful discount to conservatively calculated intrinsic value.  Buffett argued that this is the surest way to use funds intelligently: it’s hard to go wrong when you’re buying dollar bills for 80 cents.

Buffett made other arguments against cash dividends, including the fact that you’re forcing all shareholders to incur taxes.

 

Have a great week.

If you enjoy this blog, please forward it to others who may be interested.

If you want to receive these emails, here’s how:

 

1. click on this link  (or type www.leedsonfinance.com into your browser)
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IMPORTANT: if you don’t receive the email in step 3 or you don’t click on the link, you won’t be on the list.  Sometimes, people who use corporate emails get blocked (it’s probably 50% of the time).  So if you don’t get the email, you know you need to use a personal email.

 

 

 

 

You’ve probably read that China is no longer the “cheapest manufacturer in town”.  While I heard this many times, I didn’t know much about it.  So, this past week, I read a really interesting paper about the subject, “The End of Cheap Chinese Labor”, by Hongbin Li, Lei Li, Binzhen Wu and Yanyan Xiong.  The paper was published in the Journal of Economic Perspectives in late 2012.

 

This paper is interesting because it explains how wages are increasing in China.  But, I think that there’s something even more interesting to think about…as the Chinese work force becomes more educated, will they start to compete with some of the more sophisticated manufacturing that we have in the U.S.?

 

Here’s a summary of the paper:

 

Background Numbers – Rising Wages

 

1. Cheap labor has played a pivotal role in the Chinese model (which has been to grow through exports).

 

2. In 1978, the average Chinese urban worker was making $1,004 (in 2010 dollars). Now, that same worker is making $5,487.

 

3. From 1978 through 1997, the average salary of the urban worker only increased .1% per year (from $1,004 to $1,026). This was much slower than real GDP growth.  (NOTE: the growth rates in this paper are low because they are measuring wages in “real U.S. dollars”.  The Chinese currency was actually overvalued in the late 1970s – so as it lost value, the result is that wages were not rising at a high rate in “real U.S. dollars”.)

 

4. From 1982 through 1997, labor productivity grew almost 3 times faster than real wage growth. This means that Chinese labor was becoming cheaper.

 

5.  From 1998 through 2010, the average annual growth rate of real wages was 13.8%.

 

6. Since 1997, China’s wages have increased at a much faster rate than productivity. This means unit labor costs were increasing.

 

7. Wages are increasing for all levels of workers. The fact that low skill workers are also seeing this increase suggests an overall rise in wages.

 

8. Wages are rising in both the more developed coastal regions and the less-developed inland regions. They are rising for both exporting and non–exporting firms.

 

9. Major exporters are labor-intensive. As a result, their costs are increasing.

 

 

Three Reasons Why Urban Wages Have Grown So Fast (in China) Since 1997

 

1. Compensation has become tied to productivity. This resulted from the privatization of state-owned enterprises in the mid-1990s. Workers were no longer allocated by central planners. Firms gained the right to pay higher wages to more productive employees. Private sector employment went from nearly zero in the 1980s to approximately 80%.

 

2. There was a growing shortage of labor. China had a baby boom from 1950 through 1978, with women averaging 5.2 births. In 1979, China started the “one child policy”. For many years, China has benefited from the “demographic dividend” – where a large percentage of the population was working and there were relatively few dependent children or elderly people. China’s population is expected to begin declining by 2015 and of the labor force may have already peaked.

 

3. There was slowing migration of rural workers. Prior to 1997, the growth rate of migrant workers was 10.8% per year. Since then the growth rate has been 4.6%. Those who are most willing to migrate already have done so (the low hanging fruit has been picked). The Chinese registration system means that rural citizens cannot enjoy public services in the cities (such as education, medical insurance, housing or pensions). Many migrants want to stay closer to home now. At the same time, it is difficult for firms to move inland.

 

 

 

The Cycle is Ending

 

1. In the 1980s and 1990s, Chinese workers had low unit labor costs.

 

2. Foreign firms earned profits by outsourcing to China.

 

3. This triggered fast employment growth and rural-to-urban migration.

 

4. There is no longer a huge amount of slack in the labor supply and the “underpricing” of Chinese labor is coming to an end.

 

5. Wages are rising faster than productivity, particularly in labor-intensive exporting industries.

 

6. If wage growth continues at this pace, the average real wage in urban China would reach $20,000 by 2020.

 

 

China Will Move Up the Technological Ladder

 

1. Labor productivity has been increasing at 11.3% per year for over a decade.

 

2. Manufacturing firms have made heavy investments in research and development (R&D per worker has increased 16.9% per year in the past 20 years).

 

3. Capital is deepening (total assets per worker increased to $94,000 in 2010).

 

4. Human capital has risen dramatically. College entry class enrollment increased from 1.1 million in 1998 to 6.6 million in 2011.

 

5. By 2050, 40% of China’s labor force can be expected to hold a college degree.

 

 

So Where is China Headed?

 

1. The end of cheap labor does not mean the end of economic growth.

 

2. Rising productivity and education mean that China’s comparative advantages are shifting.

 

3. If China can improve the quality of education and foster innovation and entrepreneurship, they can become a force in the high value added manufacturing sector.

 

 

Have a great week.

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Below, find some of the most interesting things I read in the last week.

 

Lower Q1 earnings.  Sixty-three S&P companies have lowered their forecasts for Q1 earnings, while 17 have raised them.  This is the largest disparity since the firm began tracking the data in 2006.

 

When will QE end?  St. Louis Fed President Bullard suggested that the Fed could reduce their monthly $85 billion of bond purchases by $15 billion for each .1% that our unemployment rate drops.  (The unemployment rate was 7.9% in January.)  Cleveland Fed President Pianalto also suggested that the benefit / risk tradeoff of quantitative easing leads her to conclude that we may need to slow the purchases (although she didn’t offer a specific plan like President Bullard).

 

The bullish argument for gold.  Central banks bought 535 tons of gold in 2012.  This is the most since 1964.  Net purchases by central banks accounted for 12% of overall demand in 2012.   ETFs purchased 279 tons.  The bar and coin market was 1,259 tons.  Until four years ago, central banks as a whole had been net sellers for 15 years.  They had been selling 400 – 500 tons.  Now, they’re buying 500 tons.  This is a large swing in a 4,400 ton market.

 

The bearish argument against gold.  George Soros cut his investment in the SPDR Gold Trust by 55%.  Billionaire investor Louis Moore Bacon sold all of his investment in the same ETF.

 

Huge news if this trend continues.  From 2009 to 2011, total health spending grew at the lowest annual pace since they started keeping these records (52 years ago).  In fiscal year 2012, Medicare spending per beneficiary grew just .4%.  Overall Medicare spending grew 3% (because there are more beneficiaries).  The CBO projects spending on Medicare and Medicaid in 2020 will be $200 billion – a 15% drop from the CBO’s projections three years ago.

 

Compare the slowdown to historical growth.  For the past 43 years, Medicare spending per beneficiary grew 2.7% faster than the overall economy.  Medicare spending grew from $7.7 billion in 1970 (.7% of GDP) to $551 billion in 2012 (almost 4% of GDP).  But, for the last three years, Medicare costs per person have grown 1.3% slower than GDP.

 

What explains this drop?  Analysts think that the weak economy is only part of the reason for reduced growth in health spending.  We’ve also been starting to see changes in the way insurance is compensating doctors.  The slowdown in spending started even before the recession (so it’s not purely a recessionary issue).  On the downside: (1) this doesn’t solve our problems; (2) we’ve had temporary slowdowns in spending before; and (3) this may reduce pressure on Congress to address our long-term problems.

 

The future isn’t pretty.  Unfortunately, the number of Medicare beneficiaries is projected to grow 3% each year as the boomers retire.  This is why Medicare spending is expected to be more than 4% of GDP in 2023 and 6.7% in 2037.

 

Income inequality is returning post-recession.  According to Berkeley economist Emmanuel Saez, incomes rose 1.7% during the economic recovery.  When you break that down, income rose 11% for the top 1% of earners while the other 99% saw a .4% decline.  This is largely the result of increasing stock prices (helping shareholders) and high rates of unemployment (holding down the income of wage earners).  The income gap had shrunk during the recession (which is what normally happens).

 

Top 10% are doing relatively well.  Excluding earnings from investment gains, the top 10% of earners received 46.5% of all income in 2011.  This is the highest proportion since 1917.

 

The median household isn’t doing great.  Median household income was $50,054 in 2011 – 9% lower than it was in 1999, after accounting for inflation.  Other studies show that middle-class incomes have grown at a higher rate if you include transfer programs and benefits.

 

So we’re done fixing the budget?  A week ago, President Obama said, “Over the last few years, Democrats and Republicans have come together and cut our deficit [over the next decade] by more than $2.5 trillion through a balanced mix of spending cuts and higher tax rates for the wealthiest Americans.  That’s more than halfway towards the $4 trillion in deficit reductions that economists and elected officials from both parties say we need to stabilize our debt.”  The upcoming sequester could get us even closer to the $4 trillion goal.  (This ignores the fact that we’re stabilizing the debt at a higher level and when the baby boomers are fully retired, our debt-to-GDP ratio will be destabilized.)

 

How’s this for an instruction manual?  A Wall Street Journal piece said that the federal government issued 70,000 pages of guidance last year to help explain The Affordable Care Act.

 

Another example of the cost of education.  A New York Times article said that a bachelor’s degree from Appalachian State can easily cost $80K for a state resident (including tuition, room, board and other expenses).  Approximately 40 years ago, the cost was $550 / year.  With inflation, that would equate to $4,000 / year today.

 

A large percentage of undergrads spend significant hours working jobs.  As of 2010, 17% of full-time undergraduates (traditional age) worked 20 – 34 hours per week.  Approximately 6% worked 35+ hours per week.

 

I knew I should have been part of Baywatch.  A recent Wall Street Journal op-ed piece said that 30,000 retired California government employees receive pensions higher than $100,000.  There are ten that will combine to receive $50 million.  One retired San Diego librarian receives $234K.  Orange County beach lifeguards are retiring at age 51 with $108,000 annual pension plus health-care benefits.

 

State and local employees need to prepare.  The Florida Supreme Court ruled that public employees’ pension contracts can be adjusted.  A 2011 state law requires state employees to contribute 3% of their salaries to the pension fund.  It is expected that this case will ultimately be decided by the U.S. Supreme Court.

 

Take some time off!  The NY Times published a piece about the fact that we would be more productive if we relaxed more.  More than 1/3 of employees eat lunch at their desks.  More than 50% of workers assume that they’ll work during their vacations.  Sleep deprivation (defined as less than six hours of sleep per night) costs American companies $63.2 billion / year in lost productivity.  Sleep deprivation is one of the best predictors of on-the-job burn out.  (So, I guess this means that having children ultimately leads to job burn out?)  Americans left an average of 9.2 vacation days unused in 2012.

 

Evidence that the world is crazy.  Wrestling will be removed from the Olympics in 2020.  So, let me get this right…wrestling is no longer an international sport, but rhythmic gymnastics, where girls (or worse, women) prance around with a ribbon is a sport.  Maybe wrestling took three minutes away from the television coverage of beach volleyball (a well known sport from the original Olympics) and that’s why it needed to be canceled?

 

Political sausage-making is hard to watch.  Here’s a link to a really interesting PBS Frontline documentary about our financial crisis.  It’s called “Cliffhanger”.  It aired on February 12th and is approximately 55 minutes long.  You’ll have to watch for yourself, but my view was that it was not favorable to either President Obama or Representative Cantor.  I thought it was somewhat favorable to Speaker Boehner.  He seemed to be the most willing to compromise and find a middle ground (knowing that no one would be happy).

 

Have a great week.

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I don’t typically discuss specific companies, but sometimes corporate events allow me to think about bigger issues.  Today, I want to talk about Dell – because it allows me to discuss something that I’ve always been opposed to – management buyouts (MBOs).  I don’t think it’s a coincidence that MBO is just a letter switch away from MOB – because in an MBO, management tries to “make you an offer you can’t refuse.”  We prosecute mobsters, yet somehow management is allowed to do worse.

 

Imagine that I am the founder and CEO of a company.  You invest in my company.  You risk your capital.  You trust me to run the company for your benefit.  I am your agent.  Then, I come to you and I tell you, “I’ve got great news.  We’ve received an offer from some people who want to buy the company.”  As a shareholder, you respond, “that’s great…who is interested?”  I respond, “me and my friends.”

 

How do you feel at that point?  Didn’t you hire me to maximize the value of this company for you?  Why is the company worth more to me?  How will the company be worth more if I squeeze you out and own the company with my friends?

 

Ultimately, this is what Dell is doing.  I’ve always thought MBOs were outrageous and this deal is no different.  Fortunately, there are some large, sophisticated investors and they appear ready to fight back.  I hope they’re successful.

 

I’ve read through Dell’s 8-K about this deal.  I want to share a few of my favorites from it:

 

1. Dell says, “The price represents a premium of 25 percent over Dell’s closing share price of $10.88 on January 11, 2013, the last trading day before rumors of a possible going-private transaction were first published.”

Of course, what Dell didn’t say is that “the $13.65 price is 24% less than the $18 price that the stock sold for less than one year ago.”

 

2. Dell says, “The independent directors of the board have concluded that the proposed all-cash transaction offers an attractive and immediate premium for stockholders.”

Of course, not all investors have risked their capital with the hope of a “quick pop”.  Many were buying this company as a long-term investment because they believed that it was undervalued.

 

3. Here’s my question for Dell.  If another buyer had approached Dell and had offered them $15 per share, but Michael Dell would have had to sell all of his shares (so that the buyer could be the 100% owner), would he have presented this as a good deal for shareholders?

Why is $13.65 a good deal for all shareholders other than Michael Dell?

 

4. Dell says, “We fully believe that we can and will achieve our transformation into a leading global, end-to-end solutions provider, but we are best served pursuing this route as a private company.”

I’m trying to understand why this is.  What about your shareholder base has stopped you from this transformation?

Here’s what really gets me.  I’m going to look into my magic ball and try to see the future.  After this “transformation” is complete, what are the chances that Dell is going to come back and tell me that they will operate best as a public company?  Mr. Magic Ball tells me that the chances are pretty darn high…bordering on 100%.

 

5. Dell says that they will have “a so-called ‘go-shop’ period, during which the Special Committee – with the assistance of Evercore Partners – will actively solicit, receive, evaluate and potentially enter into negotiations with parties that offer alternative proposals.”

This is being discussed as if it ensures that this is a fair deal – one that is maximizing the value.  From what I’ve read, this is being done to shift the burden of proof in a lawsuit (a lawsuit that I hope and expect will occur).  If Dell did not set up this Committee, Dell would have the burden of proving that this was a fair deal (if they were sued by shareholders).  Since they have established this committee, the plaintiff shareholders will have the burden of proving that the deal is unfair.

 

So, here’s how I see it.  Michael Dell believes that the company is undervalued.  Shareholders believe that it’s Mr. Dell’s job to maximize the value of the company.  Michael Dell believes that he can maximize the value for himself and Silver Lake Partners.  Apparently, being a public company was holding Dell back.  That makes me feel a lot better.

 

I have no idea whether Dell should be an $8 stock or a $24 stock (like some of Dell’s institutional investors believe).  (For a very compelling argument that Dell is worth $24, see Southeastern Asset Management’s letter to the Dell board of directors.)  Most importantly, I have not heard any explanation as to why Dell will be more successful as a private company.  This appears to be Michael Dell trying to capitalize on a depressed stock price in order to enrich himself.  Dell has squeezed vendors for years…now they’re squeezing shareholders.  In my opinion, this is the type of behavior that is bad for investors and ultimately bad for capital markets.

 

Have a great week.

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My blog topics tend to replicate my parenting skills, where I like to praise once for every 48 times I punish / criticize.  So, having just finished my 48th critical article, I thought that I would share some ideas from a more optimistic article that I read recently.

 

Roger Altman (President Clinton’s Deputy Treasury Secretary and currently the Chairman of Evercore Partners) wrote “The Fall and Rise of the West” that was published in the current issue of Foreign Affairs.  He identified five reasons to be optimistic about the United States:

 

1. The Housing Market – whenever this market has been pushed down far enough for a long enough period of time, it eventually rebounds.  New home construction and sales of those homes fell by two-thirds after the bubble.  In addition, banks have improved their mortgage underwriting standards.  Securitization markets and household attitudes toward mortgages and home-equity financing have become healthier.  Mortgage credit is more available.  Finally, population growth will couple with a recovery in household formation to drive high demand.

 

2. New Technologies in Oil and Gas – we now have access to energy deposits that were previously unknown or inaccessible.  Natural gas output is 25% higher than five years ago.  The output of oil and other hydrocarbons rose by 7% in 2012 (the largest single year increase since 1951).  The International Energy Agency projects that the U.S. will surpass Saudi Arabia as the world’s largest oil producer by 2017.  This will create jobs and reduce oil imports.

 

3. The U.S. Banking System Has Been Recapitalized and Restructured – they have shed the bad assets and improved their capital and liquidity ratios.  While outstanding loans are still below 2008, consumer credit started hitting new highs again in 2011.

 

4. The Great Recession has Spurred Greater Efficiencies in the U.S. Manufacturing Sector – unit production costs are 11% lower in the U.S. than ten years ago.  Foreign competition is seeing their costs rise.  Resurgence in housing is helpful because it drives demand for manufacturing.  The decrease in energy prices will result in lower manufacturing costs (and greater competitiveness).

 

5. Increased Chances That Washington Will Fix the National Debt Problem – President Obama has cited deficit reduction as his top priority and the Republicans are finding that their anti-tax stance is not politically popular with the masses (according to Altman, who is a Democrat).

 

Never able to give unadulterated praise, I’ll rain a bit on this parade.  I’m (by far) most excited about #2 (energy changes).  I think #1 (housing recovery) and #4 (manufacturing recovery) are significant, keeping in perspective that both are still coming off deep drops.  I’ll side with Dallas Fed President Fisher on issue #3 – we still need to end “too big to fail”, not just for the risk it creates but also for the unfair competitive edge that it gives to the largest banks.  Finally, I disagree with #5 – I don’t see the political will to solve the debt issue.  The hard decisions will involve how much we’re going to cut spending and / or increase everyone’s taxes (not just the taxes of the top income earners).  I don’t see the political will to take on any of these issues or to reach any compromise.

 

I hope this can count as a positive blog.  I feel somewhat dirty for having written it.

 

And speaking of dirty, I’m writing this blog in anticipation of the Super Bowl.  I love the Super Bowl and I’m anxiously awaiting this game.  I will give loads of credit to Jim Harbaugh for what he’s accomplished – although I’m just not a Jim Harbaugh fan.  I really don’t have a reason – I just don’t care for him.  (It’s probably similar to the way that many non-Alabama fans don’t care for Nick Saban.)  That makes it a little difficult to root for SF.  With that said, I could never cheer for Ray Lewis.  I’m all for forgiveness.  I guess, it’s just that I’m for forgiveness after some significant time in the penitentiary.  He’s pled guilty to obstruction of justice in a (double) murder case.  The idea that ESPN has hired him and that I’m going to have to listen to this criminal makes me sick.  I’m going to be watching the Super Bowl with the remote in my hand so that I can mute the sound when the announcers start to praise this guy.  Ugh.

 

As always, it’s tough being me.

 

By time this blog gets sent out, I hope that you’ve enjoyed the Super Bowl and you’re having a great week.

 

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I want to give you two quick things to think about:

 

1.  When will we ever fix our problems?

Here are two common arguments I hear:

Argument A: If we raise taxes now or if we cut government spending, it could lead to another recession.  So, we can’t act now.  We need to get the economy on firm ground before we make those changes.

Argument B: We have to give people time to adjust before we cut Social Security (or Medicare) or any other benefit that they receive.

 

So, my question is…when do you think that we’ll feel that the economy is so strong that our politicians will say, “now is a great time to balance our budget”?  When will we address our long-term structural problems?  Shouldn’t we be deciding on these changes right now and locking them in – so that we can start to adjust our behavior for the future?

 

2.  Could we afford for interest rates to return to their prior levels?  The math does not work out for interest rates to ever increase.  Let me take you through some numbers (realize that we standardize all numbers by comparing them to GDP):

Our total debt (including what we owe to the Social Security “trust fund”) = $16 trillion.

Our GDP is also approximately = $16 trillion.

So, we say our debt = GDP  (or we say debt = 100% of GDP)

Tax revenue for the past 50 years has been = 18% of GDP  (on an annual basis)

From 1988 – 2007, five-year U.S. Treasuries had an average interest rate = 5.72%

If interest rates returned to this level, interest expense would = 5.72% of GDP.

Spending 5.72% of GDP on interest expense, when we take in tax revenue that is = to 18% of GDP doesn’t work.  That’s almost 1/3 of our tax revenue just being used to pay interest.

Do you think that the Fed thinks this is sustainable?  Absolutely not.

I’ll write more about this problem in the near future…

 

Have a great week.

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Dallas Fed President Richard Fisher gave a great speech last week about ending “too big to fail” (TBTF) – the situation where a handful of banks are so large and important to the economic system that it is implicitly understood that the government would bail them out, rather than let them fail.  Here are a few highlights (most of this is lifted straight from the speech or is slightly paraphrased):

 

1. TBTF defined.  President Fisher defined TBTF as firms whose owners, managers and customers believe themselves to be exempt from the processes of bankruptcy and creative destruction.

 

2. Moral hazard.  These firms are effectively subsidized (compared to their non-TBTF competitors) and the result is that they are likely to take greater risk in search of profits.

 

3. Hurting the recovery.  These banks are limiting the effectiveness of monetary policy because sick banks don’t lend.

 

4. Ineffective regulatory solutions.  Now, Dodd-Frank has 16 titles and runs 848 pages.  More than 8,800 pages of regulations have been proposed (and we’re not done).

 

5. Dallas Fed’s solution to TBTF.  The Dallas Fed believes that only commercial banking operations (not shadow banking facilities or the parent company) should benefit from the safety net of federal deposit insurance and access to the Fed’s discount window.

 

6. There are a few HUGE players.  Approximately 98.6% (5,500 out of 5,600) of U.S. banking organizations are community banks with assets less than $10 billion.  They only account for 12% of total industry assets.    There are 70 banks with assets between $10 billion and $250 billion.  They account for 1.2% of banks and 19% of assets.  Finally, there are 12 institutions with assets between $250 billion and $2.3 trillion.  These are .2% of all banks, but they hold 69% of industry assets.  See chart below.

 

7. Little outside control over the TBTF banks.  In comparing the different-size banks, President Fisher doesn’t believe that there’s much regulatory authority or investor control over the large banks.  Because management does not believe that they would be allowed to fail, regulators have little control over the largest banks.  Unsecured depositors and creditors offer their funds at a lower cost to TBTF banks than to mid-sized and regional banks that face the risk of failure.  See chart below.

 

8. Huge financial subsidy. The TBTF global subsidy has been estimated as being worth $300 billion (annually) for the largest 29 banks.  To put this in perspective, all the US bank holding companies summed together reported earnings of $108 billion in 2011.

 

9. Tremendously complex.  See chart below to understand just how complex the five largest U.S. banks are.

 

10. More of the solution.  We must reshape TBTF banking institutions into smaller, less-complex institutions that are economically valuable; profitable; competitively able to attract financial capital and talent; and of a size, complexity and scope that allows both regulatory and market discipline to restrain excessive risk taking.

 

11. Lets not penalize the majority of banks.  At present, 99.8 percent of the banking organizations in the U.S. are subject to sufficient regulatory or shareholder/market discipline to contain the risk of misbehavior that could threaten the stability of the financial system.  Zero-point-tow percent are not.  Furthermore, to contain that risk, regulators and many small banks are tied up in regulatory and legal knots at an enormous direct cost to them and a large indirect cost to the economy.

 

12. We need an alternative solution.  There should be more than the present two solutions: bailout or the end-of-the-economic-world-as-we-have-known-it.  Both choices are unacceptable.

 

I love the fact that President Fisher is keeping the pressure up on this issue.  Remember that President Fisher was the member of the FOMC who was saying that there were significant problems that were going to play out with our banks as the crisis started — see story here.  While I tend to favor the required use of contingent convertible debt by banks (see my earlier blog post here), I’m just happy that we’re still talking about it.

 

Have a great week.

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First, thanks for all of your emails.  I received a ton of emails about the video in last week’s blog.  I read all of the emails.  I don’t have the chance to respond to most (unfortunately).

 

Today, I want to show you three more interesting charts from the “Citizen’s Guide to the 2012 Financial Report of the United States Government”.

 

1. The Ugly Demographics

This chart shows the retirement of the baby boomers.  Social Security is really set up as a “pay-as-you-go” system.  Current workers pay for current retirees.  This works well when a lot of people are working and not many people are retired.  When the situation is reversed (not many people working and a lot of people retired), it doesn’t work out as well.

 

In this chart, you see the increase in the number of Social Security beneficiaries per 100 workers (who will be working and contributing to pay for those retirees).  Before you send me your ugly emails, remember…you really haven’t been paying for “your” Social Security.  We’ve been paying for the Social Security of people who are already retired.  Our kids will (hopefully?) be paying for “our” Social Security.  See chart below.

 

 

2. Our Tax Revenue

This is just a reminder that the vast majority of our tax revenue comes from income taxes plus payroll taxes.  We spend so much time arguing about (and avoiding) corporate taxation.  Yet, as a source of revenue, it’s relatively small.  See chart below.

 

 

3.  Is Corporate Taxation Progressive?

I thought that this was a really interesting chart.  The largest companies (ranked by assets) pay less in taxes as a percentage of their income (when compared to smaller companies).  See chart below.

 

 

 

Have a great weekend.

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Late Thursday, the “Citizen’s Guide to the 2012 Financial Report of the United States Government” was released.  As you can imagine, this is always an exciting time for me.

 

Actually, I think that a lot of the ideas and charts contained in this report are crucial.  Today, I want to share five slides with you.  Later this week, I will share four more that I found interesting.  Hopefully, it will give you a little something to think about.

 

Five Slides

1. We have huge unfunded liabilities.  Depending on how you measure it (closed group or open group), Social Security and Medicare are going to cost $38 trillion – $50 trillion more in the next 75 years than we’re going to take in from dedicated taxes.  (If you don’t know the difference in the closed group and open group, here’s a link where I discussed this in the past.) The underfunding ($38 trillion – $50 trillion) is measured in today’s dollars (i.e., that’s the present value). 

To give you context, we have $16 trillion of debt outstanding, only $12 trillion which is held by the public.  (The rest is held by “trust funds” such as the Social Security trust fund.) Think of it this way: if we had the proper amount of money today in order to satisfy the promises that we’ve made, we’d have another $38 trillion – $50 trillion of debt! In actuality, this is somewhat of an exaggeration because some of these programs were intended to be partially funded by general revenue (such as Medicare Parts B and D). But, it’s certainly fair to say that we’re $20 trillion underfunded (and that would more than double our debt level). See chart below.

 

 

2. If you don’t limit yourself to the next 75 years, but measure this unfunded liability for the infinite horizon, we’re $66 trillion underfunded.  See chart below.

 

 

 

3. One underfunded liability that you rarely hear discussed is the liability for pensions to government employees (retirees) and veterans.  This is approximately $6 trillion.  See chart below.

 

 

4. Our future deficits will grow over time.  Deficits will result in higher debt and that will lead to large interest payments.   Look at this chart and realize that most of what we spend is Social Security, Medicare, Medicaid and defense spending.  I constantly hear people say that we just have to cut “waste”, but alas, it’s not that easy.  See chart below.

 

 

5. Finally, look at how our debt is expected to explode.  Show this picture to your grandkids and tell them “sorry from Uncle Sandy.”

 

 

My sports comment for the day… I’ve heard a lot of people defend Lance Armstrong by citing Livestrong.  Well, Livestrong may be a great organization, but don’t forget that Lance attacked many innocent people and ruined many of them.  Here’s a great interview of Greg LeMond’s wife.  As a reminder, Greg LeMond is the only American to ever have won the Tour de France.

Have a great weekend.

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