Another Day In Paradise

As one travels through the cities and towns across the United States you see the faceless multitudes drifting from place to place. For you and me it is just another day in paradise. But, for those countless millions all across the country their plight continues unmercifully with no respite in sight. Day after day, night after night no place lay their weary souls just left out in the cold. Their plight has only grown in numbers. As of today in the state of Washington alone there are over 60,000 children roaming the streets. That is just the children that they account for. And, there are thousands more adults, and families seeking shelter each night. These numbers themselves indicate that there is something drastically wrong in our society today. In New York City there are close to 70,000 homeless adults and children and many more encamped in old subway tunnels. The fact of the matter is that in every major city and even in rural areas there continues to be a growing percentage of our population forced into a vicious cycle that is almost impossible to break free.

Who ever thought that in this 21st century more of our citizens have lost their homes at a rate equal to that of the Great Depression of the 1930’s. This dramatic rise in homelessness is attributed to many factors starting with the way our economy has shifted from being the most dominate one in the world following World War II to one that is almost totally dependent on imports relative to a service oriented base economy today. The manufacturing economic structure that we had 40 years ago is no longer around. With this change the middle class jobs that created the wealth and stability that once secured the United States as the premier country for the world’s goods has steadily evaporated. Slowly and steadily the wages, the types of jobs, and the middle class that produced the greatest economic expansion in Americas history from 1946-1963 are at the lowest level since the 1930’s. This shift of the majority of the population from middle income stature to low income and poverty levels just shows how far this nation has gone in reverse. Most of the population today are no longer able to save money or pay down debt. Instead they have created the enormous debt that have contributed to the current economic crisis.

More Americans were lurid into the worst housing collapse since the 1930’s by way the financial institutions and the banks rewrote the rules on lending practices. What we now know as the easy qualify only to find out later they couldn’t afford to make their mortgage payments. Stagnant wages, loss of jobs, and health problems have all contributed to the rise of homelessness all over the country. People are finding it more difficult everyday to come up with ways to pay rents for apartments or landlords can’t afford the upkeep of their properties and are forced to close leaving the occupants with no place to go. With personal savings at record lows these citizens who have been force out of their apartments or homes due to job loss, foreclosure, fire or any other disaster don’t have the funds set aside for moving or down payment and are forced out into the cold leaving them with no where to go. As of yet Banks still after receiving all that billions of bailout funds from Uncle Sam the foreclosure rate nation wide is still climbing

While more and more people being swept into this situation cities and towns still look at these persons with scorn and disdain, as it was their fault to begin with. In part some might agree but the bottom line is municipalities have to ban together to help and eliminate this scourge on us all. It is occurring at an alarming rate in every city and town all across America. If the United States citizens and the United States Government don’t alleviate this crisis soon every citizen will be affected.

There is a dramatic physical and mental national health concern with the vast numbers of people that are homeless. These people find it almost impossible to find and secure the beneficial food that is so important to maintain ones own physical health and if these people continue to live this way many will succumb to mental and other health problems causing further financial and economic hardship on the rest of the population in the United States.

This problem is so acute that the Government must take action now to avoid a major catastrophe from developing. In many cities it is already happening. The citizens of the United States have to change the perception on the plight of the homeless because today many of us could be swept into this situation at any time. The creation of living wage jobs for all that needs one would make a huge difference. One that would impact the entire economic future of the United States. A national WPA type of program that has already started has of yet to produce a reduction in the numbers of homelessness across the country.

To vastly reduce the increasing plight of so many only a total reform of governmental policies will be effective. The current economic policies to date have only made it far too easy for major business to capitalize on foreign investment rather than domestic investment. Until governmental policies reform business today will only continue to sacrifice the American worker for more profit from foreign investment. This again is a major contributor to the ever increasing numbers of our citizens who are forced out into the cold.The plight of so many of our citizens today is a major blight on our society in the opinion of the nations of the world. To shift investment away from foreign markets that have been producing huge dividends and profits to the wealthiest few to produce the same or greater return on investments by hiring more Americans to put the unemployment rate under 3.5% nationally with real living wages using more Americans would be one sure way of securing the success of eliminating the plight of homelessness in America.

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Wall Street Is Destroying the Economic Recovery

I grew up listening to Van Halen. The band’s eponymously named debut album was easily one of the greatest pieces of vinyl to emerge from the late ’70s to early ’80s rock scene. And then along came Sammy Hagar to replace David Lee Roth as lead vocalist, and, well, the chemistry died.

The formula was the same: four dudes, a guitar, a bass and a set of drums. But the chemical reaction they catalyzed was something altogether different. I lost interest.

Which is, I acknowledge, an admittedly obtuse segue into a speech Fed Governor Stanley Fischer recently gave at the Aspen Institute. Fischer’s words gathered a good bit of ink, but for reasons unrelated to this week’s dispatch.

The media trained its sights on Fischer’s comments that seemed to indicate the U.S. economy is approaching the Fed’s employment and inflation goals, and, thus, the Fed is nearing the point at which it will raise interest rates again.

I was focused on a different comment – one that explains why the U.S. economy has no traction and why the U.S. stock market sits on a precarious ledge. The chemistry is, in essence, off. An ingredient necessary for economic vibrancy is missing, and this week’s dispatch aims to show you exactly what it is that’s missing and why it’s missing.

Let me quickly dispense with the notion that employment in America is strong. I’ve written many times showing why that assessment is as bogus as a Milli Vanilli concert. (Remember the duo ostracized for lip-synching in the ’80s?) While the economy has added a fair number of jobs, quantity does not speak to quality.

Every month for the last few years, the preponderance of jobs we’re adding are in low-wage service-sector corners of the economy. Or they’re low-wage white-collar jobs in office administration, education, menial health care and temp agencies. Average pay in every case is below the U.S. median, meaning the ability of the American worker to pursue a consumption-oriented middle-class life is increasingly difficult, which, in turn, is part of the reason our economy (deeply dependent on the consumer) continues to struggle seven years after the recovery began.

But there is a second reason, which the Fed’s Stanley Fischer hinted at in his speech.

He told his audience that “business-sector productivity is reported to have declined for the past three quarters, its worst performance since 1979,” and “productivity growth has been lackluster by post-World War II standards.” As part of the reason why, he said: “Business investment has been relatively modest during the current expansion, and so increases in capital per worker have been smaller than in previous decades.”

English translation: American companies aren’t putting money to work in the economy by investing in their businesses or their employees.

And I have the facts to back up Fischer’s claim.

I pulled all the data on corporate buybacks inside the Dow Jones Industrial Average since 2008. This represents companies that are using corporate profits to buy back company shares.

Basically, companies have a few things they do with the profits they earn: pay dividends to shareholders, invest in the business and/or buy back their own stock.

Well, it’s clear that Wall Street’s preoccupation is itself, not the economy and, increasingly, not even the underlying business.

From the beginning of 2008 through today, the 30 companies inside the Dow have spent $1 trillion buying back their shares. That’s nearly half of the $2.15 trillion in profits they earned.

In the same period, they also paid out just shy of $775 billion in dividends.

Inclusive of dividends and buybacks, the Dow 30 companies have less than 18% of their profits remaining to reinvest in the business or employees.

Recent numbers are even more egregious.

The Economy Manipulation Game

So far this year, the Dow 30 companies have spent $337 billion on dividends and buybacks – 117% of their profits. They’re paying/spending more than they’re earning.

The vast bulk of that money is going to buybacks.

After paying dividends and spending lavishly (let’s call it “foolishly”) on buybacks, there’s very little, and often nothing, left for the economy writ large.

Corporate America, as defined by the Dow 30, is, as these numbers prove, simply more interested in enriching itself than bolstering an economy dragging its butt along the pavement.

Buybacks so far this year, at nearly $200 billion, are higher than the entire amount spent on buybacks in six of the last seven years – and just barely below the record $209 billion spent in all of 2014.

This is a problem because buybacks offer no benefit to the economy. They serve only two purposes:

To financially engineer higher earnings per share than a company would otherwise report. That, in turn, artificially lowers the P/E ratio, making a company and the overall Dow seem less expensive than it really is relative to what’s really going on inside the businesses.

To generate bigger paychecks for executives – and this is one of the greatest flaws on Wall Street and something that both regulators and shareholders and their advocates must address soon if they want to deal with income inequality in America and why slack business investment, as Stanley Fischer pinpointed, is hurting the broader economy. Bonuses are largely based on earnings-per-share metrics. And it is wildly unfair to shareholders that management can monkey with numbers to goose earnings that, then, provides management with even more money. Better if the metrics were based on business-growth measures not so easily manipulated.

To me, the worst part of this buyback spending binge is that boards of directors are approving share repurchases at insanely expensive, questionably justifiable prices. Stocks have been this expensive only a few times in history – just before the Great Depression, in the late ’90s during the tech boom and just before the Great Recession.

Each of those, clearly, ended quite badly.

To give you an idea of what this manipulation looks like, consider one of the most egregious earnings manipulators – Travelers (the insurance company).

Since 2008, Travelers’ sales have grown by a spectacularly mediocre 1.5% a year since the 2008. Yet earnings per share are up 93%. Incredible!

Only it was sleight of hand. Travelers reduced its share count over the period by 48%. Reducing shares by half allowed the company to essentially double earnings on a business that didn’t grow much at all.

Travelers’ P/E ratio would essentially double to 21 from 11, way too expensive for a company where net income has actually declined on sales that barely progressed.

So that’s what’s really going on in the economy and on Wall Street.

It’s why I say a reckoning is close at hand. Manipulators can monkey with the system for a while. But sooner or later, the system repairs itself. And from this level of overvaluation, the repairs are going to be quite painful indeed.

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The Leading Edge of the Dollar Hurricane

BUCHAREST – If you’ve never been to this town, it is at once Paris on the come and a frayed remnant of Soviet architectural banality. By which I mean, what you see is what you’re inclined to see.

I’ve come to this analogy looking out the window of my quaint, Beaux Arts hotel and seeing 19th-century buildings that I might call “ghetto chic” and in need of some care and cash to restore their glory (I happen to be partial to this city)… while others just see “ghetto” and walk away.

Just depends on what you’re inclined to see.

Bringing this to mind is the Washington Post article I happen to be reading on my phone as I look out over Bucharest. I find myself wondering: What inclinations hide here? What is this reporter not telling me that might provide an analysis fundamentally different from his?

The story he has written is the latest on America’s international trade in goods and services for July, which happened to be released in September. Basically, our trade deficit.

Novocain to the brain, I know. But hang with me a moment. There’s a salient point here that explains why monthly headline numbers and the news coverage you generally get tell you very little about the economic winds swirling around you, or the broader implications, which are, in this case, quite troubling for your near-term future and mine.

This particular Post scribe wants me to know that America’s trade gap narrowed by 11.6% in July – more than forecast, I’m told, so, I guess, salad days are here again, or at least on the way. The value of shipments to overseas customers also perked up – to a 10-month high, no less! That pickup in exports (theoretically a bright spot and around which today’s dispatch ultimately revolves) surged because of food sales.

We’re in high cotton now, dear reader. High cotton, indeed.

Just don’t try selling that cotton to anyone who’s seen the statistics. Nobody who knows how it was made is buying it.

Back in the day, I was a financial reporter at The Wall Street Journal, and when I smelled a rotting fish, my reflexes sent me in search of the source to examine that fish myself.

And so I did. I pulled the Commerce Department’s raw data. And you know what? This fish stinks for a reason…

A Strong Dollar Squeezes Profits

I’ll get to the stink in a moment, but first – who cares?

Exports account for nearly 50% of revenues inside the S&P 500 and, as such, are a key reason the S&P’s operating earnings are down now for seven consecutive quarters – the longest contraction in at least 20 years.

That’s because exports are a primary victim of the strong U.S. dollar. As our Benjamins rise against other currencies, consumers and businesses outside America can afford fewer and fewer products made in America because “American-made” is suddenly too costly in terms of the local yen, euros, pounds, pesos or shekels.

So, fewer John Deere tractors are leaving the showrooms in Brazil. Canadians struggling through a midlife crisis are buying nearly 10% fewer Harley-Davidsons. Just two examples of a larger trend, and the leading edge of the dollar hurricane.

On the backside, the sales that do occur in euros, Brazilian reals and loonies buy fewer and fewer dollars here at home when the cash is repatriated.

Managements running companies such as Deere and Harley-Davidson then do what Wall Street demands – they cut costs to preserve bottom-line profits for crotchety shareholders and trigger-happy money managers for whom a penny’s miss on per-share earnings is a cardinal sin.

As an act of contrition, Deere and Harley-Davidson lay off higher-wage workers (as all three have), and those lost jobs ripple through Uncle Sam’s economy and his GDP slows.

And yet, the Fed and the White House crow about an economy at near-full employment – never mind that the new jobs responsible for near-full employment are largely low-wage jobs mixing martinis and setting up appointments in a doctor’s office.

Now, about that stink the Washington Post was peddling as fresh fish…

Blame China

You see, the month of July isn’t the story of a trade gap narrowing or export values at a 10-month high. That’s like writing the story of the elephant based on its small tail.

Exports did increase by $3.62 billion from June to July, which, one might surmise, has Uncle Sam’s economy moving in the right direction at least. Alas, no.

Nearly $3.56 billion of that increase was due to unexpectedly large shipments of soybeans, primarily to China as the Middle Kingdom manages what is apparently a pork shortage. China operates the world’s largest “strategic pork reserve” (no, really), and hogs grow fat on soybean meal, yet China’s soy production has suffered of late.

The rest of the month’s data… not so great.

But even that’s not the real point.

Beware the Fed’s Pied Piper

At the other end of the elephant’s tail is the broader impact of the strong dollar over time, since one month does not a trend make. A trend makes a trend, and the trend of American exports in a strong-dollar world is depressing.

Exports of American goods and services are down nearly $64 billion so far this year. Every primary category is sucking on a barrel of red ink – foods, feeds and beverages; industrial supplies and materials; capital goods, except automotive; automotive vehicles, parts and engines; and consumer goods.

All down.

For 19 consecutive months on a year-over-year basis.

That we might rightly call a trend.

Yet the $64 billion in lost exports is but a 5% decline from a year ago. Yet even that pittance is imposing huge costs on the economy. Imagine the impact to Deere and Harley-Davidson if the dollar strengthens more.

That is context for every Federal Reserve meeting from here on out, which is context for the two biggest risks in the global economy today… the U.S. dollar and Fed policy.

Into this trend various members of the Fed sing a song of an economy healthy enough to handle higher borrowing costs. Various economists hum along to the same nonsense. Wall Street dances to the lovely tune.

Maybe you remember, dear reader, that the Pied Piper led rats and children to their deaths in 13th-century Saxony with enchanting music.

Sure, interest rates need to rise. Rates should never have been this low to begin with. But they are low because of government profligacy and hideous Fed policy back into the 1980s.

Low rates have perverted savings and investment patterns. They’ve stolen wealth from righteous savers and showered it upon wastrel borrowers, most particularly the bloated Western governments. And they’ve blown ridiculously large bubbles in stocks, bonds and real estate. Those will burst.

That’s guaranteed.

It won’t be pretty.

See, the world is addicted to low-rate dollar debt. It’s the opiate of corporate, consumer and governmental masses who always need just one more hit to make the pain go away. Companies from Ukraine to Brazil to Malaysia have been mainlining the stuff by the trillions for a nearly a decade now.

Raise interest rates in America and you’ve got yourself a problem that potentially spins our current mini-depression into a Greater Depression.

Higher rates mean the debt-addled face higher – potentially debilitating – debt-repayment costs. It means foreign companies must now sell more of whatever they sell locally to generate ever more local dinero that they need to buy ever more dollars to make their dollar-debt payments. It means foreign governments must raid their piggy banks.

Can’t sell enough to generate the needed dollars? Not enough coins in the piggy bank? Bonds default. Local banks crumble and send local stock markets diving. Local currencies crash.

Will we get a debt or currency crisis somewhere in the world that spills over globally and ransacks the American economy again? Who knows? But if you mix gunpowder with a spark, you get an explosion whether you want it or not.

Just something to think about when you hear Fed officials and economists singing lovely songs of an economy that can shoulder higher interest rates… or when you’re reading the day’s fishwrap telling you America’s export numbers are at 10-month highs.

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