Thursday, January 22, 2009
This entry is actually a response to a very interesting website I stumbled across earlier today. It's an open forum where people can post ideas about government policy. Following on the "wiki" premise, the site is called www.policywiki.com. The particular section I am interested in is regarding my own home-grown Canadian people and what they think our government should do (since it just announced a decade of fairly significant deficits to "combat the recession").
I was going to post my response in the "my ideas" section but I think it might be a bit long for the forum format so I just did a synopsis there and linked to this post, where I have my full argument.
So here it goes... my thoughts on today's economy.
LESS consumption is the true key to a long-term successful economy. Unfortunately the modern economists have bought into this idea that consumption is the key to a booming economy.
It is not: Very shortly, this is what has gotten us into this situation: We, as a nation, have BORROWED money (because of ridiculously low interest rates) to consume. The stuff we are buying does not have any asset worth - they are things that we wear, that we eat, that we burn in our cars, that we surf the web on. These things are worth far less, or are completely worthless, almost as soon as they are purchased. The debt taken is not backed by anything of value, it is an IOU.
couple this ridiculous social mentality with the fact our companies have been outsourcing their projects due to labour unions, high corporate taxes and bloated and unnecessary regulations and we have a massive dive in production coupled with a massive hike in consumption.
The icing on the cake is that our government thinks it needs to run huge deficits in order to "get us out of the recession". This mentality speaks a sorry truth that our government believes in pushing bubbles and putting the brakes on when they burst. Unfortunately this only ends up in the building of a bigger bubble and the burst is that much more violent.
Government policy should be completely changed - we as a country should force what is TRULY best for us into their policies. Our entire tax structure, government service load, and monetary policy needs utter reform in order for us to become a true world leader economically - the only thing that keeps us in a somewhat healthy state is that we are just "not as bad off" as our friends to the south. But we are still much worse than we should be.
The types of policies that should ABSOLUTELY be avoided:
A) Government taking on more debt
What our government is planning on doing is equivocal to you buying a brand new car after you have just lost your job. Imagine when interest rates approach more normal levels historically how a "mere" $60 billion or so turns into $100 billion or $200 billion because of the devastation of compound interest against debtors. We will end up paying 2-3 fold for money today that is being completely wasted.
B) Giving money that we as citizens have sweated for to fund Research and Development
This is perhaps one of the more terrible ideas that I have heard to date. Pouring billions of dollars into R&D guarantees nothing - there is absolutely no asset whatsoever to back all of that debt; only the hope of a possible future asset that may or may not even come close to the value of the underlying debt.
C) Jobs - Government should NEVER be responsible for providing jobs!
It is a universally proven fact that the average government employee is around 60% as productive as a private sector employee. Even worse, virtually all government corporations in our country have lost BILLIONS of dollars. A recent example is CN Rail - they cost billions to taxpayers when they were run by the government. Funny thing, since going private (i.e. being bought out by private equity) they are now one of the most fundamentally strong companies in Canada and have stellar earnings levels! They even employ more people!
D) Imposing ridiculous laws on markets for trading and day-to-day business.
Naked short selling has been around since the mid 1600's when the Amsterdam Stock Exchange was first started. Anybody who blames short sellers for current market turmoil is simply announcing in a horribly loud and uninformed voice that they have no fundamental understanding of how markets work, both long term and day-to-day.
First, on a long-term basis, the market relies almost completely on fundamental aspects - if the fundamental components of the business being traded are bad or, even worse, completely insolvent (as the entire US banking system is now) then the price of that company will reflect it. If short selling did not exist, prices would actually be LOWER than they are now.
How does that work, you might ask. Very simply. Short sellers must eventually become buyers in order to cover their positions. Short selling is much riskier versus simply holding equities, because you can actually hold NEGATIVE equity (i.e. if I short at $10 and the stock goes up to $30 I actually have lost 200%) versus long positions where the most you can lose is 100%. But short covering offers support levels, which in turn entices true buyers back into the market. It is the precursor to the majority of bottoms and eventual positive trend building. Without short-selling most people would just hold their stocks and hope they go up some day.
Now for the good stuff:
What the government SHOULD do:
A) Stop subsidising.
I understand that lobbyists are convincing but the subsidising of corporations must end. This only makes them second-string government corporations who spend the money badly, employ unproductive workers and build B-Grade products. (See big 3 automakers for example over the last 25 years for an excellent reference point.)
Subsidies kill innovation, smother it completely. Who needs to worry about those kinds of things if the money is just going to keep on coming, if your customers aren't your lifeline? Recessions create opportunity. It is a chance for small companies to spring up and take market share that their massive competitors over-extended themselves to grab. It is a chance for revolutionary products and innovations to be born.
The subsidies don't just stop there - governments have to STOP SUBSIDISING DEBT. The only debt that should be tax-deductible is debt that is strictly for capital growth purposes, whether personally or corporately. All other debt should be left out of the write-off category.
Stop subsidising student loans! The only reason university and college have gotten so expensive is because the government hands out loans to anyone who needs them. If student lending was based entirely upon the private sector, using reasonable and conservative lending standards, tuition prices would plummet because everybody and their uncle wouldn't be able to get a student loan. This would actually OPEN UP the opportunity for people to enroll in college and decrease the crippling debt loads the unfortunate students of today have to graduate with.
Many many other examples of government subsidation and how it actually destroys true economic growth - but you can find those out on your own if you really want to.
B) Lower corporate taxes:
Unfortunately, the sheer size of our government is what causes us as citizens to have a massive tax burden. This also translates over to businesses. It is much more appealing for a company to do business elsewhere because they will pay far less tax on their income. This strips millions of jobs away from the private sector. Jobs that you or I could have - the government, bloated and inneficient, beurocratic and lumbering, literally robs us not only of our hard earned money by funding operations much better (and efficiently) handled by the private sector, but also robs us of the jobs those private companies would be creating.
Something to always keep in mind. The government can never CREATE wealth, they can only shuffle it around. And to make matters worse they always create new beurocracy to "adminster" the shuffling of said funds, taking their cut in the process. Subsidising causes inferior productivity, workmanship, and less money ending up into the private sector's (i.e. YOUR) hands.
It is akin to this scenario: You and 5 friends are sitting at a table. You each have $10 in your pocket and are trying to decide whether you should buy pizza or submarine sandwiches. A man sitting at the next table overhears them deliberating.
"I have an idea".
"What is that?" you ask
"Why don't I pick for you? That way you'll get a fair and unbiased opinion."
You and your friends mull this new option over. It would stop any arguments, you decide. "Sure, you can pick for us."
The man holds out his hand. "I'll need the money first."
You look quizzically at each other, but finally shrug and hand it over.
"Okay." The man scratches his chin. "I think you should get pizza."
Those of you who wanted it smile, and the others just shrug it off - that was the deal. The man pulls out a cell-phone.
"What are you doing?" you ask.
"Ordering the pizza." He waves you off with a smile. "There's this nice little shop called Vinnie's down on Main St."
You shake your head vehemently. "That place makes terrible pizza!"
He shrugs. "It should be fine. Not that know the first thing about making pizza, but I'm sure you'll end up liking it. Besides, Vinnie's shop has three employees and most other stores have only 2."
You throw your hands up in frustration as he orders your pepperoni pizza for delivery. The total comes to $50.00 He smiles and hands you the 5 $10 dollar bills, pocketing the last one for himself.
"hey, what are you doing?" You point to his pocket where your money lies. "That's our money!"
He shakes his head. "That's the fee for my services." With a tip of his hat he walks away.
Definitely a much more simplified version of things but the story is essentially the same for subsidies - the government takes your money, picks the worst business to give it to (after all they really only have their own business model to follow), and takes their cut before doling out the rest. And you are left with less money, an inferior product in your hands, and are being told that this is a necessary part of the modern economy. Rubbish!
But back to the nuts and bolts to wrap this thing up. The last thing government should do is completely alter the monetary and tax structure for individuals. I have a proposal that would ultimately build the most rock-solid foundation for an economy. It would be painful for most people as it would result in drastic lifestyle changes, but in the end.... perfection.
a) Remove ALL TAX on investment income for individuals. Also remove all tax on interest and dividend income - this increases savings rates by a huge magnitude creating a virtually indestructible base for an economy over the long haul.
b) Remove tax write-offs for all interest payments except those for mortgages, business, and other capital growth.
c) Concentrate on trade missions to Asian countries, who will soon be the world's primary economies and importers of our valuable resources.
d) Abolish the bank of Canada. Replace it with a Crown Corporate who's primary purpose is to acquire gold and silver using government surpluses on a sliding scale (I.e. percentile basis of the surpluses). Allow the free market to determine interest rates for the individual.
e) Make it illegal for the government (themselves) to replace cash contributions to CPP with government bonds - i.e. remove the ponzie scheme that currently exists. Also require that 25% of the contributions be used to purchase gold and silver bullion from Canadian mints. Mandate that all securities held within CPP must pay dividends and have paid them for at least the previous 5 years. Mandate that at least 25% of CPP holdings must be Canadian equities, and 50% must be international with a maximum 10% of the international holdings being US companies. -
A note: I personally disagree completely with CPP and have tried fighting being forced to contribute on several occassions but apparantly you can be JAILED for this as it constitutes government fraud, so I use this as a far-distant second choice.
f) STOP subsidising companies and lending and allow the market to determine what it appropriate. This will eradicate the idea of booms and busts and allows for steady and constant growth.
We have one of the hardest working and most innovative countries on earth and every time the government hands out cash to a dying company it robs thousands of us of new opportunities. The government needs to be hacked down to a more manageable size and the private sector needs to be allowed to function as it should.
That's it everyone. Part three of "The Perfect Storm" should be up in the next week. Happy trading.
Also, anyone looking for some decent trades for future earnings reports, I highly recommend shorting Goldman Sachs, J P Morgan and Morgan Stanley as the further insolvency of their balance sheets comes into play. I predict either BAC or Citi possibly declares bankruptcy this year.
Another fantastic buy for the next few months is the UltraShort Lehman 20+ year bond and the Ultrashort Lehman 7-10 year bond ETF's. These guys will probably double as the bond market bubble bursts and shatters within a matter of 150 days. Possibly triple. I have already made money taking out options against BAC at the beginning of the year.
I will post some near-term trading positions that I will be taking over the next few weeks so you can follow along.