Saturday, June 30, 2012

ObamaCare, Individual Mandate Tax and Medicaid Expansion

The individual mandate tax is a bad deal for young people. Their premiums will be much higher than market based, thus enabling the old to pay less as a result of what amounted to congressional arbitrariness and fiat.

Thanks also to the Supreme Court's decision in ObamaCare, the Medicaid expansion option for states will require each state in effect to choose between providing more for public education and insuring more lower income people. And taking funds from a federal government that in fact has no funds, other than borrowed ones, to grant. The federal government's financial cupboard is and has long been empty, regardless of pretending otherwise.

In simple terms, the laws of economics where choice and scarcity prevail haven't been repealed. They can't be. When we spend what we don't have, we have to either borrow more or reduce spending on something else we're currently funding.

We can't have everything, even if our "save the middle class" government says we can.

Now please consider the following two articles.

Health Act's Dismal Economics adds this to the discussion:

"Let the games begin—or rather, let the gaming of the system begin now that the Supreme Court has upheld the law that mandates the purchase of health insurance under the Patient Protection and Affordable Care Act. Other laws have yet to be heard from, including the laws of economics. . . . the reason the Act has to mandate that health insurance be bought by individuals lies in the economics of market pricing.

In a properly functioning market for health insurance, young people would normally pay lower premiums than older people, based on very different probabilities of needing medical care. But under the Affordable Care Act, the young are being asked to subsidize the old, with premiums lowered for the latter and hiked for the former. Hence the need for arm-twisting in the form of an individual mandate.

Whatever teeth that mandate will really possess depends greatly on the mix of incentives. Since the Act requires that no one be denied insurance based on preexisting conditions, there already will be no incentive to buy insurance in advance of any need to use it; once you need medical care, you simply buy in as though you were a customer right from the start.

That strategy wouldn't be very popular if the financial penalty for not buying insurance approached the cost of that insurance. But the penalties are far lower, starting at $95 or 1% of annual income in 2014, whichever is greater, and rising to $695 and 2.5% by 2016. By contrast, annual insurance costs would be about $5,000, at least. And at an assumed $50,000 a year income, pretty good for most people under 35, that 2.5% still comes to just $1,250."

And Reluctance in Some States Over Medicaid Expansion says this in part:

"Millions of poor people could still be left without medical insurance under the national health care law if states take an option granted by the Supreme Court and decide not to expand their Medicaid programs, state officials and health policy experts said Friday.    
Republican officials in more than a half-dozen states said they opposed expanding Medicaid or had serious doubts about it, even though the federal government would pick up all the costs in the first few years and at least 90 percent of the expenses after that.

While upholding the most hotly debated part of the health care overhaul law — a requirement that most Americans have health insurance or pay a penalty — the Supreme Court said in its ruling on Thursday that states did not have to expand Medicaid as Congress had intended — leaving a huge question mark over the law’s mechanism for providing coverage to 17 million of the poorest people.

In writing the law, Congress assumed that the poorest uninsured people would gain coverage through Medicaid, while many people with higher incomes would receive federal subsidies to buy private insurance. Now, poor people who live in a state that refuses to expand its Medicaid program will find themselves in a predicament, unable to obtain either Medicaid or subsidies.

That potential gap will probably lead to ferocious statehouse battles in the coming year, as states weigh whether to accept billions of dollars in federal aid to pay for expanded coverage. The health care industry, sensing the skepticism in some states, is preparing a campaign to persuade state officials to accept the money for coverage of the uninsured.

But already, governors in Kansas, Nebraska and South Carolina, among other states, have said they would have difficulty affording even the comparatively small share of costs that states would eventually have to pay.

Gov. Dave Heineman of Nebraska . . . indicated that he was against expanding Medicaid eligibility.
“As I have said repeatedly, if this unfunded Medicaid expansion is implemented, state aid to education and funding for the University of Nebraska will be cut or taxes will be increased,” Mr. Heineman said.

In South Carolina, . . . a spokesman for Gov. Nikki R. Haley, said, “We’re not going to shove more South Carolinians into a broken system that further ties our hands when we know the best way to find South Carolina solutions for South Carolina health problems is through the flexibility that block grants provide.”

In New Hampshire, State Representative Andrew J. Manuse said he and other Republicans were already working to block the expansion of Medicaid. “We can’t afford it,” Mr. Manuse said. “It’s as simple as that. Thank God the Supreme Court gave us an option.” "


It's going to take lots of money, and money we don't have at the ready, to insure more people with greater coverage, keep our various governments functioning, keep our public education system from falling apart and continue to pay "unfunded" retiree benefits for Social Security and public sector workers. And then there's Medicare, Medicaid and countless other underfunded government knows best programs as well. And while we're at it, let's not forget the post office, Solyndra and others.

My best guess is that reality will now begin to take center stage in the public discussion. How will we pay for all these goodies, admitting that they're all "nice-to-haves?"

We will now have to make choices about what's "nice-to-have" versus what's "necessary to have?" What we're willing to pay for, in other words.

The days of the free lunch are coming to an end, both here and in Europe.

So my overall take on the week's events is that a very healthy, necessary and long overdue national conversation is beginning.

And although perhaps initiated by the Supreme Court's decision about the "Affordable Care Act," the discussion will go far beyond that ruling.

A few of the discussion items will consist of the following: How big of a government, how to pay for it, what about the young versus old, public sector versus private sector benefits, emphasize private sector economic growth or government growth, how "progressive" will the tax system be, what rights will the states have, will we acknowledge that the federal government in fact has no money to share with the states, and countless other things.

In my opinion, this is all good stuff for We the People to discuss and decide. It's what self governing people should do. 

Thanks to President Obama, the Affordable Care Act, the Congress and the Supreme Court, we're in for some very interesting times --- and choices, too.

Just as it should be.

Thanks. Bob.

Friday, June 29, 2012

Buy-And-Hold Investing Is Not Dead ... Neither Is It Dumb

Currently almost all of the so-called "investing expert" pundits are virtually aligned against buy-and-hold investing. That's reason enough to believe otherwise, at least for me.

And that admittedly contrary approach is in large part attributable to the fact that short term traders and long term investors inhabit two completely different worlds.

And that's probably because the short termers live in an "investing" world of fast traders. Accordingly, they probably wouldn't even recognize a long term investor, since that's not their "game."

Buy-and-hold is mostly right sounds the right notes to me. That's why I wanted to share its contents with you:

"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.
—Warren Buffett

In 2011, if you had an equity portfolio and left it alone all year, presuming you did not make any terrible mistakes, not trading was a great idea. . . .

2012 is proving to be much the same as 2011 . . . although I maintain that very well could change for the positive soon.

What we know about trading is that there are very few winners. While the best traders make a lot of money by beating most of the others (a lot like poker), there are almost no retail investors among the winners.

If you must trade, taking a slow-hand position-trading approach with companies and sectors that you have fundamentally qualified is probably the way to go.

Position trading is seeking to catch major moves over an extended period of time from a particular company or sector. Unlike active traders who are looking to move in and out frequently, a position trader who uses fundamental analysis in selecting companies and sectors will trade infrequently, only trading out when the major move has ended or market conditions become extreme.

Today, investors who are stuck in cash or bonds have a great chance to start fundamentally choosing stocks and sectors to buy and hold for a pretty long time. As Buffett has also said, "You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing."

Right now, I have a . . . pretty simple thesis:
  • An economic collapse is not imminent, the world economy already collapsed (2007-09, in case you missed it). What is going on now is the slow, painful, disgustingly frustrating and labored re-birth of the global economy.
  • The world is not done growing by simple virtue of the fact that there are billions of people who want better standards of living.
  • Scarcity will increase over the next two to three decades until sustainability models and alternative energy take hold.
  • Europe will gradually pull through (I'm tired of using the word "muddle" because so many people have adopted it) in an ugly, but fairly brilliant way, as they save the euro from attack by speculators and those motivated to blow it up for other reasons.
  • The United States will eventually do things right after trying almost everything else.
  • America is poised to boom as she is flush with many of the necessities of life, i.e. food and natural resources; strong in manufacturing high-end goods, i.e. machinery, medicine and technology; strong in skilled services, and very importantly, has a new large generation about to hit the workforce.
While rampant pessimism and fear exists among investors lamenting the past 12 years, that simply makes it a good, and maybe great, time to invest in stocks. The neat thing about mass investor psychology is that it offers some wonderful opportunities to go against the grain."

My Take

I'm actually pretty optimistic about the investing picture going forward. But I could be wrong, of course, especially concerning the very short term. To me, by the way, a short term investing time frame is five years or less.

Thus, for those who want to get in and get out at the right time, I'm not your guy. Not even close.

Even if we guessed right about the getting in piece, we'd still have to get lucky as to when to get out as well. Two-fers aren't good bets. Or if we were right about the getting out piece, then we'd have to be right about the right time to get back in, too. So my view is not to play if we're not prepared to stay.

Brains and Luck

The world is filled with smart people, for sure, but I don't know anybody smart enough to time market in-and-outs. The smarties may get lucky a time or two perhaps, but there's a huge difference between luck and brains. And nobody's consistently lucky. Correlation doesn't equate to causation.

Buy-and-hold investing is a great way to build long term financial stability and even create a little wealth while doing so. While it's very much a long term thing, that doesn't mean we can't enter or exit from time to time, depending on circumstances and especially our own.

Why So Optimistic in Such a Gloomy World? 

Well, there are at least two very good reasons for optimism: (1) energy independence is coming to America, and (2) reducing the size of government in relation to our economy is underway as well.

And most important, there is developing a widespread recognition, if not understanding, of the necessity of private sector growth, accompanied by deleveraging, in America and the rest of the world

Someday soon we'll confront our entitlement funding issues related to promised retirement benefits, including Social Security and medical care. 

And we'll also ask ourselves, at least rhetorically, why government bureaucrats are presumed to be better managers of our money than we would be.

And while we're figuring all that out, we'll be asking the same questions about how we spend our educational dollars as individuals and as a society, too.

Summing Up

In other words, MOM thinking will triumph over government knows best OPM. 

Just as we'll decide that being an owner is better than being a creditor. And that both are highly preferable to being a debtor.

That's just what I think, but I wanted to share those thoughts with you today. So I did.

Keep the faith.

Thanks. Bob.

A Great Week for We the People ... We'll Get the Government We Deserve

Pogo says we're our own worst enemy and challenges us to take charge of our own affairs.

He's all about the power and responsibility of We the People all the way. So am I.

In essence, that's exactly what Chief Justice Roberts said to us in the ObamaCare ruling this week as well.  If we don't like the law, get rid of those who voted for the law.

And it's not about ObamaCare any longer. It's much bigger than that. Now it's about the choice between (1) the big government knows best approach and (2) the individual knows best approach.

In other words, will we trust in government to do the right thing for us or will we instead retain the individual freedoms to make our own choices concerning how we will best take care of ourselves and each other? That's pretty serious stuff.

The ObamaCare Election lays out the broader political context outlined by the Court in its instructions to We the People:

"ObamaCare is alive. And now we have us an election.

Politically, here's what the Supreme Court provided in upholding the president's health legislation: clarity. Ever since the March oral arguments, with their tantalizing hints the court might strike down the law, the politics of health care has been a muddle.
With this week's decision, the debate refocuses. This election is now about ObamaCare—not just in its own right, but as proxy for a generational debate over liberty. Chief Justice John Roberts, in legitimizing sweeping federal powers, has left it to the U.S. electorate to serve as the check on government intrusion—and thus dramatically elevated the November stakes. . . .

(In the case of) Mr. Romney, the decision gives him (the opening) to elevate ObamaCare into a far larger, more powerful debate. The former governor is adept at citing the laundry list of ObamaCare ills, and on Thursday he did so again, including a vague reference to the law's many "taxes." Yet the significance of the Roberts ruling was in fact the finding of a specific new and frightening taxation power—the government right to levy a tax on any American behavior it deems inappropriate.

That is enormous. The Roberts majority didn't just legitimize ObamaCare—it provided Democrats a road map, and the tools, for the party's ambitions to turn us into a European-style entitlement state.

Mr. Romney's challenge is to explain that ObamaCare is only the beginning. This new court-granted power is Mr. Romney's most powerful warning regarding a second Obama term.

It's also an opening to make his own appeal. If the court will not stop government, then only the American people can—by electing a president and a Congress that promise respect for American liberties. The more Mr. Romney can articulate his own limiting principles for governance, the more voters will appreciate the contrast with today's president.

This election is now about ObamaCare. Which is, in turn, about everything else."


So here are the two relevant questions for We the People to decide: (1) Do we choose big government knows best entitlements and pretend that our elected elitist politicians will somehow be able to provide security and abundance for one and all? (2) Or do we instead choose the path of individual liberties in providing both security and abundance for ourselves and those in need of assistance?

And that, my friends, is a mouthful.

The debate between who's best capable of deciding on behalf of We the People --- government elitists or common individuals --- goes back to ancient times --- even much before Plato.

At our nation's founding, we chose to base our society's future well being on the common man's good judgment. The founders did that by recognizing the inherent God given blessings of liberty, aka individual freedoms.

My own super strong belief is very much on the side of the ordinary individual and not on the side of the elitist government knows best officials. All of us are smarter than any few of us. And individual morality and general prosperity align totally with free people acting in free markets as they so choose from time to time.

Now we'll see how the rest of our fellow Americans see these things come this Novermber.

And regardless of how this year's particular voting turns out, there will be another one soon thereafter. We've had lots of elections these past 236 years, and we'll have lots more in the decades and centuries to come. That's what self governing free people do.

The forces of freedom, individualism, free markets and equal opportunities are going to permeate each and every corner of the world these next few years and decades.

And in the U.S. we'll continue to lead the way, as we have since our nation's inception, and as we always will. At least that's my take.

Thanks. Bob.

In Their Own Words ... A Rose, or Tax, by Any Other Name .....

The Tax Duck quotes the main actors in passing the "Affordable Care Act," and I use the word "actors" advisedly. In their own words, they tell us about what they believe the word "tax" doesn't mean:

"Editor's note: The duck test—if it looks like a duck, swims like a duck and quacks like a duck, it probably is a duck.

As the basis for the majority opinion in the Obama health-care decision, Chief Justice John Roberts argued that the law's individual mandate to buy health insurance is valid because it is a tax, citing Congress's power under the Constitution to "lay and collect taxes" for "the general welfare of the United States."

Herewith, from President Obama on down, is a sampling of Democratic denials that the individual mandate is a tax:

President Barack Obama, talking to George Stephanopoulos on ABC News, September 2009:

Stephanopoulos: Your critics say it [the mandate] is a tax increase.

Obama: My critics say everything is a tax increase. My critics say I'm taking over every sector of the economy. You know that. Look, we can have a legitimate debate about whether or not we're going to have an individual mandate or not, but—

Stephanopoulos; But you reject that it's a tax increase?

Obama: I absolutely reject that notion.

From the White House website, December 2009, under the headline, "The Truth on Health Care Reform and Taxes":

As we move into the final stage of the historic push for health reform, opponents of reform are testing the age old adage that if you only say something enough times you can somehow make it true. Yesterday, we heard a new version of the old, tired refrain that the health reform bills in Congress would raise taxes on the middle class. So let's set the record straight: First, the health insurance reform bill being considered in the Senate does not raise taxes on families making less than $250,000.


Then-House Majority Leader Steny Hoyer of Maryland, July 2010: "I don't see this as a tax."


Secretary of Health and Human Services Kathleen Sebelius appearing before the House Ways and Means Committee, February 2012: "It [the mandate] operates the same way a tax would operate, but it's not per se a tax."


Office of Management and Budget Director Jeffrey Zients appearing before House Budget Committee, February 2012:

Rep. Scott Garrett (R., N.J.): If I make under $250,000 and I do not buy health insurance as I'm required to under the Affordable Care Act, is that a tax on me or is that not a tax on me? A moment ago you said there are no tax increases.

Zients: There aren't.

Garrett: So that's not a tax?

Zients: No.


House Minority Leader Nancy Pelosi commenting Thursday on the Roberts decision: "Call it what you will.""


Ok, Nancy. Then let's call a spade a shovel --- it's a tax. And let's call the "Affordable Care Act" what it is as well --- "The UNAFFORDABLE CARE ACT."

Thanks. Bob.

49%ers, aka Double Dippers, Stockton and ObamaCare


There is a profound difference between what is legal, what is political, what is proper governance and what are the economic results of any specific activity or program.

The cost of anything involving government is paid for, at least eventually, by assessing taxes which offset the expenditures. In the end there is no free lunch.

That seems to have been forgotten by most Americans since Social Security legislation was passed in the 1930s, Medicare and Medicaid were enacted in the 1960s, and public sector unions helped our elected officials create the problem of seriously underfunded entitlements for public sector workers. Now we can add the cost of ObamaCare to that long list of "unaffordables."

So it's only fitting and proper that ObamaCare is officially titled the "Affordable Care Act."

Who will pay for all these entitlements? We the People will.

Taxes are the way we balance our governments' budgets. Otherwise we continue to pile on deficits and debts for future taxpayers. That can't continue forever. Ask Europe.

A Trifecta ... My 49%er Double Dipper "Education," Stockton's Bankruptcy Filing and ObamaCare's "Tax"  Ruling All on the Same Day

(1) Last evening I talked to a public school teacher who had taught one of our children in middle school some 20 years ago. He looked good and healthy. When I asked if he was still teaching, he volunteered that had officially retired and was now a teaching 49%er. A bona fide double dipper. My guess is he is in his early 50s.

Retired with a full pension, he now teaches three classes per day so he can earn ~50% of what full time teachers are paid yet still receive a full pension payment ---- in large part courtesy of the taxpayers. In essence, he is paid close to 150% of what he used to be paid, and is doing 50% of what he used to do. However, someone else has to teach the other 51% of the day, so the cost to the taxpayer is double what he received while teaching full time. And even though I'm a taxpayer, he didn't even thank me for being so dumb!

The interesting thing to me was how quickly and easily he happily told his story to a fellow taxpayer. Not a hint of embarrassment, justification or apology for the apparently widespread ongoing taxpayer fleecing by our teachers. And the President wants to borrow more money from China so we can hire even more teachers.

(2) Stockton is bankrupt because it spent more than it collected from taxpayers for a long, long time. That time is over.

(3) ObamaCare was upheld yesterday, and the individual mandate was called a tax by the Court. Whatever it's called, the legislation is going to be very costly. The taxes charged won't be nearly high enough to pay for the costs of the entitements promised.

Social Security was enacted in the 1930s and payments made into the system still aren't called taxes by most people. We call them "contributions." Sounds better to the ear.

As in other government programs, the Social Security taxes -- er -- contributions don't come close to covering the full costs of the program.

Medicare recipients receive in benefits about three times as much as they pay in to the system while working and paying taxes.

Summing Up

My point is simple. Whatever we choose to call something, it is what it is.

Somebody has to pay 100% of the real costs of all these programs someday. If not now, then later when our kids and grandkids will do the paying for us.

Stockton entered bankruptcy the same day ObamaCare taxes were upheld and my path crossed with a 49%er double dipper. That's a trifecta of sorts.

And it doesn't even cover how we will pay for Medicare, Medicaid and Social Security.

Aren't free lunches and word games great?

Thanks. Bob.

It's Official ... Stockton's Bankrupt

Stockton officials entered formal bankruptcy proceedings late yesterday. See Bankruptcy Protection:

"Stockton, Calif., officially filed for Chapter 9 protection on Thursday, making it the largest-ever U.S. city to file for bankruptcy.

Stockton officials said late Thursday that the Northern California city had filed a petition for Chapter 9 bankruptcy with a Sacramento federal court. In a statement, Stockton Mayor Ann Johnston said, "We are extremely disappointed that we have been unable to avoid bankruptcy," but added the city had to enter bankruptcy "to get our fiscal house in order."

City Manager Bob Deis said, "Our General Fund resources are depleted, and we cannot allow the City to spiral into uncontrolled default. Bankruptcy stops a barrage of lawsuits and allows the city breathing room while working toward a Plan of Adjustment and moving Stockton forward."

Stockton's bankruptcy attorney, Marc Levinson, declined to comment. Stockton officials didn't immediately return calls seeking further comment.

Earlier this week, Mr. Deis said Chapter 9 protection was Stockton's only choice after failing to reach a deal to restructure more than $700 million of debt with creditors.

Stockton, with a population of around 300,000, will now formally restructure debt with 19 parties of creditors, including retirees, city workers and bondholders. Mr. Deis said the city has already been able to reach agreement with a third of the creditors during a mediation process that preceded the bankruptcy filing. With the filing, the city will likely also suspend payments to bondholders, make cuts to labor contracts and eliminate the city's contribution to retiree health care.

Chapter 9 bankruptcy protection provides a financially distressed municipality protection from its creditors while it develops a plan for adjusting its debts. Creditors cannot demand a liquidation of assets to force the municipality, while under protection, to repay debts.

Stockton's bankruptcy filing is the biggest for a U.S. city in terms of both debt load and population. Bridgeport, Conn., which has 141,000 residents and filed for Chapter 9 in 1991, was to date the largest city by population to enter bankruptcy, according to federal records. And until now, the city with the biggest debt load entering bankruptcy was Vallejo, Calif., which owed $50 million to creditors when it filed in 2008. (Vallejo emerged from insolvency last year.)

Stockton has spiraled into a morass of debt because of high retiree costs and big spending on a downtown revitalization effort, coupled with falling property-tax revenues because of the real-estate downturn, among other factors.

The city has slashed more than $90 million from its budget since 2009—including reducing its police department by 25%, cutting its fire department by 30% and slashing pay by as much as 22% for some workers. Still, the cuts were enough to overcome budget deficits, leading to Thursday's bankruptcy filing. "


Now the painful decisions begin about apportionoing the limited funds between current workers, retirees and creditors.

Since the representatives of the various parties couldn't agree among themselves, the court will do it for them.

They'll be sorry in the end for not gutting up to their many issues earlier -- much earlier -- while there was still time to set things straight on their own.

And the citizens continue to be poorly served by city and union officials. Oh well, what's new about that?

Thanks. Bob.

State's Rights and Schools

Any State with the Right Reason discusses the state of No Child Left Behind waivers granted by the federal government to 19 states as of today:

"What do you call a federal law from which 19 of the 50 states have been formally exempted? That would be the No Child Left Behind Act, the 2001 law passed by bipartisan majorities that is now disowned by both the left and right.

. . . the Obama Administration continued its administrative rewrite of the statute by adding eight more states to the 11 it had already exempted from the law's main requirements. "These states are getting more flexibility with federal funds and relief from No Child Left Behind's one-size-fits-all mandates in order to develop locally tailored solutions to meet their unique educational challenges," Secretary of Education Arne Duncan said.

Locally tailored solutions, flexibility with federal funds, no more one-size-fits-all mandates—sounds as if Mr. Duncan has had a mind-meld with Jim DeMint. Alas, no.

The law's expectation that 100% of students meet certain standards in math and reading by 2014 was unrealistic and needed to be changed. But Mr. Duncan is mainly responding to pressure from teachers unions that hate No Child Left Behind because its testing standards and transparency have let millions of parents know for the first time how truly rotten their child's school is. He's also exempting only those states that accept the Obama Administration's priorities (such as core national standards) that it couldn't get through Congress. This is faux federalism.

No Child Left Behind served a purpose in raising expectations for all schools and even the poorest students, but its accountability provisions are now in jeopardy. Better to return education cash and control to the states and drive reform with universal school choice in which the money follows the child."

Summing Up

Perhaps the recent votes in Wisconsin, San Diego and San Jose will cause people to take another look at government schools and the subsidiarity principle.

Let's hope so.  Better yet, let's insist on it.

Thanks. Bob.

Thursday, June 28, 2012

Ford Results Provide Another Reason Why Europe's Economy Matters to U.S. Firms

Ford Says Overseas Losses Will Triple in 2d Quarter has this to say:

"Ford Motor Company’s chief financial officer said Thursday that the automaker’s international losses would triple in the second quarter, primarily because of much weaker European sales. The executive, Robert Shanks, also disclosed that Ford would consider closing an assembly plant in Europe should demand keep falling.

Ford lost $190 million in the first quarter in its international operations, with Europe accounting for nearly 80 percent of the total. Since then, the market has grown worse, and Ford losses are mounting.

“We lost $190 million in the first quarter, and it will be three times greater than that in the second quarter,” Mr. Shanks said in an interview on Thursday at Ford’s headquarters.

A loss on international operations of $500 million to $600 million in the quarter, which ends Saturday, will depress Ford’s overall earnings for the period. Previously, the company had forecast that international losses for the second quarter would be roughly the same as the first quarter.

“We have good results in North America and solid results at Ford Credit, but international losses will be triple,” he said. “The overall company profits will be substantially lower.”

Up until now, Ford has suffered less from the downward spiral in European vehicle sales than its Detroit rival, General Motors, which is planning to close at least one assembly plant on the Continent.

Mr. Shanks said Ford could no longer rule out the option of shutting one of its five European plants.

“We do have excess capacity,” he said. “It’s too soon to say, but we’re going to have to develop a plan that gives us an opportunity to do that.”

Ford has an 8 percent market share in Europe and last year broke even in the region at an industrywide sales level of 15.3 million vehicles. But with sales running at an annual rate of 14 million, Ford cannot make money, Mr. Shanks said.

“This is not a cyclical issue, it’s a structural issue,” he said.

The forecast for Ford’s overall second-quarter results underscores how badly the European market is hurting even the healthiest players.

Mr. Shanks, who took over as Ford’s top finance official earlier this year, said the difficulty in reaching a solution to the European economic crisis could force automakers to make decisions soon on restructuring.

“If the leaders of Europe aren’t able to come up with a really good plan to satisfy the financial markets, there could be severe consequences,” he said."

My Take

GM is struggling in Europe and now Ford is reporting it has major operating problems as well.

It's an interconnected world, for sure. Slow sales in one market often will mean tougher conditions elsewhere.

Thus, as the various European economies continue to deteriorate, U.S. based companies will suffer.

And as more U.S. companies experience operating issues in Europe, the U.S. economy will have an even harder time getting to a solid recovery.

Thus, let's hope the two day European summit now underway does something unexpected and helps the worldwide situation.

Thanks. Bob.

Wal-Mart Stock and Dividend Growth

Wal-Mart is an interesting story stock lately. While I'm not suggesting it as a short term buy, it does have a lot to say about long term investing in safe, defensive, stable, well managed, well financed  and dividend growing blue chip companies. And what they do is easily understandable to the individual investor as well.

It's one of those buy it, "put it in the drawer" and then forget it for a decade or so stocks. The past ten years hasn't been kind to investors, but what about Wal-Mart, as an example?

Wal-Mart Stock Near All-Time High says this in part:

"Wal-Mart Stores . . . which once advertised "always low prices," clearly wasn't referring to its stock.

Shares of the world's largest retailer have raced ahead of the broader market in the past few months, nearing their all-time closing high of $69.69, set in 1999. The ascent is the latest sign of stock investors' appetite for defensive plays, such as the big retailer with its steady cash flow and regular dividends. . . .

The prospects for further gains are debatable. Bulls point to the better-than-expected quarterly results Wal-Mart reported last month as well as a price-to-earnings ratio that remains relatively modest....
The stock has jumped 12% over the past three months . . . .

The retailer's price-to-earnings ratio has risen to 14.8 from 11.7 a year ago and this month hit a high of more than two years, according to FactSet. That indicates the stock has gotten pricier, with investors paying more for the profit the company generates.

But Wal-Mart's price-to-earnings ratio remains below its average over the last 15 years and little slightly above that of the S&P 500.

Consumer-staples companies have proven resilient in recent months. Some investment strategists have recommended sticking with defensive stocks amid uncertainty about Europe's debt crisis and signs of the U.S. and Chinese economies slowing down.

Such a strategy might benefit Wal-Mart, which has quintupled its annual dividend over the past decade, including a 9% increase this year in the payout, to $1.59 a share. The retailer has also been active in buying back its shares. As of the end of April, it had spent more than a third of the $15 billion its board authorized for share repurchases in July 2011. . . .

The median price target of analysts who follow Wal-Mart is $67.50, according to Thomson Reuters, leading many analysts to give the shares a "hold" rating.
A Wal-Mart spokesman declined to comment on the company's stock price."

My Take

Wal-Mart is a solid company with sound finances and a proven track record of increasing cash dividends annually.

While the price of its stock is no higher than it was in 1999, neither is it lower. And its dividend payment per share has quintupled over the past ten years, including a 9% hike this year.

Stock analysts typically recommend stocks based on the anticipated performance over the next six to twelve months. To me that short term trading mentality is just plain silly.

Who knows what will happen to the price of a stock over a short period of time?  Nobody.

But for those of us willing to buy and hold for a long time shares of rock solid companies that yield more than 2% currently (Wal-Mart's yield is now 2.34%) and are expected to increase their dividends over time, what's not to like?

Besides, Wal-Mart's stock will likely trade meaningfully higher in future years than it does today.

Here's a 1-2-3 Comparison

(1) Ten year government bonds yield 1.6% currently. Wal-Mart's dividend yields 2.34% right now.

(2) And that government bond won't increase its interest payment on that bond during the next ten years, whereas Wal-Mart almost certainly will at least double its dividend payment.

(3) And if interest rates rise at all during the next ten years, that bond won't be worth what is is today.

On the other hand, Wal-Mart's share price will likely be 50% to 100% higher a decade from now. And if it isn't at that time, you will likely have had multiple chances to sell it before then and receive a much higher price than it's selling for today.

Summing Up

Lots of other blue chip companies exhibit the same characteristics as Wal-Mart.

While there are no guarantees, of course, you can't steal second with your foot on first.

Stay away from buying bonds and carefully consider buying blue chip stocks with that money.

Thanks. Bob.

European Two Day Summit Meeting ... Not Much Likely to Happen

European leaders are meeting today and tomorrow concerning how to prevent their financial wheels from coming off totally.

Although the ObamaCare Supreme Court ruling today is getting all the headlines in the U.S., events at the European summit are equally if not even more important to the economic future of Europe and the world, including the U.S.

Practically speaking, Greece has defaulted. And now Spain and Italy are close to the edge as well.

Will they default or will Europe "vote" to inflate instead? In a fiscal debt driven crisis, those two alternatives --- default or inflate --- are the only available options other than private sector growth. And growth isn't coming to either Spain or Italy anytime soon. Hence, keeping the wheels on is very much job #1.

It's good the EU expectations are low has the overview:

"There’s been a lot of talk about what European Union leaders are discussing at the summit than began earlier Thursday. And there’s been a lot of discussion of what they may do, and what they won’t do – even if almost every person who studies the situation knows what they should — and will have to eventually — do anyway.

But at least for the umpteenth EU summit, expectations do seem to be lower. And that’s a good thing, . . . Maybe markets won’t end up so disappointed.

After more than a dozen similar summits since the European sovereign debt crisis began, where officials kick the can down the road, “people have little hope this will be the one where they make a decision,” (an investment manager) said Thursday. “They need to eventually discuss the structural issues, but I don’t think that will be solved at summit #19 or 20 or 21. We expect more noise and more false starts out of Europe.”"

There actually is very little Europe can do anytime soon about cleaning up its financial mess, but let's look more closely at the important future "keys to the game."

Optimism on Europe Doesn't Add Up says this:

"In Europe there is hope, and then there is math. And the two are on a collision course.

Optimists are counting on the latest make-or-break European summit that starts Thursday to deliver convincing steps toward the fiscal and banking unions deemed necessary to keep the euro alive.

Unfortunately, even best-case scenarios for the two-day summit won't change some bleak arithmetic. This suggests the debt crisis will rage in Spain and Italy for years.
For government debt to shrink as a share of gross domestic product, economies typically need growth plus inflation, known as nominal GDP, to exceed borrowing costs. In short, the economic pie expands faster than the debt.

Yet Spain and Italy will struggle to post any rise in nominal GDP this year. And it will probably shrink around 2.5% in each country next year, warns Ben May of Capital Economics.

Meanwhile, Italy had to pay nearly 3% Wednesday to sell six-month debt, compared with 2.1% a month ago. Both countries also have seen yields on 10-year debt rise to between 6% and 7%. That doesn't bode well for debt-to-GDP ratios.

Italy's already is 120%, second only to Greece in the euro zone. It should expand to 135% by 2015, Mr. May said.

Spain started from a lower level, but its climb has been striking. Debt to GDP has doubled in the past four years to an expected 80% or more in 2012. That will surely climb further when Madrid is handed the tab for its bank bailout. The country's prime minister sounded the alarm Wednesday, saying, "We can't finance at current prices for too long."

It may have little choice. While growth falters, overhauls of labor-market practices mean higher joblessness in the near term. And when it comes to inflation, wages and prices also must remain below Germany's to restore competitive balance in the euro zone. So even if Spain and Italy make all the right moves, their debt burdens likely will rise.

The hope in Europe is that this week's summit will deliver enough signs of progress that investors can safely start buying Spanish and Italian debt again. That would bring yields down and spark a virtuous economic cycle.

Maybe. But it will be tough to make the numbers work."

My Take

Without a resumption of reasonable economic growth, countries like Italy and Spain
will continue to fall deeper into what is already a very deep financial hole.

{NOTE: The same is true for the U.S., but that's another story. Besides, as the cleanest of the dirty shirts, we have years and years and years to go before approaching their beggar status. We'll get our act together long before then if we heed their example, which I'm betting we will.}

In order for Spain's and Italy's financial situations to show the necessary financial improvement, each country's nominal GDP growth will need to exceed its borrowing costs. Otherwise its debt as a percentage of GDP will only deteriorate further. But both are entering recessions, so near term economic growth isn't on the horizon for either of them.

Accordingly, Spain and Italy (as well as Greece, Portugal and others) now very much need Germany to ride to the rescue. However, bailing out other nations isn't at all popular among German citizens for obvious reasons.

Besides, Germany doesn't have unlimited borrowing power. Although it's a giant in Europe, it's a relatively small economy compared to ours. As a result, the Germans will rightfully be extremely cautious about "bailing out" southern European countries and agreeing to share their debt obligations.

In other words, without a common fiscal union throughout Europe being agreed upon sometime down the road, Germany would just be committing its resources without any reasonable chance of being repaid or even insisting that its resources were being managed prudently. Of course, other than the Germans, the rest of Europe's sovereigns are for the most part imprudent when it comes to living within their means, to say the least. {NOTE: Take heed, my fellow Americans.}

On the other hand, Germany's economy very much needs the European Union to continue in existence, since it depends heavily on exports to other European nations for much of its own GDP growth. Thus, Germany's financial future depends in substantial part on the rest of the zone continuing to function.

It ain't easy being Germany these days. Of course, it ain't easy being Greece, Cyprus, Spain, Italy, Portugal, Ireland or even France either.

Summing Up

The euro currency will continue to weaken considerably over time.

That weakening in turn will allow  currently uncompetitive European countries to become more competitive with their exports. In turn this will also strengthen Germany's export business outside Europe as well.

The price for this weaker currency will be higher inflation and higher costs for imports, including oil.

But that's how default will be avoided, or at least that's the likely plan.

In addition, the good citizens throughout Europe finally will have to come to grips with the simple fact that their government knows best protective "emperor" in fact has no clothes. Street protests won't change that.

This simply means that the socialistic welfare state administered by government officials won't be able to continue indefinitely.

To have any real and lasting financial security, each nation's products and services must be able to be sold profitably at globally competitive prices.

And unless a country's economic growth resumes at a reasonable pace in relation to its outstanding debt levels, its debt and overall financial situation will only worsen.

That's the simple "math of the matter."

Thanks. Bob.

Medicaid Expansion Prior Posting

Please see our March 26, 2102 posting titled "ObamaCare and Medicaid ... The Real Story" for a ful discussion about the legislation and its coercive aspects regarding forcing states to expand Medicaid eligibility or forfeit their federal Medicaid funding for existing programs.

Today the Court adopted the logic we offered in that posting, giving each state the right to choose whether to expand Medicaid coverage or not without forfeiting existing government funding should it opt out of expansion.

That's a victory for the states, for the people and for limited government as well.

It's good to see the Court take this limited government approach to Medicaid.

For a full review and discussion of the "coercive" Medicaid issues, please see the above referenced post.

Thanks. Bob.

Supreme Cout's Ruling on ObamaCare ... Putting It In Perspective

Our post dated October 1, 2011 was titled "ObamaCare ... What Impact Will Its Constitutionality Have On 2012 Elections?" Please refer to it for an overall analysis of the various issues before the Court and their likely decision --- which would be upholding the law's various provisions.

More importantly, the 2011 post sets forth the reasons for why the likely decision would be that the Affordable Care Act is constitutional. The post also discusses the likely political consequences for the 2012 election as well. And the role of We the People, of course.

Now that all this has come to pass largely as expected, it's time to look forward. There's lots of good news in the decision for fans of limited government, as I am.

What the Court did today was in essence refuse to provide unlimited powers to Congress under the commerce clause. This is pretty much the first time the power of Congress has been limited since New Deal legislation was passed in the 1930s. That's a huge positive for the idea of limited government, and that's a great thing in my view.

The Court also had meaningful things to say about the individual mandate specifically. It distinguished between activities and non-activities within the meaning of the commerce clause, saying that Congress can't require people to engage in an activity like buying insurance, eating broccoli or otherwise NOT doing something. It can only regulate activities --- not non-activities as specified by the ObamaCare legislation.

The personal mandate is in fact a tax, according to the Court, and there is no doubt about the authority of Congress to tax the American people. Even though the President and the Democratically controlled Congress stressed the fact that it wasn't a tax when passing the legislation initially, it is what it is, in other words. A tax by any other name is still a tax.

Finally, individual states won, too. They can opt out of Medicaid expansion without losing funds for existing Medicaid programs. This is a victory for states' rights and the inability of the national government to do anything it chooses to do.

All in all, the constitutional issues pretty much all came down on the side of limited government. That's more than good enough for me.

Now it's up to We the People and our elected officials to take the necessary steps to have an effective and genuinely free choice affordable health care system in America.

The debates will be long and hard, and in the end the people will decide. As we should.

For an overview, please see Summary of Supreme Court health care decision.

And for a Q & A, please see What the Supreme Court's Health-Law Ruling Means for Consumers.

Summing Up

We'll comment further as circumstances warrant. For now, however, there really isn't much to add to what we said in our October, 2011 post referenced above.

Long live our federalist system of government and its separation of powers.

The Court didn't say it endorsed or approved of the legislation but merely that Congress acted within its powers when passing it.

Now the ball is back in the hands of We the People.

Thanks. Bob.

Breaking News ... Supreme Court Upholds ObamaCare

We'll have some analysis later on the Court's ruling, but here's the main idea. The Affordable Care Act was upheld by the Court.

The Supreme Court decided the individual mandate was constitutional pursuant to the government's taxing power. Apparently it ducked the issue of whether the law was unconstitutional under the commerce clause. The rest of the law apparently was upheld as well.

At the time the law was being legislated and thereafter, both the President and the Democratic Congress stressed that the individual mandate was not a tax. The Court, however, ruled that it was.

This should all make for an even more interesting presidential campaign this year.
In any event, this will do nothing about lowering our health care costs or providing individuals more choice.

Of course, Medicare is also unaffected, and that's the biggest elephant in the room.

If We the People don't like the mandate or other parts of the law, it's up to us to get it changed through legislation. That seems fair to me.

We'll discuss this in a broader context as more details become available.

Thanks. Bob.

Restructuring Educational Opportunities in America and Work Time in Europe

Europeans "enjoy" far too much non-work time in the form of holidays, short work weeks, abundant sick days, lengthy vacations and so forth. July is pretty much a zero work month for many of them and has long been that way.

On our side of the ledger, Americans urgently need to improve both the quality and cost effectiveness of our educational system greatly. This will require that our system be restructured radically and thoroughly.

Putting these two thoughts together -- the European work mindset and the need for American educational restructuring -- is the topic herein. We'll solve ours, but they'll have a much harder time on their end. It's a matter of two different cultures.

First, an example from Europe. National Lampoon's European Vacation captures the European productivity, output and time on task problem nicely:

"Europeans who catch a sniffle this summer . . . may be owed another paid vacation to make up for it, following a decision last week by the European Court of Justice.

Under the ruling, workers who get sick on holiday are entitled to paid time off equal to the amount of time they didn't feel well during the original holiday. The question originated in Spain, where trade unions sued for the vacation do-over allowance some years ago. The European court has now upheld the right throughout the EU, noting that the "entitlement to paid annual leave must be regarded as a particularly important principle of EU social law, a principle expressly enshrined in the EU Charter of Fundamental Rights," and thus "cannot be interpreted restrictively."

Little danger of that. Vacation do-over rights only add to the EU minimum of 20 paid days of vacation per year—not including national holidays and EU-mandated weekends, breaks and additional time off for night-workers.

National regulations are often even more generous. In France workers can get 10 days of paid leave on top of the national 25-day minimum, if they work for up to 39 hours per week rather than the statutory 35-hour maximum. Gainful Spanish employment includes 15 days off for an employee's marriage and honeymoon, and two days off for any births, hospitalizations or deaths in his immediate or once-removed family.

Per a 2009 Court of Justice ruling, European workers also have a right to the paid time off they accrue on sick leave—meaning they can celebrate the end of a long recuperation by immediately going on holiday. No word on how that ruling, considered alongside last week's vacation give-back, would wind up looking in, say, Belgium, where a doctor's note (psychiatrists count) can get an employee up to 80% of his salary indefinitely.

The court's ruling comes when official unemployment in Spain is 25%, and half of young Spaniards can't find a job. All of these entitlements and allowances raise the cost of employment, and so reduce the job opportunities for everyone. It does no good to have the right to re-do a vacation if you can't find a job in the first place."

Now let's look at the U.S. Our educational system has tremendous opportunities for improvement related to school and student productivity, output and time on task gains. But first we have to make some critical choices about changing the status quo. So let's start there.

Class Struggle says this in part:

"Much has been written about the choice we face just 19 weeks from now, when we will select the next president. But while we discuss the almost polar opposite views of Barack Obama and Mitt Romney on spending, regulation, taxes and health care, we shouldn't lose sight of another very important issue: education.

While the candidates have some areas of agreement, their beliefs about education are still quite different, and the impact on our nation's youth of a second Obama term versus a first Romney term would be significant. Not surprisingly, given their differences on most other issues, Mr. Obama's approach more closely follows the status quo, pro-teachers-union track, while Mr. Romney's more closely follows the reform, pro-student track. Mr. Romney's plan includes vouchers that would give disadvantaged children, particularly those in failed schools, and their parents the option of moving to a school of their choice.

In the past, decisions on where children went to school would usually depend primarily upon their ZIP code. Giving parents choices is important, perhaps now more than ever, because we can see it working in many places where it has been tried. . . .

Ms. Burke notes the District of Columbia Opportunity Scholarship Program, where vouchers are provided to low-income children. Those who used a voucher to attend a private school had a 91% graduation rate compared with a 55% rate for students at the district's public schools.

"There is far more evidence in support of school choice than there is evidence in support of a further centralized education agenda," Ms. Burke notes. She cites Mr. Romney's statement that "a choice for every parent means a chance for every child."

Greg Forster of the Foundation for Educational Choice put together a good education analysis in the spring of 2011 titled "A Win-Win Solution: The Empirical Evidence on School Vouchers."Of 19 empirical studies of voucher programs, nine` show that "vouchers improve student outcomes, six that all students benefit, and three that some benefit and some are not affected," Mr. Forster notes. Only one study "shows no visible impact," and "none of the studies finds a negative impact."

What's more, competition works. Eighteen of the 19 studies found that "vouchers improved public schools" as well as helping students in private ones, and the remaining study found no impact, so that no study found a negative impact on public schools either."

And while we're at it, let's not leave out our U.S. colleges.

How About a Three-Year B.A.? makes the common sense recommendation that colleges stay in session all year.

In other words, why take summers off, and why not use the time and facilities to provide a better educational experience and outcome at a much reduced overall cost? And why not do the same thing with our K-12 schools, too?

My Take

Europeans are culturally conditioned not to work too hard or too long. It's in their memes.

They are part of a long and well established welfare society, even though they can't pay for it now. Nevertheless, European courts still endorse such ridiculous things as providing extra vacation time should a person become ill while on vacation. Although not hopeless, the European cultural situation is dire in terms of world competitiveness. That means lower living standards throughout Europe, which in large part will be the natural result of their socialistic welfare state approach.

In the U.S., on the other hand, we have no such deeply embedded cultural issues. Our issues with education, for example, are more related to the influence of heretofore powerful teachers unions and school administrators.

Simply giving parents and children more opportunities to choose for themselves would immediately enrich the educational experience and outcomes in our schools. And it would do so at a much lower overall cost as well.

Summing Up

If we don't work, we don't produce.

If we don't produce, we have nothing to trade with others who have produced.

If we don't allow individual choice about what we will or won't produce, such as education, we won't produce highly educated citizens.

And if we don't do that, we may end up like our holiday taking, work avoiding, virtually bankrupt European friends.

Let's not do that.

Thanks. Bob.

Wednesday, June 27, 2012

Illinois Public Pension Rate of Return Assumptiom to be Cut

Illinois Pension Fund May Cut Return Target has the breaking news:

"The Illinois Teachers' Retirement System's top official said the pension fund might lower its annual-return target, now among the highest in the U.S.

"My guess is that it comes down," Richard Ingram, executive director of the $31 billion pension fund, said in an interview with The Wall Street Journal. "We are not immune from financial reality. We are looking at the same numbers as everyone else."
[image] Illinois TRS
Richard Ingram

The Illinois Teachers' Retirement System provides pensions to 101,000 retired public-school employees in Illinois. Its current 8.5% assumed rate of return has been in place for 25 years.

Lowering the annual-return target could increase the pension fund's liabilities by billions of dollars even as Illinois is struggling to keep up with current pension payments, which have soared.

But the cloudy near-term outlook for returns on the pension fund's investments makes it likely that actuaries will recommend a cut in the annual-return target, he said. "It's an unforgiving equation," he said.

The pension fund's board could vote on the move in August.

The Illinois Teachers' Retirement System was 46% funded as of June 30, 2011, meaning its assets as of that date covered just 46 cents of every $1 in future liabilities. State pension funds in Illinois are among the lowest-funded in the U.S.

Public-pension funds across the U.S. are under scrutiny for using assumptions that some critics say are too optimistic. Pension funds also use their assumed rates of return to calculate the present value of their future obligations. The higher the so-called discount rate, the lower the liabilities are.

But some large public-pension funds are capitulating to the grim realities of slow economic growth and volatile markets.

Earlier this month, New Jersey officials approved lowering the assumed rates of return at the state's pension funds to 7.95% from 8.25%, according to a spokesman for New Jersey's treasury office."

My Take

The pathetic  funding level of Illinois pensions for its teachers will look even worse sometime soon, according to the report.

In simple language, a lower expected return means a greater future liability. If I owe $1 in ten years and expect to earn zero, I'd have to fund that $1 now. However, if I expect to earn 7% annually, I'd only be required to set aside 50 cents now in order to have $1 ten years from now. That's the rule of 72 at work. Thus, 7% x 10 years = an approximate doubling of the initial amount invested.

In any case, it appears that Illinois actuaries will "urge" the pension  fund to reduce its rate of return expectations which in turn will mean its unfunded liability increases. It's simple accounting or bookkeeping at work. Nothing else.

What really needs to happen is that sufficient money needs to put into the fund and then invested properly to achieve a solid rate of return over time.

Until now, there hasn't been enough money set aside. Changing the rate of return assumption won't change that. Nor will it change how well the investments do when the money has been contributed.

Here's the only rate of return equation that makes sense to me: Real funding level at any future point in time = real money contributed now + real investment return earned over time.

Thanks. Bob.

Europe's REAL Problems ... No Time for Schadenfreude

Schadenfreude simply means the pleasure derived from the troubles of others. In the U.S., it's tempting to look with disfavor at our European friends and the position they're in these days. Tempting but wrong, of course.

That said, there is much for us to learn from the European situation, and we need to soak up, and then apply to our own situation, this vicarious knowledge as much and as rapidly as possible, too.

If we don't act quickly, someday in the not distant future we may be facing a similar situation to the Europeans, although it's not likely for at least several reasons.

Accordingly, let's review three good reasons confirming why our American situation is indeed much different than that facing Europe: (1) We have a long history of individualism, entrepreneurialism, free market competition and the rigors of private sector capitalism; (2) we have a very real shot at achieving energy independence; and (3) as a result, we may someday soon have the legitimate opportunity to reduce defense spending as a percentage of total government expenditures.

To the contrary, European sovereigns (1) have well established socialistic governments and cultures, (2) must import most of their energy requirements, and (3) already spend virtually nothing on national defense.

So what will Europe's leaders decide to do this week, and what should we realistically expect from them in the coming weeks and months?
European Disunion Faces Endgame has this to say about the European "keys to the game:"

"One test of whether proposals for European banking, fiscal and political union circulated ahead of Thursday's summit will calm the crisis is to ask a simple question: Do the proposals make it more likely that France raises its retirement age to 67? It was only recently reduced to 60 for some workers.

Put another way, will the proposals make it more likely that struggling Italian companies can lay off underperforming workers without the say-so of a judge? Or, to labor the point, will they make it more likely Spain shuts down the branches of failed banks rather than keeping them afloat?

Sadly, there is little in the flimsy seven-page document put together by the presidents of the European Council, European Commission, European Central Bank and Eurogroup to suggest the answer to any of these questions is "yes."

The road map to a banking union has been well-flagged. The proposals for tighter control of national budgets build on already existing arrangements. But the section on how to ensure national governments pursue policies that lead to strong and sustainable growth and employment is threadbare. It contains nothing more than platitudes about the need for "measures to strengthen the political and administrative capacity of national institutions."

Credible mechanisms to ensure countries tackle unaffordable welfare systems and inflexible labor markets are needed. Without those, talk of pooling debt via a common bank-deposit guarantee program or common euro-zone bonds must be for the birds.

It isn't enough for countries to stabilize debts if structural rigidities and long-term pension and health-care commitments make it impossible for them to expand and cut their overall debt burden. So long as Italy is unable to expand faster than its 20-year average of around 1% per annum, it will remain a sword of Damocles over the euro-zone economy.

What mechanisms could possibly convince governments, citizens and investors that vital economic overhauls will be implemented? That is hard to see.

It would help if national governments started taking steps without external pressure. But politicians are reluctant to dismantle expensive entitlements and voters even less willing to support those who try. . . .

That leaves the euro zone in a dark place. A robust political union with central powers to tackle long-term competitiveness offers the euro zone its best hope of lasting stability.

The alternatives are a breakup of the single currency or turning it into a giant version of Italy—a difficult-to-govern transfer union with political and financial instability hard-wired into its constitution. Both of those ultimately lead to the risk of financial catastrophe."

My Take

Most European countries are in a no growth to recession mode, and many of them are, for all practical purposes, insolvent. As a result, issuing more bank guarantees, more government loans and putting more money in circulation won't solve any of their fundamental problems.

So while I'm definitely not in the "euro is doomed camp," it is certainly difficult to see them making any much needed progress anytime soon. My best guess is they'll find a way to muddle through for now without making much lasting headway to a brighter future.

That said, here in the U.S. we have our own issues with states like Illinois and cities like Stockton.

Simply stated, European and U.S. governments have made promises that go far beyond the willingness and even capabilities of their citizens to fund with higher taxation, especially because of feeble to non-existent economic growth anytime soon.

There is simply too much debt for the size of our economies to be able to service comfortably, if at all.

And in any event, these humongous debt loads of the various European nations and the U.S. will meaningfully restrict solid economic growth for a long time.

Add the deleveraging process well underway in individual households along with their underwater mortgages, and it's not a pretty picture. Something definitely has to give, and soon.

To repeat, unlike in America, Europe doesn't have the prospect of energy independence.

Nor do they spend anywhere near what we currently spend on national defense. Thus, they have no room for cuts.

Add to that their huge debts and welfare state status, and it's going to be a long hard slog for years to come.

Let's hope I'm wrong and that the European leaders demonstrate a little backbone these next few days.

However, don't bet on it.

Thanks. Bob.

The Peak Oil Myth, Energy Independence and a Free, Secure and Prosperous People Doing Our Own Thing

We have had some good news on the energy front lately. Housing as well. We'll focus on energy herein.

Oil prices have declined rapidly recently. Today I went by one gas station advertising regular gas at $2.99. That made me feel good. A few minutes later, I passed another station selling gas for $2.95 per gallon. That  made me feel even better.

Lower oil prices act as tax cuts for all Americans. Lower prices also improve business prospects for a wide variety of businesses as well, including Wal-Mart and other mass retailers. Restaurants and hotels, too.

They also reduce inbound and outbound transportation costs for every business. Thus, seeing more big trucks going down the highway provides a great signal to consumers and businesses alike. And if we decide to take a plane somewhere, it's nice to know that airlines will be paying less for fuel costs as well.

{Other good news out today is the continuing recovery in home sales and pricing. We have a very long way to go to get out of the housing ditch, of course, but apparently we're no longer headed in the wrong direction. See Pending home sales climb to two-year high in May.}

But let's stay with the overall topic of energy independence and what it will mean to North America and the rest of the world, including China.

The U.S. is at long last coming to grips with the reality that we will be able to achieve energy independence in the near future. While many of us mistakenly long believed that day would never come, now I'm totally convinced that it will happen, and relatively soon. And energy independence will provide tremendous benefits to future Americans in countless ways.

Has Peak Oil Peaked? makes the "America as slow learner" a great "feel good" story in the end:

"Remember the days when a threatened hurricane and news of Syria downing a Turkish jet would send oil prices spiking?

Peak oil, the Malthusian scenario whereby global oil-supply growth has reached its limit, appears to have, er, peaked. Oil prices aren't responding to the usual stimuli....

It isn't just that demand in the Western world is down, although it is, offsetting roughly half of the gain in emerging-markets demand since 2005. The more troublesome development for peak-oil proponents is on the supply side, where recent events such as the shale-based resumption of oil-output growth in the U.S. suggest terminal decline isn't the only option.

A new report from the Harvard Kennedy School's Belfer Center for Science and International Affairs suggests the world could be capable of producing 110.6 million barrels a day by 2020, up from 93 million barrels a day now. Moreover, the report concludes more than 80% of the new oil production looks profitable at a long-term oil price of just $70 a barrel. That isn't a return to cheap oil, but it would be less than what the world has been conditioned to expect in recent years. . . .


Going long on Malthus is to effectively go short on human ingenuity and technological innovation. Belief in peak oil sows the seeds of its own refutation as it forces up prices and makes what was previously too expensive to contemplate—such as fracturing shale rocks—worth trying. It also encourages greater conservation, such as raising fuel efficiency for vehicles, meaning some of that recent decline in Western oil consumption will likely prove structural. . . .

If demand doesn't keep up beyond then for whatever reason—say, a Chinese slowdown—the second half of the decade could be a real downer for peak oilers. Long-term price expectations would follow.

But there's even more good news for Americans on the oil front. As U.S. Leaves, Oil-Hungry China Stuck in Middle East says this in part:

"Projections from the U.S. Energy Information Administration find the U.S. will drastically reduce its reliance on imported oil, in particular from the Middle East, over the next two decades, a potential victory as the U.S. has long looked to slash reliance on resources from a volatile region half a world away.

China’s story is precisely the opposite.

As the U.S. looks closer to home to satisfy energy demand, China is expected to remain heavily reliant on Middle East oil. Beijing is already carving business, diplomatic and potential military in-roads through the region in a bid to shore up ties with traditional U.S. allies like Saudi Arabia as well as emerging producers such as Iraq.

Additionally, China is looking to imports from the Middle East and elsewhere to compensate for gradually slowing growth of Iran imports and supply concerns related to potentially long-term political instability in Sudan.

In short, analysts say, even as Beijing fears a growing reliance on Middle East crude, the rate of its economic growth leaves policy makers few options. As a result, China is settling in for a long-term economic and political presence in a region that for decades has overshadowed U.S. foreign policy.

To be sure, China has taken some small steps to diversify its sources of energy away from Middle East oil. Crude imports from Venezuela, for example, more than doubled between 2009 and 2011 to about 231,000 barrels a day, according to China customs data. Additionally, China is aggressively working to exploit potentially vast deepwater reserves of oil and gas beneath the South China Sea while partnering with foreign energy companies to develop shale deposits in the country’s west.
About 50% of China’s crude imports is now sourced from the Middle East, according to customs data, and analysts say it’s unlikely that number will fall dramatically over the medium term.
China is far more dependent on foreign energy sources than the U.S. . . ."

How about one more good news oil story? Expanded Oil Drilling Helps U.S. Wean Itself From Mideast summarizes the North American outlook nicely:

"America will halve its reliance on Middle East oil by the end of this decade and could end it completely by 2035 due to declining demand and the rapid growth of new petroleum sources in the Western Hemisphere, energy analysts now anticipate.
The U.S. will halve its reliance on Middle East oil by the end of this decade and could end it completely by 2035 due to falling demand and growth of new petroleum sources, energy analysts say....

By 2020, nearly half of the crude oil America consumes will be produced at home, while 82% will come from this side of the Atlantic, according to the U.S. Energy Information Administration. By 2035, oil shipments from the Middle East to North America "could almost be nonexistent," the Organization of Petroleum Exporting Countries recently predicted, partly because more efficient car engines and a growing supply of renewable fuel will help curb demand.

The change achieves a long-sought goal of U.S. policy-making: to draw more oil from nearby, stable sources and less from a volatile region half a world away. "Whereas at one point there were real and serious concerns about the ability to maintain sustainable access of supplies to the United States if there were disruptions in the Middle East, that has changed," Carlos Pascual, the top energy official at the State Department, said in an interview."

Summing Up

Our long and winding road to energy independence has been continuously interrupted over the past several decades, but the goal is very much within reach now. As a result, our nation's security and general prosperity will be quite positively impacted throughout the rest of the 21st century.

Near term let's all hope and expect that our politicians won't get in the way and slow us down.

There's simply too much at stake and too many benefits to be had.

Could gas prices dip below $2.50 per gallon this autumn? Why not? Could the economy be stronger than now projected? Again, why not?

But if prices don't fall that low, let's hope it's because the U.S. economy gathered unexpected steam in the interim, thereby causing our energy consumption to increase substantially.

If that happens, $2.99 or $2.95 per gallon will still sound and feel really good to me. How about you?

Thanks. Bob.