Government Initiatives to Keep Young People Unemployed

The government jobs programs seem to be working --- assuming they are designed to keep young people from working for the greedy fat cats and evil businessmen.

And I'm serious about that apparent no jobs by government design stuff. At least that's often the effect of government's actions.

How crazy is it that we expect government rules and regulations to protect our youth from being exploited in the work place? How can the young folks ever be exploited, even if there were an intention to do so, if there's no demand for their services?

In other words, the economy sucks, my friends, and government is doing as much as it can to keep it sucking, albeit perhaps unintentionally.

Are any of you old enough to remember Johnny Carson's game show "Who Do You Trust?" in the late 1950s and early 1960s?  The game worked like this: you trusted either yourself or your female partner to answer the question put forth by Johnny Carson.

Now We the People have to answer the question whether we trust the government or the young people themselves, including their parents perhaps, to look after the best interests of our young folks. I know who I trust to do that job, and it's certainly not the government knows best gang.

Today many businesses that may otherwise hire the young aren't doing so because of onerous government rules, regulations and other "assistance." In plain language, the government is often keeping  businesses from hiring youthful workers, even if our young folks would like to have the job because 16% of them are unemployed, and a staggering 50% of them are underemployed. Go figure!

How to keep the young unemployed tells the tale:

"If Congress and the administration wanted to keep the young and unskilled out of work, how would they do that? It’s not hard. Indeed, recent history suggests that they know how. They would raise the minimum wage, pricing young people out of some jobs. They would require that firms pay for health care, or, failing that, pay a penalty for each uninsured employee. They would discourage unpaid internships, which are often a first rung on the career ladder. They would try to ban young people from some jobs in agriculture on family farms.

Our government has done all this, and more. . . . Here’s how it works:

Increases in minimum wage. Minimum wage increases from $5.15 per hour to $7.25 an hour over a three-year period, from 2007 to 2009, particularly affected young and low-skilled Americans.

When Social Security, workers compensation, and unemployment insurance are added to the $7.25 minimum wage, the cost to the employer is about $8 an hour. That means that employers will rationally hire only workers whose output exceeds $8 an hour. Some inexperienced young people, whom it makes sense to employ at $5.15, will not be employable at $7.25.

Health care requirements

Another way to discourage employers from hiring low-skill workers is to impose a per-worker tax. That’s exactly what the Patient Protection and Affordable Care Act of 2010 will do, beginning in 2014.

Under the act, firms with 50 or more employees will be required to offer affordable health insurance, or pay a $2,000 annual tax for each uncovered worker. Employers in the 50+ size bracket will continue to hire skilled workers — but they will diminish their compensation by the cost of health insurance. For employees paid at minimum wage, however, this will not be possible, because they may not be paid less. So, some unskilled workers won’t be hired. 

Employees of industries that have traditionally offered the greatest opportunities to entry-level workers — leisure and hospitality, and eating places — will be particularly hard-hit by the new law. The $2,000 penalty will amount to 9% of average wages in the food and beverage industry and 8 percent of wages in the retail trade. Many firms do not now offer all employees health insurance. Also, they have large percentages of entry-level workers, whose hiring will fall off.

 

Restrict free internships

How about younger workers, in their teens and early 20s, who can’t get paying jobs, but want unpaid internships, to get experience that may qualify them for a future job that pays? In order to reduce employment among these workers, the administration can make it more difficult to get an unpaid internship. . . . That’s what the Labor Department did in April, 2010. It published six new criteria for working as interns.

The internship has to be “educational” (whatever that means). It must benefit the intern, who must not displace regular staff. The employer cannot benefit from the intern’s presence. At the end of the internship, the intern is not necessarily entitled to a job. The internship will be unpaid. Read more about internship guidelines.

Compliance with these regulations is challenging. What if the student is benefiting from the internship at the beginning of the summer, and then gets bored? Must he quit? Conversely, what if he becomes so experienced that before summer is over he does useful work that benefits the employer?

Many interns perform work that benefits employers, but benefits them less per hour than the minimum wage. In this case, the smart business decision would be not to hire an intern.

This is unfortunate for high school and college students who use internships to evaluate different careers. Knowing what avenue to pursue is helpful before taking out a loan for an expensive academic degree.

 

Agriculture restrictions

The good news is that experience shows that sometimes public opinion can stop some silly rules. In August 2011, the Labor Department proposed that teens under 18 be prohibited from doing certain jobs on farms and in allied lines such as grain elevators, silos, grain bins, feed lots, and livestock exchanges and auctions. Read update to child labor regulations.

Outrage from rural communities, and some members of Congress, caused the Department to withdraw the rules last April.

We should not be surprised at the rise in youth unemployment, an increase that is altering the fabric of society. It is a tragedy that the United States prohibits those with skills worth less than $8 an hour from working. And it makes no sense for firms to be discouraged from taking on unpaid interns — useful training at a time when the press is replete with stories about mismatches of job requirements and applicants’ skills.

If young people can’t get a foot on the first rung of the career ladder, how can they get to the second? Or the third? Or, one day, the corner office?"

My Take

The law of unintended consequences is alive and well in many government enacted laws, rules and regulations.

By trying to protect the young from greedy and ill intentioned fat cat business leaders, they end up hurting those they're designed to assist. It happens all the time.

As just one example, minimum wage laws sound good but generally do great harm to those they're supposed to help.

It often works that way with extending unemployment compensation benefits as well.

And student loans. And in government contracts requiring higher than market based pay to protect the unions. And when harming consumers by protecting Florida sugar cane operations and Iowa ethanol operations.

Yes, our government does a lot of things that harm us, albeit unintentionally.

But they make for good sound bites when the programs are announced.

The idea that government is  on the job protecting our otherwise helpless young people from greedy and ill intentioned business leaders is a complete crock, but it sells!

Accordingly, short term politics continuously prevails over long term common sense and empirical evidence to the contrary. Even when it harms our young people, our economy and society as a whole.

I could go on, but I won't. Politics sucks.

Thanks. Bob.

More on the Unemployment Numbers ... Eight More Years and Twice as Fast Economic Growth are Required to get Unemployment Rate Back to "Normal"

Jobs market is treading water, and that's not bad says the following about July's unemployment report:

"Treading water doesn’t get you very far, but it does prevent you from going under.

The U.S. economy continued to make very slow progress in July, according to the latest read on the jobs market from the government’s Bureau of Labor Statistics. Read the full BLS report.

A total of 163,000 net new jobs were added in July, while the unemployment rate edged a tenth higher to 8.3%, the BLS estimated. Read our full news coverage of “July jobs data show some improvement in hiring.”

It was a mixed report, with positives mostly outweighing the negatives. But in a climate that fears the worst, a mixed report is encouraging.

Month-by-month movements in these data can be volatile and misleading, and certainly aren’t anything one should consider very seriously when planning for the future. Seasonal adjustments, in particular, have been disrupted this year by both weather and company decisions about when to hire or retool factories.

When viewed over a slightly longer horizon, a more useful picture emerges.

Over the past six months, business establishment have created an average of 141,000 jobs a month, more than enough to absorb new jobseekers, but not nearly enough to absorb all those millions who’ve been without work for months if not years. Treading water.

Over the past six months, the unemployment rate is unchanged at 8.3%, with employment rising just about as fast as the labor force has. Treading water.

Over the past six months, average weekly paychecks have risen at a 2.1% annual rate, just a touch higher than prices have risen. Treading water.

Over the past six months, the number of hours worked in the economy has risen at a 1.5% annual rate, enough to keep the economy growing at a slow pace. Treading water.

Treading water isn’t good enough, but at least we haven’t gone under."

My Take

If we can only tread water, eventually we'll drown.

If we have roughly 15 million people in aggregate who are (1) "officially" unemployed, (2) underemployed (working part-time or discouraged), or (3) who have prematurely withdrawn from the work force in recent years, and if the new entrants into the labor force increase by ~150,000 each month, we can do the math as to how long it would take to get the unemployment rate down to what we used to view as normal. That is, 5% or so.

My math says roughly 100 months or more than eight years, and that's not a slam dunk by any means.

How's 2020 sound?

But there's a caveat that comes even with the 2020 guesstimate. Only if we're somehow able to increase monthly jobs by 300,000 instead of the current average monthly rate of 150,000 or less, is the 2020 estimate credible. That's an approximate double from today's numbers.

Thus, it would take 100 more months to employ the 15 million  people now out-of-work, underemployed or those who have prematurely "retired." The other 15 million will be the new labor force entrants over that time period.

While the above guesstimate is admittedly not accurate (what estimates are?), at least it provides an indication of the severity of our serious economic issues and how long it will take to overcome them, assuming we ever get serious about doing just that.

Finally, to get back to "normal" we'll need something closer to 4% real GDP growth instead of the less than 2% we're currently experiencing.

That will happen only as a result of economic growth enhancing actions taken by the evil and greedy fat cats located in the private sector of our economy. And it will require the approval of evil and non-Sierra Club approved things like building the Keystone pipeline project as well as drilling for more oil, natural gas and so forth.

We're not on that track today. Not even close.

Meanwhile, we're supposed to be content with treading water. Until we drown, I guess.

Thanks. Bob.

Breaking News ... July Employment Numbers Suck ... What's New?

The unemployment rate ticked up to 8.3% in July from 8.2% in June.

The broader U-6 rate ticked up to 15% from 14.9%.

The labor force participation rate declined slightly.

Not a pretty picture.

Economy Adds 163,000 Jobs says this:

"U.S. employers stepped up hiring in July as the economy continued its uneven recovery heading into this fall's presidential election.

U.S. payrolls increased by a seasonally adjusted 163,000 jobs last month, the Labor Department said Friday, but the unemployment rate, obtained by a separate survey of U.S. households, ticked up one-tenth of a percent to 8.3%.

Economists surveyed by Dow Jones Newswires expected a gain of 95,000 in payrolls and an 8.2% jobless rate.

The latest payroll numbers are encouraging after three months of weak job creation, but the figures still aren't enough to lower the unemployment rate, and hiring remains well below the pace set at the start of the year.

Republicans and Democrats are likely to seize on Friday's numbers—they offer the strongest hiring as well as the highest unemployment rate since February. . . .

June and May payroll numbers were revised with only a small net effect—June payrolls rose 64,000 compared with the initially reported 80,000, and May was up 87,000 versus an earlier estimate of 77,000.

Other recent data have pointed to a soft patch—personal spending stalled while factory orders fell in June. Both consumers and businesses appear cautious while the outlook remains unsettled.

Federal Reserve officials, at a meeting this week, held off on any new action to help the economy. But the central bank now appears poised to launch a new round of stimulus should the recovery remain weak. . . .

The Fed's policy makers next meet formally on Sept. 12 and 13. They will have an additional jobs report to scrutinize, as well as other economic data, before deciding whether to launch another major stimulus program.

The Labor Department Friday said private companies accounted for all of the growth in July payrolls, adding 172,000 jobs during the month. Governments, meanwhile, shed 9,000 positions. The federal work force shrank by 2,000.

In the private sector, professional and business services added 49,000 jobs, led by temporary help and computer systems design.

Manufacturing, a bright spot in an otherwise tepid recovery, added 25,000 jobs. The pace of factory hiring has tailed off markedly since the start of the year.

And the health-care industry added 12,000 positions. . . .

Average earnings edged up by two cents to $23.52 an hour, while the average workweek was unchanged at 34.5 hours.

A broader measure of unemployment—which includes job seekers as well as those in part-time jobs—rose to 15.0% in July from 14.9% the previous month.

Summary

We'll have more on this later as more details become available and are reviewed and analyzed.

Thanks. Bob.

Michael Phelps ... "You Didn't Build That"

Phelps Beats Lochte in 200-Meter Medley has this to say in part:

 

American Michael Phelps won the Men's 200 meter Individual Medley on Thursday.

LONDON—American swimmer Michael Phelps beat teammate Ryan Lochte in the 200-meter medley Thursday night, tying at one victory apiece an epic Olympic rivalry that pitted two of the best swimmers of all time.

Thursday's was the second and final race between Phelps and Lochte at these Games and probably their last race ever against each other. Phelps said he would retire from competitive swimming after the Games.

The gold medal in the 200-meter medley made Phelps the first male swimmer to three-peat in any swimming event and pushed his already world-leading Olympic career record to 20 medals. With his silver in the race, Lochte's career total of 11 medals now trails only Phelps among American male Olympians."

The Life of the Party adds this tongue-in-cheek twist about Mr. Phelps in an editorial about President Obama's now famous statement about roads, bridges and such:

"From a friend watching the Olympics: "How about that Michael Phelps? But let's remember he didn't win all those medals, someone else did. After all, he and I swam in public pools, built by state employees using tax dollars. He got training from the USOC, and ate food grown by the Department of Agriculture. He should play fair and share his medals with people like me, who can barely keep my head above water, let alone swim."

The note was merry and ironic. And as the games progress, we'll be hearing a lot more of this kind of thing, because President Obama's comment—"You didn't build that"—is the political gift that keeps on giving.

They are now the most famous words he has said in his presidency. And oh, how he wishes they weren't."

Summing Up

That about says it all.

Except for this.

Congratulations to Michael Phelps.

He is "The Greatest."

Thanks. Bob.

Facebook Has Lots of Competition on the Horizon

Facebook's stock price is deteriorating by the day, if not the hour. Some people may be inclined to jump in and buy now, believing the worst is behind for the share price. That may not be a good bet to make, and here's why.

Google attacking Facebook's home turf is subtitled 'Social-advertising market will be crowded:'

"Google Inc.’s acquisition of social-media marketing start-up Wildfire Interactive earlier this week highlights a major flaw in the thinking of Facebook Inc. bulls.

That thinking assumes the No. 1 social network will have plenty of time and a clear road to figure out how to profit from its huge base of users. Once Chief Executive Mark Zuckerberg and company do that, the thinking goes, it will just take a couple of years before Facebook grows into its pricey valuation.

Yet Google’s deal for Wildfire — whose software helps businesses and individuals run effective marketing campaigns on social-media sites — shows that Facebook’s competitive landscape is far from static.

In fact, Google is the third large company in as many months to attack Facebook on its social turf.

Last month, Salesforce.com Inc. agreed to acquire Buddy Media, Wildfire’s slightly larger rival, for $689 million. In May, Oracle Corp. snapped up Vitrue, another social-media marketing start-up, for $300 million.

Taken together, Oracle, Salesforce and now Google — which reportedly paid $350 million for Wildfire — now have invested more than $1.3 billion to acquire software and expertise targeted at the advertising market for social media.

This tells me that the obstacles in Facebook’s path to success are not only internal ones relating to management execution. The fight for social-media ad dollars is going to be a bare-knuckle brawl among companies with deep pockets. . . .

Right now, social-media marketing consists mainly of contests, coupon-like promotions and similar campaigns. The secret sauce for Wildfire . . . is its ability to create what is essentially a custom application for every client.

Retailers text to reach youngsters

The start-up says it has 16,000 customers, including more than half the top brands in the Fortune 50 — among them giant consumer companies such as AT&T Inc. and Sony Corp. Read a profile of Wildfire Interactive.

This type of marketing is still in its infancy, but as it grows more sophisticated, these campaigns all will be targeted based on the behavior of social-media users and the personal data contained in their profiles (just as search advertising is now targeted at keywords typed into search requests).

That’s an adjacent market for Google, which is why its acquisition of Wildfire seems like a good strategy. The moves by Salesforce.com, the pioneer of online customer-tracking software, and Oracle, the database giant that’s now attacking Salesforce in that market, are a bit more of a stretch. . . .

Danger of a walled garden

It’s easy to think that Facebook has firm control of this landscape, thanks to its 900 million global users. If Google wants to target them with ads, Facebook could try to block the move or charge rivals for access to its valuable user data.

Facebook just set up its own online exchange to make it easier for advertisers to target consumers, by accessing what the company calls a user’s “social graph.” This demographic and online-behavioral data directs which Facebook users see the so-called sponsored stories and other social ads that Facebook has begun rolling out.

Yet keeping that ad exchange sealed off as a walled garden may be harder than it seems, for two reasons.

First, Facebook isn’t the only social-media site in a world that also includes Twitter, LinkedIn Corp. , Google’s own entry and newer sites such as Instagram and Pinterest. Zuckerberg knows this, which is why he spent $1 billion on Instagram, even though the service has just a tiny fraction of Facebook’s user count.

Second, Facebook’s earnings report last week made clear that its most active users are the roughly 500 million or so who access the social network every day via a mobile device. Those are the users that will be most valuable to online advertisers and marketers.

They’re also the ones Facebook has the least control over, because unlike Google — or Apple Inc.   — it makes neither the hardware nor an operating system for the smartphones or tablets that consumers use to access Facebook’s mobile app.

As I’ve written before, mobile advertising also is much less lucrative than selling ads viewed on desktops or laptops. Read previous column, “Where the fat mobile margins are.”

No one knows exactly how all this will play out, but I think it’s likely that large corporate advertisers are going to want exposure to more social-media users than just those on Facebook. . . .

Facebook is no plodding giant. The company has shown itself to be nimble when developing and improving its software. All that self-reported data in user profiles make its social graph a gold mine for advertisers.

Make no mistake, Facebook has positioned itself to be the biggest player in the market for social-based advertising. But with deep-pocketed rivals gunning for it, no one should assume the top social network will have that market to itself."

Summing Up

Social media is a rapidly and constantly changing market. Accordingly, the long term winners and losers haven't yet been clearly defined. That will take several more years.

As the market expands and customers register their "votes," some social media companies will become stronger, some weaker and some will exit. We just don't know which ones.

With respect to investing, we have zero way of knowing now how profitable Facebook will be in the future or how large its revenue base will be. We don't even have a clue as to how large the relevant market size will be.

Accordingly, I don't intend to buy Facebook stock but plan to sit back and enjoy the industry's competitive struggle from afar.

While there admittedly are no guarantees with any investments, to me it doesn't make sense for individual investors to try to pick the ultimate winners and losers of this probably brutally competitive social-media advertising game.

The customers and advertisers will decide all that sometime down the road. I prefer the spectator route and will be watching the action.

Thanks. Bob.

Global Demand is Lousy ... Manufacturing Cutbacks ... Undergoing a Vicious Downward Spiral

Global demand is weakening. In substantial part that's attributable to the bubble bursting in the U.S. economy a few years ago due to excessive debt accumulated during the bubble blowing days.

We've discussed this debt deflation scenario previously, so we won't go into detail again in this posting. That said, you can bing or google Irving Fisher and "debt deflation" or if you prefer, Hyman Minsky and "The Financial Instability Hypothesis." They each describe accurately how the economic fiasco of the past few years occurred and why, and they did so decades ago.

In any case, consumers are tapped, households are tapped, mortgages are under water, wealth is depleted and, well, you know the story.

Manufacturing and the vicious spiral downward is the subject of Factory flu is global contagion:

"Across the world, production lines are shutting down and factory workers’ hours are being cut. A dearth of demand has fallen back on goods producers, suggesting the global slowdown will not turn around soon.

Wednesday brought news that factory activity either downshifted significantly or outright contracted in July. The euro-zone factory recession worsened last month. China posted its weakest official manufacturing reading since November. Readings from Australia and the U.K. were the lowest in at least three years. The Institute for Supply Management said the U.S. factory sector contracted for a second straight month.

The culprit for manufacturers is falling demand.

Germany, a factory powerhouse, reported machinery orders fell for a ninth consecutive month. In Brazil, the orders index dropped for the fourth month in a row. In the U.S., new orders dropped for a second consecutive month.

The problem is that falling demand feeds upon itself. Concerns about the euro-zone debt crisis and China’s past tightening action to slow inflation have led consumers and businesses around the world to cut their spending. Less global demand leaves less work for global manufacturers who, in turn, order fewer supplies and commodities from other producers. . . .

The weak state of factories is boosting expectations of central bank action. . . .

The problem for the U.S., at least, is that any move by the Fed may do little do boost demand directly.

The rise in stock prices that usually accompanies quantitative easing may help consumers and businesses feel wealthier. But unless that euphoria is followed by increases in actual sales and jobs increase, it won’t last."

Summing Up

Our world's economic problems are deep and severe.

Solving a debt deflation crisis is neither a short term nor a painless event.

It will take years and fundamental change as well. The debt driven Keynesianism as practiced by governments the past several decades is coming to an end.

That said, as long we continue to put off implementing the inevitable solutions which will necessitate an unfailing emphasis on private sector growth and government spending reductions, the return to a healthy economy and high employment will be delayed.

Tomorrow morning's unemployment number won't change that. For that matter, neither will talk about increasing taxes on only the fat cats. And putting off finding solutions to our public sector retirement benefits issues won't help anything either. Nor will striking manufacturing employees yearning for a return to the "good old days" achieve anything other than a pyrrhic victory, if that, in the end. They may not even have jobs.

Here's the real message behind the global manufacturing cutbacks. Factories will close. The only question is which ones. In the U.S. and even in socialist  France where President Hollande is attacking Peuguot leaders for trying to run the French auto maker in the best way they can.

Things are tough worldwide and pretending otherwise is an act of foolishness --- on everybody's part.

Thanks. Bob.

Facebook and the California Budget Deficit

 Facebook shares are down another ~4% today after a similar drop yesterday.  They're down 50% from a few weeks ago.

But does the price of Facebook's shares matter? And if so, to whom?

For that matter, do share prices affect government finances?

Well, yes, in the case of Facebook, these things do matter. In fact, they matter a great deal to California politicians, legislators, taxpayers, public employees and citizens.

As Facebook sinks, so do California's budget assumptions puts it this way:

"With Facebook shares trading at  all-time lows, investors in the busted IPO are gnashing their teeth.

But they’re not the only ones.

California state officials had been counting on a big boost to state revenues from the social networking company FB -3.83% .

California Governor Jerry Brown’s office put the number as high as $1.9 billion, assuming that Facebook shares are trading around $35 later this year when restricted stock unit lockups end.

Now however, with Facebook barely above $20, those assumptions are very much in doubt.

And as the Legislative Analyst’s Office told the Sacramento Bee “if the company’s stock price remains depressed, hundreds of millions of income tax dollars assumed in the 2012-13 state budget plan are at risk.”

Summing Up

I guess the share price does matter, and a lot---even to millions of people who have no idea what the share price is.

Thanks. Bob.

Youth Unemployment ... Jobs Needed ... Sustainable Economic Growth Required

Tomorrow's unemployment numbers for July will be released at 8:30 am Eastern time. The results are not expected to be strong or significantly different than the weak reports of recent months.

If the official headline rate of 8.2% ticks up or down, that will be the lead story for the national TV news Friday evening and Saturday's morning newspapers as well. But it won't mean much, if anything. Times are tough and will remain that way for some time.

What probably won't get much news coverage is the (1) change in the labor force participation rate, (2) the U-6 unemployment rate and (3) the youth unemployment rate, respectively. That's too bad, because each of these three numbers is actually more telling than the official unemployment rate.

Hope and Change 2.0 is an editorial about youth unemployment and the upcoming elections:

"One of the most quoted, unquestioned maxims in life goes like this: If you're not liberal when you're young, you have no heart. If you're not conservative when you're older, you have no brain. What if this time, it's different?

In 2008, Barack Obama brought three new things to American politics: himself; hope and change; and the youth vote. Four years later, the three are cohabiting uneasily.

The Wall Street Journal-NBC poll notes that enthusiasm for the election among voters aged 18 to 34 is sloping downward, from above 60% in 2008 when Mr. Obama was new to below 50% now that he is known.

Whatever change the youth vote had hoped for then, the most compelling delta in their world since is the rate of nonemployment for those aged 18 to 24, which has risen to nearly 16%. A study compiled recently by the Associated Press, based on academic surveys, said the combined rate of youth unemployment and underemployment was an astounding 50%.

Which brings us to a buzz thought more powerful than the alleged correlation between age and ideology. For better or worse, anything established in our time is vulnerable to being overturned by a technology or idea that is then called "disruptive." Barack Obama is president today because he harnessed the power of disruption.

Starting in January 2007, when the senator began his 23-month trek to victory, a team of tech-savvy Obama campaign workers perfected the techniques of Internet fundraising and grass-roots organizing used on a smaller scale by Howard Dean's 2004 presidential campaign. . . .

The 2.0 version of barackobama.com has been upgraded into a site called "Dashboard." It's described as "a customized platform with the best tools in online organizing." Mr. Obama himself has cited the Internet's natural fit for "grass roots organizing." This notion of the Web as an engine of political organizing fits the Web's earlier image as history's greatest freebie. Push buttons and great things happen, at little or no cost.

That was true, but in four years it has become clear that what the Web and all the technologies in its orbit have become for most people is history's most powerful engine of capitalism.

The reality is Apple. Apple is a capitalist cult. No doubt the iPhone, iPad (introduced in 2010) and MacBook Air are mystical devices, but obtaining them requires letting an Apple store employee swipe many hundreds of dollars from your credit card. Most of the magic apps designed for these platforms are ultimately about . . . buying more stuff: restaurant meals, clothes, clubs, travel, tickets, video-streaming subscriptions. It never stops. Not to mention the omnipresent mobile data plan.

It's all a wonder, but it has imposed on college students and the youth vote a reality that was easier to deny in olden times: To "access" this wonderful world, you've gotta have a job. And a pretty good one.

Everything about this world is out of sync with the one conjured by Barack Obama as he campaigns. He wails daily about "tax cuts for the wealthiest." The wealthiest? Is he referring to the young programming dudes and marketing dudesses working for Google, Zynga, Craigslist, Groupon, Facebook, Yelp and all that? These people are creating the greatest galaxy of capitalist choice that's ever existed. And what decides if you're living inside or outside the galaxy is cash flow, a job.

The Obama target audience this time includes a cohort of voters who were 14-year-old videogamers when he arrived; the rest of the youth vote is four years deeper into the unexpected discoveries of real life. What are they hearing from the president? Two things: his offer of student loans at below-market rates and, incredibly, the ObamaCare guarantee that lets them live at home on their parents' health-insurance until age 26. It's a great deal, if you want to live in Italy.

Inside one presidential term, Barack Obama's old world of hope and change has been disrupted. Yes, there was a time one could pretend economic reality arrived in some imagined future, not unlike the Social Security or Medicare illusion. "Someone" will pay for it. "Someone" will hire me when I decide to work, after I've made the transition from liberal to whatever comes after that. That's the way the youth vote thought in the Sixties. Hope and change was this generation's Woodstock."

Summing Up

College is expensive, jobs are scarce  and young people wishing to enter the work force are having a difficult time finding employment, let alone what they consider a "good job."

And there isn't much "hope" for much "change" anytime soon.

The president wants to raise taxes on the fat cats and fails to mention that that will address only a miniscule 5% of the ongoing trillion dollar annual fiscal deficits.

He leaves We the People, including the young, to wonder what, if anything, he would propose to do about the other 95% of the annual trillion dollar shortfall which must be addressed if economic and jobs growth are going to pick up.

Oh well, we have an election coming up, so I guess those things can wait another few years.

Or can they?

Thanks. Bob.

Breaking News ...San Bernadino Files for Bankruptcy

San Bernadino, Calif., files Chapter 9: report:

"NEW YORK (MarketWatch) -- The city of San Bernardino, Calif., on Wednesday filed a petition to reorganize under Chapter 9 of federal bankruptcy law, Bloomberg News reported. The city -- located 60 miles east of Los Angeles and home to more than 200,000 people -- is facing a $46 million budget deficit, Bloomberg reported. San Bernardino is the third California city to file for municipal bankruptcy proceedings in a bit more than a month. The cities are particularly facing higher pension costs while revenue from property taxes and sales taxes wanes, the news service reported. San Bernardino has cut its workforce 20% in the past four years, the news service reported. The city filed the petition in U.S. Bankruptcy Court in Riverside, Calif., Bloomberg reported."

Summing Up

Three down and more to go in California.

It's a sick situation with no relief in sight.

The money is gone, but the debts and promised public employee benefits remain.

Now the bankruptcy court will decide what to do about this mess.

Stay tuned.

Thanks. Bob.

We the People are Gaining ... But Still Have A Very Long Way to Go

Ted Cruz of Texas is the Republican nominee for the U.S. Senate this fall.

My view is his primary victory is a big deal and reflective of the power of the We the People movement to take back our country. Long journeys start with small steps.

The Meaning of Cruz tells the tale:

"For all of the brawling between Republicans and Democrats, sometimes the most consequential elections are within each party. That's the case with the victory on Tuesday by 41-year-old Ted Cruz in the Texas Republican Senate primary, which shows that the reform wing of the GOP is continuing to expand.

Mr. Cruz blew away Lt. Governor David Dewhurst, who began as the heavy favorite, had his own fortune to draw on and was backed by the GOP establishment, including Governor Rick Perry. Mr. Cruz, who won by 14 points, had support from the Club for Growth, FreedomWorks and other reform groups as he tapped into grass-roots unhappiness with status quo Republicans.

This marks the third Senate upset this year for conservatives running against party favorites. In Indiana, state treasurer Richard Mourdock defeated six-term incumbent Dick Lugar, and in Nebraska state Senator Debra "Deb" Fischer beat two far better known candidates. If they win in November, as they are favored to do, the trio will buttress the ranks of the GOP's reform caucus that includes such 2010 victors as Pat Toomey of Pennsylvania, Rand Paul of Kentucky, Mike Lee of Utah, and Ron Johnson in Wisconsin.

Mr. Cruz attacked Mr. Dewhurst for being in Austin too long and for letting the budget in Texas grow too much. The jab that hurt most was reminding voters that in 2005 Mr. Dewhurst floated the idea of a wage tax in Texas, which looked to voters suspiciously like a back-door income tax. The plan died, and Mr. Dewhurst denied paternity, but the charge stuck.

Media grandees who are volunteering Republicans to vote for a tax increase, please take note. GOP voters don't agree.

Ted Cruz during his victory speech on Wednesday.

Mr. Cruz, a son of a Cuban immigrant father, is both a populist and conservative intellectual. Texans showed enormous tolerance in not holding his Princeton-Harvard Law education against him, perhaps because he is a staunch supporter of what he calls "the forgotten Ninth and Tenth Amendments" of the Constitution.

He clerked for Chief Justice William Rehnquist and former appellate judge J. Michael Luttig, and as Texas Solicitor General he successfully defended the state before the High Court in Medellin v. Texas (2008), after the International Court of Justice tried to override Texas's justice system. He wants a flat tax and would repeal every last comma of ObamaCare.

Mr. Cruz's triumph also shows the degree to which the GOP now has a growing number of nonwhite rising stars. They include Florida Senator Marco Rubio, whose family emigrated from Cuba, Indian-American Governors Bobby Jindal (Louisiana) and Nikki Haley (South Carolina), Governors of Latino descent Susana Martinez (New Mexico) and Brian Sandoval (Nevada), and black Congressmen Tim Scott (South Carolina) and Allen West of Florida. The conventional media wisdom is that the GOP is doomed to minority status as whites become a smaller share of voters. Not so fast.

As they grow in numbers and clout, the GOP's reformers will have to find a way to stay true to their free-market principles while being pragmatic enough to build coalitions to solve Washington's enormous problems. The promising news is that this is not your father's GOP, or even your older brother's."

Summing Up

Change is in the wind.

The Depublicans and Remocrats are being challenged by We the People.

Limited government isn't dead yet.

It's going to be long struggle, but in the end we'll win.

Whenever that is.

Thanks. Bob.

The Facebook Stock's Story ... Buy and Hold Investing ... Stick with Strong Companies with a Long and Successful Track Record ... Be a Boring Investor and End up a Happy One

There's lots of chatter these days about buy and hold investing being a thing of the past. My view is different, and here is some solid evidence to support it.

The Facebook Flip: Funds Exit Early is revealing for what it says about mutual funds:

"It wasn't supposed to end like this.

Fidelity Investments was an early buyer of Facebook Inc. In the spring of 2011, two dozen of its funds bought more than $200 million worth of the company's private stock. Then, when Facebook went public in May, many of those funds and other Fidelity funds loaded up on publicly traded shares.

Now, many of the giant Boston-based company's fund managers are shrinking their stakes.

Twenty-one Fidelity funds sold more than 1.9 million public Facebook shares combined in June, with 16 of them selling more than a quarter of their stakes in the company, according to investment-research firm Morningstar Inc. Private shares can't be traded until later this year.

It is unclear whether the Fidelity funds made or lost money on the Facebook shares, but the stock has languished below its $38 offering price on May 18. In June, it traded between $25.52 and $33.45; shares hit an all-time low of $20.84 before closing at $20.88 on Wednesday.

The moves represent an about-face for Fidelity, one of the first institutional investors to take a significant stake in Facebook and the country's third-largest mutual-fund company by assets. Fidelity's funds owned the shares for at most six weeks—much shorter than the median holding period of about 22 months for U.S. stock funds, according to Morningstar. . . .

Mutual-fund analysts say it is uncommon for mutual funds to flip shares so quickly.

"Investors expect that what's in the portfolio will be in there for more than a month," said Todd Rosenbluth, a mutual-fund analyst at S&P Capital IQ. "Typically, people who are investing in a mutual fund believe that their fund is investing with a long-term horizon." . . .

Fidelity wasn't the only company with funds that flipped Facebook shares. Turner Investment Partners' Large Growth fund, which has a typical holding period of about seven months, sold 28% of its shares within weeks of buying them. OppenheimerFunds Inc.'s Global Allocation fund in June sold more than 10,000 shares, or 10% of its holdings.

"Some of these funds clearly thought it was going to be a hot deal that they could flip" before the price dropped, said Michael Lipper, president of investment-advisory firm and mutual-fund consultant Lipper Advisory Services. . . ."

 

Now let's look at the broader meaning for individual investors and buy-and-hold investing.

In Picking Facebook Shares, Repeating the Mistakes of the Past says this:

"Since the implosion of the dot-com bubble in 2000, retail investors have been rightfully wary of the stock market. Facebook was going to change it all, bringing the ordinary investor back.

Instead, Facebook was a massacre for retail investors, highlighting yet again why stock picking is a loser’s game. The hype around Facebook was enormous as retail investors salivated at the chance to buy what they hoped would be the next Apple. . . .

The Facebook example is one more confirmation of studies that have shown that, on average, individual investors lose out consistently when they buy and trade individual stocks. They’re better off investing in passive index funds.

Professors Brad M. Barber and Terrance Odean recently released a paper surveying the evidence. Studies of individual investor trading found that “many investors earn poor returns even before costs.” These investors trade badly and tend to lose more money than they would using a simple buy-and-hold strategy in passive funds that match indexes like the Standard & Poor’s 500-stock index.

How big is the loss? The same authors in another study of 65,000 investors found that the 20 percent who traded most actively earned 7 percentage points a year less than the buy-and-hold investors, the 20 percent who traded least actively. For the individual investor, that can add up to hundreds of thousands of dollars over a lifetime.

This is not surprising. Even mutual fund managers have trouble beating the market. Last year, according to S.& P. Indices, 84 percent of actively managed funds did not beat the Standard & Poor’s index representing that fund’s sector. Going back over five years, 61 percent of funds underperformed. Even so, most mutual funds beat individual investors who try to do it themselves.

If the professionals have such problems, individual investors don’t have a chance. They are not as knowledgeable and not as disciplined. Study after study has found that individual investors have a disposition effect — that is, they tend to sell winners too soon and hold on to the losers by refusing to recognize their failure.

Individual investors are also heavily influenced by their mind-set and their environment.

For one, they are strongly influenced by media reports and buy stocks that are promoted. And, yes, there are studies of Jim Cramer’s show, “Mad Money,” and this effect. One recent study found that the higher the viewership of the show, the bigger the market reaction to stock recommendations. The authors also found that Mr. Cramer’s buy recommendations had more influence than sell recommendations, reflecting people’s desire to bet on winners. But didn’t we know that already from the tech bubble? More than a decade ago, stocks of companies with little or no profits were wildly hyped. It all ended badly, with retail investors losing the most. . . .

The Facebook affair was but a sad repeat.

These inherent flaws put us off on the wrong foot when we pick and trade stocks. We don’t diversify enough, don’t do enough research and tend to sell on emotion rather than logic.

If this weren’t hindrance enough for even the most educated individual investor, the Facebook debacle shows that the market is rapidly changing in ways to make it even harder for individual investors to profit. . . .

Beyond all of these barriers, individual investors are also faced with a stock market that has remained stagnant for the last decade.

So what can be done?

One thing to consider is whether to further educate individual investors on the problems of investing on their own. The studies show that in general, investors are better off in passively managed index funds. But even here, investors tend to defeat themselves. At least one study has found that investors who engage in passive exchange-traded funds eat away the gains in performance by using this as an excuse to trade more. The problem again occurs when investors try to trade on their own. . . .

But the bottom line is that more needs to be done to educate and help individual investors. It should become common knowledge that investing in an individual stock and trading may be fun, but it may also be dangerous to their wealth."

My Take

Invest in strong and highly profitable companies with a long and well established track record. When you buy, you should intend to stay the course, and not to make a quick buck trading. That's the difference between investing and gambling.

Don't get caught up in the emotion of hot stocks, new companies or IPOs.

Owning shares of strong companies is a winner over time as long as we don't get cute or greedy.

Stick with the basics.

Facebook has a whole lot of valuable lessons to teach us individual investors about how not to invest.

Let's learn that lesson vicariously.

Thanks. Bob.

What Can the Fed Do, if Anything, to Help the Economy?

The Fed just released its assessment that the U.S. economy continues to struggle and that the central bankers are at the ready to help with economic growth.

Fed Gives Stronger Signals of Action says this in part:

"The U.S. Federal Reserve signaled more strongly it will take new steps as needed to boost the economy, but held back from immediately starting a new round of bond buying or taking other actions on Wednesday.

Fed officials flagged intensifying concerns over the economic outlook and gave a stronger indication they are moving closer to taking further action as they continue to monitor the fragile recovery. A string of disappointing jobs reports, a sharp slowdown in second-quarter growth and a softening in inflation have fanned expectations that the Fed may step in later this year with new stimulus for the economy.

"The committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability," the central bank said in a statement issued at the end of the Federal Open Market Committee's two-day policy meeting.

Fed officials have already downgraded their economic forecasts this year and they sounded fresh notes of concern in Wednesday's statement.

The central bank noted that economic activity had "decelerated somewhat over the first half of this year." That's a shift from their assessment in June that the economy had been expanding moderately this year."

Now that we know the Fed wants to help, let's ask ourselves just what they can do.

The Music Men is a takeoff on the old movie musical  "The Music Man" about a con man who goes to a small Iowa town named River City, scams the townsfolk into parting with their money and then skips town with the cash.

Here's part of the editorial:

"As the financial world breathlessly awaits word this week from the Federal Reserve and European Central Bank, we can't help but think of "The Music Man." In that classic if now dated musical, the residents of an Iowa town are gulled by a huckster selling band equipment. They desperately want to believe in his power to solve their town's delinquency problems, until they discover Harold Hill can't play a note.

Central bankers are today's music men, the maestros we desperately want to believe can rescue the world economy by playing one more monetary tune. Buy more bonds and lift the stock market! cry the boys at Pimco and Goldman. Pay less for bank reserves! shout the Princeton professors. Promise to keep rates at near-zero until 2015—or 2016 or 2017—beg the politicians.

And so Mario Draghi and Ben Bernanke will try to sell us 76 more trombones. Sooner or later we'll discover that their money illusion can't save an economy from its more fundamental problems, and that they may even be interfering with the faster growth they want.

In the case of the Fed, the evidence is already clear that Mr. Bernanke's extraordinary ministrations are producing less and less bang for the buck. . . . QE1, or the first bout of bond-buying, took place at the trough of recession and no doubt contributed to the recovery. With the velocity of money falling amid the panic, monetary policy had a clear role to play.

In most business cycles, the Fed then retreats from its monetary easing as the economy recovers. In this case, even as growth returned to an annual rate of 2.4% in 2010, the Fed kept pouring it on.

Yet each successive intervention has yielded diminishing economic returns. QE2, launched in September 2010, did lift stock market prices for several months. But it also lifted other asset prices, such as oil and commodities, while sending dollar liquidity into emerging markets that produced property and inflation spikes.

The commodity bubble raised the cost of food and energy and dampened the very growth that the Fed was hoping to spur. Countries on the periphery of the dollar bloc had to tighten their monetary policy.

Far from accelerating, growth slowed within the year. . . .


Meanwhile, the costs of all this have been considerable, and are under-appreciated. Near-zero interest rates have punished savers and retirees. The inflation breakout that some predicted hasn't materialized, but the commodity bubble has reduced the growth of real middle-class incomes. With its bond buying, the Fed has supplanted the private market as a price setter and made the long bond useless as a price signal.

Above all, near-zero interest rates have disguised the cost of the government's fiscal mismanagement. By keeping the Treasury's borrowing costs artificially low, the Fed has reduced the urgency to cut spending and guaranteed an explosion in financing costs when interest rates do inevitably rise. Good luck to the future President who has to re-finance $1 trillion to $2 trillion in debt issuance at 6%.

To put it another way, far from contributing to growth, the Fed has become part of the problem. . . .  The Fed's policies have benefited government at the expense of the private economy. No wonder growth is lackluster.

This is not to suggest that Mr. Bernanke and his fellow music men are deliberately trying to con the public. They really are trying to conjure faster growth. The fundamental mistake is everyone else's for putting so much faith in the magical powers of central bankers. The residents of River City were fooled by Harold Hill because they wanted to be."

Summing Up

The Fed can't solve our economic or fiscal problems.

Only tax and fiscal policy can do that, coupled with private sector initiatives which will create economic growth.

Unfortunately, too few of We the People are aware of this simple truth, at least at this time.

As time goes on, however, the conclusion will become inescapable. Increasing the money supply doesn't produce anything except more money. No thing.

The Fed, unlike con man Harold Hill in "The Music Man," isn't trying to fleece anyone. They just are playing the fiddle that they have to play. It's strictly noise to the real economy.

Unless and until We the People get that and cause our feckless politicians to address taxes and government spending and private sector initiatives (Keystone pipeline and other energy development, for example), the economy will remain in a stall speed mode.

And as our U.S. economy continues to muddle through, the rest of the world's economies will suffer even more.  We in the U.S. are the consumer spending engine that must perform for one simple fact. As the world's largest economy by far, U.S. consumer spending accounts for two thirds of our GDP.

When our consumer spending suffers, as now, the rest of the world's economies suffer even more. That's because they don't have enough export business to ship to us.

High unemployment is the rule almost  everywhere these days, and our Fed is helpless to do much of anything about it. It's out of bullets.

We're in a worldwide slowdown, if not recession, and one in which Ben Bernanke and the other music men at the Fed playing their 76 trombones can't bring to an end.

Thanks. Bob.

Breaking News ... Fed Stands Pat for Now

Fed downgrades economy view, doesn't alter policy  has the breaking news story:

"The Federal Reserve on Wednesday downgraded its view on the economy but otherwise didn't make make any changes to its key interest rate, low-rate pledge, or asset-buying plans. The Federal Open Market Committee now says "economic activity decelerated somewhat over the first half of the year," vs. a prior description of saying the "economy has been expanding moderately." The decision not to extend its low-rate pledge beyond the current "late 2014" came as a surprise. The Fed kept its federal funds rate target between 0% and 0.25% and said it "will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability." The vote was 11-1, with Richmond Fed President Jeffrey Lacker preferring to omit the time period over which economic conditions are likely to warrant an exceptionally low rate."

More to come.

Thanks. Bob.

States are Suffering Severe "Underemployment" Issues with No End in Sight

Unemployment is 8.2%. At least that's the government's story.  What's the real one?

States' Hidden Jobless Woes tells it like it really is:

"California and Nevada are struggling with some of the nation's highest rates of workers who are looking for jobs or not putting in as many hours as they would like, new government data show.

The ranks of these individuals aren't reflected in the overall jobless rate in the U.S. Labor Department's monthly unemployment report. That report—July's figures will be released Friday—is the best gauge of the health of the labor market. But the overall jobless rate, which now stands at 8.2%, doesn't tell the whole story.

For example, the national unemployment rate doesn't take into account people who want to work but haven't looked for a job in the previous four weeks because they figured none were available.

The national unemployment rate also doesn't account for people in part-time jobs who would prefer full-time work. To get a broader view that encompasses both groups, economists at the federal Bureau of Labor Statistics track the under-employment, or U-6, rates for states and the entire country.

According to Labor Department figures released late last week, California and Nevada are struggling not just with high unemployment, but also severe under-employment. California's average unemployment rate from July 2011 through June 2012 was 11.2%, but its broader under-employment rate was far higher, at 20.3%....

When it comes to one particular type of under-employed citizen—the part-timer who wants to work full-time—California is the worst offender nationwide. . . .

Nevada, another state hit by the housing bust, is worse off than California when it comes to general under-employment. Its average unemployment rate is 12.3%, the government says, and its under-employment rate is 22.1%—a gap of 9.8 percentage points compared with California's 9.1 percentage-point gap. The U.S., as a whole, has a 6.8 percentage-point difference between its 8.5% average unemployment rate and 15.3% underemployment rate. . . .

However, the data contain a spot of good news for the nation as a whole. The declines in many states' under-employment rates are steeper than those notched when the government tracked the data a few months ago. Particularly notable are improvements for the long-term unemployed and discouraged workers.

Still, California by itself is a huge part of the U.S. economy, accounting for about 13% of gross domestic product. The bigger picture from the most recent data reflects workers seeking jobs and hours, while many companies are too skittish to hire."

My Take

8.2% unemployment is bad enough.

However, many states have twice that rate of underemployment when involuntary part-time and discouraged workers are taken into account.

Whatever number we see Friday, it's a dismal situation which won't improve materially until the government starts encouraging private sector growth by slowing and then reducing government spending.

Vilifying the job creators and acting like complete fools in Washington won't instill a lot of confidence in either job providers or job seekers.

In turn, that will make it even harder to grow the economy and create more jobs.

When will all this "save the middle class, make the undeserving millionaires and billionaires pay their fair share" silliness stop? Soon, let's hope. But don't bet on it.

It's an election year.

Thanks. Bob.

Yesterday's Election Update

We the People and limited government scored two meaningful victories yesterday.

Ted Cruz won in Texas and no new transportation taxes won in Atlanta.

Both were political anti-business-as-usual victories.

The people are now speaking clearly. Let's hope the politicians are listening.

A Tea-Party Favorite Wins Texas  Race says this in part:

"AUSTIN, Texas—Houston lawyer Rafael "Ted" Cruz easily won a runoff election Tuesday to become the Republican U.S. Senate nominee in Texas, underscoring how tea-party activists are upending this year's GOP primary contests.

Mr. Cruz, a tea-party favorite, defeated Texas Lt. Gov. David Dewhurst, the candidate backed by most of the state GOP establishment, including Gov. Rick Perry. He led by 57% to 43%, with 96% of the state's 7,957 precincts reporting.

Mr. Cruz will hold a commanding advantage in the general election in heavily Republican Texas, which hasn't elected a Democrat to statewide office since 1994. His Democratic opponent in November will be Paul Sadler, a former state representative who defeated retired educator Grady Yarbrough in the Democratic runoff. The winner will fill the seat of retiring GOP Sen. Kay Bailey Hutchison.

Mr. Cruz's win "is the biggest victory for the tea party to date," said Tom Jensen, director of Democratic firm Public Policy Polling. A May poll by the firm showed Mr. Dewhurst with a 17-point lead, but a July 29 poll of likely GOP voters found a complete reversal, with Mr. Cruz ahead by 10 points. . . .

The Texas Republican primary was viewed nationally as a test of the strength of the tea-party movement, which played an insurgent role in 2010 congressional races and this year targeted several big-name GOP lawmakers considered insufficiently conservative, with mixed results."

The voters spoke clearly in Atlanta as well. Voters reject transportation tax says this:

"Distrustful of government and riven by differences, metro Atlanta voters on Tuesday rejected a $7.2 billion transportation plan that business leaders have called an essential bulwark against regional decline.

The defeat of the 10-year, 1 percent sales tax leaves the Atlanta region's traffic congestion problem with no visible remedy. It marks failure not only for the tax but for the first attempt ever to unify the 10-county region's disparate voters behind a plan of action.

"Let this send a message," said Debbie Dooley, a tea party leader who early on organized opposition to the T-SPLOST tax measure. "We the people, you have to earn our trust before asking for more money.""

Summing Up

It was a good day for We the People and a bad day for elitist business-as-usual government knows best politicians and bureaucrats.

Let's keep up the good work.

Thanks. Bob.