Universal Health Care = GM Solution

Mark these words.

General Motors will be owned by the Federal Government (no suprise)

Universal Health Care will be the solution government offers to create a profitable General Motors!

How to Save the Republican Party

There seems to be some debate on how to save the Republican Party. Some say we need to be more inclusive, move to the center and be more moderate. Others say we need to get back to conservative message of smaller government, lower taxes and a strong military. 

I say we need to rally around common sense. Simply do what is right based on simple principles.

Where is the common sense? Where are the people in government that are offended by the corruption of government? There are so many conflicts of interest by government officials that it is impossible to know where to begin saving our system.

When I hear a politician say, "our state needs to get our fair share of the federal largesse," I think, where are the statesmen? We sit in Sioux Falls, SD and watch as the whole nation is in the process of burning down in a firestorm of debt and destruction, and we fight for more of our nations unfunded bounty. If we don't begin to speak out, who will?

When I hear a politician say, "I sit on the powerful Appropriations Committee," I ask, where have you been as the country has spent trillions of dollars of future generations debt? Where were you when you watched Fannie Mae and Freddie Mac lower lending standards to an unreasonable level? Where were you when Wall Street was making trillions of dollars on ponzi schemes such as credit default swaps? 

You were creating your own Ponzi Scheme called Medicare and Social Security, and you didn't send one press release predicting the financial crisis. I read about press releases about all the money that is brought back to the state, but never read about how you thought the Federal Government is going bankrupt.

When I hear a politician say, "America is the richest country in the world" in order to justify the need for another government program, I look around and ask, where were you in the years leading up to the greatest economic destruction of a nation in the history of the world? Where were you calling for constraints on spending to protect posterity and the future of America?

It has been easy to be a compassionate politician the last twenty years. America has turned into a country that learned how to create an economy by taxing the labor of generations of Americans not yet born. What started with a 90 days same as cash, has turned into an infinite debt obligation with no realistic ability to pay off our debt. This has been the reason for our success. On paper, America was the richest country in the world. In reality, we are the most indebted country the world has ever seen.

Common sense tells us this isn't sustainable. But yet you still have government telling us that we need to spend more to get us out of the economic depression we are entering. 

I am not sure if the Republican Party can ever rebound, but if it has a chance, the message to adopt is simple.

America is broke and overweight. Some may suggest the way out is to eat and spend more. Common sense tells us that it is better to control our spending and eat less.

Government is controlled by people that need to get elected. Republicans have always gotten elected by promising people a chance to keep more of their own money. Democrats have always gotten elected by promising government will spend more money.

I am more concerned about saving our country than saving the Republican Party. 

The only way for America to survive is through adopting a national understanding. As Americans, we can not spend what we don't have. We must always save for a rainy day, even when it is raining. We can not expect others to pay for our own mistakes. 

An Automobile Parable

For seven years, I sold shop equipment to car dealerships. Over that span, I had an opportunity to meet hundreds, if not thousands of auto dealership owners.

Auto dealerships are quintessential American family small businesses. They often employ dozens to hundreds of employees, require millions of dollars of capital, experience ups and downs of the economy, and have witnessed severe competition over the last dozen years, not just from competitive brands, but from competing same brand dealerships. I witnessed the technological progress of the internet disrupt business models that worked for decades. I witnessed rapid growth of megadealerships, and I saw them fail.

In all of my experiences, the most interesting lesson one can learn from car dealerships is the laws of human nature in action and on display. Of particular interest is the differences in generational leadership and the amazing lessons in life discovered through understanding these differences.

As with any observation, there are limitations to extrapolation of the lessons to the larger group. But we shall begin.

To understand the plight of the auto dealerships, you have to understand that most, if not all of the auto dealerships are third or fourth generation owners, or, they are owned by people who went to business school to learn how to run a business based on financial statements, not on getting to know customers.

At the beginning of the auto industry, car dealerships were owned by real entrepreneurs. My working definition of an entrepreneur is a business owner who interacts directly with their customers on a daily basis. First generation owners were friends with their customers, and they worked hard to provide value to their customer, to get to know them, and to create a lifelong relationship with them. The most common characteristic of a first generation owner is they were people persons. They got along with their mechanics as well as their clients. All were considered family. They often worked incredibly long hours and their success came from hard work, perseverance and conservative investment strategies.

The children of first generation auto dealers had much different experiences. They were the owners son (occasionally daughter), but rarely did they work as hard as their father. Often, they were children of some privilege, not showy wealth, but wealth none the less. They most likely attended college, where they were removed from the auto business, but where they learned to manage a larger business. In essence, they were managers of the business, not entrepreneurs. They were members of the country club and these were their friends. They became more isolated from their workers, and although they still were pleasant to their employees, they were by no means friends to the mechanics. This dynamic changed the way the business was run. Numbers and bottoms line become more important than people and relationships. Although there would be nice Christmas parties, loyalty became less and less important.

The children of second generation owners lost all of the entrepreneurial instinct of their grandparents. These children were much more social than their parents, but not in a business way. They were really good at waterskiing and were more at home at the lake cabin, than understanding the increasing complexity of how a car actually worked. The privileges of life were the most important part of this persons existence. Unfortunately, the success of the business was dependent entirely on the managers that were hired, and often did not come from the owner. A quality private school education enabled them to understand how to leverage relationships with bankers in order to grow and to acquire additional dealerships, but contact with customers was not a priority and was often not possible in the leisure lifestyle of a large scale owner. All too often, the third generation led the dealership into the ground.

Why? The lesson is that for a business to be successful, you have to have the trust of everyone you come into contact. It was more likely third generation owners were more interested in selling death and disability insurance on an auto loan, than in selling the car itself. This was the way you could "earn" more money. These people talked themselves into believing these products were for the benefit of the customer. In reality, they were only in the best interest of the car dealership. In the end, one must treat people with respect, and do what is in their best interest, even when they don't know what that is. This is what makes a successful business.

The parable of the automobile industry applies to the problems facing America today. The traits that built America, hard work, perseverance, thrift, honesty and integrity, have been forgotten. Today, people look to take advantage of people first, make billions of dollars, and then donate some of their blood money to charities to help the very people they took advantage of. People look for short term gain, instead of planning for the long term. Today we punish people with the traits needed for success and reward people who don't possess them.

The structural problem with America is that too many industries are run by "third generation" leaders. People who have learned to manage a business at Wharton or Harvard, but don't know or wouldn't get along with their own customers. They vacation in places where they will not be bothered instead of at places that keeps them in touch with reality. When there are so many layers between them and the people that are buying their products, the system will ultimately fail.

And it has.

Housing Crisis-35% of all mortgages are upside down

Here are some housing statistics that every investor in banks should understand. 

Let's start with some facts.

There are roughly 77 million homes in the United States.

Of these, 55 million homes are mortgaged.

Between 16 to 20.4 million homeowners owe more money than their house is worth.

Roughly 21% of all homes in America have negative equity.

Roughly 35% of all homes with mortgages are in a negative equity position.

Banks that wrote these mortgages sold them to Wall Street or Fannie and Freddie to wrap up in mortgage backed securities. However, there is an incentive for homeowners to simply leave their homes and file bankruptcy. This has a definite impact on banks, particularly in the credit card portion of their business.

Also, everyone should realize that the Federal Government is absorbing all of these losses in order to prop up the banking sector. The total losses could equal $2-5 trillion. The economy for the last 5 years relied on consumers using their homes as cash machines. This is going to affect future growth (retraction) in the economy.

Here are some supporting articles about the state of the housing crisis here and here.

Rigging the system to protect banks

Wells Fargo posted a $3.8 billion profit in Q1 of 2009, despite needing $15 billion in TARP funds. Surprisingly, not a single major bank failed the vaunted stress tests by the Department of Treasury. 

You would think that the world has found order and peace once again.

You would be wrong.

Piecing together the Department of Treasury and Federal Reserve strategy to prevent the collapse of the financial system and protect the American taxpayer, it now seems clear the intentions of the Obama Administration. Talk up the strength of the banking system with positive news so banking stock prices will increase. As we have seen in the last month, every TARP receiving major bank saw their stock price double or triple. 

The positive news has allowed private banks to issue a total of $32 billion of common stock since the stress test results were released. 

Read here the $8.8 trillion Wells Fargo raised in it's common stock release.

It is my prediction that these fallacious earnings reports and stress tests will only create a bubble of higher stock prices, but earnings will fall by the end of the year when housing prices continue to fall and unemployment reaches double digits.

Confidence in What?

The Obama Administration has gone on a public relations tour to tout the positives in the economy. In toe, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner have been issuing positive news about the economy at a rapid pace. 

Today, the White House announced our economy is expected to grow by 3.5% by the end of the year. This, despite recent layoff announcements of 4.5 million jobs in the last 6 months and revised GDP declines by 6.6% for the last two quarters. This despite the fact that official unemployment has hit 8.5%. This despite millions of self employed construction workers are not counted in the national figures making the actual unemployment numbers around 12-15%. This despite $3 trillion dollars worth of expected losses in mortgaged value in real estate. This despite the revised government spending deficits raising to 1.89 trillion levels. This despite the fact that nearly $1 trillion of off budget spending. This despite the fact that the Federal Reserve is left buying government treasury bills because there are no other buyers for our debt.

Since the key to economic growth is confidence in the future, the Federal Government is creating confidence based on a media generated public relations campaign, not on underlying facts or supporting economic factors. The Obama Administration is fixing the problem by artificially creating confidence and spending trillions of deficit spending in the process. The Obama Administration is creating a confidence bubble that is bound to burst, just like the dot-com bubble, the housing bubble and the excessive leverage bubble.

But it won't work, and the target of this bubble is to encourage people to move the price of stocks up, so companies can issue new stock offerings in order to raise equity capital. This will not last and people should be aware.

Energy Costs

The economy is in the process of contracting by 18%. One of the industries that supposedly will bring us out of this recession is the promotion of alternative energy through the use of a carbon tax or cap and trade legislation. The purpose of this legislation is to increase the cost of energy for consumers, in order to encourage alternative energy.

Will this work? To answer this question we must understand the true cost of alternative energy.

What would the cost of energy have to be for alternative fuels to be economically viable? Unfortunately, many people don't understand economics. For something to be viable, the front end cost of installation must be paid off in a reasonable time, and the cost of financing the project plus operating expenses and a reasonable profit must equal the amount consumers are willing to pay.

Some people are pushing wind power. Aside from the fact that we would have windmills from sea to shining sea even to make a dent in our electricity usage, the cost of energy would have to nearly triple for this technology to be economically sustainable without subsidies. Can our consumers handle energy costs three times higher than current rates?

Some people think solar power. The technology isn't close to being economically sustainable. Some suggest costs of energy would have to increase four to five fold. Can our consumers handle this price hike for energy?

Others suggest battery technology will be the future. The costs are just too great.

Energy is the glue that holds an economy together. The price of energy is figured in everything we buy. While only a small percentage of our income is spent directly on gasoline and electricity, every product we buy relies on energy. Some suggest a doubling in the price of energy reduces our purchasing power by 25%. 

If this is true, a doubling of energy costs without a corresponding increase in wages will create economic chaos that $140 oil did last year. Many people think the housing bubble was the sole cause of the economic crisis we are experiencing, but the pin that popped the bubble was the rapid rise in energy prices. 

Cap and trade legislation will lead to another rapid rise in energy prices which will only extend the depression we are witnessing today.

Exactly how is the economy doing?

As the stock market has increased 30% the last two months, there should be significant doubts about the long term trend of our economy. 

Today, the Federal Government is on a pace to add $2.5 trillion to our national debt this year. Over the next 10 years, the Federal Government is projected to spend $11 trillion more than it takes in. Since there are no longer enough private buyers, the US Department of Treasury issues debt and the Federal Reserve "buys" the debt at an alarming and staggering rate. 

Somehow, investors are encouraged by this policy and they buying financial stocks with the impression that the government will do whatever it takes to prevent their failure. This is a very short sighted investment strategy.

There are several weaknesses with the theory that the Federal Government can bail out this problem. The entire economic system is too complex and interconnected to pick just a single group of banks to protect. Many estimates place the total losses related to the financial bubble at $11 trillion, the entire size of our yearly GDP. Consumer spending makes up 70% of our GDP, but 25% of consumer spending was artificially created by unsustainable credit standards and using homes as cash machines. 

While you have heard about a housing bubble, the biggest bubble is the United States GDP and that bubble is in the process of bursting. According to the above numbers, the GDP needs to contract 18% from the high point in 2007. Keynesian economics says government spending can fill the hole to protect our GDP bubble by printing money. This will work in the short term, but never in the history of the world, has an economy sustained itself by finding a way to prop up the economy by taxing the work done 50 years in the future by workers who haven't even been born yet.

Is it this economic system that investors find encouraging as they push the stock market higher? 

The following article should raise some serious doubt.

http://www.marketoracle.co.uk/Article10375.html