Monday, September 12, 2011

Obama's Jobs Act: It's Terrible, Here's Why

There have been many analyses provided on Obama's job speech, so I'll keep my commentary short and link you to a few good sources to compliment the analysis (scroll to bottom). 

The entire transcript for Obama's "Jobs Speech" can be found here, while the analysis is as follows. Quotes are italicization and indented. Keywords for analysis are underlined by the author. Let's begin...
These men and women grew up with faith in an America where hard work and responsibility paid off. They believed in a country where everyone gets a fair shake and does their fair share – where if you stepped up, did your job, and were loyal to your company, that loyalty would be rewarded with a decent salary and good benefits; maybe a raise once in awhile. If you did the right thing, you could make it in America.
In this paragraph Obama describes his interpretation of what American workers use to believe. His first sentence is correct where he indicates hard work and responsibility used to pay off. Today that has been destroyed by government, unions, and wall street to name a few. This is rooted in moral hazard, inefficiency, and criminal acts that occur by wall street firms that are essentially sanctioned by the government. In essence, the government has destroyed the rewards associated with hard work by tinkering with the economy and selective implementation and creation of law. He also says "...a country where everyone gets a fair shake and does their fair share..." This is an absolutely skewed interpretation, outright false, and plain un-American. I hope I've made my disdain for this clear. America was never about being fair (nor is life), it was about being just, where everyone was issued the same rules. This is the difference between communism/socialism and free market capitalism. The fact that the president actually said this in such a prominent speech should raise alarm for everyone as it is not what America was ever suppose to be about. Moving on...
...Building a world-class transportation system is part of what made us an economic superpower...
The American Jobs Act will repair and modernize at least 35,000 schools. It will put people to work right now fixing roofs and windows, installing science labs and high-speed Internet in classrooms all across this country. It will rehabilitate homes and businesses in communities hit hardest by foreclosures. It will jumpstart thousands of transportation projects all across the country.
An issue that I have with these "public works" job creation plans is they simply don't work, especially in modern day America where we're not trying to truck along dirt roads. There are two ways that you can look at this, short-term and long-term. In the short-term you can create busy work, but that doesn't necessarily result in long-term gain. The government doesn't have the ability to correctly dictate which projects are needed, which inevitably results in misallocation of capital, inefficiency, and waste. Instead the government should simply let the private sector keep their money and invest it efficiently as the markets determines where the best dividend producing projects are. To think that a government bureaucracy is efficient enough or intelligent enough to determine how capital should be allocated is naive at best. Would you let the government invest your personal funds? Of course not, but that's exactly what they are doing when they take and allocate capital as they see fit. There is absolutely no difference, and the outcome is always the same--disastrous.
It’s not just Democrats who have supported this kind of proposal. Fifty House Republicans have proposed the same payroll tax cut that’s in this plan. You should pass it right away.
In this short paragraph the president is trying to appeal for consensus. This should really indicate that the proposal is even more toxic as there is plenty of incompetence in Washington to go around.

With this short commentary, I'll turn you over to the videos below, which address the details more completely, and in the interest of efficiency, I won't repeat what's already been said, even if it is "shovel-ready."

Addressing some other points of Obama's speech

Peter Schiff (always a must watch)

VisionVictory Channel. He discusses the moral hazards associated with Obama's proposal and some other current events including the Swiss Franc flash crash, which can be found in a previous post here.

Friday, September 9, 2011

Flash Crashes: Silver, Swiss Franc, Gold

A montage of "efficient" markets...enjoy.

First off, silver. The key things to note here, 1) The complete lack of volume the hour prior to the take-down, 2) The volume during the take-down, which is orders of magnitude greater than the previous hour, 3) The fact that this took place Sunday night during very thinly traded hours, and 4) the similarity to the Swiss Franc candle below. Overall, this decline occurred under highly suspicious conditions. Unlike currencies which are overtly manipulated, precious metals take on a more clandestine form, but are blatantly obvious to anyone who follows these markets closely, heck even passively. To date central banks have been unwilling to admit their participation in full, but have indicated various degrees of shenanigans with little media attention. Take a look at GATA for more information on how this has been occurring for years.

(click for larger image)
The Swiss, typically a neutral country, has entered the currency war with guns ablazin'. This is how a national currency, and a national people, lose over 8% of their purchasing power overnight, thanks to central banking. 

(click for larger image)
A measley 8% you say, let's take a look at the bigger picture:

(click for larger image)
Scratch that. We have a decline on the order of 18%, but that took a little over a month. So what exactly are we looking at? Essentially how fast a currency can be devalued when a central bank deems it necessary. Down the road the Swiss will learn that this is a zero sum game and the markets will inevitably overwhelm their target. Defend as they might, they'll eventually be overrun and have wasted a lot of money in the process.

Finally, I'll leave you with gold which has increased from roughly $250/oz ten years ago to over $1900/oz more recently. In one of the more recent peaks it experienced a peculiar smack-down, which of course looks similar to any one of the currency intervention charts. In reality, gold is manipulated, currencies are manipulated, bonds are manipulated. The whole works, so when you think you are making a sound investment in paper assets traded on exchanges where derivatives and margin are commonplace, don't forget that margin can be changed, some central back can sell short with reckless abandon, and of course they rarely never play fair.

(click to enlarge image and uncover the mystery)

Sunday, September 4, 2011

The Economic Food Chain: A Snapshot

The basis of economy is rooted in peoples' need for essential items, and their wants for discretionary items. So let's begin with the basic human needs: energy, water, and to a certain degree, shelter. At first glance it may seem that food was left out, but this is actually a subcategory of energy. Shelter was added because it is often needed to increase your energy efficiency, as in, keep you from getting too warm or cold relative to the outside temperature. Finally, fresh water is the last essential element for obvious reasons, namely, you'll die without it and so will everything else. In summary, humans need energy, food, fresh water, and shelter. At the end of the day we are all working for these basic necessities. As an example, we buy food at the grocery store, fill up our gas tanks (energy), pay rent/mortgage (shelter) and utilities (water, sewer, electric). If we lack any of these essential elements we'll at the very least be uncomfortable, and at worst, be dead, so this is the basis of economy. Essentially, all of us are willing to work for these necessities

At the very core is energy because without it none of the other essentials can be obtained. In the modern world there are three basic forms of energy that are harnessed daily: electric, combustible (food, oil, gasoline, etc.), and photosynthetic (plants harnessing the sun's energy). Food and energy form a one-way "feedback loop", meaning, you can't get food without energy. 

To clarify this point, let's take a look at a simplified supply chain:
  1. At the farm level, land must be cultivated, this requires a refined or distilled oil product (typically diesel) to operate modern machinery.
  2. Fertilizer consisting of nitrogen, phosphorus, and potassium (N-P-K) are usually applied to the soil. Nitrogen is typically made through a steam reforming process involving natural gas. Phosphorus and potassium are mined from various locations around the world and then transported to the farm. Mining operations are heavily energy intensive requiring extraction and processing followed by multiple transportation legs. Again, oil is the primary energy source.
  3. The machinery used to plant and harvest was made somewhere and is predominantly steel. Steel is a product of iron ore, which is extracted from the earth through, you guessed it, a mining operation. Once extracted, the iron ore is processed into steel at a foundry, requiring an immense amount of heat. The heat may be generated by any available energy source granted it's economical for the foundry. The steel must be fabricated into various forms that would be required to build the farm machinery (tractors, combines, etc.). Finally, the assembled product is shipped to the farm by rail (diesel) and truck (diesel). Of course, I'm being concise in this description, but one can imagine the general flow.
  4. With the machinery in place and the soil fertilized, seed can be planted. As the crop grows it requires fresh water through irrigation. Irrigation is a pressure driven operation, requiring a pump, which draws electricity.
  5. At this point we have used a large amount of energy just to plant the crop and maintain it. Our payback comes from the crop harnessing solar energy through the process of photosynthesis.
  6. Once the crop has matured, additional energy is required to harvest, process, and distribute the crop to its various users (more oil).
Even in this simplified scenario, the process is quite elaborate. It should be evident that energy, typically in the form of oil, is the Achilles' heel of the entire operation. Should the price of oil increase, multiple points in the supply chain will experience an increase in cost. Once this occurs, food prices increase and begin to move more money from the "wants" category to the "needs" category. Meaning, that nice new iPad gives way to a loaf of bread or a gallon of gasoline. The increase in oil prices can be achieved in a number of ways, typically through increased global competition for the resource (increased demand), dwindling supply, or currency debasement, which increases the cost of imported oil as the currency's purchasing power is reduced. Today we have all three components in play, which will inevitably lead to a scramble to secure energy resources. The US infrastructure has become so accustomed to cheap oil that a sudden increase in oil prices would send shock waves throughout the economy, bolstering those in the energy and food production sectors.

In this discussion energy, food, mining, and water have been highlighted as the essential elements for not only economic growth, but fundamental survival as an economy's "needs" must always come before its "wants." This is due to the simple fact that energy and food are higher on the economic "food chain." Once they become scarce, they overwhelm elements that are lower on the chain. I believe we're in the process of shifting into a resource-limited paradigm, and if so, this is where you'll want to direct your efforts for long-term gain.