Obama’s Better Bargain

“I’m going to challenge CEOs from some of America’s best companies to hire more Americans” President Obama at Knox College July 24, 2013

Obama’s Better Bargain – Podcast 7.25.13

Summary of the Podcast

Ryan and Louis discuss Fed Chairman’s Congressional testimony. Ryan noted that rates have gone lower due to recent dovish comment by Ben Bernanke. Ryan notes this morning’s jobless claims came in slightly higher than anticipated.

Louis recaps the Ben Bernanke’s recent statements and their impact on interest rates. Louis notes that the unemployment rate doesn’t reflect the state of the health of the employment market because it doesn’t include people who stopped looking for work and includes part time workers. Louis notes that Ben Bernanke actually made these same points and noted a large number underemployed workers and a low labor participation rate.

Louis notes that Bernanke added to his comments that the economy is not doing well by explicitly stating that the “economy is weak and that if the Fed were to tighten policy the economy would tank” . Louis notes that the media did not pick up on these comments and continues to interpret each piece of economic data as evidence of an improving/recovering economy.

Louis notes that rates are low not only because the Fed keeps the interbank rate low but because the Fed is also buying $85 billion a month of mortgage backed securities (MBS’s) and US Treasuries (T-Bonds). Louis notes that even if the Fed does not raise rates, interest rates will rise if they slow down their purchases of of MBS’s and T-Bonds because there will be less demand for them and the yields will rise.

Louis and Ryan speculate whether the Fed will taper their purchases in September. Louis notes that even if the Fed were to taper its purchases from $85 billion to $65 billion it would still be a larger program than QE 1 or QE2. Ryan notes that the Fed will not taper at all in September. Louis notes that they have plenty of excuses they can give as to why they can’t taper their purchases.

Louis notes that the amount of new homes sold in June 2013 was less than 500K and that in 2005 1.5 million new homes were sold.

Ryan notes that the abundance of part time workers in the economy and how it is not good for the overall economy.

Louis notes that during the 1960’s the US was spending a lot of money on the Great Society and the Vietnam war but that the economy could withstand it because the economy was strong and notes that today its difficult for employers to absorb Obama care costs when the economy is weak.

Louis notes that President Obama in his Better Bargain speech yesterday called on companies to hire more workers. Louis notes that companies are not in business to hire workers but rather to produce a profit for their shareholders. Louis further notes that companies hire workers if they help them do so.

Louis also notes that the President praised the improvement in the stock market because it helps people bring back the value of their 401K plans. Louis notes that one of the reason the values of 401K plans are rising is because companies are showing higher profits (and higher share prices) partially as a result of lower expenses due to keeping their employee headcount down by not hiring or by firing workers!

Louis notes that the QE based economy supports the stock and real estate markets but that if the QE is pulled both markets per Bernanke’s admission, tank. Louis notes when those markets come down there is nothing underlying the economy.

Louis notes that if that happens the trillions of dollars spent will been a waste of money.Ryan notes that QE helps the banks and the rich the most.

Louis notes that when large cash buyers leave the market it may not necessarily be a good thing for mom and pop buyers as their withdrawal could indicate that prices are too high and that there is no longer a good return.

Ryan discussed the valuation of homes in the DC area. Louis and Ryan discuss what the market dynamic might look like when cash buyers leave the market. Louis speculate that prices might drop and that could provide an opportunity for mom and pop home buyers even as rates rise.

Louis and Ryan discuss the impact comparables have on the housing market. Louis notes that if rates were to rise that Ryan noted that the adjustable rate mortgage would return.

Louis notes that if, as they speculate, that the Fed does not pull back QE that the stock and housing markets could rise further. Louis notes that besides the massive of amounts of money being spent on QE, there is still the underlying structural issue of massive amounts of debt and notes that Detroit is symbolic of the coming debt crisis.

Louis notes that there are those that dismiss Detroit’s woes as predictable. Louis notes that Detroit is supposed to be the manufacturing capital of the world not a bankrupt no-go city.

Louis notes that the US is still viewed as the dominant economic power because of the problems in Japan and Europe and the BRICs. Louis notes that in spite of its massive debt loads the US dollar is still king and is viewed as the cleanest shirt in the dirty laundry bin.

Louis notes that gold and silver lost their traction over the last year or so because the economic collapse and consumer price inflation did not happen.

Louis notes that China’s economic strength is also overstated, citing their recent sub par PMI number and that much of their growth also comes from massive government stimulus.

Ryan discusses the advantage of a real estate investment.

Louis notes that during the early years of stimulus and QE the economy was not improving and gold and silver went higher. Once the stock market and real estate markets finally started to respond to the lower interest rates engendered by three rounds of QE, people who had bought gold and silver through ETFs (vs buyers of physical gold and silver) sold them in favor of other stock and real estate investments.

Louis notes that the Fed stuck at the QE long enough to show results in the stock and real estate markets and to beat down gold and silver.

Ryan thinks that because the Fed’s QE program is finally showing stock market and real estate market results they won’t want to taper.

Louis notes that if the stock and real estate markets crash there is nothing from which to rebuild the economy.

Louis notes that had the Fed not embarked on QE we would have had the greatest deflationary spiral in history and notes that even with the massive amounts of money printed we are showing at best anemic growth

Louis notes that economies recover much quicker without central planning. Louis notes that the government intervention and insistence that people go to college and the making available of loans is counter productive.

Louis notes the 50 + companies that were started by people who did not go to college or dropped out of college. Louis notes that there is a lack of creativity on the part of young people as they expect that getting a degree in and of itself is how to do well and removes a dynamic aspect of the economy.

Ryan notes that there is a misguided belief that going to college is productive activity. Ryan notes that you can learn just about anything for free from the internet for little or no cost.

Louis notes that most jobs require good people skills, phone skills,writing skills and excel skills-things that are not really taught in college.

Louis notes that companies are the only productive entities in society and that governments can only give what it takes from companies.

Louis notes that even though college does not provide job ready skills, many employers still require a college degree as a prerequisite for employment.

Louis notes that we spend an enormous amount of money educating children for 12 years of school and they are still not ready for college and require remedial courses.

Louis notes that by the time you are in sixth grade one should have all the basis math and English needed to do most jobs.

Ryan notes that a debt driven life after college should not be promoted.

Louis notes that the value of college is a myth.

Louis notes that Keynesian economic is not the study of how markets work but how they can fix them with government or central banking intervention.

Louis notes that the Fed and BOJ have admitted that they are missing their inflation targets and predicts they won’t stop until they hit and exceed them.