Obama and the Keystone Pipeline

It was pretty cowardly for Obama to hide behind the State Department's decision that the Keystone Pipeline was not in our national interests. I mean, those guys work for him. No question John Kerry does what he's told. The rest of his speech was even more bizarre. He admonished Congress to pass an infrastructure bill that would create more jobs and long-term benefits for America. Gee, I thought a pipeline was an infrastructure project, that like most infrastructure projects, creates lots of short-term economic activity followed by years of service revenue and added value to infrastructure users, both direct and indirect. Obama also pooh-poohed the effect on energy prices and energy security. Security is enhanced because we have reduced dependence on imports from unstable ares. Without this pipeline we'll need to replace the Canadian oil with foreign oil. And the recent Russian plane crash raises all sorts of questions about the growing risks from ISIS. That Canadian oil may be headed for China now. The oil will still be moved, but it will be moved across territory we don't have real control over. There's really not much effect on the environment either way, and that's the really disturbing thing here. Is Obama such a poor trader he couldn't convince the green lobby to let this one go and save their chits for something that really matters? What does that say for his Iranian nuclear deal?

Public Debt Levels and the Presidential Campaign

Leading up to the 2012 election I wrote about concerns over the structure of federal spending and its effects on total public debt in the US. I was concerned that the administration had built structural spending to 24-25% of GDP, while we had never been able to generate more than 18% of GDP in federal revenues. The good news is that the economic recovery has brought tax receipts up to that 18% level, as well as lowered expenses to the 21% level. So deficits are running 3% of gdp or less. This may be as good as it gets, however. Our public debt is now at 100% of GDP. We can get away with this at zero interest rates, but if rates rise 2% structural spending will increase. Another recession or slower growth could also affect the deficit by increasing social services costs and reducing revenue as a percent of gdp. The good news is that the administration has taken advantage of lower rates to push treasury debt maturities to near record long levels. This will insulate us to some degree from rising interest rates at some point. It would seem to me that the presidential candidates should debate the desired ratio of public debt to gdp. If we want it less than 100%, we are going to have run deficits that are smaller than gdp growth. And how will we go about that? By spending cuts, tax increase, tax cuts. Donald Trump, could you please raise this issue while you're still relevant?

The US Government Puts Citizens at Risk For Identity Theft

Is it really any wonder the US Government is the victim of huge hacks? When you get your Medicare card, your identification number is your social security card, printed right on the card, and part of every doctor's records. Who really knows the security standards they hold themselves to. This is a disgrace, as private insurers haven't used social security numbers on their statements in decades, for the most part, and they don't require you to provide them to doctors. Our own government is putting every senior at risk of identity theft. A bill was recently passed that orders HHS to provide cards to new beneficiaries within 4 years, and an additional four years for existing beneficiaries. This is a disgrace. If the government is so far behind on this issue, what does that mean for the future cybersecurity of anything government touches or regulates? Elizabeth Warren should forget the banks and go after HHS.

Hubbub in a Holster

It is always dangerous to make policy changes in the wake of disaster. The President seeks to use the Newtown tragedy not so much to prevent the next one, but to advance his agenda. So his Rose Garden anger/blame speech over the Senate gun control failure conveniently failed to mention another vote related to the bill that only garnered 40 votes. There are problems with the bill which the President actually misrepresented in his fervor to call the NRA liars. When discussing the amendment's prohibition against a national gun registry, he failed to mention it only applied to the attorney general, and not other governmental agencies. As we move on to deal with the important mental health aspects of gun control, it is not hard to imagine HHS deciding it needs to consolidate information to cross-check with mental health records coming from a healthcare system falling under steadily increasing federal control. The Senate should move forward to resolve the issues with this bill. Speaking of post-disaster policy initiatives, it is ironic that a decade ago the liberal establishment railed against Bush anti-terrorist legislation, a lot of which President Obama promised to eliminate, then eventually decided to extend. He's a smart guy, and knows when to switch from principles to public relations. Obama is working very hard to fool the American public again. He's busy taking moderate stances on entitlements and painting the opposition as radicals out of touch with the mainstream. This is all about the 2014 Congressional elections. The divided legislature keeps him from an unencumbered implementation of his "equal outcomes" agenda. I suppose he was growing up in Indonesia and didn't get "equal opportunity" translated correctly--or didn't realize that it didn't exist there. If this occurs, one can only hope that the Congress will realize they need to get re-elected, and that need may trump the President's agenda.

Buffet's Move on Heinz Validates Einhorn

David Einhorn of Greenlight Capital is battling with Apple over methods of maximizing shareholder value. Einhorn argues that "Cash Distributors Can BE Great Growth Businesses For Decades." Examples of this are Coca Cola and IBM. Tim Cook of Apple calls the issue a "silly sideshow." Well, I'm an Apple shareholder, and I don't think so. I think the strongest support of Einhorn's idea to issue preferred stock is the Heinz acquisition recently structured by Warren Buffett at Berkshire Hathaway. In order to purchase Heinz, Buffett knew he'd have to pay a premium to market, but he didn't want to overpay. So a key element of his deal was a large preferred issue, which Berkshire will own. The $8 billion preferred yields 9%. There's a tax arbitrage here as corporations only pay a 5% tax rate on preferred dividends rather than a 35% tax rate on interest. In the case of Apple, a preferred issue would be very valuable to corporate investors. In the case of Heinz, Buffett is buying a company with great brands that don't require a lot of financial capital to grow. So the preferred is a way of taking returns out of the company so the owner (Berkshire) can redeploy those assets productively. Einhorn points out that Apple is allowing a third of its market cap to sit on the balance sheet earning sub-par returns, giving no opportunity for shareholders to redeploy those assets. Apple is similar to Heinz in that its branding has created a business that generates excess capital. In order to maximize the value of Apple, the company must allow shareholders to redeploy the profits of the business. Let's hope the management looks at the Heinz deal and realizes they can create a similar structure for Apple shareholders.

Perverse Incentives

According to Republican Representative Jim Gerlach of Pennsylvania, Ernst & Young has a report out that says raising tax rates on the rich could cut 700,000 jobs over the next ten years. The Republicans want to use this as an argument against raising rates. But President Obama was re-elected despite an abysmal jobs performance, and his administration is poised to issue new regulations, held up until the elections were over, that will undoubtedly cause more job losses. Clearly his agenda of a better quality of life regardless of economics is based on his practical experience with "voter-nomics" that shows him the unemployed will vote for the party of entitlements, not the party of jobs. The worry is the Republicans are using arguments that are meaningless to the President, and overestimating their leverage. The White House is now insisting on a more permanent resolution of the debt ceiling, one of the few leverage points the Republicans have. This implies the cliff negotiations may drag into the new year, creating more volatility in the market in the meantime, and more layoffs, which will be used by the White House to blame Republicans.

Why I’m Voting for Romney

It’s a tough choice between two candidates who sincerely want a better America, and whose campaign rhetoric has been tainted by the need for each of them to appeal to their own party bases--representing very polarized groups. I’ve come down to a few simple ideas to make this decision. My biggest concern is the structural budget deficit the US is facing. The US President answers to the people, of course, but he tends to decide what the people are saying to him--usually leaning to the view of a mandate. We haven’t seen it in our day, but the President may soon come to answer to the bond market. Ask the governments of Greece and Spain how this works. Obama’s agenda--or maybe it’s his party base’s agenda, has driven up baseline federal spending to 24-25% of GDP, from about 20-21%. We’ve never been able to raise more than 18% or so of GDP in taxes, except during WW II. Currently taxes are only raising 15% or so of GDP. Taxes are based on activity and incomes, and the incomes portion is really falling short. If we become a higher cost economy, that part may not improve. I don’t mind a 3% budget deficit. If the economy grows that fast, we won’t increase our debt-to-GDP ratio, and the bond vigilantes won’t be dictating terms to us. If we continue on our current path, however, we are likely to keep running deficits in the 6-10% area, increasing our debt-to-GDP ratio and bringing the bond market into play. Remember that even now the Federal Reserve is buying a big portion of the new debt we’re issuing. We can avoid a debt default in this manner, but only at the cost of a dollar that will buy alarmingly fewer goods and services. The government in this scenario would have little choice but to keep printing money because if it paid high bond rates, government spending could be driven up to 27-28% of GDP, leading to catastrophic deficits. I don’t believe much of either candidate’s published plans, but I think Romney will be more serious about fiscal discipline than Obama. The polarization of America is a big concern to me. It bothers me that so many reasonable Americans can’t engage in civil discourse on politics. On a pure track record basis, Romney was able to reach across the aisle as a Republican governor in a a state where the legislature was 85% Democrats. I don’t think this was solely due to his sparkling personality, but I do believe his experience has taught him that you need to solve problems, not hope they’ll go away. I also think it’s important that Massachusetts has a flat tax. I believe that the progressivity of the tax code is the most corruptive influence on politics today. In Massachusetts, the people have had chances to vote on a progressive tax code, and always turned it down. And this is a very liberal state! If politicians have an expensive dream, they have to get a broad spectrum of people to pay the bill. They can’t sell it to some folks on the basis that others will pay for it. It keeps them honest, well, at least for politicians. But most of all, it creates space for political dialog on real issues. Because once you have a progressive tax code, the central issue is always one of what is the fair share of taxes to be paid by different groups. And it is a question that can never be answered. So instead of talking about how we build wealth as a society and opportunity for all, we argue about who pays. If we didn’t have that argument, we’d have more opportunity to reach across the aisle as Romney did. All of us. Of the two candidates, Romney stands for less progressivity in the tax code. The third decision point for me is track record. Romney has been very successful at most things he’s done. People love to attack him for moving jobs to China, but as a businessman I know that making those decisions has taught him what the reasons are that lead to those decisions. And he knows how government can fix the environment that leads businesspeople to make those decisions so more Americans can keep their jobs. I don’t see any background that would let President Obama understand this at a gut level. He didn’t have much of a track record in the Senate, not introducing any bills, and as President, he let the most divisive elements of his party write key legislation instead of taking on a leadership role in the design of it. I’ve hired lots of people in my career. I attribute most of the success I’ve had to identifying talent and motivation in others--since I didn’t have much talent myself! When I think of myself as interviewing Romney and Obama for the job of President, and think about which one is more likely to solve the complex problems he’ll face, I just think Romney has the track record that tells me he’ll be able to accomplish that.