Issues, News and Views
A TRUMP AGENDA, LOOKING FORWARD
2018/02/12 - After President Trump's amazing tax reform victory to finish off the first year of his administration we can now look forward to building on that success to hold the solid Republican advantage in the House and build on the slim majority in the Senate.
The tax reform law is already growing in popularity as it appears to be creating additional economic empowerment that will help the Growth and Opportunity Party withstand the usual mid-term barrage that inflicts a President's party, but more must be done.
And we must also consider the derivative impacts of tax reform as well as other initiatives to maintain the momentum leading to Trump's re-election in 2020.
So we bring you our policy agenda for 2018.
We expect President Trump to build a wall. Even if Republicans had 60 seats in the Senate that would still not be enough to build a wall outright because some Republicans are not conservative. If conservatives want a wall then we'll have to give up something. That's the way Democracy works. Sorry if you struggle with that.
So as much as we detest pretending our laws don't exist, and recoil at the moral hazard that goes along with it, we steel our spine and support the offer the President made in his State of the Union legal status for DACA, in exchange for: a full scale impenetrable border wall; end of the lottery; and end of chain migration.
Here's the thing: Democrats probably won't go along with it. Probably 50 to 100 Republicans in the House will vote No, and that's OK, we understand. It's a centrist compromise, and it can be expected that many conservatives will balk. But that also means that 25 to 75 Democrats will have to vote Yes to make the bill happen.
For the Republicans this is a heads-we-win-tails-you-lose proposition. If the bill passes we finally get the wall we have craved forever. We get a permanent solution in exchange for a never-again concession. Their benefit is in the past and finite; ours is in the future and unlimited. You always take this deal.
Further, the Republicans can take credit for passing the bill and make the case to Hispanics that it was a Republican House, Republican Senate, and Republican President that made this happen. And not the Democrats. So who's got your back?
And if Democrats don't go along, Dreamers will take out their full fury on the Democrats for not coming through. They will be uncloaked of using the Dreamers like pawns.
And not just the Dreamers. The Democrats will be exposed to the entire nation for the scheming manipulative political hacks that they are, that they actually don't care at all about the people they claim to want to help. All Democrats care about is manipulating disadvantaged people to squeeze them for votes. The Democrats will sell out their constituents every time. There will be uncivil war in their party.
The Democrats can see how this plays out - there's a reason they looked so unhappy about the President's State of the Union offer.
There's no perfect conservative solution for this problem. The President's plan is the best opportunity to fix the problem permanently, plus gain political advantage heading toward November.
Abundant affordable energy is a key driver for economic growth. Everything should be done to remove hindrances to development of energy supply, regardless of source. Government should not be picking winners and losers. Regulation should be level and even-handed. Penalties and subsidies should be eliminated. Ensure that an all-of-the-above situation and let free market forces determine winners and losers.
This administration seems to be committed to the free-market all-of-the-above policy that Chalprem supports, but we repeat it anyhow to reinforce the crucial, foundational nature of this policy. So much good derives from it.
We had noted with concern that US oil production had seemed to level off last summer while prices continued to rise, but the anomaly was only temporary. In recent months production has accelerated in the face of rising prices (as we would have wanted and expected), causing inventories to rise of late and now prices to fall again.
US oil production is in the process of surpassing record production from 1970 at over 10 million barrels per day. We will soon overtake Saudi Arabia for #2 and by year end we should overtake Russia as the world's #1 oil producer. Within a few years we are expected to become a net energy exporter. What would that do for our balance of trade?
We expect our energy policy to keep a lid on oil prices and it seems to be happening. Two factors, however, are currently fighting against us.
First, Venezuela has more oil than any country on the planet, yet their production has plummeted under the disastrous progressive regimes of Chavez and Maduro. They now produce less than 20% of what any of the top three countries do, lessening global supply.
Second global supply is further diminished by OPEC. They are curtailing production to keep prices up (and failing to some extent). Saudi Arabia needs to raise funds and wants to do so by staging a public offering of shares in their state-owned oil company Saudi Aramco. In order to get the best price on the company they need to artificially inflate oil prices to keep revenue and margins up. Once they complete the IPO you can expect oil prices to plummet. (Thus I wouldn't touch this IPO)
The President is committed to infrastructure spending and we fully agree. President Trump's deregulatory push has reinvigorated the economy in his first year, just as it appears that his tax reforms are strengthening the economy in his second year. But what of the future, and the continued economic vitality needed to fend off the fake news barrage and secure his reelection?
That's where the President's infrastructure initiatives come in. They are longer term and required lad time to bring their benefits to fruition. President Trump (that still sounds great!) understands this and knows he needs to start now so that the economy will keep humming for years to come.
Infrastructure and deregulation are inextricably intertwined. The permitting process is where good public purpose ideas go to die. We are lucky if there is a ten year lag through the approval process. That's why our infrastructure is lagging behind our global rivals and falling apart. The President know this and is seeking reform to the permitting process.
With regulation disexcessed, the other rail, of course, is money. There is a reason we discussed abundant affordable energy first. The best way to pay for new and improved roads bridges and tunnels is through raising the fuel usage fee.
The cost of gasoline has come down drastically due to the rise of American oil production, and it seems that this trend will continue for decades. After a hundred-plus years of pumping oil, we have more proven reserves now then we've ever had. Low gasoline prices will be with us for a long, long time. Simple supply and demand.
It should be intuitively obvious that we should invest some of those savings in our transportation infrastructure. If the Administration's policies bring down the price of gas by, say, a dollar a gallon, shouldn't we take maybe twenty-five cents and pour it into more and better roads?
The current per-gallon fuel consumption fee has an efficiency of about 99%, meaning that it only costs our economy about 1% of the total take for businesses to comply with and governments to enforce the administration of the fee. Tolls on the other had have an efficiency rating of only about 70%, 30% of the total take goes to administration, compliance and enforcement.
In addition the system for collecting the current road user fee is already universally in place so the incremental cost of increasing the fee and raising the funds is almost zero.
In addition, privacy rights advocates should support the fuel consumption fee over tolls. Not only does the government not track where you drove your car as it can with tolls, it doesn't even know who bought it. And if you pay in cash, then even the fuel supplier doesn't know.
The case for raising the fuel consumption-based road user fee is compelling in every way. Keep energy costs low by maximizing oil production, use some of the saving to raise funds for infrastructure, and streamline the infrastructure permitting process. It's a win-win-win. Make America Great Again.
EDUCATION AND TRAINING
Anyone who has ever bought something on Amazon has interacted with a massive technological revolution that is taking place. The skills needed in a 21st century work force is vastly different from the skills needed in a 20th century work force. Naturally, that has implications, but not necessarily bad ones unless we pursue dysfunctional public policy.
Education and training needs to change radically to meet 21st century needs but it sometimes seems that the changes are in the wrong direction. We need more people with technology training but our schools are pumping out useless Diversity Studies graduates.
School choice is absolutely essential to ensure that parents can direct their children to schools that will outfit their children with a viable common-sense 21st century education rather than radical left-wing progressive indoctrination in metaphysical mumbo-jumbo.
Also necessary is for state governments to facilitate practical vocational training that seeks to match prospective work force entrants with skills training relevant to local and regional opportunities.
One of the benefits of increasing automation is that manufacturing can be re-shored back to America. As labor shrinks as a proportion of a manufacturer's cost mix, other factors such as energy costs and proximity to markets become preeminent. This is where the United States has significant cost advantages over China that will allow us to reclaim our manufacturing heritage.
But only if we have full labor force participation, and a technically competent workforce at that, capable of performing efficiently and effectively in an automated environment.
SPENDING, DEFICITS AND DEBT
The government does not have a revenue problem, it has a spending problem. Entitlement reform is absolutely necessary. People do what you pay them to do. If you pay people to work, they will work. If you pay people to not work, they will not work. If you pay people to be poor, they will be poor.
Let's be clear on this. People do what you pay them to do. If you pay people to be poor, they will be poor. That's what Democrats do they pay people to be poor. We need to stop providing incentives for people to not work.
We need to attack the core causes of poverty, and that's what Trump's agenda seems to be about - creating as many jobs as possible, as many good jobs as possible. Improving incentives for workers to take those jobs (tax cuts), and, removing incentives (entitlement reform) for workers to spurn those opportunities.
We are not talking about putting children, the elderly, or legitimately disabled to work. Rather we are talking the able-bodied working age individuals who are sponging the system, and about a system that is itself incentivized to propagate problems rather than eliminate them.
What happens to a social services case worker who solves all his problem, who has no more cases? What would happen to the worker, his colleagues? And his boss, what would happen to her? God forbid they should be forced to get a real job in the private sector, making stuff people actually want and earn!
If you stop paying people to not work, you will be surprised how rapidly the amount of not work in America will diminish. And poverty will diminish along with it. And deficits will decline. And we will make America great again.
A RENEWED UNDERSTANDING
The "New Deal" and the "Great Society" should have died with the 20th Century. It is time to kill them. The 21st Century requires a new arrangement, call it the Renewed Society that lays out what is expected of Americans. President Kennedy explicitly laid out the foundation for this Renewed Society, "Ask not what your country can do for you - ask what you can do for your country".
Freedom isn't free. There are no Rights without Responsibility. The greatness of a nation and the goodness of its society is a function of the sum of the life choices made by its people. If too many among us make poor life choices our communities will fail. Crime, poverty and poor health will prevail.
The best thing you can do for your country is stay in school and get a job. Yes, it's that simple. Challenge yourself to take best advantage of your educational opportunities, and then challenge yourself to get the highest paying job.
Our nation is obliged to honor the right of its citizens. In exchange for those rights, citizens are responsible to honor their obligation to society: education and employment.
Of course our society should be benevolent toward those who cannot help themselves children, seniors, and those who are legitimately unable to hold gainful employment in either physical or clerical occupations. And we should provide temporary assistance to help those who are currently not supporting themselves for whatever legitimate reason.
But we must refuse to help those who refuse to help themselves. Society has no obligation to those who dishonor their obligations to Society.
Policymakers must ensure that public policy towards individuals is oriented toward incentivizing work, and also disincentivizing not-work. No handouts teach people to fish for themselves, do not give fish away.
Public policy must be pro-business and incentivize job creation. Not with handouts and subsidies. Just a simple deregulated environment conducive to hiring, an environment that inspires individuals to start businesses, and encourages executives to expand businesses. And hire people.
There is nothing more important than work. Any gainful legal employment is a good thing, and the higher the value added the better. People should be lauded for having good paying jobs, not shamed for it. If anything, people should be shamed for not working, for sponging off the hard work of others.
SEMI-ANNUAL FORECAST OF ECONOMICS, MARKETS, AND INTERNATIONAL AFFAIRS
2018/01/10 - Happy New Year. As is our wont, we herewith provide our semi-annual update on the economy and markets. For years now we have been correct, and we again predict that our predictions will come about as predicted.
Let's begin by talking about the black swan risk factors, and topping the list is Korea. We continue to believe that a Korean war, while not probable, is far more likely than commentators and pundits predict. We do not believe the probability is as high as one in two (50%), but no less than one in five (20%) and possibly as high as one in four (25%) or even one in three (33%).
It is hard to game out what would happen in a Korean conflict. For example, in a best-case scenario, a successful decapitation strike combined with a pre-emptive nuclear-threat elimination strike could cause a collapse and surrender by the NK's, ending the war almost before it starts. Such an immediate, desirable and definitive outcome would prompt a short term euphoria initiating another leg up for optimism, sentiment, markets and the economy.
But that's not going to happen. More likely a conflict will include several weeks of very ugly ground war with many casualties in the South, and this will hit markets hard. Stay hedged in case there's a war, stay fully invested in case there isn't.
And the world will be on edge as it watches and waits to see what, if anything, China can or will do. Ultimately we believe China can do nothing. The North is the worst regime on the planet. China is hardly better, a wolf in sheep's clothing for whom Kim a useful pawn, but this is not the time or place for China to undress and expose their geopolitical ambitions of regional domination.
Aside from Korea there are the usual concerns, including massive global debt, especially among governments. The US government has a spending problem (not a revenue problem). At some point our $20+ Trillion debt will catch up with us, but that day is not today. Soon, perhaps, but not now. The party is not over quite yet.
United States equity markets continue in a "buy-the-dip" environment which serves to prevent small dips from becoming huge crashes. Which keeps buyers poised at the edge, ready to jump. If there is a major correction it would come from a geopolitical shock like Korea, or a change in economic outlook like a bad read on inflation, but not an "air pocket", not some kind of random imbalance of supply and demand contained wholly within capital markets.
We continue to hold a constructive view of the United States economy with a number of factors contributing to the favorable environment. However, we do see risks of a downturn developing. We are not saying that a recession is inevitable or even likely any time soon; but there exists a significant possibility that recession pressures may develop as the year unfolds.
The first and most important factor presently in play, as always, is the cost of energy. And yes you can thank fracking for these favorable energy supply fundamentals. The price of oil and especially natural gas remain at levels conducive to economic growth. That being said, the price of oil continues to climb. Heretofore we had expected oil prices would hit a ceiling before approaching their current levels, but that doesn't seem to happening quite yet, which is a concern.
Theoretically a domestic price of $60 should be triggering a response of increased production that should keep near-term prices in check. In addition, these prices should serve to stimulate investment in exploration, development and related technologies that should keep the longer term price trajectory at sustainable levels as well. But no one seems to be opening the spigots.
The second most important factor in our positive economic view is the continuing roll back of regulation by Republican administrations at both the federal and state levels. This is the big mystery that economists, journalists and bureaucrats never seem to understand. Unless you are a business owner you will never grasp how oppressive a regulation can be, and how suppressive it is to economic activity.
Economists don't know how to quantify regulation and therefore do not model it. Thus there is no index, no data release, no time series, no news for journalists to report on. And in quite retrograde fashion, legislators and burrocrats (yes, they are asses) point to the growing number of laws they have passed, and regulations they have implemented, as metrics of their success, while in fact they suffocate the economy.
The deregulation wave sweeping across America will continue to fuel economic growth, growth unexpected and unpredicted by the Media-Academia-Government Complex. And of course President Trump will get no credit for the growth and opportunity he is spurring in America. Deregulation is low-hanging fruit. It is free money. It is like how good you feel when you stop banging your head against the wall.
The third reason for continued US economic growth is the new tax cut. The cut in business taxes will switch the US from being one of the most punitive tax nations to one of the most accommodative tax nations. Not only does this serve our economic interests directly, it also forces other jurisdictions to respond, fostering organic economic growth in their countries, causing them to buy more US goods and services. It's very good.
There will also be an impact by foreign companies. For an example, consider BMW, which builds its entire global production of SUVs in upstate South Carolina. Energy is cheaper, land is cheaper, and regulation less frustrating, than any other potential alternative on the face of the planet that BMW originally considered.
Now you can add lower taxes to that list. Not only will the US maintain its hold on BMW production and not need to worry about seeing it clawed away by Mexico or China, BMW might decide to allocate an even higher proprotion of their global vehicle production to the US.
But every firm around the globe with international operations faces the same considerations - some of whom will maintain production here, production that might otherwise have been vulnerable to relocation; or other businesses who might now decide to expand operations here; or still other companies who will be attracted to America who might otherwise have proceeded with other alternatives.
A fourth reason for continued US economic growth is global economic growth. For some years the US economy has been hampered by sluggish growth elsewhere, but now global economies are showing signs of growth. There had been worries about China but those seem to have dissipated (for the time being). Brazil had seven months of positive employment growth (before dropping back a tick in November). Eurozone factories are registering production levels that are at all-time highs.
A fifth reason for economic optimism is the current low levels of interest rates. Yes, rates are rising, but at a very slow pace, and from historically low levels. Rates are still very low, but the expectation of rising rates should entice businesses and households to invest now and lock in low financing costs while they still can. You can expect homebuilders in particular to do well in this environment.
With these factors in play we see continued favorable economic prospects. Whether or not growth will continue its string of >3% growth quarter after quarter remains to be seen, but it is not unrealistic. It stands to reason that the stock market should continue moving northward as corporate revenues increase, margins expand and profits proliferate.
But synchronized global growth is a two-edged sword. Too many economies doing too well all at the same time creates demand pressures and price bubbles. Bubbles take many forms - an oil bubble, a housing bubble, a dot-com bubble, a tulip bubble, a bitcoin bubble, a copper bubble, or perhaps this time it will be an Amazon bubble.
Consider China, to the extent you can. China is opaque, and everyone knows it has its issues. Just because China fakes its numbers doesn't mean things are going badly. The China-bears have been wrong for a long, long time. But even a broken clock is right twice a day.
One good China indicator is the price of copper. Copper supply is relatively stable, and copper demand is mostly a China story. If the price of copper goes down, that would indicate trouble in China. Copper has been on a roll since the summer, currently sitting at 4-year highs. This indicates strong copper demand from China, which in turn is indicative of robust global economic activity.
However, we may already be in a copper bubble. Copper rose above $3/pound in August and now sits around $3.25-$3.30. Since hitting $3.15 in September, it has twice dropped to about $2.90 but the second dip was of shorter duration. Fluctuations are normal, but it should keep hitting higher highs and higher lows.
But, excessive demand combined with a supply shock could be problematic for the global economy. Freeport-McMoRan, the world's largest corporate copper miner, has been in sometimes acrimonious negotiations with the government of Indonesia about its mining activities there, and there is always the possibility that it could end badly with a strike, lock-out or some other production disruption.
A significant contraction of copper supply could cause an economic face plant in China. Not enough raw material available, and too high a price for what is available, could drastically slow their economy, in turn triggering a melt-down in their debt-laden real estate market. Eerily similar to our economic meltdown in 2008 triggered by the oil bubble.
And then there is oil. Our economic optimism over the past few years has been founded partly on low oil prices, but $60 oil is not stimulative. It is a good price, a fair price, but hardly the windfall that consumers both businesses and individuals have enjoyed the past few years. We may see an oil price bubble develop if US production does not soon increase beyond levels that are currently approaching all-time highs set in the early 1970's.
We will not avert a spike in oil prices if US producers get greedy and do not ramp up production soon. Just like the copper scenario we outlined, inadequate petroleum production combined with a supply shock Iran looks at-risk at the moment could cause a face plant in the global economy.
There is also a question of how much slack there is in the US labor market. The how-and-why of the low US labor participation rate is a very relevant question but well beyond the scope of this article, nonetheless, the economy - employers - may soon run out of workers even while many prospective workers choose instead to sit around smoking pot and collecting government hand-outs. (Hey Washington, now would be a great time for welfare reform).
Just like the oil and copper markets, we may soon see a price spike in wages, perhaps a drastic one. As companies have to pay incrementally more for each marginal worker they add, they become somewhat obligated to pay all their workers on the same scale, thus rapidly increasing their payrolls and creating consumer price pressures.
Price pressures on inputs such as labor and commodities tend to find their way into consumer prices, which means inflation. And if the Fed sees inflationary pressures developing, then interest rate hikes will surely follow larger rate hikes at a faster pace than the stock market has priced in. Right now most pundits are expecting two to three hikes this year, but more than that could cause markets to tumble. And that wakeup call would cause consumers to pull back their spending.
Many left wings pundits are arguing that now is not the right time for the recently enacted tax cuts and they are right, at least in economic terms. They may very well contribute to a recession in the short term. But they will also contribute to a robust recovery and are vital in the long term. And now is the only time it could happen politically, thanks to those very same liberals. The time for the tax cuts was eight years ago. Better late than never.
The bottom line is that recessions are caused by insufficient supply of production inputs - if a business can't get their hands on sufficient raw materials, they have no choice but to curtail production, and at the same time, increase prices charged to customers to maximize the revenue on what they are able to produce. Higher prices cause consumers to scale back consumption, while simultaneously, central banks see rising prices and raise interest rates - when the economy is already slowing down. And as this reverberates throughout the business sector, prices continue go up while employment continues to decline, and the economy falls into recession.
Again, we are not saying that a recession is imminent, or even likely. What we are saying is that the pieces are starting to come together, and that is not something we have said over the past few years. We see storm clouds on the horizon, but that does not mean it's going to rain. We are still positive on the economy. For now. Check back in July.
|© Copyright 2018 Challenge The Premise. All rights reserved.|