Economic Trends

Is the U.S. the Next Greece? No California Is!

2012-01-14T13:04:00.000-08:00

A Greek, an Italian and a Spaniard spend the evening drinking in a London pub. Who pays the tab? Answer: the American. This satire adds a bit of humor to a disturbing trend whereby the U.S. taxpayer bails out not only "too big to fail" U.S. businesses but then bankrolls overspending European economies via the U.S. Federal Reserve (Fed).

Gerald O’Driscoll, a former vice president and economic advisor at the Dallas Fed, and a current senior fellow at the Cato Institute recently argued that the Fed’s temporary U.S. dollar liquidity swap arrangement with the European Central Bank (ECB) is “essentially a transfer of U.S. dollars to banks in Europe.”

Unlike the Fed, Euro-zone national banks cannot mask or reduce debt problems by simply printing more currency. Only the Fed’s counterpart, the European Central Bank, (ECB) can flood the market with more Euros to ease the debt burdens of the 17 nations. But the ECB’s only mandate is to maintain price stability thereby precluding massive currency infusions. Instead, each of the 17 nations, much like U.S. states, can only shrink debt burdens by cutting spending, defaulting on sovereign debt, or raising taxes.

Thus, the United States, with assistance from the Fed, is not on the path of Greece but California and Illinois are. The U.S. debt burden can and will be diminished by the Fed flooding the market with dollar purchases of U.S. Treasury bonds. This action, of course, adds to inflationary pressures in the U.S. along with pushing interest rates higher.

However with the current U.S. debt at $15 trillion even this Fed action must be accompanied by higher federal taxes, federal reduced spending, or both. The day of U.S. debt reckoning is likely to come sooner rather than later, just as it has for the Eurozone.

Ernie Goss.

Follow Up to My Prior Post

2012-01-05T18:21:00.000-08:00

Continuing on the trend of "More Whiskey, Anyone?", I could not help but notice the headline on today's front page: "Drunk people know the're messing up but just care less." No kidding. That explains a lot, doesn't it!

EAM

In case you missed it ...

2012-01-04T14:38:00.000-08:00

In case you missed it, here is a link to an op-ed I penned last week in the Omaha World Herald on the topic of the payroll tax cut legislation enacted at year-end. The article, "Circus of payroll tax cut business as usual for D.C." [Editor's version] was supposed to be entitled, "More Whiskey, Anyone?"

Even though some readers might think giving up coffee for whiskey sounds like a new year's resolution that they could keep, I suggest that Congress ought to put our financial house in order by cutting spending, rather than pandering with gifts to keep them in office. Note in particular the message that Obama unwittingly embraced by gathering responses from the people on returning the payroll tax to its former level: people reduce spending, giving, and investment when their taxes go up. I hope he remembers that lesson, but something tells me otherwise.

Here is the full article:
http://www.omaha.com/article/20111230/NEWS0802/712309995

EAM

Do Right-to-Work States Economically Outperform Other States?

2011-12-11T13:44:00.000-08:00

Several months ago, the International Association of Machinists (IAM) brought a complaint before the Na-tional Labor Relations Review Board (NLRB) against Boeing Aircraft contending that the builder of the 787 Dream-liner engaged in unfair labor practices by announcing that, due to past work stoppages in Washington state, Boeing had decided to produce their newest plane in South Carolina, a right-to-work state.

That is, Boeing’s South Carolina workers are not compelled to join a union and/or pay union dues as they are in Washington. The union petitioned the NLRB to close the $750 million South Carolina plant and force Boeing to manufacture the aircraft at their Washington facility.

From a societal point-of-view, how would a decision in favor of the union likely affect U.S. economic growth? Comparing economic growth rates between the 22 right-to-work states and all other states would provide some insight into this matter.

U.S. Bureau of Economic data show that between 1990 and 2010, right-to-work states experienced much higher median economic performance with 1) Employment growth of 25.9 percent for right-to-work states versus 7.9 percent for all other states. 2) Per capita income growth of 117.8 percent vs. 104.3 percent, 3) Population growth of, 29.0 percent vs. 23.6 percent, 4) Manufacturing employment growth of 84.0 percent vs.19.4 percent, 5) Manufacturing wage per worker growth of 108.7 percent vs. 96.1 percent.

Thus on every economic dimension examined, right-to-work states experienced significantly greater economic performance than non-right-to-work states. While certainly not definitive, comparative economic growth rates indicate that an NLRB decision to force Boeing to move production from South Carolina to Washington would have, other factors unchanged, reduced overall U.S. economic growth.

The NLRB last week dropped the complaint against Boeing after the company reached a settlement with the union after Boeing guaranteed the production of the older 737 aircraft in Washington. Extortion works sometimes. Ernie Goss.

America Doesn’t Make Anything Anymore: Wrong! Manufacturing Stronger Than Ever

2011-11-13T13:02:00.000-08:00

In the mistaken belief that outsourcing is a major factor contributing to America’s loss of manufacturing jobs, Congress continues to push bills that limit manufacturers’ ability to expand abroad. Combined this with the hyper-bolic “America Does Not Make Anything Anymore,” and legislators feel compelled to offer bills restricting manufacturing firms’ flexibility to expand geographically. This legislation not only breeds uncertainty, but chills U.S. economic growth.

In 1948, the nation’s gross domestic product (GDP) in manufacturing was $70.1 billion. By 2010, U.S. manufacturing GDP had expanded to $1.8 trillion for an annual growth of 5.3 percent. During this same period of time U.S. manufacturing lost nearly three million jobs. Thus between 1948 and 2010, each worker’s productivity skyrocketed with GDP per worker expanding from approximately $5,000 to $145,000 over the 62 year period.

If manufacturing GDP per worker had grown at the slower rate of the rest of the economy, U.S. manufacturing employment would have been 5.8 million higher in 2010. Thus, the real culprit explaining U.S. manufacturing employment declines has been soaring productivity driven by vastly improving technology and processes.

As a result, critics that wish to blame out-sourcing for pullbacks in U.S. manufacturing employment should more properly turn their scorn to rising productivity which has generated ever improving living standards for Americans.

Only Luddites and hyperbolic politicians would limit the freedom of manufacturers to choose the levels of capital, labor and outsourcing that are most appropriate for their firms. American manufacturing productivity growth, much like agriculture before it, has been a driver of higher U.S. living standards. Ernie Goss.

The Impact of the Buffett Tax: Adding Jobs at H&R Block?

2011-10-23T19:12:00.000-07:00

As part of its 2011 Jobs Bill, the Obama Administration has proposed the “Buffett” tax to snare millionaires that are not paying what President Obama calls their “fair share.” White House Communications Director Dan Pfeiffer reported in a tweet that the tax would “act as a kind of AMT.” Let’s hope not!!

In 1969 the Minimum Tax was passed to be rebranded in 1982 as the Alternative Minimum Tax (AMT). The original goal was to hook 155 high-income households that paid no federal income taxes. Currently more than half of AMT tax collections come from taxpayers making between $150,000 and $200,000 and it is estimated that by 2015 over 50 million Americans will pay the AMT. As expected, millionaires thwart the original intent of the AMT by hiring tax experts that insure that they avoid the punitive tax. They will likewise sidestep the Buffett tax with the burden falling on thousandaires.

What should instead be done? The U.S. Congress and Obama Administration should immediately undertake fundamental tax reform that eliminates tax loopholes and deductions that are contrary to economic growth. This action would then allow overall tax rates to be lowered for all. Here is an example of a tax loophole that should be eliminated. In 2010, a taxpayer could buy an energy efficient diesel SUV that is used in his/her business and receive a tax credit of $1,800. So far, so good. However, if the SUV weighs more than 6,000 pounds, the taxpayer could take an additional tax deduction of up to $25,000. Only tax preparers at H&R Block can appreciate the onerous tax code that encourages both energy efficiency and gas guzzling.

Adding the Buffett tax will serve only to add more tax goodies such as this for those able to hire astute tax attorneys and accountants. It will certainly create jobs at H&R Block along with other tax preparers. Ernie Goss

Economic Misery Index Rises to Highest Level Since 1984

2011-09-16T14:06:00.000-07:00

Arthur Okun, economic advisor to President Lyndon Johnson created the misery index in the 1960s. One calcu-lates the index by adding the unemployment rate to the inflation rate. It is assumed that both a higher rate of unem-ployment and elevated inflation produce economic pain and social costs for a country’s citizens.

Since the U.S. recession ended in 2009, America’s misery index has expanded from 7.5 to its current level of 12.7. That is, a combination of rising inflation and more people out of work indicate a deterioration in economic performance and a rise in economic distress. In fact for August 2011, the U.S. misery index rose to its highest level since 1984’s misery index of 12.7 when the nation’s rate of unemployment was 7.8% and its inflation rate was 4.9%. Today’s misery index matches that of 1984 with an unemployment rate of 9.1% and an rate rose to 3.6% producing a misery index of 12.7.

But today’s misery index falls well short of measuring the true misery of those seeking job opportunities. In August 2011, there were 14.0 million Americans out of work and looking for a job (the only individuals counted in the unemployment rate by the federal government). This number ignores the 8.8 million workers who were working part-time, but desired full-time work and the 2.6 million Americans that got so discouraged with job search that they left the labor force.

Summing all U.S. workers not fully employed means that in August 2011, 16.5% of U.S. workers were seeking greater job opportunities with a resulting misery index of 20. Additionally, teenagers, with an August 2011 unemployment rate of 25.4 percent, are experiencing “misery” unmatched since the Great Depression. Little wonder that consumers remain cautious regarding the purchase of anything beyond the necessities of life.
Ernie Goss.

Who Is Responsible for the U.S. Debt Downgrade?

2011-08-21T12:07:00.000-07:00

Many pundits and politicians blame the Tea Party for Standard & Poor’s recent downgrade of U.S. debt. Whether one agrees or disagrees with the policy prescriptions of the Tea Party, placing blame for the downgrade is clearly wrong.

Without Tea Party intervention, Congress would have merely raised the debt ceiling with no spending re-straints or revenue enhancements as they have ten times since 2001. By insisting on spending cuts, the Tea Party simply made U.S. debt somewhat more attractive to investors and thwarted and even larger downgrade.

As a result of the economic downturn beginning in the final quarter of 2007, federal spending has grown by 30.0 percent while federal tax receipts have slumped by 5.4 percent thus leaving the nation with an annual budget deficit of $1.3 trillion for next fiscal year and a federal debt that is growing at an unsustainable pace. Cuts from the baseline in “discretionary” spending reached in the latest debt ceiling compromise will not put a dent in the problem.

To successfully reduce the debt burden of the federal government, we must as a society accept real cuts to larger non-discretionary spending programs such as Medicare and Social Security, allow the Bush tax cuts to expire for all workers at the end of 2012, not just the so-called wealthy (there are just too few affluent), and experience vastly higher economic growth. Short of these outcomes, more and more of the national income will be transferred to baby-boomers from younger workers who will be saddled with the mounting U.S. debt. Ernie Goss.

Questions & Answers to U.S. Debt Ceiling

2011-07-12T05:08:00.000-07:00

1. What does increasing the debt limit mean for our average readers?
INCREASING THE DEBT CEILING WILL BE A NON-EVENT FOR THE AVERAGE AMERICAN. NOT INCREASING THE DEBT CEILING WILL HAVE SEVERAL SIGNFICANT IMPACTS. A) FIRST, THE U.S. WOULD NOT DEFAULT ON ITS DEBT OBLIGATIONS BUT WILL CONTINUE TO RETIRE MATURING BONDS AND PAY REGULARLY SCHEDULED INTEREST PAYMENTS. B) SECOND HOWEVER, THE U.S. TREASURY IN CONSULTATION WITH THE PRESIDENT WOULD HAVE TO PRIORITIZE GOVERNMENT OUTLAYS OTHER THAN OBLIGATIONS RELATED TO DEBT. THIS WOULD MEAN THAT SOCIAL SECURITY PAYMENTS COULD BE DELAYED OR U.S. GOVERNMENT VENDORS WOULD NOT BE PAID UNTIL THE SITUATION IS RESOLVED. C) THIRD, EVEN THOUGH THE U.S. WILL NOT DEFAULT ON ITS DEBT OBLIGATIONS, IT IS VERY, VERY LIKELY THAT YIELDS (INTEREST RATES) ON U.S. BONDS AND T-BILLS WOULD RISE DRAMATICALLY (I.E. GREECE, PORTUGAL) AS GLOBAL INVESTORS SEEK SAFTER BONDS SUCH AS THOSE OF SWITZERLAND.

2. What does employing the codicil in the 14th amendment mean, in terms of squaring it with the Congress’ Constitutional power over the purse?
TREASURY SECRETARY GEITHNER IMPLIED THIS PAST WEEK THAT THE FOURTEENTH AMENDMENT TO THE U.S. CONSTITUTION GIVES THE PRESIDENT THE AUTHORITY TO PUSH THROUGH AN EXTENSION OF THE DEBT CEILING WITHOUT CONGRESSIONAL APPROVAL. HOWEVER, THIS WOULD BE A RISKY STRATEGY SINCE THE ISSUE WOULD HAVE TO BE RESOLVED IN THE COURTS WITH INVESTORS LIKELY FLEEING U.S. BONDS THUS DRIVING INTEREST RATES HIGHER UNTIL THE SITUATION IS RESOLVED BY THE COURTS.

3. What does it mean to raise spending in relation to GDP? How does that affect consumers and the economy in general?
RAISING GOVERNMENT’S SPENDING RELATIVE TO GDP SIMPLY MEANS THAT A LARGER SHARE OF THE NATION’S OUTPUT IS COMPOSED OF GOVERNMENT SPENDING AND LESS OF PRIVATE SPENDING. THE PROBLEM WITH THIS SHIFT FROM PRIVATE TO PUBLIC SPENDING IS THAT PRODUCTIVITY GROWTH IS MUCH LOWER IN THE PUBLIC SECTOR THUS OVERALL U.S. ECONOMIC GROWTH WOULD BE SLOWED. THIS WOULD AFFECT ALL AMERICANS AS THEY WOULD EXPERIENCE SLOWER WAGE GROWTH, FEWER BENEFITS SUCH AS MUCH SMALLER RETIREMENT PACKAGES AND HIGHER INTEREST RATE. WE ECONOMISTS TERM THE IMPACT ON HIGHER INTEREST RATES—CROWDING OUT. AS THE GOVERNMENT DEBT GROWS, INTEREST RATES RISE WHICH DISCOURAGES BUSINESS INVESTMENT.

4. I’ll ask you to put your expertise in motion here: What would you do to resolve this situation?
I WOULD PUT A SIX MONTH PATCH IN PLACE UNTIL A TAX REFORM PACKAGE COULD BE PASSED. ONE ELEMENT OF THE TAX REFORM PACKAGE WOULD INCLUDE ENCOURAGING THE RE-PATRIATION OF CORPORATE EARNINGS. CURRENTLY U.S. CORPORATIONS HAVE OVER $1 TRILLION IN EARNINGS PARKED ABROAD. ENCOURAGING THESE CORPORATIONS TO BRING THIS REVENUE TO THE U.S. BY LOWERING THE CORPORATE TAX RATE ON THESE EARNINGS FROM 35% TO 10% WOULD ADD $100 BILLION TO CORPORATE TAX COLLECTIONS AND ANOTHER $42 BILLION IN DIVIDEND TAXES FROM INVESTORS. IN ADDITION TO THE $142 BILLION IN FEDERAL TAX COLLECTIONS, CORPORATIONS AND INDIVIDUALS WILL SPEND AND/OR INVEST THE NET REVENUES. ACCORDING TO MY ESTIMATES, THIS WILL GENERATE MORE THAN $800 BILLION IN CORPORATE INVESTMENT AND $32 BILLION IN INVESTOR SPENDING (DISALLOW STOCK BUY BACKS). THIS WILL PRODUCE U.S. JOBS AT THE SAME TIME IT FATTENS BOTH FEDERAL AND STATE TAX COFFERS. ABSENT THIS ACTION, CORPORATIONS WILL CONTINUE TO INVEST THESE FUNDS OUTSIDE THE U.S. CREATING NON-U.S. JOBS.

5. What if the “crisis” isn’t resolved before the August deadline?
NOT INCREASING THE DEBT CEILING WILL HAVE SEVERAL SIGNFICANT IMPACTS. A) FIRST, THE U.S. WOULD NOT DEFAULT ON ITS DEBT OBLIGATIONS BUT WILL CONTINUE TO RETIRE MATURING BONDS AND PAY REGULARLY SCHEDULED INTEREST PAYMENTS. B) SECOND HOWEVER, THE U.S. TREASURY IN CONSULTATION WITH THE PRESIDENT WOULD HAVE TO PRIORITIZE GOVERNMENT OUTLAYS OTHER THAN OBLIGATIONS RELATED TO DEBT. THIS WOULD MEAN THAT SOCIAL SECURITY PAYMENTS COULD BE DELAYED OR U.S. GOVERNMENT VENDORS WOULD NOT BE PAID UNTIL THE SITUATION IS RESOLVED. C) THIRD, EVEN THOUGH THE U.S. WILL NOT DEFAULT ON ITS DEBT OBLIGATIONS, IT IS VERY, VERY LIKELY THAT YIELDS (INTEREST RATES) ON U.S. BONDS AND T-BILLS WOULD RISE DRAMATICALLY (I.E. GREECE, PORTUGAL) AS GLOBAL INVESTORS SEEK SAFTER BONDS SUCH AS THOSE OF SWITZERLAND.

6. How valid are the comparisons to increasing the debt limit to consumers arbitrarily and unilaterally increasing their credit limit?
THERE ARE SEVERAL DIFFERENCES. LENDERS WILL ONLY ALLOW CONSUMERS TO RUN DEFICITS FOR A LIMITED AMOUNT OF TIME. THE FEDERAL GOVERNEMNT HAS NO SUCH CONSTRAINT (EXCEPT THAT IMPOSED BY POLITICS AS ADMINISTERED BY CONGRESS). THE FEDERAL GOVERNMENT CAN CONTINUE TO ADD TO THEIR ACCUMULATED DEBT. HOWEVER, THIS WILL SLOW ECONOMIC GROWTH AS INVESTORS DEMAND HIGHER AND HIGHER INTEREST RATES. HIGHER INTEREST RATES WILL CHOKE OFF ECONOMIC GROWTH. A SECOND OPTION AVAILABLE TO THE FEDERAL GOVERNMENT BUT UNAVAILABLE TO CONSUMERS IS THE FEDERAL GOVERNMENT’S ABILITY TO PRINT MORE MONEY. WE HAVE A SYSTEM OF FIAT CURRENCY. THUS THE FEDERAL RESERVE COULD BUY THE FEDERAL GOVERNMENT’S DEBT THEREBY PUTTING MORE CURRENCY INTO THE SYSTEM. OF COURSE, THIS RESULTS IN EXCESSIVE INFLATION AND MOUNTING STRESS ON THE BANKING SYSTEM.

Ernie Goss

Is Now the Time to Buy a Home?

2011-06-08T15:46:00.000-07:00

Last September I recommended that if you expected to remain employed and in your new home for 3 to 5 years, it was a great time to buy a house. Since then, according to the Case-Shiller 20 city composite index, housing prices have plunged by another 6.2 percent. Do I still recommend buying a home? Yes, and let me provide the rationale.

In 2007 at the height of the housing bubble, the average monthly payment on a U.S. home was $1,166 assuming no down payment and a 30 year mortgage. At that same time, the average monthly rent for a U.S. apartment/house was $665. Thus in 2007, the average monthly house payment was 75 percent higher than the average monthly apartment rent. By March 2011, housing prices had plummeted while apartment rents had expanded to the point where the two were equal---that is the monthly mortgage payment was the same as the monthly apartment rental.

Between 1988 and 2004, the monthly mortgage payment was approximately 31 percent higher than the average monthly apartment rent. If U.S. shelter prices return to this average ratio or relationship, one of three changes must occur, 1) apartment rentals must decline by 24 percent, 2) housing prices must rise by 30 percent, or 3) the 30 year mortgage rate must soar from its current level of 4.8 percent to 7.4 percent. Which will occur?

First, I do not expect rental rates to decline. In fact, I expect robust growth in rental prices across the U.S. However, I do forecast a combination of advancing housing prices and expanding mortgage rates to bring the ratio back to its long run average. So just like last September, housing represents a true deal for the buyer who locks in current bargain prices and record low mortgage rates. However in my judgment, this option will only work for the person who remains in the home for more than three years and locks in a fixed mortgage rate close to today’s ultra attractive rates.
Ernie Goss.

Taxing Rich: Politically Popular But Economically Damaging

2011-05-12T08:19:00.000-07:00

President Obama argues that the “rich” are not paying enough income taxes. He contends that raising the tax rate on workers earning more than $200,000 is not only fair but will shift the income distribution in a healthy direction. Unfortunately historical income and tax data undermine both of his claims. Ignoring the data, President Obama, and many public policy wonks, argue that undertaxing the “wealthy” has caused the income distribution to shift dramatically in favor of high salaried workers.

While it is true that high wage workers have experienced superior income growth over the past three decades, it is a false that higher income earners have enjoyed relatively lower tax burdens. The latest tax data from the Tax Foundation show the top 5 percent of taxpayers, those making more than $160,000, paid 59 percent of income taxes which was up dramatically from the their 43 percent of income taxes paid in 1986. The same data indicate that the bottom half of taxpayers, individuals making less than $33,000 paid only 2.7 percent of income taxes and well down from their 6.5 percent of federal income taxes paid in 1986. Thus between 1986 and 2009, the top 5 percent of wage earners dramatically increased their percentage of federal tax payments while the bottom half of earners significantly reduced their share of federal tax collections.

Has the shift in the tax federal income tax burden from low income to high income workers produced a more equitable income distribution? The answer is an unambiguous NO. In 2009 the top 5 percent of earners took home 35 percent of total taxable income, a significant improvement from their 24 percent share in 1986. From 1986 to 2010, the bottom half’s share of income dropped from 17 percent to 13 percent. In summary, data show that extracting a larger proportion of federal income collections from higher income workers has failed to moderate income differences. In fact, one could argue that placing a rising share of the nation’s tax burden on top earners has resulted in growing income inequality. However, calculating a more precise association between the distribution in income and income taxes goes well beyond the scope of this essay.

But if the income tax burden is not the culprit in rising income inequality, what is? The most significant contributor to mounting income inequality has been differences in educational achievement. In 1980, bachelor’s degree holders earned 60 percent more than workers with only a high school diploma. Almost 30 years later, the income gap has widened to the point to where those with a bachelor’s degree earned double that of a high school graduate. In 2009, compared to the high school dropout, workers with a bachelor’s degree earned almost $50,000 more. Additionally, December 2010 showed unemployment rates of 15.7 percent for workers without a high school diploma, 9.8 percent for workers with a high school diploma, and 4.6 percent for college educated workers. Government data show a clear association between education levels and income, and the correlation has been growing stronger.

However, facts have not stopped a parade of politicians from railing against the “rich.” In the name of fairness and deficit reduction, President Obama has proposed to raise taxes on families with yearly earnings of more than $250,000, and individuals making over $200,000. There are three problems with such a policy. First politically speaking, a large number of low income individuals (the 95 percent) can vote to inflict even higher taxes on the supposed rich (the 5 percent) in the future. The latest IRS data show that approximately 52 million Americans filed tax returns that used exemptions, deductions and tax credits to completely wipe out their federal income tax liability. This cohort represents a large voting block that can transfer even more of the federal income tax burden to the “rich.” Second, such a policy shifts the cost of government to a small proportion of the population and thus encourages government overspending on subsidies for individuals with no tax liability. Third, and most important, it will not result in a more equitable distribution of income.

In fact, past data show that it is more likely to contribute to greater income inequality and slower economic growth.

Ernie Goss

Rural Mainstreet Economy Expansion Quickens: Farmland Prices and Farm Equipment Sales Continue to Soar

2011-03-17T14:13:00.000-07:00

March Survey Results at a Glance:
· Pace of Rural Mainstreet economic expansion quickens for March.
· Home sales increase for first time since end of federal tax credit.
· Farm equipment sales expansion remains very strong.
· Strong farm cash receipts reduce loan volumes.
· Almost 50 percent of bankers think that the problem of “too big to fail” has grown over the past three years.

The March overall index for the Rural Mainstreet economy moved above growth neutral 50.0 for a fifth straight month indicating that the rural agriculturally dependent areas of the region continue to expand at a solid pace, according to this month’s survey of bank CEOs in a 10-state region.

Overall: The Rural Mainstreet Index (RMI), which ranges between 0 and 100, advanced to a healthy 56.7 from February’s 55.3. This compares to a much weaker reading of 47.4 in March 2010.

Creighton University economist Ernie Goss said, “Expanding global and domestic economic growth is pushing the Rural Mainstreet economy into solid growth territory,” Goss and Bill McQuillan, CEO of CNB Community Bank of Greeley, Neb., created the monthly economic survey in 2005.

Farming: The farmland price index remained above growth neutral for the 14th straight month slipping slightly to a strong 75.0 from 75.9 in February. The farm equipment sales index ballooned to 75.9 from 63.5 in February. “Farm implement producers and dealers are experiencing a banner year as farmers spend their higher income,” said Goss, the Jack A. MacAllister Chair in Regional Economics at Creighton.

According to Michael Johnson, CEO of the Swedish American Bank in Courtland, Kan., “We had an 80 acre tract that sold two years ago for $3,000 an acre. Same land resold last week for $5,000 per acre.”

But some concerns were raised. Cameron Mathis head of the Tilden Bank in Creighton, Neb., is concerned that escalating fuel prices could boost farm input prices to levels significantly cutting into farm income.

Banking: The loan volume index for March rose to 47.1 from February’s 39.0. The checking deposit index increased to 68.7 from 67.8 in February, while the index for certificates of deposit and other savings instruments slipped to 45.5 from 50.8 in February.

This month bankers were asked how the recently passed Dodd–Frank Wall Street Reform and Consumer Protection Act would likely affect community banks. Of the bankers expressing an opinion, 96 percent expect to charge customers additional fees to cover their higher transaction costs associated with the portion of the bill which caps the swipe fees charged for debit card transactions. In fact, 99 percent of bankers advocate modification or further analysis of the portion of the bill.

This month bankers were also asked how government action since the financial meltdown in 2008 has affected “too big to fail” (TBTF). Only 4percent of the bankers think that TBTF is a smaller problem today than in 2008. Almost half, or 48 percent, think TBTF is a bigger problem today than three years ago.

According to Larry Winum, president of Glenwood State Bank in Glenwood, Iowa, “The only way to truly eliminate TBTF is to downsize all bank and non-bank financial institutions to a level that they will no longer cause a "systemic risk" to the entire economy."

Ken Henstorf, president of the First National Bank in Shenandoah, Iowa indicated that only “lip service” had been paid to TBTF. Henstorf said that TBTF banks are bigger today than in 2008.

Jobs: For a fourth straight month the Rural Mainstreet economy added jobs with a March index of 56.2 from 52.5 in February. “Rural areas are clearly outpacing the urban areas in terms of job growth. Even with recent job gains, the Rural Mainstreet economy has 206,000 fewer jobs today (4.4 percent) than before the recession,” said Goss.

Confidence: The economic confidence index, which reflects expectations for the economy six months out, was down, but a still strong 65.2 from 70.9 in February. The confidence index has been trending higher over the past year and is well above last March’s reading of 54.3.

Home and retail sales: For the first time since June of last year, the home sales index climbed above growth neutral. The March index increased to 52.3 from 44.0 in February. “Home sales have been on the decline since the tax credit for first-time home buyers ended last April,” said Goss.

Each month, community bank presidents and CEOs in nonurban, agriculturally and energy-dependent portions of the 10-state area are surveyed regarding current economic conditions in their communities and their projected economic outlooks six months down the road. Bankers from Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wyoming are included.

This survey represents an early snapshot of the economy of rural, agriculturally and energy-dependent portions of the nation. The Rural Mainstreet Index (RMI) is a unique index covering 10 regional states, focusing on approximately 200 rural communities with an average population of 1,300. It gives the most current real-time analysis of the rural economy.

Colorado: For a third straight month, Colorado’s Rural Mainstreet Index (RMI) moved above growth neutral. The March reading rose to 55.5 from February’s 51.8. The March farmland and ranchland price index was unchanged from February’s 69.1. Colorado’s farm equipment sales index soared to 74.9 from 60.6 in February. The rate of job gains for Rural Mainstreet Colorado over the past 12 months was 0.4 percent.

Illinois: For a 11th straight month, Illinois’ RMI remained above growth neutral. The March index stood at 56.6, down from 62.5 in February. For a 14th straight month, farmland prices advanced above growth neutral with a March reading of 75.5, up from February’s 69.3. Farm equipment sales for March climbed to 75.8 from 67.5 in February. Jim Ashworth, president of Carlinville National Bank in Carlinville, said that, “While our local economy in general remains mired, we enter an interesting planting season as land prices continue to rise as higher cash rents follow grain prices.” The rate of job gains for Rural Mainstreet Illinois over the past 12 months was 0.5 percent.

Iowa: The RMI for Iowa inched upward to 57.3 from February’s 57.2. The farmland price index slipped to 75.5 from 77.5 in February. The state’s farm equipment sales index jumped to 76.4 from February’s 65.1. The rate of job gains for Rural Mainstreet Iowa over the past 12 months was 1.6 percent.

Kansas: The RMI for Kansas was above growth neutral 50.0 for the month. However, the index dipped to a still healthy 55.9 from 58.0 in February. The farmland price index declined to 74.4 from February’s 78.2. The March agricultural equipment sales index rose to 75.3 from February’s 65.7. Dale Bradley, CEO of The Citizens State Bank in Miltonvale, said, “A very fragile economy.” He is concerned about upcoming mortgage failures, higher fuel prices, along with state governments in the red. He also reported that much of the wheat in Kansas is in fair to poor condition. The rate of job losses for Rural Mainstreet Kansas over the past 12 months was 0.5 percent.

Minnesota: The March RMI for Minnesota dipped to 57.2 from 58.7 in February. Minnesota’s farmland price index declined to a still robust 75.4 from February’s 78.8. The agricultural equipment sales index stood at 76.3, up significantly from 66.3 in February. The rate of job gains for Rural Mainstreet Minnesota over the past 12 months was 1.5 percent.

Missouri: The RMI for Missouri rose to a regional low of 51.5 from February’s 50.0. The farmland price index for Missouri expanded to 76.6 from 71.5 in February. The March farm equipment sales index jumped to 71.5 from 59.1 in February. The rate of job losses for Rural Mainstreet Missouri over the past 12 months was 2.9 percent.

Nebraska: The March RMI for Nebraska advanced to 58.7 from February’s 57.2. The farmland price index slipped to 76.6 from 77.6 in February. The farm equipment sales index decreased to 65.1 from February’s 76.1. The rate of job gains for Rural Mainstreet Nebraska over the past 12 months was 3.2 percent.

North Dakota: The North Dakota RMI for March climbed to a regional high of 66.3 from 59.7 in February. The farmland price index expanded to 83.0 from 79.6 in February. Farm equipment sales for March rocketed to 83.9 from 67.2 in February. The rate of job gains for Rural Mainstreet North Dakota over the past 12 months was 10.2 percent.

South Dakota: For a fifth straight month, the RMI for South Dakota was above growth neutral. The index for March climbed to 57.7 from February’s 56.6. The farmland price index dipped to 75.8 from 77.0 in February. South Dakota's farm equipment sales index for March was 76.7, up from 64.5 in February. The rate of job gains for Rural Mainstreet South Dakota over the past 12 months was 1.2 percent.

Wyoming: The Wyoming RMI for March was unchanged from February’s 57.2. The March farmland and ranchland price index slipped to 75.5 from 77.5 in February. The state’s agricultural equipment sales soared to 76.4 from February’s 65.1. The rate of job gains for Rural Mainstreet Wyoming over the past 12 months was 1.5 percent.

Many Corporations Oppose Corporate Tax Cuts

2011-03-12T16:37:00.000-08:00

Despite a corporate tax rate of 35 percent, U.S. corporations paid an average tax rate of only 26.5 percent the year before the recession. But even this statistic overstates the U.S. corporate tax burden for many. For example, the Wall Street Journal recently reported that Whirlpool Corporation paid no federal income taxes on its $18 billion in sales and $619 million in earnings for 2010.

They accomplished this feat by taking advantage of production tax credits ranging from $75 per dishwasher to $200 per refrigerator. Thus, Whirlpool was able to stockpile more than $500 billion in tax credits for making “energy efficient” appliances. Not only did Whirlpool pay no taxes last year, they will carry unused tax credits forward so that they will pay no taxes until many of the overly generous politicians have “left the scene of the crime.”

To take additional advantage of U.S. taxpayers and investors, Whirlpool has placed the unused portion of the tax credit on their financial statements as an asset. Thus, any cut in corporate income tax rates will result in a reduction of Whirlpool’s assets and net worth since it will lower the value of the tax credit. But Whirlpool is hardly alone in this entirely legal activity. For 2010, GE paid a corporate tax rate of less than 9 percent on its $12.2 billion in profits after it took advantage of federal tax credits designed to promote laudable and potentially dubious social goals. IRS data indicate that 493 U.S. corporations with more than $100 million of 2007 profits claimed an average tax credit of more than $148 million.

To eliminate this unequal and inefficient tax treatment, Congress should cut corporate tax rates for all, and eliminate the credits for the few. However, I am not optimistic that this will be achieved since favored corporations, lobbyists and politicians derive significant benefits from the status quo.
Ernie Goss.

Rural Mainstreet Economy Continues to Grow: Farmland Prices and Farm Equipment Sales Continue to Soar

2011-02-17T13:48:00.000-08:00

February Survey Results at a Glance:
· Rural Mainstreet economy expands for February but pace of growth slows.
· Farmland prices continue to soar.
· Farm equipment sales expansion remains very strong.
· Strong farm cash receipts reduce loan volumes.
· Over 80 percent of bankers expect Dodd-Frank reform to have negative impact on community banks.

For Immediate Release: Feb. 17, 2011
OMAHA, Neb. – The February overall index for the Rural Mainstreet economy moved above growth neutral 50.0 for a fourth straight month adding to the expectations for sustained economic growth, according to this month’s survey of bank CEOs in a 10-state region.

Overall: The Rural Mainstreet Index (RMI), which ranges between 0 and 100, declined to a still healthy 55.3 from January’s 59.3. This compares to a much weaker reading of 36.6 in February 2010.

Creighton University economist Ernie Goss said, “An expanding global economy, a cheap dollar and alternative energy production are pushing the Rural Mainstreet economy into territory not experienced since the early 1970s.” Goss and Bill McQuillan, CEO of CNB Community Bank of Greeley, Neb., created the monthly economic survey in 2005.

Kathy Thuman, president of Farmers State Bank in Maywood, Neb., said “Farmers were profitable in 2010 due to all around high commodity prices, but I can't definitively say that will raise the entire economy of the area.” However, she argues that because of this expansion, farmers have “learned to save for a rainy day.”

Other bankers are likewise cautious such as Dale Bradley, CEO of Citizens State Bank in Miltonvale, Kan., who said he expects a market correction “due to many negatives still out in front of the economy.”

Farming: The farmland price index remained above growth neutral for the 13th straight month soaring to 75.9 from January’s 75.4. The farm equipment sales index was down though it remains healthy with a reading of 63.5, down from 74.6 in January. “Based on our survey of bankers, farmland prices continue to grow at an annualized rate of more than 15 percent and agriculture equipment sellers are experiencing surging sales across most of the region,” said Goss, the Jack A. MacAllister Chair in Regional Economics at Creighton.

Cameron Mathis, president of Tilden Bank in Creighton, Neb., indicated he expects higher input prices this year would mean 2011 income growth would not be as good as 2010.

Banking: As a result of very healthy cash flows, farmers have reduced their borrowing. The loan volume index for February rose to 39.0 from January’s record low 33.9. For the 12th straight month, the other two banking indicators stood above growth neutral. The checking deposit index climbed to 67.8 from January’s 66.2 and December’s 66.7, while the index for certificates of deposit and other savings instruments slipped to 50.8 from 52.5 in January.

This month we asked bankers how the recently passed Dodd–Frank Wall Street Reform and Consumer Protection Act would likely affect community banks. Of bankers expressing an opinion, slightly less than 14 percent anticipate positive impacts while approximately 81 percent expect negative impacts for community banks with 5 percent expecting little or no impact. Of those expecting negative impacts, 44 percent expect “very negative” impacts.

However, some were more circumspect. Larry Winum, president of Glenwood State Bank in Glenwood, Iowa, said, “The key to how community banks will be impacted by the Dodd-Frank financial reform legislation will be determined by the final rules.”

Jobs: For a third straight month the Rural Mainstreet economy added jobs with a February index of 52.5, unchanged from January. “For this part of the country, rural areas are clearly outpacing the urban areas in terms of job growth. Even with recent job gains, the Rural Mainstreet economy has 115,100 fewer jobs today (2.4 percent) than before the recession,” said Goss.

Confidence: The economic confidence index, which reflects expectations for the economy six months out, surged to 70.9 from 63.4 in January. The confidence index has been trending higher over the past year and is well above last February’s reading of 52.8.

Home and retail sales: Despite the economic turnaround, home sales remained weak with a February reading of 44.0, down slightly from January’s 44.1. This is the eighth straight month the reading was below growth neutral 50.0. “Home sales have been on the decline since the tax credit for first-time home buyers ended last April,” said Goss.

Each month, community bank presidents and CEOs in nonurban, agriculturally and energy-dependent portions of the 10-state area are surveyed regarding current economic conditions in their communities and their projected economic outlooks six months down the road. Bankers from Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wyoming are included.

This survey represents an early snapshot of the economy of rural, agriculturally and energy-dependent portions of the nation. The Rural Mainstreet Index (RMI) is a unique index covering 10 regional states, focusing on approximately 200 rural communities with an average population of 1,300. It gives the most current real-time analysis of the rural economy.

Colorado: For a second straight month, Colorado’s Rural Mainstreet Index (RMI) moved above growth neutral. The February reading rose to 51.8 from January’s 51.1. The February farmland and ranchland price index dipped to 69.1 from 71.3 in January. Colorado’s farm equipment sales index also slipped for the month with a February reading of 60.6 from January’s 70.5. The rate of job losses for Rural Mainstreet Colorado over the past 12 months was 0.7 percent.

Illinois: For a 10th straight month, Illinois’ RMI remained above growth neutral. The February index stood at regional high of 62.5, down from January’s 70.1. For a 13th straight month, farmland prices advanced above growth neutral with a February reading of 69.3, up from 67.5 in January. Farm equipment sales for February decreased to 67.5 from February’s 77.4. The rate of job gains for Rural Mainstreet Illinois over the past 12 months was 6.6 percent.

Iowa: The RMI for Iowa declined to 57.2 from January’s 61.8. The farmland price index advanced to 77.5 from 77.4 in January. The state’s farm equipment sales index slumped to 65.1 from 75.8 in January. The rate of job gains for Rural Mainstreet Iowa over the past 12 months was 1.9 percent.

Kansas: The RMI for Kansas was above growth neutral 50.0 for the month. However, the index decreased to 58.0 from January’s 63.2. The farmland price index rose to 78.2 from 77.3 in January. The February agricultural equipment sales index sank to 65.7 from 79.9 in January. The rate of job gains for Rural Mainstreet Kansas over the past 12 months was 1.6 percent.

Minnesota: The February RMI for Minnesota sank to 58.7 from 65.2 in January. Minnesota’s farmland price index grew to 78.8 from February’s 78.4. The agricultural equipment sales index stood at 66.3, down from January’s 77.6. The rate of job gains for Rural Mainstreet Minnesota over the past 12 months was 3.1 percent.

Missouri: The RMI for Missouri declined to 50.0 from 51.0 in January. The farmland price index for Missouri expanded to 71.5 from 71.2 in January. The February farm equipment sales index declined to 59.1 from 70.4 in January. The rate of job losses for Rural Mainstreet Missouri over the past 12 months was 4.5 percent.

Nebraska: The February RMI for Nebraska slipped to 57.2 from 62.4 in January. The farmland price index expanded to 77.6 from January’s 76.9. The farm equipment sales index decreased to 65.1 from February’s 76.1. The rate of job gains for Rural Mainstreet Nebraska over the past 12 months was 1.5 percent.

North Dakota: The North Dakota RMI for February slumped to 59.7 from 64.9 in January. The farmland price index expanded to 79.6 from January’s 78.2. Farm equipment sales for February stood at 67.2, down from 77.4 in January. The rate of job gains for Rural Mainstreet North Dakota over the past 12 months was 4.1 percent.

South Dakota: For a fourth straight month, the RMI for South Dakota was above growth neutral. The index for February declined to 56.6 from 60.9 in January. The farmland price index expanded to 77.0 from January’s 76.2. South Dakota's farm equipment sales index for February was 64.5, down from 75.4. The rate of job gains for Rural Mainstreet South Dakota over the past 12 months was 1.6 percent.

Wyoming: The Wyoming RMI for February dipped to 57.2 from January’s 62.2. The February farmland and ranchland price index slipped to 77.5 from 78.9 in January. The state’s agricultural equipment sales declined to 65.1 from 76.0 in January. The rate of job gains for Rural Mainstreet Wyoming over the past 12 months was 2 percent.

Follow Ernie Goss on Twitter www.twitter.com/erniegoss
For historical data and forecasts, visit our website at:
http://www2.creighton.edu/business/economicoutlook/

Skyrocketing Food Prices: Blame Bernanke?

2011-02-10T14:35:00.000-08:00

Secretary of Agriculture Tom Vilsack has done a very credible job in managing federal farm policy. However, no one inside or outside of Washington has done more, unwittingly, for agriculture than Federal Reserve (Fed) Chairman Ben Bernanke. Since bailing out (my term) Bear Sterns in March 2008, the Fed, under the guidance of Bernanke, has expanded the nation’s money supply by 145 percent.

This has had the impact of lowering the yield (interest rate) on short term Treasury bills from 3.27 percent just before the recession began to today’s rate of 0.15 percent. And due to the Fed’s unprecedented intervention in the nation’s long term U.S. Treasury market (via QE1 and QE2), the rate on the 10-year U.S. Treasury has plummeted from slightly over four percent to just over three percent. This action by the Fed has reduced the value of the dollar and stimulated demand for commodities, especially food. For example over the past year, prices have soared by 18 percent for all farm products, by 43 percent for corn, and by 50 percent for all grains. The Fed and Bernanke must take credit, or blame, for skyrocketing farm prices, farm income and farm land values.

Is this the next bubble to burst or is it just the beginning of rapidly rising prices for non-food items? I argue that it is a little of both. While Bernanke will never assume the liability or credit for stimulating farm income, he has served up a healthy expansion for farm country and deserves to share the secretarial crown with Mr. Vilsack. Ernie Goss

Recessions Have Become More Budensome on the Less Educated Worker

2011-01-19T09:24:00.000-08:00

Since 1970, the U.S. economy has suffered six recessions with an average length of 12.3 months. Compared to the other five economic downturns, the latest recession, which began in December 2007, was the longest at 19 months and the most severe with 7.2 million jobs lost, or almost three times the historical average. Furthermore, except for the recession of 2001, the job gains from the 2009-10 rebound have been the weakest since 1970 with only 72,000 jobs added.

Since 1970, there has been a clear pattern with more recent recoveries producing fewer jobs, higher unemployment rates, and less wage growth. What accounts for this? It has mostly to do with globalization and technology, which have battered less educated workers. Once the recession begins, companies slash payrolls deeply, especially for the less educated, and when the upturn begins, they find that they can increase output much faster than they are required to increase payrolls. For example, unemployment rates for December 2010 were15.7% for those without a high school diploma, 9.8% for those with a high school diploma, and 4.6% for the college educated.

Compared to every other post-1970 rebound, the 2009-10 recovery has generated profit and stock price growth exceeding any other, and produced the slowest pace of wage expansion. Data show that globalization and technology have tilted the economic playing field toward capital and away from wages, at least for those less educated. The lesson is clear: don't drop out of school and risk becoming a Third World wage earner in a First World economy.
Ernie Goss

Should Congress Let Bush Tax Cuts Expire? The Lesson from the States

2010-11-16T15:33:00.000-08:00

Unless the lame duck session of Congress votes to extend the 2001 and 2003 tax cuts, often referred to as the Bush tax cuts, all wage earners and investors will get hammered by a mammoth tax increase beginning with their first pay check, or dividend check in January 2011. Apart from the large transfer of wealth from the private sector to the public sector, what are the likely impacts?

For an indirect measure of the impact, we can examine the growth differences of states with the lowest income tax rates and those with the highest income tax rates over the past decade. On the low end, Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming have no personal income tax. At the other end of the spectrum California, Idaho, Iowa, Maine, Minnesota, New Jersey, New York, Oregon, and Vermont have the most burdensome individual income taxes with a median rate of 9.0%. This means that if you live in one of the high tax states and earn $100,000, your take home pay will be as much as $9,000 less than if you lived in one of the “no tax” states.

Additionally, yearly economic growth between 2000 and 2008, as measured by GDP, was 7.5 percent for the no tax states and 5.5 percent for the high tax states. In terms of jobs, the low tax states experienced job growth of 5.4 percent between 2000 and 2010 while the high tax states suffered job contraction of 2.8 percent. For the lame duck Congress the message is clear; failure to extend the Bush tax cuts will stifle growth and potentially push the economy back into recessionary territory. Ernie Goss

The Federal Reserve Actions Are Hurting-Not Helping

2010-10-15T12:03:00.000-07:00

Next month, the Federal Reserve (Fed) interest rate setting committee, the FOMC, meets to consider changes in rates. Unfortunately for the U.S. economy, they have telegraphed that they intend to exercise more quantitative easing (QE).

What this means is that they have exhausted traditional weapons to combat the economic malaise and they intend to engage in the unconventional policy of buying long term U.S. Treasury bonds. This policy has the impact of reducing long term interest rates and pumping more dollars into the economy. There are two problems with this policy.

First, long-term interest rates and mortgage rates are already at historic lows. Lower rates will not stimulate greater consumer spending or home buying. In fact, by telling families that rates will remain low for the foreseeable future, potential home buyers are encouraged to delay the purchase in hopes of a lower home price combined with even lower mortgage rates down the road. Second, pumping more dollars into the system will result in excessive inflation as early as the second half of 2011, even more asset price bubbles (e.g. gold) and a fragile U.S. dollar. This will generate another round of economic unwinding in the near term.

So what should the Fed do? They should indicate that they will soon begin raising interest rates. This will encourage some home buyers that are currently on the fence to buy that new home. It would also shore up the confidence of investors and business owners who gauge QE as an extreme measure conveying Fed panic.

As the old saying goes, "when you've dug yourself into a hole, quit digging."
Ernie Goss

Bank CEOs Negative on 2009 Stimulus Package: Report Slower Growth

2010-07-16T08:19:00.000-07:00

July Survey Results at a Glance:
· For the first time since April, the Rural Mainstreet index dips below growth neutral.

· Farmland prices and farm equipment sales continue to advance, but at a slower pace.

· Almost two-thirds of bank CEOs expect the current financial reform package to have a negative impact on community banks.

· Only 10 percent of bankers report positive economic impacts from the 2009 stimulus-spending package.

· Bankers expect the lack of hiring to be the biggest economic challenge for Rural Mainstreet over the next 12 months.

After recording an index above growth neutral for two straight months, the overall index for the Rural Mainstreet economy dipped below growth neutral 50.0, according to the July survey of bank CEOs in a 10-state region.

The Rural Mainstreet Index (RMI), which ranges between 0 and 100, sank to 49.3 from 52.6 in June and 54.3 in May.

According to Dale Bradley, CEO of Citizens State Bank in Miltonvale, Kan., “There are many economic bumps in the road before we see progress in the U.S. Economy.”

Creighton University economist Ernie Goss said, “Much like other economic indicators from across the nation, our survey is signaling slowing in economic progress. However, surveys over the past several months show an economy that has improved significantly from last year at this time.” Goss and Bill McQuillan, CEO of CNB Community Bank of Greeley, Neb., created the monthly economic survey in 2005.

The farmland-price index moved above growth neutral for a sixth straight month to 52.5, down slightly from June’s 54.7. “The farm economy has clearly improved from last year and we are seeing that reflected in farmland prices. However, the strengthening of the U.S. dollar, which has dented farm commodity prices, has slowed the growth in farmland prices,” said Goss.

Terry Engelken, CEO of Federation Bank in Washington, Iowa, reported, “We are seeing a few farmland sales over $7,000 per acre.”

The farm equipment-sales index slipped to 51.8 from 53.1 in June. “The outlook for farm income for 2010, while still healthy, has softened a bit lately. This has cut into the growth in farm equipment sales,” said Goss, the Jack A. MacAllister Chair in Regional Economics at Creighton.

For a fifth straight month, all bank indicators were above growth neutral. The loan-volumes index dipped to 53.1 from June’s 57.9. For July, the checking-deposit index improved to 54.6 from June’s 53.5. The index for certificates of deposit and other savings instruments climbed to 55.4 from 51.8 in June.

This month, bank CEOs were asked to assess the financial reform bill just passed by Congress. Only 29 percent expect it to have a positive influence on community banks while 66 percent anticipate a negative impact on community banks. The remaining 5 percent expect little or no impact stemming from the reform package. Some bankers voiced concern for the consumer. For example, Dan Coup, CEO of the First National Bank in Hope, Kan., said, “The sad part about the whole package is that the consumer will again be the biggest loser.”

Amplifying the negative sentiment for the bill, Barry Linnens, CEO of Cottonwood Valley Bank in Cedar Point, Kansas said, “Our small community banks, did not create this situation. However, we will be the first to step up to the plate and help the local community and economy.” On the other hand, Pete Haddeland, CEO of the First National Bank in Mahnomen, Minn., expects the financial reform package to reduce his bank’s FDIC premiums by 39 percent.

After moving above growth neutral for two consecutive months, the new-hiring index once again sank below 50.0. The July hiring index slumped to 45.4 from 50.9 in June and May’s much healthier 56.1,” said Goss.

Much like other elements of July’s survey Rural Mainstreet retail sales nosedived for July with a reading of 41.7 for July, well off of June’s 52.6. The economic confidence index, which reflects expectations for the economy six months out, slipped to 52.4 from June’s 56.1.

As indicated by Steven Lane, CEO of Security Savings Bank in Farnhamville, Iowa, “People seem to have very little confidence in the economy getting better.”

After two straight months of healthy new home sales readings, the July index plummeted to 41.7 from 56.1 in June and 58.8. “Much like the rest of the nation, residential housing has hit a roadblock,” said Goss.

Each month, community bank presidents and CEOs in nonurban, agriculturally and resource-dependent portions of the 10-state area are surveyed regarding current economic conditions in their communities and their projected economic outlooks six months down the road. Bankers from Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wyoming are included.

This survey represents an early snapshot of the economy of rural, agriculturally and energy-dependent portions of the nation. The Rural Mainstreet Index (RMI) is a unique index covering 10 regional states, focusing on approximately 200 rural communities with an average population of 1,300. It gives the most current real-time analysis of the rural economy.

Colorado: Colorado's RMI for July once again moved below growth neutral to a weak 45.5 from June’s 47.6. The July farm and ranch land price index dipped to 52.1 from June’s 53.7. Colorado’s farm- equipment sales index moved lower to 50.4 from June’s 51.1. The rate of job losses for Rural Mainstreet Colorado over the past 12 months was 2.7 percent.

Illinois: For a third straight month, Illinois’ RMI advanced above growth neutral. The July reading was 53.4, down from June’s 54.6. For a sixth straight month, farmland prices advanced above growth neutral with a July reading of 56.0, down from 57.2 in June. Farm-equipment sales for July dipped to 54.3 from June’s 54.6. Jim Shafer, president of the First National Bank in Tremont, reported that home sales, hiring and the overall economy were all up slightly. The rate of job gains for Rural Mainstreet Illinois over the past 12 months was 1.5 percent.

Iowa: Iowa’s RMI once again climbed above growth neutral with a July index of 52.5, down slightly from June’s 54.2. The farmland- price index dipped to a still healthy 55.6, down from June’s 57.0. The state’s farm- equipment sales index declined to 53.9 from 54.4 in June. Charles Helscher, president of Farmers Savings Bank in Keota, reported that, “In our area, beans look decent and some corn planted in the first planting window appears average at best, but the corn planted late leaves a lot to be desired.” He expects no bumper crop in his area. The rate of job gains for Rural Mainstreet Iowa over the past 12 months was 0.4 percent.

Kansas: The RMI for Kansas remained above growth neutral 50.0 for the month. The index dipped to 51.2 from 53.1 in June. The farmland-price index decreased to 54.9 from June’s 56.4. The July agricultural equipment sales index slipped to 53.2 from June’s 53.8. The rate of job losses for Rural Mainstreet Kansas over the past 12 months was 0.1 percent.

Minnesota: The RMI for Minnesota moved lower to 54.5 from 57.0 in June. Minnesota’s farmland-price index decreased to 56.6 from June’s 58.4. The July agricultural equipment-sales index stood at 54.9, down slightly from 55.8 in June. Pete Haddeland, CEO of the First National Bank in Mahnomen, said, “Crops look very good.” The rate of job gains for Rural Mainstreet Minnesota over the past 12 months was 1.7 percent.

Missouri: Missouri’s RMI slumped to 49.6 from June’s 51.6. The July farmland-price index for Missouri declined to 54.1 from June’s 55.7. The July farm-equipment sales index decreased to 52.4 from June’s 53.1. The rate of job losses for Rural Mainstreet Missouri over the past 12 months was 0.6 percent.

Nebraska: The July RMI for Nebraska dipped slightly to 53.2 from June’s 55.3. The farmland-price index for July decreased to 54.2 from June’s 57.6. The state’s farm-equipment sales index sank to 54.2 from 55.0 in June. The rate of job gains for Rural Mainstreet Nebraska over the past 12 months was 1.0 percent.

North Dakota: For the 14th straight month, North Dakota’s RMI was the highest in the region. However, the index slid to 56.5 from June’s 58.5. North Dakota's farmland-price index declined to 57.6 from June’s 59.1. Farm-equipment sales stood at 55.9 down slightly from June’s 56.5. The rate of job gains for Rural Mainstreet North Dakota over the past 12 months was 2.8 percent.

South Dakota: For a third straight month, the RMI for South Dakota was above growth neutral with a July reading of 50.8, down from 53.0 in June. The state’s farmland-price index sank to 54.7 from 56.4 in June. South Dakota's farm-equipment sales index was 53.0 for July, compared to 53.8 for July. The rate of job losses for Rural Mainstreet South Dakota over the past 12 months was 0.7 percent.

Wyoming: Wyoming’s RMI for July sank below growth neutral with a reading of 47.5, down from June’s 48.8. The July farm and ranch land price index declined to 53.1 from June’s 54.3. The state’s agriculture equipment sales was unchanged from June’s 51.7. The rate of job losses for Rural Mainstreet Wyoming over the past 12 months was 1.6 percent.

Ernie Goss

Latest Mid-America Survey Points to Growth

2010-07-01T15:54:00.000-07:00

Good afternoon,

To see an overview of our latest survey results, click on the following:

http://www.youtube.com/watch?v=LzaIWKHFMws

June survey results at a glance:
· Leading economic indicator slips, but remains at a healthy level.
· Inflation gauge takes biggest one-month plunge since October 2008.
· Over the past six months, the percentage of supply managers expecting a yearly pay reduction increased from 1 percent to 6 percent.
· Export orders rose to highest level since beginning of the recession in December 2007.

The Business Conditions Index for the Mid-America region dipped slightly to a still healthy level, pointing to an expanding regional economy in the months ahead, according to the June Business Conditions survey of supply managers in the nine-state region.
The index slipped to 62.5 from 64.2 in May. An index of 50.0 is considered growth neutral for the leading economic indicator. This was the seventh straight month that the index has risen above growth neutral, signaling a healthy economic recovery for the regional economy in the months ahead.
Ernie Goss

Latest Survey Results of Bank CEOs Positive

2010-06-21T17:17:00.001-07:00

Our latest survey of bank CEOs in 10 states shows that the economy continues to improve http://tiny.cc/eausf (no double dip here)

Ernie Goss

Trade is good, free trade is best. by Tim Bastian

2010-06-10T15:07:00.000-07:00

Of all the bad policy moves during the 1930’s, probably the most damaging were the trade protectionist acts designed to “protect American producers and workers”. The Great Depression started out as a really deep recession, but isolationist policy makers started an ever-escalating series of trade restrictions and as other countries retaliated with moves of their own, world trade collapsed. Just in case you’ve never heard why it is so good, even necessary for prosperity, or if politicians of today are coaxing you into thinking new import restrictions are needed, or that America needs to be more self-sufficient, I wanted to share some basics about the greatest human economic invention in the history of the world: trade.

Trade is simple, yet the benefits are enormous. As you probably know I’m on the faculty at Creighton University where I teach undergraduate economics classes. I particularly enjoy teaching trade theory in my microeconomics classes because students from many different academic majors and backgrounds come together in the same room. It’s one of the few courses where I’m just as likely to have pre-med students as I am to have philosophy, finance, theology, or even physics majors.

Inevitably, when I start to discuss international trade more than a few students immediately fall into the “America first” protectionist camp. Others lean toward the idea of “Fair Trade”, or paying more than market price to producers in developing countries to presumably help them attain a higher standard of living. While telling both sides they’re dead wrong doesn’t make me the most popular guy in the room, it is a rush to watch them drop their biases toward free trade as I explain its benefits.

As you know, trade involves two parties; one party who makes something and another party who wants what the other made. As long as the party who made it values it less than the party who wants it, an exchange is made. The beauty of such an exchange is that both parties end up better off. Over thousands of years, mankind has realized that if we all produce what they’re best at, and then trade that good or service for things that we really want, our prosperity will be maximized. For example, I could change the oil in my car, but I don’t. I’m better at other things, and my time is better spent doing them. I use the money I earn to hire someone who’s really efficient at changing oil. That frees me up to do what I’m best at, presumably to maximize my income.

Let’s take this to the national level. I keep hearing political pundits talk about limiting international trade to “protect American jobs and industries”, and that trade is, somehow making us poorer. To demonstrate why this is such a silly statement let me posit the following: If trade is not good between nations, then it could not be good between states. If trade were not good between states, then it would not be good between communities, and if trade were not good between communities, it must not be good between individuals. Now, imagine what it would be like to live here in Omaha: we’d all live in mud huts since we have very few trees here in Nebraska; we’d most likely have a lot of hungry people, since we’d all grow our own food; we’d almost certainly not get to know one another very well, because we’d all have to build our own form of transportation; and a lot of us would freeze to death next winter because the only thing that would keep us warm would be to burn our corn!

Trade is good, it is very good. More trade is better than less trade, more trading partners are better than fewer trading partners. The key is for producers to make what they are best at making. Too often inefficient industries lobby government for special protections, usually in the name of “protecting American jobs”. This behavior hurts our economy in two ways: 1.) consumers pay more for the products produced by the protected industry, and 2.) resources used in the protected industry are not allowed to naturally flow toward the more efficient industries, lowering profits there (not to mention available jobs in that industry).

Step back for a moment and consider this: World trade allows consumers to purchase goods at the very lowest prices possible, giving them more while spending less. For producers, world trade opens up new markets with more willing buyers and allows producers to sell more of their products at the highest price possible. In other words, you get to consume more at lower prices while being able to sell more at higher prices. Could it get any better?

Tim Bastian

Bernanke’s Swatting at the Deflation Windmill

2010-06-08T12:52:00.000-07:00

Of late, economists, policy makers and pundits have joined forces to denounce the avowed common enemy of deflation, or falling price levels. Not surprisingly, the Federal Reserve (Fed), much like Don Quixote’s attack on animated windmills, stands ready to slay an imaginary foe; in this case deflation.

Supporting the Fed’s hand wringing and angst, Fed Chief Ben Bernanke points to a core consumer price index (CPI) that climbed at its slowest pace since 1966, or just under one percent over the past year. Unfortunately it is inflation and prices bubbles, in my judgment, that jeopardize U.S. economic progress. Remember the CPI is the price gauge for a market basket of goods purchased by an average urban consumer. Much like the drunk with one hand in the refrigeration and the other in the fireplace, everything is on average “ok.”

That is, averages are masking price bubbles and troubling trends in certain areas. For example over the past year, education prices climbed by 4.8 percent and medical costs expanded by 3.3 percent. Furthermore with the CPI overweighting housing, pullbacks in housing prices are producing a CPI that is not representative of a bubbling brew of inflationary pressures that once underway become very, very difficult to slow or halt. A second more sinister outcome is an asset bubble, or an extended period of time, in which assets are overvalued. That is, the mantra “buy low, sell high,” is replaced by “buy high-sell higher.” Under the guidance of Bernanke, the U.S. central bank has lowered the federal funds rate from 5.25 percent in June 2006 to the current level of 0 percent. This aggressive and record rate cutting has contributed to gold prices soaring by more than 98 percent and 10-year U.S. Treasury bond prices skyrocketing by approximately 42 percent. These and other bubbles will burst with very negative consequences unless the Fed begins immediately to increase interest rates.

Ernie Goss

Mid-America Leading Indicator Rises to Four Year High: European Turmoil Fails to Slow Exports

2010-06-01T09:13:00.000-07:00

May survey results at a glance:
· Leading economic indicator climbs to highest level in almost 4 years.
· Largest job gains since June 2006.
· Almost 21 percent of respondents reported negative impacts for their firm from Europe’s economic turmoil.
· Over 72 percent of the purchasers expect any new cap and trade law to increase prices.
· Purchasers report very healthy export orders and imports for the month.

For a video summary, go to:

http://www.youtube.com/watch?v=ChD906q92Bw

The May Business Conditions Index for the Mid-America region advanced for a sixth straight month, pointing to a growing economy in the months ahead, according to the May Business Conditions survey of supply managers in the nine-state region.

The index expanded to 64.2 from April’s very healthy 61.7. An index of 50.0 is considered growth neutral for the leading economic indicator. This was the sixth straight month that the index has risen above growth neutral signaling a healthy economic recovery for the regional economy in the months ahead.

The financial turmoil in Europe is a threat to the economic expansion underway. It has increased the value of the dollar, which has made U.S. manufactured goods and farm products less competitive abroad. The flight to the safety of U.S. Treasury bonds, if sustained, will have significant and negative impacts on agriculture income and on economic prospects for industries with linkages to agriculture. This month we asked supply managers how the European economic problems are affecting their firms. Almost 21 percent of respondents reported negative impacts for their firm from Europe’s turmoil. The remaining 79 percent indicated little or no impacts to date. In my judgment, more negative impacts will surface if the dollar continues to appreciate against the Euro.

Ernie Goss

Cash for Calypso: The Next and Ultimate Economic Stimulus?

2010-04-27T15:05:00.000-07:00

Over the past 18 months, the U.S. federal government, in an effort to stimulate the economy, has given us, “Cash for Clunkers,” followed by “Cash for Appliances” and finally (?) “Cash for Caulking.” Why not create the ultimate in stimulus programs and match the European Union’s (EU) Calypso program. This ambitious program was intended to promote social tourism throughout the Continent. The Calypso program specifically targets the disabled, poor families, senior citizens and "youth," defined as people up to 30 years of age, to go on financially assisted holidays.

Armed with revenues from the Value Added Tax (VAT), devotees claim this Social Tourism program represents “An Opportunity to Overcome the Crisis?" The nearly bankrupt Spanish government has already assisted more than 1,000,000 senior citizens don Speedos and bikinis, or better yet, lose their tan lines on a “nude” beach in equally financially strapped Greece. Using specious economic models, the Spanish claim they get back €1.70 for every Euro spent. With such extravagant returns, the Spanish should send some of their travel vouchers to sun deprived Mid-Westerners. We would certainly benefit from the vitamin D and think of the injections to the Spanish Treasury.

In addition to creating a dubious economic program, the Europeans were ill-served by their marketing gurus. As you remember from your Edith Hamilton mythology primers, Calypso was a Greek sea goddess who was confined to the island of Ogygia by her Mother for supporting her father during the War of the Titans. Europe’s economic ideas should likewise be border bound. Borrowing Yuan from China makes a lot more sense than borrowing economic ideas from Europe. Wine YES—VAT--NO. Ernie Goss.

Big Breasts and the Value Added Tax

2010-04-09T11:58:00.000-07:00

Sometime in the next decade, the accumulated debt of the U.S. federal government will total one year’s worth of the nation’s output of goods and services. This is a milestone that Greece and Great Britain are now approaching with calamitous results. As I write this essay, these two European nations are experiencing capital outflows, rising interest rates, and a ruinous growth in taxes stemming from profligate government spending. And here in the U.S., if all goes as planned, the cost of health care reform, and cap & trade energy taxes will push the nation into financial territory that is normally associated with bankrupt regimes in the southern hemisphere.

This year alone, the federal government will add $1.6 trillion, about the size of the entire U.S. economy in 1975, to the accumulated debt. In an effort to stem the red ink, some in Congress have called for the implementation of a federal value added tax (VAT) much like that paid by European citizens.

A VAT is appealing in that it is easy to administer and punishes consumption, not work. However, exempted products in the name of fairness become a real quagmire. For example, in Great Britain, bras, up to and including size 34B, are not subject to the VAT since it presumed that this is children’s apparel. Of course the impact of this exemption would punish the breast implant industry, or worse yet, force more well endowed women into underwear more properly worn by devotees of the Marquis De Sade.

For our sisters’, daughters’, wives’ and mothers’ sake, just say no to the VAT. Restraints on government spending are the answer, not new taxes.

Ernie Goss

Expanding Physician Owned Hospitals (POH) Creates Problems

2010-03-26T08:55:00.000-07:00

Abstract

I was engaged by Catholic Health Initiative (CHI) beginning March 9, 2010 to examine the impact of increasing the number of physician-owned hospitals (POHs) in Nebraska. This “White Paper” represents my work to-date on this task. In the study that follows, I summarize past research investigating cost issues related to POHs, and I undertake a cursory analysis of the impact of Nebraska’s POH, the Nebraska Heart Hospital (NHH), on the cost of heart operations for the period July 2008 to June 2009. I found that the cost per patient day for all heart procedures was 39.9 percent higher at the NHH compared to all other hospitals in the region and was 45 percent higher than the average for all Nebraska hospitals. Had NHH charged the same price per patient day as other hospitals in the region, savings to patients would have been $15.9 million for the period July 2008 to June 2009.

Introduction
In economics it is theorized that an increase in supply, with no change in demand, results in lower prices and higher output. However, this is often not the case for hospitals. That is, an increase in hospital availability does not necessarily produce lower prices. In fact the opposite outcome is often observed with the addition of a hospital, or hospital beds, actually increasing hospital prices and health care costs.

It has been found that in the hospital sector, Roemer’s Law applies. That is, "in an insured population, a hospital bed built is a bed filled." This rule was produced by researcher Milton Roemer (1959), working at the UCLA School of Public Health. Roemer and colleagues found a positive correlation between per capita short-term hospital beds available and the number of hospital days used. Thus, the addition of hospital beds was found to drive up medical prices in a community.

Supporting this nexus, a 2008 study (Trinh, et al., 2008) concluded that hospital competition was associated with higher levels of duplication of inpatient, ancillary, and high-tech services. Furthermore, the researchers found that this duplication of inpatient services resulted in higher costs and higher hospital operating margins. The positive link between hospital utilization and hospital cost has been especially acute for physician-owned hospitals (POH). That is, past research has concluded that the addition of physician-owned facilities to an area, contrary to economic theory, generates higher prices.

Physician-Owned Hospitals (POHs)
In a recently published study, it was found that the entrance of POHs and limited-service hospitals to communities is associated with significant growth in total hospital volumes and total hospital spending (Lewin Group, 2004). In a related study, Mitchell (2007) found that the entry of a physician-owned orthopedic hospital between 1999 and 2004 drove up market area utilization of complex spinal fusion procedures by 121 percent. By the end of the period, Mitchell concluded that 91 percent of orthopedic procedures were performed in POHs with the residual nine percent being completed by full-service community hospitals. In addition to reducing community hospital utilization, it has been concluded that POHs generate higher costs for health care in an area. For example, an analysis by the Medicare Payment Advisory Commission (MedPAC) found that heart, orthopedic and surgical specialty hospitals had higher inpatient costs per discharge than community hospitals (Lewin Group, 2004).

Several factors account for the positive relationship between the addition of POHs and health care costs, and the negative correlation between the addition of a POH and lower utilization at full-service community hospitals.

Consumer not decision maker. Economic theory requires that for effective market operations, informed consumer decision making characterize both the input and output markets. In the market for hospital care, this is not the case since physicians have a significant amount of control over the patient’s choice of hospitals. For POHs this is especially problematic since physicians have a motivation to refer patients to facilities in which they have a stake or ownership interest. For example, Greenwald (2006) found that 80 percent of physicians were prone to refer Medicare patients to orthopedic facilities for which they had more than a five percent stake. Federal law generally prohibits physician self-referral, but grants an exception known as the “whole-hospital exemption” which allows physicians, who have an ownership interest in an entire hospital, to refer patients to hospitals where they are authorized to perform services. According to the GAO (2003), 96 percent of physician-owned limited-service hospitals that opened between 1990 and 2003 were located in states without Certificates of Need (CON) laws.

Cherry Picking. POHs treat a smaller share of Medicaid patients, or patients with high needs, but low financial resources. For example, it was found that 13 percent of community hospital admissions were Medicaid patients. However, only 3 percent of admissions to POHs were Medicaid patients (TrendWatch, p. 5). According to Cram (2005), POH patients were less likely to have co-existing conditions and were less likely to have had a heart attack prior to surgery. Mitchell (2005) discovered that POH were more apt to treat low severity cases and cases with lower comorbidities. In an analysis of eleven studies examining POHs, it was concluded by each of the studies that POHs “cherry-pick the most profitable patients.”[1]

Limited emergency rooms. By limiting the share of patients entering via the emergency room, POHs reduce their cost by avoiding patients with more severe or complicating health factors. In a report by the Office of the Inspector General, less than one-third of POHs have physicians on site at all times. Furthermore, they found that 25 percent of POHs did not have adequate written policies for managing medical emergencies and only about half of POHs have an emergency room. The study also discovered that POHs with emergency rooms were more likely to have only one bed.

Higher Margins at POHs. An analysis of Medicare cost reports in 2006 found that 57 percent of physician-owned facilities had margins above 9 percent. In contrast, only 17 percent of acute care general hospitals had margins greater than 9 percent (MedPac, 2005). It was found that steering patients to the higher margin hospitals resulted in higher medical costs. Mitchell (2005) found that physician owners of cardiac hospitals treated patients with more generous insurance and these patients incurred more profitable surgical diagnosis-related groups (DRGs).

Nebraska Examples of POHs
POH Heart Facilities. In a national study, Nallamothu (2007) discovered that the opening of a POH focusing on heart health resulted in a significant increase in usage and a doubling of the rate of coronary revascularization of Medicare beneficiaries. Confirming past research, it was concluded in an examination of a Lincoln, Nebraska POH that physicians steered patients to the physician-owned facility (McManis,2005). Additionally, it was concluded that this physician-owned facility focused on services that were reimbursed at higher rates and on patients that were the best payers. Through the referral process, it was concluded that this hospital avoided, or limited, emergency cases and tended to treat healthier patients (Nallamothu, 2007).

Table 1 (available on request) compares the hospital experience for heart procedure patients at NHH to that of all hospitals in the region and to all Nebraska hospitals for the period July 2008 to June 2009.[2] Data indicate that charges for heart procedures at the NHH were significantly higher than that at all hospitals in the region and at all Nebraska hospitals. Average cost per patient day were $14,304 for NHH, $10,228 for all hospitals in the region, and $9,867 for all Nebraska hospitals. Thus, costs at NHH were 39.8 percent higher than the average for all hospitals in the region, and 45.0 percent higher than the average for all Nebraska hospitals. If NHH had charged the average price for all hospitals in the region, patient savings for 2008-09 would have been $15,873,279. If NHH had charged the average price for all Nebraska hospital for 2008-09, patient savings for 2008-09 would have been $17,279,288.

In Table 2 (available on request) is listed the average length of hospitalization for NHH, for all hospitals in the region, and for all Nebraska hospitals. As presented, NHH’s patients were hospitalized for shorter periods of time than patients in the comparison groups. This difference may have been produced by: 1) NHH admitting and treating healthier patients that were required to remain in the hospital for a shorter period of time, and/or 2) NHH physicians discharging patients after a shorter stay. Since hospitals are generally compensated by DRG, rather than length of stay, keeping patients in the hospital for a longer period of time reduces hospital profitability. However, while differences in Table 2 support this hypothesis, they are not statistically significant at the 95 percent level of confidence but merit additional analysis to be definitive.

In addition to charging higher prices, data suggest that the NHH pulled patients away from Bryan LGH. According to the Lewin Group, full-service hospitals, such as Bryan LGH are less able to support essential but money-losing care as they lose more profitable patients to POH (Lewin, 2004). Not surprisingly, according to Bryan LGH Administration, the number of heart surgeries at their hospital dropped from 482, the year before NHH opened, to 60, the year after NHH opened. Data from Table 1 also show higher utilization at NHH.

Summary
This “White Paper” has compared past studies that analyzed the impact of POHs on health care costs. In general, research has concluded that the addition of POHs increases cost for patients in an area. Moreover, the addition of POHs to an area tends to undercut the economic viability of full-service community hospitals in the service area. By selecting patients with less severe illnesses, by limiting emergency room care, and by earning higher profit margins, POHs tend to increase medical costs in an area. The fundamental factor accounting for this relationship is that the decision of which medical facility to use is made, or influenced, by the physician, not the patient. Thus, physicians with a financial stake in the POH are motivated to send high profit margin patients to the POH. Cost data for one of Nebraska’s two POHs, NHH, support the conclusion that Nebraska’s POHs charge higher prices for medical procedures than community hospitals.[1]

References
American Hospital Association, “Self-referral to Physician-owned Hospitals,” April 17, 2008.

Cram P, et al. “Cardiac Revascularization in Specialty and General Hospitals,” New England Journal of Medicine, April 7, 2005, Vol. 352(14), pp. 1454-1462.

Government Accountability Office. (April 2003). Specialty Hospitals: Information on National Market Share, Physician Ownership, and Patients Served. Washington, DC.

Greenwald, Leslie, et al. 2006. “Specialty versus Community Hospitals: Referrals, Quality, and Community Benefits,”. Health Affairs, 25(1), 106-118.

Lewin Group (2004). “TrendWatch: Impact o Limited-service Providers on Communities and Full-service Hospitals, Sept. 2004, Vol. 6(2).

McManis Consulting, 2005. “Impact of Physician-owned Limited-service Hospitals,”

MedPac. 2005. “Report to the Congress: Physician-Owned Specialty Hospitals,” Medicare Payment Advisory Commission, Washington, DC.

Mitchell, J.M. (2005). “Effects of Physician-owned Limited-service Hospitals: Evidence from the Market for Cardiac Inpatient Care in Arizona,” Health Affairs Web Exclusive, Oct. 25, 2005.

Mitchell, J.M. (2007). “Utilization Changes Following Market Entry by Physician-owned Specialty Hospitals,” Medical Care Research and Review, 64(4), 395-415.

Nallamothu, BK, et al. “Opening of Specialty Cardiac Hospitals and Use of Coronary Revascularization in Medicare Beneficiaries,” Journal of the American Medical Association, March 7, 2007, Vol. 297(9), pp. 962-968.

Office of the Inspector General, “Physician-Owed Specialty Hospitals’ Ability to Manage Medical Emergencies,” http://oig.hhs.gov/oei/reports/oei-02-06-00310.pdf Department of Health and Human Services, January 2008.

Roemer, Milton. “Hospital costs relate to the supply of beds,” Modern Hospital. 1959 Apr;92(4):71-3.

TrendWatch, “Physician Ownership and Self-referral in Hospitals: Research on Negative Effects Grows,” American Hospital Association, April 2008.

Trinh, Hanh Q, Begun, James W and Luke, Roice D. “Hospital service duplication: Evidence on the medical arms race,” Health Care Management Review 33, no. 3 (Jul-Sep 2008): p. 192.

[1]An examination of spinal fusion operations at Nebraska’s other POH, the Nebraska Orthopedic Hospital, shows the same relationship as presented in Tables 1 and 2. That is, for the POH, cost- per-patient day were generally higher and the length of hospitalization was shorter than for community hospitals.

[1]The eleven studies were 1) MedPAC, 2) McManis: Black Hills, SD Case Study, 3) McManis: Lincoln, NE Case Study, 4) McManis: Oklahoma, OK Case Study, 5) McManis: Wichita, KS, Case Study, 6) TrendWatch, 7) Government Accountability Office, 8) Mitchell: Oklahoma City, 9) NEJM: Cran et al. , 10) Office of the Inspector General, 11) JAMA: Naltanothu et al.

Ernie Goss

Rural Mainstreet Economic Index Doubles from March 2009

2010-03-24T15:32:00.000-07:00

March Survey Results at a Glance

*Rural Mainstreet index soars to highest level in almost two years.
*Farm and ranch land index expands above growth neutral for second straight month.
*Largest economic challenges for ethanol production; 30 percent listed lack of government incentives while 24 percent indicated the availability of venture capital funds.
*Approximately 60 percent of bankers expect requirements for escrow of insurance and taxes on residential loans to reduce housing loans in 2010.

OMAHA, Neb. – For the sixth time in the past seven months, the overall index for the Rural Mainstreet economy rose, but it continues to remain below growth neutral, according to the March survey of bank CEOs in a 10-state region.

The Rural Mainstreet Index (RMI), which ranges between 0 and 100, soared to 47.4 from February’s 36.6. The reading is more than double the 18.7 recorded for March of 2009. A reading of 50.0 is considered growth neutral.

“The RMI has remained below growth neutral for 25 consecutive months. However, over the past several months, the RMI has been trending upward. We can safely say that the negatives are getting decisively less negative as the farming and ranching economies improve. Even so, economic conditions are weaker in the rural areas than in the urban areas of the region as the softer 2009 farm economy continues to work through Rural Mainstreet businesses in the region,” said Creighton University economist Ernie Goss. Goss and Bill McQuillan, CEO of CNB Community Bank of Greeley, Neb., created the monthly economic survey in 2005.

The farmland-price index moved above growth neutral for a second straight month to 58.2 from 52.8 in February. For the next six months, almost one in four, or 24 percent, of the bankers expect farm and ranch land to decline in value while 14 percent expect farm and ranch land to increase in price.

On the other hand, the farm equipment-sales index slipped to 41.4 from February’s 42.4. Prior to February of this year, both farmland price growth and farm equipment sales had been slipping. “I expect farm equipment sales to pick up as the farm and ranch economies improve in the months ahead,” said Goss.

This month bank CEOs were asked to identify how the new Regulation Z, which requires the escrow of real estate taxes and insurance for residential real estate, will affect their lending. More than 60 percent of the bank CEOs expect to reduce the number of housing loans due to this regulation. However, Joe Conover with Northwest Bank in Okoboji, Iowa, expects little impact from Regulation Z since it will apply only to high-priced houses.

Jeffrey Gerhart, CEO of the Bank of Newman Grove in Newman Grove, Neb., argues that banks need to be watching current banking legislation before Congress for negative impacts on rural banks and the communities they serve.

Contrary to recent months, loan-volumes improved significantly to 55.2 from February’s weak 43.7. For March, the checking-deposit index climbed to 56.2 from 52.8 in February. The index for certificates of deposit and other savings instruments expanded to 54.4 from 50.9 in February.

Hiring in rural areas has yet to bounce above growth neutral. However, the new-hiring index moved higher to 45.7 from February’s 34.8 and January’s 40.1. This was the 27th consecutive month that the index has been below growth neutral. Only 14 percent of bankers said hiring was up from last month. “The Rural Mainstreet economy continues to lose jobs at an annualized rate of roughly 2 percent. While this is well above the rate of job losses for urban areas, the pace of job losses has slowed from the 4 percent pace experienced in previous months,” said Goss, the Jack A. MacAllister Chair in Regional Economics at Creighton.

Bank CEO's were also asked about the impact of ethanol production on the Rural Mainstreet Economy. Approximately 27 percent expect ethanol production in their area to expand by more than 10 percent from 2009 levels. More than four in ten bankers anticipate that ethanol production for 2010 will growth by more than five percent. Asked about the biggest economic challenge for ethanol production in their area, 30 percent listed the lack of government incentives as the largest hurdle, while 24 percent indicated that the availability of venture capital funds was the most significant 2010 challenge for ethanol producers.

Tom Boyer, president of Farmers State Bank in Fairmont, Neb. says that his conversations with local ethanol plant managers indicated that their biggest challenge for 2010 would be the lifting of tariffs on imported ethanol from Brazil.
Like much of the nation, retail sales were less than healthy for the month with a February retail-sales index of42.4, which was up dramatically from February’s 32.4.

Just like the recently released national housing data, home sales for Rural Mainstreet were not good for March, though the home-sales index did improve to 46.5 from 37.5 in February.

Ernie Goss

Budget Lies in Health Care: Who cares?

2010-03-19T12:21:00.000-07:00

As discussed in previous posts, the health care bill proceeds on the unrealistic assumption that Medicare reimbursements paid to healthcare providers will be reduced during future years. Without that reduction, the deficit reduction element of this bill goes away. To the contrary, the true costs begin to emerge. Along with smoke and mirrors accounting, which accelerates taxes and defers benefits, the true costs of government-provided healthcare in the final tally will be much more onerous than the Obamacare supporters are willing to let on.

The recent CBO figures that are being touted by the Democrat leadership as they chant a deficit reduction mantra while at the same time running our country into bankruptcy are based on this Medicare assumption. However, cuts in Medicare reimbursement rates are not sustainable, as providers simply cannot provide these services for even lower reimbursement rates. At least three possibilities emerge to address the problem: (1) increasing rates for services on insured patients (now everyone else) even more, thus allowing the providers to subsidize the Medicare patients with revenues from insured patients; (2) de facto rationing of care to seniors dependent on Medicare, with these seniors becoming worse off as a result of the health care bill because they cannot find providers who will serve them; or (3) a later “fix” that will restore benefit levels to sustainable rates, thus protecting seniors dependent on Medicare.

The first and second options will be politically unsustainable, as they will dramatically raise costs for the insured or impose those same costs on the Medicare population. Neither is a sane approach to this problem. So a betting person would put his/her money on the third option. But of course, this will significantly increase the costs of this health care package and take away the "deficit reduction" cover, even with all the smoke and mirrors accounting.

A memo posted at politico.com today, which purports to come from democratic strategists, shows that a Medicare fix is indeed in the works, but supporters are instructed not to talk about it. The memo points out that “most health staff are already aware that our health proposal does not contain a ‘doc fix’ [i.e., a restoration of these benefit cuts]." The memo goes on to explain: “The inclusion of a full SGR [sustainable growth rate] would undermine the reform’s budget neutrality. So, again, do not allow yourself (or your boss) to get into a discussion of the details of CBO scores and textual narrative. Instead, focus only on the deficit reduction and number of American’s covered.”

In other words, LIE.

If people want to have health care funded by the government, then they should step up and be honest about what it will cost, who will pay, and how much. Then let's vote on it. This kind of deceptive behavior is unconscionable, but it is the modus operandi of the current administration. And I thought that it was supposed to be all about transparency, giving people an "up or down" vote, removing special interests from the legislative process, and bipartisanship!

You can read the full text for yourself here: http://www.politico.com/static/PPM138_100319_recon.html

EAM

Greek Financial Foibles Hit Mainstreet

2010-03-13T14:41:00.000-08:00

The 6,200 miles between Athens, Greece and Sioux Falls, South Dakota failed to prevent recent Greek bond problems from clipping growth in this Mid-American community as well as in other agriculturally based areas. But how did this seemingly remote event affect businesses, farms and workers in the nation’s breadbasket?

First, investors, fearing Greek bond defaults, bailed out of the Hellenic nation’s sovereign debt funds selling Greek bonds and buying “safe haven” U.S. Treasuries. In order to buy U.S. Treasury bonds, investors converted their Euros to dollars driving up the value of the dollar relative to the Euro from $1.51 to $1.35 within two short months. This means that the price of an Omaha hotel room for Europeans rose from 66 Euros to 74 Euros per night. During this same time period, the price of a bushel of South Dakota corn, measured in dollars, plunged by 14 percent. That is, U.S. produced goods, such as corn, became less price competitive while European produced goods declined in terms of U.S. prices.

Likewise, this safe haven buying of U.S. Treasuries drove U.S. interest rates lower and Greek rates higher. However, this situation to be reversed in the months ahead due to Greece’s implementation of corrective taxing and spending policies designed to cut their deficit. At the same time, U.S. policymakers continue to ignore rising budget deficits and mounting debt that would make even Dionysus blush. Ultimately, U.S. citizens face the trifecta of higher taxes, inflation and interest rates unless federal overspending is halted.

Ernie Goss

Colorado's New Tax Arouses Amazon to Action

2010-03-11T13:59:00.000-08:00

Today's BNA Electronic Commerce & Law Report (March 10, 2010) (by subscription) reports on Colorado's enactment of H.B. 1193, which requires retailers with affiliate relationships in Colorado to collect sales taxes for online purchases. The bill reaches out to touch online retailers like Amazon who receive customer referrals from those with online links to Amazon. But in this case, the legislators did not get the extra taxes they anticipated. Instead, Amazon responded by severing ties with Colorado residents who are affiliates.

Sales tax revenues on online sales have long been a bone of contention for states that are hungry for revenues. (I was one of the early writers on this topic, publishing a law review article on it in 1997. See Something New Under the Sun? State Taxation of Internet Commerce, 30 Creighton Law Reveiw 1113 (1997)). Constitutionally speaking, states must have nexus with the seller before imposing obligations on the seller to collect income taxes. Based on the Supreme Court's ruling in Quill v. North Dakota, nexus requires a physical presence for purposes of imposing sales tax collection obligations. Getting nexus over online sellers like Amazon, without any offices or sales departments in the state, has long been a vexing problem. So various theories developed, including looking to the physical presence of agents who may be providing services on their behalf.

Colorado seized on Amazon's associates program, which allows website operators to advertise Amazon products and to receive payments for those customers who purchase the goods. If an "Amazon associate" with this website is a Colorado resident, Colorado legislation seeks to make that relationship a basis for subjecting Amazon to a potential tax collection obligation if the total from all such affiliates exceeds $10,000. It would also impose a requirement to notify Colorado residents of their obligation to pay a sale or use tax, as well as to send notice of all purchases made during the prior year. There are significant penalties (computed on a per customer basis) for a failure to comply.

But as it turns out, some companies don't just shut up and pay. They take action when they view the burdens of the tax to outweigh their benefits. And that is what Amazon did. They wrote all of their in-state affiliates and told them, sorry, no more advertising revenues. Thus, you are essentially out of business if you are making money with a link to Amazon products.

Amazon may lose some customers, but it also disentangles itself from burdensome compliance obligations imposed by Colorado. Colorado loses. It will not generate these future taxes and penalties, and it will also lose the income taxes from the advertising fees paid to affiliates. Colorado citizens lose, particularly those who wanted to earn money from affiliate activities.

A gentle reminder: Taxes have consequences. Not all new taxes raise revenues. Those interested in Amazon's new policy can find it here: https://affiliate-program.amazon.com/gp/associates/help/operating/compare?ie=UTF8&pf_rd%5Ft=501&ref%5F=amb%5Flink%5F162989822%5F1&pf%5Frd%5Fm=ATVPDKIKX0DER&pf%5Frd%5Fp=&pf%5Frd%5Fs=assoc-center-1&pf%5Frd%5Fr=&pf%5Frd%5Fi=assoc%5Foperating

EAM

Health Care Reform: Truth vs. Fiction

2010-03-04T13:16:00.000-08:00

Today's Wall Street Journal has an excellent editorial along with excerpts from the remarks of Congressman Paul Ryan (R-Wisconsin) dealing with the true costs of health reform. As the WSJ editors put it, Congressman Ryan's remarks "methodically dismantle the falsehoods -- there is no other way of putting it -- that Mr. Obama has used to sell 'reform' and repeated again yesterday."

These falsehoods include:
(1) The bill (presumably the senate version) will reduce the deficity by $131 over the next 10 years. The CBO figures come out that way because the bill engages in smoke and mirror financing tactics, which underestimate the true costs. Among the deceptive features, the bill covers 10 years of tax revenues (estimated at about half a trillion dollars) along with cuts in Medicare that no one believes are sustainable (also about half a trillion dollars, covered here in a prior blog -- including a 22 percent cut in medicare reimbursements beginning next month) to pay for six years of new spending.

If seniors think they have a hard time getting treatment now, just wait until those cuts are implemented. The political reality, though, is that the Congress probably won't let those cuts be implemented, but the costs of that separate bill won't be included in this one, thus adding to the attempted deception of the American people. Although the President claims that he would not sign a bill that would increase the deficit, it will do just that, adding to crushing burdens that we already face in unfunded liabilities for medicare, medicaid, and social security.

Adding insult to injury, the senate bill also takes funds from increased social security tax revenues and uses them to finance health care. But wait a minute -- as Rep. Ryan points out -- "either we are double counting them or we don't intend on paying those Social Security benefits." He makes similar points on funds from the long-term care insurance program.

(2) It does not "bend the cost curve downward." Rep. Ryan points to the chief actuary of Medicare for this fact, which is hard to dispute. And of course, there is the matter of what it means for government to bend the cost curve at all. Greater efficiencies through technological or other productivity gains would be a legitimate basis for changing medical costs, but those gains or hard to deliver, especially when the bill adds new layers of government regulation. Those who are outraged by insurance premium increases may need to learn that just because the government says premiums must go down does not necessarily generate cost savings without some corresponding reductions in services.

Our comrades may disagree with us about the level of federal government involvement in healthcare delivery. But if you want to deliver a good, you need to articulate a sound means for financing it. The President's proposal does not do that. It simply leaves a bigger problem for a subsequent Congress -- and as discussed in my previous entry, subsequent generations --to solve. And that is not responsible government by anyone's definition.

EAM

Grameen Omaha Opening!!

2010-03-04T07:04:00.000-08:00

24th and Q Street, the heart of South Omaha, is an unlikely spot to find a New York City businessmen and a Bangladeshi economist. A crowd of several hundred packed into the retired City Hall building to welcome world-renowned Professor Yunus and Grameen America’s CEO Stephen Vogel, who were in town to celebrate the grand opening of Grameen America’s second U.S. branch office. [http://www.grameen-info.org/]

Although the United States is a new and unique market for Grameen, Yunus said, “people across the globe are the essentially the same, with similar wants, needs, and aspirations.”
While Omaha’s less densely populated demography will be a challenge to Grameen’s proven model of micro-lending, success in the area may lead to expansion into many diverse metropolitan areas across the United States.

“May Omaha start the chain of expansion,” said Yunus as he wrapped up his opening speech.
Though the idea of a $1500 loan impacting a business may sound far-fetched to most Americans, my interviews with Grameen borrowers suggested otherwise.

A local business owner and one of the branch’s first borrowers teared up when asked what her life and business would have looked like without the Grameen loan.

“I would have been out of business within several months,” she said.

Overlooked by traditional banks, she reached out to Grameen. With the $1500 loan, she covered trade show fees, marketing expenses, and funded the purchase of a new computer—items necessary for success in her chose field. With hard work, the business is now on stronger footing, and with a wide-eyed smile, she noted that her last loan payment was just a few months away.

“Grameen took a chance on me when no one else would,” she said. “This leaves me feeling inspired to push forward.”

Raul and his wife Mimi, owners of a local Peruvian restaurant, had little capital to purchase the initial inventory they needed after pouring all available funds into securing a location for their business. Grameen provided them the funding they needed to get the business up and cooking.
When asked about his long-term business plan, Raul answered in two parts, mid-term and long-term. It was clear that the future was on his mind. While finishing up the payments on their first loan, the couple is making plans for a follow-up loan with Grameen to purchase a commercial oven, which would greatly help to expand the restaurant’s capabilities.

Grameen has obviously brought more than just a few small loans to South Omaha entrepreneurs. A cosmetics businesswoman disliked the traveling requirements and time spent away from her family, yet she takes solace in the fact that the harder she worked, the more she earned. To borrowers like her, Grameen has brought hope in a better future and a resurgence in the idea that the American Dream is alive and still within reach to those willing to work for it.

Aaron Konen
3/1/2010

Health Care Reform: A Trojan Horse?

2010-02-27T07:14:00.000-08:00

The so-called Health Care Summit has provided another opportunity for President Obama to rally his troops for a massive charge at the metaphorical mountain of health care reform. Unfortunately, the other side of that mountain peak is a steep cliff, and those troops who follow may find that the descent is not so pleasant. The rationale for the rush: because the democratic leadership thinks a window of opportunity is closing. Unless they can get this Trojan Horse inside the walls, the gates may be shut in November when the people speak their will. And of course, there is nothing like a big entitlement program to perpetuate an expansive role for government in the lives of its citizens, which is the core of their political agenda.

Unfortunately, the economic sustainability of our country is not getting adequate attention from those supporters. The President has argued that his bill (though we don't yet know exactly what it will contain) will lower health care costs. But without methods to increase competition and induce market-based controls into the spending of health-care dollars, how will that be true? If your version of reform is based on government subsidies to make health care more "affordable" (which, of course, is at the heart of this plan), then that means more government spending, financed by taxing and redistribution. Or more accurately, since this bill defers many of the tax consequences for political reasons and it underestimates the true costs of providing these benefits, it will mean borrowing and redistribution, followed by future taxing. And that can lead to something even more destabilizing for our economic future.

Mark Steyn has an interesting piece in National Review Online that suggests we are heading down the same path as some of our European neighbors, particularly Greece, which is now in the throes of economic turmoil. As much as we may benefit from building on the cultural, culinary, and artistic heritage that has come to us from Europe, emulating their economic policies is not in our best interest. Emulating their family and child-bearing practices may not work so well, either.

Steyn points out that Greece is now in social uproar due to the combination of large entitlements and limited productivity. Financing entitlements based on taxing the next generation (as we have also done, and are doing even more rapidly with deficit spending and rapidly depleting surpluses from social security) can work if the birth rate is adequate. But in Greece, the birthrate is an astonishingly low 1.3 (vs. 2.1 in the U.S.) (Alas, that Big Fat Greek Wedding thing we have heard so much about is apparently not bringing little Greeks into the world, and that is a loss for all of us.)

The consequence for a society based on large entitlements is dire: there are simply not enough grandchildren to finance grandma and grandpa's benefits. This creates a situation where those getting benefits (or those who think they are about to get the benefits, and expect they will croak before the system crashes), keep sticking it to the younger generation for as long as they can. It reflects a selfish world-view in which the future is damned as long as I get my satisfaction. Frankly, I think this moral dimension of health care reform deserves attention. Many on the left tap into religious principles rooted in loving and caring for our neighbors as a basis to support massive expansion of govenrment entitlements. It is nice to be able to do things for others. But without a sustainable basis to finance them, how is it moral to bankrupt the next generation? (And as an aside, if one wants to root this in satisfying a religious obligation, shouldn't we be fulfilling this obligation on a personal level, rather than through a forced exaction by the state? I have never understood that mindset.)

Check out the article and see if you agree with the parallels. If you agree with Steyn, then stand up and be counted on behalf of our children and grandchildren. There may still be time to correct this problem.
http://article.nationalreview.com/426405/when-responsibility-doesnt-pay/mark-steyn

EAM

Rural Mainstreet Economy Slumps for February: Bankers See Business Hiring as Biggest 2010 Challenge

2010-02-18T15:39:00.000-08:00

February Survey Results at a Glance
* Rural Mainstreet index declines for first time since August of 2009.
* Farmland price index advances above growth neutral for first time since October of 2008.
* Approximately 38 percent of bank CEOs expect lack of hiring by Rural Mainstreet businesses to be the biggest economic hurdle in 2010.
* Over 40 percent report that regulatory oversight was restraining U.S. bank lending.

OMAHA, Neb. – For the first time since August of last year, the overall index for the Rural Mainstreet economy declined and continues to indicate significant economic weakness, according to the February survey of bank CEOs in a 10-state region.

The Rural Mainstreet Index (RMI), which ranges between 0 and 100, slumped to 36.6 from January’s 41.0. A reading of 50.0 is considered growth neutral.

“The RMI has remained below growth neutral for 24 consecutive months. It is clear that the rural economy of the region is underperforming the urban areas. The softer farm economy for 2009 continues to weigh on Rural Mainstreet businesses in the region. Agriculture producers have been taking a conservative approach to their buying and this is showing up in our survey,” said Creighton University economist Ernie Goss. Goss and Bill McQuillan, CEO of CNB Community Bank of Greeley, Neb., created the monthly economic survey in 2005.

Despite a weaker overall index, the farmland price index move above growth neutral for the first time since October 2008, or around the time that the U.S. dollar began to increase in value and agricultural commodity prices softened significantly. The February farmland-price index rose to 52.8 from 47.4 in January. On the other hand, the farm equipment-sales index slumped to 42.4 from 47.2 in January.

This month bank CEOs were asked to identify the biggest economic challenge to the 2010 Rural Mainstreet economy. More than one-third, or 38 percent, expect a lack of new hiring by businesses in the area to be the most significant economic hurdle for 2010. Coming in a close second place, 30 percent of bankers anticipate that weak commodity prices will be the largest problem for the rural economy for 2010. Dale Bradley, CEO of Citizens State Bank in Miltonvale, Kan., said the weakness in farm prices is not stacking up well for Rural Mainstreet banks. Ranking third were concerns over farm input prices with 16 percent expecting high agricultural input prices to be the biggest economic challenge for 2010.

As in past months, loan-volumes remained low with a February loan volume index of 43.7, which was up significantly from January’s record low 33.4. This month bank CEOs were asked why U.S. banks had not stepped up their lending. More than 41 percent reported that regulatory oversight was the prime factor limiting loan activity. According to Pete Haddeland, CEO of First National Bank in Mahnomen, Minn., “I think the regulators have zeroed in on community banks, and are holding them to a much higher standard than the big banks.” Another banker indicated that it was the threat from regulators that was causing reduced lending.

On the contrary, Larry Franklin, CEO of Cornerstone Bank & Trust in Alton, Ill. said, “Community Banks continue to fund their communities, by making loans for worthwhile purposes, despite increased regulatory burden.” On the other hand, 34 percent of the bankers reported that cut backs in loan demand from borrowers was the chief factor reducing loan activity. Only 21 percent said that borrower credit quality was the prime reason that U.S. banks were limiting lending.

For February, the checking-deposit index declined to 52.8 from January’s 59.2 and December’s 69.8. The index for certificates of deposit and other savings instruments expanded to 50.9 from 47.5 in January.

As the Rural Mainstreet Economy wilted for the month, the economic outlook slipped as well. The monthly confidence index, which tracks bankers’ economic outlook six months from now, sank to 52.8 from January’s 59.7. However, there were some improvements on the horizon. According to Ken Walsh, CEO of Ruby Valley Bank in Twin Bridges, Mont., “Cattle prices are beginning to show some improvement, which will be a big benefit in our area. We look forward to green grass and a renewed outlook for the local economy.”

Hiring in rural areas has yet to trend upward. The new-hiring index fell to 34.8 from January’s 40.1. While the February 2010 reading was up from February 2009’s record low 14.7, this month’s report was not promising in terms of new hiring. This was the 26th consecutive month that the index has been below growth neutral. Only 7 percent of bankers said that hiring was up from last month.

“The Rural Mainstreet economy continues to lose jobs at an annualized rate of roughly 4 percent. While this is certainly not good and is well above the rate of job losses for urban areas, the pace of job losses has slowed from the 5 percent pace experienced in previous months,” said Goss, the Jack A. MacAllister Chair in Regional Economics at Creighton.

Like much of the nation, retail sales were less than healthy for the month with a February retail-sales index of 32.4, which was down from 40.2 in January. Some of the bankers report losing local sales to regional “big box” retailers.

Just like the recently released national housing data, home sales for Rural Mainstreet were not good for February. The home-sales index slumped to 37.5 from January’s 40.1.

Each month, community bank presidents and CEOs in nonurban, agriculturally and resource-dependent portions of the 11-state area are surveyed regarding current economic conditions in their communities and their projected economic outlooks six months down the road. Bankers from Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wyoming are included. Additional surveys were completed by Montana bankers but not reported separately.

This survey represents an early snapshot of the economy of rural, agriculturally and energy-dependent portions of the nation. The Rural Mainstreet Index (RMI) is a unique index covering 11 regional states, focusing on approximately 200 rural communities with an average population of 1,300. It gives the most current real-time analysis of the rural economy.

Colorado: Colorado's RMI sank to 35.7 from 40.3 in January. The February ranch- and farmland-price index rose to 51.9 from January’s 46.8. The state’s Rural Mainstreet new hiring index sank to 33.9.

Illinois: The Illinois RMI once again moved below growth neutral. The RMI for February slumped to 34.8 from January’s 38.4. Farmland prices rebounded to 51.0 from 44.4 in January. Hiring in rural agriculturally dependent areas of the state remained weak with a February reading of 33.0 for the new hiring index.

Iowa: Iowa's RMI once again moved below growth neutral according to the monthly survey of bank CEOs in the state. The RMI for February dipped to 37.1 from 41.2 in January. The farmland-price index climbed above growth neutral to 53.3 from January’s 47.6 and December’s 44.7. Iowa’s new hiring index for February was a frail 35.3. According to Bradley Robson, CEO of First State Bank in Belmond, “The federal government needs to quit working on/or passing legislation that short circuits business decisions founded in economics rather than legislative enticements.”

Kansas: The Kansas RMI, like much of the region, was below growth neutral 50.0. The index slipped to 34.9 from January’s 39.0. The farmland-price index climbed to 51.1 from January’s 45.4. The February new hiring index for the state was a weak 33.1.

Minnesota: Minnesota's RMI dipped to 36.3 from 39.8 in January. Minnesota’s farmland-price index advanced to 52.5 from January’s 46.3. New hiring among Rural Mainstreet businesses was very weak with a reading of 34.5.

Missouri: The Missouri RMI slumped to 37.0 from 41.5 in January. The February farmland-price index grew to 53.2 from January’s 48.0. Hiring in rural areas of the state was not good for the month with a new hiring index of 35.2.

Nebraska: The February RMI for Nebraska slipped to 38.5 from 42.3 in January. The farmland-price index for February rose to 54.7 from January’s 48.7. The state’s rural areas continue to lose jobs as the new hiring index for February stood at 36.7.

North Dakota: For the ninth straight month, North Dakota’s RMI was the highest in the region. Even so, the index moved below growth neutral to 48.1 from January’s 52.1. North Dakota's farmland-price index climbed to 58.3 from January’s 52.6. Layoffs exceeded hiring for the month as the new hiring index stood at 40.3 for February.

South Dakota: The RMI for South Dakota remained below growth neutral with a February reading of 38.5, down from 43.2 in January. The state’s farmland-price index climbed to 54.7 from 49.7 in January. South Dakota's new hiring index was 36.7 for February.

Wyoming: The Wyoming RMI for February dropped to 34.3 from January’s 39.2. The February ranch- and farmland-price index advanced to 50.5 from 45.7 in January and 44.1 in December. As in the other states, businesses laid off more workers than they hired as the new hiring index stood at 32.5.
Ernie Goss

Increasing Taxes on Rich Is Neither Fair nor Sound

2010-02-12T09:47:00.000-08:00

In the name of fairness, President Obama has endorsed increasing taxes on individuals making more than $200,000 by allowing the tax rate on each additional dollar of earnings to climb from 35 percent to 39.5 for these “rich” workers. Additionally, these individuals will see their taxes on dividends and capital gains advance to pre-2003 levels.

This means that in states such as Oregon, successful business owners will pay more than $500 in income taxes for each $1,000 of additional income. Recently in a ballot initiative with less than 2.5 percent of the state’s electorate participating, Oregon’s voters approved raising the top tax rate on income to 11 percent. Oregon’s experience is not unique. Across the nation, lower income individuals are shifting more and more taxes from themselves to the “rich” via the voting booth. In 2007, the top ten percent of income earners paid more than 70 percent of federal personal income taxes, while the bottom 50 percent paid less than three percent of federal income taxes paid (http://www.ntu.org/main/page.php?PageID=6 ). This disparity will increase significantly in 2011.

There are three problems with this distribution of burdens. First, politically speaking a large number of low income individuals (the 90 percent) can vote to inflict even higher taxes on the supposed rich (the 10 percent). Second, this shifts the cost of government to a small proportion of the population, thus encouraging government overspending. Third, taxing higher wage earners more punitively reduces overall economic growth by discouraging work and entrepreneurship, thus reducing the size of the economic pie for all, including the poor. Fourth, raising taxes for either high or low income wage earners in these times of economic fragility is unwise and potentially reckless.
Ernie Goss.

Inflation Outlook: Can We Believe the Fed?

2010-02-01T06:33:00.001-08:00

At their January 26-27 meetings, the Federal Reserve interest rate setting committee said that, "With substantial resource slack continuing to restrain cost pressures and with longer-term inflation expectations stable, inflation is likely to be subdued for some time." Surveys of supply managers both ISM's national (http://www.ism.ws/) and Creighton's regional (http://tiny.cc/UsKhv ) run contrary to this assertion and point to elevated inflationary pressures.

The Fed normally would like to see inflation running at 1.75% to 2.00%. Based on surveys of supply managers, I expect the inflation rate to rise to 3.5 percent by the middle of 2010. This will push long term rates up even as the Fed holds short term interest rates "too low." The Fed needs to be increasing rates now before inflation and inflation expectations get out-of-hand. Meantime the Fed attempts to control expected inflation by issuing the statement listed above. To be fair, they are caught between a "rock and a hard place." A fragile economy that needs low interest rates and monetary growth and an economy that is heating up with rising inflation and inflation expectations. However, they need to err on the side of higher short term interest rates in my judgment. Ernie Goss

Loan Volume Declines to Record Low Level for Rural Mainstreet

2010-01-21T16:16:00.000-08:00

Survey Results at a Glance
*Rural Mainstreet economy continues to decline but at a slower pace.
*Bank lending declined to a record low for the month.
*More than one-third of bankers don’t expect a Fed rate hike this year.
*Economic confidence remains very healthy.

For Immediate Release: Jan. 21, 2010
OMAHA, Neb. – For a fifth straight month the overall index for the Rural Mainstreet economy advanced, but continued to indicate significant economic weakness, according to the January survey of bank CEOs in an 11-state region. The Rural Mainstreet Index (RMI), which ranges between 0 and 100, rose slightly to 41.0 from December’s 40.9. A reading of 50.0 is considered growth neutral.

“The RMI has remained below growth neutral for 23 consecutive months. The uncertainty surrounding legislative changes coming from Washington combined with economic weakness among Mainstreet businesses linked to the farm sector appear to be weighing on the rural, agriculturally dependent economy,” said Creighton University economist Ernie Goss. Goss and Bill McQuillan, CEO of CNB Community Bank of Greeley, Neb., created the monthly economic survey in 2005.

For many of the bankers, health care costs remain an issue. According to Jeffrey Gerhart, CEO of the Bank of Newman Grove, Neb., “Increasing health care costs continue to concern me. Our costs continue to rise but meaningful improvements in our health care system that would lower the cost do not seem to be the focus of Congress.”

As in past months, the fragility of the rural economy is being reflected in farmland prices and the sales of farm equipment. The January farmland-price index rose to 47.4 from 44.9 in December. This was the 15th straight month that the index remained below growth neutral. The farm equipment-sales index increased to 47.2 from December’s 40.4.

This month we asked CEOs by how much farmland prices have changed over the past 6 months. More than one in 10, or 11 percent, indicated that farmland prices had increased by more than 5 percent over the second half of 2009. Approximately 31 percent, reported that farmland prices declined over the past 6 months. The largest share of bankers, approximately 41 percent, reported no change in farmland prices over the past half year.

However, there were wide variations in reports of farmland prices. For example, Dale Bradley, CEO of Citizens State Bank in Miltonvale, Kan., reported, “Land prices seem to be staying strong. Crops were good this fall, but prices are down and that does not bode well for our farmers.”

Despite the corn harvest being behind schedule, yields are up dramatically for 2009 according to the bankers. More than one-third, or 38 percent, indicated that yields were up more than 10 percent over 2008 levels. On the opposite side, only 7 percent reported that yields were down by more than 10 percent. Overall, 65 percent reported yields up from 2008, while only 15 percent indicated that yields were down from 2008.

Even with the current muted economic conditions for Rural Mainstreet, bankers were very upbeat about future economic prospects. The monthly confidence index, which tracks bankers’ economic outlook six months from now, climbed to 59.7 from December’s 53.7 and November’s 50.1.

Hiring in rural areas was decidedly negative. Nonetheless the negatives are getting less negative as the new-hiring index advanced to 40.1 from December’s 33.4. While January’s reading was the highest since July 2008, it was the 25th consecutive month that the index has been below growth neutral. Approximately 9 percent of bankers said that hiring was up for the month but roughly 65 percent reported that hiring was down for January from December levels.

“Over the past year, the Rural Mainstreet economy has lost 150,000 jobs, or 3.1 percent of its employment. While this loss is certainly a problem, it is encouraging that the annualized pace of job losses has declined from the 5.4 percent experienced only a few months back. I expect the pace of losses to moderate significantly in the months ahead,” said Goss, the Jack A. MacAllister Chair in Regional Economics at Creighton.

Like much of the nation, retail sales were less than healthy for the month, with a January retail-sales index of 40.2, down from 43.3 in December. However, crippling winter weather played an important role in reducing retail sales.

Just like the recently released national housing data, home sales for Rural Mainstreet were not good for January. The home-sales index slumped to 40.1 from December’s 40.4.

This month, bank CEOs were also asked when they expect the Federal Reserve to begin raising interest rates. Only 7 percent expect a rate hike in the first half of 2010, while 37 percent anticipate that the Fed will not raise rates until 2011. Most, or 56 percent, expect a rate increase in the second half of 2010. Pete Haddeland president of the First National Bank in Mahnomen, Minn., does not expect a rate increase until unemployment peaks and is on its way down.

Despite the United States Treasury Department encouraging increased lending, the loan-volume index slumped to a record low level. The January loan volume index plummeted to 33.4 from December’s 45.7 and November’s then record low 38.3.

For January, the checking-deposit index declined to 59.2 from 69.8 in December. The index for certificates of deposit and other savings instruments slumped to 47.5 from December’s 59.6.

Each month, community bank presidents and CEOs in nonurban, agriculturally and resource-dependent portions of the 11-state area are surveyed regarding current economic conditions in their communities and their projected economic outlooks six months down the road. Bankers from Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wyoming are included.

This survey represents an early snapshot of the economy of rural, agriculturally and energy-dependent portions of the nation. The Rural Mainstreet Index (RMI) is a unique index covering 11 regional states, focusing on approximately 200 rural communities with an average population of 1,300. It gives the most current real-time analysis of the rural economy.

Colorado: Colorado’s RMI expanded to 40.3 from 39.8 in December. The January ranch- and farmland-price index rose to 46.8 from December’s 43.8 and 44.1 in November. The state’s Rural Mainstreet loan volume index plunged to 32.7 from December’s 44.6. Colorado’s Rural Mainstreet economy has lost more 3.7 percent of its employment over the past year. This compares to a loss of 3.9 percent for Colorado's urban areas.

Illinois: The Illinois RMI once again moved below growth neutral. The RMI for January rose to 38.4 from 37.6 in December. Farmland prices continue to slump with a January index of 44.4 which was higher than December’s 42.4. Illinois’ Rural Mainstreet economy has lost more 5.3 percent of its employment over the past year. This compares to a loss of 4.0 percent for the state’s urban areas.

Iowa: Iowa’s RMI remained below growth neutral, according to the monthly survey of bank CEOs. The RMI for January edged higher to 41.2 from 40.7 in December. The farmland-price index was also below growth neutral with a January reading of 47.6, up from December’s 44.7. Iowa’s Rural Mainstreet economy has lost approximately 3.2 percent of its employment over the past year. This compares to a loss of 1.5 percent for Iowa's urban areas.

Kansas: The Kansas RMI, like much of the region, was below growth neutral 50.0. The index was unchanged from December’s 39.0. The farmland-price index climbed to 45.4 from 43.0 in December. The January loan volume index plunged to 31.4 from December’s 43.8. But all was not negative for agriculture. According to Frank Sullentrop, president of Legacy Bank in Colwich, “Commodity prices and farm income have been one of the few bright spots in our local economy over the past year. Kansas’ Rural Mainstreet economy has lost approximately 6. percent of its employment over the past year. This compares to a loss of 3.2 percent for the state’s urban areas.

Minnesota: Minnesota's RMI inched higher to 39.8 from December’s 39.3. Minnesota’s farmland-price index advanced to 46.3 from December’s 43.3. The January loan volume index for the state’s Rural Mainstreet economy sank to 32.2 from 44.1 in December. Brian Nicklason, president of Woodland Bank in Remer reported, “Winter tourism in our area is down. Lack of good snow and high gas prices are the likely cause of the downturn. Most restaurants, bars, gas stations and motels are finding customer traffic is below last year’s levels.” Minnesota’s Rural Mainstreet economy has lost approximately 3.4 percent of its employment over the past year. This compares to a loss of 2.9 percent for Minnesota's urban areas.

Missouri: The Missouri RMI slipped to 41.5 from December’s 41.7. The January farmland-price index expanded to 48.0 from 45.7 in December. Loan volumes remained weak with an index of 33.9 for January which was down significantly from December’s 46.5. Missouri’s Rural Mainstreet economy has lost approximately 3.9 percent of its employment over the past year. This compares to a loss of 2.2 percent for the state’s urban areas.

Montana: There were too few responses to produce a reliable index.

Nebraska: Nebraska's RMI climbed to 42.3 from December’s 42.0. The farmland-price index for January expanded to 48.7, up from December’s 34.7. The January loan volume index tumbled to 34.7 from December’s 46.8. But some areas in the state reported solid growth in farmland prices. For example, John Nelsen, president of First Tier Bank in Holdrege, said, “Our farmland sales have been very limited but have set record highs as they occur.” However, he is somewhat concerned about the financial strength of the agriculture sector. Nebraska’s Rural Mainstreet economy has lost approximately 2.2 percent of its employment over the past year. This compares to a loss of 1.9 percent for Nebraska's urban areas.

North Dakota: For the eighth straight month, North Dakota’s RMI was the highest in the region and the only one above growth neutral. The January RMI for the state slipped to 52.1 from December’s 52.2. North Dakota's farmland-price index climbed to 52.6 from 50.2 in December. The state’s loan volume index plunged to 38.5 from December’s 51.0. North Dakota’s Rural Mainstreet economy has increased the size of it employment by 1.8 percent. This compares to a loss of 1.1 percent for the state’s urban areas.

South Dakota: The RMI for South Dakota remained below growth neutral with a January reading of 43.2, up slightly from December’s 43.1. The state’s farmland-price index climbed to 49.7, which was up from December’s 47.1. South Dakota's loan volume index for January slumped to 35.6 from 47.9 in December. South Dakota’s Rural Mainstreet economy has lost approximately 2 percent of its employment over the past year. This compares to a loss of 1.3 percent for the state’s urban areas.

Wyoming: Wyoming's RMI for January slipped to 39.2 from December’s 40.1. The January ranch- and farmland-price index rose to 45.7 from December’s 44.1. However, according to Kent Shurtleff, CEO of Wyoming National Bank in Riverton, “The value of farmland is hard to ascertain in our market. Not a lot of farms have sold recently to my knowledge.” The Wyoming loan volume index for January tumbled to 31.6 from December’s 42.4. Wyoming’s Rural Mainstreet economy has lost approximately 6.6 percent of its employment over the past year. This compares to a loss of 3.1 percent for the state’s urban areas.

Next month’s survey results will be released on the third Thursday of the month, Feb. 18.
Ernie Goss

U.S. Debt Levels Will Kill Growth

2010-01-14T11:41:00.000-08:00

This past month the U.S. Congress once again opened the national piggy bank to the biggest of the big financial institutions. On December 24, the U.S. Treasury announced that it would provide an unlimited amount of assistance to Fannie Mae and Freddie Mac, the government supported enterprises that are the largest source of funds for U.S. home loans. According to the American Enterprise Institute, taxpayer losses will top $400 billion from this mis-guided policy http://tiny.cc/EvadC . Additionally, bailouts such as this raise the national debt, which now exceeds $13.1 trillion, to its highest level relative to the size of the economy, since 1946. Since 1946, the federal debt has grown 15 times faster than the overall economy and now approaches 90 percent of GDP.

According to a recently completed study, http://www.kansascity.com/444/story/1675905.html advanced countries spending above the 90 percent threshold cut their average annual growth by about two percentage points lower than countries with public debt of less than 30 percent of GDP. Thus a continuation of the recent trend in bailouts and deficit spending will lower yearly economic growth. Furthermore, interest rates, including mortgage rates, will rise significantly over the next two years absent federal government spending restraint. Likewise, the Federal Reserve will have to push short term interest rates, such as the prime rate, higher to combat higher inflationary pressures resulting from out-of-control federal spending.

To quote former First Lady, Nancy Reagan, “Just say no.”

Ernie Goss

Medicare Reimbursement Concerns

2010-01-08T07:30:00.000-08:00

Today's Wall Street Journal contains an interesting story on the Mayo Clinic. ("Medicare and the Mayo Clinic", WSJ online, 1/8/09.) Many of us have friends or relatives who have received excellent treatment at this clinic, and the Obama administration has touted the Mayo clinic as an example of cost savings producing better treatment outcomes. But as this story reports, Mayo is losing a lot of money on treating medicare patients. The low reimbursement rates don't cover the costs of treatment. As a result, they are refusing to take on medicare patients in one of its clinics.

This confirms a point made in a previous post about the healthcare reform bill. The budget savings touted by Sen. Nelson and other supporters proceed on the unrealistic assumption that medicare reimbursement rates are not raised in the future. But as doctors refuse to take on medicare patients, how is this helping seniors? And what will be the response? Will rates (and government expenditures) increase further, so that the government is incapable of keeping its promises? Or will there be a greater impetus for further government involvement that will expand this form of rationing to all citizens? (i.e., Comrade, you must treat all who come to you). This bill is not the grand solution touted by its supporters.

EAM

Reform (and Inaction) Behind Closed Doors

2010-01-06T10:59:00.000-08:00

Drudge today contains a link to a video clip showing President Obama's frequent promises to televise health care reform talks on C-Span. Here is the direct link:
http://www.breitbart.tv/the-c-span-lie-did-obama-really-promise-televised-healthcare-negotiations/

But of course, that is not a promise he will choose to keep. Despite representations by Speaker Pelosi that the process is open, President Obama is encouraging the Democratic leadership to bypass traditional conference processes and to pass this bill quickly. An AP story can be found here: http://news.yahoo.com/s/ap/20100106/ap_on_bi_ge/us_health_care_overhaul

So, no transparency (on C span or otherwise), not to mention the promised bipartisanship from the President for this bill. It will be done behind closed doors as the Democratic leadership crams the result down the throats of the American people. It is like your evil stepmother forcing bitter medicine down your throat and enjoying it while you gag, all the while telling you "It is good for you." Right.

Meanwhile, as this spectacle unfolds, we should be reminded that there are genuine areas of concern where Congress has been expected to act for the benefit of the people, where it has failed in its job. Consider the matter of revisions to the estate tax. Due to the oddities of budget reconciliation compromises with democrats during the Bush administration, various aspects of tax reform enacted were temporary in nature, sunsetting in 2010. The estate tax was one such example, with the tax effectively abolished this year. However, it will reemerge with a vengeance in 2011 with an exempt amount of only $1 million (compared with $3.5 million in 2009) and a top marginal rate of 55 percent.

While it may sound like a good thing to have the estate tax expire, the devil is in the details. As a corresponding change, the income tax consequences of inherited property are substantially worse in many cases. In what I used to refer to as the "cheat the government and die" strategy, persons of modest means who were not subject to the estate tax would be able to avoid taxes on the appreciation in the assets they passed on to their heirs by the basis adjustment in I.R.C. § 1014, which essentially allowed the heir to take a basis equal to the fair market value of the property. Of course, this adjustment was also available to taxable estates as well. But with the decline of the estate tax, heirs with inherited assets may now face an income tax in connection with the sale or exchange of those assets, since the 1014 basis adjustment rule also sunsets in s in 2010. Its successor, section 1022, is complex and may provide some adjustments for those with modest assets, but it is likely to raise income taxes for many who inherit property.

Although the House has passed a bill to extend the 2009 laws, the Senate has not taken this up. House leaders also knew that this bill was "DOA" in the Senate, and that much more work needs to be done, certainly before the 2011 return of a $1 million exemption and high tax rates, which will dig deeply into the middle class and hit small business owners especially hard. There are rumblings of retroactive changes, which would reach back and impose taxes on events before the legislation is actually completed.

So, how does one plan in this environment of uncertainty? Bear in mind that many estate plans contain formulary clauses, which make gifts based on the amount of estate taxes. Those formulary approaches are jeopardized by the uncertain state of the law at the time of death.

Should citizens also be subject to the uncertainty of laws of taxation, as they are also subject to the uncertainties of secret negotiation of health care reforms? Citizens who value the rule of law, as well as open and accountable government processes, should be outraged on both counts.

EAM

Mid-America Jobs Over Decade

2010-01-03T12:25:00.001-08:00

Click on Images

Nelson's Ads: Reality Check

2010-01-02T20:04:00.000-08:00

Ben Nelson’s recent television ads seek to bolster his sagging poll numbers by going directly to the people with his views on health care. Unfortunately, the senator is still on the wrong track. Nebraskans should continue to be outraged. Below are some off-the-cuff reactions to comments from Senator Nelson in his last ad. (The quotes reflect my best efforts to track his language. I will gladly accept correction if the language is inaccurate.)

First, Senator Nelson tells us that the health care bill provides a “common sense, private sector approach that now reflects Nebraska values.” I fail to see how an approach to health care administration that compels citizens to purchase insurance at the pain of fines and imprisonment reflects a “private sector” approach. And what of provisions that set up government bureaucracies that, according to the bill, cannot be repealed? I don’t think thoughtful Nebraskans -- or other conscientious Americans -- approve of this kind of government intervention into our lives. Neither do we approve of the heavy-handed and duplicitous means for passing this bill, or attempts to hamstring future generations from changing provisions that, upon reflection, seem unwise.

Second, he tells us that this Bill “lowers costs for families and small business”. Perhaps he should consult the evidence that is emerging about the likely impacts of this bill on health insurance premiums. Even the CBO admits that insurance outside of employer group plans will increase in cost. For a family policy, data reported November 30 indicated that the costs would increase from $13,100 to $15,200 per year. Private studies likewise show increases. Of course, supporters of the bill point out that government subsidies may help families earning less than $88,000, but let’s be honest: those subsidies are not free. This is not driving down healthcare costs; it is merely redistributing them through a costly government bureaucracy. Rather than relying on market incentives for cost savings (such as health savings accounts) or addressing significant problems that raise the costs of treatment, like liability threats due to malpractice, this bill will impose financial penalties on physicians based on treatment and referral outcomes. If that approach reduces costs, it is also likely to reduce care, which is not so good if you are sick.

Third, he asserts that the Bill “protects seniors and Medicare.” Of course, this ignores the fact that this bill is based on continued low Medicare reimbursement rates. These rates will likely mean a reduction of services available to Medicare patients, if Congress ultimately permits these cuts to be implemented. (If it does not, then see the deficit reduction lie stated below.) How is that protecting seniors and Medicare?

Fourth, he baldly states that the bill “stands up to special interests”. I suppose giving Mutual of Omaha exemptions not available to other competing insurers really shows how special interests are not influencing the Senator. And of course Nebraska is now the recipient of the “Cornhusker Kickback” regarding Medicaid, while other states will bear huge additional future costs. I guess the families and small businesses in those states will have to pay higher taxes – oops, Senator – does that cost count? Perhaps the Senator doesn’t think those costs matter to them.

Finally, he suggests this will lower the deficit. But this bill is a deficit buster. Supporters claim hypothetical reductions in deficits over the next ten years only through financial legerdemain: by imposing new taxes immediately and recording revenues for 10 years, but providing most benefits only for the last six years. If one looks honestly at the future value of government obligations, this program is not remotely sustainable under current revenue structures. Those who earn and pay can expect to bear even greater burdens.

Health care debate is far from over. The democratic leadership’s blind desire to deliver a political message is going to embroil us all in controversy for years to come as the full costs of this fiasco emerge and the full extent of the government’s interference with the medical delivery structure becomes known. By then, I can only hope that the Senator will be in the private sector and that he will have to stand in line with the rest of his comrades for rationed care from the same health care delivery system.

P.S. Senator Grassley proposed an amendment to the bill that would have required members of Congress to purchase their healthcare through the same insurance exchanges as the people. The democratic leadership would not permit a vote on this amendment.

Some Humor on the Nelson Vote

2009-12-22T07:58:00.000-08:00

The letter I sent to Senator Nelson, posted below, was written Saturday morning, before the full implications of his vote for the matter of federal funding of abortion as well as the infamous “Cornhusker Kickback” were revealed. Commentators have been appropriately taking the Senator to task for his decision. Despite the views of Harry Reid, many of us don’t see unprincipled compromise in exchange for an earmark to be respectable behavior for a Senator; treasure returned to your constituents cannot erase the damage done to the rest of our citizens, born and unborn. We expect more from our leaders -- like real leadership.

But enough seriousness. If our politicians behave like buffoons, we should at least be able to laugh about it. Although I would like to be an equal-opportunity offender, owing to the present situation, the lines below are dedicated to the so-called “Blue Dog Senate Democrats”. (If you are a “Blue Dog Democrat” who does not support behavior like Senator Nelson, then they don’t apply to you. I recognize that these folks in the House may be all that is left to defend us from the health bill.):

· What is the difference between a Blue Dog Democrat and an S.T.D.? One makes you regret an intimate encounter you had in a voting booth. The other can be treated with penicillin.

· What is the difference between a Blue Dog Democrat and a neutered male dog? One humps your leg and tells you he is accomplishing something. The other can be trained to bring in the newspaper.

· Why did the Blue Dog Democrat get sent to obedience school? He kept mistaking his constituents for fire hydrants.

· What is the difference between a Blue Dog Democrat and a prostitute? One thinks it is his job to screw people who trust him as long as the payoff is big enough. The others just have sex for money.

· What is the difference between a Blue Dog Democrat and the “Clapper” (as seen on TV)? One turns on his voting light whenever Harry Reid claps his hands. The other is actually a useful device that people want to purchase for their homes.

I am just getting started. Feel free to add your own to this list. I hope they bring some merriment to an otherwise dismal political situation, which is truly unfortunate given the cultural and spiritual richness that might otherwise dominate our thoughts in this time of year – yet another sign that those in power do not have their priorities straight.

EAM

Senator Nelson's Vote Is Bad for Society

2009-12-19T15:09:00.000-08:00

Senator Nelson,

I was disheartened to hear of your decision to support the health bill. While I applaud and respect your pro-life stand (and give thanks to God for this effort), that is not the only problem in this bill. You have marketed yourself as an independent thinker, and I have thought well of you for it in the past. But it appears that in the end you follow the Democratic party leadership. I do not share their vision for America, and others I respect and honor share this skepticism.

The manner in which this bill has been handled, with secrecy and intrigue behind closed doors, is scandalous. What happened to transparency? If this is really so good for everyone, why not let us see and consider what it is you are supporting?

Please reconsider your position. I believe that this bill, when its full provisions come to light, will be exposed as the policy disaster that it is. It will not deliver true reform that will reduce health costs. It will impose new taxes and dishonestly measure budgetary impacts. You are supporting obligations that my children must bear for years to come, while the uninsured receive no help until years from now. It portends significant medicare cuts, which as you well know, are not merely waste but genuine care for our seniors.

What is the rush, if not to please your democratic leaders? Have you not heard the voice of your fellow citizens? Whatever the political benefit you might have been promised to you, you would be wise to be as skeptical as the people are becoming with regard to their hollow promises and empty words.

Imposing oppressive obligations on our citizens is not the way of freedom and liberty. We can do better than this. Please change your mind before it is too late to roll back the clock on this disastrous outcome.

I work in Nebraska, but live in Iowa. I thus did not vote for you, and won't be able to vote for you in the next election. But be assured that if you persist in this support, it is my sincere hope that you are returned to the private sector so that you must live under the obligations you are imposing on us. I intend to use my time, treasure, and talent, as well as my editorial pen, toward seeing that this hope is fulfilled.

Sincerely,
Ed Morse
Professor of Law
Creighton University

Rural Mainstreet Economy Continues to Lose Jobs: CEOs Report Regulators Limit Loans to Farms and Businesses

2009-12-18T12:20:00.000-08:00

Survey Results at a Glance
· Rural Mainstreet economy weakens again with job losses.
· Bank lending sank for the month.
· More than half of bank CEO’s report that bank regulators are the reason for reduced farm and small business lending.
· More than 71 percent of bankers say refunded TARP funds should be used to reduce the federal deficit.

For a fourth straight month the overall index for the Rural Mainstreet economy advanced, but continued to indicate significant economic weakness, according to the December survey of bank CEOs in an 11-state region. The Rural Mainstreet Index (RMI), which ranges between 0 and 100, rose to 40.9 from 38.4 in November and 37.5 in October. A reading of 50.0 is considered growth neutral.

“The RMI has remained below growth neutral for 22 consecutive months. The decline in farm income related to pullbacks in agricultural commodities from last year continues to weigh on the rural, agriculturally dependent economy,” said Creighton University economist Ernie Goss. Goss and Bill McQuillan, CEO of CNB Community Bank of Greeley, Neb., created the monthly economic survey in 2005.

The downturn in farm income and the global economic downturn have negatively affected both farmland prices and sales of farm equipment. The December farmland-price index slid to 44.9 from November’s weak 45.6. This was the 14th straight month that the index remained below growth neutral. The farm equipment-sales index rose slightly to 40.4 from November’s 39.9 and October's 36.7. However, there continue to be areas of increasing farmland prices. Dan Coup, CEO of First National Bank in Hope, Kan., reported, “Several land auctions in our area this past month have shown steady to slightly stronger prices.” Coup indicated that local farmers and ranchers, not outside investors, were purchasing the land.

The corn harvest remains significantly behind schedule with 13 percent of the bankers reporting that less than 75 percent of the crops have been harvested.

Recent data indicating that the nation’s jobless rate topped 10 percent had a negative impact on the monthly confidence index, which tracks bankers’ economic outlook six months from now. While the index rose to 53.7 from 50.1 in November, it was down from October’s 58.7.

Hiring in rural areas remains well below growth neutral. The new-hiring index sank to 33.4 from November’s 36.3 and October’s 35.6. For December, 5.8 percent of bankers reported an upturn in hiring while 39.1 percent detailed cuts in hiring. This is the 24th consecutive month that the index has been below growth neutral, due in part to the national and global recessions and declining farm income from much lower agricultural commodity prices.

Uncertainly continues to thwart hiring. Richard Hanneken, CEO of MRV Banks in Sainte Genevieve, Mo., said, “Congress’ Health Care Proposals have lots of small business people sitting on their hands on hiring until they see what the costs are going to be.”

“Over the past year, the Rural Mainstreet economy has lost 188,000 jobs, or 3.9 percent of its employment. This pace of job losses is significantly higher than the 3.1 percent pace for the urban areas of the region. I do expect the pace of job losses for the Rural Mainstreet economy to slow in the months ahead,” said Goss, the Jack A. MacAllister Chair in Regional Economics at Creighton.

Like much of the nation, retail sales were less than healthy for the month, with a December retail-sales index of 43.3 which was up sharply from November’s 38.5. However, weather played an important role in the numbers. According to Jim Stanosheck, CEO of Sate Bank in Odell, Neb., “Two snow storms during the past month have impacted main street business.”

Just like the recently released national housing data, home sales for Rural Mainstreet were not good for December. The home-sales index slumped to 40.4 from November’s 43.1 and October’s 46.7.

This month, bank CEOs were also asked what should be done with Troubled Asset Relief Program (TARP) funds refunded to the U.S. Treasury. More than 71 percent indicated that the funds should be used to reduce the federal budget deficit. Only 15 percent supported using the funds for job creation programs.

Despite the Treasury Department encouraging increased lending, the loan-volume index continues to weaken. The December loan volume index stood at 45.7, up from November’s record low 38.3. This month, bankers were asked to identify factors accounting for weak lending. More than half, or 51 percent, of bank CEOs indicated that bank regulators were the prime factor restricting loan volumes. More than two-thirds, or 35 percent, indicated that weak loan demand was the major factor driving down borrowing by farms and small businesses.

Pete Haddeland president of the First National Bank in Mahnomen, Minn., echoed what bankers reported, “The federal government tells banks to lend to small business, but the regulators don't have the same message.” Dale Torpey, president of Federation Bank in Washington, Iowa said, “We are starting to see the effects of all of the new regulations. Customers do not understand all of the need for the paperwork and do not understand what it all means.” Todd Douglas, First National Bank in Fort Pierre, S.D., said, "recent legislative changes, increased FDIC premiums and rising compliance costs, have slowed lending."

For December, the checking-deposit index advanced to 69.8 from November’s 66.4. The index for certificates of deposit and other savings instruments soared to 59.6 from 50.9 in November.

Each month, community bank presidents and CEOs in nonurban, agriculturally and resource-dependent portions of the 11-state area are surveyed regarding current economic conditions in their communities and their projected economic outlooks six months down the road. Bankers from Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wyoming are included.

This survey represents an early snapshot of the economy of rural, agriculturally and energy-dependent portions of the nation. The Rural Mainstreet Index (RMI) is a unique index covering 11 regional states, focusing on approximately 200 rural communities with an average population of 1,300. It gives the most current real-time analysis of the rural economy.

Colorado: Colorado’s RMI expanded to 39.8 from November’s 36.9. The December ranch- and farmland-price index sank to 43.8 from 44.1 in November. The state’s Rural Mainstreet loan volume index stood at 44.6 signaling a pullback in lending for the month. Colorado’s Rural Mainstreet economy has lost more than 16,000 jobs over the last year, or 5.0 percent of its Rural Mainstreet employment.

Illinois: The Illinois RMI once again moved below growth neutral. The RMI for December rose to 37.6 from 35.2 in November and 34.4 in October. Farmland prices continue to slump with a December index of 41.6, down from November’s 42.4. The December loan volume index was 42.4, the lowest in the region. Illinois’ Rural Mainstreet economy has lost almost 90,000 jobs over the last year, or 7.3 percent of its Rural Mainstreet employment.

Iowa: Iowa’s RMI remained below growth neutral, according to the monthly survey of bank CEOs. The RMI for December edged higher to 40.7 from November’s 38.0. The farmland-price index was also below growth neutral with a December reading of 44.7, down from 45.2 in November. December’s loan volume index stood at 45.5, indicating weak lending volumes. Iowa’s Rural Mainstreet economy has lost more than 29,000 jobs over the last year, or 3.9 percent of its Rural Mainstreet employment.

Kansas: The Kansas RMI, like much of the region, was below growth neutral 50.0. However, the RMI did expand to 39.0 from 36.9 in November. The farmland-price index dipped to 43.0 from 44.1 in November. The December loan volume index was 43.8. The state's Rural Mainstreet economy has lost more than 30,000 jobs over the last year, or 5.8 percent of its Rural Mainstreet employment.

Minnesota: The state’s RMI climbed to 39.3 from 37.2 in November. Minnesota’s farmland-price index slipped to 43.3 from November’s 44.4. The December loan volume index for the state’s Rural Mainstreet economy was 44.1. Minnesota’s Rural Mainstreet economy has lost more than 36,000 jobs over the last year, or 5.7 percent of its Rural Mainstreet employment.

Missouri: Missouri's RMI for the month grew to 41.7 from November’s 40.0 and October’s 39.2. The December farmland-price index expanded to 45.7 from November’s 44.4. Loans remained weak with an index of 46.5 from December. Don Reynolds, president of Regional Missouri Bank in Salisbury said, “The cost of crop production was high due to excess rain. Yields were better than average and prospects for locking in good prices both for sales and input costs look good for next year.” Missouri’s Rural Mainstreet economy has lost more than 17,000 jobs over the last year, or 3.6 percent of its Rural Mainstreet employment.

Montana: There were too few responses to produce a reliable index. Ken Walsh president of Ruby Valley Bank in Twin Bridges said, “Most of the cow/calf operators have sold calves for the year and prices are well below 2008 levels.” He expects Main street businesses to struggle because of the agriculture prices.

Nebraska: Nebraska's RMI climbed to 42.0 from 39.5 in November. The farmland-price index for December slipped to 46.0 from November’s 46.7. The December loan volume index was 46.8. Despite the weather, Kathy Thuman, president of Farmers State Bank in Maywood, reported, “The corn harvest in southwest Nebraska is going hot and heavy as of Dec. 15, despite 6-8" of snow cover.” Nebraska’s Rural Mainstreet economy has lost more than 9,300 jobs over the last year, or 2.9 percent of its Rural Mainstreet employment.

North Dakota: For a seventh straight month, North Dakota’s RMI was the highest in the region. The December RMI for the state advanced to 52.2 from November’s 50.5. North Dakota's farmland-price index slipped to 50.2 from November’s 51.7. The state’s loan volume index was 51.0 for December. North Dakota’s Rural Mainstreet economy has gained almost 1,000 jobs over the last year, or 0.7 percent of its Rural Mainstreet employment.

South Dakota: The RMI for South Dakota remained below growth neutral with a December reading of 43.1 which was up from November’s 40.6. The state’s farmland-price index dipped to 47.1 from 47.8 in November. South Dakota's loan volume index for December was 47.9. David Callies of Miner County Bank in Howard, said “Excellent crop yields have been and will continue to be a big boost to the local economy.” South Dakota’s Rural Mainstreet economy has lost almost 4,000 jobs over the last year, or 1.8 percent of its Rural Mainstreet employment.

Wyoming: Wyoming's RMI for December expanded to 40.1 from 38.4 in November. The December ranch- and farmland-price index dipped to 44.1 from November’s 45.6. The Wyoming loan volume index for December was 42.4. Wyoming’s Rural Mainstreet economy has lost more than 15,000 jobs over the last year, or 5.9 percent of its Rural Mainstreet employment.

Next month’s survey results will be released on the third Thursday of the month, Jan. 21.
Ernie Goss

Fed’s Interest Rate Policy Not Helping Small Business

2009-12-15T06:06:00.000-08:00

The Federal Reserve’s interest rate policy is actually making it more difficult for small businesses to obtain bank loans. While the Fed has lowered their funds rate to 0% - 0.25% ostensibly to stimulate loans and kick start the sagging economy, the funds have not found their way to the Mainstreet economy. The reason is quite simple. Banks can borrow from the Fed at these record low rates of interest and then purchase U.S. Treasury bills and bonds which carry no risk of default. At this time, the spread between bank’s borrowing cost and the yield on the 10-year U.S. Treasury bond is roughly 3.4%. With the prime interest rate (the rate charged to most credit worthy customers) now at 3.25%, it makes little sense for banks to lend to businesses incurring greater risk and adding little to their bottom line. Ernie Goss

Federal Spending on Steroids

2009-12-13T14:55:00.000-08:00

Today, the U.S. Senate approved a $1,100 billion (that’s $1.1 trillion) spending bill. The measure, a year-end package that covers about half of all federal programs for the rest of the year, goes to President Barack Obama for his signature. Included in this spending program were 5,244 earmarks for law makers’ pet projects. Relative to the overall economy, this year's spending and debt will be the largest incurred by the nation since 1946. This is after the federal government spending advanced by 8.3 percent in Quarter 3 of 2009 and 11.4 percent in Quarter 2 of 2009. As a result of this out of control spending, federal legislators will raise the debt ceiling from its current level of $12.1 trillion to $14 trillion this next week. As White House Chief of staff Rahm Emanuel recently said, “You never want a serious crisis to go to waste.” Unfortunately, this rapidly increasing federal spending will create its own crisis. Ernie Goss

When Will Job Losses End?

2009-11-30T19:36:00.000-08:00

When will the nation begin to add jobs and is the stock market getting ahead of the economy? Since 1950, the U.S. economy has suffered 10 recessions with a median length of 10 months. On average, the nation did not begin adding jobs until 3 months after the end of the downturns. Normally the longer the length of the recession, the shorter the period before the economy begins adding jobs.

Furthermore, the stock market began rising, on average, approximately 4 months before the end of the recession. Thus if history is a guide, the economy will continue to experience stock market gains and the number of jobs should begin to increase in the first quarter of 2010. Unfortunately, the lack of clarity from policy makers is undermining the willingness of businesses to hire new workers and could delay new hiring and puncture stock market gains. The top need of consumers and businesses---public policy certainty. This will cure what ails the economy. Ernie Goss

Rural Mainstreet Economy Still in Recession: Annualized Job Losses Exceed 5 Percent

2009-11-21T13:42:00.000-08:00

· Job losses for Rural Mainstreet continue at an annualized pace exceeding 5 percent.
· The Rural Mainstreet Economy has yet to rebound.
· Bankers expect 2009 crop income to be down less than livestock income.
· Over 98 percent of bankers think the nation’s 20 largest financial institutions should pay the cleanup costs related to “too-big-to-fail” policies.

For a third straight month the overall index for the Rural Mainstreet economy expanded, but continued to indicate significant economic weakness, according to the November survey of bank CEOs in an 11-state region.

The Rural Mainstreet Index (RMI), which ranges between 0 and 100, advanced to 38.4 from October’s 37.5 and September’s 36.5. A reading of 50.0 is considered growth neutral.

“The RMI has remained below growth neutral for 21 consecutive months. The decline in farm income related to pullbacks in agricultural commodities from last year continues to weigh on the rural, agriculturally dependent economy,” said Creighton University economist Ernie Goss. Goss and Bill McQuillan, CEO of City National Bank in Greeley, Neb., created the monthly economic survey in 2005.

This month, bankers were asked to compare estimated 2009 farm income from crops and livestock to that in 2008. On average, bank CEOs expect crop income to be flat from last year and project livestock income to be down by 5 percent from last year. “This is a much better outlook than the one provided by the U.S. Department of Agriculture that projects 2009 farm income will be down by almost one-third,” reported Goss.

However, many bankers such as Tom Boyer president of Farmers State Bank in Fairmont, Neb., indicate that it is too early to accurately gauge farm income. Scott Tewksbury, CEO of Heartland State Bank in Edgeley, N.D., said, “Crop income levels are a little hard to judge because of the delayed harvest. November weather has been good, and the harvest of row crops is progressing quickly.”

The downturn in farm income has negatively affected both farmland prices and sales of farm equipment. The November farmland-price index rose to a weak 45.6 from 43.0 in October. This was the 13th straight month that the index moved below growth neutral. The farm equipment-sales index advanced to 39.9 from 36.7 in October. “Farmers are a lot more cautious in their purchases of farm equipment than they were in early 2008,” said Goss.

Recent data indicating that the nation’s jobless rate topped 10 percent had a negative impact on the monthly confidence index, which tracks bankers’ economic outlook six months from now. That index fell to 50.1 from October’s 58.7.

Hiring in rural areas remains well below growth neutral. The new-hiring index rose to 36.3 from 35.6 in October and 27.0 in September. This is the 23rd consecutive month that the index has been below growth neutral, due in part to the national and global recessions and weakening farm income from much lower agricultural commodity prices. “Job losses on an annualized basis are more than 5 percent for the Rural Mainstreet economy. Over the past 12 months, the region that we survey has lost almost 265,000 jobs. Recent surveys indicate that these job losses are likely to continue for the near term,” said Goss, the Jack A. MacAllister Chair in Regional Economics at Creighton.

Like much of the nation, retail sales were less than healthy for the month, with an October retail-sales index of 38.5, up modestly from October’s 36.0.

Just like the recently released national housing data, home sales for Rural Mainstreet were not good for November. The November home-sales index slumped to 43.1 from 46.7 in October. But some bankers were more positive. However, according to John Schmaderer, president of Tri-County Bank in Stuart, Neb., “The homebuyer’s tax incentives, combined with low mortgage rates, continue to provide strength to the local housing market.”

This month, bank CEOs were also asked who should pay the added cost of federal financial bailouts related to “too-big-to-fail (TBTF)” policies. Over 98 percent indicated that the cost should be paid by the 20 largest financial institutions in the nation. Less than 2 percent thought the taxpayer, or the overall banking industry, should cover the costs. As expressed by Ken Henstorf, president of First National Bank of Shenandoah, Iowa, “We need to continue differentiating community banks from the TBIF institutions and especially the non-banks in our market.” Henstorf expects TBTF to be a defining issue going forward.

On a related matter, John Nelsen, president of First Tier Bank in Holdrege, Neb., said “We need all banks to participate equally in funding the FDIC assessment, dollar for dollar, with no exceptions. This will prepare us for a failure of one of the TBTF institutions which will surely occur.”

Others such as Larry Winum, president of Glenwood State Bank in Glenwood, Iowa, argue that the TBTF institutions need to be downsized so that they no longer pose a systematic risk to the economy.

Rural Mainstreet bankers say they are getting mixed messages from the federal government regarding lending. The Treasury Department is encouraging increased lending while bank regulatory oversight is negatively affecting lending by the banks. As a result, the November loan-volume index declined to a record low 38.3, down from October’s already weak 42.4.

For November, the checking-deposit index soared to 66.4 from October’s 61.0. The index for certificates of deposit and other savings instruments inched lower to 50.9 from 51.7 in October.

Each month, community bank presidents and CEOs in nonurban, agriculturally and resource-dependent portions of the 11-state area are surveyed regarding current economic conditions in their communities and their projected economic outlooks six months down the road. Bankers from Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wyoming are included.
Ernie Goss

A Weaker Dollar Is Beneficial

2009-11-15T12:55:00.000-08:00

Since March of this year, the value of the dollar, relative to the currencies of the US’s major trading partners, has sunk by almost ten percent. This downward movement has produced the usual hyperbole from chattering political leaders. For example, Timothy Geithner repeats the mantra that a strong dollar is very important to a healthy US economy. http://economix.blogs.nytimes.com/2009/11/12/the-great-shrinking-american-dollar/ However, the benefits of a weaker dollar, within a range, cannot be ignored.

For example, a deteriorating dollar encourages foreign firms to expand or to locate facilities in the US. Recently Christof Romp, head of the turbine division of a German machinery manufacturer, stated that, “If the dollar carries on declining, we might be forced to move more of our production to the US.” http://online.wsj.com/article/SB125809667186946819.html

Furthermore, a weaker dollar makes US goods sold abroad cheaper strengthening US manufacturing and farming. Since the fourth quarter of 2007, the US trade deficit has plunged by more than 50 percent. A large share of this decline was due to a softer Us dollar. It is certainly politically appealing to rail against the dollar decline. Such arguments, however, are not grounded in economic reality.
Ernie Goss

Liberals Economic War on the Productive

2009-11-13T13:48:00.001-08:00

U.S. Senator Majority leader Harry Reid is considering attaching a Medicare tax on workers making more than $200,000 to help fund health care reform. Reid, of course, fails to recognize that these individuals will already be paying confiscatory rates on their income in 2011. In 2011, the Bush tax cuts expire pushing the capital gains rate from 15 to 20 percent and the top marginal rate from 35 percent to 39 percent. Combine that with the 5.4 percent surtax on those making more than $500,000 contained in the House version of the health care reform bill, means that liberals are serious about punishing work and rewarding indolence.

According to the Wall Street Journal, http://online.wsj.com/article/SB10001424052748704402404574527781844595304.html these actions represent a 69 percent hike in taxes for the more productive or high income workers and small business owners. Tacking federal taxes on to state income taxes means that many individuals will be paying between $0.50 and $0.55 in income taxes for each dollar earned. These tax increases threaten the strength of the economic recovery as these higher income workers decide to spend a little more time at the lake and a little less time at the job. Ernie Goss

Did Buffet Get Burned on BNI?

2009-11-09T16:58:00.000-08:00

Last week Warren Buffet announced that his company, Berkshire Hathaway (BRK) would buy the remaining 77 percent of Burlington Northern Santa Fe Corp. (BNI) that he didn’t already own for $100 per share.

Based on the stock prices of two of BNI’s competitors, Union Pacific (UNP) and CSX Railroad, BNI’s stock should be selling for $82 per share. Furthermore, based on Buffet’s bid, UNP should be selling for $76, well up from today’s closing price of $62. So either the analysts following BNI, and UNP are wrong, or Buffet has made a huge mistake. It has been advanced that Buffet is betting on the relative efficiency of railroad to trucking and/or on a U.S. economic expansion. But these explanations do not add up since, in order to consummate the purchase of BNI, Buffet agreed to sell his Union Pacific stock whose earnings are expected to grow at triple the rate of BNI over the next five years.

Given that last year, almost half of BNI’s tonnage was coal and BRK owns coal fired electricity producing Mid-American Energy, Buffet is essentially doubling down his bet that the current anti-coal, growth hostile cap & trade bill before the U.S. Senate will die a deserved death. Ernie Goss.

Cap & Trade: Europe’s Experience Should Be a Warning

2009-11-01T15:52:00.000-08:00

Europe’s recent economic performance shows how “cap and trade” will likely affect the U.S. economy if Congress passes this legislation currently before the body. In 1997, Europe adopted emission reduction goals outlined in the Kyoto carbon targets, termed the Kyoto Protocol. That year, Republican congressional leaders declared the Kyoto Protocol “dead on arrival” in the US Senate. In response, the Clinton administration chose not to defend the Protocol. Instead, the White House announced that, until other key developing countries signed on, the Protocol would not be sent to the Senate. Subsequently, the Bush Administration remained steadfastly opposed to Kyoto for both presidential terms. Now the Obama Administration, in attempt to reduce carbon emissions paralleling that of Kyoto, is backing a cap & trade bill. However, Europe’s economic experience since 1999 provides US Congressional Representatives, Senators and President Obama with real evidence to reject this anti-growth measure.
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From 1999 to 2008, a period marked by Europe’s carbon limitation program, Europe’s inflation adjusted economy grew by 19.0 percent while the US’s GDP expanded by 23.5 percent. In fact if the US grew at the same pace as Europe during this period, US GDP would have been $500 billion less in 2008. In terms of unemployment rates, the comparisons are even more startling. From 1999 to 2008, the average unemployment rates were 8.3 percent in Europe and 5.0 percent in the US. In 2008 if the US jobless rate matched that of Europe, another 4.2 million Americans would be jobless searching for work.

While the gap in US and Europe economic performance since 1999 cannot be pinned solely on carbon emissions programs, Europe’s relative economic lethargy should be a warning to lawmakers considering cap and trade legislation---vote no on this measure. European vacations and wine are just fine, but their carbon emissions sensibilities should not be imported into the US if US economic growth is to be supported.
Ernie Goss.

No Economic Recovery For Rural Mainstreet: Bankers Expect Drop In Holiday Sales

2009-10-15T18:26:00.000-07:00

October Survey Results at a Glance:
· The Rural Mainstreet Index advanced for a second straight month.
· Bank CEOs expect holiday retail sales to shrink by 1.5 percent from last year.
· Farm equipment sales decline again.
· Over three-fourths of bankers support an extension and/or expansion of the tax credit for first-time homebuyers.
· Six of ten bankers report their FDIC premiums are up more than 250 percent from last year.

For a second straight month, the overall index for the Rural Mainstreet economy expanded but continued to indicate significant economic weakness, according to the October survey of bank CEOs in an 11-state region.

The Rural Mainstreet Index (RMI), which ranges between 0 and 100, advanced to 37.5 from 36.5 in September. A reading of 50.0 is considered growth neutral.

“The RMI has remained below growth neutral for 20 consecutive months. The decline in farm income continues to weigh on the rural, agriculturally dependent economy with few signals that the economic downturn is coming to an end,” said Creighton University economist Ernie Goss. Goss and Bill McQuillan, CEO of City National Bank in Greeley, Neb., created the monthly economic survey in 2005.The downturn in farm income has negatively affected both farmland prices and sales of farm equipment. The October farmland price index rose to a weak 43.0 from September’s 41.1. This was the 12th straight month that the index moved below growth neutral. The farm equipment-sales index slipped to 36.7 from September’s 38.6.

However, there are pockets of very strong farmland sales. As reported by Larry Rogers, CEO of the First Bank of Utica in Utica, Neb., farmland in his area recently sold for $6,650 per acre, indicating a very strong market for farmland.

Recent positive national economic news and record low interest rates propelled the confidence index, which tracks bankers’ economic outlook six months from now, to 58.7 from 43.5 in September.

Hiring in rural areas remains frail. The new-hiring index rose to 35.6 from September’s 27.0. This is the 22nd consecutive month that the index has been below growth neutral, due in part to the national and global recessions and weakening farm income from much lower agricultural commodity prices. “Over the past 12 months, rural areas of the region have lost more than 5 percent of their jobs. This compares to a loss of 3.6 percent for urban areas of the region,” said Goss, the Jack A. MacAllister Chair in Regional Economics at Creighton.

Like much of the nation, retail sales were less than healthy for the month, with an October retail-sales index of 36.7 from 32.8 in September. This month bankers shared their expectations for holiday sales. On average, bankers forecast holiday sales to decline by 1.5 percent from last year’s weak sales. Brian Nicklason, president of Woodland Bank in Remer, Minn., said, “I have talked to several local retailers and hospitality businesses, and they are very concerned about business prospects over the upcoming winter months.”

Despite an improving national housing market, the Rural Mainstreet home-sales index stood at a frail 46.7, which was up from 42.7 in September. Bank CEOs were asked about their support for the federal home tax subsidy with 68 percent endorsing a continuation of the $8,000 tax credit for first-time homebuyers and 9 percent backing an increase in the tax credit. Only 23 percent supported an end to the program.

This month bank CEOs were also asked how much their Federal Deposit Insurance Commission (FDIC) fees had increased from last year. Fifty-two percent of bankers reported that FDIC premiums had grown by more than 250 percent. On average, bankers reported an increase of 320 percent from last year. “This increase is undermining the profitability of community banks; the FDIC’s recent proposal for banks to pre-pay their 2010-2012 premiums is especially troubling,” said Goss.

Rural Mainstreet bankers reported mixed banking numbers for the month. The loan-volume index declined to 42.4, its lowest level since November 2006, down from September’s 49.3. According to Frank Sullentrop, president of Legacy Bank in Colwich, Kan., there is a good explanation for this. “Regulatory oversight has had a significant impact on reducing lending activity.

For October, checking-deposit growth dipped to 61.0 from 61.9 in September. The index for certificates of deposit and other savings instruments inched higher to 51.7 from September’s 50.1.

Each month, community bank presidents and CEOs in nonurban, agriculturally and resource-dependent portions of an 11-state area are surveyed regarding current economic conditions in their communities and their projected economic outlooks six months down the road. Bankers from Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wyoming are included.

This survey represents an early snapshot of the economy of rural, agriculturally and energy-dependent portions of the nation. The Rural Mainstreet Index (RMI) is a unique index covering 11 regional states, focusing on approximately 200 rural communities with an average population of 1,300. It gives the most current real-time analysis of the rural economy.

Mortgage Rates Will Top 6 Percent When Job Losses Cease

2009-10-14T13:16:00.000-07:00

For the first week of October, the average rate on a 30-year fixed mortgage was 4.87 percent, down from 4.94 percent last week. Despite this low level, some home buyers are waiting for even lower rates. Forget about it! Even though rates may move a bit lower in the short run, I expect rates to rise very quickly once the economy, as measured by job prospects, improves. That’s right, if you want to see where mortgage rates are going, just watch the job market. At the beginning of the recession in December 2007, annualized job growth was 1.4 percent and the 30-year fixed rate mortgage was 6.1 percent. At the depths of the recession in April of 2009, annualized job growth had plummeted to -5.6 percent and the 30 year mortgage rate had sunk to 4.81 percent. Today job growth is still negative at -2.3 percent and mortgage rates have rebounded slightly to 5.06 percent.

I expect mortgage rates to again top 6.0 percent when the nation begins adding jobs. Thus expect two potentially harsh outcomes when the labor market turns around. First, the monthly payment on a $100,000 home will rise by more than $50. Second, this will signal the end to the high prices and low yields on long term U.S. Treasury bonds that determine mortgage rates. So if you have a large share of your savings in these bonds, either directly or via mutual funds, put your money somewhere else to avoid heavy losses when the labor market improves. Ernie Goss.

Is the market over-valued?

2009-10-09T12:41:00.000-07:00

Many Yo-Yo financial reporters are yelling and screaming about the stock market being over-valued. This may be the case, but many of them are using trailing P/E ratios to justify their hypothesis. This is ridiculous logic, so before you accept their conclusions, let me explain.

For a trailing P/E, they may take the S&P 500’s current price of 1068 and divide by the index’s 2008 as-reported earnings of $14.88. This simple calculation yields a P/E ratio of 72x. The index’s trailing P/E has averaged 16x since 1936, so at 72x, the market is grossly OVERVALUED, right? Don't agree just yet, because this certainly isn't the case if you analyze the P/E from different perspectives.

It may be fine to calculate a P/E ratio in normal times by looking at previous year’s earnings, but last year was in no way normal. Last year’s earnings are a poor proxy for earnings going forward, so for now, please throw your trailing P/E ratio out the window. It is useless.

It is also illogical to use as-reported earnings at this time. In 2008, and continuing on for the next few years, you will see a lot of charges in between the operating and net lines of most companies’ income statements. Financial companies have taken massive losses due to asset write-downs, and other firms have incurred huge restructuring charges to align themselves for a more profitable future. As-reported earnings captures all of these charges, but since they are transitory and astronomically high for now, they shouldn't be included when hypothesizing the over/under valued-ness of the stock market.

Instead I would advise looking at a forward P/E ratio based on operating earnings, which doesn't include those transitory costs. Using 2010 operating earnings expectations should give us a more normalized picture of profitability going forward. Either way, it is certainly a more accurate proxy than 2008 figures.

The forward operating P/E for the S&P 500 has averaged around 19x for the past 20 years. S&P estimates 2010 operating earnings to be $73.47, implying a P/E ratio of 14.5x. From my calculation, the stock market appears CHEAP.

Writers want to sell stories. In deciding that the market is expensive, and since many people follow P/E ratios, they fandoongle the ratio to outrageous numbers to grab your attention and support their conclusion.

When times return to normal, go ahead and bring back your trailing P/E ratio, but for now, don’t be fooled by their calculations.

Aaron Konen

Should You Invest in Gold Now?

2009-09-24T08:11:00.000-07:00

Most investors in the U.S. stock market have seen their “nest eggs” plummet faster than January temperatures in Nebraska. For example, investors who purchased a basket containing one share of each the Dow-Jones Industrial 30 in 1999 lost almost 20% of their investment over the past decade. On the other hand, the investor who invested his/her bundle in gold experienced a gain of 262% during this same time period. What accounts for gold’s superior return? Rising inflation, a cheaper dollar, an expanding economy, and escalating risks account for gold’s fantastic returns. But among these four factors, investor’s risk assessment dwarfs the other three in terms of influence on the price of gold. The best measure of financial risk is the gap between the yield on corporate bonds and U.S. Treasury bonds. As risks rise, investors sell corporate bonds and buy risk free U.S. Treasury bonds. This increases the yield on corporate bonds and decreases the yield on U.S. Treasury bonds widening the gap between the two. If risks rise to levels existing in January of 2009, gold prices are likely to soar by as much as 78% from the current price. However, if risk declines to the level existing in November 2007, one month before the recession began, gold prices will plunge by approximately 11%. Thus, investors’ decision to buy gold should hinge on their assessment of the direction in financial risks. A return to the scary financial environment of early 2009 will reward gold buyers handsomely, while a more soothing economic climate will inflict losses on the gold buyer.

Ernie Goss

Is It Time to Buy Natural Gas?

2009-09-03T11:51:00.000-07:00

Natural gas prices tumbled again Thursday, hitting a new seven-year low of $2.52 per million cubic feet after the government reported an increase in supplies. Meanwhile, benchmark crude for October delivery advanced to $68.17 a barrel on the Nymex. The ratio of the price of a barrel of oil to a million cubic feet of natural gas is now 28.2 compared to the historical average of 10.0. One can interpret this one of three ways; 1) either natural gas prices are artificially low, or 2) oil prices are artificially high, or 3) the fundamental relationship has changed due to supply and demand factors.

If natural gas prices are artificially low due to speculative activity, then this would present an opportunity for the long term investor to buy natural gas. The United States Natural Gas fund (UNG), an exchange-traded fund that tracks natural gas prices, has plunged this year hitting a 52-week low of $8.94 a share on September 3, well down from $62.00 per share in July 2008. So should investors jump in and buy shares of UNG. I say be cautious. The price of natural gas and UNG could go lower.

Even though the ratio of the price of oil to natural gas is at a 25 year high of 28.2, the ratio of oil production to natural gas production is at a very low level (not a record but low nonetheless). What this is telling us is that, natural gas prices are very low due to significant increases in supply or production. Thus, I would not expect any momentous natural gas price rebounds unless and until there is a rapid upturn in natural gas demand due to changing federal energy policy.
Ernie Goss

Regression to the Mean and Investing

2009-08-24T13:00:00.000-07:00

Sir Francis Galton, cousin of Charles Darwin, first identified regression to the mean in his 19th century publication Regression towards mediocrity in hereditary stature. Simply put, it indicates that, left to themselves, things tend to return to normal, whatever that is. Thus when the price of stocks, as represented by the Dow-Jones Industrial 30, declines to a level that is significantly below the long term trend or mean, investors are provided an opportunity to buy low now and sell high later.

Between 1929 and 2007, the Dow 30 grew at a compound annual rate of 5.2%. From December 2007 until August 2009, the Dow 30 plummeted at an annual rate of 14%. In order to return, or regress, to the mean the Dow 30 would have to soar to 14,690. Thus buying the Dow 30 via the Diamonds (DIA) should provide investors with a substantial financial reward, assuming a return to trend.

There is certainly no guarantee when this will happen and there are three reasons that regression to the mean may be a frustrating guide to decision making. 1) It proceeds so slowly that a shock disrupts the process. 2) The regression may be so strong that it “punches through” the trend or mean, 3) The mean may be unstable. Nonetheless, statistically speaking, stocks are currently priced for the buyer, not the seller.
Ernie Goss

Where Is the Next Asset Bubble?

2009-07-30T17:11:00.000-07:00

Over the past decade, U.S. investors have been whipsawed by three major asset bubbles. First buoyed by overly zealous investors in the 1990s, technology stocks rocketed to levels that will not be matched before most baby boomers are either in a nursing home or dead. As a measure of this euphoria, the NASDAQ index rose above 5,000 in March of 2000. Today that same index is less than 2,000 and shows no signs of returning to those go-go days. Second, housing prices relative to income soared to unprecedented levels from 1995 to 2006. However over the past two plus years, residential housing prices have plummeted yearly by more than 15 percent. Third, oil prices increased to almost $150 per barrel in 2008. Today’s price pressures indicate no quick return to that level even after the economy begins to move out of the recession.

What does each of these “bubbles” have in common? All were fueled by investor’s quest to earn economic returns far beyond what would be characterized as normal. So are there asset bubbles in today’s economy, and will the bubble burst? Yes and yes. The largest and most significant bubbles are in U.S. Treasury long bonds and in the value of the dollar. Over the past two plus years, the yield on the 10-year U.S. Treasury has declined from 5.1 percent to its current level of 3.6 percent. To achieve this plunge, prices of the long bond advanced by more than 40 percent during this same period of time. Global economic fear pushed investors from Beijing to Boston to seek a “safe haven” for their investments. These investors judged U.S. Treasuries as the safest of the havens. Thus massive sales of equities and purchases of U.S. Treasury bonds drove demand and prices for the 10-year U.S. Treasury to levels not seen in more than half a century. To purchase these bonds, international investors exchanged their currency for dollars forcing the dollar to speculative highs.

So when investors assess that economic risks have bottomed and equities are the smart play, they will begin selling the 10-year U.S. Treasury bond and buying equities-both U.S. and non-U.S. This will produce colossal losses for investors that have a significant portion of their wealth tied up in U.S. Treasury long bonds. Of course, a decline in the motivation to buy U.S. Treasury bonds will also result in a plunging U.S. dollar. To borrow from Alan Greenspan, we have, at this time, an irrational exuberance for U.S Treasury bonds which has generated a significantly elevated value of the dollar.

Ernie Goss

More Financial Hypocrisy from Warren Buffett

2009-07-25T11:21:00.000-07:00

On April 8, 2009, Moody’s downgraded Berkshire Hathaway stock from AAA to AA2. At that time, Berkshire owned more than 20 percent of Moody’s outstanding stock. On July 23, 2009, Berkshire announced that it had sold more than almost 10 million shares of Moody’s. This appears to be a sign of pure retaliation on the part of Warren Buffett, CEO of Berkshire, and the grand ethicist of Wall Street.

As in the past, Mr. Buffett calls for more objective stock evaluations except when it comes to his company. That is, Mr. Buffett has always been one of the most sanctimonious CEOs in the U.S. For example, he fails to even blush when he calls for higher taxes except when it comes to levies that hit his pocketbook. He has advocated the abolition of the dividend and capital gains tax cuts at the same time he rails against the new cap & trade bill which will cost his Mid-American Energy Company millions in taxes.

Ernie Goss

Cap & Trade: Who Pays the Cost?

2009-07-01T05:42:00.000-07:00

Congress narrowly passed a cap & trade bill that the Congressional Budget Office has estimated to cost more than $600 billion over 10 years. Who will pay the cost of this federal mandate? It depends on the industry.

For products for which the consumer is relatively insensitive to price hikes or there are few competitors, such as electricity, the consumer will pay most of the burden as the producer passes on the increased cost to its customers. For products for which the consumer is much more responsive to price increases or there are many competitors, such as food, the producer will absorb the increase in cost.

Thus it is clear that contrary to the bluster from politicians, Americans, both rich and poor will experience an increase in their costs in the next ten years. Whether one calls that a tax hike is irrelevant.

Ernie Goss

Why Are Oil Prices Higher?

2009-06-22T12:49:00.000-07:00

Despite evidence from Creighton’s three monthly surveys showing no immediate end to the recession (www.outlook-economic.com ), many economists, pundits and analysts contend that the economic downturn is over. What evidence do they have?

It’s hidden in the price of oil, they say. In the past six months, oil prices (in dollars) have soared by more than 80 percent. The bulls contend that this is a signal that the economy is once again on the mend with U.S. economic growth driving prices higher. The bears, on the other hand, argue that this rapid expansion is the result of a weaker dollar and speculator oil buying. So which side has it right?

First, oil prices measured in Euros have risen by 27 percent. Thus, a large share of the increase in oil prices stemmed simply from a weakening U.S. dollar. Next using a simple economic model to explain oil prices since 1999, I conclude that almost none of the run-up in oil prices resulted from improvements in the economy. Instead, I find that of the 27 percent change in oil prices (in Euros), fully 10 percent can be explained by global investors desire to invest in oil rather than U.S. debt. That is, due to looming multi-trillion dollar federal deficits, investors have chosen to sell U.S. Treasury bonds of dubious value and buy oil. Of the remaining 17 percent increase, 4 percent, 7 percent and 6 percent are accounted for by seasonal factors, supply cutbacks and other unidentified factors, respectively.

In conclusion, the largest contributors to soaring oil prices over the past six months have been a weakening U.S. dollar and international investors selling bonds to buy oil.

Ernie Goss

Federal Incentives for Auto Purchases Are Inconsistent

2009-06-18T15:03:00.000-07:00

As part of the 2009 Stimulus Bill, consumers are able to deduct state and local sales and excise taxes paid on the purchase of a new foreign or domestic vehicle costing up to $49,500 that weighs no more than 8,500 pounds.

http://www.driveclassic.com/blog/?p=132

On the other hand, the federal government also allows consumers to deduct up to $25,000 on the purchase of an SUV weighting at least 6,000 lbs. Termed a Section 179 purchase, the bill was intended to assist GM, Ford and Chrysler in the sale of the more profitable large SUVs. Well it failed to prevent the bankruptcy of both GM and Chrysler, but continues to encourage Americans to buy the behemoth SUVs.

http://www.section179.org/section_179_vehicle_deductions.html

If the federal government is serious about cutting gasoline consumption and green house gases, it should first insure that current policies are consistent before embarking on passing new legislation.

Ernie Goss

U.S. Auto Bankruptcy: Good Money Chasing Bad

2009-05-27T13:08:00.000-07:00

On December 4, 2008, my colleague, Ed Morse, and I wrote an essay calling on the U.S. federal government to let the marketplace work in terms of the potential bankruptcy of GM and Chrysler. Since that essay was written, the federal government has funneled good money after bad to the tune of $20 billion to $30 billion.

http://economictrends.blogspot.com/2008/12/reid-pelosi-co-are-not-investment.html

and

http://www.youtube.com/watch?v=RL4MDmaXX7M

As of this writing, Chrysler is in bankruptcy proceedings and there is a 99 percent likeihood that GM will likewise declare bankruptcy. GM's bankruptcy is moving quickly forward due to GM bondholders rejecting the plan to exchange their bonds for GM stock. The GM bondholders have correctly assessed that they will do better under bankruptcy proceedings than under ownership of the "sinking ship." Who could blame them? Well the Obama Administration could and does.

In the Chrysler crisis, the Obama Administration forced secured bondholders to accept a deal that only a Washington Mutual stockholder would agree to. Essentially, the Obama Administration is attempting to abrogate bankruptcy law by strong arming Chrysler bondholders into accepting less than they would have received in statutory bankruptcy proceeding. Well, it is not working with GM as GM bondholders reject the extortion attempts from the Administration.

The Obama Administration must accept the fact that not only does this activist policy approach not work, it produces exorbitant costs for the taxpayer. "Too big to fail" should be replaced by the shorter and more accurate "just too big."

Ernie Goss

Will Obama’s Plan Help Real Estate and Banking?

2009-04-29T06:57:00.000-07:00

The latest incantation of the U.S. Treasury plan announced by Secretary of Treasury Geithner, while addressing the problem, focuses on the symptom, not the problem. The real “banking” problem is that housing prices continue to move lower thus reducing the value of the assets on banks’ balance sheets. The median price of houses sold in the nation declined by approximately 18 percent last year. My own estimates indicate that average home prices across the U.S. need to drop by another 14 percent to get back to the long term sustainable ratio between housing prices and income.

So what needs to be done? In order to underpin the housing market, President Obama’s 2009 Stimulus Package provides an $8,000 tax credit to first- time home buyers. This is inadequate since many of those who qualify do not currently have the resources to make the purchase, nor do they have the tax liability to fully benefit from the credit. Instead, the Obama

Administration’s 2009-10 budget proposal should provide a tax credit of $15,000 for all 2009 home purchases, not just first-time buys. Additionally, President Obama’s 2009-10 budget propsal has proposed a reduction in the mortgage interest rate deduction for families earning more than $250,000. This will have a negative impact on housing sales, prices, and ultimately the health of the banking industry.

The Obama Administration’s plan to cut agricultural support payments will more directly affect RM banks. The plan that has been advanced calls for limiting agriculture support payments for farms with revenues greater than $500,000. This ceiling would snare about half of the farms in Nebraska, for example, and place even more downward pressure on farm land prices, and ultimately the profitability of RM banks. During these fragile economic times, this is no time to be placing additional financial stress on rural communities dependent on farm income.

As an additional step to improve the banking industry, “mark to market” accounting should be abandoned for two years. In 2007, the Securities and Exchange Commission (SEC) implemented what was termed “mark to market” requiring that financial institutions mark or write down assets to market value. This has meant that, due to the inability to price or value packages of mortgages on their balance sheets, these institutions have marked them to practically zero in some cases under the overly restrictive assumption that they will collect nothing from the disposition of these assets. This is clearly draconian and reduces the ability of the financial institutions to make loans thus further weakening the economy.

As indicated by Dale Torpey, president of Federation Bank in Washington, Iowa in our February 2009 survey, “Land prices have leveled off and in some instances have dropped slightly. If some of the farmers can’t renegotiate their rent prices we could be looking at losing some of them in 2010.” Thus, banks, even in those in agriculturally dependent parts of the nation, likely face challenges for 2009 that call for greater attention.

Ernie Goss

Obama and Stock Market Commentary [stop now please]

2009-04-14T10:15:00.001-07:00

Today Obama came out with another downbeat message on the economy. “By no means are we out of the woods,” he said. Yet in the latest 30% run up, he had more of a “glass half full” mentality. And earlier in his presidency, many thought he was far too negative about the economy, adding negative momentum to our already beaten down markets. Does anyone else feel like he isn’t quite sure which side to take? His advisers have yet to find the right balance between being optimistic but not too optimistic to push to markets up 30% in weeks [where we are now] and being pessimistic but not too pessimistic to push the markets down 30% [where we were a few months back]. His comments up to this point have only added momentum (volatility) to market movements in both directions. So until they figure this balance out, how about taking a neutral position and letting the markets work themselves out? The president has many responsibilities, but lets’ leave stock market commentary up to stock market participants.

AIG Execs should keep their bonuses....what?

2009-03-19T14:29:00.001-07:00

I was at a kindergarten class yesterday listening to kids talk about what they wanted to be when they grew up. One child surprised me by saying he wanted to work in Credit Default Swap Risk Management at AIG. I was thoroughly surprised. In the network of people I know, I’m not aware of anyone with even a hint of interest in working at AIG. The little tike surprised me. [JOKE]

Then I started to wonder, why would anyone want to work for AIG? One might expect the reason AIG execs continue to plug away is because they feel personally responsible for losing billions of dollars. Yet in the era of mis-aligned pay structures and leaders refusing to take responsibility for any of our economic problems (i.e. Bush, Greenspan, numerous CEOs), I doubt this is the case.

It certainly isn’t a feel good job either. And your neighbors wouldn’t be impressed. Actually they may downright despise you for working at AIG. Now that we have seemingly donated $200 billion to the company (without that warm-fuzzy feeling you usually get from charity work), every AIG exec’s move is under intense public scrutiny. This certainly doesn’t make the job any easier. In summation, I could only think of 1 reason why I would work for AIG—money. And lots of it.

We shouldn’t force AIG to reduce wages (including bonuses) below market rates. When the ultimate motivating factor [money] is taken away, the talented ones will flee the company. Few people understand the intricacies of AIG’s business, and without high pay, why would anyone who does understand them consider working there, especially when they can find work elsewhere for higher pay and less scrutiny? If all the talented and intelligent people leave for more pay and less scrutiny, I would argue that taxpayers will be on the hook for even more money. Time will tell.

Mexico Strikes Back: Is This the Beginning of the Trade War?

2009-03-17T13:38:00.001-07:00

As part of the 2009 Stimulus Package, Congress inserted ill-advised “Buy America” provisions that require organizations receiving federal funds to purchase from American suppliers. Subsequently, European and Japanese representatives warned that these provisions invite trade retaliation.

Now in response to the U.S. closure of the Mexican border to Mexican trucks traveling to the U.S. with cargo, the Mexican government has slapped tariffs on 90 U.S. industrial and agriculture products. The initial U.S. closure was President Obama’s payback to members of the Teamsters.

President Obama’s wilting under pressure from Congress with the Stimulus Package and unions with the Mexican trucking fiasco is disturbing and foreshadow a potential return to the foolish economic policies of the Hoover Administration with the passage of the Smoot-Hawley Bill in 1930. This is very bad policy and will produce slower growth, higher prices and elevated interest rates.

Ernie Goss

Berkshire anyone?

2009-03-03T15:21:00.000-08:00

Warren Buffet has always paid particular attention to the book value (BV) of his stock -- the value his financial statements say the company is worth. Often times the market assigns a much different value to the stock. Buffet knows that though the market value (MV) of his company will vary, over the course of years and decades, MV and BV will have pretty strong correlation.

2008 was a historically bad year for BRK's BV and an even worse year for its MV. Its BV dropped 10% and its MV dropped nearly 40%. Berkshires ending market to book ratio was 1.37. Over the past 21 years, this ratio has averaged 1.69.Many analysts look at MV/BV ratios to decipher relative value. Similar to a PE ratio, the lower it goes, the cheaper the stock looks.

Berkshire's 5 lowest market to book ratios over the past 21 years averaged 1.4. The year following these low ratios, the stock price increased 36% on average.

Take a look:
2005 MV/BV = 1.46. 2006 return 27%
1999 MV/BV = 1.48. 2000 return 27%
1991 MV/BV = 1.41. 1992 return 30%
1990 MV/BV = 1.45. 1991 return 36%
1987 MV/BV = 1.21. 1988 return 59%

average return = 36%

Keep in mind, BRKs 2008 closing price was $96k. Today it is trading around $74k. Like he said in his latest shareholder letter, "Charlie and I feel like mosquitoes in a nudist camp -- there are opportunities everywhere."

With $27 billion in cash, the old Oracle is in a good position to do what he does best. Speculators/investors will reap significant returns as Berkshire's BV/MV ratio recovers to average levels over the next few years.

Reviving the U.S. Economy: An Alternative to President Obama’s Big Government Solution

2009-03-01T18:58:00.000-08:00

On November 4, 2008, American voters, by electing Senator Barack Obama to the U.S. presidency, collectively signaled that they wanted a larger and more activist federal government. However since the presidential elections, investors have registered their skepticism of a larger and more invasive federal government by pulling funds out of U.S. stock markets. Between President Obama’s election and the release of the details of his budget plan on February 27, 2009, the Dow Jones Industrial Average and the broader S&P 500 have plummeted by 27 percent.

In 1996, President Bill Clinton stated that the era of big government was over. President Obama’s 2009-10 budget proposal reverses even the hints of Clinton’s restraint and ushers in a return to a federal financial incursion not experienced since the war torn Truman Administration. Overall President Obama’s budget proposes the largest federal deficit as a share of the economy since the U.S. was fighting the Germans in Europe and the Japanese in the Philippines. Even the Johnson Administration’s Great Society Programs combined with Vietnam War spending did not approach the levels of government spending proposed by the Obama Administration.

The Obama deficit, combined with the 2009 Stimulus Package, are ostensibly designed to underpin a flagging U.S. economy and to stimulate growth. The current economic downturn began in housing, spread to the banking sector and subsequently ravaged the stock market leaving a hobbled “meat and potatoes” economy. Below, I present an alternative plan for each of the problem areas that relies more on private, not big government, solutions to the economic malaise.

Reviving housing. The median price of houses sold in metropolitan areas of the nation declined by approximately 18 percent last year. Without policy intervention, I expect housing prices to plunge by another 14 percent in 2009. In order to underpin the housing market, Obama’s 2009 Stimulus Package provides an $8,000 tax credit to first- time home buyers. This is inadequate since many of those who qualify do not currently have the resources to make the purchase, nor do they have the tax liability to benefit from the credit. Instead, the 2009-10 budget proposal should provide a tax credit of $15,000 for all 2009 home purchases, not just first-time buys. Additionally, the federal government should allow investors that rent homes to write off all losses against their ordinary income. Currently, investors must spend 500 hours per year working on the property.

Stimulating the banking sector. In 2006 Congress passed what was termed as “mark to market” requiring that financial institutions mark or write down assets on market value. This has meant that due to the inability to price or value packages of mortgages on the balance sheets of many financial institutions, these institutions have marked them to zero under the overly restrictive assumption that they will collect nothing from the disposition of these mortgages. This is clearly draconian and reduces the ability of the financial institution to make loans thus further weakening the economy. I recommend that the Congress suspend “mark to market” accounting for two years. My other recommendation to revive the financial sector is to pursue the Swedish model of bank reform. In 1992, Sweden, suffering through it own banking crisis, set up a “failed” bank to buy the toxic assets of the nation’s other banks. This “failed bank” using a reverse auction process would then buy packages of mortgages from troubled banks. The Swedish solution meant that all of their major financial institutions were returned to profitability by 1994.

Energizing the stock market. President Obama’s 2009-10 budget plan calls for the abolition of the 2001 and 2003 tax cuts for individuals making more than $200,000, and couples earning more than $250,000. This will mean an increase in tax rates on capital gains and dividends. This impending increase has had a significant dampening impact on the stock market since Mr. Obama’s election last November. In my judgment, restoring these tax cuts for all would rebuild a substantial amount of the stock market.

Additionally in order to support the largest expansion in the deficit and debt since 1945-46, President Obama would allow the top income tax rate to rise from 35 percent to 39 percent beginning in 2011. This is no time to be increasing the taxes on any worker, high or low income. Such a large tax increase is now having a large and negative impact on the stock market and the overall economy.

My plan is a sensible approach that does not radically alter the role of the federal government in the economy nor does it significantly increase the financial burden that baby boomers such as President Obama and I hand off to our children and grandchildren, or those who ironically voted for President Obama in abundance.

Obama’s Next Economic Mistake: Increasing Taxes on Investors

2009-02-25T16:59:00.000-08:00

Last week, President Obama outlined elements of his first budget. Unfortunately, it contains tax increases that are likely to contribute to the current economic malaise. Mr Obama proposes that the 2001 and 2003 tax cuts that reduced the taxes on capital gains and dividends expire at the end of 2010.

http://www.reuters.com/article/marketsNews/idUSN2551157420090225

Additionally Mr. Obama would allow the top income tax rate to rise from 35 percent to 39 percent beginning in 2011. This is no time to be increasing the taxes on any worker, high or low income. Such a large tax increase is now having a large and negative impact on the stock market.

Since Mr. Obama won the election the Dow Jones Industrial Average has dropped by over 23 percent and has declined by more than 17 percent since Mr. Obama’s inauguration on January 20. The stock market is telegraphing to our political class that a tax increase on stocks and high income tax rates for workers are not the right steps.

I encourage our Congressional representatives, U.S. Senators and the Obama Administration to make the 2001 and 2003 tax cuts permanent. While this action would not restore the equities markets to their prior lofty levels, it would increase stock prices at a time when investors are searching high and low for some good news.

Obama also wants to maintain the tax on estates worth more than $3.5 million, instead of letting it expire next year. And he proposes "a fairly aggressive effort on tax enforcement" that would target tax havens and corporate loopholes, among other provisions, the official said.
Mr. Obama’s proposals are putting significant downward pressures on the stock market. Be bold Mr. Obama. Keep the 2001 and 2003 tax cuts and challenge the demagogues in the Democrat party .

Ernie Goss

Stock-like returns w/o buying stocks

2009-02-17T08:11:00.000-08:00

Many market participants expect the equity markets to teeter along around DOW 8000 for quite some time. If recent market conditions have drifted your risk preferences away from stocks, but you cringe earning a measly .11% in your "high-yield" checking account, you may want to consider high-yield corporate bonds.

An individual investor with less than $100,000 to invest probably shouldn't try to build their own bond portfolio. It would be costly and time-consuming to find enough suitable bonds that match your investment preferences. To avoid these costs, consider a bond fund. For someone who still has an appetite for risk, I would look at the iBoxx High Yield Corporate Bond Fund (HYG): http://us.ishares.com/product_info/fund/overview/HYG.htm

The fund invests in 52 different bonds across different sectors with an average credit rating of B+ (non-investment grade) and an expense ratio of .5%. Yes, high-yield bonds are "risky," but these days so too are common stocks that have paid an increasing dividend for the past 75 years. Plus, with bond investing you are higher up on the demand chain should things go wrong with the underlying company.

In this environment bonds can experience stock-like returns--HYG's hefty dividend yield is over 10%. Until the stock market looks more attractive, you can get paid to wait.

As outflows of stock funds speed up, inflows into bond funds are increasing, with over $5 billion coming in last week (week ended 2/12). So my idea probably isn't too unique, but either way it may be an attractive alternative to stock investing worth considering.

The 2009 Stimulus Package: The Good, Bad and Ugly

2009-02-15T19:49:00.000-08:00

Well it is over. Tomorrow President Obama will sign the $787 billion stimulus package. Of course the package has some positive, bad and downright horrible elements.

First the good. This package combined with record low interest rates, and a fix for the banking sector will push the U.S. economy into positive growth territory. In my judgment, this will occur by the final quarter of 2009. This will be manifested in advance by leveling of unemployment rates and significant upturns in yields on 10-year U.S. Treasury bonds.

Next the bad. The Congressional Budget Office has estimated that this year’s federal deficit will exceed $1.2 trillion. Spending from the Stimulus package combined with TARP 2 funding will likely push the deficit to $2 trillion. This will elevate the federal debt to roughly $13 trillion allowing baby boomers such as me and President Obama to burden younger generations with higher interest rates, excessive inflation and/or burdensome taxes.

Finally the ugly. Included in the Stimulus Bill is a requirement that spending emanating from the package be focused on American companies. I have written earlier on the consequences of such a requirement.

http://economictrends.blogspot.com/2009/02/smoot-hawley-redux-2009-economic.html

Apparently members of Congress, the Senate and the Obama Administration are prepared to use most of the history of the Great Depression to advance this year’s Stimulus Package. They have skillfully avoided discussing the Smoot-Hawley Bill which was passed in 1930 and was an important factor contributing to the depth and length of the Great Depression. Just as the 1930 bill, this year’s invites retaliation from some our significant trading partners such as China. This will have negative ramifications extending well beyond Mr. Obama’s tenure in the White House.

Ernie Goss

Left in the Dark Again

2009-02-11T11:05:00.000-08:00

I try my best not to comment too much on politics, but with American economic issues and political activity diverging so closely, it is hard not to. My last post attempted to cut back on the cynicism, but here I go again.

Obama’s uneasy rhetoric, scare tactics, and overall vagueness during his news conference on Monday left me feeling utterly unconvinced. I will paraphrase the statement that bothered me most: “We know the stimulus bill isn’t perfect—some things will work and others won’t—but it is important that we get the bill on my desk as soon as possible to prevent future and possibly irreversible damage to the American economy.”

Elected officials are being scared into voting yes on the stimulus package.

In an impossible situation lets’ ask a few impossible questions:

1. Why is it better to get a less than perfect package passed through quickly rather than wait to get it right? Didn’t the TARP fiasco teach us anything?

2. If the House fails to pass the bill this week, what exactly will happen? Would the benefits of taking a bit more time outweigh the further costs of the job loss, bankruptcies, and citizen confidence?

3. Theoretically, American civil servants in the upper echelon of our government should be the brightest minds in the world. If anyone can figure out a PERFECT plan in a short amount of time, shouldn’t it be them?

Treasury Secretary Geithner’s vague bank bailout plan yesterday left Wall Street hungry for answers. He did, however, assure us that mistakes will be made and that things will continue to get worse.

4. Obama promised that Geithner would enlighten us on specific plans to save our banking system. Why did Tim leave us in the dark with few detailed answers? Easy answer: He is just as confused as we are.

Maybe this is reassuring; I think at this point a saviour praising answers would be either crazy or an idiot. Or both.

What Would Stimulate the U.S. Economy?

2009-02-08T11:44:00.000-08:00

I have been very critical of the Keynesian approach to reviving the U.S. economy. In fact, 200 economists, including me, recently ran a full page ad in the New York Times opposing this method of stimulating the economy.

http://www.cato-at-liberty.org/2009/01/28/economists-against-the-stimulus/

So what federal government action would put the U.S. economy back on the path to healthy growth? As an initial step, decision makers must acknowledge where the economic problems began and where the economic difficulties remain. The economic meltdown began in housing and was later reflected in an equity market (stock market) that declined at a pace not seen in decades. So I propose that the following actions be undertaken to remedy the economic malaise:

Housing. The median price of houses sold in metropolitan areas of the nation declined by approximately 18 percent last year. Without policy intervention, I expect housing prices to plunge by another 14 percent in 2009. In order to underpin the housing market, the stimulus package currently under U.S. Senate deliberation should provide a tax credit for ALL home purchases in 2009, not just first-time buyers. Additionally, the active/passive investor definition for home investors should be eliminated. These two steps WOULD cure the ailing housing market. The problem is that it would create another bubble in the housing market. However, the stimulus package currently under consideration creates its own asset price bubbles. The Federal Reserve would be required to take the air out of the bubble at a more acceptable pace in the years ahead in either case.

The Stock Market. At the end of 2010, the 2001 and 2003 tax cuts expire. This means that the tax rate on capital gains from stock sales increases and the tax rate on dividends rises. These impending increases have had the impact of stifling U.S. equity markets. Making the 2001 and 2003 tax cuts permanent WOULD bolster stock prices.

The problem with the Obama/Democrat stimulus package is that it results in a permanent increase in government programs that must be paid for in perpetuity by U.S. taxpayers. This, of course, results in a huge shift of wealth from the nation’s youth to baby boomers such as me and President Obama and most of those in Congress.

Ernie Goss

It isn't all bad.

2009-02-03T06:11:00.000-08:00

The overhaul of bad economic news has flooded my veins with pessimism. In light of this, let’s take a minute to reflect on the rainbows shining through the stormy clouds. Success is a terrible teacher; you learn much more from catastrophe. Here are a few positive trends resulting from the letdown of 2008.

1. Savings. Consumer spending fell for a record 6th straight month in December. Though we are only saving a measly 3.6% after taxes, things are moving in the right direction. We are being more realistic in terms of what we can/cannot afford. It is hurting retailers, but in the long-run will lead to a more balanced and sustainable economy. Hopefully the savings trend will help to shift more and more of our economic output away from spending and more towards private investment and exports.

2. Opportunity. There have only been a handful of 40% yearly drops in our stock market. Problems continue to persist, but for young investors, this is one of our first opportunities to invest in a severely depressed market, cheap by most common valuation methods. Money is made much easier by buying at the bottom, right? No one really knows where the bottom is, but surely we are closer today than we were a year ago.

3. Bargain Hunting. Has anyone else been able to negotiate a slue of items that usually aren’t negotiable? Dental bills, transmission flushes, even standard prices on retail goods—buyers certainly have the upper hand. If you’ve held on to your frugal ways throughout this crisis, you are probably in a good position to take advantage of the “hangin’ on by a thread” blowout sales common in most retail stores.

4. Perceptions/habits changed. Do you find yourself cutting more coupons? Recycling? Driving less? Thinking about ways to get more MPGs? Considering scrapping the gas-guzzler? The general populace has woken up from its spending slumber. Even as fuel prices plummeted, I found myself consolidating trips and scrubbing that dirt off my car to get a bit more mileage. The combustible calamity of last summer has permeated through the American epidermis--most people understand that an American energy solution is paramount, regardless of how cheap liquid gold gets.

5. Better Americans. For whatever reason, from media hype to a re-awakened interest in politics, Americans have become more involved in the democratic process. Increased scrutiny by the media has its negatives, but it helps to hold our president and his tax-dodging appointed officials accountable. Politifact.com is tracking progress on over 500 promises Obama made throughout his presidential campaign. Though interest may be waning a bit post-election, Americans seem more in tune to the decisions our government is making on our behalf.

Smoot Hawley Redux: The 2009 Economic Stimulus Plan

2009-02-01T23:06:00.000-08:00

President Herbert Hoover signed the Smoot-Hawley Tariff Act into law on June 17, 1930. The Act was designed to raise tariffs on over 20,000 imported goods. http://en.wikipedia.org/wiki/Smoot-Hawley_Tariff_Act . However, one of the unintended consequences of the Act was retaliation from more than 25 of the U.S.’s trading partners to the point that U.S. exports declined from $5.24 billion in 1929 to just $1.6 billion in 1932.

http://www.buyandhold.com/bh/en/education/history/2002/smoot_hawley.html

Thus the Smoot-Hawley Act was a prime contributor to the Great Depression that engulfed the nation’s economy until the Japanese bombed Pearl Harbor on December 7, 1941.

Despite the clear evidence that restricting trade is destructive to a nation’s economy even during good economic times, the 2009 Economic Stimulus Bill that is winding its way through the Congress and likely to be signed by President Obama contains anti-trade elements that are certain to bring on retaliation from our trading partners and push the U.S. economy further into the abyss.

Provisions of the 2009 Stimulus Bill require those receiving stimulus money to use only U.S. providers or suppliers, or to give them strong preference. This is very reminiscent of the thinking behind Smoot-Hawley. Not surprisingly, after the House vote last week passing the bill, a spokesman for Catherine Ashton, the European Union trade commissioner, said that "if a bill is passed which prohibits the sale or purchase of European goods on American territory, that is something we will not stand idly by and ignore." And Prime Minister Taro Aso of Japan denounced this portion of the Plan in Davos, Switzerland, saying, "We will resolutely fight protectionism."

http://www.iht.com/articles/2009/02/01/america/obama.4-420750.php

The “Buy American” portion of the bill is just one of the elements that must be jettisoned before Senators and Congressional Representatives sign on. Keynesian economics is not the only bad idea the Obama Administration is bringing back from the 1930s.

Ernie Goss

Moving away from Capitalism?

2009-01-30T08:05:00.000-08:00

There were 2 boys in 2 very different countries. Both grew up poor, yet had the aspirations to attend college.

Tom is from Rich-land. His dad died young and left his mother with 6 children to feed. The government gave his mother a large sum of money to provide for the family. After a few years of excessive spending and lack of planning, the money was gone. His mother couldn’t feed him and Tom was hungry, so he went to the local government office to collect food stamps, which allowed him to be fully-nourished. When he entered school, he got similar treatment through a free lunch program provided by the local government.

A few years later, Tom looked for a job. He was unsuccessful, so he went to the government office to apply for unemployment benefits. He wanted a car but got around by public transportation fine. Best yet, the Transportation Authority gave his family monthly vouchers for free transportation.

When Tom turned 18, he decided to go to college. A local organization provided him with need-based scholarships and grants. He applied for several more student loans to cover his cost of living while in school so that he didn’t have to work. The Rich-land government even paid for his room and board.

Tom struggled through school but eventually graduated. His resume wasn’t too impressive since he didn’t work during school. He had a hard time finding a job. Back to the government office he went to collect unemployment benefits and food stamps.

The benefits weren’t enough to pay for the housing he wanted, so he went to the housing authority office, where they approved him for heavily reduced rent. Now he had enough to provide food for his belly and a roof over his head. Because times were tough, the government sent him a $500 check in the mail. He bought the flat-screen TV he always wanted. He still can’t find a job. “I will get around to it,” he says.

Don is from Poor-jikistan. His dad died young too and left his mother with 6 young children to feed. Don’s mom had no choice but to start a small business to feed the family. Luckily they had a small plot of land, where she grew fruits and vegetables to sell at the local market. She still struggled to put food on the table, and Don was hungry. How could he make enough money to get something to eat and help out his family? With an absence of fruitful benefactors, he had to depend on himself to improve his family’s situation.

In his neighborhood the local newspaper cost 50p, but in the business district, newspapers cost 100p at the newsstand. He told his mom that he planned to buy newspapers in their area and sell them to the rich folks on the other side of town. To compete with the newsstands, he decided to sell the newspapers for 75p. He would also take the newspapers to his clients rather than them needing to stop at the newsstand.

His mom said if he had to skip school to run his business, she wouldn’t allow it. So, he woke up at 5 AM to finish morning sales and returned before the 10 AM starting bell.

Don found himself with a steady income from the start, finding that he could sell a lot of newspapers just by walking through a traffic jam and selling directly to people in their cars. It wasn’t the safest way to do business, but Don felt it was a well-calculated risk. His clients enjoyed being able to buy their newspaper on the go—a new idea that Don developed.

Refusing to indulge himself with the extra cash, Don instead decided to expand his business. There were too many lucrative intersections in the business district for him to cover alone, so he interviewed and hired 10 kids from his neighborhood to help out.

Don gave them training, proper walking shoes and uniform, and a percentage of every newspaper they sold. After a few years of managing this small fleet of workers, Don decided to go to college. He had learned basic accounting, management, and leadership skills through running his small business but yearned to learn more about how to build his business.

However, school wasn’t cheap, and the government was too burdened with other issues to provide grants and scholarships for education. Don took on another job at a restaurant to cover costs, running his business in the morning, studying going to class during the day, and waiting tables at night.

Life was not easy for him; worked for every penny. By this time, his near 30 employees covered nearly every lucrative intersection in the business district. Rather than go out of business, some newsstands partnered with him to provide additional products to the clients. He wasn’t getting enough sleep, but he was getting by. If he wanted to finish school, he had no other option but to keep doing what he was doing.

One client in particular, who was a manager at an accounting firm, had observed Don’s knack for business. He always said that Don could intern for him after a few years of business courses in college. After a few years in college, Don accepted the challenge. Because it was during the day, Don shifted his classes and study time to night, and delegated the day-to-day activities of the newspaper business to one of his trusted employees. Don still retained the right to make the big decisions.

This situation worked out for a few years until Don graduated. The workload had taken a toll on Don, whose hair was thinning and graying. However, he finished school with satisfactory grades and the experience portion of his résumé was fairly impressive.

A life full of struggle shouldn’t be anyone’s fate. However, part of the reason for older Americans’ success was because life wasn’t easy for them; success was directly linked to how hard they wanted to work. The struggle forced them to start businesses or work their way up in a company with the hope for a better life.

As parents, many of them didn’t want us to struggle like had to—it seems our government isn’t willing to let us struggle either. Life is much easier for us. If we fail, there are safety nets. If our parents/grandparents failed, they hit the concrete and broke their legs (without government provided insurance, by the way).

Though the older generation of Americans may not have noticed it at the time, the struggle in their life combined with the lack of options or assistance from other parties helped them to develop valuable behavioral traits useful in life and business. Our government (and parents) try to do everything they can to help lessen the blow of this economic downturn, but by laying out the safety net and depriving us from struggle, it will be much more difficult for us young ones to develop skills needed to survive in a capitalist society.

Buyers Beware

2009-01-27T10:13:00.001-08:00

The consumer confidence report, which measures economic sentiment among consumers, came out today; another gloomy economic figure to add to our collection. It edged downward another point to 37.7, from 38.6 in December, its lowest figure since 1967. As Americans look to find their footing, sentiment couldn't be more pessimistic.

In recent months consumers have cut spending dramatically, which in itself doesn't see like such a bad thing. People are trying to save more. Coupons are trendy. Goodwill anyone?

Remember, GDP = C + I + G + (X-M)

C= consumer spending
I = net investment
G= government spending
X-M = net exports

In an economic downturn, we leave ourselves particularly vulnerable to negative GDP growth, since consumer spending makes up more than 2/3 of our economic activity. An earlier blogger quoted that "the American economy is basically a giant ponzi scheme." We simply buy, buy, buy, import DVDs and flat screens from Asia, where they have been more than willing to finance our binge shopping with treasuries (though this can't continue indefinately). We've had import fever.

Well, the keg has run dry and the party is over. Our lack of spending is having a chain reaction felt around the world. Thousands of plants in China are closing daily, American companies aren't filling their orders; American consumers aren't buying. What is the answer? Replace America with another frivoulous and free-spending country who buys first and thinks later. In this environment, who are the potential candidates?

No one is more capable than us at being the buyer of the world.

In the future, hopefully we can change the composition of our GDP. We need to find a solution to making globally competitive products/services using our expensive workforce. I know it is comical, but what if we actually exported more products than we imported? We are on the first wave of innovation, so anything is possible, right? I hope so.

Putting Things In Perspective

2009-01-23T11:20:00.001-08:00

There has been an overhaul of negative news regarding the direction the US is heading in the future. I know times are tough, but in relative terms, things could be a lot worse. We are the most fortunate and affluent country in the world, flush with a multitude of civil rights and citizen benefits. Imagine if this was the US:

1. After a run-off democratic election victory, the new president of our country is forced to flee. The former tyrant refuses to give up power and abducts, tortures, and murders anyone in the opposition. He even looks to kill family members and friends of the newly elected president. We are prisoners in our own home.

2. In order to go shopping, you must take a suitcase full of cash. The tyrant and his cronies have printed so much worthless money that inflation is running at 3 million percent--a magnified version of our Federal Reserve. You have a trillion dollar bill and it barely buys a slice of bread. You consider using your cash to start a fire for cooking.

3. We have no functioning education system, the health care system is down, most industries are closed, and food is scarce beyond belief. The idea of being employed is nothing more than a silly idea. Sewage is building up in the streets and there isn't access to clean water. Thousands of people are dying from a disease we only previously knew about through antiquated text. Our country is crumbling to the ground day by day; and entirely man-made disaster.

This isn't just a story to make a point. These things really are happening in Zimbabwe today. You think our government is against us? We have absolutely no idea how "against us" a government can really be.

The next time you feel like criticizing and pointing fingers at our government—and the fact that we can openly complain about our government makes us inherently lucky—say a quick thanks that you were lucky enough to be a part of this country—it was basically a coin flip anyways.

Something to Believe In

2009-01-20T09:35:00.000-08:00

Obama has just taken office! What a historic step towards social/racial/gender equality. I am proud to be a witness of history in the making.

However, I think many of us have the feeling of one part excitement mixed with another part nerves. The economy is in the doldrums and will probably get worse. Millions have lost their jobs and there are more to come. Unemployment may hit 10%, economic growth has stagnated and will stay that way for a while, and citizen moral is dismal at best. The government is running out of tools to manage the crisis, and our deficit is ballooning exponentially faster than expected.

By looking at the quantitative data, it’s easy to see the mess we are in, and it’s obvious that the burden of debt will be passed on to the next generation. Despite all the negatives, the intangibles of our next leader will hopefully outweigh everything else. We are desperately in need of a leader who inspires us—someone who makes us proud to be a part of this great country.

There will be more layoffs, more bankruptcies, foreclosures, and the like. Of course you have heard that things will probably get worse before they get better. However, we need to remember that our greatest resource, the American people, is a resilient one. Our resources will be re-allocated towards making products for the new era. Businesses will restructure, get leaner, and re-tool their focus to compete in an ever-competitive global economy.
Opportunity will show itself in the midst of chaos. We need to be hungry again. We are still the most powerful country in the world and we need to start believing it.

Ethics for Sale: Geithner’s Selling, Obama’s Buying

2009-01-19T09:02:00.000-08:00

It seems that ethics in government are somewhat flexible depending on economic circumstances of the nation. Mr. Obama’s nominee for the job of Secretary of Treasury, Timothy Geithner, just forgot to pay his payroll taxes while he was an employee of the International Monetary Fund. Certainly a mere $40,000 in underpayments could slip even the most vigilant taxpayer. But you see Mr. Geithner did not pay the taxes until he became a nominee for the Treasury job.

But Democrats and Republicans in the House, Senate and in-coming Obama Administration are arguing that in this very, very treacherous economic time, we must not saddle nominees with needlessly high hurdles. It is argued that we can ill afford to lose this individual with otherwise impeccable credentials. That is if we also turn a blind eye to the fact that he employed a housekeeper who was in the country illegally.

http://www.whiotv.com/nationalnews/18478224/detail.html

However, I argue that there are two issues at work here. First, ethical standards should not be this malleably and salable. Second even if we wish to abandon our ethical standards, should we do it for this candidate? He has been working behind the scenes during this economic meltdown that began on September 18. Thus far, I think we should all have some doubts regarding his capabilities.

Is this change we can believe in?

Ernie Goss

Obama’s Plan: Stimulus or Welfare?

2009-01-08T16:29:00.000-08:00

This week, President-elect Barack Obama vowed that he intended to advance what he termed a stimulus bill that would provide a $1,000 tax rebate to 95 percent of working families. His idea is to "to get people spending again." http://news.theage.com.au/world/us-families-to-get-1000-dollar-tax-cut-obama-20090109-7czx.html According to Mr. Obama, “This would be "the first stage of a middle-class tax cut that I promised during the campaign and will include in our next budget."

The inaccuracies, untenable assumptions and mis-placed fundamentals of Mr. Obama’s recent rhetoric are too long and numerous for a blog. Let me list just a few of the foibles of his plan. First, a vast share of those receiving the “tax cut” actually pay no income taxes. So for this group, they are more accurately defined as welfare recipients. Don’t get me wrong, most all of us are receiving subsidies or welfare from some level of government. My primary objection is to Mr. Obama’s terminology. Let’s label it more accurately. My second objection to his plan is that over the past two decades more and more of the tax burden has been shifted away from low income workers to high income workers to the point where the majority (those not paying federal income taxes) can vote themselves a pay raise by inserting political leaders into office who promise to “soak the rich” and enrich the “working families.”

This was the genius of Mr. Obama’s campaign when he promised to raise taxes on families earning more than $250,000 and cut taxes on families making less than this amount. How could the 95 percent majority, those making less than $250,000, resist voting for the man who vowed to take earnings from the supposed rich, the 5 percent minority and give to them. I am just surprised that all politicians aren’t running on such a clever and ultimately destructive platform. Why am I not surprised that Mr. Obama now indicates that he may in fact not increase taxes on the “evil rich”?

Instead he intends to expand by $800 billion an already out-of-control federal budget deficit. According to the Congressional Budget Office, the deficit for 2009 will total more than $1.2 trillion even without Mr. Obama’s stimulus. As a percent of the economy, this is the largest U.S. deficit incurred since World War II. Now I once had the mis-fortune to serve as a Visiting Scholar with the Congressional Budget Office and can thus attest to their model’s inability to get within a mile of the likely final value. This deficit added to an already too large federal debt of over $10 trillion is going to choke the next generation with higher inflation, interest rates and taxes. As a baby-boomer, I can only cry for those individuals younger than me who will ultimately pay the cost of this mammoth blunder.

Ernie Goss

Fear Is Gripping U.S. Economy: Government Overreacts Again

2008-12-19T07:17:00.000-08:00

So much for laissez faire economics! The Bush Administration announced today that it was bailing out the Big 3 auto producers. Tuesday, the FED made a historic rate cut of 75 basis points, lowering the fed funds rate to between 0 and .25%. This is the lowest funds rate that the Fed has established since it was created in 1913. Additionally, the incoming Obama Administration indicated that it was going to advance a two year stimulus package of $850 billion. All of this screams----inflation, a weak U.S. dollar and higher interest rates beginning as early as 2010.

And how has the market greeted this intervention—not well. Equities continue to struggle and investors are so unconvinced of the government intervention that they are willing to accept a negative return on short term U.S. Treasuries and have driven the yield on the 10-year U.S. Treasury to 2.2 percent. In other words, the actions by our government leaders have not inspired confidence from investors. The more they do the worse it gets. According to the old aphorism, when you find yourself in a deep hole, quit digging.

As for the largest portion of the U.S. economy, consumers are being enticed to spend. Every store in the mall seems to be running a different kind of sale every week. On Black Friday you could buy 1 pick-up at full price and get an SUV for free.

All the while, the dollar printing press is and will keep running on overdrive, which was reflected in recent dollar moves. The US Dollar Index is down 12% from its multi-year high on 11/21. And today, the dollar weakened the most EVER in one day against the euro (since its inception in 1999).

Usually, dollar weakness means oil strength. On a day when the dollar showed record weakness, oil moved below $40 for the first time since 2004. In ordinary times, this wouldn’t make sense. However, we are in the extraordinary times, where falling world-wide demand for oil is overriding other fundamentals, including dollar exchange rates. Don’t expect this to last.

Recent trends show dollar weakness. Government intervention should lead to increased demand in equities and real estate. The combination of further slides in the dollar with an increased demand for oil (it can’t go much further down, can it?) will contribute to the last part—much higher inflation. So what should you do? Buy the TIPS.

Aaron Konen and Ernie Goss

Liquidity: Too Much or Too Little

2008-12-15T15:21:00.000-08:00

Cash is piling up for investors and companies at incredible rates. We are far from having a liquidity issue-at least a lack of it. Liquidity is so great relative to investment opportunities I feel like I could dive in it and have a quick swim. What we are facing is a fear and uncertainty issue. Merger and Acquisition (M&A) activity is at 9/2001 lows. Because of the delays/absence of M&A activity, S&P 500 companies alone have hoarded nearly $650 billion in cash, a record amount.

Some (possibly 100+/-) US companies are trading at prices under their cash value per share. This makes no sense unless there is a huge amount of fear priced in.
The money supply figures came out yesterday. M2 (currency, demand deposits, savings, money market) has grown consistently this year, and is getting closer and closer to triple the size of the Dow Jones market capitalization ($8.6 trillion). That’s right, our cash and liquid holdings are 3 times larger than the worth of our most coveted stock index.

I didn’t crunch the numbers, but a reliable source yesterday told me that our M2 was actually greater than the market capitalization of the S&P 500 (that includes 500 of our biggest companies).

Money market funds have also seen record net inflows. $57.5 billion came in last week alone (Tuesday to Tuesday). The seven-day simple yield on all taxable money market funds fell from 1.04% to .94% during this time. Money isn’t coming in because of attractive yields; it is coming in because of fear and uncertainty.

The point I am trying to get across is this: there are mounds and mounds of cash out there. With yields on government bonds pushing closer and closer to 0 (or negative in some cases), it is only a matter of time before the gauntlet opens and investors start buying equities and buyers of long term U.S. Treasuries lose major amounts of money.

Aaron Konen

Asset Classes Where Should You Go?

2008-12-10T10:36:00.000-08:00

Where should you put your money during tough economic times? A friend of mine recommended buying cattle, hogs, and natural gas. He is a pharmacy student who doesn’t know a whole lot about the market, so his recommendations were mean to be a joke.

In tough times like these, should we follow the actions of real professionals? Another Omaha-an, Warren Buffet, knows quite a lot about the nuances of the markets and investing, right? So… what about following his investing pattern?

A few days ago, Berkshire’s 13-F was filed. This document, filed quarterly with the SEC, shows current holdings of institutional investment managers at the end of each quarter.

His top holdings on 9/30 (in no particular order) were: Wal-Mart, Wells Fargo, US Bankcorp, Wesco Financial, Johnson & Johnson, Kraft, Proctor & Gamble, and Conoco Phillips.

From 9/30 until 11/18, these stocks were down 20% on average.

Not exactly the return I was looking for. If we can’t follow Warren Buffet, a man that Nebraskans and many other folks around the world consider to be the top dog in the investing realm, should we just give up and buy the whole market?

Well, if we bought SPY (the S&P 500 ETF, similar to an index mutual fund) on 9/30, we would be down 25%. Hmmm. So diversifying actually made things worse. What about buying real-estate?

RWO, an ETF that tracks the Dow Jones Wilshire Global Real Estate Securities Index, is down 44% from 9/30. Now, if you were to buy tangible real-estate, like a home or a strip mall, the value of your investment may not be down this much, but a 15% drop from 9/30 until now wouldn’t be a huge exaggeration.

So, lets’ revert back to my pharmacy student turned investment advisor friend. From 10/1 to 11/18, the live cattle, lean hog, and natural gas December 2008 contracts were down 4% on average.

This example is supposed to leave you confused, which is the point. Few people can make sense of investment opportunities in this senseless and extraordinary market. In my example, the person who was least informed has shown the best results. The dream team of investing has been left as confused as us everyday novice investors.

So maybe you should look into buying lean hog futures, as my friend recommended. Or maybe you should see if there is a trading opportunity that can be exploited by tracking the relationship etween the humidity index and the NASDAQ. Whatever I do, it doesn’t seem to mater. Save for a sturdy bed mattress, a safe place to store money is hard to find.

However, an opportunistic like me will keep dumping high percentages of my paycheck into diversified ETFs. If you have a better idea, please let me know. For example, if you find a positive relation between the degree of frost on the ground relative to small-cap technology stocks, at this point I’m all ears.

Aaron Konen

Obama's Job Goal Is Not Enough

2008-12-05T16:12:00.000-08:00

November’s unemployment figures came out today. They were quite staggering in October (240,000 jobs lost) and were even worse for November (533,000 jobs lost). The worst may be yet to come.

Social unrest will force Obama to put the issue of job creation at the top of his agenda when he takes office in January. His massive 2 year public works plan aims to create 2.5 million jobs – a new-new deal of sorts. This may help to improve dismal worker moral, but these are only temporary jobs (there are only so many bridges that can be built); the positive effects will be short lived; and 2.5 million is paltry given the losses to date and the new jobs necessary to keep the unemployment rate from rising higher.

In order for sustainably low unemployment, the private sector needs to play the key role, not the government. Only the private sector can re-allocate our unemployed to a long-lasting job.

Currently, US companies are cutting jobs at shocking rates. It is impossible to get through a financial publication without reading about another company cutting its labor force by 10%. When will the carnage end?

7% unemployment is expected by year-end, and 10% unemployment isn’t outside the realm of possibilities for next year. This would be the worst recession for the job markets since 81-82.

However, many of the largest employers in our country are spending more time begging on Capital Hill than improving their out-dated business models. Obama’s plan may be our only option until serious structural changes are made in our private sector’s largest employers. Say it ain’t so.

Aaron Konen

Reid, Pelosi, & Co. are not Investment Bankers

2008-12-04T09:46:00.000-08:00

The “Big Three” automakers are running out of capital. Their business models have not adapted successfully to changes in the global marketplace, and in particular, to changes in our own domestic markets for personal transportation. Ford, GM, and Chrysler products have long been losing market share to their foreign competitors. Consumers have been voting with their pocketbooks, and they have been choosing products from other manufacturers. The reasons for these choices are complex, and they are certainly open to debate. High labor costs, which have failed to deliver sufficient productivity gains to keep these manufacturers competitive with other firms, have a lot to do with the cause. But the writing on the wall could not be clearer: these companies have not been successful.

Figuring out how to make them successful is a challenging process. Chrysler attempted to deal with its competitive challenges by merging with European powerhouse Daimler-Benz. This firm put a lot of capital on the line in that merger, and presumably backed up that capital with the best managerial talent they could find. They ultimately concluded that this merger would not bring the value they intended to create. Chrysler was spun off and a private equity firm now owns the company. This process has taken several years, and plans for change in that firm are still presumably under development.

Likewise, Ford and GM have both been struggling with their business models. Their executives have tried to acquire foreign brands, in much the same way that Mercedes-Benz attempted with Chrysler. Ford’s acquisition of Volvo provided some technological benefits with regard to safety, which have been integrated in other products. However, it chose to sell off its investments in Land Rover and Jaguar, which ultimately could not be successfully integrated into a viable profit-generating center for the company.

In the meantime, foreign manufacturers, initially shut out by trade barriers, have located their production facilities in the United States. They employ thousands of workers, and they have provided significant capital investments in plants, equipment, and human resource development in this country. Eleven firms, not three, manufacture in this country.

The day of reckoning has come. The Big Three are running out of cash. The wheel has turned, and it is time to evaluate whether these firms can continue. The current economic crisis had something to do with hastening that day, but it is not the cause of their demise.

The automakers are now seeking capital from the lender of last resort – the U.S. government. Of course, this means that taxpayers will pay – there is no amorphous “government” that does not involve us. Our investment will come from forced exactions by the government, not voluntary investments based on the motivation of potential profit.

The decisionmakers for allocating that capital – the Congress – have not done so well in economic matters. They spend far more than they take in. They have sponsored the enterprises (i.e., Fannie and Freddie) that bear a good deal of responsibility for the current credit crisis. But the American people reelect them with regularity, and have recently chosen to entrust the economic wellbeing of the country to their care.

When the automakers came in October, the Congressional hearings were an opportunity for show. Exposing the private jet travel of executives makes for good political theater, but it has nothing to do with the solution to the financing problems of the automobile companies. Nor is the level of their executive compensation. Spreading all the jet costs and all the executive salaries and bonuses over total production will not meaningfully reduce the cost of producing a car; nor will it make particular models more desirable for consumers.

Congress sent the automakers back to make a plan – in a few weeks – about how they would change. This is also great political theater – but of no significance. Pelosi, Reid, & Company are politicians, not investment bankers. To suggest they are competent to make these decisions about how to change and restructure companies, when the private sector has not been able to do it in years, is foolish. Congress will probably spend our money on this, and they will attempt to justify it by the fact that they are trying to do the same things in so many other areas, including alternative energy. But this is neither a reflection of competence or justice.

We should let markets decide the future of these companies. The world will not end without them; nor will their assets remain unproductive. Others will acquire those assets and build the cars and trucks that are successful, and they will do so competitively.

EAM/EPG

Is the VIX a Good Predictor of the Stock Market?

2008-12-03T16:59:00.000-08:00

The Volatility Index, or VIX, is an often quoted figure used in today’s markets. It is a calculation used to measure investor fear. Historically, it has held at around 20. Below 20 corresponds to less stressful times in the markets, and above 30 signifies high volatility due to investor fear or uncertainty.

Judging by recent movements in market indices (mention of a 300 point swing fails to interrupt my coffee break anymore), you might guess that the VIX is above 30. On 11/20, it topped out at an all time high of 81! Over the past few months, we have seen sustained VIX figures at unprecedented levels.

There have been numerous studies showing a strong correlation between the VIX and market performance. Since it is a forward indicator, VIX readings should help us to gauge market movements in the future. On Friday, the VIX closed at 55.28. From 11/20 until then, the DOW was up 14%. Investor fear went down, and markets went up. Pretty simple, right?

Common sense should tell us that the best entry point into the market is when the herd is getting out. An often-quoted Buffet proverb comes to mind—be greedy when others are fearful and fearful when others are greedy.

Putting considerable investment decision weight on the VIX is probably foolish, but positive contrarian indicators like this one help to re-affirm my belief that there is a light at the end of the tunnel. Eventually I have to be right, don’t I?

Aaron Konen

Inflation for the Long Run? Don’t Count on It!

2008-12-01T18:00:00.000-08:00

There is a lot of talk these days about deflation, which is a general decline in prices. We worry about persistent declines in prices because they encourage consumers and businesses to delay purchasing goods, services and capital since the price tomorrow will be lower that the price today. This, of course leads to increased unemployment, decreased corporate profits, and downward pressures on the nation’s gross domestic product. While we have experienced deflation in most commodities of late (the producer price index, ppi), be certain that it won’t be persistent, nor will it result in deflation in terms of consumer prices (the CPI).

The current crisis has forced (or encouraged) our government to add trillions of dollars to our current national debt, which just passed the $10 trillion mark much faster than expected. This year the U.S. budget deficit is expected to top $800 billion. Coupled with possible tax cuts in the short-term future, increases in government spending on public works, and promises of an additional stimulus package, a potential disaster, in terms of inflation, looms in the future. A former chief auditor of the federal government said it best—the first thing you need to realize about the government is that they have no money.

You can’t lower taxes while piling on debt, increasing government spending, and adding another stimulus package without expecting someone to pay for it in the future. Two government actions in the future will surely dampen the prosperity of X and Y-ers as they age in the work force.

There are only three paths available:
1) To pay for its future obligations, the government can print more and more money which depreciates our currency (the $ will be worth less in real terms) making foreign goods more expensive in the U.S. Accordingly to the quantity theory of money, MV = PQ where M is the money supply; V is velocity of the money supply or how fast the money turns over; P is the price level; and Q is the level of goods and services or output. Thus, if velocity is fairly stable over time-which it is- and output increases at a pace of 3 percent to 5 percent, prices will make up the difference. Thus if the money supply grows by 10 percent, prices will increase by 5 percent to 7 percent. Not only is this not deflationary, it is inflation at a pace well beyond the level that is acceptable. http://en.wikipedia.org/wiki/Quantity_theory_of_money

2) Taxes will be raised in future years to pay off the debt and interest on the debt.

3) Interest rates will rise as the government issues more debt to pay interest costs and to retire the old debt.

Thus, any signal of deflation in prices now is a façade; expect higher prices in the future (maybe double digit inflation for some time) and a dollar that will be more useful in starting fires than buying a loaf of bread (nothing like a little hyperbole to bring the point home). When will this occur? Not until 2010 when U.S. Treasury Paulson is lounging on a beach in Hawaii sipping on a Margarita.

Aaron Konen and Ernie Goss

The U.S. Depression: Mixing Fact and Fiction

2008-11-26T14:51:00.000-08:00

It is often asserted that President Franklin Roosevelt ended the U.S. economic recession. Unfortunately the facts are in conflict with the myth.

http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.aspx?RelNum=5409

The depression began in 1929 with the stock market crash and resulted in the nation’s unemployment rate rising from 4 percent in 1929 to 25 percent in 1933, the year Roosevelt took office. Roosevelt initiated the first New Deal in 1933 with banking reform laws, emergency relief programs, work relief programs, agricultural programs, and industrial reform (the NRA). The first New Deal essentially ushered in a federal welfare state, as well as the end of the gold standard and prohibition. The Roosevelt launched a "Second New Deal" in 1935. This second program included labor union support, the WPA relief program, the Social Security Act, and programs to aid farmers.

Despite the two New Deals and aggressive economic stimuli from the Roosevelt led administration, the U.S. gross domestic product (GDP), which was $104 billion in 1929, did not reach this level again until 1941 with the beginning of U.S. involvement in World War II. Furthermore, the nation’s unemployment rate was over 17 percent in 1939. That jobless rate has not approached that level since.

Now we are to understand that Mr. Obama intends to model his economic stimulus programs according to his mis-readings of the Franklin Roosevelt years. The nation is not willing to suffer anything approaching its Depression experience. Unfortunately, Mr. Obama has unveiled ideas, which if matched by real programs, will result in a prolonged period of negative and slow growth for the country. For example, bailing out GM will result in the waste of taxpayer money and only delay that behemoth dinosaur’s ultimate demise.

http://economictrends.blogspot.com/2008/11/no-bailout-for-gm.html

Ernie Goss

CEOs Are Robbing the Economy

2008-11-23T08:22:00.000-08:00

Goldman Sachs (GS) has received praise in recent days after announcing that 7 top executives will forgo their 2008 bonuses, which are routinely 7+ figures. When I called and spoke with some AIG executives about their 2008 bonuses, they said, “we worked extremely hard to destroy the value of our company, destroying and delaying retirement for millions of our investors, and being a leader in the destruction of our economy. In doing so, we feel that we should be compensated appropriately.”

OK, so I didn’t actually speak with AIG. But, many other companies are following suit and lowering their bonuses this year. Bank of America (BOA) says bonus payouts this year will be around 50% of last year’s. GS really is getting some serious praise. Their CEO, Mr. Blankfein, should be able to survive this year on at least premium ramen noodles after receiving a near $70 million bonus last year.

I guess I just don’t get it. Talk about protection, what other job can you lose billions of dollars for consecutive years and still earn millions of dollars year after year in bonuses and salary?
Appropriate compensation in my book would be a county jail as opposed to straight-up prison. I was reading about 1 hedge fund that promises to make up for any cumulative losses before the company takes its management fee. This was a few months ago, so they may not be in business anymore.

I guess my main question is, why can’t we hold our top executives more accountable for the choices they make with our invested money? Why does the thug who holds up a Dunkin’ Donuts for the $84 in the cash register get 10 years jail, and BOA senior execs who lose billions of dollars get 50% less of a bonus, say, only around $5 million?

Aaron Konen

U.S. Stock Market: This Is a Buying Opportunity

2008-11-16T16:35:00.000-08:00

Judging by the tone of the media, it seems that by this time next year, about half of us will be unemployed. If any of us can afford to travel, it will be only by horse and buggy, since our car companies have gone bankrupt. We will also be driving without insurance, as our insurance companies have gone bankrupt. Looting/chaos will run rampant, as at that time we carry our valuables and cash on our person, as none of us have homes and since all of our banks have gone bankrupt.

This is obviously an exaggeration, but by watching the news for a few hours a day, it’s hard not to expect that doomsday is coming.

Anyways, I just got a coupon in the mail yesterday from JcPenney’s for 40% off any clearance items (which are already marked down 50%). I am not quite sure, but I think they may be paying me to take their clothes. This is a bargain hunter’s dream. However, most people aren’t bargain hunters with investing. When we get nervous about the markets and the economy, many people panic and sell their whole portfolio. On the other side, when we see our statements having monthly double-digit returns, we consider selling our house, family heirlooms, and wives/progeny to invest in the stock market. Our investing mentality is completely counter-intuitive.

The loss of confidence in the world-wide stock market/economy has had dire consequences. From its Oct. 2007 high to its Oct. 2008 low, the Dow has fallen 54%.
I found a few other examples of multi-year lows within the past 40 years:
· From its Oct. 1973 high, the Dow fell 43% to its Oct. 1974 low
· From its Feb. 1977 high, the Dow fell 23% to its Feb. 1978 low
· From its Sept. 2001 high, the Dow fell 28% to its Sept. 2002 low

The average gain from these 3 multi-year lows to their next year’s same month high was 32%.
History tells us a few things. 1) The snowball effect from herd buying makes stock markets increase more than it should 2) The snowball effect from herd selling makes the market drop further than it should, and 3) the worst time to take your money out and give up is at a multi-year low, which is where we stand today.

Over the past few weeks, the market is sending bargain hunters coupons in the mail for bigger and bigger discounts.

Aaron Konen

No Bailout for GM

2008-11-12T07:17:00.000-08:00

There are 11 auto manufacturers in the U.S. today. This is seven more than the U.S. had 40 years ago. Thus there should be little support for a bailout for GM or Chrysler. Due to their non-competitive cost structure, GM's and Chrysler's long-term economic future is doubtful. A bailout would only delay the inevitable insolvency of both GM and Chrysler. "Too big to fail" is a failed policy. In the event of their failure, work will be simply shifted to their more productive and lower cost U.S. competitors such as BMW, Mercedes, Hyundai, Honda, Toyota, Nissan, Ford, and Mitsubishi. All of the listed companies are global in scope. These producers are owned by U.S. citizens (among others), pay U.S. taxes, employ U.S. workers and have U.S. citizens on their upper management team.

Management and unions representing workers at GM have failed. A vital market based economy demands that success be rewarded and failure be punished. In this case, management failed to recognize how dependent company profitability was on large cars and low gasoline prices. Unions failed by pressing for wage and benefit concessions that were greater than the market could bear. The only reason to bailout GM is political. And mixing politics and economics normally results in lousy outcomes.

Ernie Goss

Don’t Bet on the Dollar, Long-Term

2008-11-09T14:42:00.000-08:00

The US Dollar Index (USDX) measures our currency’s strength relative to a basket of well-known currencies around the world. An increase in the figure signifies dollar strength, and a decrease signifies weakness. In July of 2001, the index was at a multi-year high of over 120. In mid-March of this year, it hit a 35-year low of 70.7. As a general trend, the dollar has weakened since the inception of this index in the early 70s. However, since this mid-March low, the USDX has strengthened 22 percent to 86. The Japanese Yen has also strengthened in close unison with the dollar. But be careful betting that the dollar will continue to gain in value. Recent strength in the dollar and the yen stem primarily from massive “safe haven” buying as investors seek temporary safety from the extreme volatility of thinly exchanged currencies.

A phenomenon called ‘carry trade’ occurs when investors whose home country have low interest rates choose to invest in countries with higher interest rates. In recent years, for example, the Bank of Japan (BoJ) has kept interest rates barely above 0%. Because of this, many Japanese investors have looked at investing in countries with higher bank interest rates like Australia, Korea, South Africa, and New Zealand. Here is a summary of the performance of these currencies relative to the dollar since mid-March:
· Australian Dollar: -41%
· Korean Won: -34%
· South African Rand: -23%
· New Zealand Dollar: -35%

If you have been paying attention to the U.S. Federal Reserve and the BoJ’s recent interest rate moves, you might wonder: Why are so many people demanding dollars and yen as their interest rates move closer and closer to zero? At one point in October, investor’s were actually paying a premium for 3-month Treasury Bills (which translates into a negative return for that 3-month period, excluding exchange rate movements). Shouldn’t investors demand fewer dollars and yen if they are earning less and less interest on U.S. Treasuries?

The crisis of 2008 has brought on a huge flight to safety. What we mean is, as Japanese and American investors expect the worst in a global downturn (like Iceland going bankrupt), they unwind their carry trade positions in foreign countries and repatriate their money. The world obviously views the dollar and yen as two of the safest currencies, which can explain at least part of the strengthening in the USDX.

When demand settles and the smoke clears from our current debacle, investors won’t be satisfied earning a negative real rate of return on their dollars and yen. Therefore, carry trade will re-emerge, and with a US Treasury printing press running on overtime, expect the dollar to continue down its depreciating path.

So what are the factors that will place downward pressures on the dollar for 2009 after all of the safe haven buying recedes? First and importantly, the U.S. will continue to run monthly trade deficits of more than $50 billion. This puts downward pressure on the dollar. Second, the Chinese Central Bank due to pressure from the U.S. will allow their currency to rise in value compared to the dollar. This has the impact of making Chinese goods more expensive in the U.S. which assists U.S. competitors. Third, U.S. interest rates will likely remain lower than those set by the European Central Bank (ECB). The ECB’s mandate is to keep inflation low. They will do this by keeping short term rates well above those set by the U.S. Fed.

So when will the dollar begin to depreciate? As soon as the global angst recedes in the first quarter of 2009.

Aaron Konen and Ernie Goss

Sports Fantasy, Stocks and IPOs

2008-11-05T19:43:00.000-08:00

Over the past few years, fantasy sports leagues are getting more and more competitive. Just a decade ago, the victor’s sole prize was bragging rights. Now, the winner’s purse could be in excess of $1 million (A recent WSJ piece just described a fantasy football league for the Wall St. elite with an entry fee of $100,000). I just learned about a TV channel dedicated entirely to fantasy football! And, once a season, many husbands skip out on family obligations in order to meet with their league on fantasy draft night.

So, you might ask, where am I going with this? Let me throw out a wild idea about where I see fantasy sports going. Professional athletes will incorporate themselves like a publicly listed company and trade in financial markets. How will this happen? Let me just throw out some ideas.

For an IPO to occur there are 3 key players involved: The company wishing to go public, the investment bank who assists them and markets their shares, and the regulatory bodies that govern both throughout the process.

The company will be the pro athlete, the investment bank will be the pro team that acquires the athlete, and the regulatory body will be the sports organization, like the NBA, NFL, NHL, etc.
The athlete will trade based on their earning power / potential earning power over the life of their career (maybe even after retiring, as some athletes make more money after their sports careers end).

The increasing competition in sports has been paired with increasing illegal activity—anything from performance enhancing drugs to spying on practices to forging birth certificates. Additionally, the federal courts are also playing a bigger role in litigating the illegal activity in professional sports, trying to “clean up the game.”

This could be an effective way for sports fans to hold professional athletes more accountable for their actions. Because their company (the athlete) would be much more transparent, via annual and quarterly reports filed with their respective regulatory body, illegal activity would be much more difficult to pursue without consequences.

This is a wild idea, and it would take a dissertation to fill in all the gaps, but this is a step I see fantasy sports taking within my lifetime.

Aaron Konen

A Return to a Failed Economic Paradigm

2008-11-02T16:10:00.000-08:00

In 1936, John Maynard Keynes’ General Theory was published. His model of economic society fit perfectly with the prevailing economic policy of the Roosevelt Administration that was pumping up the size of the government in an attempt to exit the Great Depression that began in the U.S. in 1929. As a testament to the veracity of the model, the Depression, despite the introduction of the WPA program (Works Progress Administration), social security and a host of other mammoth programs, did not end until the beginning of U.S. entry into World War II in 1941.

The Keynes’ paradigm, which advanced the notion that the government, by its taxing and spending policy, could end an economic downturn or thwart inflation, was the dominant model of the executive and legislative branches until 1983 when Ronald Reagan assumed the U.S. Presidency. With the ascendancy of Paul Volker to the head of the Federal Reserve earlier in 1979, monetary policy, accompanied by supply side economic policies, became the dominant model of the U.S. economy post-Reagan. This model depended on lower marginal income taxes and aggressive money policy to stimulate the economy and end a recession. Between 1983 until 2008, Keynesian economics was dismissed as anachronistic and a failed policy approach. According to the monetarists, relying principally on the work of Milton Friedman, using the blunt instrument of the federal budget to manage the economy was problematic. Due to the time necessary to implement spending and tax changes, Keynesian economics was deemed useless in a fast changing economic world. Furthermore, growth in the size of the government, that normally accompanies implementation of Keynesian policy, thwarts economic growth.

However with the tidal wave of Democratic candidates in Congress and the likely success of Obama, the tired Keynesian model is resurfacing. Sadly, this year we have had one stimulus package passed with another on the Congressional table. The one passed and the one under consideration, will only serve to shift more resources to the government sector and reduce long-term economic growth. U.S. citizens should brace themselves for higher tax rates, elevated interest rates and slower growth accompanying this “return to the past.”

Ernie Goss

The Consumer Confidence Index and the Stock Market

2008-10-29T13:27:00.000-07:00

One closely followed economic indicator is the consumer confidence index (CCI). It is a survey by the Conference Board that measures how optimistic or pessimistic consumers are with respect to the economy currently and in the near future. The report came out October 28 with its lowest reading EVER at 38, down 61% from the September reading. Remember, the highest rating ever was in January 2000, at 145. If you remember correctly, this is about the time when www.absolutelyanyinternetstock.com (think Level 3) was trading at a multiple of last year’s reported earnings that will never be duplicated. The S&P 500 Index has since shed more than 1/3 of its value. My question is, how good are we consumers at judging the health of the economy or the stock market.

Since we are now at a historic low in the CCI, I wanted to see how the market (S&P 500) historically fared when the CCI was at several different multi-year lows. The results may surprise you.

· In December 1975 the CCI was 43. The S&P on 12/15/75 was 90. 1 year later it was 105, returning 17%
· In October 1982 the CCI was 54. The S&P on 10/15/82 was 134. 1 year later it was 170, returning 27%
· In February 1992 the CCI was 47. The S&P on 2/15/92 was 413. 1 year later it was 445, returning 8%
· In July 2003, the CCI was 77. The S&P on 7/15/2003 was 991. 1 year later it was 1111, returning 12%

A year from these 4 multi-year lows, the market gained on average 16%, well above historical average returns for any major US stock market index.

Without further research, I can’t say how strong the correlation is between these two variables, but as my simple example showed, it may be a contrarian-type figure worth looking at when deciding on entry/exit points in or out of the market. For me, it re-affirms my belief that money put to use in US equities now or in the near future will yield above average returns.

Aaron Konen