Michigan out 28,000 jobs – August’s 7.4% jobless rate is 14-year high.

Excerpted from the Detroit News this morning. . . .  

  • Michigan‘s unemployment rate in August was the worst since since September 1993.  
  • Massive automotive buyouts and a sharp decline in residential construction were cited as factors for the state’s jobless rate. 
  • Last month 28,000 jobs were lost in Michigan, bringing the total number lost since this time last year to 96,000. 
  • Since August 2006, employment in Michigan has dropped by 2 percent while nationally it has increased by 0.8 percent. 
  • The data shows that people are leaving the state. The pool of workers dropped by 16,000 in August and has declined by 81,000 (1.6 percent) since this time last year.  

What does all of this mean? Again, on the face of it not a great deal, because all of the information is based on lagging indicators, which means the cause of everything in the above list happened six to 12 months ago.  

It’s what’s behind the scenes and between the lines that’s significant. And actually critical is a better way to describe the two things that hold our economy in the balance.  

  • The state budget impasse  

Depending on whose math you use, the state of Michigan is facing in excess of a $1.5 billion deficit in the next fiscal year. The state is hemorrhaging both jobs and people, yet the governor is unable, as usual, to make the difficult decisions necessary to actually reduce the size of government to better match the reduced population of the state. Instead, she’s looking at taking the easy, and gutless, way out by raising taxes. If you’re looking for something that will tip the balance toward an even longer recession for the state, look no further. 

  • The UAW negotiations with the automakers

To his credit, the normally bombastic and irrationally insane Ron Gettlefinger is keeping his mouth shut. It finally seems as if he realizes what’s at stake, which is nothing less than the survival of the automakers. GM has seen the light and the battleship is turning – why can’t the state? I guess that that’s the difference between leadership and politics. 

For the contrarian real estate investor, all of this is actually good news, because one of the implications is that the real estate market will continue to be soft. This is unfortunate of course, but like just about every other adversity it provides the seed of an even greater opportunity.

If you have the courage to act.

 

You Never Could Tax Your Way to Prosperity

Lest you think that this is a diatribe related to politics, relax. Long, long ago I gave up letting the micro-brains in government (both elected and unelected) impact by disposition.

No, this is a post about economics. And basic economics at that.

I have long believed that the framers of our constitution should have included a minimum number of basic economics courses at the university level as requirement for holding any elected or unelected position in any federal or state-level government. And with so many idiotic decisions being made in terms of “handling” the economy, my belief gets validated over and over again.

Case in point – my great state of Michigan. (Notice that was a small-g great).

Did you hear the latest? After all of these months, and with a budget due by Sep 30 or the government will shut down, our small-g governor is STILL sticking to her belief that she can tax the state back into prosperity. With all the job losses, all the foreclosures, all the uncertainty, with Comerica, Pfizer, and now Volkswagen high-tailing it out of the state, her BRILLIANT idea is to RAISE taxes.

Unbelievable.

My frustration stems from the fact that economic data has been proven time and time again that raising taxes DOES NOT improve the economy. Conversely, though, the economic data has CONSISTENTLY shown that cutting taxes increases TOTAL tax revenue. Counter-intuitive, yes, but true nonetheless.

A prime example of this total lack of understanding of basic economics is the cigarette tax. Cigarette smoking declines, so cigarette tax revenue to the government declines. The government counts on this money, so their solution is to raise the cigarette tax. This causes MORE people to stop smoking, so tax revenue declines again, so they raise taxes again. And so on, and so on.

I feel sorry for the last guy left smoking in America – he’s going to have to pay a billion or so dollars a pack for cigarettes. (Although if the Fed keeps monkeying with the economy, with inflation a billion dollars won’t be a billion dollars anymore. But don’t get me started on this again).

This behavior is so stupid that it’s comical. Yet it continues to occur, over and over again.

Why is this so hard to understand?

 

 

They Did WHAT?!?

WOW. Again.

I had written up a long follow-up post on this Federal Reserve intervention that I had planned to post yesterday, but I got hung up in meetings and couldn’t get to it.

I wrote long (and eloquently, I might add) about how there was NO possible way that after their dump-and-run “liquidity injection” they could even THINK about lowering interest rates for AT LEAST the next two to three months. About how the economy has been experiencing pretty significant inflationary pressure in the food and fuel sectors over the last 12 months. And about how all of this pointed to the rational decision for them to retreat back to their 30 year old policy of targeting inflation as Public Enemy #1. Boy was I wrong.

Not only have they and their colleagues dumped nearly $350 billion dollars into the economy, just in the last few days, but they lowered interest rates a half percent as well.

This is bad news for the economy. Really bad news. Because these acts together pretty much guarantee an onslaught of inflation.

You see, inflation is a bad thing. In the most simplest terms, it’s an oversupply of money in the economy, and anything that is in oversupply decreases in value. The same goes with money. So what inflation does is decrease the value of your paycheck faster than you can make it up with raises. In short, it silently lowers the standard of living for just about everyone that works for a paycheck, and it particularly impacts retirees and others on fixed incomes, because their payments are rarely set to adjust anywhere near the true rate of inflation.

So you end up working more and making less. And if that’s not bad enough, the cure for inflation is worse than the disease.

How do you cure an oversupply of money? You raise interest rates! And raise them, and raise them, and raise them. It’s a bitter pill to swallow for everyone.

The problem is, we’ve gone so long without any real appreciable inflation that everyone has forgotten what it’s like. Remember 20% mortgage rates in the late 70’s and early 80’s? They actually peaked in June 1981, and these staggeringly high rates in turn had a crippling impact on business, because nobody could afford to invest in new business or new equipment. This caused a massive recession to start in July of 1981, which lead to the economic double-whammy – staggeringly high unemployment rates that peaked at almost 11% in 1982.

The interest rates alone were enough to cripple the housing market. The high unemployment only exacerbated it and caused the greatest number of foreclosures in history. Wait – that sounds kind of familiar, doesn’t it?

So enjoy your rally today in the stock market. You paid a high price for it but don’t know it yet.

It’s kind of like everything else we do in this country – we put it on a credit card and figure we’ll worry about it later.  

 

As I mentioned at the end of my last post, if you’re interested in diversifying OUT of stocks and other investments that don’t protect you from inflation, and into to investments that provide stable and predictable returns, then visit my website at www.MPSG-LLC.com and request my special report “How to Buy a US Post Office, a Wal-Mart, and a Meijers with your IRA.” You’ll be glad you did.  

The Sins of the Past

Wow. I never thought that I’d see it happen. The Federal Reserve, that mysterious, secretive, “quasi-governmental” entity that has made a regular habit of thumbing it’s nose at the general pubic and the day to day performance of the market, has succumbed. They have fallen. They have gone over to the dark side and made a wholly populist decision.

And unfortunately it’s not just the Fed – it’s a number of other central banks around the world as well. They all blinked. Or more appropriately, they all made a knee-jerk reaction and dumped nearly $300 billion dollars into the economy, nearly overnight, simply because stock markets around the word were adjusting. And they stand at the ready to add more. Their actions typically have the impact of dropping a rock into a lake; this is more like dropping a boulder into a mud puddle. Talk about inflationary pressure! Paul Volcker would be turning over in his grave if he weren’t still alive.

Ever since the days of malaise, aka Jimmy Carter, aka stagflation, the Fed has held as it’s main policy goal the limiting of inflation. After seeing the damage that rampant inflation had on the economy, that has always seemed to be a prudent choice. And they have executed the policy with such dogged persistence that they have, on occasion, come close to tanking the economy through their ever increasing interest rates.

But overall they have been very successful in battling inflation. In fact, they have perhaps been too successful, because right now there is an entire generation of adults out there that have never experienced it, and probably another whole segment of the adult population that did experience it but that has since forgotten about it. And as the philosopher George Santayana wrote back in 1905 “Those who cannot remember the past are condemned to repeat it.”

Hold onto your brokerage account statements, because it appears that that’s exactly what’s about to happen.

If you can’t (or just don’t want to) remember the impact that inflation has on the stock market, let me refresh your memory a bit. I went back and did some research on the DOW average between 1978 and 1981, the years of some of the highest inflation rates every recorded in the US. On December 31, 1977 the DOW closed at 831.17. On December 31, 1981 it closed at 875.00.

So over four years the average closed a total 43.83 points higher.

A whopping 5.3%. Over FOUR years.

So say goodbye to your IRA and 401k returns if you’re invested in stocks.

 

If you’re interested in diversifying OUT of stocks and away from the volatility of the national economy in general and earn stable, predicable returns, then visit my website at www.MPSG-LLC.com and request my Special Report “How to Buy a US Post Office, a Wal-Mart, and a Meijers, with your IRA”.