Wednesday, June 30, 2010

Socialist Pigs

Socialist Pigs


06/30/10 Taipei, Taiwan – Capitalism produces. Socialism distributes. The two systems do not coexist comfortably with one another. In fact, they are inimical.

Some of the most celebrated champions of socialism have coined terms like “greedy capitalist” or “capitalist pig.” By implication, a socialist is neither greedy nor a pig. But economic history suggests that socialists are just as porcine as their capitalist counterparts…maybe even more so.

One need only look to the recent goings on in Australia, your editor’s country of birth, for a glimpse into the real world outcomes of this ideological struggle. Kevin Rudd was last week ousted from Prime Ministership after a botched attempt to impose a “super profits” tax on the most productive sector of the Australian economy – the mighty mining sector. We provided a few details in Thursday’s issue:

“The story is a classic ‘producer vs. parasite’ tale…Rudd, like any other socialist bully would do, attempted to sell the tax to the Australian public under the familiar ‘fair share’ slogan.

“‘The infrastructure needs of this state are vast and on the existing tax base cannot be funded,’ Rudd told Australian reporters while on a recent visit to Western Australia, the nation’s largest mining state. ‘We say the sector of the economy most able to share a greater part of the burden for funding our infrastructure needs for the future is in fact our most profitable mining companies.’

“If this sounds like thinly veiled Marxist rhetoric,” we remarked, “that’s because it is. As the founder of that ill fated, though persistently insidious ideology himself famously noted: ‘From each according to his ability, to each according to his need.’”

One might be forgiven for thinking that, after Rudd’s spectacular political decapitation, replacement Prime Minister, Julia Gillard, would think twice before trying to kill the goose laying all of Australia’s golden eggs. Alas, it was out with one parasite, in with another.

Ms. Gillard is certainly aware of the research released by the Western Australia Chamber of Commerce and Industry that suggests the “super profits” tax, as it stands, would have erased $4.4 billion and 17,000 jobs from the West Australian economy next year – before the tax was even scheduled to be implemented in 2012. The study further predicts the cost to the state’s economy would have risen each year to total $60 billion and 100,000 jobs lost by 2020.

And yet…Gilliard revealed her parasitic DNA within hours of nabbing the Prime Minister’s post.

“I want to make sure Australians get a fair share of our mineral wealth,” she declared, “But we want to genuinely negotiate…”

Gillard is widely expected to push for a slightly diluted version of the “super profits” tax. “I am throwing open the door to the mining industry,” she said just last week, “and I ask that in return, the mining industry throws open its mind.”

As warm and fuzzy as those sentiments may be, the fact remains that such featherweight idealisms invariably end up weighing a stone…and that is a burden the strongest, most able members of society are usually expected to shoulder. But theft is still theft…even if it is watered down a tad. Don’t expect the industrialists to take her play-nice politico-doublespeak lying down.

Although he welcomed the new leadership’s change of tack, Atlas Iron chief executive, David Flanagan, was unequivocal in his assertion that tax must be axed.

“We’ve been screaming blue murder to anyone who will listen about what the problems are with this tax,” he told The Australian this week.

Australians have been getting a pretty “fair share” of the local mineral wealth for some time now anyway. Those who risked their capital and bought even a single share of BHP Billiton, Rio Tinto, Fortescue Metals, Atlas Iron et al., were richly rewarded over the past decade as the geologic and geographic blessings of the “Lucky Country” and, more importantly, the efforts and initiative of its mining companies, paid off handsomely. (Of course, China and India’s voracious appetite didn’t hurt, either.)

In addition to capital appreciation and regular dividends for shareholders, ordinary, working Australians have also exacted what might be seen as a “fair share” of the local resource wealth. Through compulsory contributions to Australia’s Superannuation Fund – a scheme not entirely dissimilar to America’s Social Security, though decidedly healthier…at this point, anyway – working Australians have a large, indirect holding in the nation’s mining giants. Working Australians, therefore, saw the value of their retirement savings appreciate, more or less, alongside the rise and rise of the very companies the “super profits” tax sought to penalize. [Those same workers, not coincidentally, were among the first to see the value of their retirement nest egg shrink as the share prices of the nation’s mining companies collapsed after the proposed tax was first run up the national flagpole.]

Of course, all this is to say nothing of the tens of thousands of hard-working individuals who actually spend their days and nights thousands of feet below Australia’s rusty red surface actually digging the stuff up…and the carpenters, plumbers and electricians who build and service lodgings to house them…and the local businesses that profit from an influx of workers to the region…ect., etc., etc… (Not to mention the exorbitant taxes each and every link in this value chain already pay!)

After all, a barrel of oil or a ton of coal is worth nothing until it is first brought to market. Invariably, that process takes an immense amount of capital, the expertise to extract said resources and the gumption to actually get one’s hands dirty doing the job.

At the end of the day, those who deserved a “fair share” of the resource wealth got exactly what they deserved: a share commensurate to the effort they put in. By contrast, those who don’t work, don’t pay into Superannuation, don’t build or service mining towns in some way, don’t risk their capital by investing in those “conspicuously productive” companies; those who don’t actually contribute anything to the process of bringing the product to market at all, get exactly what they deserve: nothing.

People seem to think that just because they have an emu and a big red kangaroo on their passport they are somehow entitled to a bounty of riches…riches someone else must earn for them, no less. They define a “fair share” as a Divine Right handed down to them the moment they were born – coincidentally – in a resource rich land.

People of such a mind should consider asking how their poor brothers and sisters are faring in Venezuela, or Mexico, or Iran, or Nigeria or, for that matter, just about anywhere else on the African continent. These lands all enjoy an abundance of natural riches…and an abundance of government involvement in “distributing” the profits. And yet, curiously enough, the people living under these supposedly benevolent regimes are among the most repressed and impoverished on earth. Hmmm…

Socialist maxims may score high marks for eloquence and pathos; but they score very low marks for economic wisdom. Capitalism produces. Socialism distributes. Without capitalism, socialism cannot function. In other words; socialism needs capitalism.

Intriguingly, the inverse is not also true. Capitalism has no need of socialism whatsoever. Capitalism distributes wealth by creating opportunity, forged in the crucible of open competition. Capitalism amasses the capital that invests in the enterprises that enable others to advance their financial conditions. Capitalism does not confiscate wealth and redistribute it. Capitalism multiplies wealth…and in the process redistributes opportunity.

Of course, productivity and wealth creation does not come from penalizing the most productive members of society. It comes from standing aside and allowing them to do what they do best, be that excavating minerals, building cars or growing bananas.

Left alone, the free market operates as a kind of evolutionary arms race. Companies compete to offer the same product at a better price, or a better product at the same price. Those that cannot keep pace eventually whither and die. Through this “survival of the fittest” process, prices are over time driven down and the quality of goods and services forced higher. In this fashion, those at the lower end of the socio-economic spectrum benefit most from the toils of companies competing to capture their business. And, the best part is that nobody has to steal a penny to pay for it. The “capitalist pigs” will finance the whole operation themselves…if only the safety-net socialists would get out of the way and let them.

Flip, Trip,

Flip, Trip, Double-Dip


06/30/10 London, England – Peter Orszag fell on his sword last week. Barack Obama’s budget director left after disagreeing with Obama’s tax pledge. ‘Read my lips,’ the chief executive might have said; no new taxes for people earning less than $250,000.

Mr. Orszag hastened to distort the record:

“I want to emphasize that it would be inaccurate to say that I have told the president personally that I’m leaving because of concerns about our fiscal policies,” he said in his exit interview.

Mr. Orszag can’t seem to put a simple sentence together. But he can count. According to the last census results, there were 1.7 million households in America with incomes of $250,000 or more. Even if you took an additional $250,000 in tax from each one of them, raising the effective rate on many of them to nearly 150% of income, it you would still have a trillion-dollar deficit. There is no way the rich alone are going to be able to shoulder America’s growing debt burden.

“Peter feels strongly that this is a pledge that has to be broken…” said an administration source.

Mr. Orszag is only the latest OMB casualty of modern debt financing. The first came a quarter century ago next month. David Stockman was the “propeller head” of the early ‘80s. He could count too. When the Reagan team refused to raise taxes to close the deficit gap, Stockman moved on. He quit on August 1st, 1985 and went on to write his memoir: “The Triumph of Politics; why the Reagan Revolution failed.”

Stockman was right. Politics prevented the Reagan administration from getting control of deficits.

If the Reagan administration had been in the oil business at the time, it might have invented deep water drilling. Instead, one of the Reaganites’ signal contributions was to liberate America’s conservatives from their hatred of deficits. The Republicans didn’t know it at the time, but their innovation would later prove disastrous.

But Reagan was able to increase federal debt without causing a breakdown in federal finances. When interest rates were falling from 15% to 3% it was hard to go broke. Almost no matter how much debt you had, you could refinance at lower rates. Which gave the rest of the world the wrong idea. It seemed like you could borrow forever.

Alas, all good things…and bad things…come to an end. Borrowing in the private sector peaked out in 2007. Since then it has been downhill.

Of course, the lesson was lost on the feds. They’ve got their economists, their theories, and their elections. As you know, people come to think what they must think when they must think it.

The Europeans have their backs to the wall. In front of them is the bond market – unwilling to extend more credit. They have to believe that cost-cutting is the way forward. So far, practically every government in Europe has promised to take a sharp knife to fat public budgets. Since we’ve been back in Europe, almost every headline takes up the story.

“Brutal cuts…

“Budgets slashed…


All in the name of austerity! But what can you do when you can’t borrow any more money?

On Monday, it looked like the gods were against them too. Greece announced a new borrowing campaign and the Parthenon got struck by lightning. Zeus will only put up with so much.

Poor Ireland, too, is in bad shape. The Irish have been good sports about it. They’ve embarked on one of the most aggressive cost-cutting campaigns in the Old World. But do you think lenders are pleased? Nope. They’ve actually forced up Irish sovereign debt yields.

And now, investors are wondering: what next? How much ‘austerity’ can governments deliver? How much is enough? And what happens to stocks while the world is de-leveraging?

The Dow fell more than 240 points yesterday. If the stock market looks ahead, as the experts say, what is it looking at?

We don’t know. But if it opens its eyes at all it will see that actually the world isn’t de-leveraging. Not yet. The US is still borrowing heavily. Its borrowers show no sign of fatigue.

Meanwhile, the G-20 meeting ended with a call to trim public debt. But no one said ‘now!’ That’s what they bond market says…when it has had enough. And for the moment, governments are still adding to their debts in anticipation of lowering them when the economy picks up.

But wait…what makes them think the economy is getting better? Aren’t we headed to a ‘double-dip recession?’

Uh huh.

And if the economy goes down again…won’t unemployment go up? Maybe to around 12% this time?

Uh huh.

And won’t tax receipts go down?

Uh huh.

And won’t public spending go up – with more unemployment compensation, food stamps, and counter-cyclical social spending?

Uh huh.

And won’t deficits actually grow larger, not smaller?

Uh huh.

Which brings us back to the aforementioned David Stockman, Ronald Reagan’s director of the Office of Management and Budget. Stockman gave a speech last October in which he predicted that the economy would not ‘recover’ as promised…and that the budget deficit, then about $1.5 trillion, would grow to as much as $2 trillion per year.

Stockman may be right again.

And more thoughts…

“Ireland is a mess,” began a colleague. “Just drive down the street. You’ll see houses for sale everywhere. And there are unfinished housing developments. And empty offices too.

“The funny thing is that prices have not fallen. That’s the government’s contribution to this problem. They’ve made it worse by taking in all the bad property debt into one very bad bank, backed by the government. This has meant that the lenders, builders and developers have not had to own up to their mistakes. There’s been no rush to sell…and few desperate sellers, because the worst of them can effectively refinance through the government’s bad bank.

“Of course, it means that the property market can’t correct itself either.

“Everybody’s happy when prices are going up. But when prices are going down they don’t seem to have the stomach for it. So, they do everything they can to stop it. Of course, it creates this zombie situation, where the market can’t correct itself. It can’t clear. Because prices aren’t allowed to fall. So people who have money don’t want to buy. And people who don’t have money can’t sell.

“And what can we do about it?

“Nothing…so let’s go down to Henry Downes and have a shot of whisky.”

We were in Ireland for a meeting of the minds of our Bonner Family Office. This is a project unlike anything else your editor has ever been involved in – very long-term investing for the benefit of future generations. Interested readers are invited to read more about it here.

Asian Stocks Fall

Asian Stocks Fall on China Manufacturing, Moody’s Spain Review

By Monami Yui and Shani Raja

July 1 (Bloomberg) -- Asian stocks fell after China manufacturing growth slowed and Moody’s Investors Service placed Spain’s credit rating on review for a possible downgrade, fueling concerns over the strength of the global economy.

Mining companies BHP Billiton Ltd. and Rio Tinto Group, which get at least a fifth of their revenue from China, sank more than 2 percent in Sydney after the Purchasing Managers’ Index, a gauge of Chinese manufacturing, fell more than economists estimated. Nissan Motor Co., which gets 13 percent of its revenue in Europe, sank 1.9 percent in Tokyo after Moody’s said it may lower Spain’s Aaa classification.

“Investors are already finding difficulty traversing the wall of worry,” said Tim Schroeders, who helps manage about $1.1 billion at Pengana Capital Ltd. in Melbourne. “A downgrade of Spanish sovereign debt would be another piece of negative news that adds to demand for perceived safe-haven investments.”

The MSCI Asia Pacific Index dropped 1.1 percent to 111.56 as of 10:40 a.m. in Tokyo. About five times as many stocks fell as rose. The gauge has slumped 13 percent from its high this year on April 15 on concern Europe’s debt crisis and Chinese steps to curb property prices will hurt global growth.

Japan’s Nikkei 225 Stock Average slumped 1.5 percent and South Korea’s Kospi dropped 1 percent. The S&P/ASX 200 Index lost 1.7 percent in Sydney.

Futures on the Standard & Poor’s 500 Index lost 0.6 percent. The gauge yesterday fell 1 percent as ADP Employer Services said companies in the U.S. added fewer workers in June than forecast.

“Investor sentiment is certainly negative and we’ve seen that reiterated in buying of defensive asset classes,” said Chris Weston, head of institutional dealing at IG Markets in Melbourne. “Traders are pricing in a double dip, which is not a healthy stalking ground for equities. In the short term, markets could be oversold and due a bounce.”

China Manufacturing Slows

China Manufacturing Slows for Second Month Amid Growth Concern

By Bloomberg News

July 1 (Bloomberg) -- China’s manufacturing expanded at a slower pace for a second month in June, adding to signs that growth in the world’s third-largest economy is moderating.

The Purchasing Managers’ Index fell to 52.1 from 53.9 in May, the Federation of Logistics and Purchasing said in an e- mailed statement today. That was less than the median 53.2 estimate in a Bloomberg News survey of 12 economists.

The figures indicate Premier Wen Jiabao’s government is succeeding in tempering an expansion that hit an 11.9 percent annual pace in the first quarter, which threatened to inflate consumer and asset prices. Signs of the slowdown have unsettled investors around the world because limited demand in advanced economies has left global growth reliant on emerging markets, led by China. Asian stocks headed for a third day of losses.

“China’s growth is off the peak and will gradually cool,” Qu Hongbin, a Hong Kong-based economist at HSBC Holdings Plc, said before today’s release. “Still, this is just a slowdown to a more sustainable rate rather than a meltdown.”

Qu said “resilient” private consumption and government spending on public housing will help to sustain growth.

That outlook hasn’t been shared by investors, who sent the Shanghai Composite Index to a 14-month low yesterday. The MSCI Asia Pacific Index dropped 0.9 percent as of 8:52 a.m. in Hong Kong. The world is relying on China to help sustain a recovery that Group of 20 leaders this week described as “uneven and fragile.”

Autos, Electronics

The manufacturing index, released by the logistics federation and the Beijing-based National Bureau of Statistics, covers more than 730 companies in 20 industries, including energy, metallurgy, textiles, automobiles and electronics.

On June 29, the New York-based Conference Board corrected its leading economic index for China to show the smallest gain in five months in April, fueling investors’ concerns that growth is easing and adding to signs of weakness worldwide. Europe’s manufacturing and services expansion slowed in June and Japan’s industrial production and household spending slipped in May.

Baosteel Group Corp., China’s second-biggest steelmaker, this week scaled back its growth plans, cutting its target for capacity in 2012 by 38 percent.

In China, policy makers have spent the first half of the year seeking to prevent property-price bubbles and contain inflation, which surpassed the government’s full-year target of 3 percent in May. So far, the winding back of the stimulus has not included an interest-rate increase.

Credit Target

The government has told banks to set aside more money as reserves, targeted a 22 percent reduction in new lending from the record $1.4 trillion in 2009, and indicated that the yuan’s peg to the dollar is over.

Lu Zhengwei, a Shanghai-based economist at Industrial Bank Co., said concern that an economic slowdown is possible may have damped purchasing managers’ sentiment and higher labor costs may have altered hiring plans.

Manufacturers including Honda Motor Co. and Foxconn Technology Group have pushed up wages and at least nine Chinese provinces and cities will raise minimum wages from today after Wen called for measures to head off growing worker unrest.

The government has cracked down on property speculation by raising down-payment ratios and mortgage rates for multiple home buyers. Clamping down on local-government borrowing to contain risks from last year’s explosion in debt could also limit growth. The finance ministry said it will scrap export rebates on some steel and metal products from July 15 to limit energy consumption and pollution.

“The biggest uncertainty in the outlook later this year may be how determined the government is in meeting its energy and pollution targets and in limiting related industries,” said Lu.

Signs that China may be able to maintain momentum include a 49 percent jump in May exports from a year earlier and quickening growth in retail sales. Still, June or July trade data may start to show the effects of Europe’s crisis, cabinet researcher Zhao Jinping said, according to a June 28 China Business News report. The statistics bureau is scheduled to release June and second-quarter data on July 15.

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