A Look Back on My Jan 2009 Forecast

Every good prognosticator should go back once and a while and see how he did. At least if you have the guts! So here's what I said on the New Year's Day 2009 marked with ">" and in-line comments in "[]"

>Will 2009 be worse than 2008? I'll go out on a limb and say no it won't. Here are my reasons:

>1) As core commodity prices drop, especially energy, suddenly a lot of unprofitable businesses become profitable again. For example, airlines.

[Thing stayed low for a bit but not anymore as the China and other emerging markets continue to grow.]

>2) As much as the main-stream press wanted a recession on Bush's watch, the press is not going to let Obama and a Democratic congress suffer the same fate. There will be more economic cheerleading the minute there is any good news that can somehow be linked to an Obama policy (whether true or not).

[Well things have gotten worse, but certainly there was a lot of economic cheerleading initially. How many headlines have you seen that say something unexpectedly got worse, or where the lead of the article is an effort to find the silver lining in bad economic news. . .any positive that can be spun to say things will be better next week? more on that later]

>3) Obama's economic team isn't going to be as radical as some (including I) fear, and the Republican filibuster capability in the Senate as well as public disdain for bailouts, will throttle back some of what could have been excesses.

[Well got the filibuster bit wrong! I didn't think Franken had a chance! And it's not the Obama economic team that's matters at the moment but everyone else in the Obama administration who do seem to be fairly far left]

>4) Things weren't actually that bad - even jobless claims slumped much more than expected - 492,000 new unemployment claims last month vs. 586,000 the month before.

[Well that was true at the time, but it has gotten worse!]

>5) If so many think things will be bad in 2009, then chances are the opposite will happen.

[Got that wrong!]

>Will things be dicey? Sure. I'm not jumping in to buy stocks now. But soon there will be many buying opportunities. It could still go all pear-shaped, if for example Obama and Congress raise taxes, or print money to bailout UAW fat-cats. But here's hoping Obama actually wants a 2nd term. If he doesn't blow it, he might actually get that!

[Well that's the money quote! I was right about the stock market. You'd have made out like a bandit if you got in on the multiple buying opportunities. I also got it that if Obama and Congress pursue anti-growth policies, exactly as has happened, that the economy would go badly!]

Well there it is. I was too optimistic that Obama and Democrats in Congress wouldn't be complete economic illiterates. That'll teach me.

Health Care in Hong Kong

I happen to be undergoing some medical treatment in Hong Kong, which is an opportunity to share some observations.

Health care here is expensive, on par with the US. Equally, the quality is good. There are some 50 public hospitals and another dozen private institutions as well as many clinics serving this city of 7M people. Doctors are educated to international standards.

Service is remarkably efficient. Waits are short to non-existent. I had an appointment in days, and some follow-up tests on the weekend - most clinics are open Saturday morning and I have some further tests at a hospital on Sunday. Every single visit has been a clockwork of on-time efficiency. Even the waiting room magazines are new - not that I had time to read them!

It's also easy to pay. My insurance is based on reimbursement for initial visits. I know exactly what it costs, and can pay by credit card immediately after the visit. Equally, if you have an insurance card, you know exactly what is accepted at any clinic or hospital and they'll take that. This is a contrast from every clinic I've been in the US, even small ones, where they don't even know what the bill is after your visit.

Pharmacies are abundant, well stocked, and efficient.

The public health system also seems to be pretty good. Flu shots are widely available and there are public add campaigns for H1N1 prevention, in addition to all manner of general hygiene and the like. This is after all, a city that dealt with SARs not too long ago.

For fans of traditional medicine: Chinese medicine abounds. Of course that's not proven by double-blind clinical studies, but 5000 years of accumulated trial-and-error is worth at least a little bit.

There are criticisms of course. Is drug safety sufficient? Are hospital operational controls where they need to be? But from what I can see, it isn't much different than the same criticisms elsewhere, and it seems better than average - although it would be interesting to look at some hard data in this regard.

On balance there are reasons life expectancy here is in the 80 year range and among the best in the world. Quality health care must certainly be one of them.

One more thing: The system is nothing like nationalized health care Europe nor is it anything like Obamacare. It is arguably far superior.

Japan Fiscal Crisis?

Here is another doom and gloom article about how Japan is poised or a big crisis: Deflation to give way to hyper-inflation.

As a resident of Japan for 17 years before moving to Hong Kong, I find the story missing a few important points.

Despite Japan's high government debt to GDP ratio, there is still a lot of cash in Japan. Moreover, consumer debt is not nearly as high as other countries. In fact, it is quite difficult to get consumer debt. Housing prices have also risen to the point where market value and mortgages are now back to about where they should be.

Much has also been said about whether the DPJ, who wrested power away from the LDP last year will change anything. Probably not, but there are glimmers of differences. For one, a scandal involving kickbacks to the tune of $400k to an assistant to one of the party leaders isn't taking him down. Not long ago, a few thousand bucks of graft was enough to cause chaos, at least in the press reports. But now it seems everyone is wise to the fact that everyone who was anyone in power was set up with some issue just so that the power brokers had something to use to take down the unruly. The voter isn't buying it anymore. That doesn't excuse what the assistant did, but it certainly isn't causing the government to cave.

(Update: DPJ is denying that there is any issue at all and going after the prosecutors to produce real evidence. Again, more challenge to the traditional powers by the new government. Government popularity has dropped from 71% to 48%, but that's still way better than LDP last several years. . .)

But here's the real point: Japan, Inc. remains terribly inefficient. All it has to do to muddle through (yet again) is to generate that much more productivity or efficiency gain in one a year to keep it all going. In other words, it isn't hard to free up the capital to get through the current fiscal problems. Taxes can stay roughly the same. Unemployment goes up or down a little bit. Civil servants keep their jobs. Salarymen for the most part go to work the next day. Students find work somehow. . .and everybody is happy.

The GDP doesn't grow. Japan doesn't become the #1 economy in the world. But then, nobody really wanted that anyway. If you really want to understand Japan, understand that basically they just want to be left alone.

Take a bath. Have some sake. Mind your manners. And all will be fine.

Mike Mayo Testimony On the Banking Crisis

CLSA Analyst and Managing Director Michael Mayo gives a brilliant 10 minute presentation to Congress on the root causes of the banking crises. He pulls no punches and takes on all sides.

The industry was "on steroids" with consumers, government and regulators all guilty. His list of 10 issues, with root causes going back at least 10 years:

1) Excessive Loan Growth (more than 2x GDP)

2) Higher yielding assets (too good to be true?)

3) Too many eggs in one basket (real estate)

4) High balance sheet leverage (10x to 40x over the last 20 years)

5) Risky exotic banking products (like a bad Sangria - you don't know what's in it even after the hangover)

6) Consumers went along (false illusion or prosperity leading to risky borrowing)

7) Accounting changes that allowed reserves to fall (1.8% to 1.2%)

8) Regulators allowing FDIC deposit insurance without premium payments (like paying your life insurance only after you die)

9) Government facilitated allocation of capital to risky borrowers (Fannie and Freddie anyone?)

10) Incentives (compensation is consistent with revenue but not with risk)

At the end Mr. Mayo commented that the crisis was primarily one of not enough capitalism, correctly regulated. Hear Hear. While liquidity must be preserved, bad choices must be met with the consequences - i.e. companies must be allowed to fail.

Even if you disagree with what he said, you have to respect the presentation. Beyond that, you have to respect the decade of research Mr. Mayo has presented. There is a reason he is ranked #1 in his field.

Sure Pat Robinson is wrong - but the FT is just lazy

The FT article is just lazy. Others have highlighted that Pat Robertson is both wrong on history and on what the Bible says about God's will on earth. But the FT reporter failed to check that at the very same time Pat Robertson was also appealing for donations for Haiti.

As for Rush Limbaugh - just check his website and transcript for the full context. At no time did he say not to donate to Haiti. Indeed, other of Rush's comments were about how if the US takes away the tax deduction for charitable donations the ability of American's to contribute will be diminished.

As for the basket case that is Haiti? Predictably there are those who will try to blame everything but the real issues (e.g. Bush, capitalism, the UN, the US generally. . .and even the failure of the Copenhagen climate summit).

The main problem is corruption. Haiti remains one of the most corrupt countries in the world.

Should wealthy nations help? Yes. Should the US do what it can to get aid to those who need it? Of course.

Should the US right be blamed for trying to block such assistance? Of course not. At least not based on the facts of what conservative opinion leaders are actually saying and doing.

Latest US Unemployment - Not Good

Ed Morrissey at HotAir has the details (linked to title), but bottom line is that US employment picture is not improving and even the AP finally has to admit it. The 10% rate is only part of the picture. Hundreds of thousands are taking themselves out of the work force. The actual number of jobs has dropped by 10 million in the last year. The average time out of work is now 29 weeks. That's more than 6 months. And that's the AVERAGE. How long can you go with no income?

Here's even worse news: The only job growth has been in government and to a lesser extent healthcare. That means the private sector, the true engine of growth, is NOT improving.

That's just the data - now to assign blame: Democrats in US government and ANYONE who supported them in any election in at least the last 3 years. Why? With control of Congress for the last 3 years, and now the White House and a filibuster proof majority in the Senate, the political buck stops there.

To recap the failed policies and policy direction:

1) Community Reinvestment Act and failure to reign in Fannie Mae and Freddy Mac policies: These lead to irresponsible lending practices, translated as lending to people, for political reasons, who are unlikely to repay. This is the true root cause of the sum-prime debacle.

2) Stimulus package that was politically driven (pork) not economically driven (get money in the economy quickly)

3) Failure to consider further tax cuts: Even worse, taxes will increase soon as the AMT has not be re-adjusted, the Bush tax cuts will expire, and as various US States scramble for revenue to stay afloat.

4) Flawed health care "reform" program and opaque political process: The key issue here is that the broad private sector has no choice but to assume this will raise both costs and taxes. This results in a "hunker-down" mentality, meaning no hiring.

5) Take overs instead of letting markets run: Case in point GM. For a good counter-example, Ford is doing much better.

6) Failure to take the War on Terror seriously (and yes that's what it is): Why is this important? It goes to whether the private sector and Americans generally view government as competent. Without a sense that things are going in the right direction, consumers are less likely to open their wallets and private sector employers are again less likely to hire.

7) Focus on Climate Change: Guess what? The vast majority do not believe this is a priority issue, and certainly do not think that the act of breathing (by which I mean expelling CO2 into the air) cause it. Again, Failure of government to focus on economic fundamentals is a root cause of the problem.

To put an Asia view on this, the total number of jobs lost in the US since January is nearly the total population of Hong Kong and Singapore combined! As for the rest of Asia, China is growing at 8%, India nearly as much. Again, those governments are moving as quickly as they can to far more free market and transparent approaches as possible. Even China, with all its command and control mindset at least had a stimulus program that put money into the economy quickly!

Now as for all you who voted for Democrats. WHAT WERE YOU THINKING? Did you honestly believe the people you voted for have policies that are good for the economy? Do you still think that? What facts do you base those views on? I'm not saying you have to believe Republicans or anyone else for that matter. But please. Free markets, lower taxes, smaller government, less (but balanced) regulation, works every time. It'll also keep the government out of your bedroom, your church, and other things you deserve the right to control yourself.

Don't tread on me.

Happy 2010 (?)

So it remains to be seen whether 2010 will be better than 2009. This will depend a lot on how you define "better". But let's start with our economic stats:

Item                Jan07  4Oct08 31Dec08 31Jul09  31Dec09
Unemployment        4.5%    6.1%   6.7%    9.5%     10.0%
CPI (with energy)   2.0%    5.5%   -1.7%   0.7%     1.8%
Gasoline cost/gal.  $2.25   $3.60  $1.66   $2.60    $2.61
Dow Jones           12,500  10,325 8,776   9,171    10,365
S&P500              1,450   1,099  903     987      1,110
Nasdaq              2,500   1,947  1,577   1,978    1,858

The only bright spot is that the equity markets are back to where they were in October 2008. If you had the stomach for it, and the cash on hand, you could have done quite will from the lows last March with many US markets having their best run since the 30s. You'd have done even better if you put your money in the Hong Kong Hang Seng index, which is up over 80% this year (and has no currency risk vs. the USD by the way). You'd have done even better if you held on to Credit Suisse stock (a former employer of mine), which is up over 100%!

But that doesn't help if you are unemployed. Jobless recovery anyone? Some 21.2M Americans were out of work at some point during 2009. There are also indications that a lot of job seekers simply gave up and are not in the statistics.

So what happened to all that stimulus, cash for clunkers, etc.? TARP arguably had a positive impact on liquidity that is essential for the banking system. Keynesian stimulus, however, did what it always does, which is hardly anything. First of all, it was badly executed: most of the money is not yet in the economy! Second, the initiatives that did proceed created nothing sustainable. Cash for clunkers was a blip. Bailouts of GM have done nothing except line union wallets and generate more requests for money (another $3.9B just this week).

What should have been done? How about immediate tax breaks or deferrals to get the money directly into the hands of consumers, who will first pay down debt, and then start shopping a bit. I'd even go so far as to suggest that activity would generate new tax revenue - at least more than is being generated now!

So what hope for 2010? The economy will no doubt pick up a bit, but I don't see anyone suggesting it will roar back. If anything there is a bit of a bubble in the stock market. Certainly trends towards higher taxes don't help, which brings me to the health care debacle.

How can anyone believe that the health care legislation in congress now will help anything? By all accounts (and it is hard to know exactly what is in these bills) ObamaCare will reduce quality, increase costs, and most certainly raise taxes. How does this help anyone? It drives the cynical view that it isn't about health care, but rather increasing government power over individual choice. For that reason it must be stopped.

At least ClimateGate, defined as the willful falsification of climate data and coordinated suppression of contradictory research by "scientists" with a political agenda in favor of anthropogenic climate change, has slowed down the rush to crush the global economy with bad economics. Even if we agree that climate is changing, the best way to deal with it is not massive wealth transfers controlled by bureaucrats at trans-national agencies. The only tried, true and tested method of adapting to change on a massive scale is the power of free markets, free trade supported by property rights and rule of law. If we had more of that in Zimbabwe, Venezuela, North Korea, most of the rest of the mid-east and Africa - there wouldn't be any problem. China and India get this, as evidenced by their actions at Copenhagen.

By the way, China's economy is growing at about 8%. The stimulus implemented there actually seems to work, but most of the activity is driven by trade and entrepreneurship. Ditto India!

And how about Obama's performance? Well certainly no better than my last post. Most would say worse (just look at the polls). And why not. Obama is the least qualified US president of my lifetime. Even Carter had been a state governor and had military experience. It's not even clear that Obama is that smart. After all, has anyone seen his college grades? Are his books any better than say Palin's (and any less ghostwritten)? B+ isn't even close. D- is more like it, even by the criteria set by the left wing of his own party (Gitmo anyone?) - as for the things that matter to most Americans like jobs, security, and how about choice in health care - well again the polls speak for themselves.

As for foreign policy - the US is now officially a laughing stock. Nobody takes the US seriously. Obama is not seen as credible nor consistent. This leads to perceptions of weakness. At best Obama can be ignored. Worse, the US can be sidelined from the discussion. Is there really anything more to say other than where is Hillary?

At least Iraq is a win! Bummer Afghanistan though. At least the dithering on that decision is over.

So what's this all mean for 2010? Probably not a Republican sweep in Congress. . .but it doesn't create cause for optimism. Best I can wish everyone is that personally things go well and that the undy-bombers are not on your flight. So happy 2010, such as you can!