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Lunch With Robert Reich

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The other day had me sharing a cold, congealed chicken salad for lunch with Bill Clinton’s Secretary of  Labor, Robert Reich, at San Francisco’s posh Fairmont Hotel. We covered a wide range of market impacting topics, which I have summarized below. A Rhodes Scholar who dated Hillary Clinton at Yale, ran for governor of Massachusetts, and authored 12 books, Bob is never without an original thought, nor a stranger to controversy.  Today he didn’t disappoint.

Bob says that easy money is creating new bubbles around the world, especially in China and commodities, that will only end in tears. The Middle Kingdom is the first country where inflation may break out to the upside.

There is also a new form of protectionism that has emerged under the guise of competitive currency devaluations, where counties printing paper money are racing to the bottom. This will eventually force a revaluation of the Chinese Yuan (CYB), and there’s nothing the Chinese can do to stop it.

A US GDP that is 71% dependent on consumer spending is unsustainable, since they can no longer afford it, can’t get credit, no longer have a personal ATM in the form of home equity loans, are worried about losing their jobs, suffer under a huge debt burden, and are now unexpectedly having to save more for their retirement since their houses have dropped in value by half.

Scott Brown’s surprise win for the Massachusetts senate seat will only cause uncertainty in Washington to explode, not exactly a stock market friendly development. Brown is really “a sheep in wolves’ clothing,” as he is ideologically distant from the right wing that is currently running the Republican party, voted for Massachusetts’s state health care plan, and didn’t dare to use the word “Republican” in his campaign.

However, the loss of the Democrats’ super majority in the senate will force them to disassemble the health care plan into smaller, more digestible and palatable parts which they can pass with only 51 votes, just as Bush did with the 2001-2003 tax cuts.

The Obama administration committed a major error by devoting one third of its massive $870 billion stimulus program to tax cuts, which in this environment, will get saved, not spent. You might as well have buried the money in your back yard.

The TARP money, while succeeding in rescuing the financial system, only ended up in Treasury bills, and never made it to Main Street. This is what the public is irate about. The loopholes in the proposed financial regulations are big enough for bankers to drive their Ferraris through. The best way to revive the economy is to give money to the states directly, which, unable to run deficits, and can only cut spending and raise taxes. This will create a $350 billion drag on the economy during 2010-2011, in effect an “anti stimulus” that cancels out a third of the federal government’s reflationary efforts.

I took two of Bob’s economics classes at UC Berkeley, and know too well his wry humor, acid wit, and preference for backing up arguments with mountains of empirical data. Entering students are obliged to buy 400 pages of photocopied charts, tables, and other raw data about the labor market which they are expected to commit to memory by the end of the semester. These are not basket weaving classes.

Bob warned me not to take his investment advice, as he bought his home in Berkeley at the 2006 market top, just before it dropped in value by half. On top of that he has had to eat a 10% cut in his Berkeley professor’s salary forced on him by drastic state budget cutbacks. UC Berkeley is the crown jewel of public education, but the state has little choice but to starve it to death. This is not good for the long term future of the Golden State, which has to create the educated class to earn the wealth to pay the taxes.

The real kicker of the lunch was Bob’s forecast that unemployment will remain stubbornly high at 9% a year from now. This is going to be a big problem for Obama in November. The jobs that have been exported to China or replaced by machines aren’t coming back. Because of the arcane way in which the surveys are conducted, someone who isn’t looking for work isn’t counted. But when the economy starts to improve, when they do start to look they are newly counted as jobless, causing the politically sensitive figure to shoot up. To avoid this trap, it is better to look at the Payroll Survey released on the first Friday of each month, which gives a much more accurate read on the economy. Even still, with the average work week at a record low of 33 hours, employers will make their existing staff work longer hours before they hire anyone new.

As we parted company, Bob left me on an upbeat note. “The good news is that the Great Recession of 2008-2009 is over. That’s because it’s now 2010.”

For more iconoclastic and out of consensus analysis, you can always visit me at www.madhedgefundtrader.com , where the conventional wisdom is mercilessly flailed and tortured daily. You can also download past interviews with industry heavyweights on Hedge Fund Radio.

 

 

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Fri, 02/05/2010 - 02:47 | 218582 Anonymous
Anonymous's picture

OBAMA and Bernanke are featured in a movie-- about greedy hedge funds called "Stock Shock." Even though the movie mostly focuses on Sirius XM stock being naked short sold nearly into bankruptcy (5 cents/share), I liked it because it exposes the dark side of Wall Street and revealed some of their secrets. DVD is everywhere but cheaper at www.stockshockmovie.com

Thu, 02/04/2010 - 20:01 | 218147 edupreneur
edupreneur's picture

From OpportuniTV.com/many-jobs/:

Popular online markets for customized education (CE) can be expected to catalyze the creation of many jobs.

From a November 6, 2009 article in the Wall Street Journal:

"According to the Census Bureau, nearly all net job creation in the U.S. since 1980 occurred in firms less than five years old. A Kauffman Foundation report released yesterday shows that as recently as 2007, two-thirds of the jobs created were in such firms. Put more starkly, without new businesses, job creation in the American economy would have been negative for many years."

From a 2005 report by The Nielsen Company:

"By enabling entrepreneurs to start a business online and immediately reach a market of 157.3 million registered users worldwide, eBay has become the best place to start, grow and operate a small business."

Harvard Business School professor Clayton Christensen is the originator of the canonical Model of Disruptive Innovation, and a co-author of the 2008 book Disrupting Class: How Disruptive Innovation Will Change the Way the World Learns. From Disrupting Class:

"Students need customized pathways and paces to learn.

…The second [phase of the disruption of standardized education] will be the emergence of a user network, whose analogues in other industries would be eBay…"

Stanford economist Paul Romer is the originator of New Growth Theory, which updates growth economics for the information age. From Romer’s entry on Economic Growth in the 2007 edition of The Concise Encyclopedia of Economics:

“The country that takes the lead in the twenty-first century will be the one that implements an innovation that more effectively supports the production of new ideas in the private sector.”

“Perhaps the most important ideas of all are…ideas about how to support the production and transmission of other ideas…North Americans invented the modern research university…As national markets for talent and education merge into unified global markets, opportunities for important policy innovation will surely emerge.”

From The Mystery of Economic Growth, a 2004 book by Harvard economist Elhanan Helpman:

"Interest in growth theory abruptly revived…in the 1980s. The two key papers were by Romer (1986) and Lucas (1988).

…Romer (1990) also initiated the second wave of research on the “new” growth theory.

…A more detailed study of the U.S. economy is provided by Jones (2002). He found that between 1950 and 1993 improvements in educational attainments, which amounted to an increase of four years of schooling on average, explain about 30 percent of growth of output per hour. The remaining 70 percent is attributable to the rise in the stock of ideas that was produced in the United States, France, West Germany, the United Kingdom, and Japan."

In particular, CE markets can be expected to attract many buyers and sellers of corporate training.

From a May 20, 2004 article in The Economist:

"“There has been a huge swing to custom programmes,” says Fiona van Haeringen of IESE, who attended a recent annual conference of business-education providers in America…Looking to this year, most saw growth coming mainly from customised education."

From Seeing What’s Next: Using the Theories of Innovation to Predict Industry Change, a 2004 book co-authored by Christensen:

"Modular, customizable corporate training has an advantage that interdependent M.B.A. programs can’t match — a product specifically designed for each employee’s needs.

…In contrast to the leading schools’ integrated structure, the on-the-job management education industry is a disintegrated one. Hundreds of specialized firms develop materials, others design courses, and others produce and teach them."

...Companies that introduce a CE market will race to:

1. provide loans to CE consumers
2. become a bank, as a means of increasing the amount of money that the company can lend
3. introduce more loan programs and financial services that complement the market (e.g., loans to small businesses, so more jobs are available to CE consumers)

---

Please consider forwarding the above to RR.

Best regards,

Frank Ruscica

 

Thu, 02/04/2010 - 18:14 | 217945 loup garou
loup garou's picture

To be a ‘reformer’, one must have a good grasp on what it is they are trying to ‘reform’, how it works, and do the heavy lifting of seeing how past ‘reform’ has impacted the system. The “educated class” fails miserably in that area. (If you have car problems, do you ask the paper boy to fix it?) The current brand of “Democratic Socialism“ has degenerated down to simple ‘activism’ without understanding of economics, culture or society. The “educated class” is so removed from the majority of America that they don’t know what it looks like or how to address it. The “educated class” is not smart enough to realize that they have been, and are, a major part of the problem.

Anyone caught up in the knee-jerk “debate” about ‘what the federal government should do has already lost, by conceding that the federal government is the “solution” of first resort. This proposition has things entirely backwards -- it isn‘t; at least, it shouldn’t be, and it wasn’t intended to be. It is beyond me how anyone can think that what the federal government has been/is doing is somehow beneficial to our national interests. Since a return to the constitutional republic intended by the Founders is obviously out of the question, I have a better idea what the federal government should do -- nothing. In fact, if you want to see a real revitalization of the economy, of entrepreneurship, and in hiring, then announce that Il Douchè and the Congress will be going on a 3 year vacation. The will remove the dark cloud of uncertainty about what these knuckleheads will/might do next, because the “rules” would not be changing on a daily basis. (“First, do no harm.”)

Thu, 02/04/2010 - 13:47 | 217362 ATG
ATG's picture

Old news MHFT.

Tell us something we don't know.

Like the default of the Fed and Treasury...

http://www.jubileeprosperity.com/

 

Thu, 02/04/2010 - 11:28 | 217034 Anonymous
Anonymous's picture

Right and Left are political ploys to divide the population, just as the purpose of political parties is to create divisiveness in the citizenry. Yet, Left, Right, Republican and Democrat become brainless responses when anyone believes these entities make any real difference. While the representatives of these concepts point figures at one another, the problem and its resolution sit off to the side and unresolved. That of course is the point. Resolution of societal problems is nothing but an irrelavency to the real activity of moving all the natrual resources,means of production, assets and income into the hands of the very few, which the real business of government.

Thu, 02/04/2010 - 11:19 | 217015 Anonymous
Anonymous's picture

Reich always reminded me of that evil midget inventor/scientist from the Wild, Wild West TV show.

Thu, 02/04/2010 - 13:46 | 217359 ATG
ATG's picture

The Plane! x 3...

Thu, 02/04/2010 - 11:13 | 217003 foxmuldar
foxmuldar's picture

Reich comments about buying his house at the top, tells us he was also clueless on the overvaluation of the housing sector. I must agree with Reich on the jobs market. I have been working a 3 day work schedule for a month after the plant I work at build up its inventory, and now waits for buyers. A year ago we had 22 employees working 5 days a week. Now we have 17 working 3 days. Most companies won't hire as they realize they can get as much work done with less help. 

What Tax cuts was Reich talking about? Oh that $13 a week cut in the income tax for last year. They got that back by slipping more hidden taxes onto things such as a government and state tax now being charged for 911 use. I had been paying the county $1.25 a month for 911 but now the government and state want their piece of the action. WTF does the government have to do with 911? If I call for help, will Obama send one of his medical teams to my home. Hahaha! 

I'm surprise Reich didn't have much positive to say about Obama. Perhaps he's getting soft in his later years. I don't feel sorry for the leftest state of California. They continue to allow Illegals suck up the benefits that tax payers have been paying for.  Well Unemployment numbers are out today, and once again the analysts got it wrong. But they always get it wrong.  What a nice gig to have if you can get one.

Thu, 02/04/2010 - 10:52 | 216986 Rainman
Rainman's picture

Those who can't do teach.

Perhaps there will be a faculty position available at Berkeley for Mr. Obama in 2013. He'll fit right in.

Thu, 02/04/2010 - 13:44 | 217350 ATG
ATG's picture

Angela Davis?...

Thu, 02/04/2010 - 11:15 | 217006 ChickenTeriyakiBoy
ChickenTeriyakiBoy's picture

one day obama will be on the supreme court, despite his unbecoming and rabble-rousing misrepresentation of the citizens united ruling. if there were a trade in this prediction on intrade i would take it, and collect my retirement cushion in 15-20 years

Thu, 02/04/2010 - 12:38 | 217190 Anonymous
Anonymous's picture

Obama is going to usurp Jimmy Carter as the worst president ever. And just like Carter he is going to live a long useless, unproductive life, far away from Washington.

Thu, 02/04/2010 - 10:49 | 216982 Gimp
Gimp's picture

No sh*t a leftist elitist with his background, Yale, Rhodes Scholar, UC Berkley. Unemployment to him is conversation piece at the latest lefty cocktail party with fellow academics.

The peasants are revolting! Reich response - I know they are.

 

Thu, 02/04/2010 - 10:31 | 216968 10044
10044's picture

He also says we need easy money, all keynsian morons don and he's gono have his head handed to him when his FRNs become worthless

Thu, 02/04/2010 - 10:18 | 216959 Anonymous
Anonymous's picture

How many phone books was he sitting on?

Thu, 02/04/2010 - 09:50 | 216934 A tumor named Marla
A tumor named Marla's picture

"This is not good for the long term future of the Golden State, which has to create the educated class to earn the wealth to pay the taxes."

WHAT?!?!?!?

That's some seriously elitist thinking right there....wow.....

 

 

Thu, 02/04/2010 - 12:15 | 217129 Anonymous
Anonymous's picture

Education is not the solution, education is the problem!

.... No.

Thu, 02/04/2010 - 11:50 | 217073 DaveyJones
DaveyJones's picture

It's clear that California creates the "educated class." Just look how well they manage their homefront. I'm not sure what impresses me more about Robert, the fact that he dated Hillary or the fact that he didn't marry her. And she would have taken the offer. She likes to look down on people.

Thu, 02/04/2010 - 09:54 | 216937 docj
docj's picture

Reich is good for nothing if not a healthy dose of leftist, elitist snobbery.  Evidently he didn't disappoint.

Thu, 02/04/2010 - 10:50 | 216984 Anonymous
Anonymous's picture

Thankfully, both he and madhedgefundtrader are smarter than a douche Republic party mouthbreather.

Thu, 02/04/2010 - 11:37 | 217055 docj
docj's picture

Irony challenged, as usual.

Thu, 02/04/2010 - 11:25 | 217026 curbyourrisk
curbyourrisk's picture

yeah...ok....sounds like someone has an IQ no bigger than his shoe size.

 

Figures....an anonymous posting.

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