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Lunch With Robert Reich
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 (FXI) 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.
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.”
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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Bob, we are going to have to give you an "F" for buying a house in 06. You obviously didn't study your 400 pages of charts and stats. But Bob, the good news is, that if you walk away from your mistake right now, you will get an "A" for the semester. We reward learning no matter how long it takes...
You'll notice that Bob and all the other economics pontificators always put that "magic happens" phrase in there - "when the economy picks up." As IF! The System is dying, period!
This is _close_ to the realities that lie ahead:
http://theautomaticearth.blogspot.com/2010/09/september-4-2010-jim-pupla...
One can squabble over some of the semantics, but on the whole it's pretty much a certain path/outcome.
"Did you know that it has one staff member on its payroll for each student? The ratio for other state schools is more like 6:1 or 7:1."
Did you know that the quality of an education directly correlates to access time with the professors? Speaking to and interacting with people who know more than you do is how you learn things.
...if there are quality professors.
In the short term the good news is that Romer leaving the administration and going back to UC Berkley. In the long term, it is bad because she will create more people that will expouse the same crap that didn't work in the real world.
A lifetime of theory proved worthless in 18 months.
\Maybe she and Bob can soon enjoy a chicken lunch at the Fairmont in San Francisco or San Jose to discuss where they went wrong.
bob reich was one of those guys in the clinton administration who sold that bill of goods called nafta. so after offshoring our manufacturing base he tells us we are in a depression. go figure
While NAFTA is the stinking turd that we knew it was, this kind of stuff was inevitable. It was kind of like the housing bubble in that the rich were trying to bilk everyone else by "spreading out the risk." The System needed to devise new methods for exploitation, for pulling in resources (in this case it was via the financial sector, managing the global money flows that NAFTA helped churn up). The resouces were ALWAYS going to become insufficent to fuel growth; and, without growth the System is a gonner... All of this is just nitpicking, looking at the spilled tea leaves and not understanding that our tea is no longer in the cup...
+100,000,000,000,000
Why would anyone listen to Bob - obviously doesn't get it concerning the economy by his own admission of poor real estate investing.
Who paid the lunch tab?
Chicken salad at the Fairmont?
In San Fransisco, it doesn't get much better than that. Good choice.
WTF?
"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."
I don't even know where to begin. GDP is also one third government transfer payments, Bob. Does he teach at the same college Romer returned to? Why would anyone want more credit (this is more fucking debt Bob) while suffering under a "huge debt burden"?
"The Obama administration committed a major error by devoting one third of its massive $870 billion stimulus program to tax cuts"
ROTFLMAO...thank Barry for me Bob, what would we ever do without him & Biden...somebody needs explain that one to me...my taxes have not gone down. Tax credits are not a tax cut...Bob. Semantics much...Bob?
"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."
It did exactly what it was intended to do...Bob...it socialized their loss onto me/us...Bob. It most certainly did make it to Main Street...Bob...in the form of more debt...Bob. It is moral hazard writ large...Bob. And I have no interest in subsidizing any more of it...Bob.
"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."
Yeah...that's a real kicker there, Bob. Split my gut over that one. Who was it that signed NAFTA into law? What administration did you serve under again Bob?
Tell me, what is your opinion of Rubinomics again? Still warm and fuzzy on it Bob?
Bob? Bob?...are you there Bob?
Am agreement with practically all your remarks save one, which ignores important variables:
"A US GDP that is 71% dependent on consumer spending is unsustainable..." (realize this is quoted remark)
The question is, how much of that 71% is now made up of the top .5% of the top 1%?
Assuming your talking about wealthy people's spending habits and/or taxation.
Leaving aside a third of GDP being first run through government at some level, let's just say all of GDP is really organic.
I say it does not matter. It is theirs to spend or save as they choose. It's none of my business unless I subsidize their wealth creation. That's why I don't believe in intervention or subsidies.
I don't care how rich or how poor someone is. We should care, as should any civilized society, about how they obtained their wealth...if it was fraud/theft we have laws to address this. Try them, convict them if guilty and jail their ass.
Let me put it another way, but through the same prism.
To envy, to the point of confiscating someones wealth simply because they have it and you don't, requires the same logic as taking 50% (or whatever %) of a welfare mothers 150 million dollar power ball jackpot winnings. She took the risk. No one else did. It is hers.
It is the same thing to me.
Now, another neo-Keynesian approach could be to have our welfare mom lottery winner being paid off in Best Buy or Publix coupons because this get's that "money" back into circulation, in fact all of it. That is the reasoning behind the theory I believe.
Somehow I don't think our mom would be down with that ;-)
And then put it further in context with the Big Picture- the world's population is increasing, while the US was/is consuming 25% of the world's resources with but 4% of its population. The US will NEVER again grow: and no one else will either (and they are starting to come to this realization). The US's "consumer-based" economy is toast, and by way of globalization, so is everyone else's*. Doesn't really matter who is doing the consuming, consumption is going to drop off a cliff.
Nicole Foss (in this interview - http://theautomaticearth.blogspot.com/2010/09/september-4-2010-jim-pupla...) spells it out. Joeseph Tainter has been writing (and warning) about this for years. But, we ignored all this scary talk and went on pumping up our postive feedback loop... A world sustained by increasing consumption? Hey, that's postive!, what could possibly go wrong with that?
http://www.youtube.com/watch?v=kWliylnxSrA
Ah...Reich...another fucking Yalie incrowd oligarch who is utterly fucking clueless.
They have institutionalized idiocy and systemic conformancy at these universities. You go along with the dogma. And these people think they're elites merely by repeating orthodoxy which is patent bullshit.
Interestingly on TARP, there were many who believed at the time that this was a necessary liquification of the PDs so that the Treasury could roll paper...it appears that this is exactly what occurred.
......."institutionalized idiocy and systemic conformancy at these universities. You go along with the dogma. And these people think they're elites merely by repeating orthodoxy which is patent bullshit."
Right to the point. Priceless comment.
Cripes! This is actually the second time I'm in agreement with you.....
I realized my mistake in going directly to my local Employment Security office. I'm taking the newest unemployed person I know and we have an appointment to meet with our state Republican senator. We want to hear from the Republicans exactly where the tax cuts have created jobs. If more people visited their Republicans' office BEFORE the unemployment office, we'd have a much improved national conversation. Don't let Republicans and Faux control the conversation.
Republicans, Democrats, they are all collectivists now. Don't let the party names and rhetoric fool you, there is no difference.
Collectivists? Care to explain how you come up with that observation?
Yeah, maybe collectivists for the elites, but my understanding of the ideological positions associated with "collectivism" is that it's aimed at the masses/common person. But, you're free to continue with your ignorance, as it keeps you tied down to tilting at windmills while I escape from the real monsters...
When I say collectivism I am not merely referring to socialism and other systems supposedly designed to bring the bottom bitch a little higher on the totem pole. I am being much more general. Think more along the lines of the chasmic divide and gradations between totalitarianism and anarchy.
Both wings of the party want us all to be part of SS, Medicare, etc. Both want us involved in their foreign excursions for resources and political supremacy. Both want us to surrender individual liberty for the preceived security of the whole (Patriot act, etc). Both want us to be global subjects in their corporate empire (Reps with outsourcing, Dems with Cap and Trade, both with allowing illegal immigration).
That individuals, left to their own devices will be prosperous and happy, is as foreign to them as showers are to hippies.
I'm not taking money from my labor and family to raise a bunch of brown,welfare savages. In short, I'm not paying federal taxes ever again. You better start building those jails and importing the foreign troops because we're through with your nonsense.
Read Reich's column in the NYTimes on how we got here - kind of explains this to the common man. He is a frequent guest on the Larry Kudlow show. Now that Obama has saved capitalism (ponzi free market capitalism), these same "capitalists" are now on the throat of the very folks who saved them. Remove Mark to Market. Let Bank of America, Citigroup, Wells Fargo fail and the rest fail. We will find out how great our "capitalism"economy really is !
Heard Reich claim he was trying to find a short and pithy manner in which to summarize the causes for the meltdown.
Allow me to lecture Reich, titled "10 Easy Pieces":
Group of Thirty
JP Morgan Chase
Goldman Sachs
Morgan Stanley
Citigroup
BankofAmerica
Blackstone Group
KKR
Citadel Capital
Carlyle Group
Get rid of the "federal" reserve and it's premeditated boom and bust cycles first.
News flash: boom bust cycles existed before the Fed. (yes, I'm all for it going away, but I really don't need to consume precious energy in pushing it in this direction, as it'll be a natural outcome- happen all by itself [ref "enough rope to hang..."]).
No more booms, only bust ahead. It's contraction and there's nothing that can alter this. Overshoot is a bitch!
This is the jewish dwarf who urges government discrimination against white men. No wonder his garbage family fled the cossacks.
http://www.youtube.com/watch?v=opxuUj6vFa4&feature=player_embedded
I don't think they would be able to flee very far with those little legs - probably got a ride from some White construction worker.
Bob, dangerous combination of Big Govment and Academia.
Did Reich use a booster seat at the restaurant?
test
Reich'zzz stimulus spending to prosperity is nonsense. Let me guess mhft, Bob left you to pick up the lunch tab?
What an absolutely brilliant piece. Unlike many who take Keynes' name in vain, I've read most of what he wrote. His view on economic stimulation was simple: it isn't a tickling contest.
For this and many other reasons, the three things wrong with Obama's QE have been (1)Too tentative (2) Too one-sided and (3) too soft on the private sector.
For real recovery in 2009, he should've thrown everything at it while being mindful of the deficit, ie
1. Tax cut vouchers that must be spent on American goods 2. Private sector retail chipping in some of the disguised price discount 3. QE part subsidised by any corporate holding major cash reserves 4. Emergency tax breaks for exporting 5. Infrastructure investment supporting new/future industry 6. 100% tax fine for banks underwriting mergers rather than entrepreneurs 7. Guaranteed percentage of privately lent funds to go to small business 8. Fed-Guaranteed 'exchange rate' for companies importing rawmaterials in order to add value for export.
Looking at today's infrastructure spend, for example, is this QE or November sweetener? Too little at a time - and probably too late now.
http://nbyslog.blogspot.com/2010/09/exclusive-insiders-believe.html
wardslog
Look at the trade numbers. All this U.S. spending/printing sure has been good for China.
A piece on Reich brilliant? Gag me with a construction-sized shovel, for chrissakes!
Reich was the penultimate BS master when he was with the Clinton Administration, kinda late in the game to try to reinvent himself, much in the same manner that his fellow comrades, Jeffrey Sachs, Stiglitz, Blinder and Krugman have been doing for quite some time (and I say that now finding Stiglitz and Krugman are finally making some intelligent comments, at long last).
Let us never forget what Reich said and did during those years, what a pathetic liar and fraud he was.
Once a crook......
The problem is debt. More debt just makes it worse. Learned professors just make it worse. Everything that is insolvent has to go bankrupt, including the US gov't. We also have to stop this socialist central planning and crony capitalism. A free market with sound money, impartial taxation and rule by the Constitution is the way back to prosperity. It's so obvious even a truck driver can figure it out. But too obvious for the intellectual class.
actually this is a very interesting post and a very interesting meeting MHFT. Where is it on SA? Needless to say my response would be "the government can end unemployment tomorrow" and Robert Reich of all people knows it. Moreover I don't see BO as "tentative" per se but LOST. What was that line "Jesus Saves but George Nelson withdraws!" In short the GOVERNMENT BANK IS BEING ROBBED YOU MORON. Perhaps someone should stop that? Having tried to do it myself and totally failed all I have to say it "Hat's Off to Roy Harper." It's a capitalistic wet dream....
Why are you not working for the Obama administration? "Too tentative"? Wasting $3T would have revived the economy if only we had wasted more? Any scheme that has its basis in the government picking winners and losers is doomed to failure because politics and cronyism always trumps "the right thing to do".
Was it a speech MHFT or are you having another Commander McBragg moment intimating it was a private affair? The Fairmont would not serve bad chicken salad.
The MHFT's lunch story is a 100% valid, as I was there. Though, I must admit I feel slighted for not being expliclity mentioned in the article as well. - Jesus
Quite, MM, and you know old boy, the interview was done entirely in Mandarin.
Serial name dropper, is it now?........did I ever tell the story about when I was flying over the North Pole, or was that the South Pole?.......whatever, I had just taken a call from Miss Moneypenny and........I already know what you are thinking. The meeting with M was set.
+1
The debts can't be serviced because the tax base is eroding. That leaves retrenchment and default as the only viable options. Reich's 10% pay cut (poor baby) is just a hint of the 40%-50% contraction that is needed to clear the system.
I'd be interested in hearing how you arrived at your 40%-50% figure. Please explain.
Thanks!
BTW - Please consider the affects of economies of scale in reverse.
We have gotten into trouble in the past by taking our foot off of the accelerator too soon.
Just because Reich did not time the housing market well does not discredit his economic body of work, there is no correlation.
The real dilemma Americans have is how to allocate their assets for inflation/deflation scenarios, so they can limit losses when we have the next big draw down.
Keith Piccirillo:>>Just because Reich did not time the housing market well does not discredit his economic body of work, there is no correlation.<<
Says who?
Well,
What to do,what to do?,
Odumma, just announced another 30 Billion Spending bill.., on top of the 80 Billion one they signed onto, what 2-3 weeks ago?.
For Small Bidness tax cuts, proposing a 100 Billion cut, (for Nov elections of course,benefitting the UNIONS!).
Meanwhile, back at the El Rancho Grande De D.C., there is STILL 187 Billion left from the LAST major Stimulus Bill.
Excuse me, I know I ain't brite.................(:>
BUT, WTF are we spending MORE Billions when we have 187B, sitting in a corner doing SHIT?.
If anyone in their right minds, still thinks these dudes have no clue what their doing, I am a Rhodes Scholar.
Welcome to Hamerika Comrades!!
The remaining money will be used in certain districts where Dems are facing tough fights. That's a given.
Ha ha... I remember that when Newt Gingrich was running around screaming about slashing govt spending that his district was receiving MORE handouts than any other district in the entire US, with the exception of DC (which, as we know, is where the viper pit is located).
Party hacks!
Thanks for playing!