Via Brian Rogers of Fator Securities - Notes From The Sales Desk
“The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.” - Thomas Sowell
The EUR lives to fight another day
The big news this morning, aside from the relatively strong economic data out of the US (of course, we’ll have to wait for the downward revision on jobs to see the real number, which is an ongoing statistical aberration for the record books but anyway) is the news that the German parliament overwhelmingly passed the measure to support the EFSF. In reality, this wasn’t really that newsworthy as passing this particular legislation had been expected since Germany originally agreed to the deal in principal earlier this summer. This was not the leveraged, CDO^2 like structure that failed NY Federal Reserve President cum Treasury Secretary Tim Geithner had been pitching recently in Europe. No, that idea has been dismissed out of hand and Mr. Geithner properly ridiculed for recommending that the already over-taxed European people be further Major Kong-style strapped to the ticking atom bomb that is the European banks’ leveraged balance sheets. The vote today was widely expected, although the margin of victory at 523 for vs 85 against, probably was a bit of a surprise. Still, Germany is only the 9th of the 17 countries to vote and pass the deal so there could be more drama as the situation changes daily while the 8 additional countries prepare their own votes. It would be a surprise if the rest of the Euro nations don’t support the EFSF but in this unstable economic environment, anything is possible.
But assuming the rest of Europe proper agrees to the deal, much more attention will be focused on Greece, and indeed the rest of the PIIGS, to determine the serious nature of their intentions to enact austerity programs. Already it appears that the ability for the Greeks to raise more in taxes is being questioned by none other than prominent Greek politicians. Greek Deputy Prime Minister Theodore Pangalos was reported in the AP as saying, “I believe that the tax limits of Greek society have been exhausted. I would say they have been exhausted for some time." So for those keeping score at home, the austerity measures in Greece, if ever implemented which is doubtful to say the least, will further shrink the Greek GDP at a time when debt is increasing at crushingly high rates while the ability for the government to increase revenues via raising taxes is effectively dead. And the Europeans are working overtime to keep Greece from defaulting. Uhh, yea. Good luck with that.
The Political/Big Money Love Affair
I was speaking to a good friend of mine yesterday who works in medical sales. This guy isn’t an econo-phile or Fed watcher, just a regular guy trying to keep his job and scrape together an honest living to support his wife and 2 daughters. We were talking about real estate and why we’re in the mess we’re in. In a previous life, I used to sell fixed income derivatives on mortgages and CDOs (forgive me Father, for I have sinned) so I had a particularly good seat ringside as the mortgage bubble was blowing and eventually burst.
As I explained the incestuous relationship between the banking and political elite and how this relationship led to the unwinding of almost all of the decent financial regulation passed during the Great Depression, my friend became a bit incensed and asked, “How can politicians consistently support these bankers, even today, when the result of everything they’ve asked for has been disastrous for the average American?” Good question, my friend, good question indeed.
In my opinion, it’s ridiculously simple. You see, we live in the world of multi-million dollar election campaigns. According to followthemoney.org, the total amount of money raised in 2010 in all states for all candidates was $3.4bn. During the Presidential election in 2008, President Obama raised over $745mm while John McCain only raised $386mm. In other words, the Presidential election has become at least a $1.1bn industry. And that number doesn’t include the major sums raised and spent by their competitors during the primaries.
The total for the 2007-2008 state and federal election cycle was $5.7bn. And who were some of the largest contributors to this total you might ask?
· #1, National Education Association (a union) - $56mm
· #6, National Association of Real Estate - $28.5mm
· #9, ActBlue (liberal policy Organization) - $23.1mm.
In general, the top 50 contributors consists of a lot of unions, Indian gaming, major corporations and industry specific special interests. Do you think those organizations are giving all this money because they enjoy participating in the democratic process? Hardly. They look at this money as an investment and they expect a return. If they think the Dems will win, they’ll spend slightly more on the Dems but still contribute to the Repubs and vice versa.
Making Politicians Dance
From the politician’s side, the math couldn’t be simpler. According to opensecrets.org, the winner of a seat in the House of Representatives will spend on average about $1.4mm while the winner of a seat in the Senate will spend about $9mm. In other words, it’s all about the money. If you don’t raise a large enough war chest, you’re dead. If you don’t accept the special interest/lobbyist money, the other guy will and he or she will win. Meanwhile, there are no term limits on either chamber so your incentive is to build your own mini-empire of power and influence by playing ball with the biggest money donors. Perfect this formula and you can become furniture in Congress and stay there for decades. Seeing as how most of the folks roaming the halls of our Congress are the kind of people who never met a mirror they didn’t like, the thought of being a major power-broker in DC is too much to resist. Big name committees, non-stop TV appearances, book deals, VIP invites to all the big DC events, etc... The upside to taking lobbyist money is huge while the downside is you lose and return to obscurity.
So let’s recap, there are very few limitations to the amount of money and favors that can be given to politicians by large corporations, unions, special interests and wealthy individuals. Because of the influence this money buys, these donors guarantee themselves a special place in the candidate’s heart and mind. This is their hook, money. On the other side, you have a class of politicians more than happy to sell out for whomever offers the most money to ensure they can keep winning their office over and over and over again as we have no term limits on Congress. And because we don’t cap the amount of money a person can spend on election campaign, it largely becomes a contest of whomever raises and spends the most wins. Not always, but typically. Thus, we have created a political class that only serves itself and its clients’ narrow interests and rarely considers the greater good. And we wonder how the American dream got killed. You tell me the incentives inherent in any system, and I’ll tell you how the humans in that system are going to behave.
A Modest Proposal
Is it really that hard to understand why our politicians (and frankly those of many European nations) have consistently voted for legislation that gutted the economic value of our countries in favor of bankers? As Deep Throat told Woodward and Bernstein, “Follow the money.” If we really want to reform our political and economic institutions, the recipe is simple:
1. Term limits. 1 term, 2 terms, 3 terms or something else, but limit the amount of time ANY person can roam the halls of Congress.
2. Campaign spending limits. The max you can raise to run for the House of Representatives should be equal to some easy to define number. Say 10x the average salary of all state workers. That would mean that someone running in my home state of NM could spend about $440k while a candidate from a higher income state like New Hampshire could spend around $650k. Allow the candidate to accept that money from any source he or she likes and in any size, but make them publish the details of where they got the money.
As long as we keep the current system in place, we should not expect a political culture dramatically different from what we have today. Perhaps the donors will change a bit over time and the issues du jour will mean sometimes the Dems win, sometimes the Repubs win, but the system from the perspective of a DC insider will stay the same. Lobbyists win, Americans writ large lose.
Low Interest Rates Forever
What does the political rant above have to do with economics in general or Latam specifically? Everything. In case you haven’t noticed lately, the market doesn’t move on good or bad earnings or economic data, it moves on political rumors and innuendo about government’s willingness to continue the TARP/cheap money/QE lifeline to the terribly over-leveraged banking sector. It’s especially troubling when you consider the faith most members of Congress place in Ben Bernanke and the other Oracles of Delphi at the Fed. One area that’s going to come home to roost very soon is the zero interest rate policy (ZIRP) that has been in place since late ‘08/early ’09.
Simply stated, investors in any maturity of US Treasury bonds are currently receiving a negative real return. Now for the speculative money, this might not be too bad given the much more negative returns of the stock market recently but for traditional buyers of long-dated fixed income that have long-dated asset return hurdles to meet, this is a disaster. Pension funds, insurance companies and other players that must meet a certain growth hurdle rate, say 5-8%, are falling dramatically behind their actuarial goals. This means regular folks are again going to be given the shaft for the failings of our Fed’s monetary policy.
The problem for the Fed and government, however, is that with the enormous size of our national debt at about $15tr (thanks again special interest crew), we can never again allow the bond market to function without the Fed prepared to buy bonds at the slightest sign of distress. Again, simple math. If the average rate the government pays on its debt rises to 5%, which is less than the long-term average of between 5.5% and 6%, then the interest rate expense we’ll pay on an annual basis will be $750bn, an amount comparable to the entire Dept. of Defense budget. Remember, we bring in about $2.2tr in revenue via taxes. If we have to pay $750bn or about 34% of total revenues on nothing more than interest on the debt, we’re toast.
The White House, the Fed, the Treasury and a few members of Congress are aware of this but most in DC remain blissfully ignorant of this fact. Bottom line is this: QE does not exist for the banks or the economy or any other excuse uttered by PhDs at the Fed, it’s about keeping borrowing costs low for the US as we simply can never afford to have high rates again or our credit and thus economic system will collapse. Monetizing the debt – it’s not your grandfather’s Federal Reserve Bank!
Meet the New Boss, Same as the Old Boss
Therefore, our conflicted, bought-and-paid for politicians will continue to support the Fed because it is literally the only institution on the planet capable of keeping interest rates low. Low interest rates are the only thing that allows the US Treasury to continue to issue hundreds of billions of new bonds each month that will only be paid back in devalued dollars to fund wasteful spending we can’t really afford. Spending that flows to all of the large political donors in Washington’s quid pro quo style. The “success” of keeping interest rates low keeps the same kind of political “Yes” men and women, folks who will gladly do what they are told for the right dollar amount (which conjures up a much more pejorative term to describe their actions but this is a family audience), returning to DC on a regular basis. Which of course keeps our country subjected to the politics of big money, a “for sale” political class and bad legislation.
Reform the election system and we have a chance of changing the thinking and thus institutions in DC that our ruining our lives. Keep the system as is and get ready for the Great Reset. In fact, even if we do change the system with the debt we have, it may already be too late to avoid the Great Reset but at least we’ll have better personnel in DC to clean up the mess.
* Fator Securities LLC, Member FINRA/SIPC, is a U.S. entity and a member of the Fator group of companies in Brazil. The comments below are from Brian Rogers, who is employed by Fator Securities (Brian’s opinions are his own and do not constitute the opinions of Fator Securities or the Fator group of companies).
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