Boom2Bust.com

Why Ethanol Sucks

“So ethanol is bad for taxpayers, bad for consumers, bad for the environment, and bad for the world poor. Does anyone benefit from ethanol?”

Wall Street Journal Online Video Link

Source:

“Ethanol: Silly Senator, Corn Is for Food!”
reason.tv
Wall Street Journal Online, August 14, 2008

Windfall Profits Tax? Where’s The Windfall?

Driving back and forth between Chicago and Burlington, Wisconsin, last week, I listened to the news on the radio quite a bit. There was a lot of chatter about Exxon Mobil reporting its highest quarterly profit ever ($11.7 billion) on Thursday. Not surprisingly, politicians were quick to criticize the announcement. The New York Times’ Clifford Krauss wrote Friday:

Democrats in Congress were quick to criticize Exxon’s profit, hoping that the resentment felt by many drivers over high gasoline and diesel prices could help them in an election year.

“Inside the boardrooms at the major oil companies, it’s Christmas in July,” said Senator Charles E. Schumer, Democrat of New York.

Does anyone still pay attention to this guy? IndyMac. Lest we forget!

Anyway, one politician decided to take on the issue of oil company profits directly. On Friday, Senator Barack Obama (D-IL) announced a new proposal where oil companies enjoying record profits would face a “windfall profits” tax, where the cash would be passed on to consumers in the form of a rebate.

Hmm. A “windfall-profits” tax. I seem to recall that a windfall-profits tax was previously imposed on oil companies back in 1980, but was eliminated in 1988 after oil exploration and gasoline prices both fell. I’ve also heard that the tax raised only $79 billion, well below its proponents’ estimates. As a matter of fact, oil industry economists blamed the tax for contributing to a decline in exploration and drilling, helping set the stage for the energy crisis we currently face.

A reduction in oil exploration and drilling. Great. That’s exactly what our country needs right now. Which leads me to ask, which rocket scientist came up with this idea?

Earlier today, ABC News’ Jake Tapper asked the Obama campaign about the specifics behind the tax proposal. From their exchange:

TAPPER: What is a “windfall profit”?
OBAMA CAMPAIGN: Senator Obama believes that while oil companies and shareholders need incentives to run well managed businesses that invest in efficiency and innovation, a significant share of the record profits the big oil companies have been making have nothing to do with their management skill or investment decisions. Instead, it is the result of changes in the price of oil because of factors like supplies in the Middle East, demand in Asia, and disruptions and distortions in the oil market.

Therefore, a well designed mechanism can impose a fee on a small share of these windfall profits without affecting incentives for oil companies and without affecting the price of oil. Indeed, as the Congressional Research Service recently concluded: “[T]o the extent that a surtax on the corporate income of crude oil producers on their upstream operations could approximate such a [pure corporate profits] tax, this would not raise crude oil prices and would not increase petroleum imports in the short run. While the current corporate income tax is not a pure corporate profits tax, a surtax for oil companies would arguably be an administratively simple and economically effective way to capture estimated oil windfalls in the short run.” [Emphasis added, “The Crude Oil Windfall Profits Tax of the 1980s: Implications for Current Energy Policy,” Congressional Research Service, 3/9/06, p. 32.]
TAPPER: Should such a tax only be applied to oil/gas industries?
OBAMA CAMPAIGN: Yes.

Okay. Enough of this foolishness.

…a significant share of the record profits the big oil companies have been making have nothing to do with their management skill or investment decisions. Instead, it is the result of changes in the price of oil because of factors like supplies in the Middle East, demand in Asia, and disruptions and distortions in the oil market.

Geez, is that the best they can come up with? In which parallel universe is any business or industry NOT affected by external factors such as supply-and-demand fluctuations, disruptions, and distortions? As such, is it fair to impose additional taxes on a business or industry just because these factors (which had “nothing to do with their management skill or investment decisions”) played out the way they did?

Yet, the most disturbing aspect of this ill-contrived proposal is the fact that profit margins in the oil and gas industry aren’t exactly at windfall levels. The evidence? From the July 27 issue of Parade Magazine (based on U.S. Department of Energy data):

Although Exxon Mobil netted $40 billion in 2007, the average profit margin for oil companies is just 7.6%, compared with 9.2% for most manufacturers.

Adding to growing speculation that the proposal is purely for political pandering, the Wall Street Journal wrote yesterday:

Maybe they have in mind profit margins as a percentage of sales. Yet by that standard Exxon’s profits don’t seem so large. Exxon’s profit margin stood at 10% for 2007, which is hardly out of line with the oil and gas industry average of 8.3%, or the 8.9% for U.S. manufacturing (excluding the sputtering auto makers).

If that’s what constitutes windfall profits, most of corporate America would qualify. Take aerospace or machinery — both 8.2% in 2007. Chemicals had an average margin of 12.7%. Computers: 13.7%. Electronics and appliances: 14.5%. Pharmaceuticals (18.4%) and beverages and tobacco (19.1%) round out the Census Bureau’s industry rankings. The latter two double the returns of Big Oil, though of course government has already became a tacit shareholder in Big Tobacco through the various legal settlements that guarantee a revenue stream for years to come…

The Journal summed it up best when it stated:

…a windfall is nothing more than a profit earned by a business that some politician dislikes. And a tax on that profit is merely a form of politically motivated expropriation.

It’s what politicians do in Venezuela, not in a free country.

Sources:

“Exxon’s Second-Quarter Earnings Set a Record”
Clifford Krauss
New York Times, August 1, 2008

“Obama’s Proposed ‘Windfall Profits Tax’”
Jake Tapper
ABC News, August 5, 2008

“With Gas at $4 a Gallon… Who Is Getting Your Money?”
Parade Magazine, July 27, 2008

“What Is a ‘Windfall’ Profit?”
Review & Outlook
Wall Street Journal, August 4, 2008

Second Stimulus Package Update

Seems like there’s been a lot of interest lately in a second stimulus package to get the U.S. economy back on its feet. On July 15, I talked about how House Speaker Nancy Pelosi met with several economists and announced afterwards that:

We will be proceeding with another stimulus package.

On July 22, Reuters reported:

The U.S. Congress is discussing a second economic stimulus bill that could include nearly $15 billion in infrastructure spending, a senior member of the House of Representatives told Reuters on Tuesday.

Rep. James Oberstar, a Minnesota Democrat who chairs the Transportation and Infrastructure Committee, said a stimulus package could include “accelerating” pay-outs of $9.5 billion from the federal trust fund dedicated to road construction and maintenance…

The money would go to funding more than 2,600 projects, he said. States would receive full federal funding and then have a few years to pay back any matching funds.

Richard Cowan, John Crawley, and Lisa Lambert noted:

Congressional aides have discussed infrastructure elements to the plan, but have not provided cost estimates or other details. The timing of any second stimulus bill remains up in the air.

The Senate Appropriations Committee on Tuesday postponed consideration of its version of a second stimulus plan until September, said Robert Byrd, the panel’s chairman and a West Virginia Democrat.

President George W. Bush has indicated he wants to see how effective the first stimulus package is before looking at another one.

The idea of a second stimulus package hasn’t been lost on U.S. presidential candidate Barack Obama. According to the Star Tribune of Minneapolis-St. Paul yesterday:

Back from a nine-day overseas trip, Sen. Barack Obama made a point of turning to domestic concerns, calling a meeting Monday to solicit advice on reviving the economy and lifting wages.

Obama’s 2 1/2-hour economic forum, which was closed to the media, included some of the top economic policymakers of recent Democratic and Republican administrations. Among them were Robert Rubin and Paul O’Neill, Treasury secretaries in the administrations of Presidents Bill Clinton and George W. Bush. Billionaire investor Warren Buffett took part by phone.

Obama said the economy needs short- and long-term fixes, including another “stimulus” from Congress…

The group agreed with Obama’s call for a second stimulus plan, although there was some debate about the size.

Obama wants to inject another $50 billion into the economy. Laura Tyson, who headed Clinton’s Council of Economic Advisers, said, “There were people in the room who felt it should be more.”

Sources:

“Infrastructure could spur new stimulus: Rep”
Richard Cowan, John Crawley, and Lisa Lambert
Reuters, July 22, 2008

“Obama gains support from economic team for a second economic stimulus plan”
Star Tribune, July 29, 2008

How Will McCain, Obama Deal With A Record Budget Deficit?

Last week, I talked about the U.S. national debt. $53 trillion of debt (factoring in long-term liabilities), or $455,000 per American household.

This week, it’s the U.S. budget deficit, which the White House predicts will reach close to half a trillion dollars in 2009. The Associated Press’ Andrew Taylor wrote earlier today:

The government’s budget deficit will surge past a half-trillion dollars next year, according to gloomy new estimates, a record flood of red ink that promises to force the winner of the presidential race to dramatically alter his economic agenda.

The deficit will hit $482 billion in the 2009 budget year that will be inherited by Democrat Barack Obama or Republican John McCain, the White House estimated Monday. That figure is sure to rise after adding the tens of billions of dollars in additional Iraq war funding it doesn’t include, and the total could be higher yet if the economy fails to recover as the administration predicts.

The result: the biggest deficit ever in terms of dollars, though several were higher in the 1980s and early 1990s as a percentage of the overall economy.

Both presidential candidates have proposed new initiatives as part of their campaign platforms. The question is, how will this latest deficit forecast affect their agendas? Taylor noted:

Neither campaign is backing off campaign promises — McCain to cut taxes and Obama to expand health and education programs — in light of the bleaker new figures.

“We can’t afford not to invest in some major initiatives such as health and energy and middle-class tax cuts,” said Obama economic adviser Jason Furman. “And we also can’t afford not to pay for those initiatives.”

Some would disagree with Furman. MarketWatch’s Robert Schroeder wrote today:

Stan Collender, a managing director for Qorvis Communications who formerly worked on both the Senate and House Budget Committees, is skeptical that the next president will have an easy time getting much accomplished as long as the deficit remains high.

“Based on what we now know for sure about next year’s budget, none of the presidential candidates’ promises should be taken seriously,” said Collender. “Unless they, the country, and those lending us money are willing to tolerate much higher nominal deficits and a larger debt than has so far been imaginable, the next president’s options will be severely limited,” Collender wrote Tuesday.

Sources:

“US deficit zooming to half-trillion as Bush leaves”
Andrew Taylor
Associated Press, July 29, 2008

“Deficit projections complicate candidates’ plans”
Robert Schroeder
MarketWatch, July 29, 2008

The Next Great Depression

Taking it down a few notches today, I enjoyed a nice cigar from the Dominican Republic this afternoon out on my balcony here in the Windy City. Kind of bummed out that one of my suppliers raised their prices, though. Too bad. I almost pulled a JFK and ordered a stockpile of cigars last year after Washington Democrats were looking to increase the tax cap from a nickel per cigar to $10 a stick— or 20,413%. Unbelievable. By the way, never heard of the JFK cigar story? Well, if you have time, I highly recommend you watch the following video (a little over 3 minutes long) of Pierre Salinger, JFK’s secretary, telling the story (and other cigar-related ones)…

YouTube Video Link

While puffing away, I got the chance to listen to a portion of last weekend’s “Financial Sense Newshour” broadcast. Jim Puplava and John Loeffler have been talking about a financial crisis window for a while now, which they expect to take place between 2009 and 2012. Puplava and Loeffler had this to say last weekend:

JOHN: So looking forward, say, 12 to 24 months, we would say, given where we’re going, we can probably look towards higher gold and metals prices; there will be another money crisis – another currency crisis – and all it would seem like they’re [Congress] doing right now is staving off the day of reckoning. Let’s face it, we said that 2008, that’s the ramp up to 2009 to 2012 – it’s accelerated a little more than I thought it would be and it’s a little more violent than I thought it would be, but nevertheless we’re still on that; and somewhere in that window, all of this stuff begins to fall apart and you can’t tell what’s going to trigger it, but it will go.

JIM: It’s going to trigger. And I think that the thing that’s scaring the heck out of them [Congress] is all of this is starting to unfold – whether it’s $4 gasoline at the pumps, headline inflation with foods, banks going under, stock market manipulation – all of this – and they’re desperately just trying to buy time to get elected because you’ve got 535 people in Congress who are worried about keeping their jobs. And what I think is going to happen is as this worsens the country is going to lurch very hard to the left in the November election (we’re going to get into this in the next segment) and then as a result of the policies that are going to put us in place, that is going to give us our great depression that I anticipate.

By 2010, the United States is going to be in a major depression.

And then, what is going to happen is we’re going to lurch – almost do a 180 degree turn – and lurch very hard to the right as one disaster after another unfolds upon the country.

Great cigar, not so great forecast…

Source:

Financial Sense Newshour
3rd Hour, Part 2
FinancialSense.com, July 19, 2008

Are Rich Americans Leaving The Country?

I heard the rumor the other week. A number of wealthy Americans are leaving, or making plans to leave, the country. The player-haters can’t wait (of course). Consider the following comment that appeared on DemocraticUnderground.com:

LEAVE. Take your money and go. America will survive without you…

So rather than ruin our country for the other 90% whom you despise. Go away. Take all of your precious money and go elsewhere. Even if it means depression we will be better off in the long run without your manipulation of our government just for the sake of having your cake and eating it too.

And it appears some politicians can’t wait for the rich to leave either. On June 11, CNN Money senior writer Jeanne Sahadi talked about the 2008 U.S. presidential candidates’ proposed tax policies. She wrote:

But voters really want to know one thing: How would the presidential candidates’ views trickle down to their tax bills? A report released Wednesday by a nonpartisan policy group in Washington, D.C., takes a big first step toward answering that question.

According to the Tax Policy Center’s findings, Sahadi wrote that under presumptive Democratic nominee for president Barack Obama:

High-income taxpayers would pay more in taxes, while everyone else’s tax bill would be reduced…

Obama’s plan would keep the 2001 and 2003 tax cuts in place for everyone except those making more than roughly $250,000, and he would increase the capital gains tax.

…the highest-income households – those with at least $603,000 in income - would see a dramatic decline in their after-tax income - a drop of 8.7%, or $116,000.

The CNN Money senior writer noted:

Jason Furman, a newly appointed senior economic adviser to Obama, said his preliminary response is that the report’s findings bear out what Obama’s campaign has been saying: that he’s for the middle class.

At the expense of the rich, apparently. Just this afternoon, the Associated Press reported:

Democratic Sen. Barack Obama on Friday called for higher payroll taxes on wage-earners making more than $250,000 annually, a step that would affect the wealthiest 3 percent of Americans.

The presidential candidate told senior citizens in Ohio that it is unfair for middle-class earners to pay the Social Security tax “on every dime they make,” while millionaires and billionaires pay it on only “a very small percentage of their income.”

The 6.2 percent payroll tax is now applied to all wages up to $102,000 a year, which covers the entire amount for most Americans. Under Obama’s plan, the tax would not apply to wages between that amount and $250,000. But all annual salaries above the quarter-million-dollar amount would be taxed under his plan, Obama said.

I know what you may be thinking. It’s about time the rich starting paying their fair share of taxes. However, last fall, the Washington, D.C.-based tax research organization The Tax Foundation looked at the latest release of Internal Revenue Service data on individual income taxes. In 2005:

The top-earning 25 percent of taxpayers (AGI over $62,068) earned 67.5 percent of the nation’s income, but they paid more than four out of every five dollars collected by the federal income tax (86 percent). The top 1 percent of taxpayers (AGI over $364,657) earned approximately 21.2 percent of the nation’s income (as defined by AGI), yet paid 39.4 percent of all federal income taxes. That means the top 1 percent of tax returns paid about the same amount of federal individual income taxes as the bottom 95 percent of tax returns.

Stephen Moore, a senior economics writer for the Wall Street Journal editorial board and a contributor to CNBC, wrote in the November/December 2007 issue of The American magazine:

Yes, income in America is skewed toward the rich. But taxes are skewed far, far more. The top 5 percent pay well over half the income taxes.

Maybe the rich ain’t so bad after all. Get rid of them, and who will pay for all those precious government programs?

But the question still remains. Are rich Americans leaving, or planning to leave, the country? Consider a poll conducted by Zogby International which asked adult Americans if they had ever considered moving outside the United States. The survey, which had more than 115,000 respondents, excluded anyone relocating offshore for less than two years and anyone who relocated because of government requirements, the military or their jobs. Bob Bauman of offshore experts The Sovereign Society wrote on October 16:

The Zogby results are shocking – especially compared to the entire U.S. population (now about 303,116,000). The numbers below are for households, not individuals.

• 1.6 million U.S. households already decided to move offshore and are headed in that direction.
• Another 1.8 million households are seriously considering moving and are likely to do it. Many have taken preliminary steps.
• 7.7 million households are “somewhat seriously” considering moving and “may” do it.
• Nearly 3 million households are seriously considering buying a vacation home or other property outside the United States. Another 10 million are “somewhat” seriously considering it.

This means that almost 10% of U.S. households are considering leaving the country. Another 10% are considering living outside the country part-time. Most analysts are ignoring this silent massive emigration.

These would-be emigrant households plan to spend an average of US$260,000 on buying or building a house. They’re also planning to spend at least US$36,000 annually on living expenses outside the United States.

In total, they represent hundreds of billions of dollars leaving the U.S. economy each year.

Bauman quoted John Gaver of ActionAmerica.org, who said:

The problem is that increasingly, the wealthy perceive that they are under attack by their own government and they are taking the only rational option left open to them. They’re taking their wealth and leaving.

And regarding the number of wealthy Americans who have already left the country, Bauman wrote:

Every year, about 250,000 U.S. citizens and resident aliens leave America to make a new home in some other nation.

In 2005, the U.S. Bureau of the Census upped this estimate. They guessed that over 350,000 U.S. citizens and resident aliens would leave the United States permanently.

On February 15, John Gaver wrote in a piece on ActionAmerica.org:

Wealthy US citizens continue to leave the US at an alarming rate…

Tax haven countries are recording significantly larger numbers of US applicants for permanent residence or second citizenship every year. Keep in mind that most of those expats are wealthy, since poor people can’t afford to leave. In fact, millions of poor people risk their lives in the back of trailers or crossing Arizona desert every year, to take advantage of our increasing welfare state. It is the wealthy, who are leaving and they represent lost US investment dollars and subsequently, LOST US JOBS…

When big money is forced out of the US, it is the average citizen who has to make up the difference in higher taxes. The Income Tax and US government attacks on wealth is costing you money in more ways than you know.

Sources:

“What they’ll do to your tax bill”
Jeanne Sahadi
CNN Money, June 11, 2008

“Obama wants payroll tax on incomes above $250,000”
Charles Babington
Associated Press, June 13, 2008

“Summary of Latest Federal Individual Income Tax Data”
Gerald Prante
The Tax Foundation, October 5, 2007

“Guess Who Really Pays The Taxes”
Stephen Moore
The American, November/December 2007

“Why the Well-to-Do Are Escaping America”
Bob Bauman
The Sovereign Society, October 16, 2007

“US Taxpatriates Compiled by the Internal Revenue Service”
John Gaver
ActionAmerica.org, February 15, 2008

Analysts: Gas May Soon Cost $4 Per Gallon

Speaking of the high cost of gas these days, the Associated Press’ John Wilen said today that gasoline prices extended their record run at the pump. He wrote:

At the pump, the national average price of a gallon of gas rose 0.2 cents overnight to $3.289 a gallon, according to AAA and the Oil Price Information Service. That’s the latest in a string of records set as gas prices have followed surging oil futures higher…

Wednesday’s surge in gas futures, accompanied by a big gain in oil prices, is expected to send prices even higher at the pump in the near future; retail prices follow the futures market, although with some time lag.

How bad could gas prices get? The AP business writer said:

The report also showed that refiners are holding back on producing gasoline due to low refining profit margins. The combination of low production and higher demand during peak summer driving season — and high crude prices — could boost gas prices even further into record territory…

The Energy Department expects gas prices to peak near $3.50 a gallon later in the spring. Many analysts think prices could rise as high as $3.75 or $4.

It’s no surprise then that with prices rising at the pump, politicians are not only (predictably) attacking Big Oil, but are clamoring for the White House to bust out that “Magic ‘Tussin,” otherwise known as the Strategic Petroleum Reserve. R.A. Dillon of the Fairbanks Daily News-Miner wrote today:

Obama energy adviser Jason Grumey recently told Reuters news service that the candidate would stick it to Big Oil.

Grumey said Obama would take an active role in U.S. oil markets as president, challenging the dominance of large oil companies and perhaps using the Strategic Petroleum Reserve to ease supply concerns and lower prices.

Give me a break. Not that I like high energy prices, but does the Obama campaign really think Americans are stupid enough to believe there’s a simple fix to our energy problems? Apparently so, as they’re portraying the Illinois Senator as the solution to the gas pump blues. Right now, the Obama campaign is running a TV ad in Pennsylvania attacking Big Oil. Dillon wrote:

The 30-second-spot opens with a shot of a long line of cars waiting at an Exxon retail station during the energy crisis of the 1970s.

“Nothing’s changed,” Obama says in the ad. “Except now, Exxon’s making $40 billion a year, and we’re paying $3.50 for gas.”

The Illinois Democrat goes on to say he won’t let Big Oil “block change anymore” and that he’ll push for a tax on “windfall profits” to pay for developing alternative sources of energy and energy assistance for low-income families.

Alternative sources of energy? Like corn ethanol? Time’s Michael Grunwald wrote on March 27:

But on Nov. 6, at a biodiesel plant in Newton, Iowa, Hillary Rodham Clinton unveiled an eye-popping plan that would require all stations to offer ethanol by 2017 while mandating 60 billion gal. (227 billion L) by 2030. “This is the fuel for a much brighter future!” she declared. Barack Obama immediately criticized her–not for proposing such an expansive plan but for failing to support ethanol before she started trolling for votes in Iowa’s caucuses.

So, what’s the problem with biofuels and corn ethanol? Grunwald also noted in his piece:

But several new studies show the biofuel boom is doing exactly the opposite of what its proponents intended: it’s dramatically accelerating global warming, imperiling the planet in the name of saving it. Corn ethanol, always environmentally suspect, turns out to be environmentally disastrous.

Like I said, resolving the energy issue isn’t that simple. Think about it- if it were, Americans would have figured it out during the last energy crisis. I could not find anything about Mr. Grumey’s energy credentials. However, legendary energy investor T. Boone Pickens had this to say last month regarding the U.S. presidential candidates and their understanding of energy. Pickens said, “They don’t know anything about it.”

Sources:

“Gas prices rise to new national record”
John Wilen
Associated Press, April 3, 2008

“Oil companies targeted in Obama’s Pennsylvania ad campaign”
R.A. Dillon
Fairbanks Daily-News Miner, April 3, 2008

“The Clean Energy Scam”
Michael Grunwald
Time, March 27, 2008

Leave Hillary Alone!

On Tuesday, Democratic presidential candidate Hillary Clinton said she made a mistake when she claimed she came under sniper fire during a trip to Bosnia in 1996 as the first lady. According to Reuters’ Jeff Mason:

In a speech in Washington on March 17 Clinton said of the Bosnia trip: “I remember landing under sniper fire. There was supposed to be some kind of greeting ceremony at the airport, but instead we just ran with our heads down to get into the vehicles to get to our base.”

She also told CNN last week: “There was no greeting ceremony and we were basically told to run to our cars. Now that is what happened.”

However, different news outlets have disputed her claim and offered up as proof a video of the trip, which showed Clinton walking from the plane, accompanied by her daughter, where they were greeted by a young girl in a small ceremony with “no sign of tension or any danger,” according to Mason.

The New York senator explained the discrepancies by saying:

So I made a mistake. That happens. It proves I’m human, which, you know, for some people, is a revelation.

This afternoon I was lucky enough to see some missing footage of the Bosnia trip (much obliged, Michael Rivero’s What Really Happened.com). After watching the video, I must admit— it appears the whole event went down like she said it did. Therefore, all I have to say to her naysayers is:

Leave Britney, I mean, Hillary alone! Anyone who has a problem with her— you deal with me!

-Inspired by Chris Crocker

YouTube Video Link

Source:

“Hillary Clinton calls Bosnia sniper story a mistake”
Jeff Mason
Reuters, March 25, 2007

New Poll: More Than Half Of Americans Expect Recession

Earlier today, a Reuters/Zogby poll showed that a majority of Americans expect a recession in the next year in light of the housing slump, growing inflation, and tightening credit conditions. The survey of 1,105 likely voters found that 54% of respondents thought a recession was looming. According to Emily Kaiser in “Majority of Americans expect a recession: poll,” it was the first time since the recession question was added to the monthly poll in September that more than half predicted such a downturn.

“Can you say hell in a handbasket?”

Economic worries have now replaced the war in Iraq as the top issue in this year’s U.S. presidential election as the housing bust takes a toll on Americans, said Kaiser. Three out of four Americans expected home prices will hold steady or fall in the next year. The poll, conducted between January 13 and 16, found that less than 40% of those surveyed thought the U.S. economy would be able to avoid a recession. The Reuters reporter noted:

Those nearing retirement age were particularly concerned about recession. Among those ages 50 to 64, 61.2 percent expected a recession, making them the most pessimistic group.

That group includes a large portion of the Baby Boomer generation born in the nearly two decades after the Second World War. Much of their savings is tied up in home equity and stock-based retirement plans, both of which have been under pressure in the past year.

Pollster John Zogby, himself a Boomer, said older boomers were increasingly delaying retirement or cutting back spending for fear of outliving their savings. Zogby said:

We began as an anxiety-ridden generation and that’s how we’re going to punch the time clock, too.

The poll had a margin of error of plus or minus 3 percentage points.

How To Win The White House

What if I were to tell you that winning the White House means not running for election in 2008? It doesn’t make sense, at least on the surface. Some time ago I happened to read a book by Robert R. Prechter, Jr., called Conquer The Crash. The author is a stock market analyst who is best known for his financial forecasts using the Elliott wave principle, which is based on mass psychology and the belief that the fluctuation from pessimism to optimism and back creates measurable specific patterns and probabilities of outcome. Currently, Prechter is president of Elliott Wave International, which publishes analyses of global stock, bond, currency, metals, and energy markets.

The reason I bring up Prechter and his book is that the Elliott wave practitioner studied U.S. electoral history and its relationship to the larger economy. In chapter 27 of his text, Prechter shared his findings with readers- and aspiring politicians.

When the stock market is rising, voters tend to maintain the incumbent leader. When stocks fall, the individual is removed from office. Prechter claims, “though the instances are rare, there are no exceptions to this rule.”

A national leader does not control his country’s economy. However, the economy significantly controls the politician’s image. “When the economy contracts,” says Prechter, “that image suffers, and the voters throw him out.” This rings true all over the world, according to the analyst.

Prechter talked about potential repercussions of a deflationary crash for the nation’s highest office holder. A deflationary crash is characterized in part by a persistent, sustained, deep, general decline in people’s desire and ability to lend and borrow, according to Elliott Wave International’s website. He said:

If there is a deflationary crash, the incumbent leader of your nation, no matter how popular he is early in his term, will not win re-election if stock prices are much lower on election day. The financial and economic decline during his term and the defeat that follows will not be primarily his fault, though the majority will insist they are. If the decline is a drawn-out affair, more than one successive leader could suffer defeat at its hands.

The head of Elliott Wave International also noted that the politicians in power at the time of the deflationary crash “always appear inept, because they take actions designed to ‘help the economy,’ which fail, or they decline to take actions and are blamed for fiddling while Rome burns.” Prechter declared, “Regardless of what they do, or don’t do, the public blames them and their party and kicks them out.”

At the beginning of 2008, the likelihood of an economic recession in the United States grows every day. Some, like Merrill Lynch, would say we’re already in a recession. A number of individuals, like Prechter, are even predicting a full-blown financial storm. Should that scenario take place after the 2008 election, it is very likely that the American public will blame the President and his/her political party for the economic crisis and boot them off the national stage.

Source: Wessel’s Living History Farm

Prechter recommended the following gameplan for those with political aspirations:

If there is a major stock market crash, you want to run for office near the bottom. You will be revered by the public and historians if you win. George Washington, Abraham Lincoln, Franklin Roosevelt and Ronald Reagan were all elected at or near the bottom of severe downtrends, and all have an exalted place in American history.

Third parties do well in tough times; so do outsiders and radicals; incumbents do poorly. So if you are a non-incumbent political animal, you can plan now to take advantage of the situation. If you want to be a politician, plan to run for office on any party ticket but that of the leader(s) in your country who rode the trend down.

So, what if I were to tell you that winning the White House means not running for election in 2008? Doesn’t sound too crazy anymore, does it?

Investment Bank Predicts Ron Paul Victory As Economy Weakens

Every year, the Strategy Team at Danish investment bank Saxo Bank puts together a list of ten long-shot predictions for the new year. It’s interesting to note that more than a few of these predictions have come true over the years. For example, at the end of 2006, Saxo analysts said they were bullish on oil “given the raft of alarming geopolitical scenarios with alarming implications for global supply.” Crude oil prices in 2007 almost reached $100 per barrel. Another prediction by bank staff was that the Federal Reserve would bring the federal funds rate down to 4% by the end of 2007. It now stands at 4.25%.

Here are some of the investment bank’s more notable predictions for 2008 (from Emirates Business 24/7):

World oil prices to hit $175 even if growth slows
Much of the conventional wisdom on oil has been proven wrong over the past few years, as previously unimaginable new highs in the price of oil have only been a reflection of the strength of global growth, rather than an obstruction in its path. With the weak US dollar and shrinking profit margins for refiners, the end consumer in many places worldwide hasn’t noticed a difference between oil prices at $99 compared to oil prices at $75. Even if global growth slows in 2008, it will continue to move ahead in the emerging markets of the world where marginal energy demand is growing the most. As “peak oil” becomes an accepted principle and supply and demand do a nervous dance, the price risk in energy remains firmly to the upside.

UK economy likely to go into a nosedive
The British economy may go into a nosedive in 2008, weighed down by some of the same factors that have toppled the US. The UK housing bubble is possibly worse than the US bubble and has only begun to unwind. The Bank of England has dragged its feet as the credit crisis has unfolded, which could worsen the situation compared to the Fed, where “Helicopter” Ben Bernanke has replaced “Easy” Alan Greenspan. The UK consumer is even more overextended in terms of all forms of debt than his US counterpart.

S&P 500 falls 25% from its 2007 high to 1,182
Why 1,182? That would be an exact 25 per cent drop from the 1,576 high the S&P 500 index reached in mid-October this year. History shows that a stock market drops 15 to 30 per cent when housing markets fail. “Easy Al” and “the slice and dice any manner of junk and pass on the risk to your clients” investment banking paradigm triggered the biggest housing bubble in US history. The unwind from the height has already been severe, but it has further to go. So we are daring to forecast that the fall in the major US index will lie at the extreme end of the scale.

Grain prices to double again as demand rises
This year saw the most spectacular gains in the grains complex in recent memory as wheat prices doubled and soybean prices rose to levels not seen since the wild grain markets of the 1970s. Human population growth has slowed on a percentage basis, but per capita consumption of grain is accelerating as emerging markets switch to higher protein diets, which have a multiplier effect on the grain market. Every kg of beef requires seven kgs of feed, for example. Chinese meat consumption has also doubled per capita since 1990 and milk consumption has tripled since 2000.

Many of the big US home builders to go bankrupt
As 2007 draws to a close, many of the stocks for the largest home construction outfits in the US are rallying after George W Bush rolled out his desperate attempt to stem the sub-prime tidal wave by fiddling with rate reset mechanisms and implementing other measures, which seem like pumping medicine into a dead horse. These steps are too little and too late, as the last phases of the US housing boom were one of the worst examples of overextension by any industry – driven by excess liquidity. At least three of the largest US home builders could go bankrupt in 2008.

Chinese equities likely to see correction next year
The Chinese stock market bubble in 2007 saw one of the most remarkable accumulations of paper wealth in financial market history. The rise in Chinese equities is certainly due in part to solid fundamental underpinnings, including a liberalisation of markets and remarkable economic growth. But there are a number of factors we believe may have resulted in an unhealthy overextension in equity prices that could mean an ugly correction in 2008 – possibly around the psychologically important 2008 Summer Olympics in Beijing.

Ron Paul elected President of the United States
The most outrageous! One would imagine a party with the least popular president to inhabit the White House – ever – wouldn’t stand a snowball’s chance in Texas of getting a new candidate elected to the presidency. But Ron Paul is no George W Bush, even if he is a Republican like Bush and is from Texas like Bush. His libertarian, anti-war platform is about three standard deviations away from the platform of any other republican candidate — or even Hillary Clinton, for that matter. Paul’s share in the Republican candidate polls has rocketed from one to six per cent in the space of a few months and there is the best part of a year to go until the election. As should be clear from this year’s outlook, we are quite negative on the US economy in 2008. A general slowdown and stock market turmoil must increase the odds of a Ron Paul nomination as he has been the only candidate to speak about the budget, account deficits and the dollar crisis.

Vanguard Founder Says Recession Odds At 75 Percent

Earlier today, CNN Money posted the answers to questions Fortune readers asked of John Bogle, the 78-year-old founder of mutual fund giant Vanguard. With $1.3 trillion in assets, Vanguard is now the second-largest mutual fund company. Bogle talked about the odds of a U.S. recession, the U.S. housing market, the subprime crisis, and challenges to the U.S. economy, among other issues.

What are the odds of a recession right now?

I would put the odds of a recession at 75 percent. This economy is very much consumer-based, and I believe that 70 percent of the GDP is consumer spending. That’s a very high number. Two things are happening there: Consumers have fewer resources because from 2001 to 2005 they took $5 trillion out of real estate. That will not recur. This is a big drop. We also see weakness in auto sales and retail spending - we even see it at companies like Starbucks. There is another, equally important factor in consumer spending, and that is confidence. Consumers are not going to spend if they are worried about the future.

Will the real estate market improve anytime soon?

It doesn’t look so good. I really don’t see it improving soon. At some point homes will have to be built. But right now there is not much incentive to build new places when there are so many old places on the market. When those lines cross I don’t know. It’s complicated by the fact that many people have gotten into ARMs [adjustable-rate mortgages] who didn’t know what they were doing. I don’t know what is going to happen to those people when lenders foreclose. When banks were community banks, they were more careful. But when banks sell loans in a bundle, they are clearly not going to be concerned about mortgage quality. So we have to have a better system in the future to make sure we have a much better element of credit quality in mortgages.

How does the U.S. subprime mess compare with other crises you have seen in your career?

I’d say the most similar example was the S&L crisis of the late ‘80s and early ‘90s. The issues were somewhat the same: Institutions borrowed short and lent long.

The immediate concern for most investors is the subprime market, but over the long term what do you see as the biggest challenges facing the U.S. economy?

Externally, we are faced with $1.5 trillion already poured into Iraq and Afghanistan. So you have enormous expenditures in a corner of the world that is important to us, but it is very unwise to think we can bring democracy to a place that doesn’t share our values. There are also the challenges from low cost production in China and India. At home, we have a tremendous future financial problem with the federal deficit. We’ll have to take action on Social Security someday. Government spending has gotten to the point where we will have to either cut spending or raise taxes. Another problem is this deadlocked Congress. And I see the quality and caliber of our presidential nominees, and I am not impressed.

It raises the question of whether this country is even able to run itself anymore.

Is A Republican President Really Better For The Economy?

In the December 11 article “Economists Say Recession Risk Is Climbing,” the Wall Street Journal talked about some of the findings from its latest survey of economists. When asked which presidential candidate would be best for the economy, only half of the 52 economists participating in the survey responded. The Journal reported that 35% of respondents chose Rudolph Giuliani, 19% chose John McCain, and 15% picked Mitt Romney as the candidate who would be best for the U.S. economy. Hillary Clinton was picked by 8% of economists participating in the poll, while 4% chose John Edwards. Ron Paul, Michael Bloomberg, and Alan Greenspan each got a write-in vote. Alan Greenspan?

I’m not surprised that the survey results showed economists felt a Republican White House would be best for the U.S. economy. I’ve always heard that the economy performs better under a Republican president. Even when I was an undergraduate student at the University of Illinois at Urbana-Champaign in the early nineties, some of my classmates said that it was a shame that President Clinton and the Democrats were reaping the benefits of economic policies instituted by President George H.W. Bush’s administration. So tonight, I’m going to explore the claim that Republican administrations are “best” for the U.S. economy.

I call to your attention a study done in December 2006 by Elliott Parker, Ph.D., who is a Professor of Economics at the University of Nevada-Reno. Using data from the U.S. Department of Commerce’s Bureau of Economic Analysis, Dr. Parker first compared the economic performance of Republican and Democratic presidencies from 1929 through the end of 2005. He found that the Real GDP Growth Rate (annual average) was 1.9% for Republican administrations and 5.1% for Democratic administrations during this time. Real GDP Growth Rate Per Capita was .7% for the Republicans and 3.8% for the Democrats. However, the professor pointed out that the years comprising the Great Depression and WWII should probably be excluded from the comparison. So economic performance from 1949 (end of Truman administration) to 2005 was compared, which showed Real GDP Growth Rate (annual average) under Republican administrations now stood at 2.9% and Democratic administrations at 4.2%. Real GDP Growth Rate Per Capita was 1.7% for the Republicans and 2.9% for the Democrats. These results prompted Dr. Parker to conclude that “the economy has grown significantly faster under Democratic administrations, and more than twice as fast in per-capita terms.”

The University of Nevada-Reno economics professor also uncovered the following while conducting the economic comparison between Republican and Democratic presidential administrations from 1949 to 2005:
• Unemployment Rate- Republicans 6.0%, Democrats 5.2%
• Change In Unemployment Rate- Republicans +0.3%, Democrats -0.4%
• Growth of Multifactor Productivity- Republicans 0.9%, Democrats 1.7%
• Corporate Profits (share of GDP)- Republicans 8.8%, Democrats 10.2%
• Real Value of Dow Jones Index- Republicans 4.3%, Democrats 5.4%
(in logarithmic growth rates)- Republicans 2.8%, Democrats 4.4%
• Real Weekly Earnings- Republicans 0.3%, Democrats 1.0%
• CPI Inflation Rate- Republicans 3.8%, Democrats 3.8%

Regarding the question of statistical significance, Parker noted:

The differences in growth, unemployment, and the corporate profit share are all statistically significant, and support the argument that the economy may actually perform better under Democrats. The differences in weekly earnings, stock market growth, inflation, and multifactor productivity all favor the Democrats as well, but these differences are not statistically significant.

Addressing the claim heard back in my college days, Dr. Parker also tried to account for a lag effect. He said, “It is a reasonable argument that economic performance early in a new administration is likely to be the result of policies followed by the prior administration.” Therefore, he tested whether lagging the effect of the administration on growth might support the argument that the economy actually performed better under Republicans. The professor found that even with up to four years of lagged effects, there was no evidence that the economy performed better under Republicans.

Dr. Parker drew the following conclusions regarding the claim that Republican presidencies are “best” for the U.S. economy:

But we can reasonably conclude that these government statistics provide evidence that directly contradicts the argument that the economy does better on average under Republican administrations. With lagged effects and other causes considered, the difference may be insignificant, but the economy may actually perform worse under Republicans.

The Great Escape, On Hold

As predicted, U.S. Treasury Secretary Henry Paulson spoke today about the proposed rescue of subprime mortgage borrowers, and said he’s confident the U.S. government and other parties involved will agree on a finalized plan this week. According to Bloomberg today, Paulson said:

The number of subprime mortgage resets is going to increase dramatically next year, and we need to make sure the capacity is there to handle it… Treasury is aggressively pursuing a comprehensive plan to help as many able homeowners as possible keep their homes.

Borrowers “with steady incomes and relatively clean payment histories” will be the focus of the rescue, Paulson said in his speech at the Office of Thrift Supervision conference. The Treasury Secretary would not “put a number” on how many people could stand to benefit from the proposed plan. The Wall Street Journal said today that many subprime mortgages were made to first-time homebuyers or to speculators who planned to quickly flip their homes.

The September 6 issue of The Economist noted that for now, the appetite for big bailouts remains limited. They pointed to a recent Fox News poll, where 70% of respondents were against using taxpayer dollars to help out troubled homeowners, while 80% were against a bailout for banks and mortgage companies.

Meanwhile, Housing and Urban Development Secretary Alphonso Jackson said in a separate interview that the Bush administration expects to make an announcement on December 6 regarding the plan to save the homes of subprime borrowers.

Not one for being left off the bandwagon, earlier today U.S. Senator and Democratic presidential candidate Hillary Clinton called for a 90-day moratorium
on foreclosures for homeowners who default on subprime mortgages, a 5-year freeze on the monthly rate for subprime adjustable mortgages, and a fund for as much as $5 billion “to help communities suffering from high rates of foreclosures,” according to Bloomberg.

By the way, Reuters reports that:

The subprime mortgage crisis has hit some states harder than others, including Florida, Nevada, California, Michigan and Ohio — key states in next year’s presidential elections.

Coincidence?

Harry Caray Weeps For You…