Dear Reader,
Welcome to the weekend edition of Casey Daily Dispatch, a compilation of our favorite stories from the week for the time-stressed readers.
Of course, if you want to read all of the Daily Dispatches from the week, you may do so in the archives at CaseyResearch.com.
By Kevin Brekke
Poor California. The land of dreamin’ in the ‘60s has awakened from a long slumber to find itself at the bottom of a dog pile of bummed-out karma. That the state is once again being steered by Gov. Jerry “Moonbeam” Brown is an irony not lost on the hopeful denizens of a once-great state looking for redemption. Yet, deliverance from the economic and regulatory sins of several past decades will not be easy.
The recent passage of a budget in California at the eleventh hour includes the usual mix of budget cuts, tax increases, and questionable accounting. It also places a heavy reliance on accurate tax revenue estimations that carry penalties should the state fail to meet them. The budget will ultimately stand or fall on the expectation by legislators that the state will capture $4 billion in tax collections beyond the previous estimate. If this wish upon a star does not come true, the budget will get whacked by another $2.6 billion.
A Bad Assumption
Missing from the entire budget process and estimation game is an examination of a crucial assumption: that the tax base will remain stable. That is, will the number of overburdened taxpayers and businesses that foot the bill for all the spending remain fairly constant? Evidence is mounting that the answer is “no.”
I covered this question in previous articles that take a look at how a state should not be run. A synopsis of the theme would read:
Today, there are multiple combat lines being incised between a number of fiscal, economic, as well as ideological forces. Of all the various combatants, the U.S. states are emerging on the frontlines of the fight. And some of their tactics are encouragingly following free-market principles. Recent events suggest that a battle for tax revenue has commenced, pitting high-tax states against low-tax states.
Those “recent events” refer to falling – or a stunted rise in – state corporate-tax revenue and back-of-the-pack growth performance in gross state product, population, employment, and overall tax receipts in high-tax states such as California.
Another dog just landed on this pile of bad news courtesy of Joseph Vranich, publisher of The Business Relocation Coach blog out of Irvine, California and a consultant who tracks the movement of businesses. His latest research on California concludes:
Today, California is experiencing the fastest rate of disinvestment events based on public domain information, closure notices to the state, and information from affected employees in the three years since a specialized tracking system was put into place.
• From Jan. 1 of this year through this morning, June 16, [California] had 129 disinvestment events occur, an average of 5.4 per week.
• For all of last year, we saw an average of 3.9 events per week.
• Comparing this year thus far with 2009, when the total was 51 events, essentially averaging 1 per week, our rate today is more than 5 times what it was then.
Our losses are occurring at an accelerated rate. Also, no one knows the real level of activity because smaller companies are not required to file layoff notices with the state. A conservative estimate is that only 1 out of 5 company departures becomes public knowledge, which means California may suffer more than 1,000 disinvestment events this year. The capital directed to out-of-state or out-of-country, while difficult to calculate, is nonetheless in the billions of dollars.
The full list of companies that have announced plans to disinvest in California is available via the above link, as well as other dismal data about the current condition of business regulation in the state.
It is worth noting that a disinvestment event entails more than simply a business packing up and heading elsewhere. There are several actions that a company can pursue that are detrimental to the state, and Vranich breaks them down into the following six categories:
• Construction of a facility is cancelled due to California’s costs, taxes, or environmental regulations.
• Full or partial closure. Work shifted to competitors who will perform the work out of state.
• Capital directed to out-of-state growth that in the past would have occurred in California.
• Company considered moving into California but went elsewhere, a decision termed a “U-turn.”
• California lost a new facility to another state or country.
• Out-of-state relocation.
Where Is Everybody Going? And Why?
The top destinations for company relocation or diverted investment include: Arizona, Colorado, Florida, Georgia, Michigan, Nevada, North Carolina, Texas, Utah, and Virginia. Mexico, Canada, and India also made the list. It is no coincidence that some of the states listed here are also routinely ranked as low-tax states by third-party research organizations.
The decision-makers at the companies were interviewed and asked what factors led to a determination to leave the state or redirect investment. Not surprising that, again, taxes and regulatory burdens rank as a significant deterrent. Other incentives to look outside the state include: expensive location; dreadful legal fairness to business; and an excessively adversarial business climate. Chief Executive magazine calls California the “Venezuela of North America.”
And as if it was needed, a new incentive for businesses to leave the state was enacted on April 12, 2011, in the form of a new law requiring utilities to acquire one-third of their power from renewable sources within nine years. California is already home to electricity rates twice the national average. Rates are estimated to increase from 19% to 74% when the new regulation is fully implemented. Further, the upcoming “California Global Warming Solutions Act” has the potential to place overwhelming hurdles that do not exist in other states and countries in front of local companies.
The good news is that California continues to set the standard on how not to run a state. It’s an example that other states are paying attention to and plying the dunderheaded decisions of California legislators to their advantage. Free-market competition between states for business investment, and hence jobs, is under way, and will absolutely intensify as budget deficits squeeze a growing number of U.S. states.
A similar scenario is likely in play for individual California taxpayers as well, although statistics on this are hard to come by. As employers flee the state, it seems logical that job seekers will follow. And as the tax burden for funding government grows faster than the tax-paying population, look for a greater number of taxpayers to become former California taxpayers. The time for dreamin’ is long past. It is the dawning of a new tax age for state governments.
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By Vedran Vuk
Everyone seems dissatisfied with his political party these days. Whether one is a Republican or a Democrat, no one is happy. But are the two groups actually in the same boat? In my opinion, even in their dissatisfaction, there are important differences between the parties.
Consider the dilemma of small-government Republicans. They want to curb government spending, yet the government has exponentially grown even under Republican leadership. In some ways, it’s their own fault. No one in the party seems to complain when defense contractors get fat government checks. Furthermore, many hypocrites in the party would like to cut the other guy’s programs but not their own.
Regardless of these inconsistencies, the conservative philosophical rhetoric hardly ever becomes actual policy. Even during the Reagan years, government continued its expansion (let’s not even get into George W. Bush). Republican voters are promised a fiscally conservative government, but they never get it. The reason for their anger is obvious.
But with Democrats, it’s a completely different story. They demand more government oversight, more safety nets, and more government programs. Have you opened up a history book lately? That’s exactly what happened in the U.S. over the last century. Democrats can’t honestly say that their leaders don’t fulfill their demands.
Sure, maybe the Democratic Party hasn’t enacted all its promised programs, but it’s better than the situation in the Republican camp: Their party never reduces the size of government, administration after administration.
Look at Obama as an example. He voted to bail out the auto companies and the banks. Then he passed a nearly trillion-dollar stimulus package and “Obamacare.” And from debit-card fee limits to Dodd-Frank, he’s regulating the financial sector. On top of that, Ben Bernanke’s neo-Keynesian policies pumped trillions into the system.
More regulation and more spending is pretty much the Democratic Party line, and the Obama administration has followed it. So why the complaints? Well, it’s kind of obvious here too: The unemployment rate is still high, and the economy has not recovered despite the trillions spent.
Republicans are angry because their politicians never fulfill their campaign promises. But Democrats actually do get most of their programs. However, they never work as promised; and naturally anger ensues.
Voters for both parties live in a state of denial about obvious facts. It’s time for hardcore Democrats to accept that big government doesn’t work. Do we really need to spend another trillion to prove that point? And Republican voters should realize that their party will never become fiscally responsible. It never has been, and it never will be.
It’s pointless to agonize over party politics. Democrats will keep creating failed program after failed program, and Republicans will continue to lie. Personally, I don’t care in the slightest about their false promises – no matter how sweet they may sound. I’d rather sit on the sidelines, relax, and enjoy a margarita.
By Jeff Clark
Gold and silver have both cooled from their recent highs, so many investors are asking if it’s time to pounce with their buy orders. Is there really a way to know if you’re getting a good price, one that allows you to buy with confidence? I think there is.
Many precious metals investors know that gold and silver prices tend to be soft during the summer months – but what many don’t realize is that that trend is measurable. By looking at what prices have done over each summer since the bull market began in 2001, we can recognize what a bargain price might look like today.
The charts below are based on a simple premise: Gold and silver tend to perform well through May and then pull back during the summer. This year, gold peaked on May 4 and silver on April 28 (based on London PM fix pricing).
How much do they pull back? I calculated the smallest, average, and biggest retreats from the May high to the summer low (June, July, or August) in each year of our current bull market (2001 through 2010). The charts below display the prices for gold and silver when those declines are applied to this year’s May high.
Here’s what the smallest, average, and biggest summer declines look like for gold since 2001, and what price that would represent today.
(Click on image to enlarge)
Gold’s smallest decline in the current bull market has been 2.2%, which, subtracted from this year’s May high, gives us a price of $1,506.74. The average drop over the last ten years is 8.6%, which would give us $1,407.53. The largest summer drop was 21.7%, which would take us to $1,205.17.
Gold’s low so far this summer is $1,498, a drop of 2.7% – barely more than the smallest summer decline in our current bull market. We’ve come nowhere near the average decline and have two months of summer to go, so I would be inclined to be patient here.
In fact, the data tell us that a $1,407 gold price would be completely normal. In my opinion, that would signal a great buying opportunity. Given all the monetary, fiscal, and economic issues that continue to plague most parts of the globe, I wouldn’t hold my breath that we match the biggest summer decline.
Here’s what the data look like for silver.
(Click on image to enlarge)
From silver’s May high of $43.61, the average summer decline would give us a price of $36.62. We hit $33.96 on June 28, a 22.1% fall and a greater-than-average decline. I think any price below the average 16% correction is attractive.
However, given silver’s greater volatility and the sharp declines it has experienced over past summers, one shouldn’t be shocked if we see it touch the low $30s. That’s not a prediction, but rather a reminder that this would be totally within normal limits (and keep in mind that July is historically the weakest month for silver prices). Anything below $30 would be an indubitable back-up-the-truck signal.
It’s noteworthy that the summer lows have usually represented the bottom of the market for the remainder of the year, with one big exception: 2008, when the summer decline was merely a precursor of uglier things to come. We’re not inclined to think a waterfall selloff is in the cards again, but the risk isn’t zero, and we’re thus keeping some Grants and Franklins in our brokerage accounts.
Further, I wouldn’t use this data for trading or in anticipation of an immediate gain. It’s really for the investor who is looking for a fair price to add some monetary insurance to his portfolio. That’s the whole point of buying gold and silver.
And let’s face it: if you’re not hedging your assets against currency devaluation, you’re taking far more risk than what price you pay for your insurance.
Buy smart, but make sure you buy.
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By Doug Hornig
Gary Johnson is running for the Republican presidential nomination. I’ve mentioned him here before, and I hope readers are taking the time to get to know who he is and what he stands for. I rather suspect you’ll find a lot to like, if for no other reason than that he’s honest. He says things that no candidate in his right mind (at least according to conventional wisdom) would ever say if he harbors the slightest hope of success.
For instance: When was the last time you heard a campaign speech by someone, anyone, at the local, state or national level, that didn’t include the promise to do more to create jobs? The answer is never… unless you’ve been listening to Gary Johnson.
Johnson was governor of New Mexico, elected as a Republican in a state where Democrats have a 2-1 registration advantage. Then he was re-elected, and posted a larger margin of victory the second time around. During his tenure, New Mexico experienced a very healthy 11.6% job growth. That’s double the performance of the next-best state under one of the governors presently running.
As good a track record as that is, though, the refreshing part is his honesty. Johnson admits, “I didn’t create a single job.” In fact, he cut jobs, slashing the state government payroll. What he did do is the only productive thing government can do: help create a climate in which the private sector is encouraged to create new jobs – the kind taxpayers don’t have to subsidize. The kind he was personally involved with as a successful businessman who transformed a one-person handyman startup into a construction company with a thousand employees.
Among all those political ninnies currently clamoring for our attention, he stands out as the only one who gets it.
That he’s not only honest but also right is borne out by the results of the costliest “job creation” program in history: the massive monetary stimulus applied by the federal government in the hope of generating an economic turnaround for the country. That stimulus has been financed by running up government debt, piling it atop what was already an enormous mountain of private debt.
That an increase in debt is not going to yield an increase in productivity should be obvious to everyone. If we could in fact get wealthier by simply borrowing more, then we’d all be rich and up to our eyeballs in promissory notes. It’s a ludicrous notion – yet Washington continues to subscribe to it, egged on by a large segment of the academic community, including a Nobel Prize-winning economist who thinks D.C.’s only misstep is that it hasn’t “stimulated” enough! Have they no shame?
It would appear that no one in a position of power has bothered to take even a passing glance at this chart:
(Click on image to enlarge)
This, as you can see, clearly demonstrates what sane economists call the diminishing marginal productivity of debt. The blue line is simply the relationship between GDP growth and debt growth, expressed in dollars and cents. That is, the left-hand scale shows the amount of growth created by each new dollar of debt.
Despite a few peaks to go along with the valleys, the basic trend line was steady for more than four decades. From the financing of the Vietnam War with deficit spending in the mid-‘60s to the present, each debt dollar has produced a smaller and smaller return. If the trend had continued along the same relatively gentle path, it would have reached the “saturation phase transition” line – i.e., the point at which a new debt dollar will produce nothing – in 2015. But then came the financial crisis and the super-steroidal stimulus of trillions of greenbacks conjured from the ether and – obviously – the productivity of debt didn’t just continue slowly to diminish. It fell off a cliff.
This chart ends in March of 2010, but the past year has brought both QE2 and no positive results. We’re now at the point where a dollar’s worth of new debt yields negative 50 cents in GDP growth. In other words, the “stimulus” is costing us, not benefiting us.
There’s a joke currently making the rounds that has a kid asking LeBron James to change a dollar for him. James hands him seventy-five cents. The kid says, “What’s up with that?” And LeBron replies, “I don’t have a fourth quarter.”
It doesn’t matter if you’re not an NBA fan and you don’t get the joke. The problem is, we are all that kid, and LeBron is being played by his Uncle Sam, who is twice as bad as LeBron. Uncle is asking us to assume a buck of debt and to accept a payback of just 50 cents, along with a note stamped “PAID IN FULL.”
Or, to put it in stark, painful, real world terms, even if you believe the “official” unemployment rate, it’s right where it was two years ago.
The government, as Gary Johnson is trying very hard to tell the American people, cannot print money in order to create jobs. Yet that’s the Keynesian bongo the Bush administration began pounding and which has morphed into a kettle drum under Obama. And if the trillions of debt are having no effect, or worse, then presto, there’s a ready answer why. As the aforementioned Nobel laureate Paul Krugman emphatically states, we shouldn’t have expected much because – and I am not making this up – the stimulus was “way too small.”
Yes, we live in an era in which “trillion” is tossed around pretty casually (here’s what a trillion dollars actually looks like). Still, one has to wonder what level of monetary inflation would change Krugman’s “way too small” to “adequate.” The mind boggles.
Now this isn’t an anti-Krugman rant… well, maybe a little. But I serve him up as one of the widely respected economic geniuses that a president unschooled in basic economics listens to. Krugman, Bernanke, Geithner: There’s a trinity for you. They all believe the same failed theory, and thus so does Obama. No shocker there.
The real shocker would be if our high financial Pooh bahs suddenly reversed course and decided that enough is enough. That opportunity arrives this month, with the lapse of QE2. Big Ben swears that there will be no QE3. Ok, maybe not “swears” – but at least “strongly suggests.”
This from a guy who never met a fire he didn’t think he could put out with just a little more gasoline. I don’t feel ready to take him at his word just yet.
And that, dear reader, is that for this week. Until next week, thank you for reading and for subscribing to a Casey Research service!
Vedran Vuk
Casey Daily Dispatch Editor