The Implications of a European Economic Recovery


Dear Reader,

Vedran Vuk here, filling in for David Galland. Today, I'll discuss the scenario of a European recovery. Would one mean that we're finally out of the woods? I have a couple of other interesting pieces along with the Friday Funnies, so let's get started.


What If Europe Does Recover?

By Vedran Vuk, Senior Analyst

Let's play along with the economic scenario many market participants are predicting: a calmer Europe. If the continent does recover, is it time to put on the party hats and celebrate? Well, not quite. Sure, the pressure on equities would ease up, causing a brief rise in the market. But what then? Are we really out of the woods?

If Europe escapes this mess without a major crisis, those countries won't come back at a screaming pace. Instead, the path to economic recovery will still be a slow crawl. Furthermore, China continues to have problems of its own. What started as talk of a Chinese slowdown is turning into real numbers. Sure, China isn't doing horribly, but it's hardly the hot market of a few years ago. The promise of never-ending growth with minimal risk just isn't materializing. There are also other major players with mixed performances. With commodity prices cooling a bit, Brazil's GDP growth is projected at 3.2% in 2012, a slight improvement from last year's 2.7% growth. However, only a few years ago, predicting double-digit growth rates would have drawn no laughter, based on Brazil's impressive 7.5% growth rate in 2010.

And then there's the US story. The job market is improving at a snail's pace… much like the rest of the world. If the euro crisis ends, it won't mean a burst of growth for the US – but it could mean some additional headwinds. US Treasuries will no longer be shielded by buyers protecting themselves from the worst-case scenario. As soon as the coast is clear, Treasury investors will leave in droves, either flooding back into equity markets or higher-yielding euro countries.

The ball will again be back in Bernanke's court, meaning two things for the US economy. First, US interest rates will feel upward pressure. The Fed will have to pump yet more money into the system to keep them low. And second, the US dollar will tank again. The EUR/USD exchange rate has essentially been a risk-on/risk-off trade for the past six months. At the slightest bad news in Europe, the US dollar gets a little stronger. Then over the next few days, as nothing monumental happens, the euro starts to creep back up. If Europe turns into nothing but roses and sunshine, we'll slide from the current $1.31 EUR/USD to last summer's $1.45 EUR/USD in no time at all.

Remember, the dollar isn't strong. After the Federal Reserve's monetary policy of the last few years, the USD has been ravaged. It has only managed to stay afloat as a result of Europe's underperformance and other problems. If those pressures let up and the Eurozone again shows promise, the dollar is going straight down. Believe it or not, the European Central Bank is still more responsible than the Federal Reserve… and if investors have an equivalently safe option between the two, many will choose Europe.

So, even if you believe the story of parting clouds ahead, don't get too excited; this isn't the end of it. In the best-case scenario, we can stop worrying about Greece and can start worrying instead about a weakening dollar and a sluggish economy. Perhaps that's better than expecting a crash just around the corner, but it's certainly no picnic either.

(Editor's note: Whether or not Europe recovers, investors have plenty to be wary about in the coming months and years. One area where particular caution is warranted is Exchange Traded Funds [ETFs], which can easily lead you to unexpected losses. The full story's right here.)


The GSA, Federal Junkets, and Perspective

By Dustin Siggins, Hot Air contributor

Over the last two weeks, the importance of a $820,000 junket put on by the General Services Administration (GSA) in Las Vegas has dominated the politician and pundit worlds. The spending spree has resulted in an investigation from Congress, the release of several federal employees and recriminations from both parties. Unfortunately, it has also allowed Congress and many pundits to act as though being tough on the GSA is the equivalent of good governance, something that when faced with the facts is laughably false.

Don't misunderstand – the GSA and other federal agencies should be held accountable for this and other unethical abuses of the public's money. As The Heritage Foundation's Morning Bell outlined on April 19, and again on April 23, this is only one of many publicly egregious wastes of taxpayer money in the bureaucracies in D.C. But when it comes down to it, $820,000 is not even a drop in the bucket of fraud/waste/abuse/duplicity. Here are some of the other, more easily ignored abuses:

First off is simple abuse that is acceptable for the well-connected politician but disgraceful and/or illegal for anyone else – small change, but ultimately emblematic of the systemic corruption in the federal government. Case in point is how former Representative Anthony Weiner (D-NY) gets a pension and other benefits for the rest of his life, despite resigning in disgrace. President Obama, following in the footsteps of his predecessors, is almost certainly using taxpayer dollars for campaign trips – illegal, but obviously acceptable under both parties. Senator David Vitter (R-LA) was busted for solicitation, but never spent time in jail. He will get a pension and other monetary benefits, same as Weiner.

Antithetical to many conservatives is looking hard at unproductive defense spending. However, the Defense Department is rife with abuse. For example, last October a report by Senator Bernie Sanders (I-VT) outlined how major defense contractors who paid civil fines or settled for amounts of $1 million or greater still received over $500 billion in contracts in the last 10 years. Another report, this one from The Commission Wartime Contracting [sic], estimated that between $31 billion and $60 billion had been lost to poor oversight and/or fraud in Iraq and Afghanistan during our time in those nations.

Outside of fraud, simple inefficiencies abound in the Defense Department. This Forbes piece notes that approximately $100 billion had been spent on weapons programs that were either never used or eventually canceled – all after significant investments. In an informal conversation with a friend who is a military auditor, I was told that a number of contractors take a contract and take a percentage off the top. They then subcontract to another company, which takes a percentage off the top. This subcontractor then subcontracts to another company, and takes a percentage off the top. Finally, several levels down, the contract actually gets fulfilled.

(Please read the full article in Hot Air's Green Room.)


Nine Ways Political Writers Miss the Mark

By Vedran Vuk

When I first started writing about finance and politics, my blood would boil from reading some of the arguments other writers made. But now, not much in the way of poorly constructed articles surprises me anymore. One must either adapt or suffer an early stroke.

However, there are a number of commonly used writing tricks and fallacies that continue to get me riled up. They are subtle ways in which the writer attempts to disguise reality to support his point or are oversimplifications of the issues that make no sense upon closer examination and only serve to misguide the reader. Everyone from the hardcore libertarian to the downright Marxist and everyone in between has used at least one of the techniques listed below:

1. One-Dimensional Characters. People are complex. They want all sorts of things: money, power, love, attention, respect, etc. Anyone's career and life motivations are comprised of an intricate web of factors. Yet in the world of political writing, there are apparently only two motivations: greed and altruism. Any issue where a side has money to gain is explained by greed, and every action which doesn't seem to involve money is explained by pure altruism.

If a billionaire wants fewer and/or lower taxes, he is immediately labeled a "greedy aristocrat." If another billionaire wants higher taxes and universal health care, he is praised for his selflessness. In reality, the first billionaire is probably hardly greedy and the second is hardly altruistic. Why should someone with a billion dollars be concerned with any tax rate? Even if the marginal rate goes to 95%, his life will not change much. In many ways, the guy earning $150K per year has a lot more to fear from higher taxes than the billionaire.

But what of the supposed altruist? He has much to gain from his political position. Yes, people are motivated by money, but also by a desire for attention, power, and/or respect. The limelight and political power are just as intoxicating as piles of money. And those who value them are getting exactly what they want with these "altruistic" positions. Framing any argument only in the context of greed for money distorts the complex motivations of most people.

2. The Single Source. The title of these pieces will often go something like this: New Study Shows Minimum Wage Has No Effect on Unemployment. From there, the article will relay how this new paper's statistical analysis disproves flaws in the law and how policy makers should react. Of course, the article also ignores a few hundred other papers with the opposite conclusion. In some cases, this sort of article is okay, but in areas where the research to the contrary is extensive and the topic is hotly debated in academia, a single source is not adequate evidence to proclaim a "slam dunk" for your argument.

3. Speeches as Policy. Let's start with an example. In a campaign speech, Obama boldly speaks out against the wars. Hence, a journalist concludes that Obama has an anti-war foreign-policy stance. The problem is simple: words are not actions, but political writers are somehow allowed to sidestep this very obvious point. Both sides of the aisle manipulate this on the same issue sometimes. There are Democrats who support Obama because of his speeches on the wars in the Middle East, while neoconservatives attack him for the same words. Yet his actual foreign policy should appeal to the neoconservatives and should disgust the Democrats. There's a difference between policy analysis and speech analysis. Many journalists apparently still have not figured that out.

4. Unnecessary Side Comments. Oftentimes, a writer will throw in an extra, unnecessary phrase in an otherwise objective piece to nudge a reader toward a particular view. For example: "Mitt Romney received 60% of the votes, Santorum 20%, New Gingrich 10%, and Ron Paul, with little chance of winning, 8%." The writer isn't saying something untruthful, but the Ron Paul aside isn't necessary. From the vote count, readers can infer the low chance of Ron Paul winning. Nonetheless, the writer adds an extra nudge to the reader which provides no beneficial value. This is a tactic of the writer to slyly insert an opinion while maintaining a veneer of objectivity. To a casual reader, this may not seem like a big deal, but as a writer who rereads and considers each sentence several times prior to publishing, I know that such jabs and unnecessary side comments are hardly circumstantial – or trivial.

5. Foreign-Policy Expertise. In foreign-policy pieces, a writer will often accuse someone of a weak or naïve foreign policy. But how does one prove that one is good or not at foreign policy? A fund manager earns returns, Kobe Bryant scores points, a businessman makes sales, and a construction worker builds houses. All of these professionals can show their expertise through results. But how do we know that an "expert" such as Karl Rove is really any good at foreign policy? Certainly, he has many opinions on the subject, and others often agree with him. But where are his results?

Foreign policy isn't physics, business, or engineering with observable answers. There isn't a clear right or wrong way of doing something. It all comes down to subjective opinions, so in many ways it's dumb to say, "Karl Rove has a strong foreign policy, while Obama is weak." In such a subjective field, it's impossible to prove one's opinion is really any more valuable than the next person's opinion. Calling someone's foreign policy views "weak" is a completely vacuous statement. We're not talking about the strength of a bridge, but only an opinion, and opinions can't really be weak or strong in that sense.

6. Good Intentions. Everyone has heard this a million times: "The other side has good intentions; they're just misguided." Journalists are always encouraged to find some middle ground. Hence, this approach makes the article sound more objective. And yes, they're correct to an extent – almost everyone does have good intentions.

However, if someone presents me with mountains of evidence against my point of view, yet I continue to hold my position, am I really that well intentioned? Pride and unwillingness to admit being wrong have superseded good intentions at that point. If good intentions are such prime motivators, why is there so much partisanship in Congress? Political-party pressures and one's own pride will sweep good intentions under the rug any day of the week, even when the other side is clearly right. Yet – so that journalists can maintain an objective tone to their articles – we are to imagine Congressmen as altruists battling over the best solutions to the country's many problems.

What about realizing that people are petty? Anyone who has ever had a political argument via blog or email knows this. Many people are unwilling to change their minds no matter the evidence or the argument. They just don't want to admit being wrong. It's a hard pill to swallow, but your Congressman is no more open-minded than a disgruntled blogger.

7. Good Guys Versus Bad Guys. It's almost never a story of the good guys versus the bad guys in the political realm. A story along the lines of the good union versus the evil corporation or vice versa is likely the lowest form of journalism out there. Good versus evil may be a good theme in Lord of the Rings, where heroes battle orcs. But in the real world, such a strong delineation is rarely seen.

8. Using a Story Instead of Facts. In these cases, the article starts with a story. Usually it will be an example of the most destitute person possible. For example: "Betty Jean has seven kids, and she works four jobs. She got fired last week, and she's also mentally handicapped. How is she supposed to pay for [insert your favorite activist cause – school lunches, health care, medicine, car, gasoline, rent, whatever]?" The article doesn't ever say how many people are in her situation, nor how big  the problem might be. Instead, we're supposed to form national policy prescriptions based on a single, worst-case-scenario story, which usually also leaves half of the facts out.

9. Events Explained Through Personal Values and Characteristics. It seems the media must explain everything through personal values. Take for example the latest financial crisis. Greed is always blamed as the cause. Success stories are explained in the same fashion. Economic growth in Asia is often explained by the thriftiness of the culture. It certainly helps, but there are plenty of countries around the world with very thrifty cultures that aren't doing so well economically. A change in policy toward free-enterprise and greater business freedom is what has really propelled places such as China and Singapore. I can guarantee that North Koreans are no less thrifty than their South-Korean counterparts.

The same goes with the financial crisis. Maybe, just maybe, the policies of the Federal Reserve lead to boom-and-bust cycles instead of explosions of greed. The markets don't move because we're good or bad people. Are we really to believe that everyone was less greedy in the '90s, so things were better? Even if this were true, it would be impossible to prove that greed was worse now than in 1995 or 1950, or while we're at it, 2000 B.C. Maybe I'm wrong; perhaps people back then didn't like money, power, fame, or respect.

Is it unnecessarily harsh to complain about these tactics? I don't think I'm asking too much. Simply tell the story as it is without trying to guide the reader through it. If your points are accurate, readers are naturally drawn to the conclusion. Most important, represent politicians for what they really are – people just like us instead – of virtuous altruists deciding on the world's direction.


Friday Funnies

A toothpaste factory had a problem: it sometimes shipped empty boxes without the tube inside. This was due to the way the production line was set up, and people with experience in designing production lines will tell you how difficult it is to have everything happen with timings so precise that every single unit coming out of it is perfect 100% of the time. Small variations in the environment (which can't be controlled in a cost-effective fashion) mean you must have quality-assurance checks smartly distributed across the line so that customers all the way down to the supermarket don't get pissed off and buy another product instead.

Understanding how important that was, the CEO of the toothpaste factory got the top people in the company together, and they decided to start a new project in which they would hire an external engineering company to solve their empty boxes problem, as the engineering department was already too stretched to take on any extra effort.

The project followed the usual process: budget and project sponsor allocated, RFP, third parties selected, and six months (and $8 million) later it had a fantastic solution – on time, on budget, high quality, and everyone in the project had a great time.

They solved the problem by using high-tech precision scales that would sound a bell and flash lights whenever a toothpaste box weighed less than it should. The line would stop; someone would walk over and yank the defective box off of it and press another button when done to re-start the line.

A while later, the CEO decides to have a look at the Return On Investment of the project: amazing results! No empty boxes ever shipped out of the factory after the scales were put in place. Very few customer complaints, and they were gaining market share. "That's some money well spent!" he said, before looking closely at the other statistics in the report.

It turned out that the number of defects picked up by the scales was zero after three weeks of production use. It should have picked up at least a dozen a day, so maybe there was something wrong with the report. He requested an inquiry, and after some investigation, the engineers came back saying the report was actually correct. The scales really weren't picking up any defects, because all boxes that got to that point in the conveyor belt were good.

Puzzled, the CEO traveled down to the factory and walked up to the part of the line where the precision scales were installed.

A few feet before the scale was a cheap desk fan, blowing the empty boxes out of the belt and into a bin.

"Oh, that," says one of the workers, "One of the guys put it there 'cause he was tired of walking over every time the bell rang."

That's it for today. David will probably be out again next Friday, so I'll see you again soon.

Vedran Vuk
Casey Senior Analyst

Apr 27, 2012