Monday, June 29, 2009

Court Rules for White Firefighters in Discrimination Case

The Supreme Court ruled Monday that white firefighters in New Haven, Conn., were unfairly denied promotions because of their race, reversing a decision that high court nominee Sonia Sotomayor endorsed as an appeals court judge.

New Haven was wrong to scrap a promotion exam because no African-Americans and only two Hispanic firefighters were likely to be made lieutenants or captains based on the results, the court said Monday in a 5-4 decision. The city said that it had acted to avoid a lawsuit from minorities.

The ruling could alter employment practices nationwide, potentially limiting the circumstances in which employers can be held liable for decisions when there is no evidence of intentional discrimination against minorities.

"Fear of litigation alone cannot justify an employer's reliance on race to the detriment of individuals who passed the examinations and qualified for promotions," Justice Anthony Kennedy said in his opinion for the court. He was joined by Chief Justice John Roberts and Justices Samuel Alito, Antonin Scalia and Clarence Thomas.

In dissent, Justice Ruth Bader Ginsburg said the white firefighters "understandably attract this court's sympathy. But they had no vested right to promotion. Nor have other persons received promotions in preference to them."

Justices Stephen Breyer, David Souter and John Paul Stevens signed onto Ginsburg's dissent, which she read aloud in court Monday.

Kennedy's opinion made only passing reference to the work of Sotomayor and the other two judges on the 2nd U.S. Circuit Court of Appeals who upheld a lower court ruling in favor of New Haven.

But the appellate judges have been criticized for producing a cursory opinion that failed to deal with "indisputably complex and far from well-settled" questions, in the words of another appeals court judge, Sotomayor mentor Jose Cabranes.

"This perfunctory disposition rests uneasily with the weighty issues presented by this appeal," Cabranes said, in a dissent from the full 2nd Circuit's decision not to hear the case.

Sunday, June 28, 2009

Pelosi Pushes Through Cap-and-Trade Bill in the House by Four Votes...

By this point, you have already read everything about the horrible Cap-and-Trade bill that passed the House of Representatives 219-211. With just four votes swinging the other direction, this middle-class tax bill could have been avoided.

The great Mike Pence of Indiana provided the following speech from the floor of the U.S. House of Representatives shortly before the vote on climate change legislation:

“It's hard to know where to start. I got to think, Madame Speaker, a lot of people looking in on this debate, hearing about copies filed and esoteric process really don't care very much about all that, because this economy is hurting. American families are struggling under the weight of the worst recession in a generation. Families in my district are losing their jobs. Small businesses and family farms are struggling. And all they've seen out of Washington, D.C., so far is a gusher of runaway federal spending, deficits and debt and bailouts. They didn't think it could get worse.

“But here we go. In the midst of the worst recession in a generation, this Administration and this majority in Congress are prepared to pass a national energy tax that will raise the cost of energy on every American family. Now, my colleague sporting the green lapel button, who I greatly respect, said that there is a lot of dispute about how much the average American household will pay if this national energy tax becomes law and that's true. There are estimates ranging from a few hundred dollars a year to the Heritage Foundation's over $4,000 a year.

“The estimate I prefer was from candidate Barack Obama who said in January of 2008 to the San Francisco Chronicle and I shall quote with the deepest respect, ‘Under my plan of cap and trade system, electricity rates would necessarily skyrocket.’ That will cost money. ‘They,’ referring to the utility companies. ‘They will pass that money onto consumers.’ “Now I know earlier this week the President of the United States said that polluters are going to pay the cost of this national energy tax. That's not what he said last year.

“Now, I don't know how y'all define skyrocket. When the President said electricity rates would necessarily skyrocket under my cap and trade plan, but I’d be prepared to defer to you. I define skyrocket as a prescription for economic decline. There may be a dispute of the numbers of how much I’ll be paying in my electrical bill or how much the cost of goods and services are going to go up, but there's no dispute that this cap and trade legislation will cost millions of American jobs.

“Raising the cost of energy is a bad idea in prosperous times. Raising a national energy tax in the worst recession in a generation is a profoundly bad idea. But for anyone looking in, let me say we are in the minority as we have been reminded with some firmness in this debate on occasion today.

“We don't have the votes to stop this bill. But you do. If you oppose the national energy tax, call your congressman right now. If you think we can do better to serve the interests of the American people and achieve energy independence with an all of the above strategy, call your congressman right now. Alexander Hamilton said it best: ‘Here, sir, the people govern.’ We can stop this bill. We can do better, and so we must.”

Thursday, June 18, 2009

Critics Attack ABC News for Refusing to Air Opposing Ads During Obama's Health Care Special

Opponents of President Obama's proposed health care reform are blasting ABC News for refusing to air opposing ads during a prime time special next Wednesday, just as a new study finds ABC News coverage of the president's health care plan is favorable by a ratio of 3 to 1.

The prime time special -- called "Questions for the President: Prescription for America" -- will be a nationally televised event during which Obama will answer questions presented by audience members selected by ABC News. The network has refused to accept advocacy ads during the hourlong show.

Republican National Committee Chairman Michael Steele accused ABC News and anchor Charles Gibson of making Obama's case for "nationalized" health care "without any opportunity for opposing views to be aired.

In a fundraising e-mail aimed at raising nearly $100,000 to buy air time for a counterprogram, Steele said the RNC's request to add its views to the debate during the special was "flatly rejected" by ABC News.

"What are the Democrats and their media allies afraid of? The truth?" he asked in a fundraising letter to supporters. "That is outrageous! And we will not take it!"

But ABC News spokesman Jeffrey Schneider told that it has been a "longstanding" policy not to accept "advocacy" ads.

Schneider explained that the policy was established decades ago and only local ABC affiliates air issue ads.

"Local stations have different standards," he said, adding that ABC News refused to air Obama's infomercial the week before the presidential election in November because it did not meet the station's standards.

Since the president's inauguration in January, ABC's "World News" and "Good Morning America" have aired stories that feature Obama or supporters of his health care plan 55 times compared to 18 appearances by critics of his plan, according to a Business & Media Institute (BMI) analysis released Wednesday.

Schneider said during Wednesday's broadcast a roomful of people will present a broad range of opinions on health care and be able to ask the president questions. Viewers will also be able to submit questions via

"We're going to be producing a fair and open and honest debate about health care, which is vitally important to the country" he said. "The point of the debate is to hear from all sides."

Rick Scott, chairman of Conservatives for Patients Rights, is pushing ABC News to reconsider its ban on issue ads.

"It is unfortunate -- and unusual -- that ABC is refusing to accept paid advertising that would present an alternative viewpoint for the White House health care program," he said in a statement, noting estimates that potential legislation costs at least $1 trillion of taxpayer money.

"The American people deserve a healthy, robust debate on this issue and ABC's decision -- as of now -- to exclude even paid advertisements that present an alternative view does a disservice to the public."

Some conservative bloggers are calling for people to boycott advertisers on ABC.

"All Americans who are opposed to a major media arm becoming a visible branch of the presidential political machine" should use the marketplace to voice their objection, one blogger wrote.

Tuesday, June 16, 2009

Think the Housing Problem is Over?

Think again!

Take a look at this report from Fitch, the ratings agency....

Fitch, in a downgrade of yet another 543 mortgage-backed securities of 2005-07 vintage, gives us the following side notes: "The home price declines to date have resulted in negative equity for approximately 50% of the remaining performing borrowers in the 2005-2007 vintages. In addition to continued home price deterioration, unemployment has risen significantly since the third quarter of last year, particularly in California where the unemployment rate has jumped from 7.8% to 11%... The projected losses also reflect an assumption that from the first quarter of 2009, home prices will fall an additional 12.5% nationally and 36% in California, with home prices not exhibiting stability until the second half of 2010. To date, national home prices have declined by 27%. Fitch Rating's revised peak-to-trough expectation is for prices to decline by 36% from the peak price achieved in mid-2006. The additional 9% decline represents a 12.5% decline from today's levels."

Friday, June 12, 2009

Staying Rich in the New Normal

Bill Gross, PIMCO Managing Director and one of the planet's top gurus on bonds prepared this outstanding article for his clients:

“Behind every great fortune lies a great crime.” Balzac

Balzac was on to something 200 years ago, but to be fair to modern day multi-millionaires, the only real way to accumulate wealth prior to the 18th century was to steal it, or tax it, I suppose, as was the case with kings and their royal courts. It was only with the advent of capitalism and annual productivity gains that entrepreneurs, investors, and risk-takers with luck or pinpoint-timing could jump to the head of the pack and accumulate what came to be recognized as a fortune. Still, the negative connotations persist. I remember a cocktail party in the early 80s where a somewhat inebriated guest engaged me in a debate about the merits of capitalism. “You’re filthy rich,” he said, which struck me as most unfair from a number of angles. First of all, he hadn’t seen anything yet, I thought, and second, I wasn’t quite sure where the “filthy” came from. Resentment that he’d missed out on my presumed good deal, I suppose, and in the process using a hackneyed phrase that was bitter and biting, yet had some context of historical sociological relativity. Still, he might have been on to something there – not about me, hopefully, because I’ve always felt that while PIMCO has prospered, it’s only because its clients have benefitted even more so – but about the developing sense of one-sided, perhaps off-sided wealth generation that was to dominate the next several decades. Granted, we had Bill Gates and Steve Jobs and other true capitalistic dynamos who benefitted society immeasurably. But growing percentages of fortunes were being made by those who could borrow or aggregate other people’s money. Because our economy was still in a relatively early stage of leveraging, those who borrowed money and used it to invest in higher-risk yet higher-return financial or real assets didn’t require a lot of skill, they just needed to be able to convince a bank or an insurance company to lend them some money. After that, the secular wave of leverage would be enough to multiply their meager equity many times over and carry them to a beach where a fortune awaited them much like a pirate’s buried treasure.

I remember as a child my parents telling me, perhaps resentfully, that only a doctor, airline pilot, or a car dealer could afford to join a country club. My how things have changed. Now, as I write this overlooking the 16th hole on the Vintage Club near Palm Springs, the only golfers who shank seven irons into the lake are real estate developers, investment bankers, or heads of investment management companies. The rich are different, not only in the manner intoned by F. Scott Fitzgerald, but also in who they are and what they do for a living. Whether some or all of them are filthy is a judgment for society and history to make. Of one thing you can be sure however: over the next several decades, the ability to make a fortune by using other people’s money will be a lot harder. Deleveraging, reregulation, increased taxation, and compensation limits will allow only the most skillful – or the shadiest – into the Balzac or Forbes 400.

Readers who are interested in such things as the Forbes annual list of hoity-toities will have noticed that more and more of them are global, not U.S. citizens. The U.S., in other words, is not producing as much wealth in proportion to the rest of the world. Its fortune-producing capabilities seem to be declining, which might suggest that its relative standard of living is doing so as well. If so, the implications are serious, not just for Donald Trump but for wage earners and ordinary citizens, as reflected in their income levels and unemployment rates. Stockholders, 401(k) investors, and yes, bond managers will be affected too. Last week’s furor over the possibility of an eventual downgrade of America’s AAA rating demonstrates that only too clearly. On the night of May 20, Standard & Poor’s announced a downgrade watch for the United Kingdom and since the U.S. and U.K. are Siamese-connected, financially-levered twins, the implications were obvious: the U.S. might be next. In the space of 48 hours, the dollar declined 2%, and U.S. stocks and long-term bonds were down by similar amounts. Such a trifecta rarely occurs but in retrospect it all made sense: a downgrade would cast a negative light on the world’s reserve currency, and since stocks and bonds are only present values of a forward stream of dollar-denominated receipts, they went down as well.

The potential downgrade, while still far off in the future in PIMCO’s opinion, seemed dubious at first blush. While country ratings factor in numerous subjective qualifications such as contract rights, military might, and advanced secondary education, the primary focus has always been on the objective measurement of debt levels, in this case sovereign debt, as a percentage of GDP. Yet, as shown in Table 1, both the U.S. and the U.K. entered the Great Recession with attractive ratios compared to such grievous offenders (and AA rated) as Japan.

Yet as the markets recognized rather abruptly last week, both countries seem to be closing the gap in record time. To zero in on the U.S. of A., its annual deficit of nearly $1.5 trillion is 10% of GDP alone, a number never approached since the 1930s Depression. While policymakers, including the President and Treasury Secretary Geithner, assure voters and financial markets alike that such a path is unsustainable and that a return to fiscal conservatism is just around the recovery’s corner, it is hard to comprehend exactly how that more balanced rabbit can be pulled out of Washington’s hat. Private sector deleveraging, reregulation and reduced consumption all argue for a real growth rate in the U.S. that requires a government checkbook for years to come just to keep its head above the 1% required to stabilize unemployment. Five more years of those 10% of GDP deficits will quickly raise America’s debt to GDP level to over 100%, a level that the rating services – and more importantly the markets – recognize as a point of no return. At 100% debt to GDP, the interest on the debt might amount to 5% or 6% of annual output alone, and it quickly compounds as the interest upon interest becomes as heavy as those “sixteen tons” in Tennessee Ernie Ford’s famous song of a West Virginia coal miner. “You load sixteen tons and whattaya get? Another day older and deeper in debt.” Pretty soon you need 17, 18, 19 tons just to stay even and that describes the potential fate of the United States as the deficits string out into the Obama and other future Administrations. The fact is that supply-side economics was a partial con job from the get-go. Granted, from the 80% marginal tax rate that existed in the U.S. and the U.K. into the late 60s and 70s, lower taxes do incentivize productive investment and entrepreneurial risk-taking. But below 40% or so, it just pads the pockets of the rich and destabilizes the country’s financial balance sheet. Bill Clinton’s magical surpluses were really due to ephemeral taxes on leverage-based capital gains that in turn were due to the secular decline of inflation and interest rates that at some point had to bottom. We are reaping the consequences of that long period of overconsumption and undersavings encouraged by the belief that lower and lower taxes would cure all.

The current annual deficit of $1.5 trillion does not even address the “pig in the python,” baby boomer, demographic squeeze on resources that looms straight ahead. Private think tanks such as The Blackstone Group and even studies by government agencies, such as the Congressional Budget Office, promise that Federal spending for Social Security, Medicare, and Medicaid will collectively increase by 6% of GDP over the next 20 years, leading to even larger deficits unless taxes are increased proportionately. Collectively these three programs represent an approximate $40 trillion liability that will have to be paid. If not, you can add that present value figure to the current $10 trillion deficit and reach a 300% of GDP figure – a number that resembles Latin American economies such as Argentina and Brazil over the past century.

So the rather conservative U.S. government debt ratio shown in Table 1 will likely be anything but in less than a decade’s time. The immediate question is who is going to buy all of this debt? Estimates suggest gross Treasury issuance of up to $3 trillion this calendar year and net offerings close to $2 trillion – almost four times last year’s supply. Prior to 2009, it was enough to count on the recycling of the U.S. trade/current account deficit to fund Treasury borrowing requirements. Now, however, with that amount approximating only $500 billion, it is obvious that the Chinese and other surplus nations cannot fund the deficit even if they were fully on board – which they are not. Someone else has got to write checks for up to $1.5 trillion additional Treasury notes and bonds. Well, you’ve got the banks and even individual investors to sponge up some of the excess, but a huge, difficult to estimate marginal supply will have to be bought. The concern is that this can be accomplished in only two ways – both of which have serious consequences for U.S. and global financial markets. The first and most recent development is the steepening of the U.S. Treasury yield curve and the rise of intermediate and long-term bond yields. While the Treasury can easily afford the higher interest expense in the short term, the pressure it puts on mortgage and corporate rates represents a serious threat to the fragile “greenshoots” recovery now underway. Secondly, the buyer of last resort in recent months has become the Federal Reserve, with its publically announced and near daily purchases of Treasuries and Agencies at a $400 billion annual rate. That in combination with a buy ticket for over $1 trillion of Agency mortgages has been the primary reason why capital markets – both corporate bonds and stocks – are behaving so well. But the Fed must tread carefully here. These purchases result in an expansion of the Fed’s balance sheet, which ultimately could have inflationary implications. In turn, nervous holders of dollar obligations are beginning to look for diversification in other currencies, selling Treasury bonds in the process.

The obvious solution to both dollar weakness and higher yields is to move quickly towards a more balanced budget once a sustained recovery is assured, but don’t count on the former or the latter. It is probable that trillion-dollar deficits are here to stay because any recovery is likely to reflect “new normal” GDP growth rates of 1%-2% not 3%+ as we used to have. Staying rich in this future world will require strategies that reflect this altered vision of global economic growth and delevered financial markets. Bond investors should therefore confine maturities to the front end of yield curves where continuing low yields and downside price protection is more probable. Holders of dollars should diversify their own baskets before central banks and sovereign wealth funds ultimately do the same. All investors should expect considerably lower rates of return than what they grew accustomed to only a few years ago. Staying rich in the “new normal” may not require investors to resemble Balzac as much as Will Rogers, who opined in the early 30s that he wasn’t as much concerned about the return on his money as the return of his money.

Thursday, June 11, 2009

Polls find more Americans call themselves 'pro-life' than 'pro-choice'

Less than four months into President Barack Obama's term, opinion polls are finding that Americans are taking a dramatic turn toward greater opposition to abortion. A poll conducted May 7-10 as part of the annual Gallup Values and Beliefs survey found that a majority of Americans (51 percent) described themselves as "pro-life" with respect to the abortion issue, while only 42 percent said they were "pro-choice." The results were made public May 15. It marked the first time since Gallup began asking the question in 1995 that more respondents said they were pro-life than pro-choice, and was a shift of 7-8 percentage points from a year earlier, when 50 percent said they were pro-choice and 44 percent said they were pro-life. Obama is a strong supporter of keeping abortion legal. Some groups that promote abortion have said his November 2008 election was a mandate to expand access to and federal funding of abortion. A separate Gallup Poll Daily survey conducted May 12-13 found that 50 percent of Americans described themselves as pro-life and 43 percent as pro-choice.

Saturday, June 6, 2009

Commemorating D-Day...

25 years ago today (June 6, 1984), President Reagan gave one of his most important and historic speeches at Pointe Du Hoc honoring those who fought and those who died on D-Day...

Tuesday, June 2, 2009

"Why Your World Is About to Get a Whole Lot Smaller"

Very interesting new book is out by Jeff Rubin, a former Canadian economist, entitled, ""Why Your World Is About to Get a Whole Lot Smaller". Mr. Rubin has released a short video on his new book. Looks like a great book and a must read...

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