Vigilant Investor

“And you can kiss it Goodbye!”
— Former Pittsburgh Pirates broadcaster, Bob Prince

The legendary Bob Prince would utter that call, as Pittsburgh Pirates hitters of a bygone era would knock ‘em out of the ballpark. Today, you can say the same thing about your U.S. Dollar.

After the drubbing the markets took at the end of last week – things seem unlikely to get better. To be honest – odds are they will get a lot worse. The well-established housing slump continues its nosedive. Job losses seem poised to mount. President Bush has directed the FHA to guarantee loans for delinquent borrowers (a massive bailout). Foreign ownership of U.S. government debt is dropping. Nobody knows what time bombs tick regarding mortgage-backed securities, as massive amounts of adjustable mortgages begin to reset.

And — what we have long warned about – is in no uncertain terms, coming to pass. The Dollar is getting crushed.

The Fed – along with U.S. policymakers are stuck between a rock and a hard place. The lowering of interest rates to re-stimulate the credit based American economy would certainly have an inflationary effect. A bailout of mortgage borrowers & lenders (via money printing) would also. Not only would a further acceleration in price increases be the result of such policies – so would the continued degradation of the value of American savings. Even more disconcerting is the potential that foreign lending to debt addicted America would continue to dry up at an extremely quick pace. (Why get paid back down the road with far more worthless Dollars)? Like all bad creditors – the U.S. may soon be required to pay a higher cost (interest rates) to continue borrowing. And that is never good for the bottom line.

So – will U.S. policy makers swallow the necessary bitter medicine? Will they let more hedge funds sink? Will they not bail out Wall Street. Will they let homeowners who got themselves into ridiculous, unrealistic mortgages either tighten their belts and cut spending in other areas – or become renters again? Will they let home values sink to more realistic levels? Will they watch the cleansing effects of a recession (caused by the artificial bubbles they created) take its course? Will they let the Dollar fundamentally strengthen?

Or will they try to take the easy, short-term solution way out – by greasing the wheels via the easing of credit and printing of money?

We predict the latter. But they are running out of rope.

Kiss that Dollar Goodbye!

In the last five years, municipalities that tax real estate values have experienced a boon in tax receipts. That’s because in many cases, when a property is sold at a higher value, the assessed value tracks upward to the sale value. With growth in property values in markets nationally far exceeding the pace of inflation, municipalities have found it far easier to meet their obligations.

But that might be about to change. Now that property values are starting to drop, municipalities may be faced with the dilemma of home owners challenging their old assessed values causing a decline in heady tax receipts.

Continue Reading »

We’ve talked a bit about Airlines and USAirways lock on the Pittsburgh in the past.

As a follow up, it was interesting to learn via an article originally published in the WSJ that Pittsburgh fares are dramatically lower (business fares by 19.1%) thanks to the end of the USAirways Pittsburgh Hub. As such, travel is up dramatically as new and discount airlines, like Southwest, took over the gates once held in the grip of USAirways. So, the Airport is bustling with activity, and the dire predictions of the end of the world — and the airports AirMall — were all gloom and doom predictions gone wrong.

We all ought to get a bit sicker when we start to think about how many tens of millions of dollars of taxpayer money and breaks were sunk into keeping USAirways in the region over the last few decades.

So, weep not for USAirways. Weep for the region that suffered along with it.

Here is a fine critique of the minimum wage from The Filter to add to some of our previous comments on the subject.

In Pennsylvania, the city of Pittsburgh and its Allegheny are always flirting with a “living wage”, as is PA Governor Rendell, who argues we must remain wage competitive with neighboring states. Meanwhile, Continue Reading »

Post World War II, few industrialized nations had the infrastructure remaining to fill the demand for rebuilding from the devastation. So for a twenty year period it was as if the sun was shining on American manufacturing, and the Steel Industry — which was already feeling pressure from abroad prior to the great depression — was granted a reprieve from more efficient competition for a few more decades.

Eventually, though, the six week vacations and overzealous salaries and benefits that were agreed to by management and demanded by unions, as well as the shoddy workmanship that was tolerated by both and coddled by protectionist federal laws, caught up with U.S. industry. Thus began the decline of U.S. manufacturing, witnessed first hand here in Pittsburgh in the Steel industry during the 1970s and early 1980s. The town still remains in somewhat of a soft depression, further exacerbated by New Deal development type thinking by regional governments that don’t want to admit that the old “third-way” model failed.

But I digress… On a national level, while the inefficiencies and immediate gratification thinking of both organized labor and large industry management are less common today, their legacy is still very much alive.

CFO.com has a thorough article detailing the benefits portion that is now crippling major U.S. business interests and the union membership that serves it, while many of those who created the problem are long retired if not already dead.

What will always be missed in this discussion is that this situation is caused by a sickness in America which largely revolves around having the future today, at the expense of those paying for it today, and those left with the debts in the future. This is accomplished by legislation that allows it to happen when the free market would not otherwise tolerate it, and the culpability extends far beyond the easy scapegoat of big business management and labor, although they do share their portion of the blame.

Among the problems are:

• The inflationary policy of the U.S. has vented a tremendous amount of wealth into foreign nations. Thank 75 years of Congress and The Fed for that.
• Minimum wages forced business to seek alternatives to U.S. labor at all levels when many wage scales are tied to the number. This includes investment in advanced machinery or foreign labor.
• Excessive and complex taxation is a cost added to every good produced in the U.S. Costs must come down elsewhere for U.S. businesses to remain competitive
• Overzealous environmentalism: The economy can only absorb so much before it slows and stalls when other nations are not hindered by similar rules. (I’d like to be able to drink water from every stream, but to accomplish this today would bankrupt the nation to a point where we can’t even afford 1/10 of the environmental protections we have.)
• Overzealous reliance on regulation, which increases the costs to businesses who then seek means of lowering costs to avoid passing the expense on to consumers. Foreign options come in to play.
• Legal environment is out of control.

There are also some who would demand protectionism, but let’s not forget that trade barriers come at the expense of the consumer, and these fundamentally gloss over the core problems that are strangling this once free nation and its economy. The venting we see today merely exposes this for what it is.

Our problems, however, will not resolve overnight and will affect the way investors need to look at the entire economy, as well as various asset classes in the years to come.

Pittsburgh Brewing has been struggling since the demise of the steel mills for a variety of reasons. Revived again and again with public support, this time it appears the brewery needs to fish or cut bait. That means dumping the pension program that requires massive contributions relative to cash flow. If you’ve been a regular reader or attended our most recent economics forum, you know this is a trend going on around the country, and is a taxpayer liability that could make the savings and loan bailout of the 1980s seem tiny by comparison.

I thought this local article was a good read because, while it fails to address the extra burdens the heavy pro labor mentality Pittsburgh places on its employers, it summarizes for the PBGC (the regulatory body of pension) a few items of regulatory cost that are contributing to this predicament. The boiler that fails the environmental inspection for emissions is just such an item. Note also the mandatory taxes for unemployment insurance. Of course, Continue Reading »

Here’s a follow up on the airline inefficiency discussion from a few weeks ago regarding the old guard collusion between American Airlines, Dallas and a few in Congress vs. Southwest Airlines and consumers in general. [Airport Authority tries to get Dallas service off ground - PittsburghLIVE.com] Kudos to the Pittsburgh airport authority for pushing consumer friendly practices… although for years they aided and abetted locally based USAirways. (Those are the inefficiencies that hinder the US economy badly.)

Politicians never mind a little tax-windfall flowing through the back door; Its more pleasant than trying to convince citizens that they should stick their kids and grandkids with the bill by running up even more debt when taxpayers say ‘no mas’ through the front door. (Although, it seems the AARP these days manages to find many retirees willing to help them vote through that argument!)

Hence, its no coincidence that politicians don’t seem to mind inflation — or, for that matter, dramatic price run-ups that lead to bubbles. Continue Reading »

Perhaps with the City as a Shining Beacon of Fiscal Irresponsibility, those living in Pittsburgh have a great example of what not to do with personal finances. Pittsburgh citizens are ranked among the most financially responsible in the country. If only they’d vote that way!

In Pittsburgh, the way was finally cleared for Southwest Airlines to enter the marketplace after USAirways could no longer afford to keep quasi sweetheart monopoly over the Pittsburgh International Airport. People often blame competition for the airline industry’s woes, but if anything has caused it, it was post deregulation protectionism supported by politicians at all levels. The Wall Street Journal covers just such an example in the Dallas Fort Worth area where American Airlines gets special treatment at the expense of consumers and Southwest Airlines. Don’t forget, every extra dollar spent to fly on American is one dollar less left over to spend on something else bought from a different local business.

It was interesting to see the Post Gazette digging into this issue.

I think the layman understands that politics can affect economies, especially in the Pittsburgh region. Of course, Pittsburghers are not alone in expecting too much magic from government solutions — after all, government is the instrument of politically connected for better, or, too often, worse. Continue Reading »

Taxing million dollar athletes to help pay for abusing local taxpayers with the burdens of building their stadiums is not such a bad idea. After all, what businessperson couldn’t afford to pay himself and his employees a great deal more if someone subsidized a large chunk of his overhead? (Athlete taxes Grow Popular: CNNMoney)

But if such plans become the norm, it should not distract from the cold hard fact that all taxpayers bear the big hit for such corporate welfare. Moreover, throwing good money after bad into the government trough doesn’t seem all that great a deal since politicians can’t seem to retire debt faster than they can justify creating more of it. Any and all excuses are used to justify more spending, so why provide an incentive? Absent eliminating debt, the economy is better if the athlete takes twenty of his closest friends to dinner, builds a new addition to his home, or buys the latest tricked-out Hummer. Continue Reading »

“I want to urge devotion to the fundamental of human liberty – to the principles of voluntarism. No lasting gain has ever come from compulsion. … [T]he workers of America adhere to voluntary institutions in preference to compulsory systems which are held to be not only impractical, but a menace to their rights, their welfare and their liberty.”

That’s not Ronald Reagan’s view of compulsory unionism, but that of Samuel Gompers – the father of the modern American labor union movement. But before we get ahead of ourselves, let’s frame the issue in a context of how it messes with this nation’s economy.

To point out that national education is broken is hardly groundbreaking. Few agree on how to fix it, but co-opting even more $ billions of our nations limited resources into the educational industrial complex seems to be the most popular answer. But that solution doesn’t fly. For example, the Pittsburgh City Schools just Continue Reading »