Q&A With Shah: Now Is a Time to Come Together
We've got some really good Q&A today, thanks to some really good comments and questions from you folks.
But before we dive in, I want to say something about the storm that hit the U.S. this week.
Personally, I was lucky: Hurricane Sandy only brushed by my home in the Northeast.
But there are so many individuals, families, and businesses that weren't so lucky. They are dealing with everything from serious inconveniences to horrific tragedies.
My heart and prayers go out to all of you who are trying to recover from this truly devastating storm. I especially feel for those of you who lost family members, friends, partners in life, and your beloved pets.
I've had a glimpse of the devastation you're feeling. My girlfriend's amazing mother, sister, family members, and many, many dear friends live in Breezy Point and in the Rockaways. I was just there for her brother Johnny's wedding.
The home on the beach I stayed in is flattened. Her mother's house is a wreck. And many, if not most, of their other family members' and friends' homes burned to the ground, were flattened, or drifted out to sea.
Between the loss of lives and the horrific devastation, there's nothing much left of this once beautiful community where everyone knows everyone else and no-one locks their doors.
Breezy and the Rockaways will rebuild. That's what New Yorkers do.
They fight for their neighbors, their communities, their city, their state, and America. Their citizens will come together as neighbors and friends to help each other.
Because that's what Americans do. This is who we are.
In the meantime, I send my sincerest regards and deepest sympathies to those of you suffering tragic losses.
Okay. Now let's get started with your comments on "Big Bank Protectionism."
Q: What happened to our antitrust laws? ~ Ron
A: Good question, Ron. They are there to be used when competition is deemed to be in the public's best interest. In the case of big banks, "too big to fail" is what's in the public's interest – at least, if you go by what politicians are doing, as opposed to what they are saying. Get it? They're all for big banks because those monsters pay them monster amounts of hush money to leave them alone.
Q&A: Shah on The Mess We're In
I've got some more Q&A for you today.
Remember, you can share your own comments and questions with me by posting them to the bottom of any article, or emailing them to firstname.lastname@example.org. I may not be able to respond to everybody, but I read everything you have to say.
Let's start with your very interesting response to "How Our Markets Got So Politicized." A lot of you offered solutions.
Q: To me, there's one answer and one answer only. A tax revolt, no taxes being paid to any level of government. And it has to be led by someone knowledgeable like you, Shah, along with others with courage and credibility. ~ Art
A: I love that you're a revolutionary, Art. But I don't think stopping the wheels of government and commerce by cutting off the government (including state and municipal governments) is in all our best interests. We'd be more disrupted than we can handle.
However, we definitely need a tax revolt! I'm 100% with you there. The problem, maybe the biggest one we face, is the inequity inherent (on purpose) in the tax code. There's a reason the tax code is as thick as it is; all those rules and regulations are there to be manipulated. The more rules we have, the more loopholes there are to be created. That's the game. That's why "the strong seem to get more, while the weak ones slave."
A flat tax is the way to go. It can be a flat and progressive tax. I like federal rates of 5% on gross income of less than $20,000, 7% on gross between $20K and $30k , 9% on gross between $30k and $40k, 11% on gross between $40k and $50k, 13% on gross between $50k and $75k, 15% on gross between $75k and $1m, and 17% on anything greater than ordinary income of more than $1m. I like a flat corporate rate of 20% after expense deductions. I'd like to see dividends be allowed to be 100% deducted as an expense to any company paying them and have dividends taxed at half everyone's ordinary income rate.
That's my starting point to what would be a long discussion. The rest of it would be all about limiting the growth of government spending and having balanced budgets… or else.
Q: If you want to reduce the problem in this situation, you don't need to re-write or amend the Constitution. Instead, you need to follow it. This would result in elimination of the Federal Reserve and the abolition of legal tender laws. These two steps would result in the end of control of the money-men on our society. ~ Kevin B.
Q&A With Shah: Shining the Light in a Few Dark Places and More
hanks for all the bright comments and questions you've contributed lately.
Please, keep them coming.
You can share your own thoughts with me by posting them to the bottom of any article, or emailing them to email@example.com.
Okay, who's up first this time?
Q [re: "What I See Ahead for the Economy"]: I generally agree [with your wagon analogy], but allow me to play devil's advocate. If we are so connected, why haven't the U.S. markets been struggling as much as Europe? Sure we have our problems too, but so far equity markets seem to have shrugged off Europe… ~ Dom
A: The U.S. – to use Mohammed El-Erian's phrase – is the cleanest dirty shirt in the laundry.
Corporate earnings have generally been stellar, and that's what drives the market, underneath the macro headwinds. But a lot of those earnings are global revenue streams, accounted for in terms of a weak dollar when they are translated back home into quarterly reports.
The markets also look "cheap" on a relative, historical price/earnings multiple basis. I have argued both fronts. If the dollar strengthens, because global growth weakens and capital flight out of emerging markets (China in particular, not that's it's emerging, it is HERE) heads into the U.S., that would be indicative of weakness where U.S. companies have been shining. Then, when weaker global earnings streams get translated into a more expensive dollar, earnings reports could vastly underperform expectations at first, then quarter over quarter and year over year trends more dangerously.
As far as historic PE multiples, I've argued, empirically, that the old benchmarks don't apply any more. My work says the new normal might be 12 times, not 14 to 15 times. Why? Things like technology's impact on productivity, paradigm shifts as a result of productivity changes due to technology, and volatility dynamics due to a global marketplace. These are just a couple of things we have to watch out for in terms of valuing markets, especially U.S. markets.
Q: One of the only ways the global economy can survive now is [if] the debt reset button is pushed, forcing prices down to real value rather than a notional one. But as this is not going to happen, then I guess it's the cabin in the hills. ~ Alex G.
A: It can't happen on a global scale; the hills would be too denatured of trees for want of so many tiny cabins. It could happen on some rolling basis. But, once that kind of ball starts rolling, it could snowball, and we'd be facing another 2008 look over the abyss. Only the next time could see the precipice collapse from the weight of leveraged sovereigns and overly leveraged central banks.
Come to think of it, where's my little axe?
Q: "Been Down So Long It Looks Like Up To Me" is the name of a book by Richard Farina, published in 1966 – before The Doors plagiarized the phrase in the 1970s. ~ John D.
A: Thanks, John. I always appreciate learning the true origin of the things we think we know about. I never said I was smart, just a smart*$%.
Q&A: Shah Gilani on Financial Regulation, Central Banks and More…
I got hundreds of questions and comments this month from you about my stance on regulations. Let's see why.
Q: I agree with you on the need for financial regulation. However, they must be simple and clear… How would you write the regs? ~ Cory B.
A: Cory, all the regs I would write would be one-liners. That's no joke.
Q: What we need is a hammer. Not the kind carpenters use, but a judicial hammer which treats serious crime seriously. No more civil trials for criminal offenses, such as the debacle surrounding Richard Fuld. These thugs know how to weigh odds, and most of them will gladly risk 15 months in a white-collar prison at hard tennis for, say, a few million in ill-gotten gains. You can't fix fraud, but you should be able to make the punishment so severe that only the dumbest of the dumb would give it a try. ~ Ron S.
A: That's what I've been saying. How come so many of you say it so much better than me? I'm always learning from you all.
Q: To put faith in regulation and the regulators is to assume they can't be bought. They can always be bought. Whaddya gonna do? Reform the existing corrupted agencies? Get rid of the Gensler/Goldman-run CFTC and replace it with something else? And who would run that? Somebody from JPMorgan? ~ fallingman
A: I want teachers (grade school and junior and senior high school teachers) to be our regulators. They obviously aren't about the money and they obviously are civic and civil minded. Why not?
Q: Who is going to put the "black and white" rules in place, the regulators? lol! Regulators are currently paid by the banks they regulate, umm, but, isn't that a conflict of interest, or, am I just stupid?~ Domina L.
A: Stupid is as stupid does. If we go back to the way regulators regulate, we're all stupid. We need a new breed of regulators. Expecting that we'll ever get them to come down from Olympus is proof that I am stupid. But a boy can dream, can't he?
May Q&A: Shah Gilani on the Student Debt Bubble, Europe and More…
You Asked, He Answered: Shah Gilani on China, Ben Bernanke, the Fed and Much More…
Natural Gas Q&A: Lies, Damn Lies, and Statistics
It has been a while since I responded to your many emails.
So, as we await the latest developments in the European debt mess, today seems like a good time to answer a few. This time around, I am addressing some of your questions and comments that deal with natural gas.
By the way, my staff and I read all of the input and feedback you send our way, and we're very grateful for it. Please email me at firstname.lastname@example.org. (I can't offer any personalized investment advice, but I can address your questions and comments in future broadcasts.)
Let's get started…
Q: I've just read recently several articles stating that the EIA has revised downward its estimate of our natural gas shale reserve potential by deciding to accept, unconditionally, the most recent U.S. Geological Survey stating that the Marcellus, Eagle Ford, Barnett, and other shale formations hold only 20% of the heretofore accepted reserves. This is an 80% reduction! This changes everything if true.
That's the question – is this bogus, or is there factual evidence to conclusively support this new estimate? ~ Howard B.
A: Howard, this reminds me of a famous statement from the 19th-century British Prime Minister Benjamin Disraeli (though the comment is also variously ascribed to Mark Twain, Alfred Marshall, and many others): "There are three ways to hoodwink the masses – lies, damn lies, and statistics."
The Energy Information Administration (EIA) – a unit of the U.S. Department of Energy – continues to wrestle with the distinction between reserves and extractable reserves.
The first is the volume of gas indicated by field tests and analysis. The second is gas available for extraction at current methods. I would also stipulate as "extractable" reserves only the volume that market conditions allow.
When you equate the two, we are still in the same ballpark.
Current estimates put no more than 20% of known reserves as "extractable." As technologies improve, that figure could improve, too.
For now, the EIA estimate falls in line with most others.
So to answer your question, nothing much has changed here, aside from some government bureaucrats wanting their figures to be more accurate.
Q: Kent, your work appears to be expanding into areas of advisement that could affect the future profitability and wellbeing of nations and their business relationships with existing partners. A delicate balancing act if there ever was one! If such arrangements are not handled carefully, could sanctions and/or military skirmishes be the outcome? Are we facing the possibilities of "gas wars"? ~ Fred P.
It's Not Just Congress – the System Has Failed
Sandra Bloom is in a frustrating position, and she feels stuck.
She put faith in people to do some work for her – and they've failed.
Not only did they fail to fulfill promises, they've created a bigger mess than the one they were supposed to fix.
Like many Americans, Bloom hoped the U.S. Congress would improve the country's struggling economy this year. Instead, she watched elected leaders squabble and finger-point while the U.S. credit rating was downgraded and federal debt climbed past $14 trillion.
"I am so angry at Congress for the way it is not doing its job," Bloom wrote in an e-mail to Money Morning. "There is no longer any attempt to do what is best for the country, no attempt to compromise."
Bloom shared her thoughts on what's wrong with Congress in response to a dismal CBS News/New York Times poll in early August that revealed 82% of Americans disapprove of the way Congress is doing its job – the highest disapproval rating since polling began in 1977.
This was on the heels of a USA Today/Gallup Poll in Julythat showed just 7% of Americans believed their representatives in Washington were negotiating in good faith when it came to the debt-ceiling debate.
We asked you, our readers, just what's wrong with Congress – and the overwhelming majority emphatically agreed: Elected representatives are only out for their own interests, not those of the people.
"All they have been doing is playing chicken to see who blinks first, and the American public is the loser," said Bloom. "They would rather one side's ideas be defeated than accomplish any meaningful legislation."
That could mean it's time for a change.
Why Shah Gilani's Plan to Fix the U.S. Housing Market is a Winner
Money Morning Contributing Editor Shah Gilani told us last week that if something isn't done now to fix the U.S. housing market it'll "drag the rest of the economy down into a hellish bottom that will take years, if not decades, to crawl out of."
"The housing market is our single-most important generator of gross domestic product (GDP) and, ultimately, national wealth," said Gilani. "And we can almost immediately execute a simple plan to fix mortgage financing and stabilize U.S. housing prices."
Gilani outlined steps the U.S. government needs to take to resuscitate the U.S. housing market, including unwinding Fannie Mae (OTC: FNMA) and Freddie Mac, making bailed-out banks contribute to a private national pool of mortgage capital, and creating a new ratings agency to assess the creditworthiness of mortgage pools – with a tax on the pools' interest.
He also called for more up-front money from borrowers, and for a tax-incentive program to stimulate buyer demand and stabilize the housing market.
Money Morning's Shah Gilani Responds to Reader Comments on His Housing Plan
Dear Money Morning readers:
To every one of you (and there were more than just a few!) who took the time to comment on my housing-fix plan, thank you. I read every single comment, twice.
Money Morning readers have always impressed me with their insights and activism. That's why I write for Money Morning, I get to have a "conversation" with you, which motivates me, enlightens me and always keeps me looking at every side of all the issues I write about.
Here are some of my thoughts on your comments:
First of all, it's not possible for any comprehensive address of a problem as deep and wide as what our housing market is facing to be perfect. There is no such thing as a simple solution to such a complex set of attendant issues. And, no matter how exhaustively researched and designed a packaged solution is constructed, there will always be unintended consequences and naysayers who would rather complain about the status quo than change it.