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Forget QE3, America Needs a Real Road and Job Stimulus


How is the condition of roads that you drive On? Well, the roads that I drive on are so bad that they require a large truck or SUV to navigate at anything close to normal speeds. The potholes are alignment killers, and the horrible patches were slapped on so poorly that they become uneven speed bumps. And I reside in one of the top 5 largest cities in the U.S. with a lot of petro money that has done much better than most of other cities (e.g., the newly bankrupt Stockton, CA) during the financial downturn in the economy. It gets better yet; I’m talking about the better part of town instead of the lower revenue districts. So the question is how did we get to this state? And what are the likely solutions?

I think a lot of City, County and State revenue which ought to be going towards upkeep and proper maintenance of the roads is being diverted to other areas of government, i.e., administrative and higher than market salaries of government employees (Include benefit calculations into this equation). In short, big government spending is out of control, and it is so bad, that revenue which is supposed to go towards basic services like quality roads to drive on is being circumvented by other factions of big government which should be further down the line on the need food chain.

This fact really points out what a disaster the first $900 Billion stimulus was, and how if we cannot get these roads fixed when that money was on the table, when will we ever be able to drive on quality roads again like in the 1950 and 1960`s? It literally has been that long since some of this infrastructure was originally built, and is long overdue for a full replacement cycle of CAP EX spend, and not more ad-hoc patch jobs.

One solution is to do another round of stimulus, this one dedicated strictly to mainstream road and infrastructure projects like bridges and basic utilities. This means 100% infrastructure spend, not 5% like the last stimulus with the majority of the rest going to either special interest or pork barrel projects. This will be expensive, in the Trillion dollar range, but yes the roads are that bad. However, with the economy lacking any true growth prospects, and the ad-on effects of true job creation, which a legitimate infrastructure package brings, this expense can in part be paid for with increased tax revenue reaped from a healthier economy.

But there is a caveat, and a large one, these jobs need to be for existing American citizens. These jobs cannot be offshored or outsourced. As the current projects are outsourced to private firms, who then maximize profits, and sacrifice quality of product by hiring illegal immigrants to do the bulk of the physical labor. The country doesn`t reap the entire benefits if the existing model of road construction outsourcing of these jobs ultimately just sends a substantial sum of this money out of the country via Western Union (the figures over the last decade have been staggering to say the least).

The other solution is for governments to slim down and cut the wasted bureaucracy, so that funds which should be going towards maintaining quality roads are actually used for this purpose. This probably would only occur if the voting public starts demanding better roads, to the point where it actually becomes a campaign issue that politicians have to make public stances on, and be voted out of office for not delivering upon said objective.

Unfortunately, I don`t think voters really care about this issue, and would rather have their local pork barrel spending projects, and just drive heavy duty SUV`s to traverse the roads. Compare our roads with German roads and you can visualize the quality of product produced, and commitment to infrastructural needs in this country.

By the look of our roads you would never guess we are a first rate Super-Power in terms of Capitalistic revenue generation. Again traversing roads that seem like roads in some third world countries, I have to ask where is all the money going? And whoever decided this wasn`t a high priority for the last stimulus package needs to be voted out of office for dereliction of duty.

Guest Post: Some Thoughts On Overseas Investing In U.S. Real Estate


Submitted by Charles Hugh Smith from Of Two Minds

Some Thoughts on Overseas Investing in U.S. Real Estate

Overseas investor buying of U.S. real estate is a consequence of trade deficits that have built up huge surpluses of U.S. dollars that must be recycled into dollar-denominated assets. Perhaps we should welcome the investment as both necessary and positive.

What few media pundits seem to grasp is that when our trade deficits transfer hundreds of billions of dollars to other nations, those dollars have to end up in dollar-denominated assets like bonds, stocks or real estate. Mish of Mish’s Global Economic Analysis has tirelessly explained this dynamic many times: when U.S. dollars (USD) end up in another country as a result of our gargantuan trade deficits, the dollars don’t just vanish into some other currency. One way or another, they have to flow into one dollar-denominated asset or another.

Many people have missed the difference between dollars used to settle accounts and dollars held as a result of trade deficits. Many of those emotionally wedded to the belief that the U.S. dollar is doomed gleefully grabbed onto the news that China and Japan will swap currencies directly (yen and yuan) rather than intermediate the trade with U.S. dollars. This was mistakenly seen as a nail in the coffin of the USD.

If I am in Japan and I have yuan due to trade with China, and I want to exchange those yuan for yen, I only need USD for about 10 seconds to intermediate the exchange. Cutting out the USD simply cut the exchange costs and lowered the daily trading volume of the USD.

This reduction in the transactions needed to exchange yuan for yen did nothing to change the dollars held by China or Japan as a result of their trade surpluses with the U.S.

This also didn’t lower the amount of assets or credit (debt) denominated in USD. In other words, the effect on the value of the dollar is trivial.

No matter how many exchanges the USD sitting in overseas accounts are pushed through, they still end up in dollar-denominated assets somewhere. If China exchanges its surplus USD to Saudi Arabia in exchange for oil, the USD didn’t vanish or become yuan: the USD were simply transferred to Saudi Arabia, which can either exchange them with another nation for goods or services, or they use the USD to buy dollar-denominated assets: bonds, stocks, U.S.-based companies, land in the U.S., etc.

Every time overseas holders of dollars start using their monumental stash of USD to buy real estate in the U.S., domestic pundits freak out and declare “X is buying America!” What the xenophobic pundits fail to understand is the overseas holders of USD have to buy something with their surplus dollars, and if they’re sick and tired of buying negative-yield bonds (i.e. the bond yield is lower than inflation) then they have little other choice but to buy land, buildings and businesses in the U.S.

The largest overseas owners of U.S. assets have long been the Europeans, chiefly the English. Tremendous sums have been sunk into the relative safety and dynamism of the U.S. economy, going back to the 16th and 17th centuries.

Foreign Investment Surges: U.S. Attracts Billions of Dollars as Investors Seek Relief From Global Turmoil:

Foreign investment in the U.S. last year totaled $234 billion, a 14% jump over $205.8 billion in 2010, with around two-thirds of the cash coming from Europe.”

There is an element of implicit racism at work when the cries of “we’re being taken over” swell after the Japanese or Chinese make a signature purchase of U.S. assets: beneath the surface, the message is clear: it’s OK for Caucasian Europeans to buy huge swaths of American land and built capital, but not OK for Asians to own the same percentage of assets.

Let me put this bluntly: if you don’t want overseas investors to buy American assets, then stop running gigantic trade deficits with them. Once you transfer hundreds of billions of dollars a year, each and every year, to overseas accounts, the owners of those USD will have to buy something denominated in dollars. And since we presumably made those trades of our own free will to our own benefit, then it’s hardly cricket to get all hot and bothered when those owners of USD seek the same thing we do: assets that return a higher yield at a lower risk.

That leads many holders of USD to U.S. real estate. As I outlined yesterday in Some Thoughts on Investing in the “Bottom” in Housing, rental properties offer attractive returns in a zero-interest rate world.

Why are the Chinese investing in Toledo?

I have raised hackles by suggesting that the U.S. remains a very attractive “safe haven” for overseas holders of USD. The people who are emotionally attached to the “dollar will be destroyed” ideology are often equally attached to the notion that the U.S. is an internationally unattractive place to live/invest.

Yes, I share the concerns about the erosion of civil liberties and the extreme over-reach of the State and concentrations of private capital in the U.S. These are real and worrisome trends I have covered in depth for years.

But we need to see the U.S. through overseas eyes–for example, from a Chinese perspective. Since we have many close friends in China, Japan, Korea and Thailand, and have traveled extensively “on the ground” in these nations over the past 20 years, I have multiple first-hand reports of conditions and perceptions in Asia.

The first thing that is attractive about the U.S. is the wide open spaces–just look how much of the country is sparsely inhabited. Compared to places constantly teeming with people, the U.S. is wide-open. (Recall that the U.S. is Meiguo in Mandarin: Beautiful Country.)

Just another landscape in America, ho-hum….

The northern side of Mt. Rainier (Sunrise):

Also noteworthy is the air is generally amazingly clean in the U.S. Even smog-ridden Los Angeles is relatively clean compared to Chinese urban air quality.

Then there’s the rule of law, which despite constant abuse still exists in the U.S. Your assets will not be expropriated at the whim of a senior Party official.

These same conditions also make Australia, New Zealand, Canada, Chile and Europe attractive places to invest surplus currency. The difference between all these places and the U.S. is of course the size of the currency holdings needing a home: the long-standing trade deficits with China have stockpiled hundreds of billions of USD in China. That alone powers a much greater interest in U.S. real estate.

Despite its bloated Plutocracy and numerous structural problems, the U.S. is exceedingly stable compared to other nations and remarkably dynamic compared to less-dynamic safe-havens such as Japan.

Lastly, there are enclaves serving dozens of nationalities in the “98% of us are immigrants” U.S. (92 languages have been identified among students of the Los Angeles Unified School District.) Your religious faith, class origins, caste and all the other social attributes than limit your social and financial mobility in much (if not most) of the world don’t matter that much in cosmopolitan parts of America. In general, people here are too busy to care about your personal history: just get the job done and don’t rip-off/exploit others, and you are good to go about your business.

Those with assets in China are feeling increasingly insecure. Even if your wealth was earned legitimately, as opposed to being skimmed via corruption or officially sanctioned theft, it doesn’t matter: when the blowback to corruption and inequality arises, everyone with assets will be a target.

This is why everyone with significant assets in China is seeking an overseas passport, green card and a safe haven for their wealth. This is a longstanding trend that seems to be picking up momentum: Hedging their bets: Officials, looking for an exit strategy, send family and cash overseas (the Economist).

THE phrase “naked official”, or luo guan, was coined in 2008 by a bureaucrat and blogger in Anhui province, Zhou Peng’an, to describe officials who have moved their family abroad, often taking assets with them. Once there, they are beyond the clutches of the Communist Party in case anything, such as a corruption investigation, should befall the official, who is left back at home alone (hence “naked”). Mr Zhou says the issue has created a crisis of trust within the party, as officials lecture subordinates on patriotism and incorruptibility, but send their own families abroad.

 

You do not have to be corrupt to be “naked”, however. Sending your family abroad is simply a state of maximum readiness. It does not suggest huge confidence in a stable Chinese future. Many wealthy businessmen have also been preparing exit strategies. One of the most common legitimate routes involves immigrant-investor programmes in America, Canada or Hong Kong, typically requiring an investment of up to $1m. Chinese nationals have rushed to apply for these. Three-quarters of applicants for America’s programme last year were Chinese.

 

In 2011 the central bank published an estimate on its website, attributed to the Chinese Academy of Social Sciences, that up to 18,000 officials had fled the country between 1995 and 2008 with stolen assets totalling 800 billion yuan ($130 billion at today’s exchange rate). The bank then claimed the figures were inaccurate, and scrubbed them from its website.

 

Officials who can afford to send their families abroad are usually the most powerful, and the most aware of China’s problems. Says Mr Li of Peking University, “They know better than anyone that the China model is not sustainable and that it’s a risk to everybody.”

In essence, investing a mere $1 million in U.S. business and promising to hire Americans will yield up a highly-valued green card. From an overseas point of view, wages in the U.S. are not that burdensome: Apple store employees, and millions of other workers, earn $11.25 an hour.

We have to put all this overseas investment in perspective. There are roughly $62 trillion in net assets in the U.S., and over $20 trillion in real estate. $200 billion or even $2 trillion isn’t going to buy a dominant piece of the U.S. economy.

There are positives to overseas investors buying U.S. properties. Everyone who owns real estate wants their parcel to start rising in value, and the only way that can happen is for demand to exceed supply. The “creative destruction” of capitalism only works if owners who have failed to capitalize on assets move on and turn the assets over to those with capital and a desire to rework the assets into productive uses.

The irony is that the driver of overseas buying of real estate–trade deficits–could decline as oil prices slip and imports from China decline in recession. Those complaining about overseas buying may withdraw their complaints if the drivers of overseas investment dry up and the buyers vanish, leaving the U.S. real estate market vulnerable to another cascade down in valuations.

At that point, people may wish Chinese investors were still buying in Toledo.

Cyprus, The Eurozone Breakup, & “The Dog in Charge of the Sausage Supply”


Wolf Richter   www.testosteronepit.com

Finland doesn’t get the white-hot attention Germany does, but it should because it could be the driving force behind a breakup of the Eurozone. And it fired another shot: it demanded collateral for its share of the billions of euros that Cyprus would receive from the bailout Troika.

Cyprus is the fifth of 17 Eurozone countries to ask for a bailout. It’s panic time. The first tranche, €1.8 billion, is needed by June 30 to prop up its second largest bank, Popular Bank. And suddenly, Bank of Cyprus, the largest bank, needs €500 million. That’s just the beginning. All its big banks have been eviscerated by Greek government bonds, Greek corporate debt, a real estate bubble that collapsed, and a title-deed scandal that they colluded in—whose outcrop is now gumming up their balance sheets [I warned about it in October…. Another Eurozone Country Bites the Dust].

Though the government denied any amounts had been discussed, Reuter’s “Eurozone sources” attached a number to it: €10 billion—for a country that acceded to the Eurozone in 2008, has a GDP of only €17.3 billion, and has the population of San Francisco (just above 800,000). It takes a lot of talent to do so much with so little.

In return, the bailout Troika will prescribe its bitter medicine: bank recapitalizations, structural reforms, privatizations, reductions in civil servants, and budget cuts. Communist President Demetris Christofias, who speaks fluent Russian, attended university in Moscow, and is an ally of Russian President Vladimir Putin, had already endeared himself to the bailout Troika—the European Commission, the ECB, and the IMF—by accusing them of being run like a “colonial force.”

Being so closely tied to Greece and having seen what happened there, Cypriots are worried about the fate that might befall them. But Finance Minister Vassos Shiarly had soothing words. It would be premature to speculate, he said on state radio, but the terms of the bailout “won’t be so painful as some may believe.”

Cyprus has been playing a guessing game. It would prefer a bilateral loan from either Russia or China. A veritable shuttle diplomacy has been taking place, with Cypriot officials flying to one or the other country and returning with promising smiles but little else. Last year, after it had been cut off from the capital markets, Cyprus received a €2.5 billion loan from Russia; and earlier this month, rumors were swirling around that it would receive another €5 billion. But so far, nothing. And the Chinese, who know how to negotiate, even with their communist friends, have shifted their attention to Malta on another project.

Russia and China have reason for wanting a stake in Cyprus: vast off-shore deposits of natural gas. The field off the southern coast might hold as much as 8 trillion cubic feet of gas. It’s likely that there are other fields around Cyprus. 15 major oil and gas companies and consortiums, including some from Russia and China, are bidding to do exploratory drilling, and they’re eager to build LNG export terminals and other massive infrastructure projects [read…. Manna for Bankrupt Cyprus].

But Russia and China could demand a heavy price in return for a loan—and that’s why Cyprus is even talking to the despised Troika. President Christofias, whose communist heart is closer to Russia and China, has perhaps already seen that price. So he’s fishing for a better deal. But by June 30, Cyprus must get the first €1.8 billion.

Ironically, the next day, Cyprus will rotate into the Presidency of the Council of the EU for a six-month term, as spelled out in the Lisbon Treaty. That’s democracy at the EU level: mechanized, predetermined by treaty, beyond vote. And the only directly elected institution of the EU, the European Parliament, shares the legislative functions with the Council (that Cyprus will preside) and the European Commission, but it’s emasculated because it cannot even propose bills.

This lack of democracy is the dark backdrop to the tohubohu about a fiscal union, a banking union, Eurobonds, and the idea of integrating the Eurozone more deeply, and all the other panaceas to be discussed at the EU summit: they hinge on transferring important aspects of sovereignty from democratic nations to unaccountable bureaucrats, appointed technocrats, or predetermined officials, all with an ever-increasing thirst for power. And the frustration is already high….

“An EU paradox! Now we have a situation where the dog will be in charge of the sausage supply,” said Kurt Lauk, President of the economic advisory board of the CDU, the party of German Chancellor Angela Merkel. “How can Cyprus engage in crisis management when it’s stuck deep in a crisis itself?” he asked. An eloquent paradigm for all Eurozone bailouts. He then demanded that all bailed-out countries be excluded from the presidency. An issue left up to voters, directly or indirectly, in democracies.  

During the two-day EU summit, all eyes will be breathlessly riveted on Chancellor Merkel—with one question on all lips: will she blink? Because nothing less than the future of the Eurozone and the euro is at stake. And by extension, the world economy. Only she can save it. And she’d have only 48 hours! Read…. The EU Summit To Save The Euro: It Already Collapsed.

With Total Viewers Sliding To 7 Year Lows, Is CNBC Fading Into Obscurity?


In the past 24 hours, some readers have been surprised to learn that as Jeff Reeves of InvestorPlace states, total Q2 CNBC viewership as calculated by Nielsen, has tumbled to to the lowest it has been since Q3 2005. This merely confirms that the trendline in our periodic observations of CNBC traffic was more than merely seasonal or VIX-related: it has been one long secular decline, peaking in the quarter of Lehman’s demise and down hill ever since.

Reeves focuses on some specifics:

  • Squawk Box (6-9 a.m.) is supposed to prime traders before the bell. The show posted its lowest rated its time block since Q4 2006.
  • The Closing Bell (3-5 p.m.) is supposed to wrap up the day’s action. The slot posted its fifth-lowest rating in total viewers and second-lowest ratings in the key 25-54 demographic since 1997.
  • Fast Money (5-6 p.m.) is focused almost specifically on swing trading stocks. That time slot showed the lowest rating for the 25-54 demo since 1997 — and lowest in total viewers since Fast Money launched in 2006.

Yet none of the above compares to the Nielsen-sourced data Zero Hedge compiled showing CNBC viewerships since the beginning of 2004.

The chart speaks thousands of words about the shrinking viewer engagement with either CNBC the financial news station, or CNBC the financial news station.

What the clearly chart shows is that despite occasional risk flaring episodes, and a general preponderance of either ‘good news’ or ‘bad news’ regimes, the prevailing trendline is one of anti-Gartman proportions: from top left to bottom right.

Reeves attempts to give some explanations of his own explaining this troubling for Comcast trend:

It must be noted that it’s not their fault the market is miserable, and bad ratings don’t necessarily reflect bad shows. After all, we don’t blame builders like Pulte or Lennar for causing the housing crisis with poorly made homes.

It’s also worth noting that many cable networks are experiencing a viewership drain as many younger folks take their eyeballs to the Internet — and CNBC is hardly ignoring the move to online content. Its website gets some 8 million unique visitors every month, and a shrewd partnership with Yahoo! is teaming up the megasite Yahoo Finance with CNBC to tap into an even more massive chunk of the financial media audience.

But for whatever reason, investors are tuning out CNBC on their TV sets. That’s further proof that the market is jaded, that volume will remain low in the summer and that most investors are scared or nervous about what to do next.

Zero Hedge being Zero Hedge will add one more: perhaps CNBC’s viewers have gotten tired of getting just one side of the newsflow: the always rosy, and over the past 5 years, always wrong one.

Which also explains the growth of alternative financial media venues: those unconstrained in the type of data they can report on and analyze. More importantly: those unconstrained by what producers scream in their earpiece. In retrospect, they have much to be grateful to CNBC for- if for whatever reason the financial channel was not hemorrhaging eyeballs, there would be no new captive audience to, well, capture.

Finally, whatever the reason for the endless bleed in CNBC viewership one thing we can be sure of: the advertisers – that lifeblood of every media outlet – are certainly not happy.

Guest Post: How Much To Save The Euro?


Submitted by Geoffrey Wood

How Much To Save The Euro?

Germany keeps being told that it must pay up to save the euro. But how much can Germany pay? No-one seems to have thought about that, but there is already concern about the possible size of bill – German bond yields rose soon after news of the Spanish bail out, even before it was announced where the money was going to come from. (And it was of course a bail out for Spain, regardless of what Spain’s prime minister says. If I borrow money and then lend it to someone else I’ve still borrowed it.)

There is though a more basic question. How much does it make sense for Germany to pay? What sort of bill would it be reasonable to present to them? In fact the best approximation one can arrive at is a bill of zero.

Why zero? What about all these exports that have been produced because Germany has a currency whose value is determined not just by Germany but also by less productive, higher cost, economies?  That link has artificially depressed the prices of German exports. These net exports resulting from Germany’s Eurozone membership are actually the problem.

Germany has been exporting more goods and services than it has been importing. So non-German residents have been making net transfers of funds to Germany. If they can not earn these funds, and they did  not because if they had Germany would not have run a trade surplus, they must have borrowed them. A trade surplus being run by a country means, in other words, that it is a net lender to the rest of the world.

That is certainly not always bad. Often it is good for both borrower and lender. The classic, and one of the longest lasting and relative to national income one of the biggest examples of that is the lending by Britain to the United States that went on from just after 1870 to shortly before the First World War. That lending was beneficial to both sides. In the USA it was invested productively, developing and opening up the prairies. These were, and still are, among the most fertile agricultural land in the world. The investment helped to make the USA a major and very prosperous agricultural producer. And Britain meanwhile not only earned a higher return on capital than could be earned by investing at home (Britain was even then a mature developed economy) but saw a sustained fall in the cost of living as the cost of food fell due to the imports that started to flow from the USA.

Recent German investment has not all been like that. Some has been productive – motor car factories in Brazil, the Czech Republic, and Mexico, for example. But much of it has just been lending to enable governments and individuals to spend more than they have been earning. As is now clear, many of the recipients of these loans are unable to pay them back. So in contrast to the earlier British/US experience, where both sides gained, both sides have lost.

Another aspect of this appears if we think about what would have happened in Germany if net exports had been smaller. Workers and factories would not have simply sat around. More goods and services would have been produced for investment and for consumption inside Germany. By increased investment Germany would have become more productive, and because individuals in Germany could consume more they could have had a higher standard of living. These big exports have in effect been a subsidy from Germans to many of their trading partners.

That is not the end of the story, not the end of the bad news for Germany. What an economy produces can be roughly divided into two categories: goods that are traded internationally and goods that are not. These categories – tradable and non-tradable goods as they are termed – are not of course clear cut categories, but some goods are much more easily traded internationally than others. The depressed German exchange rate has shifted productive resources, labour in particular, from the non-traded to the tradable sector. These resources are more productive there only so long as the exchange rate stays at its current artificial level. When that changes, they will have to incur all the costs of moving back. And, of course, they have been employed producing goods for which in many cases Germany may never be paid.

This is actually the exact reverse of what is now facing Australia. Its exchange rate has been driven up by a mineral boom. Policy makers and voters there are now thinking about two issues. What is a reasonable distribution of the benefits of the strong currency? And what planning should there be to deal with the inevitable end of the boom?

In conclusion, then, it is clear that it is wrong to say that Germany has benefited because of the boost to its exports delivered by a depressed euro. There have been some benefits, for some of the associated overseas investment has been more productive than it would have been at home; but there have also been some costs. The net effect is immensely difficult to calculate, but there can be no doubt that claims that Germany has gained so Germany must pay are just wrong. Any attempt to put the burden of saving the euro on Germany has to be supported by other arguments. I have yet to see them.