Author Archives: Lenore Hawkins, Chief Macro Strategist

About Lenore Hawkins, Chief Macro Strategist

Lenore Hawkins serves as the Chief Macro Strategist for Tematica Research. With over 20 years of experience in finance, strategic planning, risk management, asset valuation and operations optimization, her focus is primarily on macroeconomic influences and identification of those long-term themes that create investing headwinds or tailwinds.
What does Fiscal or Monetary Policy mean?

What does Fiscal or Monetary Policy mean?

We hear a lot of talk about which government policies can help get the economy back on its feet. I thought I’d provide a quick cheat sheet on just what these various terms actually mean.

This chart shows the complete list of tools that the federal government has to affect the economy.  There are two main types of policy, monetary and fiscal.  When you hear monetary policy think Federal Reserve.  When you hear fiscal policy, think IRS and federal spending.

The Federal Reserve can alter two things to affect the economy, the Fed Funds rate and the Money Supply.

Interest Rates:  The Federal Funds target rate is the interest rate at which private depository institutions, (mostly banks) lend the funds they hold at the Federal Reserve to each other, generally overnight.  It can be thought of as the rate banks charge each other.  This target rate is identified in a meeting of the members of the Federal Open Market Committee which usually meets eight times a year.  The New York Fed affects this rate by trading government securities.

Money Supply:  The Federal Reserve typically alters the money supply by increasing or decreasing bank reserves.  (See prior post on Fractional Reserve Banking for details on bank reserves.)

Tax and Spend:  What else need be said?  Fiscal policy involves the government increasing or decreasing taxes and the amount of federal spending, which let’s face it, pretty much just goes up.

Why The Capital Gains Tax Should Be Abolished

As many of you who follow this blog can probably surmise, I am not a big fan of the the current capital gains tax and now the administration is looking to increase the tax 33%, from from 15% to 20%.  A friend of mine over at the Center for Freedom and Prosperity, (he’s also a senior fellow with the Cato Institute) put together a great video on why this tax should be abolished, using simple, common sense rationale.

General Motors: Shame on you Ed Whitacre

Last night I watched the CEO of General Motors lie to the American people in a commercial that absolutely typifies the culture in Washington DC.  He stated that GM has repaid the TARP loan, “in full, with interest, five years ahead of schedule.”  Well now that sounds wonderful and aren’t we all just pleased as punch that the money the federal government could ill afford to give to GM was paid back “in full” so quickly?  Sadly, the fund were not paid back at all, and if fact GM is attempting to take even more money from taxpayers.

  • GM was given $49.5 billion by the federal government, $6.7 billion was a 7% loan with the remaining $42.8 billion going into a 60.8% equity stake.  (Canada gaive GM a $1.4 billion loan and “invested” $8.1 billion for an 11.7% equity position.  Together, the U.S. and Canada own a whopping 72.5% of GM!)

 

  • The $6.7 billion was paid back using funds from a government “working capital” escrow account containing $13.4 billion.  GM used a different TARP fund to pay back the original $6.7 billion loan… they just refinanced!

  

  • GM has applied to the Department of Energy for yet another $10 billion 5% interest loan to retool its plants for the CAFÉ standards.

 

Only a few media outlets are reporting this story for the ridiculous lie that it is.  Click here for a great piece by Shikha Dalmia at Forbes

For an economy to have a healthy investment climate, investors must be reasonably assured that the information they have been provided is accurate.  The American people own the majority of GM and the CEO of GM has just told one whopper of a lie to his shareholders.  Ed Whitacre, shame on you.  In any reasonable climate you would be fired, but in this world of half truths you are commended for telling people what they want to hear, even though the listeners know it is a lie.  Will this government sponsored deceit induce other CEO’s to lie to their shareholders?  As an investor, I become more and more wary of the accuracy of the information I am provided.  That is not the path to a robust economy.

The Insanity of the Federal Tax Code

After the horror of yesterday’s tax filing and the corresponding drop in my net worth, I decided to do a little research.  In 1913 the federal tax code was about 400 pages long.  Today it is around 70,000.  Americans spend 7.6 billion hours a year preparing taxes, which equates to about 3.8 million skilled workers, making the tax compliance industry SIX TIMES the size of the U.S. auto industry, (source National Taxpayer Advocate).  Imagine what growth could be achieved in our country if those resources were directed towards productive endeavors rather than filling out forms and trying to decipher vague and conflicting rules. 

82% of Americans need help preparing their taxes, 60% hire a professional tax preparer and 22% use software.  The federal government requires funding for those powers it is to exercise under the Constitution, but I cannot for the life of me understand why a nation that was founded on the rule of law has a tax code that is impossible to follow accurately with any degree of confidence and requires such outrageous expenditures by individuals and businesses.

A Father's Gift

A Father's Gift

We are living in a time in which civility and mutual respect appear to be discarded relics from the past.  This morning I read through a speech my father gave to a group of lawyers, newly admitted to the bar, in Judge McKibben’s courtroom in Nevada on November 18th, 2004 and it reminded me of how lucky I was to learn about ethics, civility and collegiality from such a kind and wise man.

My father, Richard Horton, was one of the most noble gentlemen that I think I shall ever know.  He passed away on February 7th, 2008, but his legacy lives on in the many lives he touched.  As one of the finest lawyers in Nevada for over fifty years, he was a credit to his profession.  As a business owner in Lake Tahoe, he taught me about humility and grace.  He owned the place, but few people ever knew that.  Five days a week he was a partner in the largest law firm in the state.  Saturday and Sunday he’d pick up trash, pull weeds, change light bulbs and perform any number of seemingly menial tasks around the marina in a dingy, rust-colored button down shirt, paint and grease stained brown pants, and tattered brown work boots with wonderfully curled up toes.  I remember watching my mother cringe and look away, her head shaking at his unkempt appearance when he’d walk out the door Saturday morning, eager to get to work.  Mom has always been the epitome of style.  People would try to hire Dad away after watching how diligently he performed his tasks but all he would say is, “They treat me well around here.”  He’d pump gas and graciously accept tips, putting them in the jar Mom setup for him on the kitchen counter, the proceeds of which were used to help fund the company Christmas party and employee gifts: pretty inspirational stuff for an awkward, skinny little girl, following her father around like puppy.

 Lessons from my Dad:

Ethics is about doing the morally right thing.  By being ethical in both word and deed you will earn trust and respect, but only if you are also civil.  Civility is doing what is morally right with courtesy and respect.  Civility is being congenial, cordial and pleasant in your dealings with others.  Civility ought to be your way of life, so much so that even in the face of uncivil conduct by others, you are unable to be anything but civil.  Indeed, civil conduct is contagious.  Others will catch it from you as they realize their unacceptable conduct is not being returned in kind and is gaining them nothing.  Civility is essential for a smooth functioning society and to our enjoyment of interacting with each other.  There is no need for rudeness, discourtesy and cheap shots.

You must be honorable and it will be the work of a lifetime to gain the reputation that you are honorable, that your word can be trusted, that what you say you will do, you do; that what you represent to be true is true; that you claim no more than is warranted by what you know.  A reputation is a fragile creature.  It can be destroyed in a moment by some foolish conduct.  Your reputation is not something you can establish and then forget about.  It must be burnished every day by correct and civil conduct, and like fine wine, becomes more precious with the passage of time.

You must have integrity and that integrity must be manifested in all you do and all you say.

 Do not let anger and impatience creep into your voice unless anger is truly called for, a very rare event.  You can put emphasis in your voice without putting anger or impatience in it.

Use temperate words and phrases, not heated ones.

When you lose to another, walk over to your opponent and congratulate them on their win.  Neither your opponent nor those who observe your actions will soon forget it and it will be to your credit.

Do not attribute improper motives or purposes to your opponent unless you have the evidence to truly show such.  Empty claims of an opponent’s misconduct reflect on you, not your opponent.

Civility and courtesy are not to be equaled with weakness.  Civility is part of being a good steward of your community.  Stewards are forceful and unyielding when in the right, zealous in their advocacy, yet civil.  Others must be treated with dignity and respect, but we can only do that if our conduct is civil and respectful.  Otherwise we cheapen that which we should cherish.

I’ve always been a very passionate person, forever eager to take up the sword to fight against that which I believe to be wrong.  I was blessed to have a father with such wisdom and humility to temper the warrior in me.  Thank you Dad.  I miss you.

Greece, the US and the horror of unfunded liabilities

Greece, the US and the horror of unfunded liabilities

There’s been a lot of talk about the situation with Greece and the European Union.  Greece is chided for its fiscal irresponsibility as the rest of the EU demands “austerity” measures before entering into any talk of a bailout.  The likelihood of a bailout is still anyone’s guess, but at the moment, neither Germany nor any other EU member looks enthusiastic about helping Greece when their own finances aren’t exactly pristine.  So just how bad are things?  The chart below shows current fiscal imbalance as a percentage of GDP for most of the EU countries, meaning both the national debt and the present value of all future unfunded liabilities.

Spain 244.3%
Belgium 296.5%
Italy  364.1%
Luxembourg 376.7%
Denmark 382.5%
Ireland 405.2%
Austria 409.8%
Germany 418.2%
Sweden 430.7%
United Kingdom 442.1%
Estonia 455.6%
Malta 467.2%
Portugal 491.9%
Lithuania 497.2%
Netherlands 522.8%
Finland 539.3%
France 549.2%
Czech Republic 590.8%
Latvia 619.1%
Slovenia 758.5%
Greece 875.2%
Slovakia 1149.1%
Poland 1550.4%
   
EU-25 Benchmark 434.2%

Source: Jagadeesh Gokhale, “Measuring the Unfunded Obligations of European Countries,” National Center for Policy Analysis, Study No. 319, January 22, 2009 and Eurostat

While these numbers are frightening, a more sobering fact is that the United States is only slightly better than Greece.

The chart below is from the 2008 Financial Report of the United States from the U.S. Treasury, page 137 of 188, showing the total of unfunded liabilities that the United States is currently facing.  This number is a whopping $101.8 TRILLION!

 

Adding this $101.8 trillion to the current U.S. debt of $11.9 trillion, and taking  2009 GDP at $14.26 trillion as reported by the Bureau of Economic Analysis, the United States has total liabilities of almost 800% of GDP!

Spain 244.3%
Belgium 296.5%
Italy  364.1%
Luxembourg 376.7%
Denmark 382.5%
Ireland 405.2%
Austria 409.8%
Germany 418.2%
Sweden 430.7%
United Kingdom 442.1%
Estonia 455.6%
Malta 467.2%
Portugal 491.9%
Lithuania 497.2%
Netherlands 522.8%
Finland 539.3%
France 549.2%
Czech Republic 590.8%
Latvia 619.1%
Slovenia 758.5%
United States 797.3%
Greece 875.2%
Slovakia 1149.1%
Poland 1550.4%

This is the makings of a war between the ages, where the youth of today are born with a massive and unsustainable debt burden, a burden left by their irresponsible parents and grandparents who freely spent more than they could afford and thus mortgaged their childrens’ future.  We’d be well advised to look at how José Piñera, an incredible man who I had the good fortune to spend time with this past week, relieved Chile of a similar horrendous burden.  I highly recommend his website for an understanding of pension reform.

As an investor, keep this in mind.  To cut the debt we need to either increase government revenue (tax receipts) or cut spending.  Arthur Laffer reminds us that increasing tax rates isn’t the clear way to increase tax receipts and in fact can significantly lower receipts and harms GDP.  Cut spending, our government?  Not with this current group of drunken sailors toting self issued no-limit credit cards!  So what’s the one thing the government can do without raising taxes or cutting spending to reduce its debt?  Yes ladies and gentlemen, inflation.  Monetize the debt and YOUR savings into oblivion.  Hold on to your purchasing power, it could get ugly.