Risk of global recession; Big Disconnect; Japan, Vow to Cut; Budget math; joblessness; Lagarde’s Tough Msg; Tax Me More, Europe’s Wealthy Say; Where Pay for CEOs Outstrips US Taxes; Lots of Vitriol for Fed Chief, Despite Facts;H-P’s One-Year Plan;AMZN

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Whitney Tilson writes an email, where he writes a brief commentary on his favorite articles of the week (usually). I do not agree with all of Tilson’s political views but he always has interesting things to say. This week he had some very interesting points so I am posting


Tilson’s point about Japan is spot on.

I agree with him about taxes on poor. The pundits never point out that the poor do pay FICA tax (~6.5%). It is totally untrue that 47% of Americans pay no taxes. The only people who pay no taxes are the ones who do not work at all or completely cheat the system.

No matter how poor someone is, if they are a 1099 they pay double, and pay a ~13% rate (no deductions allowed). I think people making minimum wage would have a really tough time paying federal and state taxes as well.  I think the medicaid,  and WIC systems are absolutely insane , and to a lesser extent section 8 and food stamps as well (at least in New York). I have ideas to reform these systems but that is not the focus here . I am pointing this out because I  have been accused by some readers of being a right-winger. This is totally false: I examine each issue extensively  before  reaching any conclusion. I could not care less what the Red or Blue team (as I like to call them) think about the issue. On some issues I am far to the left of President Obama, on other issues I am far to the right. Just a clarification for those readers who think I am an ideologue.

One last thing: A lot of people do not like Tilson because he is a very good marketer. They state that he is not a good investor. Tilson’s hedge fund is up 260% since 1999, versus 26% for the S&P….

But without further to do, below is Whitney’s email.


The best overview I’ve read about the current state of the world economy, which concludes:

Where does this leave us? The snapshot of data taken in August suggests that the leading economies are not yet in recession, but are clearly still weakening, especially in terms of consumer sentiment. It has become commonplace to hear economic forecasters talking of a 40 per cent risk of a double dip recession in the developed world. Econometric models of recession risk broadly agree with this assessment, and it is probably as good a judgment as any.

There are now clear signs that the tightening in both fiscal and monetary policy which was planned earlier in the year will be hurriedly reconsidered. Policy makers probably still have time to act. Whether they will act with sufficient force to restore growth to an acceptable level is another matter entirely.

2) Doug Kass also presents good data on why it’s not clear cut whether we’re in (or heading into) a recession – simply put: “The typical conditions that precede a recession are not in place.”

The Big Disconnect
11:08 a.m. EDT

  • ·         Here is the problem that is perplexing investors today.

The typical conditions that precede a recession are not in place:

  • ·         large private payroll drops in excess of 175k a month (adjusting for nonrecurrings, they are still averaging about 100k growth over last four months);
  • ·         an inverted yield curve (it is not inverted);
  • ·         acceleration in inflation (inflation is contained and so are expectations);
  • ·         an increase in real interest rates (anything but!);
  • ·         bloated inventories (low inventories to sales in place now);
  • ·         retreating retail sales (they are expanding;
  • ·         negative year-over-year leading economic indicators (advancing now);
  • ·         a drop in factory orders (also advancing) and;
  • ·         outsized durable spending relative to GDP (housing and autos remain in the crapper).

As it relates to job growth, initial jobs claims, corporate profit growth and capital spending all point to improving and better payroll growth than we saw today.

But what is happening is that the negative feedback loop that I have been writing about is taking a turn for the worse, and we don’t yet know its impact on business and consumer spending.

When we figure out the disconnect between data and sentiment, we’ll have a lot more clarity on what the markets will do.

3) A good article on the troubles facing Japan.  I am really puzzled the investors are freaking out about Italy and Spain, when Japan is much bigger ($5.5 trillion GDP, 58% larger than Italy ($2.1T) and Spain ($1.4T) combined), far more indebted, is running massively bigger deficits, has a more stagnant economy, and there’s no possibility of a bigger country like Germany to help it out.

As Japan’s fiscally conservative finance minister, Yoshihiko Noda long sounded the alarm on the nation’s ballooning government debt. It is more than twice the size of its $5 trillion economy — and rated more risky than that of Italy and Spain.

Now, after Mr. Noda was elected Japan’s prime minister this week in response to the nation’s natural and nuclear disasters, the question is whether he can administer his prescription: raise taxes while reining in spending.

“We will no longer spend wastefully as if we are pouring buckets of water into a sieve,” Mr. Noda declared in a speech on Monday just before Japan’s ruling Democratic Party elevated him to the top job.

But that political resolve could prove hard to sustain — and not simply because of the systemic weaknesses that have resulted in six prime ministers in the last five years.

This is a country that was already addicted to its public spending, even before the huge needs of the postquake reconstruction. The last time the Japanese government ran a budget surplus was in 1992, almost two decades ago. Tax income now covers less than half of Japan’s annual budget.

Mr. Noda’s call for fiscal restraint is timely, given the global context. Last month, the ratings agency Standard & Poor’s stripped the United States of its top credit ranking, saying political paralysis in Washington was making the country less creditworthy. In Europe, bond investors make daily sport of handicapping the relative risks of the debt loads shouldered by members of the euro monetary union.

“Sovereign risk is spreading to, and starting to engulf, large economies that were previously unaffected,” Hideo Kumao, chief economist at the Dai-ichi Life Research Institute, said in a recent research note.

For years, Japan has managed its gargantuan debt load, and bond buyers have been willing to lend the government money at some of the world’s lowest interest rates. But for various reasons — including that low tax rate and Japan’s aging, shrinking population — the borrowing binge is looking unsustainable.

On July 23, Moody’s Investors Service lowered Japan’s credit rating by one notch, to a level two grades below the top rating, saying weak prospects for economic growth, as well as its recent disasters, made it difficult for the government to tackle its debt.

In the near term, though, Mr. Noda’s government has little choice but to spend on postquake reconstruction. The government estimates that losses could reach as much as 20 trillion yen ($260 billion) just for the natural disasters, excluding costs from the continuing nuclear crisis at Fukushima.

That means spending on a scale unprecedented even for Japan, whose decades of public works projects are a big reason that the national debt is expected to reach 228 percent of its gross domestic product this year. That is far higher than even debt-saddled Italy, at 118 percent, and the United States, at 92 percent, according to the International Monetary Fund.

4) A good analogy about our budget crisis:


The U.S. Congress sets a federal budget  every year in the trillions of dollars. Few people know how much money  that is so we created a breakdown of federal spending in simple terms.  Let’s put the 2011 federal budget into perspective:


U.S. income: $2,170,000,000,000

Federal budget: $3,820,000,000,000

New debt: $ 1,650,000,000,000

National debt: $14,271,000,000,000

Recent budget cut: $ 38,500,000,000 (about 1 percent of the budget)

It helps to think  about these numbers in terms that we can relate to. Therefore, let’s  remove eight zeros from these numbers and pretend this is the household  budget for the fictitious Jones family.


Total annual income for the Jones family:          $21,700

Amount of money the Jones family  spent:         $38,200

Amount of new debt added to the credit card:     $16,500

Outstanding balance on the credit  card:            $142,710

Amount cut from the  budget:                                $385 


Obviously, budget cuts are needed – the key is when – but income must also rise, and there are only two drivers: higher taxes (ugh) or higher growth (ideally).


4) In the discussions about the budgetary and economic mess we’re in, I hear a lot more talk about the need to cut spending than I do about the need to put people back to work – and that’s backwards in my opinion.  The one thing I’ve noticed that EVERY person calling for budget cuts has in common: they have a job and, I’d bet that budget cuts aren’t going to affect them or their family or friends.


I think policymakers should be paying a lot more attention to the people profiled in these two articles in the NYT and WSJ – not lazy “welfare queens” gaming the system, but decent, hard-working people who are really struggling in this weak economy.  Here’s one guy profiled in the NYT:

A century ago, about 40 percent of New York City workers held manufacturing jobs, according to “Working-Class New York,” by Joshua B. Freeman. As Labor Day rolls around again, that portion has shrunk to less than 4 percent, according to the federal Bureau of Labor Statistics. And when Mr. Deare received his pink slip, he joined a growing army of the unemployed in a borough that has been hit hard by the nation’s financial turmoil. The Bronx has an unemployment rate of 12 percent, the highest in the state. For African-American men like Mr. Deare, the city’s unemployment rate is even more disturbing: nearly 20 percent.

If getting a job is hard enough for a white-collar worker armed with a college degree, then the challenge was even steeper for Mr. Deare, who has only a G.E.D., lost 15 years to drug addiction and did a brief stint in prison. He had reinvented himself at Old London, reporting to work day after day for a decade; by the end, he was earning $16.61 an hour with health insurance. How does someone with his background find a job in the new economy? Mr. Deare was about to find out.

…As the end of summer neared, he threw himself into job-hunting. He put in applications everywhere he could think of, including Target and FedEx. He contacted his former union to see if it could help. He asked everyone he knew with a job to look out for him. The effort turned out to be an exercise in rejection. Nobody offered to hire him; they didn’t even bother calling back.

To keep up his spirits, he called each morning into a 6 o’clock prayer line run by his daughter, a minister in Massachusetts. Callers shared their worries, then prayed together; some mornings, Mr. Deare revealed his job woes.

“The hardest part for him is not working, not being in the game,” Ms. Amaro said. “He’s not a sit-around kind of guy.”

And here are the five people the WSJ has been following – this is an excerpt from the last person:

At the end of July, after two years of hunting, Ms. Prentis thought her fortunes had changed when she landed a temporary job bookkeeping at an architectural firm. She hoped that the position would become permanent. But that job fell through when the company decided to fill the position internally.

However, Ms. Prentis had held on to her sales-clerk job as a backup, so she is still working. “I’m not discouraged,” she said, adding that there’s nothing to do but “keep looking.”

Whatever happens, Ms. Prentis says it is likely too late to keep her home off the auction block. She paid $150,000 for the house six years ago, but, due to late fees, penalties and unpaid interest, she now owes $260,000. Poised to move at any time, she lives out of partially packed boxes.

Every Tuesday her attention turns to the possible arrival of the auctioneer. “When the day comes I’ll move out,” she says, probably to a New York City apartment in the Bronx that belonged to her late mother and is now occupied by another relative. “I’m still here until I’m not,” she says.

For politicians in Washington, Ms. Prentis has a message: Remember the unemployed and underemployed. “Washington has done nothing to help people like me except give us welfare which we don’t want,” she says. “We want to work and keep our homes.”

5) Brooksley Born, Sheila Bair and Elizabeth Warren, move over!  There’s another tough, common-sense woman speaking truth to power that I’ve fallen for, Christine Lagarde.  I first became aware of (and impressed by) her in the documentary Inside Job, and what she had to say in Jackson Hole impressed me further.  Here’s a NYT editorial:


August 30, 2011

Christine Lagarde’s Tough Message

Less than two months after being chosen to lead the International Monetary Fund, Christine Lagarde shook up last weekend’s conference of central bankers in Jackson Hole, Wyo., with an urgent, much needed plea for bolder economic policies in the United States and Europe to head off a looming double-dip recession.

When Ms. Lagarde, then France’s finance minister, was campaigning to become the fund’s managing director, it was uncertain whether she could look beyond the politicians’ obsession with austerity that has repeatedly defeated efforts to contain Europe’s worsening debt crisis and continues to stymie effective policy making on both sides of the Atlantic.

Now free to speak her mind, her blunt remarks and prescriptions were just what the central bankers needed to hear. She rightly called for: rebalancing global trade by stimulating demand in developing countries with big export surpluses; more aggressive mortgage relief in the United States; and giving job creation priority over deficit reduction in the United States and Europe.

She also called for substantial injections of public and private capital into dangerously frail European banks. And while citing the necessity for long-term deficit reduction, she made clear that near-term policies must give priority to generating jobs, stimulating demand and renewing economic growth.

For Europe, specifically, Ms. Lagarde prescribed more financing for debt bailout plans, a concerted effort to strengthen vulnerable banks and, most importantly, a common political vision about the euro’s long-term future that has been grievously lacking.

For the United States, she called for new efforts to resuscitate consumer demand by attacking long-term unemployment and mortgage foreclosures. She suggested “aggressive principal reduction programs for homeowners,” in addition to the kind of refinancing programs the Obama administration is now considering.

American political leaders haven’t taken much notice of her speech. European financial officials have been sputtering ever since. Ms. Lagarde cannot make any of these things happen by herself. If she keeps pushing hard, the politicians may finally wake up.

6) Good to see:

Echoing a call by Warren E. Buffett, members of the European wealthy elite are urging their governments to raise their taxes or enact special levies to help reduce growing budget deficits.

Maurice Lévy, chairman and chief executive of the French advertising firm Publicis, on Tuesday became the latest European business leader to ask for higher taxes on top earners, writing in The Financial Times that it was “only fair that the most privileged members of our society should take up a heavier share of this national burden.”

“I am not a masochist; I do not love taxes,” wrote Mr. Lévy, who is also president of a French association of private enterprises. “But right now this is important and just.”

(PS—If you disagree with Buffett (and me), that’s fine – show me how we ever balance our budget without increased taxes and, assuming you can do simple math and therefore understand that taxes must go up, then if we don’t raise taxes on the people who’ve done the very best in this country over the last three decades, exactly whose taxes should we be raising? (And if you think it should be the 47% of slackers in the country who supposedly pay no taxes, read this: www.nytimes.com/2011/08/31/opinion/the-new-resentment-of-the-poor.html) – but don’t say idiotic things like, “If Buffett wants to pay more taxes, then he’s welcome to send a check to the IRS.”  That wouldn’t address the problem Buffett’s worried about; he’s calling for a policy that would affect ALL ultra-high-income/net worth people.)


7) Speaking of idiotic, Rick Perry’s comments about Ben Bernanke qualify.  The fact that he said what he did (bad enough) and then didn’t immediately apologize (worse) should be frightening to Democrats and Republicans alike.  Bernanke and the Fed are, of course, popular whipping boys, perhaps with good reason, but let’s keep the discussion civil and rooted in facts.  Here’s James Stewart with an article toward that end:

Despite getting in “trouble” for calling Mr. Bernanke a traitor, as Mr. Perry subsequently put it, Mr. Perry vaulted to the top of polls and is now the unofficial Republican front-runner. Representative Michele Bachmann, the winner of the Iowa straw poll, has been burnishing her anti-Bernanke credentials, too, criticizing the Fed as “opaque” and reminding voters in South Carolina that she’s against “printing” money.

Nor are such sentiments confined to Republican presidential candidates looking for quick political gain. Last week, I bumped into an acquaintance I’ve always considered thoughtful and intelligent. He, too, lit into Mr. Bernanke and the Fed with great fervor. He quoted the Austrian School, the once-obscure but newly vocal group of zealous free-market economists who trace their roots to the Hapsburg Empire, disdain the scientific method in economics and blame the Fed for the financial crisis and the faltering recovery.

No one in government, including the quasi-independent Federal Reserve chairman, should be above criticism. But if Mr. Bernanke is going to be the centerpiece of such a heated debate, it should be conducted on the facts. And in that respect, “The level of ignorance among some of the Republican presidential candidates about monetary policy is stunning,” Mark Gertler, a professor of economics at New York University, said this week. “Mr. Perry has been taken to task for his choice of language, but not for the substance of his remarks, which is outrageous.” (Mr. Gertler said he was a political independent but considered himself a friend of Mr. Bernanke, a Republican.) Even President Obama was curiously restrained in coming to Mr. Bernanke’s defense, saying in a CNN interview only that Mr. Perry should be “a little more careful about what you say.” Although the Fed only belatedly identified the banks that received many billions of dollars of emergency loans during the crisis — for which it has rightly been taken to task — the Fed could hardly have been more transparent than it was recently about monetary policy.

It’s hard to believe the Fed’s critics have read the minutes of the Aug. 9 Fed Board and Federal Open Market Committee meeting, which were released this week. They may not read like a Robert Ludlum thriller, but they’re nothing if not transparent. They spell out in great detail the Fed’s reaction to the latest discouraging unemployment data, tepid economic growth and stock market volatility, including specific measures that might be used to address these problems.

Some members thought none of these measures would do any good. A majority nonetheless thought that something needed to be done, and chose to announce that the Fed would keep interest rates low for at least two years — “forward guidance,” in Fed-speak — as a “possible way to reduce interest rates.” Others wanted to peg the duration of low rates to a specific unemployment target, something the board deferred to a two-day meeting in September, when it will also consider other policy options.

The minutes provide a detailed portrait of a well-intentioned group of economists struggling to eke the maximum benefit from a dwindling and largely untested arsenal of monetary options, hardly a treasonous cabal bent on secretly conspiring to inflate its way to — what? World domination?

…our political leaders and those who aspire to replace them should be debating the fiscal policies that will put Americans to work in the short term and reduce the deficit in the long term — not bashing the Fed.

I fear it’s going to get uglier as the presidential campaign intensifies. Many voters seem determined to find a scapegoat for the financial crisis and its aftermath, and some candidates are only too willing to pander by serving up Mr. Bernanke. He hasn’t commented publicly, and friends say he’s taking the attacks in stride. Still, “as a human being, this has to be exasperating,” Mr. Gertler said. “What he cares about is his place in history as a central banker.”

While debate continues about the Fed’s role preceding the collapse of Lehman Brothers, during the crisis that followed “all serious economists think he did a brilliant job in trying circumstances like no one else had ever seen,” Mr. Gertler said, and Mr. Hall agreed with that assessment. “At the height of the crisis he slept in his office,” Mr. Gertler continued. “He was working around the clock. Can you imagine what it feels like now being called a traitor?”

8) And speaking of taxes, while we have the second-highest corporate tax rate among major economies, in reality there are so many loopholes and there’s so much gaming that travesties like this occur:

At least 25 top United States companies paid more to their chief executives in 2010 than they did to the federal government in taxes, according to a study released on Wednesday.


Verizon’s chief, Ivan Seidenberg, earned $18.1 million in 2010; the company got a tax refund.


John Donahoe, eBay’s chief, collected a compensation package over $12 million, while eBay got a $113 million federal refund.

The companies — which include household names like eBay, Boeing, General Electric and Verizon — averaged $1.9 billion each in profits, according to the study by the Institute for Policy Studies, a liberal-leaning research group. But a variety of shelters, loopholes and tax reduction strategies allowed the companies to average more than $400 million each in tax benefits — which can be taken as a refund or used as write-off against earnings in future years.

The chief executives of those companies were paid an average of more than $16 million a year, the study found, a figure substantially higher than the $10.8 million average for all companies in the Standard & Poor’s 500-stock index.

9) A brilliant and hilarious skewering of HP:

Let’s say you were given a year to kill Hewlett-Packard. Here’s how you do it:

Fire well-performing CEO Mark Hurd over expense-report irregularities and a juicy sexual-harassment claim that you admit has no merit. Fire four board members, as publicly as possible. Foment a mass exodus of key executives who actually know how to run the giant computer company.

Hire new a CEO from German competitor, SAP, which sells business software, not consumer products. Tell the new CEO, Leo Apotheker, that Mr. Hurd “left H-P in great shape.”

…Go to Wall Street and tell long, confusing stories about how you are transforming H-P from a low-margin to a high-margin business.

From former CEO Carly Fiorina‘s spectacular flame-out, and former chairwomanPatricia Dunn‘s illegal spying scandal, to Mr. Hurd’s alleged sex scandal that apparently didn’t involve any sex at all, this sort of dysfunction has become “the H-P Way.”

It has been a year since H-P fired Mr. Hurd. Jack Kevorkian couldn’t have devised a better plan for euthanizing a company. But like the good doctor used to say: “Dying is not a crime.”

10) I hope Amazon gets smacked by the CA legislature:

Amazon.com, the Seattle-based retailer that is the state’s chief target, is fighting back with all the resources of a company whose stock market valuation is nearly $100 billion. In an unusual move that opponents say is a violation of the state constitution, Amazon is taking directly to voters its argument that it should not be required to collect sales tax.

Infuriated state lawmakers are responding with what some observers are calling “the nuclear option”: writing new legislation that goes after Amazon and other online retailers under an “urgency” clause. If they can get the new measure passed by a two-thirds vote before the end of the legislative session on Friday, it will trump Amazon’s efforts toward a voter referendum.

11) An incredible story about Howard Lutnick and the recovery of Cantor Fitzgerald:

TEN years and a lifetime ago, Howard W. Lutnick was a prince of Wall Street. Forty years old, and already the head of a powerful financial house, he could peer down on rivals from his office on the 105th floor of One World Trade Center.

Then — you know the rest.

American Airlines Flight 11 struck Tower One. Three out of every four people who worked in New York City for Mr. Lutnick at the brokerage firm Cantor Fitzgerald died that September morning, 658 in all. Among the dead was his younger brother, Gary.

That Howard Lutnick survived was, he concedes, blind luck. Some people died because they happened to be at the World Trade Center on Sept. 11, 2001. Mr. Lutnick lived because he happened to be taking his son, Kyle, to his first day of kindergarten.

And so Mr. Lutnick, who ran Cantor Fitzgerald then and, remarkably, still runs it today, became an unusual, and unusually public, 9/11 survivor: the executive who cried on national television and then quickly began making hard-nosed — some said hard-hearted — business decisions. Four days after the attack, with the nation stunned and ground zero smoldering, Mr. Lutnick cut off paychecks to the families of his employees, before anyone even knew just how many had died.

“I was disgusted,” one widow, whose husband had worked at a Cantor subsidiary, told the television anchor Connie Chung a few weeks later.

And yet, since those dark days, Mr. Lutnick has defied those who said he and Cantor were finished. He has rebuilt his firm, and then some. And many of those who criticized him at the time, notably, spouses and parents of Cantor employees who had died, now say he did the right thing.

By almost any measure, it is a remarkable turnabout.

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