European Union Economy Hard Numbers

Eurozone unemployment hits record. The biting austerity and debt crisis across the Euro-zone continued to hit hard in December, with unemployment coming in at a euro-era high of 10.4%, which was unchanged from revised November figures. At 22.9%, Spain clocked in with the greatest unemployment, followed by Greece and Lithuania. At the other end of the scale, Austria had a 4.1% rate, while Germany's jobless figures fell more than expected; the rate was 6.7%.

Eurozone banks to tap ECB for even more money. In further evidence of the liquidity squeeze among eurozone banks, several of the largest may double or even triple their request for funds at the ECB’s three-year money auction on Feb. 29, The Financial Times reports. Banks borrowed €489B in the emergency funding scheme's debut auction last month.

EU finalizes permanent bailout fund. Twenty-five of 27 EU member states will sign off on the €500B permanent European Stability Mechanism rescue fund. The U.K. and the Czech Republic are not supporting the vehicle, which will replace the temporary European Financial Stability Fund. The ESM is unlikely to be big enough, though, as this infographic shows.

€500 Billion seems like a lot of money. But as the graphic provided by the link in the previous paragraph indicates, the size of the debt is €2.91 Trillion, or just short of six times the amount of the bailout fund. This means the fund needs to be six times larger than what was just agreed upon. And this is only for the PIIGS nations (Portugal, Italy, Ireland, Greece and Spain). There are 22 other nations in some significant degree of current or future trouble as indicated by the unemployment numbers mentioned above.

As an aside you might notice from the infographic that BBVA (formerly Compass Bank) is the second largest lender to PIIGS nations.  Let the buyer (or in this case bank customer) beware.

Obama Economic Record

There was the speech and then there are the numbers...

Investing In Hedge Funds

“Hedge funds have made massive mistakes. We are less and less willing to invest with these people because at the point when you need them the most, they’re worth the least.”

-George Feiger, chief executive officer of Contango Capital Advisors, wealth management arm of Zions Bancorporation. Feiger manages $3.3 billion at Contango and Western National Trust Co.

In 2008, the hedge-fund industry had ~$2 trillion under management. But as Economist’s Buttonwood points out, that year was an annus horribilis for the hedge-funds. “The average performance was a loss of 23%. In cash terms the loss for that single year was more than double the industry’s total assets under management in 2000.”

This is detailed in a new book by Simon Lack titled The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True. Mr Lack reckons that hedge funds have lost enough money in 2008 to cancel out the entirety of profits made in the prior ten years.

Mutual funds have not fared any better in 2011. Data from Morningstar shows that among 4,100 funds that invest in large-cap stocks, only 17% beat the SPX. That is the smallest percentage since 1997 beating their benchmark — the S&P500 — since 1997, when 12% beat the SPX. If we look at the percentage of funds under-performing by 250 basis, its the worst since 1998.

If you are looking for something to blame, consider the unholy trinity of capital outflows, a flat 2011 market and high volatility. That was a challenging environment for hedge funds and mutual funds alike.

I suspect people are disappointed when a mutual fund under-performs with fees of 0.75 to 1.75%. But the fee structure of Hedge fund managers — 2% + 20% of the profits — is why some of them face real trouble. Its bad enough to under perform, but institutions hate paying up for the privilege.

Perhaps 2012 is the year fund managers mean revert and redeem themselves. If they don’t they should not be surprised at massive redemptions each time their window opens.

From Barry Ritholtz

U.S. Tax System: Exploiting the Poor?

An economics professor's take on our current tax system...

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this…

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that’s what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20″. Drinks for the ten men would now cost just $80.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free. But, what about the other six men? How could they divide the $20 windfall so that everyone would get his fair share?

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer.
So, the bar owner suggested that it would be fair to reduce each man’s bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.

And so the fifth man, like the first four, now paid nothing (100% saving).
The sixth now paid $2 instead of $3 (33% saving).
The seventh now paid $5 instead of $7 (28% saving).
The eighth now paid $9 instead of $12 (25% saving).
The ninth now paid $14 instead of $18 (22% saving).
The tenth now paid $49 instead of $59 (16% saving).

Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.

“I only got a dollar out of the $20 savings,” declared the sixth man. He pointed to the tenth man, ”but he got $10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar too. It’s unfair that he got ten times more benefit than me!”

“That’s true!” shouted the seventh man. “Why should he get $10 back, when I got only $2? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new tax system exploits the poor!”

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn’t show up for drinks so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, boys and girls, journalists, and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.

By: David R. Kamerschen, Ph.D. – Professor of Economics.

Market Ups and Downs

It’s going up. No, I’m sorry, it’s going down more. Oops – now up a little. No! Down more. (You get the idea).

1. Steep drop into early August, then hit a low where market rallied up 10% in six days.
2. We then dropped about 7% in 3 days.
3. We then rallied up about 9% in 7 days.
4. And then in 2 days we dropped about 8%.
5. In 2 days we rallied up 5.5%.
6. And then next 2 days we dropped 6%.
7. And the next 5 days we rallied up 7%.
8. And the next 3 days we dropped about 9%.
9. Next, we rallied up about 7%.
10. The next 4 days we dropped about 10%. Culminating with the wash out on Oct 4.
11. And then in 5 days we rallied up 11%.
12. A little rally up.
13. Another big day down.
14. Within a day, a gap up. Then another big drop.
15. Went down about 9% in seven days.
16. And this week on two days that gapped up, a total of about 640 points.
17. We finished with a rally this week of 8%
18. Today down again.

Is it any wonder progress seems so slow in coming? The truth is this has been going on for only a few months. It’s coming to a head, slowly but surely. We’ll get to put capital to work productively when that happens. For now, I’m just glad to have so much money off of this roller coaster ride.

Shared Sacrifice (Socialism) and How it “Works”

Here's how your fairness and shared sacrifice is going to "work"...at least under the current definitions...

When the reward is great, the effort to succeed is great, but when government takes all the reward away, no one will try or want to succeed. Is this man truly a genius? Checked out and this is true...it DID happen!

An economics professor at a local college made a statement that he had never failed a single student before, but had recently failed an entire class. That class had insisted that Obama's socialism worked and that no one would be poor and no one would be rich, a great equalizer.

The professor then said, "OK, we will have an experiment in this class on Obama's plan". All grades will be averaged and everyone will receive the same grade so no one will fail and no one will receive an A...(substituting grades for dollars - something closer to home and more readily understood by all).

After the first test, the grades were averaged and everyone got a B. The students who studied hard were upset and the students who studied little were happy. As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little.

The second test average was a D! No one was happy.

When the 3rd test rolled around, the average was an F.

As the tests proceeded, the scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else.

To their great surprise, ALL FAILED and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great, but when government takes all the reward away, no one will try or want to succeed. It could not be any simpler than that.

Regulation Run Amok; Choking on ObamaCare

By George F. Will
In 1941, Carl Karcher was a 24-year-old truck driver for a bakery. Impressed by the large numbers of buns he was delivering, he scrounged up $326 to buy a hot dog cart across from a Goodyear plant. And the war came.

So did millions of defense industry workers and their cars. And, soon, Southern California’s contribution to American cuisine — fast food. Including, eventually, hundreds of Carl’s Jr. restaurants. Karcher died in 2008, but his legacy, CKE Restaurants, survives. It would thrive, says CEO Andy Puzder, but for government’s comprehensive campaign against job creation.

CKE, with more than 3,200 restaurants (Carl’s Jr. and Hardee’s), has created 70,000 jobs, 21,000 directly and 49,000 with franchisees. The growth of those numbers will be inhibited by — among many government measures — ObamaCare.

When CKE’s health-care advisers, citing Obamacare’s complexities, opacities and uncertainties, said that it would add between $7.3 million and $35.1 million to the company’s $12 million health-care costs in 2010, Puzder said: I need a number I can plan with. They guessed $18 million — twice what CKE spent last year building new restaurants. Obamacare must mean fewer restaurants.

And therefore fewer jobs. Each restaurant creates, on average, 25 jobs — and as much as 3.5 times that number of jobs in the community. (CKE spends about $1 billion a year on food and paper products, $175 million on advertising, $33 million on maintenance, etc.)

Puzder laughs about the liberal theory that businesses are not investing because they want to “punish Obama.” Rising health-care costs are, he says, just one uncertainty inhibiting expansion. Others are government policies raising fuel costs, which infect everything from air conditioning to the cost (including deliveries) of supplies, and the threat that the National Labor Relations Board will use regulations to impose something like “card check” in place of secret-ballot unionization elections.

CKE has about 720 California restaurants, in which 84 percent of the managers are minorities and 67 percent are women. CKE has, however, all but stopped building restaurants in this state because approvals and permits for establishing them can take up to two years, compared to as little as six weeks in Texas, and the cost to build one is $100,000 more than in Texas, where CKE is planning to open 300 new restaurants this decade.

CKE restaurants have 95 percent employee turnover in a year — not bad in this industry — and the health-care benefits under CKE’s current “mini-med” plans are capped in a way that makes them illegal under Obamacare. So CKE will have to convert many full-time employees to part-timers to limit the growth of its burdens under Obamacare.

In an economic climate of increasing uncertainties, Puzder says, one certainty is that many businesses now marginally profitable will disappear when Obamacare causes that margin to disappear. A second certainty is that “employers everywhere will be looking to reduce labor content in their business models as Obamacare makes employees unambiguously more expensive.”

According to the U.S. Small Business Administration, by 2008 the cost of federal regulations had reached $1.75 trillion. That was 14 percent of national income unavailable for job-creating investments. And that was more than 11,000 regulations ago.

Seventy years ago, the local health department complained that Karcher’s hot dog cart had no restroom facilities. He got help from a nearby gas station. A state agency made him pay $15 for workers’ compensation insurance. Another agency said that he owed more than the $326 cost of the cart in back sales taxes. For $100, a lawyer successfully argued that Karcher did not because his customers ate their hot dogs off the premises.

Time was, American businesses could surmount such regulatory officiousness. But government’s metabolic urge to boss people around has grown exponentially and today CKE’s California restaurants are governed by 57 categories of regulations. One compels employees and even managers to take breaks during the busiest hours, lest one of California’s 200,000 lawyers comes trolling for business at the expense of business.

Barack Obama has written that during his very brief sojourn in the private sector he felt like “a spy behind enemy lines.” Puzder knows what it feels like when gargantuan government is composed of multitudes of regulators who regard business as the enemy. And 22.9 million Americans who are unemployed, underemployed or too discouraged to look for employment know what it feels like to be collateral damage in the regulatory state’s war on business.