Entries Tagged 'Economy' ↓

It is already July, and the ludicrous budget plan I wrote about  a week ago did not end up passing.  Now California is starting to issue IOUs for many of its obligations.  These IOUs are actually called “registered warrants”, and they will yield a 3.75% annual interest rate.  The state plans to repay them in October.  So what happens if you receive one?

Apparently many IOUs would be sent to residents who are still owed a tax refund.  Many small businesses that sell to the state will also receive them.  A full list of the various agencies and groups that will be paid with IOUs is here. Right now the large banks such as Bank of America, Chase, and Wells Fargo are willing to cash the IOUs for customers.  However, this only lasts until July 10th, so this means that if you need the money now you better hope that you receive your IOU before then and get it to the bank.

It is also possible to sell the IOU to other lenders and investors.  Afterall, whoever holds the IOU at the time of maturity will collect the interest accrued. There is a risk of default from the state, but I can see some people getting into the business of buying up IOUs from people who need the cash.  Most likely these folks will pay less than the value of the IOU since they want to make a profit.

If you do not need the cash right away it might be best just to hold on to the IOU because the interest accrued is not taxable.  3.75% tax free is a lot better than any CDs and bank accounts out there now, but it really means nothing if you need to pay your bills right now.

I hope that the state gets its act together by July 10th because otherwise many people may have to resort to less safe venues to cashing their IOUs.   Small businesses may not even be able to survive without the ability to keep the lights on and making payroll.  Needless to say, this is a complete debacle, and I hope it does not cause too much damage.  Additionally, this round of IOUs for those who have a tax refund is further proof that it is better to owe the government money.  If you are in this group it is probably a good idea to withhold less from your checks.

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The latest news is that the unemployment rate in the Silicon Valley is now at 11.2% and this is the highest unemployment rate on record for our area.  From a survey of my friends and family it seems that everyone is a bit unsettled about their jobs right now.  Here is what I found.

Many of the large tech companies around here already went through rounds of publicized and internally announced layoffs and a good majority has had pay freezes or paycuts starting as early as late last year.  These are all public companies that you probably have heard of.  Basically noone I know in a large company has had a raise this year with the exception of people at Lockheed Martin.  Lockheed is doing fine since is a defense contractor and we are in the midst of war.  The government cut some of their contracts and added others.    The largest organization in California is the state of California itself, and we all know how terrible the state coffers are right now.  Pretty much all public employees I know are  getting paycuts in the form of furloughs and some are being laid off.  Banking is another industry that got hit extremely hard for obvious reasons.  For example, we have a Downey Savings, WaMu, Wachovia, Wells Fargo, and Bank of America all on the same block.  Two of those banks are technically dead.

On the flip side the friends I know that work for smaller corporations still managed to get raises and bonuses this year.  This is not to say that smaller companies are doing better than larger corporations as a whole, but I think that in general smaller companies have less fat to trim than large corporations.  Most startups tend to pay less than large companies, and have a leaner team to operate everything.    For the most part raises are rare this year, and they are also much smaller than previous years.   Many small companies depend on the spending of large corporations so there is really a trickle down effect.   Personally I have no idea if my company is giving out raises, but I am not expecting anything.  I would seriously be happy with a 1% raise just to cover the increase in state taxes.  The hubby got a small 3.75% raise and I am pretty happy about that even though it is smaller than any previous raise.

Anyway, the greater economy is really out of our control, and I am pretty grateful that we still have jobs.  However, I think everyone should try to give themselves a bonus or raise through saving or earning more money.  I have done several things to essentially give ourselves a raise this year such as refinancing our mortgage, renegotiating our rent, and continuing to blog.  Reducing our mortgage and rent is basically saving us 3300 after tax money every year, and that is significant.  My blogging income is also much higher than last year as my articles age and I have a bigger collection of articles.  These changes make me a little less uneasy about the general doom and gloom atmosphere we are in, and I am hopeful that the American economy will recover eventually.

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There was a mini panic in the financial markets recently when the 10 year and 30 year U.S. Treasury yields rose significantly in one day.  The 30 year bond’s yield is now over 4.5%.  This is due to the fact that the central bank has been trying to push long term rates down by announcing that it is buying an additional $1 trillion of U.S. agency debt.  It seems like bond buyers are no longer taking this manipulation of yields, and they are demanding the interest on their investments.  What does this mean for little guys like you and me?

First of all, I am glad that this is happening because I am just sick of all the efforts to push down mortgage rates  when there is no good reason to push it down.  Higher mortgage rates will encourage people to borrow less money, and push down housing prices.  That is not a bad thing on both counts. People will buy houses when it is affordable and reasonable.  Many people are buying right now because housing prices have come down dramatically, and not because of the historically low  mortgage rate. New homebuyers may not be able to lock down mortgages under 5% any longer, but the dip in prices to come may just make up the difference. The only negative is for those who are waiting to refinance, because those below 5% rates are now gone.

Higher yields on treasuries may also make those in charge of the  U.S. government think a little bit before they issue more debt. They need to know that they cannot make every bond buyer pay extremely low rates and this endless borrowing needs to be controlled. If the U.S. government spent and borrowed less, then our taxes may be lower.  However, these higher yields will just mean that Americans will be paying more in interest for years to come with their tax revenues.  This is unfortunate, but bond buyers are investors who should not have to accept rates that do not match the risk of the investment.  For what it is worth, I think right now the yield on 10 and 30 year treasuries is still fairly low so the U.S. is still getting a fairly good deal.

Some other effects I am hopeful about is that perhaps short term rates will follow on the upward trend and savings rates will go up accordingly.  The worst scenario is that inflation is going up AND savings yields are still abysmal, and in a way that is sort of happening now.  Inflation isn’t tremendous this year, but I am noticing some small increases in gas and food prices.  Additionally, wage growth is fairly small all over the board due to the recession.

Anyway, the Obama administration tried to reassure  China that its holdings are safe by pledging that the U.S. will try to reduce its budget deficit and eliminate the market manipulations by the government.  I personally think that China’s worries are justified because actions speak louder than words.  If the U.S. is really trying to reduce its budget deficit then it shouldn’t pledge more and more borrowing and spending.   The fact that Geithner had to make such a trip to reassure Chinese leaders shows that the U.S. government is feeling insecure about its debt situation and that does not inspire confidence in the bond market. China really has no obligation to buy trillions of U.S. treasuries and China is free to invest its reserves however it wants.  If China’s reluctance to lend encourages the US to cut its borrowing and spending then it is a good thing for  United State citizens in the long run.

In conclusion, the stock markets are showing signs of recovery, so this will probably push bond yields higher since there will probably be less demand for bonds.   This is good news for everyone who has money in the stock market.  It is reasonable that bond yields are going up, and it is nice to see some market forces push back against the heavy hand of government intervention.

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The Silicon Valley is a fairly liberal place that has generally supported many of the Obama Administration’s moves, but yesterday  many in the tech industry do not seem happy about Obama’s proposal to effectively raise taxes on foreign income by billions of dollars.

Currently, U.S. based companies can defer corporate taxes on foreign income as long as they keep the income in another country.  Additionally, U.S. companies can deduct the foreign taxes and costs  they already paid against their income.  The Obama administration argues that this ships jobs overseas.  The problem with that argument  is that many U.S. based companies actually make more than 50% of their income from citizens of other countries.  Imagine if you are selling 1000000 units of something here in the United States, and you are selling 1000000 units of the same thing to the rest of the world, then you would absolutely need staff and offices in the rest of the world.  There is a Walmart in my hometown in China, and sure, it is staffed by Chinese people, but it also earns money from Chinese people.  Does the Obama administration think that taxing this Walmart more will bring those jobs to America?  That is absolutely ridiculous.  What it will do is that it would cut the profit margin of the Walmart in China, and the Chinese will have to suffer higher prices and they will probably just shop elsewhere.  This will reduce the competitiveness of American companies in other countries because other stores have to pay only the local taxes.

I really think this plan to enact protectionism via the tax code is really short sighted.  America has 5% of the world’s population, and a lot of the large multinational corporations have little room to expand in this country.  Just think of how many iPods and McDonalds you see everyday and you would understand that the United States is absolutely saturated with a lot of products and services and the growth rate for a company that stayed exclusively in the United States would not be as large as a company that sells to the rest of the world.  So why would the United States government punish corporations for making money from the rest of the 95% of the world?

Another consequence of this initiative that was not mentioned by the administration is that this will affect the stock prices of the bluest blue chips.  When you see those earnings per share numbers, they do include foreign earnings.  For example, Johnson and Johnson is a company that gets more than 50% of its earnings from foreign countries.  So imagine that half of its earnings suddenly had a tax of 30% compared to 2% the year before.  This will cut into the earnings per share significantly.  The result would be lower stock prices, and the further erosion of 401ks and pension funds.  What a great way to destroy more retirements.

The worst consequence is that large corporations could just pack up and leave the United States completely.  Just imagine all of the Silicon Valley greats like Oracle, Google, and Cisco reincorporating in another country with more favorable corporate tax systems and taking away tens of thousands of jobs permanently.  That would be a huge blow to the United States economy, and it may be irreparable.

So far, the reception to this plan has been somewhat hostile from many industry groups and foreign nations.  The Register in the UK states that “Obama declares war on Ireland” for its low business taxes.  In some ways, that is true.  U.S. based companies employ millions of people in foreign countries, and if the administration specifically targets foreign taxes, it is essentially targeting the livelihoods of these people.  It is also ridiculous to think that laying off foreign workers is good for America, because as the living standards of everyone else improves, they also purchase American goods.  If you take away those good paying jobs around the world, it is really worse for everyone.  The plan will supposedly raise $210 billion for the Treasury in the next decade, but at what cost to the global economy and America?

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I admit it. I watch a lot of TV, and this year I have had the unpleasant experience of turning on the tube to find President Obama when I expected some funny or smart show to come on. This has happened repeatedly in the last few months and it is scheduled to happen again on 4/29.

Because of Obama I had to watch Valentine’s Day episodes of popular comedies in the middle of March. I am sorry but it just feels out of context to see a bunch of hearts on St. Patrick’s Day and every show was just a little less funny. Next, I now no longer know which day some shows are on because several networks changed airing dates to accommodate Obama. Some shows are also trying to catch up by showing multiple episodes in the same week and that is just plain confusing.

I have no problem with President Obama being on TV. After all, he has important things to say, but is it really necessary to preempt prime time television every few weeks on every single network channel? What is wrong with a 6pm news conference when news is usually shown on TV? It is possible to communicate to the public on cable news, the internet, or radio so I think all of these prime time conferences are done at least in part due to Obama’s enormous ego.

So what does this rant have to do with finance or business? Well, the TV networks are definitely losing millions of dollars with each prime time intrusion by President Obama. These two upcoming weeks are especially important because it is what’s known as May sweeps. This means that many shows are having their season finales so advertising is generally more expensive. Also, the sweeps ratings are important to every show since they are used to determine advertising rates for the next season. These prime time interruptions are really hurting the major networks and the shows they are airing. It also hurts the local network affiliates in every city and town in America who receive ad revenue from the shows they air. Most of all, the revenue loss will hurt the workers at these broadcasters and shows. If a company is forced to lose millions of dollars every few weeks they are bound to cut some personnel. Also, many of the new shows that are trying to establish themselves are hurt by the constantly shuffling scheduling, and every cancellation of a show is equivalent to the cancellation of hundreds of jobs.  So believe it or not, Obama’s decision to schedule his news conferences during prime time instead of say 4pm or 6pm is truly hurting people.  I think one of these networks should just stand up to the White House and say no and I am sure that network will get more viewers than the rest because they would be showing something different.

By now I can already predict what Obama is going to say on the news conference because he generally says the same thing over and over. First, he will say something to the effect that we are in a difficult economic crisis and everyone needs to work together. Then he will say that he has cut taxes for 95% of Americans and he is cracking down on the greedy bankers. Finally he will end up with the cliche that there is hope for America. Basically, Obama is continuing his campaign and since he is president now he has the power to get primo prime time coverage for free!

I am definitely not the only one mad about these prime time TV interruptions. It may seem silly that I care about TV so much, but it is my leisure time that Obama is sacrificing for his own ego. After working 8 to 10 hour days, I think millions of Americans deserve to be shown something that makes them happy for 20 minutes to an hour. Millions of people want to escape from the reality of this horrible economy and real life just for a little while, and Obama is taking that away when he can choose not to. So I don’t think it’s stupid to say that if your President really cared about your well being he or she would leave your favorite shows alone. News conferences belong on news channels, and not during Chuck or Bones.

Here is an idea, if Obama seriously wants to be on TV on prime time so often then he should just get his own reality show. I am sure that will have great ratings and actually add to the coffers of the network that snags it. At least that would stimulate the economy instead of taking money away from broadcasters.

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