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January 09, 2012

The Daily DOOM

DOOOOM

I ring in the new year by bringing in a freighter full of DOOM, a ship packed to the gunwales with gloom, disaster, perfidy, and despair. I debated posting my DOOM backlog that I gathered over the Christmas break, but this would have led to a post roughly the length of Anna Karenina, so I decided to choose only the DOOMiest morsels to pass along.

Greece's default has been inevitable for some time now, and the last grains of sand may be running through the hourglass. One of the biggest surprises to me of the Euro crisis is how long a situation can persist in crisis mode: I seriously miscalculated the willingness of the EU's political class to ignore the catastrophe unfolding in front of them, and the willingness of the citizens of the Eurozone countries to muddle through from day to day. Greece's downfall will either be the beginning of the end, or simply the end of the beginning.

The WSJ does a video series called “Europe At the Brink” that I recommend to everyone who wants some background on how Europe got itself into this mess.

The idea that “financial self-interest” would prevent nations from going to war is silly, by the way. Or, rather, that nations can always clearly see their own self-interest (financial or otherwise) is silly. Every war ever fought in the history of humankind was caused by people acting in what they assumed was their own self-interest.

Greece is the perfect example: they entered the Eurozone assuming that it would drive their entrance into a first-world economy and style of living. But the problem was (and remains) that countries like Greece and Portugal are not like mature industrialized northern economies like Germany. A Greek word, ethos, describes the problem: the Greek ethos regarding work and productivity does not match that of their northern neighbors. What Greece really got for entering the Eurozone was poverty and ruin. Countries have had wars -- either civil or foreign -- over much less.

The WSJ video shows how interconnected modern financial markets really are. The US real-estate meltdown caused ripples that spread out and magnified existing faultlines elsewhere, but it could have been something else: the modern financial system has so many structural weaknesses that it was only a matter of time before something caused a catastrophe.


When the cheese runs out, the rats start eating each other. School districts are suing the states to force them to spend more money on the schools. Where is this extra money supposed to come from? From us, the pack-mules in the private sector, of course. I have said it many times: our public school system is a jobs program for adults, not an educational system for children. (The scandal isn't that countries like South Korea can educate their kids better than we can educate ours; the real scandal is that they do it for far less money.)

Good news: you win the lottery and the state sends you a big check. Bad news: You live in Illinois and the lottery-winnings check bounces. Illinois is now so hard up they’re stiffing lottery winners. Illinois: the state where even gambling winnings can’t be paid out on time. (The official line is that the checks were simply "returned" and didn't bounce, but you just try using that one on your local grocery store sometime and see how far you get.)

Beware the happy talk about holiday retail sales. If you can’t sell stuff at a profit, then selling more stuff isn’t really doing you any good.

Barnes and Noble may be following Borders into bankruptcy. As an avid reader, I'm not so sure how happy I am at the problems traditional booksellers are having these days. I love my Kindle and honestly believe that e-readers are well on the way to replacing the paper book, but...there is still a part of me that loves the artifact of the paper book. The weight of it, the physicality of it, the feel of the paper on the fingers. (Also: if you can’t find a way to make a profit off of $7 billion a year in revenue, you probably deserve to go bankrupt.)

Illinois: ill and annoyed.

Don’t take my Kodachrome away. Two lessons: nothing is forever, and pension promises are only valid so long as the entity promising to pay them remains solvent.

Best Buy may be on the way to bankruptcy. Couldn’t happen to a more deserving retail chain, frankly -- their whole operation verges on highway robbery for many items. Just price out an HDMI cable at one of their stores. Then laugh in bitter hilarity, and go to Amazon where you can buy the same HDMI cable for about eight bucks.

The "China boosters" like Teh Krugman, Tom Friedman, and many in the investing community have been trumpeting the ascendance of China for a decade now. But skeptics like me have been pointing out that China faces demographic pressures even more extreme than our own "Boomer bulge": they'll get old before they get rich. This news doesn't really please me -- the Chinese people deserve their share of success -- but their government has a long and ignoble history of almost bringing China to success, but not quite succeeding. Just look at the people in the picture in the linked article: I don't wish for China to fail, because China's failure means misery to people like this, people who have had enough misery in their lives. I simply wish for China to be a better country, both for the world and for its own citizens.

Boeing laying off 800 in the closure of their Wichita plant. This is the toughest kind of situation that can face many cities: the closure of a major employer with nothing of equal scale to take its place. Many displaced workers either face retraining into a different trade, or relocation to work in the same industry elsewhere. Either way, it's an expensive and uncertain proposition.

When almost everyone is poor, it doesn't foster kindness and civility; more often, it leads to insularity, selfishness, and suspicion. When a society becomes more wealthy, it also often becomes kinder. When we have enough for our own needs, we become more cognizant of the needs of others.

How Leviathan grew so large:

Every day we see large numbers in reference to the federal budget, the federal deficit, the EU's financial troubles -- you name it. But just how large is this five-year increase of 277,5000 employees in the federal workforce?

To put it into context, the increase in the number of federal government employees hired since September 2006 alone is larger than the populations of all but about the 70 largest cities in the United States.

The number of federal employees added during this period is also larger than the populations of 37 of the nation's state capitals.

The powers of the Fed have always been overrated, but now the Fed's limitations are becoming obvious even to average taxpayers.

It's going to be a tough world out there for investors for the next couple of decades. The days of easy 10-15% returns are long gone, and they shan't be coming back again soon. So where does a return-seeking investor turn? Equities are going to be a better bet than bonds (probably), but that doesn't mean they're going to do door-buster business. I think that equity returns in the neighborhood of 5-8% will come to seem pretty good. Investors are flocking back to good old dividend stocks as other sources of income dry up, and I expect this trend to continue -- the good old "widows and orphans" investments are going to become pretty mainstream in the years ahead.

The recent uptick in jobs numbers is welcome, but the unemployment problem is far from solved. Labor-force participation is still at historic lows even as the official jobless rate shrinks, and that's the statistic that should scare you -- even as the US population goes up, participation in the labor force is going down. That's not good news.

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posted by Monty at 08:44 AM

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