September 24, 2009

Free Enterprise or Unions?

By definition, free enterprise is business governed by the laws of supply and demand, not restrained by government interference, regulation or subsidy. It is also recognized as the free market. This system of supply and demand places emphasis on competition, where only the strong survive and the weak…well…they die. It reminds me of a forced bell curve that was implemented in my college courses where a certain percentage of students needed to fail in order for other students to succeed. Because no one wanted to be in the category that would fail, this method often resulted in students producing the most creative and unique problem-solving techniques to arrive at the best answers to case studies presented to the class. Free enterprise, or the bell curve in this example, allowed for the most productive classroom and class participation for the professors who taught under this method.

A second example would be to think of a potential football team – where only the best players are able to compete for 1 position in order to make the cut and get listed on the roster. I think you get the picture and understand the benefits of free enterprise in the example of the classroom and a football team.

A union, by definition, is an organization of individuals joined to protect their common interests and improve their working conditions. This system of protectionism places emphasis on everybody, where either everybody loses or everybody wins. Now imagine if the classroom was a union…where the entire class would win or fail depending on results. Would some students work harder than others? You bet. Would there be room for errors? You bet. Everyone would be expected to pull their weight for the common goal of the class, but as with any class, you’ll have your class clowns pulling down everyone’s grade.

Think of the tryouts for the football team operating as a union, where either all the players made the team or none at all. There would be some players who wouldn’t push themselves, train, or practice as hard as the others wanting to make the team.

So, from my aforementioned examples one can assume I’m a bit lenient towards free enterprise than I am for a union-supported enterprise. But in what scenario would a union be sufficient? How about the US military? Where every soldier trains together, eats together, fights together, and no man is left behind on the battlefield…even if you die your body is shipped back home. Everyone shares one common goal and there is no room for individuality, but if you make a mistake or underperform – you can rely on your comrades for help…and likewise they rely on you.

Which method is better? A free enterprise or a union…? Both methods are sufficient; however, it depends on the situation in which a method is being used. Which method would be sufficient for healthcare? Should private enterprise lead the way in which some people would have to do without health insurance to keep costs low for others? Or should we back the Obama administration and provide for all even if it meant higher taxes for some of us?

Governments, or unions, should not force over regulated markets, but at the same time free enterprise should not be able to run amuck and reiterate the overall meltdown of the economy again. There is a place for both at the round table of Capitalism, but we must thoughtfully decide the appropriate time and place for both…because too much of any one thing spells disaster.

September 23, 2009

G-20 Summit

10% unemployment rate is bad, but it also suggests that 90% of Americans are working – Barrington Lewis

I’m back folks!  Took a little break from the blog to focus on the Level 1 CAIA exam. But now I’m ready to get back to writing!

Today the G-20 summit met in Pittsburgh, NY to discuss powerful decisions that affects international economic and monetary policy and President Obama delivered a powerful “framework” for global progress and peace…while at the same time Treasury Secretary Timothy Geithner pleaded before Congress for more regulation of the banking industry. Some of us will catch the highlights of the G-20 to see what went on after we get off of work, or maybe we’ll catch the highlights and commentary once we wake up and watch the news.

But the true fans of this G-20 summit can interpret that a new world of interlinked powers or nations is emerging – indeed the world is becoming smaller. The best opportunities for investments will not be just domestic, such as here in the US, but abroad in developing countries such as India, China, Africa, etc. New financial instruments will come to play and we’ll hear top economists coin phrases such as “green investing” or “socially responsible investing”…hopefully, as time progresses and regulation is at least minutely accepted, hedge funds will self-institutionalize to the point where more middle-class citizens have the opportunity to participate in these “absolute return” funds that are currently limited to high net worth individuals.

We shall soon see how it all plays out and exactly how much trust is exerted between nations, whether ally or foe, and how democracy spreads its wings throughout the world.

September 15, 2009

Just 2 quick thoughts

  • President Obama wants more regulation of the banking industry and aims to prevent companies from ever becoming "too big to fail" and causing another meltdown of the economy.  After supplying the banks with taxpayer funded bailouts - the Obama administration wants to limit the "size" or assets of these banks to keep another meltdown from happening again.  This may backfire given that now, after the bailouts, banks have become even larger.  For instance, Bank of America acquired the assets of Merrill Lynch and Countrywide financial; Wells Fargo acquired Wachovia and Century Bank; JPMorgan acquired Washington Mutual; and the list currently goes on....

  • On another note, I think the United States is reverting back to the times of the past...this may be actually good.  Ever notice that the term "Buy America" is being thrown around lately?  Or that there are more federal grants available for students that decide to pursue math, technology, or engineering majors?  It seems as if the U.S. is becoming again more of an industrial power - where we begin to produce more and consume less.  From a political standpoint - consider the recent tariffs the U.S. has placed on imports (i.e., the tariffs on Chinese manufactured tires).  Consider the "cash for clunkers" campaign and domestic deals on Ford, Chevy, and Chrysler vehicles.  I've also noticed a lot of highways and U.S. infrastructure jobs being created and signs on my way to work stating "This project funded by the American Recovery and Reinvestment Act".  This will put a lot of people back to work and keep America going strong - as China changes its export based economy to more of a consumer based one. 

September 11, 2009

Should the super rich be taxed more? Or receive tax breaks?

It is all over the news about whether the super rich (the top 10%) should be taxed at a higher percentage than the bottom 90% of Americans, or if these high net worth individuals should be given a tax break.  Some middle class and poor Americans (the bottom 90%) believe that the super rich should be taxed at a higher percentage to cover the high costs of the healthcare reform, Medicare, Social Security, and any other expenses or defaults that our country may have. 

Billionaire Warren Buffet made a case to Congress in 2007 that the current tax code is unfair to lower income Americans, and that he pays 18% of his salary to the IRS while the rest of his staff pays nearly twice that - 33%!  Buffet stated to lawmakers that "frankly, an economy where my receptionist pays a lot higher tax rate [than] I do does not strike me as a just economy."

But on the contrary, other super rich individuals believe they deserve tax breaks and should not be "punished" for being richer than most by paying extra taxes to cover the cost of those who aren't as fortunate or those that don't work hard enough.  Some say that if the government continues to increase taxes on the super rich Americans who have more income, then most Americans will not be as motivated to achieve higher salaries because the government will take their hard earned money through taxes and give it to the lower income Americans.

What I consider interesting is how currently most super rich Americans use the tax code to their advantage.  Many super rich Americans either have a low salary or no salary at all - which means the IRS cannot tax all of their wealth with an income tax.  For instance, the boss of Blackstone Group, Steve Schwarzman, has been named the best paid CEO with a compensation of $2.3 million dollars which the IRS will tax at the highest rate of 35%.  However, you may find it interesting that according to WallStJournal, Schwarzman also received an additional "$699.8 million from the vesting of 25% of the equity granted from [Blackstone's] June 2007 IPO.  That is on top of the $684 million he cashed out on in the IPO and doesn't include the balance of his equity grant that will hit in coming years."

One can see that although Steve Schwarzman has a salary, or taxable income of $2.3 million, he also has additional gains not subject to income tax, but rather capital gains tax, which is currently at 15%.  If you add the sum of $699.8 million and $684 million, the total is $1.38 billion that is only subject to capital gains tax!  In 2008, the 2nd richest man in the world, Warren Buffet, with a estimated net worth of about $60 billion - has a salary of just $100,000 that is subject to income tax - the rest of his fortune is taxed at the current rate of 15% in capital gains tax.

So should the super rich pay more in income tax?  Or more in capital gains tax?  Or should they receive tax breaks since they pay so much already?

Who's wrong?  Who's right?  What is considered fair...?  You tell me!

Or if you're one of those considered to be in the bottom 90%, then maybe you should just make more money.....???


September 2, 2009

US Stocks Close Lower As Fincls, Consumer Cos Slide - MarketWatch

US Stocks Close Lower As Fincls, Consumer Cos Slide - MarketWatch: "US Stocks Close Lower As Fincls, Consumer Cos Slide"

Come on stocks! Get it together... September is historically the worst month of the year for stocks (supposedly), so there is no immediate need to be discouraged. On the contrary, when the market is down it is a good time to buy. So, in taking an optimistic stance, I say September is the best month of the year to buy stocks!

September 1, 2009

The strong survive and the weak get taken advantage of...

Remember not too long ago when the US economy was in a free fall?  And everyone sold off their stocks and took their losses?  In the 2nd half of 2008 and beginning of this year everyone including some "experts" and economists thought the sky was falling.  The media flashed "Bearish" images of the Great Depression and even the WallStreetJournal dropped forecasts of the Dow crashing down to 4,000 before the economy would get better.

Now take a moment and think back further to mid-2007 when the Dow reached record levels above 14,000, and every expert and economist echoed about how great the economy was...and that the Dow will keep rising as the fundamentals of our economy remained strong.  As the markets showed signs of optimism, the media kept "Bullish" forecasts showing the economy running stronger than ever as the housing bubble became larger and the real estate market was red hot.

Sometimes the media can show us that things are better than what they really are.  And on the contrary, the media can portray to us that things are worse than what they really are.  Not to mention that listening to some experts and economists predict the direction of the economy is similar to watching a meteorologist try to predict the direction of a hurricane. 

The real news is that the Dow did not fall to 4000 when times were thought to be the worst; and the economy really wasn't as strong as it appeared when times were thought to be the best!  We live in a capitalist economy where the strong survive and the weak get taken advantage of.  There are big forces at play that influence or trick individuals to buy in at the highest points of the market (even if you can't afford it), and sell off at the lowest points of the market.  All the while these forces (high net worth individuals and corporations) make record profits in both low and high markets.  Don't believe everything you hear in the media, nor everything you see. 

Do your own extensive due diligence and find out what's really going on.