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Daily Archives: March 18, 2020
Posted: March 18, 2020 at 2:47 am
How are you going to pay for that? Youve seen it a hundred times: some serious-looking pundit with glasses and a suit interrogates some over-eager politician who actually wants to do something meaningful with their elected position. They recite some jargon about taxes and savings, bicker briefly with the pundit, and then the segment ends. The pundit is proud to have done their job holding this politician accountable to fiscal responsibility; what could be more important? After all, there isnt an infinite supply of money. Except, in a very important sense, there is.
Lets go back in time. Prior to 1933, the U.S. dollar, like most currencies, was on the gold standard, limiting the amount of money the U.S. could create. However, this is no longer the case.
Today, the United States is the sole issuer of the U.S. dollar. As a fiat currency, it is inconvertible into any real resource. In 1946, then-chairman of the New York Federal Reserve, Beardsley Ruml, published an article declaring that, as a result, our Federal Government has final freedom from the money market in meeting its financial requirements. This is stated in plain English in the articles title: Taxes for Revenue are Obsolete.
This may be surprising; it certainly contradicts mainstream discourse about spending. Concerns about debt or inflation are still valid, and it is still reasonable to debate by how much government spending should exceed tax revenue. But there is no physical restriction on the amount of money the U.S. can spend.
If the federal government wants to pay you $100, they can tell your bank to increase the number in your bank account by 100. There is no need for physical dollar bills or borrowing money; all that is required is an update in your banks computer system and now you are $100 richer. The opposite occurs when you pay taxes; you give a bank account to the government and they subtract from the number in your account. There is no exchange of actual dollar bills here, but money is removed from circulation nonetheless. The government creates money by spending and destroys it by taxation, and it does both without worrying about the supply of coins and bills. This means there is no physical restriction on the amount of money it can create.
The implications of this process are profound and far-reaching. No longer do politicians have to play the how do you pay for it game; the government can simply create new money. The government may want to tax to reduce inflation resulting from an increase in the money supply, but this does not prevent them from spending it in the first place. The true constraint on government spending is resources. Can the U.S. government buy everyone a Ferrari? Sadly no, because there are far less than 327 million Ferraris in existence. But if there were 327 million Ferraris up for sale, it would theoretically be possible for the federal government to buy them all and give one to every American.
Recently, Bernie Sanders proposed universal childcare and pre-K plan that he claimed would be paid for by a wealth tax on the richest Americans. Can we achieve universal child care? If there are enough people willing to work in child care to meet the demand, yes. But reducing the number in Jeff Bezos bank account will not create new child care resources. It may be necessary to increase taxes to deal with the economic effects of this increased spending, but taking dollar bills from billionaires is not necessary for spending in the first place.
The taxpayer money myth is the antiquated belief that taxes fund government spending, and the existence of this idea is an existential threat to progressive policy. This myth legitimizes harmful ideas such as welfare recipients mooch off of taxpayers and makes cutting welfare programs much more popular. The myth establishes taxpayers as a privileged class. If taxpayers fund the government, then it follows that they should decide what the government does after all, its their money. As a result, the most marginalized and disadvantaged people are seen as the least worthy recipients of government assistance while the rich and powerful rig the levers of power to receive favor after favor.
It all comes down to protecting wealthy interests. The rich and powerful oppose universal healthcare because it would prevent employers from using the threat of a lack of healthcare access to coerce their employees; programs like universal healthcare transfer power from the rich to ordinary people. Of course, they would never say that theyre willing to let poor people die to protect their own interests. They complain that it will raise middle-class taxes, which is equivalent to stealing peoples hard-earned money. Why should taxpayers pay for other peoples healthcare? Progressives can try to respond to this objection, but we dont have to. We can reject the premise of the question altogether by realizing that we already have the resources to provide healthcare to all Americans, we just need to make them accessible to everyone.
The progressive movement in the United States should stop playing the where is the money game. If we are serious about getting things done universal healthcare, basic income, solving climate change we need to reject the taxpayer money myth in its entirety. We waste the power of the federal government by not taking advantage of all of the resources at our disposal to make our lives better. If we spend our time scrounging around for tax dollars, we will never accomplish what needs to be done. Lets start getting things done.
Matthew B. Gilbert 21 is a Computer Science concentrator in Adams House. His column appears on alternate Thursdays.
Editors Note: Due to editorial changes regarding the novel coronavirus, this articles publication was delayed.
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Posted: at 2:47 am
The Center for Public Integrity is a nonprofit newsroom that investigates betrayals of public trust.Sign up to receive our stories.
This week marks Sunshine Week, when civic groups and media organizations, among others, promote openness in government.
But as federal agencies respond to the escalating threat of the COVID-19 coronavirus, many government operations are likely to be slowed including the processing of Freedom of Information Act requests that could detail the governments coronavirus efforts.
Itll exacerbate an already cloudy situation for the publics access to government records: From 2012 through 2018, the backlog of pending FOIA requests grew by more than 80 percent, according to a new Government Accountability Office report.
GAO attributed this in part to a 30 percent increase in the volume of requests.
GAO also noted that several agencies, including the Department of State, have not updated their regulations to reflect changes in FOIA law from 2016. The law specified that agencies should amend their rules within six months. As of last month, the State Department told GAO that it was reviewing a draft of new regulations.
Two conservative organizations, Cause of Action Institute and Americans for Prosperity Foundation, released another report on Monday about how federal agencies treat instant messaging under FOIA and the Federal Records Act. Thirteen of the 16 federal agencies they surveyed do not preserve instant messages as a matter of policy, which may violate the records act and almost certainly prevents requesters from getting copies of those messages under the FOIA.
The Department of Justice, which advises federal agencies government-wide on how to interpret and implement the FOIA, has a rosier view of the state of government openness.
At a pre-Sunshine Week event last week, Principal Deputy Associate Attorney General Claire Murray, who is also DOJs chief FOIA officer, said that agencies had made a small dent in the backlog of FOIA requests during fiscal 2019, taking in more than 850,000 requests and processing more than 875,000.
Murray praised both the ideals that inspired the FOIA democracy and self-government, exercised by informed citizens and the civil servants who implement it. She noted the increasing volume and complexity of FOIA requests, but otherwise her prepared remarks did not allude to areas where improvement is needed.
Last week, Reuters reported that the Department of Health and Human Services had treated numerous high-level meetings about the coronavirus as classified and had excluded staffers who lacked a security clearance.
This raised the possibility that the agency would also withhold information about these meetings from its responses to FOIA requests concerning coronavirus. While the meetings were held in a room reserved for classified information, administration officials insist that they do not treat them as classified.
Posted: at 2:47 am
The coronavirus pandemic will limit in-person voter participation in the two states holding down-ballot elections Tuesday.
Illinois and Ohio election officials last week encouraged voters to cast ballots by mail. Both states also are holding presidential primaries, as are a couple of other states.
Headlining the congressional races is whether one of the few anti-abortion Democrats in Congress can survive a rematch against the more liberal challenger who almost unseated him in 2018. Eight-term Rep. Dan Lipinski , a member of the Blue Dog Coalition of Democrats who emphasize fiscal restraint, is opposed by Marie Newman, who lost 51%-49% to Lipinski two years ago, in the Chicago-area 3rd District.
Heres a look at all the races to watch:
Senate: Dick Durbin, the No. 2 Senate Democrat, is unopposed in the primary and will be heavily favored in strongly Democratic Illinois to defeat the winner of a five-candidate Republican primary.
3rd District (parts of Chicago and suburbs; Clinton 55%-40%): While Lipinski and Newman disagree on abortion, health care has emerged as a bigger issue during the campaign. Lipinski has criticized Newmans support for a Medicare for All government-run health-care system as unworkable. A Lipinski ad said hes working to lower prescription drug prices while Newman backs an extreme plan to eliminate private health insurance.
Newmans backers include Chicago Mayor Lori Lightfoot, Rep. Alexandria Ocasio-Cortez (D-N.Y.), and EMILYs List, which aids Democratic women who support abortion rights. Newmans TV ads have noted Lipinskis vote against the Affordable Care Act.
Unlike the 2018 primary, which was a 1-on-1 race, this years primary is a four-candidate contest that includes Rush Darwish, a Palestinian-American businessman whos had success in fundraising. Darwish has accused Newman of adopting progressive positions on health care to further her political ambitions. An anti-Lipinski vote spread out over multiple candidates could help the incumbent win again, perhaps with a plurality of the vote.
In the 2018 primary, 51% of the 3rd District primary vote came out of suburban Cook County, where Newman won narrowly, and 42% came from Chicago, where Lipinski won more decisively. The rest of the vote comes from suburban DuPage and Will Counties.
6th District (Chicago suburbs; Clinton 50%-43%): Republicans Jeanne Ives and Jay Kinzler are seeking to oppose Rep. Sean Casten (D), who unseated Peter Roskam (R) in 2018 in a district thats been drifting away from the Republicans. Ives, a former state legislator and Army veteran who challenged the incumbent Republican governor in the 2018 primary, has raised more than five times as much in campaign funds as Kinzler and is backed by some Republican members of the Illinois congressional delegation.
13th District (Champaign, Decatur, most of Springfield; Trump 50%-44%): Betsy Dirksen Londrigan, a businesswoman and former congressional aide, should advance to a rematch with four-term Rep. Rodney Davis (R), the ranking member of the Committee on House Administration. Davis won their 2018 contest by less than 1 percentage point.
14th District (Chicago suburbs; Trump 49%-45%): Seven Republicans are vying to oppose first-term Rep. Lauren Underwood (D), who unseated Republican Randy Hultgren in 2018.
They include Jim Oberweis, a state senator and wealthy dairy executive whos waged previous unsuccessful bids for federal office. Illinois Conservative PAC, a super political action committee that formed in early March, aired ads attacking Oberweis conservative credentials. The super PAC hasnt yet disclosed its donors.
State Sen. Sue Rezins supporters include Rep. Adam Kinzinger (R-Ill.); Value in Electing Women PAC, which advocates for more Republican women in Congress; and the Republican Main Street Partnership PAC, which says it represents the governing wing of the Republican Party.
Ted Gradel, a businessman who was a college football kicker at Notre Dame, aired a TV ad that showed him kicking footballs as he advocated for term limits and tax cuts.
Underwood, who has a background in health care, has been a high-profile advocate of protecting and strengthening the ACA.
15th District (Danville, Charleston, Mattoon; Trump 71%-25%): The winner of a four-candidate Republican primary will be a shoo-in in November to succeed retiring Rep. John Shimkus (R). The top candidates probably are Mary Miller, a farmer and educator, and Darren Duncan, the treasurer of Vermilion County in Danville.
Miller is the preferred candidate of the House Freedom Fund, which is the political arm of the strongly conservative House Freedom Caucus, and of Reps. Elise Stefanik (N.Y.) and Cathy McMorris Rodgers (Wash.), who are helping lead the Republican Partys efforts to elect more women to Congress. In one TV ad, Miller said she was running in part to put an end to godless socialism. Duncans platform includes opposition to abortion and gun control and support for Trumps border wall.
Photo by Al Drago/Bloomberg
Rep. Joyce Beatty (D-Ohio) is facing a primary challenge.
1st District (part of Cincinnati; Trump 51%-45%): Kate Schroder, a former vice president for the Clinton Health Access Initiative, and Nikki Foster, a former Air Force combat pilot in Iraq and Afghanistan, are seeking the Democratic nomination to oppose Rep. Steve Chabot (R) in a mildly Republican-leaning district in southwestern Ohio. Schroder is better-funded. Chabot is the top Republican on the Small Business Committee.
3rd District (most of Columbus; Clinton 67%-29%): Rep. Joyce Beatty (D), the chairwoman of the House Financial Services Diversity and Inclusion Subcommittee, is opposed in the primary by Morgan Harper, a lawyer who formerly worked for the Consumer Financial Protection Bureau. Harpers backers include Justice Democrats, a liberal activist group.
We can continue down the path of the status quo, dominated by corporate interests that are willing to let our lives and our communities suffer. Or we can organize together and fight back, Harper said at a candidate forum in February.
Beattys ads have highlighted her opposition to Trump and her work on health care and prescription-drug pricing and havent mentioned Harper.
To contact the reporter on this story: Greg Giroux in Washington at email@example.com
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Posted: at 2:47 am
Weekly Reports | Mar 13 2020
Weekly Broker Wrap: fiscal stimulus; A-REITs; food & beverage; BNPL; and aged care.
-Supermarket, food and electronics sales may derive boost from fiscal stimulus package-Short-term uplift in sales not enough to counter structural headwinds for landlords in regional shopping centres-Asaleo Care, Freedom Foods likely to benefit from recent stockpiling-Surge in unemployment likely to drive bad debts higher for Zip Co and Afterpay-Aged care sector likely to be materially impacted if coronavirus outbreak escalates
By Eva Brocklehurst
In response to the growing risk of coronavirus on the economy the Commonwealth Government has responded with a stimulus package designed to get consumers spending and circumvent a rise in unemployment.
The $17.6bn package includes a $750 payment to pensioners and others on government payments, along with apprenticeship support, wage subsidies for small business and instant asset write-offs for business.
Citi calculates the stimulus may boost retail sales in supermarkets, food and electronics by 1-2% in the June quarter. The broker is not convinced the asset write-offs will benefit retailers much.
The broker expects very limited benefit for soft goods such as apparel and footwear while retailers such as JB Hi-Fi ((JBH)) and Harvey Norman ((HVN)) may experience a spike in IT sales. The broker also suspects, given uncertainty is at an early stage, a portion of the hand-out will be saved.
JPMorgan notes that small-medium enterprises tend to run relatively high wage costs relative to sales, as they are largely concentrated in the services sector. Hence, in assessing the degree of support from the package, the broker finds it reasonable, given the fall in service consumption that could be expected.
JPMorgan still believes, ultimately, any such redistribution of income from government/business sectors to households gets saved and this will not help economic growth in the immediate term, although it may limit labour market damage.
Morgan Stanley still envisages the potential for a second, broader stimulus at the May budget. The broker considers the initial fiscal response should stabilise the economy, although a recession is still possible.
The broker considers the most important role of government at this stage is to support the labour market, as this is where severe second-round impacts can occur and stymie an eventual recovery. Further measures are expected from the state governments, albeit on a smaller scale.
The broker also expects the Reserve Bank of Australia will cut the cash rate again in April to the effective lower bound (0.25%), with an increasing probability that quantitative easing will be implemented.
Macquarie notes a limited direct benefit for the listed property sector (A-REITs) from the fiscal stimulus. The broker expects around half of the consumer support will be spent quickly, although experience with 2019 tax rebates suggests the initial boost was subdued.
If the entire fiscal package for consumers is spent in retail, this would equate to a 1.4% uplift to 12-month annual retail sales but Macquarie suspects this is unlikely outcome. The broker continues to believe a short-term uplift in sales is not enough to change the structural headwinds that landlords in regional shopping centres face.
The broker prefers those stocks with high rental income and strong balance sheets in the sector, such as Dexus ((DXS)), Charter Hall Retail ((CQR)) and Investec Australia Property ((IAP)).
Food & Beverage
Amongst Citi's coverage of Australian food and beverage stocks, a2 Milk ((A2M)) stands out as it has strong partnerships that should lead to more reliable supply to China. Asaleo Care ((AHY)) and Freedom Foods ((FNP)) may also benefit from recent supermarkets stockpiling, that should also reduce the level of promotional discounting in these categories.
Those with relatively higher gearing include Blackmores ((BKL)) and Freedom Foods, although Citi points out these are not particularly high compared with companies in other industries.
Most of the de-rating from this latest correction has been in Freedom Foods and Treasury Wine Estates ((TWE)). Citi expects the former to re-rate with increased capacity utilisation, while more clarity is needed around the coronavirus impact on Treasury Wine sales before it can re-rate.
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Posted: at 2:47 am
A former top official from President Recep Tayyip Erdogan's government on Wednesday unveiled his much-anticipated new political party, DEVA, with a programme centred upon fiscal reforms and social freedoms.
Ali Babacan, a former Turkish deputy prime minister who broke ranks with Erdogan last year, presented his Democracy and Progress Party- whose Turkish initials DEVA mean 'remedy' -as a liberal democratic and pro-Western political organisation in his launch speech addressed to supporters and founders of the party in Ankara.
The rule of law in our country is always crumpled, justice is wounded, Babacan said. Our democracy is weak. Our people cannot raise their voice no matter how high they shout.
Babacan also unveiled a 132-page-long party programme, which mostly focuses on the restoration of fundamental rights and freedoms, including the press freedom, and education in mother tongues, a central demand by the Kurdish nationalist movement in Turkey.
DEVA's programme also included a call to return to a parliamentary democracy from the current executive presidential system, and promised a new constitution based on strong separation of powers.
In order to solidify his arguments on freedom of speech, Babacan said that under his rule, young people in Turkey would be able to use social media platforms without fear of arrest.
You could tweet or like [things] without fear,"he said.
Many Turkish citizens are currently being investigated or sentenced for insulting the Turkish president on Twitter in the years since the attempted coup of 2016.
Babacan also built his speech around a call for fiscal reforms in the country.
Under his economic leadership in the 2000s, the country saw immense growth, but he later fell out of Erdogans favour due to disagreements on the fundamentals of the free-market economy.
We will realise the so-called fiscal rule that [some] didnt allow us to do, Babacan said in an apparent criticism of Erdogan, who defends his unorthodox economic policies.
DEVA's launch event seemed to have resonated in other parts of Ankara where Erdogan made an address to his colleagues atthe ruling Justice and Development Party(AKP).
If you pay attention, [you would see] that every so-called entity that is being presented as new only confirms the need for AK Party, and other than that it is useless, Erdogan said.
On the foreign policy front, DEVA's party programme calls for stronger ties with NATO, the European Union and the United States and committed itself to resolving differences with Turkeys allies in diplomatic ways.
It also says that the territorial integrity of Syria and Iraq would have utmost importance for a DEVA government in the future.
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Posted: at 2:47 am
This is a picture of a storm as it is building up over an uncultivated agricultural field and some ... [+] wind turbines in the horizon. It was shot at a location in the eastern part of the Netherlands.
This week, were highlighting three stocks to buy that have been dragged down by the current market turmoil. These stocks are for great companies whose valuations are a little high. If those valuations decline, investors should scoop up these quality businesses. The Home Depot (HD), The TJX Companies (TJX), and ICON PLC (ICLR) are this weeksLong Ideas.
Market Fears Drive Overreactions
The global outbreak of the coronavirus has rattled the market. Investors and analysts alike are concerned about its impact on the global economy. The S&P 500 recently had itsworst weeksince October 2008 while entering correction territory at thefastest rate in history.
World leadersandexpertsbelieve the outbreak will get worse, which could lead to further downside in the market. However, its not all bad news for investors. Over the long-term, market corrections present great money-making opportunities, as Warren Buffett says be greedy when others are fearful.
Focus on ROIC It Drives Valuations
The winners both during and after a market crash,as I have shown, tend to be companies that earn a high return on invested capital (ROIC). Furthermore, there is astrong correlationbetween improving ROIC and increasing shareholder value. To that end, I began my search looking for companies with consistently high and/or rising ROICs.
In addition to high ROICs, the firms below have a history of risingcore earnings,economic earnings. and positivefree cash flow. Each of these companies are high-quality, value-creating businesses. However, as Figure 1 shows, their price-to-economic book value (PEBV) ratios show that the market still expects a significant amount of growth from them. PEBV compares the current valuation of a company to its zero-growth value. A PEBV of 1 would mean that the market expects the companys cash flows to stay flat into perpetuity.
Figure 1: Three Stocks Worth Buying If Prices Correct Further
Three Stocks To Buy After Prices Fall
MyStock Rating Methodologyconsiders a PEBV below 1.6 but above 1.1 to be attractive and a PEBV below 1.1 but above 0 to be very attractive. These companies are still less expensive than the S&P 500 (SPY) with a PEBV of 2.6 but more expensive than the stocks I typically recommend. As global fears send markets falling further, it could present an opportunity to get these quality businesses without paying a premium.
ICON, PLC (ICLR) Attractive Rating
ICON, PLC (ICLR) was recently upgraded to attractive (from neutral) after I parsed its 2019 20-F (filed on February 27, 2020). I first made ICON a Long Idea inMay 2017. The company remains a leading contract research organization (CRO) and a drop in price presents a great buying opportunity.
Over the past decade, ICLR has grown revenue by 12% compounded annually and core earnings by 16% compounded annually, per Figure 2. The firm has increased its net operating profit after-tax (NOPAT) margin year-over-year (YoY) in seven of the past 10 years and its 2019 NOPAT margin of 15% is up from 11% in 2009. ICLR has improved its ROIC from 16% in 2009 to a top-quintile 25% in 2019 and has generated $859 million (9% of market cap) in cumulative free cash flow over the past five years.
Figure 2: ICLRs Revenue & Core Earnings Since 2009
ICLR Revenue And Core Earnings
In 2019, ICLR had -$26 million in earnings distortion that caused GAAP earnings to be understated. Notable unusual expenses in ICLRs 20-F include:
These unusual expenses were partially offset by:
Only by removing these unusual expenses and gains can I evaluate the core earnings of ICLRs operations. In total, I identified $0.48/share (7% of GAAP EPS) in net unusual expenses in ICLRs 2019 GAAP results. After removing this earnings distortion, ICLRs 2019 core earnings of $7.27/share are higher than GAAP EPS of $6.79.
I define "hidden" expenses and gains in the same manner as Harvard Business School & MIT Sloan in this recent paperon the topic. More details on exactly what I mean by "hidden" versus reported results are here.
ICLRsEarnings Distortion Score(as featured on CNBC Squawk Box)is currently In-Line, which means I expect it to report in-line with consensus expectations. Earnings Distortion Scores provide investors with a short-term look at the likelihood a firm will beat/miss consensus expectations. Longer-term, I focus on my overallRisk/Reward Ratings, which take into account a firms historical profitability and the level of expectations baked into the current stock price. As noted above, ICON PLC earns an attractive Risk/Reward rating, which means it provides quality risk/reward going forward, even if its not more likely to beat consensus expectations in the coming quarter.
Economic Earnings Growing Faster Than Core Earnings
Core earnings account for unusual gains and expenses included in GAAP net income. To get the full picture of a companys operations and hold management accountable for capital allocation, I also analyze balance sheets to calculate an accurate ROIC andeconomic earnings, the truestdrivers of shareholder value.
Some notable adjustments to ICLRs balance sheet include:
After all adjustments, I find that ICLRs economic earnings grew 20% compounded annually over the past five years and 18% compounded annually over the past decade.
Shares Starting to Look Cheap
At its current price, ICLR has a price-to-economic book value (PEBV) ratio of 1.3.
The expectations baked into ICLRs valuation remain low relative to the firms historical growth and expected industry growth. Even if I assume ICLR simply maintains margins and grows NOPAT by 7% compounded annually (in-line with projected industry growth) for the next decade, the stock is worth $189/share today 45% above its current price.See the math behind this reverse DCF scenario.
Leading Profitability Amongst Competitors
As I pointed out in my original Long Idea, ICLRs lean cost structure and operational efficiency give it a competitive advantage over peers. Such an advantage is still present today. Per Figure 3, ICLRs ROIC and net operating profit before-tax (NOPBT) margin rank well above its publicly traded competitors (as listed in thefirms 20-F). I use NOPBT margin in the below comparison because being domiciled in Ireland provides a unique tax advantage for ICLR.
Figure 3: ICLRs Profitability Leads Competition
ICLR Profitability Vs. Peers
The TJX Companies (TJX) Attractive Rating
I first featured The TJX Companies (TJX) as a Long Idea inApril 2018. The company remains a best-in-class off-price retailer that is worth a close look after a market downturn.
Since 2009, TJX has grown revenue by 7% compounded annually and core earnings by 12% compounded annually, per Figure 4. TTM core earnings are up 5% over fiscal 2019.The firms profit growth can be attributed to its rising profitability, as its NOPAT margin has increased from 5.5% in 2009 to 8.2% TTM while its ROIC improved from 12% to 19% over the same time.
Figure 4: TJXs Revenue & Core Earnings Since 2009
TJX Revenue And Core Earnings
TJXs Earnings Distortion Score is currently In-Line, which means I expect it to report in-line with consensus expectations. As noted above, The TJX Companies earns an attractive Risk/Reward rating, which means it provides quality risk/reward going forward, even if its not more likely to beat consensus expectations in the coming quarter.
Economic Earnings Growing Even Faster
I analyze balance sheets to calculate an accurate ROIC and economic earnings and made the following adjustments to TJXs balance sheet:
After all adjustments, I find that TJXs economic earnings grew 13% compounded annually over the past decade.
Shares Are Almost a Bargain
At its current price, TJX has a price-to-economic book value (PEBV) ratio of 1.4.
At its current valuation, TJX investors benefit from a 1.8% dividend yield and 23 consecutive years of dividend growth. A market correction would make this high-quality company an even better stock.
The expectations baked into TJX remain low relative to the firms historical growth and consensus estimates. If I assume TJX can improve margins to 9% (from 8% TTM) and grow NOPAT by just 6% compounded annually for the next decade, the stock is worth $70/share today 70% above its current price.See the math behind this reverse DCF scenario.
TJX Bucks the Retail Apocalypse Narrative
In a retail environment where the weak are getting increasingly left behind, The TJX Companies has proven its staying power. Apart from the improving profitably noted above, TJX reported fiscal 2019 was its 24thconsecutive year in which comparable store sales grew year-over-year. The firms ability to grow comparable store sales for over two decades is a testament to TJXs value proposition to consumers and the ability to efficiently manage its operations.
As Rod Sides, vice chairman of Deloitte, and its U.S. retail and distribution sector leaderstated, off-price stores can help provide price relief during a more challenging economy. But, even in times of economic growth, these stores still do well. For a significant portion of the population, price and value are important from an income standpoint, and off-price is therefore very relevant and successful.
The TJX Companies has leveraged this success to achieve leading profitability in its industry. Of the 11 Discount Stores under coverage, TJX earns the highest ROIC and NOPAT margin.
Management Now Incentivized to Create Shareholder Value
TJX has achieved its past success despite not properly aligning executives interests with shareholders interests. Not anymore. Beginning in fiscal 2019, TJX introduced a newexecutive-compensation planthat seeks to balance growth, profitability, and returns.
Under this new plan, TJX added ROIC as a performance modifier to its long-term performance share program, which made up the largest portion of executives long-term incentives. ROIC was chosen to reinforce attention to capital investments and generating returns.
Going forward, if TJX fails to meet its ROIC performance goals, executives long-term performance share awards will be reduced by 20%. While I would recommend TJX use ROIC as more than just a modifier, I still applaud the compensation committees decision to hold executives accountable for prudent stewardship of capital. This improved compensation plan, along with TJXs strong fundamentals earned it a spot in FebruarysExec Comp Aligned with ROICModel Portfolio.
The Home Depot (HD) Attractive Rating
The Home Depot (HD) was recently upgraded to attractive (from Neutral). HD has long been on my radar, but its premium valuation has turned me to cheaper stocks. Further declines in this stock would make me an avid buyer.
Over the past decade, the company has grown revenue by 4% compounded annually and core earnings by 13% compounded annually, per Figure 5. The firm has increased its NOPAT margin every year since 2009 and its TTM NOPAT margin of 11% is up from 5% in 2009. HD improved its ROIC from 9% in 2009 to a top-quintile 32% TTM and generated $43.5 billion (17% of market cap) in cumulativefree cash flowover the past five years.
Figure 5: HDs Rising Core Earnings Over Past Decade
HD Revenue And Core Earnings
HDs Earnings Distortion Score is currently Miss, which means I expect it to miss upcoming consensus expectations. However, HD has proven resilient when missing expectations in the past, as investors focus on the long-term profit growth achieved by the firm. Looking over the long-term, The Home Depot earns an attractive Risk/Reward rating, which means it provides quality risk/reward going forward, even if its not more likely to beat consensus expectations in the coming quarter.
Economic Earnings Are Growing Too
I made the following adjustments to HDs balance sheet:
After all adjustments, I find that HDs economic earnings grew 20% compounded annually over the past decade and 16% compounded annually over the past two decades.
Shares Nearing a Buying Opportunity
At its current price, HD has a price-to-economic book value (PEBV) ratio of 1.5.
Even at its current valuation, HD investors still benefit from a 2.9% dividend yield and seven consecutive years of dividend growth. A market correction would make this high-quality company an even more attractive stock.
Best of all, the expectations baked into HDs stock price remain conservative. If I assume HD can improve margins to 12% (from 11%) and grow NOPAT by just 6% compounded annually for the next decade, the stock is worth $241/share today 46% above its current price.See the math behind this reverse DCF scenario.
Industry Leader with Leading Profitability
From Home DepotsInvestor Presentation, HD is the #1 home improvement retailer in the United States, Canada, and Mexico. Furthermore, the firm estimates it has captured just 15% of its total U.S. market opportunity of ~$650 billion.
My research indicates HD has leveraged its industry leading position to achieve greater profitability over its peers. Of the five Home Improvement Products & Services Retailers under coverage, HD has the highest ROIC and second highest NOPAT margin. HDs profitably looks particularly impressive against its closest peer, Lowes Companies. Per Figure 6, HDs NOPAT margin is nearly two times greater than LOWs while its ROIC is nearly three times greater.
Figure 6: HDs Profitability Advantage Over LOW
HD Profitability Vs. LOW
Executives Interests Aligned with Shareholders Interests
Its no coincidence that HD has significantly improved margins, profits, and ROIC over the past decade, its executives are paid to do so. In fiscal 2007, Home Depot added an ROIC performance goal to its long-term incentive plan. The firmsproxy statementnoted the decision to add ROIC was based on the Companys desire to focus management on the efficient use of capital. Since adding ROIC to its executive compensation plan, HD has improved ROIC from 15% in 2007 to 32% TTM.
In its latest proxy statement, HD disclosed that one half of executives performance based share awards are contingent upon achieving a target three-year average ROIC goal. The performance share award makes up anywhere from 29-33% of executives total compensation. HDs executive compensation plan lowers the risk of investing in the company as I know its executives are incentivized to create true shareholder value. This compensation plan, along with strong fundamentals earned HD a spot in FebruarysExec Comp Aligned with ROICModel Portfolio.
Macro Conditions Bode Well for HD
Going forward, macro-economic data suggests continued growth for Home Depot and the home improvement industry in general. According to data from the American Housing Survey andHome Depot, over 50% of homes in the U.S are over 40 years of age, and nearly 80% of homes are over 20 years old. Home Depotnotesthat home improvement spend per home increases with the age of the home.
Additionally, homeowners have greater capacity to improve their homes than any time in history. CoreLogic, an industry data provider,reportedthat homeowner equity reached all-time highs in the first half of 2019 while homeowner equity has more than doubled since the housing recovery began. Home equity allows homeowners greater financial freedom when undergoing a home improvement project and bodes well for the home improvement industry.
The Importance of Quantifying Expectations
At the end of the day, declines in these companies stock prices would change very little about the strength of their businesses. When searching for value, its important to understand theexpectations already baked into a stock price. My Company Valuation Modelsincorporate all the data from financial filings to truly assess whether a firm is under or overvalued and provide an accurate representation of the risk/reward in a stock.
Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, sector, style, or theme.
My firms Core earnings are a superior measure of profits, as demonstrated in InCore Earnings: New Data & Evidencea paper by professors at Harvard Business School (HBS) & MIT Sloan. The paper empirically shows that my data is superior to IBES Street Earnings, owned by Blackstone (BX) and Thomson Reuters (TRI), and Income Before Special Items from Compustat, owned by S&P Global (SPGI).
Posted: at 2:47 am
Momentous events usually leave strong memories on those who have lived through them, and those memories often become passed on to later generations in the form of historical interpretations of why and what had happened in the past. This has certainly been so in the cases of the Great Depression, the Second World War, the Civil Rights Movement, the Vietnam War, the terrorist attack of September 11, 2001, the financial crisis of 2008-2009, and now, no doubt, in the face of the Coronavirus pandemic of 2020.
One very important aspect to many of the interpretations of these past events is the lessons drawn in terms of the role of government in the free society. The dust is very far from settling in this latest health crisis that is, truly, enveloping the world. But even in the urgency of finding and implementing ways of minimizing the impact on human life and well-being from the Coronavirus, the outlines of how this crisis may be interpreted in the future is already showing its outline in the present.
One lesson that will, no doubt, be claimed is that this has once again demonstrated the limits of free markets and the need for activist and centralized governmental oversight, control and command. Dealing with a health issue like the Coronavirus cannot be left up to the decisions or discretion of individuals or even local governments. There has to be designed and directed health-management through central planning by government experts and agencies in this type of crisis, it will be said.
As part of this lesson will be the additional claim, as happened in many previous national disasters, of the need to prevent the greed of those in the private sector who try to take personal advantage of a human disaster by price gouging and grasping at unwarranted profits at their neighbors expense. Price controls in the form of price ceilings and possibly government-organized rationing of essential goods in short supply must be placed outside the everyday arena of ordinary market supply and demand, it will be insisted.
A second lesson that will be suggested by some will be the dangers and undesirability of international interdependency for many of the goods and services needed by communities and countries, the supplies of which can become limited or completely lost during a world health crisis such as the Coronavirus due to the supply chains of production that criss-cross national boundaries under the current global system of division of labor.
Better that some essential and vital resource supplies and manufacturing of such goods be homespun; that is, produced and supplied domestically in the name of the national interest. Some conservatives who have long been wary of American industries and employments being lost to producers and workers abroad are already saying that the current health crisis shows the need for greater economic self-sufficient independence.
And, third, voices are being heard along a wide range of the political and ideological spectrum for the need and necessity for activist fiscal and monetary policies to temper and stabilize the negative financial, production, and employment recession-like effects that the Coronavirus is spreading around the world. Markets cannot be left on their own without even more dire consequences for societies beyond the tragic physical hardships and losses to human life from the pandemic.
It is said that even lower interest rates and greater amounts of money and credit are needed to bolster investment and production, while fiscal ease in the form of government spending and general or targeted tax breaks are essential to keep small, medium and too-big-to-fail larger businesses afloat. Investment stimulus and aggregate demand-management are once again shown to be the tried and true Keynesian spending cures to the economic ills of society, by the macroeconomic policy managers.
Given these likely and emerging interpretations of the Coronavirus pandemic, it is, first of all, important to appreciate that delays in effective communication about the existence and potential dangers from the virus, and then the failure of more widely spread testing in the United States are, in fact, failures not of a free marketplace but of government central planning and control.
The press has been full of stories of how early indications about the virus and its potential dangers were suppressed by the Chinese communist government. The reality of this went viral even on Chinas highly censored and controlled social media platforms when news got out that one of the physicians attempting to inform and publicize what was being discovered was ordered by the Chinese government to keep quiet, and then ended up dying from the Coronavirus himself.
And in typical political form, the Chinese government has attempted to shield President Xi Jinping from any criticism of being responsible for policies that delayed an earlier response by making up factitious stories about how President Xi was ahead of the curve, guiding and directing the nationwide lockdown and medical commands that have saved the country. And that it was really all due to the U.S. military whose personnel visiting the epicenter city of Wuhan brought the virus to China to keep that proud nation in its place, in a world of American hegemony.
The media in America, including The New York Times, have chronicled how Americas own health care central planning system prevented many of the more early responses to the virus due to the rigid top-down rules and procedures imposed by the Pure Food and Drug Administration (FDA) and the Centers for Disease Control (CDC) in hamstringing local and decentralized development and use of Coronavirus testing tools, since nothing could be done without approval and permission of the American governments health and drug planners.
Furthermore, when some rogue healthcare providers around the country attempted to disobey the health care overseers and social engineers by utilizing their own testing methods and equipment to determine who and to what extent the virus may have spread in their area of the U.S., they were told to cease and desist, and wait for whatever and whenever the testing devices were made available to them by and according to the standards of the federal regulators. (See, Adam Thierers article, How the US Botched Coronavirus Testing.)
However, rather than questioning the centralized process of permitting the development and use of methods for disease testing, the lesson to be learned, it is presumed, is that the government merely needs to introduce more flexible rules and procedures to better team up with state and local health and medical treatment agencies to deal with the current and future crises of this type.
The idea that virtually all such matters might better be left up to the private, competitive marketplace seems to not even be considered in the arena of debate. Potential market failures are seen everywhere, and possible government failures are brushed aside as incidental errors and omissions on the pathway to better political oversight of the health and medicine.
But as Austrian economist Friedrich A. Hayek (1899-1992) argued more than half a century ago, Competition is a Discovery Procedure (1969) through which individuals and enterprises have the opportunity and the incentives to not only discover the new and better and improved, but to find out what might be possible. Not only can we not know until a competitive process has been allowed to play out who may be the winner, but it is only in an arena of competition that individuals have the motive and ability to find out what they are capable of; something that they, themselves, cannot fully know the answer to until they are at liberty to try and have a reason to want to.
The hoops and hurdles that pharmaceutical companies and other manufacturers of medical and health related products must make their way through under the rules, procedures and permissions of federal agencies such as the FDA and the CDC only succeed in reducing the incentives, raising the costs, and narrowing the field of those who otherwise might be willing and able to undertake research, experimentation and marketing of those medicines and medical-related products that could save or improve lives.
A common and reasonable response is, of course, but what about standards and experimental procedures to assure consumer safety from poorly tested and hastily marketed health-related products in the pursuit of profit? Is that not the reasonable rationale for government to centrally approve and oversee regulatory methods over all such marketed products?
The word regulate is defined by Websters dictionary as meaning to govern or direct according to rule, or to bring order, method, or uniformity to . . . The Oxford Dictionary says to, control (something, especially a business activity) by means of rules and regulations. Understood in this way, there is little if anything that any of us do that is not according to regulation, both as individuals and in association with others, even without government.
We each have our time schedules and procedures that we follow in various ways and to varying detail. Even when what a person does does not seem to make much sense, do we not sometimes say such things as, just look beneath the surface and youll discover the method to the madness? Private sector clubs, associations, business enterprises and arenas of market interaction all have their own participant-generated regulations to facilitate and coordinate how and for what the participants interact with each other for smoother and more predictable pathways to mutual success; and to reinforce confidence on the part of any participant about how his interlocutor has acted and what procedures they may have followed leading up to the transaction and trade.
Many of those rules and procedures that regularize how people do things, for whatever purposes, and with whatever degree of surety of reliability and confidence in the conduct of those with whom we buy and sell have, historically, emerged before the modern era of government regulation, and often continues parallel to or independently of any such regulatory rules and procedure imposed by government.
No pharmaceutical or medical equipment company concerned with its long-term viability as a profit-making enterprise can count on staying the course in the marketplace by killing their customers, adulterating their products, or making intentional false promises or guarantees. Hollywood movies may make their millions by portraying every drug company as a murderous monster in its pursuit of more profitable market shares, but that is not how real, market-based companies can afford to operate. Possible lawsuits, sky-high insurance premiums and the loss of brand-name reputation always dog any company thinking of cutting corners to any extent. (See my review of Regulation Without the State.)
Economists have long emphasized what is sometimes called the capture theory of government regulation. That is, the industry being regulated by the government often has lobbied for that political intervention, or when this is not the case, has come to see it as an opportunity to use the regulatory intervention as means of raising the barriers to entry to any would-be new entrants and enterprises that might want to compete against the existing and established firms in that corner of the market.
Therefore, one of the central purposes of leaving markets free of government control is precisely to not block the way to potential rivals and to force the current firms in that industry to more effectively compete and innovate to maintain any profitable position in the market; and to permit the flexibility and adaptability to changing market conditions. It is open competition that assures consumer-oriented production and pricing, and it is government regulation that tends to foster rules and restrictions designed to shelter existing firms from new and creative competition.
If any such firms may be clothed with a black hat, it is those who wish to use the governments regulatory power to, therefore, stymy market competition. The fault is not with a free market, but from the introduction of government interventions and regulatory agencies manned by those who presume to know what is better for people than those people themselves, and whose activities almost inescapably always fall victim to the designs of the larger companies those agencies are set up to regulate.
In addition, sight should not be lost of the self-interested purposes of those who live on and off government agencies such as the FDA and the CDC. Their recent responses to attempts to introduce methods and procedures outside of their straitjacket of regulatory control demonstrates their desire not to permit the weakening of the institutional structures by which they justify their power, positions, and incomes within the government maze of bureaucracies.
The other ingredient in the regulatory mix is that when a crisis occurs such as the latest one in the form of the Coronavirus, concerns and even panic break out among many people in an attempt to obtain supplies of those goods viewed as essential or desirable to meet the real and imagined circumstances now facing them in the impacted communities. Around the United States, most recently, fears of mandated lockdowns and voluntary quarantining to reduce spreading of the Coronavirus may reduce or stop the availability of such essential products as toilet paper or bacterial and virus-reducing cleaning products.
Retail store shelves normally filled with such products are either empty or low in inventory. People have been scurrying from store to store in search of any brand name and type of toilet paper, for instance, even if they are not sure whether it might not rub them the wrong way! In the face of normal production levels and shipment schedules, quantities in the supply line to the retail stores have been lacking due to the unusual and unexpected increase in immediate demand.
To prevent price gouging 34 states currently have laws on the books making it illegal to excessively increase prices on high demand goods during a declared or generally considered emergency. This is meant to prevent those selling these products from unfairly taking advantage of people needing and wanting such products.
After forty centuries of price controls, it would be hoped that, finally, the counterproductive and disastrous effects of all such systems of government-imposed price controls would have been learned by now. But, alas, not. Market prices have work to do, including in times of social crises such as the one with the Coronavirus. But the government price controllers seem to never learn.
Price flexibility enables the coordination and balancing of market supplies and demands at moments in time and across time, given the degree of demand for goods and the existing supplies of them in the same time frames. Market-generated prices create the incentives for consumers to economize in the face of increased demands or reduced supply, and they create incentives for sellers to find ways to increase production and availability when there is a decrease in existing supply or an increase in consumer demands to buy.
As F. A. Hayek also emphasized, all of the knowledge in society exists in no one place or in any one mind or group of minds, no matter how knowledgeable and well-informed those individuals may consider themselves to be. Knowledge, in its many facets and forms, is dispersed and decentralized among all the minds of all the people in society in their, respective, corners of the world.
The social problem, Hayek argued, is to have some means and method to bring to bear what others know that can serve the purposes and needs we may have in mind when we are inescapably separated from each other by time and space. That is the communication role of a competitive and unrestricted price system. People in different parts of the country or the globe are able to inform each other about what they want or what they can supply through the medium of market prices. It is like a shorthand or Morse Code of supplying to others the relevant minimum of information about what and where and at what value people somewhere want and would be willing to buy what those others might have available or could produce to fill the demand.
While the concern has recently been expressed about the general availability of Coronavirus testing kits, effective face masks, respiratory equipment, and related medical supplies, the fact is that there are different intensities of demand for them, given where the higher clusters of reported or feared cases of infected people are located around the country. Allowing the price system to openly and competitively function, with no government rationing scheme preventing or delaying supply-shifting from less to more urgent areas, would rapidly assure that the existing supplies of these things were more efficiently and effectively reallocated to where prices indicated they were most in demand to meet the medical needs for them.
But not only will a functioning price system for these and other goods bring about a more rational allocation of the scarce and given quantities of these goods in the present, but rising and unrestrained prices for the various goods, with no penalty for profits earned from their current and future sale, would also serve as the essential method and mechanism to generate the incentives to increase their supplies over time and work to improve their effectiveness in fighting the virus. That is part of the advantage, dare I say, beauty, of setting creative minds free with the liberty to reap the benefits from applying their talents to solve a social problem like the current one.
The Coronavirus crisis has been compared to the seriousness of war against a life-threatening enemy. It is perhaps interesting to note that in September 1939, as Great Britain just entered into its war against Nazi Germany and the British economy needed to gear up for the conflict through new patterns for using resources and goods away from civilian uses to military production, Hayek wrote an article making the case for leaving market prices free from government controls:
The required quantities of the urgently needed factors of production ought to be released from those uses in which they can be dispensed with at the least sacrifice of other necessary things. But this is just what will happen if the scarce factor rises in price, since producers will dispense with it precisely for those purposes where it costs least to do without it . . . A little consideration will show that a rise in price is incomparably more efficient a method of bringing forth the additional supplies than alternative methods of achieving the same result [through price controls and rationing].
Price controls only succeed in short-circuiting the means of people to converse and communicate with each other so they can share vital information in the simplest and most adaptable form to constantly and continuously bring about the short-term and longer-term adjustments of goods and resources to meet the needs of people, including at a moment of a crisis like the present one. (See my article, Price Controls Attack the Freedom of Speech.)
The Coronavirus crisis began in China, and the world soon saw the Chinese governments draconian locking down and shutting in of areas of the country containing tens of millions of people in the attempt to stop or slow down the spread of the virus. The supply chains of raw materials, component parts, and manufacturing and product assembly that interdependently link China with the economies of many other countries around the world were suddenly disrupted and thrown into disarray.
Companies in countries not yet significantly affected by the Coronavirus searched around for possible substitute supplies and warned of the unavailability of various goods due to the production stoppages in the Chinese stages of numerous production processes.
In this setting, voices are being heard calling for a turn to greater economic nationalism, with government limiting a continuing dependency on, for instance, the Chinese market. For example, conservative writer Patrick Buchanan said in his March 13 column: In retrospect, was it wise to have relied on China to produce essential parts for the supply chains of goods vital to our national security? Does it appear wise to have moved the production of pharmaceuticals and lifesaving drugs for heart disease, strokes and diabetes to China?
The implication being that the U.S. government should manipulate the market through taxes, protectionism, and regulations to bring these productions back to America.
Economic nationalists like Buchanan seem to be applying Rahm Emanuels now famous phrase of never letting a serious crisis go to waste in the service of a political agenda that might be harder to push in calmer social and economic times. Supply chain stoppages and shortages that could and would easily be reversed once the virus finishes running its course, and if governments kept out of the way and allowed production relationships between companies and countries to restore and rebalance themselves, are being used as rationales for restricting a market-based global network of specialization and division of labor.
My neighbor, in turn, sells me his product for that $10 because the $10 that he earns enables him to buy something he desires that would cost him more than the $10 if he were to try to make that product for himself. Each of us gets a bargain; we each get what we want from the other at better terms (lower costs) than if we attempted to do so through autarky; that is, economic self-sufficiency, in some or all the things we might otherwise be able to obtain in exchange from trading partners literally next door or halfway around the world.
A wide variety of political criticisms easily may be made against the communist government in China in terms of both its domestic and foreign policies, and a proponent of a free-market liberal society could easily make that into a very long list. But the Coronavirus fits more in the category of a natural disaster, like an earthquake or a hurricane, that disrupts and destroys lives and property, and reduces economic potentials and possibilities for a period of time.
Again, assuming no undue government interventions getting in the way, the human beings whose actions are behind all the work, savings and investment in society, usually undertake the needed reconstruction and rebuilding within a reasonable period of time, after which life goes on as before.
Tragically, several thousands of lives have been and many more may be lost before the Coronavirus runs its course around the world. And in the meantime, production processes are and will be slowed down or temporarily halted. But factory buildings have not collapsed, farmlands have not been swallowed up by the earth, great fires have not destroyed places where people live, and cities still stand just as they did before the virus started making people ill.
In other words, this too will pass, and people will go back to work, get back to eating out at restaurants, shopping at their favorite stores, and planning their next vacations at home and abroad. While many in society are experiencing a high degree of anxiety and panic due to the uncertainties surrounding some of the properties of this virus, and while the mass media and governments have helped fuel those fears, the fact is that this virus is just a cousin of the serious flus that strike humanity around the globe with almost clockwork annual regularity, and which, unfortunately, take tens of thousands of lives each time.
If a hurricane or a drought wipes out the orange harvest in Florida, we would consider it foolish if the people and government of Alaska decided that it would now be wise to invest in hothouses to have orange independence at home due to the uncertainties of Florida weather. Wholesalers and retailers in Alaska search out temporary substitute suppliers of oranges located somewhere else in the world, and then return to buying oranges from Florida next season, if once more Florida farmers offer the better fruit at the more attractive price.
A very bad lesson, therefore, from the Coronavirus episode would be to in any way suggest that the disruptions caused by it to the supply chains of international trade justify severing through deliberate government policy the near universal benefits that all of us everywhere on the planet gain from participating in the worldwide system of division of labor, which now includes China. The citizens of any country whose government attempted to do so would experience losses in their qualities and standards of living that have been and can be theirs only through the collaborative global interdependencies of market-oriented specialization and trade.
The economywide disruptions being caused by the Coronavirus are once again bringing forth all the standard macroeconomic panaceas in the form of activist monetary and fiscal policies. On Sunday, March 15, the evening before the Monday morning opening of the U. S stock exchanges, the Federal Reserve announced that it would be buying $500 billion in government treasuries and $200 billion in mortgage-backed securities in the coming weeks and months, basically adding three-quarters of an extra $1 trillion to the American banking system. This is combined with the Federal Reserves decision to lower its benchmark discount window interest rate (the rate that the Fed charges member banks for short-term lending) to 0.25 percent, in other words, virtually to zero.
At the same time, Congress has passed, and the president has signed two spending bills as emergency expenditures to counteract negative financial impacts of the Coronavirus, additional government expenditures that come to nearly $60 billion with possibly even a lot more to come. For the first five months of the federal governments current fiscal year (October 2019-February 2020), Uncle Sam has already run a budget deficit of $625 billion, with the projection that the deficit for the full fiscal year that will end on September 30, 2020 will be over $1 trillion before these new additions to government spending.
The Federal Reserves easy money policy is supposed to stimulate additional private sector investment and related borrowing to boost production and employment. The federal governments additional deficit spending is meant to increase demand to create consumer-end and other sales to increase profit margins as a means to sustain or increase output and jobs.
All of these are stereotypical Keynesian policies designed to get an economy out of a recession caused by a falling off of aggregate demand. But, if anything, the global economy effects from the Coronavirus is demonstrating the logic and reality of Says Law, named after the 19th century French economist, Jean-Baptiste Say (1767-1832). At the end of the day, there is no consumption without production, and, therefore, there is nothing to demand and demand with, without supply.
If you want to eat, you must first plant the crop and wait for it to mature for harvesting at some point in the future. If you want a woolen sweater, you must first raise sheep, wait for their wool to grow, and then after shearing the sheep, manufacture it with all the related inputs into the sweater youd like to wear. If you want to have something to write with . . . well, maybe it would be better to just read Leonard Reads famous account in his essay, I, Pencil. (See my article, Jean Baptiste Say and the Law of Markets. )
If production falls off, then the ability to either consume directly what you have produced or to sell it to others as your demand for what they may have for sale declines as well. In China first, and now in an increasing number of countries in Europe, people have been told or commanded by their governments to stay home to self-distance themselves from others as a means of minimizing spread of the virus.
To the extent that factories slow or shut down due to work forces being instructed by governments or their employers to not come to work to fight the spread of the virus, the individual outputs of those businesses decrease or stop; and, therefore, in the aggregate, supply of output as a whole declines, which is only a statistical adding up of all the individual outputs produced by individual firms and enterprises.
Governments cannot be telling people to both curtail their workplace presence and activities to stop a spreading of the virus and, at the same time, maintain their income-based expenditures on the outputs of their national economies. The panic buying that has been seen in many parts of the United States is clearing out existing inventories of goods currently available in retail stores. Replenishing them each day and every week is dependent upon continuing and redirected production reflecting the greater than usual relative patterns of consumer demand for what are widely defined as essentials and necessities in the present crisis atmosphere.
Increasing dollar or nominal spending via greater government deficit spending does nothing to stimulate the maintenance of production and employment if workers are quarantined, factories are partly or totally idle, and goods cannot, therefore, be forthcoming in their usual or changed patterns of demand reflecting upon on what the government spends those billions of extra dollars.
Likewise, the presumed attractiveness of zero rates of interest cannot generate real additional investment spending when the available supplies of labor and other factors of production are on the sidelines due to social distancing that restricts peoples participation in the market. (See my article, The Myth of Aggregate Demand and Supply.)
We should also not lose sight of the fact that financial markets, due to Federal Reserve policy in recent years and now reinforced with this latest interest rate and security-buying announcement, are operating without a fully functioning price system. Interest rates are meant to be the intertemporal prices to borrow and invest scarce resources across time from willing lenders forgoing the use of their own savings for a period of time.
Zero or near-zero rates of interest must mean either that no one wants to borrow for anything and therefore investment demand is zero, or the economy is so awash in savings that there is more real savings in the economy than a fully satiated investment demand to use that savings for future-oriented production, and therefore savings trades at a zero price. Neither of these conditions can be presumed to hold; that is, either no investment demand of any type for available real savings or so much savings that no investment demand no matter how unprofitable need go unsatisfied from lack of savings.
Of course, we do not fully know what market interest rates should be in either normal circumstances or in a virus-based crisis situation like at the present because monetary and credit expansion and interest rate setting and manipulating by the Federal Reserve has and does prevent us from knowing what is the real savings that there may be in the economy and what are the actual market-based profitable investment demands for borrowing at rates of interest formed and set by the interacting forces of supply and demand freed from central bank intervention.
In the current climate of public hysteria, mass media hype, and wide-open fiscal and monetary sluice gates, with the possibility of government anti-gouging price controls and essential goods rationing, trying to say what policy X must and will bring about is impossible to say with complete confidence. But in a situation of declining production due to quarantining and massive increases in potential purchasing power coming on the market via monetary expansion and deficit spending this would suggest, in normal times, highly inflationary problems ahead.
But if political pressures bring about municipal, state-level and/or federal systems of price controls and rationing, the result would then be what German economist Wilhelm Rpke (1899-1966) called repressed inflation. Youd have resource and commodity bottlenecks with shortages of a growing number of those essential and non-essential goods, at controlled and fixed prices, with government-directed allocations for goods for production and consumption. The end product would be a system of government central planning, regardless of what the president and Congress decided to call it.
This is, of course, a worst case scenario. Chances are it would be a hodge-podge of politically driven incoherent and inconsistent policies introduced on the fly to meet the expediencies and emotions of the moment, and especially in a presidential election year when everyone is desperately pandering for campaign contributions and votes on election day in November.
Or, maybe, the Coronavirus crisis in America will not be as bad and as damaging as many in the scientific community honestly fear. The whole business may blow over in a few months, like other harmful and killer flu seasons. If this, hopefully, turns out to be the case, the whole episode will merely be another teaching moment in misguided and damaging government policies that markets, once again, successfully endured and survived.
[Originally posted at the American Institute for Economic Research]
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Posted: at 2:47 am
March 11, 2020, 1:44 PM
9 min read
It's a sign of the times.
Chairs for reporters in the Pentagon briefing room, usually side-by-side, on Tuesday were placed roughly three feet apart. Even the military briefers stood well apart from each other on the podium.
Chairs were placed three feet apart from each other in the Pentagon Briefing Room Tuesday amid coronavirus concerns.
With health experts advising "social distancing" to ward off the coronavirus, some of official Washington, but not everyone, was taking heed in a town where crowded news conferences and congressional hearings are the norm and close contact can be unavoidable.
On Capitol Hill, the House attending physician told members of Congress -- who skew older and are more vulnerable to the coronavirus -- they should avoid handshakes and hugs -- not easy for glad-handing politicians.
Tune into ABC News Live at noon ET every weekday for the latest news, context and analysis on the novel coronavirus, with the full ABC News team where we will try to answer your questions about the virus.
At one hearing, Democratic Rep. Rosa DeLauro of Connecticut elbow bumped with a witness who would know the drill: the director of the Centers for Disease Control and Prevention, Robert Redfield.
Rep. Rosa DeLauro and CDC Director Robert Redfield bump elbows prior to Redfield testifying before the House Appropriations Committee on the CDC's budget request for fiscal year 2021 on Capitol Hill on March 10, 2020, in Washington.
Senators have been seen trying out the elbow bump as well -- even bipartisan ones. On Monday, as Sen. Chris Coons, a Delaware Democrat, was speaking to reporters, South Carolina Republican Sen. Lindsey Graham elbow bumped him as he walked by.
They've even been doing the bump on the Senate floor.
Rep. Emanuel Cleaver, left, rubs elbows with Wells Fargo CEO and President Charles Scharf before he testifies during a hearing of the House Financial Services Committee, on Capitol Hill, March 10, 2020, in Washington.
Alabama GOP Sen. Richard Shelby told ABC News he called off going to a big meeting overseas.
"I was supposed to go to Brussels for a NATO meeting and to London, but I cancelled the meeting," Shelby said. "The doctor said stay off those planes as much as we can, so if any of you are going to Alabama Thursday night, can I get a ride? Ill ride in the back of the truck with the air."
As Senate Republican Leader Mitch McConnell came out of his office Tuesday afternoon, he rubbed sanitizer on his hands, saying, "Oh, I do this all the time now."
Vice President Mike Pence gestures with Washington State Governor Jay Inslee during a press conference on March 5, 2020, at Camp Murray adjacent to Joint Base Lewis-McChord, Washington.
The 135th annual Gridiron Club dinner, where politicians of all stripes gather with journalists each year to poke fun at each other, was canceled.
And outside the Beltway, the Democratic candidates were cancelling big primary night rallies after doctors advised against holding and attending large gatherings.
But at the White House, any signs of social distancing weren't visible.
President Donald Trump shakes hands after presenting the Presidential Medal of Freedom to former Vice Chief of Staff of the Army Gen. Jack Keane in the East Room of the White House in Washington, March 10, 2020.
More than 100 people, many of them older, packed the East Room for a Medal of Freedom ceremony on Tuesday afternoon with the president officiating and shaking lots of hands.
And later, the White House briefing room was jammed with reporters for the daily update on the crisis.
President Donald Trump arrives with retired four-star Army General Jack Keane for a ceremony to present Keane with the Presidential Medal of Freedom in the East Room of the White House, March 10, 2020.
When Vice President Mike Pence was asked whether President Trump would stop shaking hands as the administration itself recommends on its coronavirus.gov website, he responded as Trump has before.
"In our line of work, you shake hands when someone wants to shake your hand," Pence said. "I expect the president will continue to do it. I'll continue to do it."
ABC News' Trish Turner and Jordyn Phelps contributed to this report.
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Florence Bank has named Patricia Covalli its Community Support Award winner. Covalli, a collections officer, joined the bank in February 2015 and has 25 years of banking experience. The Community Support Award was established by Florence Bank in 1997 as a means of formally recognizing employees who are active participants in community events and donate their personal and professional time to local not-for-profit organizations. Each year, the award recipient has the opportunity to select a not-for-profit organization of his or her choice, and the bank makes a donation to that organization. At Covallis recommendation, Florence Bank will make a donation to Soldier On. The mission of Soldier On, based in Leeds, is to provide formerly homeless veterans with permanent, supportive, sustainable housing. Covalli serves her community as an active member of the United Way of Hampshire County. She also serves as a fundraising volunteer for Florences Look Park and volunteers at Northamptons Interfaith Cot Shelter.
Nicholas LaPier CPA PC announced that three local CPAs have joined the firm. Dawn Bryant, CPA, recently joined Nicholas LaPier, CPA PC as an audit manager. She has worked in public accounting for more than 25 years, with her primary focus in auditing and specializing in not-for-profit organizations. Her experience also includes working with for-profit businesses in various industries including retail, distribution, and construction. Bryant earned a bachelors degree in accounting, financial track, graduating summa cum laude from the University of North Carolina at Asheville. She is a member of the American Institute of Certified Public Accountants (AICPA) and the Massachusetts Society of Certified Public Accountants (MSCPA). She serves as board president for a private foundation and teaches a nonprofit business functions course for the University of Connecticut. Colleen Berndt, CPA, recently joined the firm as a tax manager. She has worked in public accounting for more than 30 years, with a primary focus in business taxation and consulting. She earned a bachelors degree in accounting from American International College in Springfield and is a member of AICPA and MSCPA. She serves on various local nonprofit boards. Edward Stambovsky, CPA, also recently joined the firm. He has worked in public accounting for more than 40 years, with a primary focus on business, individual, and trust taxation, and has consulted with businesses throughout his career. He earned a bachelors degree in accounting from UMass Amherst and is a member of AICPA and MSCPA.
The Collins Companies, one of the largest industrial distributors of pipe, valves, and fittings and engineered specialties serving the Northeast, announced a change in executive management roles. Owner and President Brian Tuohey has assumed the role of CEO and has promoted Vice President of Sales Paul Andruszkiewicz to President. In addition, Dave Shepard, branch manager of the Haverhill sales office, will lead the Collins sales team as director of Sales. He has more than 25 years of experience in the industry, first purchasing for Atwood and Morrill and then in sales for Power House Supply before Collins acquired Power House in 2015. Headquartered in East Windsor, Conn., the Collins Companies is comprised of Collins Pipe & Supply Co., Collins Controls, Niagara Controls, Collins Niagara, Power House Supply Co., and International Valve and Instrument, with nine locations throughout New England and Upstate New York.
Way Finders Inc. named Laureen Borgatti its new chief operating officer. She has been employed by the organization for 27 years, serving in various administrative capacities, most recently as the organizations chief of staff and chief administrative officer. Most recently, she served as internal project manager for the construction of Way Finders new Housing Center, to be completed in April. Borgatti chairs the board of directors of the Human Service Forum, a membership organization that assists members in better addressing the needs of the people they serve throughout the Pioneer Valley. She sits on the board of directors for the new Housing Navigator, an initiative led by the Kuehn Charitable Foundation to develop an online search tool that will give people with low and moderate incomes the ability to quickly find available, affordable rental units anywhere in Massachusetts. She also serves on the board of directors of the Dakin Humane Society.
Bulkley Richardson announced that Betsey Quick, executive director, was named the Excellence in the Law honoree for Firm Administration and Operations by Massachusetts Lawyers Weekly. Quick joined the firm in September 2017 and, during her short tenure in this role, has made a significant impact, including increasing the firms productivity, implementing policies, and advancing the overall mission of the firm. Massachusetts Lawyers Weekly honors individuals in the categories of Firm Administration and Operations, Alternative Dispute Resolution, Marketing, Paralegal Work, Pro Bono, and Up & Coming Lawyers. Quick will be recognized at a reception on Thursday, April 30 at the Marriott Long Wharf Hotel in Boston.
Springfield Technical Community College (STCC) named Thomas Robitaille an instructor in Mechanical Engineering Technology. Robitaille is the third generation in his family to join this field after his father and grandfather. A STCC graduate with an associate degree in mechanical engineering technology, he has been working as a CNC machinist and programmer at MTG Inc. in Westfield since October 2016. While at STCC, he was a peer tutor for mechanical engineering technology. He also taught a fall 2017 lecture and lab course in the program, which prepared him for this teaching position. Prior to coming to STCC, Robitaille was a non-commissioned officer in the U.S. Marine Corps Infantry from 2009 to 2014, stationed out of Camp Lejeune, N.C. While enlisted, he served two combat tours in Afghanistan in support of Operation Enduring Freedom.
Jasmine Rivera-Boucher has been promoted to director of Adult Foster Care (AFC) and Shared Living (SL) services at BFAIR. The director is responsible for the day-to-day operations of both programs, the development and implementation of the AFC/SL, accreditation, policies, and procedures as well as the fiscal administration of the AFC department. The director ensures that all funders regulations are met, which includes oversight of the referral and intake process in collaboration with the Department of Developmental Services, the Department of Mental Health, and other funding and referral sources. Prior to her promotion from assistant director, Rivera-Boucher worked at the Key Program in Pittsfield and graduated from Massachusetts College of Liberal Arts with a degree in psychology. She also holds a degree ingerontology from Maria College and certification as dementia friend trainer.
Happier Valley Comedy, a nonprofit dedicated to bringing more laughter, joy, and ease to Western Mass. (and the world) through the tenets of improv comedy, named Meghan Lynch to its board of directors. Lynch is the CEO of Six-Point Creative in Springfield, a brand strategy agency serving second-stage businesses. Lynch co-founded Six-Point in 2007 and was named an Enterprising Woman of the Year in 2019 for her companys growth and her commitment to supporting other women entrepreneurs. Lynch first became acquainted with Happier Valley Comedy when its president and founder, Pam Victor, facilitated a THROUGH LAUGHTER Professional Development workshop for the Women Presidents Organization, of which shes a member. In 2017, Lynch invited Victor to Six-Point Creative to facilitate the first of many professional-development workshops for the staff and clients.
The Mass Cultural Council announced the 2020 Artist Fellowship awards in drawing and printmaking, poetry, and traditional arts. Among this years fellowship awardees is artist Kelly Popoff, faculty member in the Art Department at Greenfield Community College (GCC). The awards include 19 fellowships of $15,000 and 16 finalist awards of $1,500. Applications were open to all eligible Massachusetts artists. A total number of 632 applications were received: 363 in drawing and printmaking, 243 in poetry, and 26 in traditional arts.
President Barrow Has Taken A Giant Step Towards The Fight Against The Deadly Convid-19 – Freedom Newspaper
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Gambia has just reported its first case of of the coronavirus, but we still want to applaud President Barrow for joining other countries in the fight against the escalation of the corona virus epidemic by announcing additional strong measures to protect Gambians against this incurable global disease.
Banning all forms of public gathering including conferences and workshops, closing schools both lower and higher leaning institutions, close monitoring of all our borders, and preparing the finance ministry to reallocate fiscal resources toward meeting the cost of the preventative measures, are appropriate steps necessary to save lives of Gambians and non-Gambians living in the country.
Barrow has demonstrated true leadership that many have been yearning for especially when our neighboring country, Senegal, have intensify its fight in the face rising number of cases in that country. We need not be reminded that if Senegal coughs, Gambia catches cold.
We are thankful that we have Barrow as president under these difficult times. Babili Mansa would have shocked the world announcing he has a cure for the disease making thousands susceptible to the disease. Thank God for that!
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