This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Tuesday, November 2, 2010

Tight Ships Don’t Need Bailouts

For all-to-many Americans, it sure doesn’t feel like the economy has made any kind of recovery but the recent profitability of corporations tells a very different story. Lately companies like Ford have been racking up surprising earnings.

Profitability is particularly prevalent among those companies that were not the recipients of government bailouts. While Ford has seen startling sales numbers and growth in earnings its peer, Government Motors, continues to struggle.

This tells us several things, most of which were anticipated by those who opposed government bailouts from the beginning.

First, those companies that did not receive government assistance are now emerging from their predicaments. Their problems have only made them stronger and more responsible. They were forced to “take their medicine” and optimize their operations. Their sales may not yet be fully recovered, but they’re running tight ships.

Conversely, businesses rescued with government help – either through regulation or with taxpayer dollars – have not learned their lessons, as evidenced by the recent revelations of additional fraud in mortgage markets. Many of these companies continue to support outsized payrolls, possibly as a result of political pressure from those who wish to keep jobless claims low. In short, few of them have corrected the mismanagement that got them into trouble in the first place.

Second, the recent progress in America’s private sector illustrates that the economy, which many continue to fear may double-dip into recession, is actually recovering nicely with the exception of unemployment. As clearly demonstrated by comparing companies which did or did not receive bailouts, it is clear that this recovery is not the result of government intervention, namely “stimulus” packages.

The blame for this lagging recovery in unemployment rests squarely on the shoulders of the federal government. Though businesses had for years engaged in less-than-ideal business practices, growing payrolls beyond what was necessary and outsourcing manufacturing for cheaper production costs for example; recent government action has put an unnecessary damper on the creation of jobs in this country.

First the government enacted legislation like Healthcare Reform, which introduced significant uncertainty into the economy. Suddenly businesses didn’t want to hire because they had no idea how expensive each new employee would actually be.

Next, unemployment benefits were extended to “help those who fell on hard times.” The result was the complete destruction of any motivation for America’s unemployed to find work.

The question now is what this all means for the economy long-term, and where we go from here. Ultimately the hope is that the recently increased profitability seen in the private sector will “trickle down” into the economy, putting people back to work and stepping up consumer spending.

There is little that business loves more than political gridlock.

This process is likely to quicken after November if political gridlock results from the November 2nd elections. There is little that business loves more than political gridlock. Gridlock of this type increases the certainty of expected costs and benefits associated with hiring, firing, building, and selling.

While some ask whether there is anything the government can do to help, the better question is what the government SHOULD do to help; the only answer being that the government should do everything in its power to get out of the way of businesses big and small. Whether that means tax cuts, less regulation, or simply a vacation for Congress, when it comes to government corporations view no news as good news.

Oddly enough, this is almost precisely what British rookie Prime Minister David Cameron did on the far side of the pond. Rarely a country to emulate, the United Kingdom under Cameron’s leadership has lately responded to the global recession in spectacularly opposite fashion from the United States.

While the US under Obama’s leadership has seen the federal government grow to become the country’s single largest employer, Cameron has slashed the UK’s budget, last week announcing the elimination of almost a half a million jobs.

In perhaps the greatest case of leading by example ever recorded, the UK has allowed its private sector, by and large, to battle through its setbacks and grow stronger. Cameron can now boast of an unemployment rate that is nearly 2% LOWER than that of the US.

As if that weren’t sufficiently impressive, England’s economy has actually seen phenomenal growth even as the government has cut both its budget and its payroll. In fact, it is quite possible that the UK’s GDP growth for the third quarter of 2010 may equal the US’s growth in the same metric for the ENTIRE YEAR.

Perhaps our current president might learn from that example. Until he does I propose that all public Presidential appearances replace “Hail to the Chief” with “If I Only Had a Brain.”

No comments:

Post a Comment