High-end chef adapts to new economy

Hat tip to Cheryl for this article from NJ.com about how Craig Shelton, the chef/owner¹ of what was once New Jersey's most expensive (and one of its best reviewed²) restaurants, The Ryland Inn, is now working in a diner. About nine years ago occasional commenter Y./TheRivers, who had won a $150-off coupon to the restaurant, treated me to dinner there for my birthday. If memory serves, he ended up paying $350+ out of pocket, even after getting the $150 off -- and we had ordered the less expensive of the two wine pairings offered for the tasting menu. We did get a couple of free cigars from the chef though, when he found out that Y. and him belonged to the same secret society/fraternal organization. From the NJ.com article,

The Skylark Fine Diner and Lounge on Route 1, with its 60s airport lounge-meets-the-Jetsons interior — flying saucer-shaped lights, retro tables and chairs, and clocks showing the time in Tokyo, Moscow, Paris, London and elsewhere — is one of the more striking diners in a state that boasts more than any other.

But still, a top chef in a Jersey diner? What’s he going to do, offer $25 patty melts?

Far from it.

Shelton, the Skylark’s guest chef, has added dozens of eclectic, globe-spanning, reasonably-priced dishes to the diner’s menu since early September. Constantine Katsifis, the Skylark’s owner, says he and Shelton are "inventing a new category of diner."

"The restaurant business across America is a horror show — down 60 percent, down 40 percent," Shelton said.

The thought of working in a diner makes Shelton laugh heartily.

"But it’s a good idea for any chef ... to have a more diversified portfolio."

After a water line break shut down the Ryland Inn in early 2007, Shelton was working on his high-end coffee line and ideas for food-related TV projects when Katsifis invited him to a restaurant trade show in Chicago.

I remember Shelton's high-end coffee line, from articles about it a couple of years ago. He was offering two types of coffee, actually: one allegedly blended and roasted for enjoyment on yachts and the other for stables. $20 per lb. for each, I believe. Back to the article,

Over dinner, Katsifis outlined a plan for the Skylark that was still evolving in his own mind.

"(There are) 20 chefs as accomplished as he is in the country," Katsifis said. "We came back from that meeting and decided to take the Skylark to the next level."

A commenter on at NJ.com wrote,

This is a welcome change. The French have bistros, the Italians trattorie and we have - diners.

NJ diners prove that anyone with a deep fryer, a can opener and a griddle can go into the business.

Well, not exactly. The most successful diners have loyal clientele who will only eat mediocre food from their favorite diner's deep fryer.

Edison is a little bit of a haul from here, but we'll have to head down there and check out the new Skylark diner.


¹A commenter on NJ.com writes that Shelton is no longer the owner of the Ryland Inn, having lost it to bankruptcy. I don't know if that's the case or not.

²From that link to the New York Times review:

Did I say words fail me? I seem to have gone on for five paragraphs about a tomato salad -- a dish you probably won't get to eat, by the way, for 9 or 10 months, the season having passed. But this is what it's like to eat at the Ryland Inn. You lose yourself in this food -- its colors, its textures, the way it works with the wine and the way the flavors seem to change and broaden with each mouthful.

[...]

Amid such riches it's easy to forget your surroundings. The 200-year-old inn, once a stagecoach stop on the road from New Brunswick to Easton, Pa., is a fine white clapboard building with Gothic touches and a green awning. The garden, open for strolling, occupies 2 of the inn's 50 acres; the rest is rolling pasture shaded by ancient trees. On a clear weekend afternoon in the fall, watching hot-air balloons drift over the forested hills of Hunterdon County, you can imagine yourself in France.

Hunterdon County is old money horse country (unlike hardscrabble Sussex County, where this pony lives).

KSW Claws Back

Long time readers may recall that we noted that shares of KSW Mechanical Services (Nasdaq: KSW), Inc. plummeted last December when two projects comprising about 40% of its backlog were put on hold in the same week. On Monday, KSW announced that the larger of those two projects has been resumed.

Readers may also recall this post from March, where we noted that KSW's corporate counsel Jim Oliviero mentioned the company was competing for a World Trade Center project. Yesterday, the company announced it had been awarded this contract. The company predicted in its press release that its backlog would total $129 million as of the end of this quarter. Before the drop last December, the company's backlog totaled $139 million.

Extreme Job Hunting

On his blog, Joshua Persky links to this breezily written Wall Street Journal article in which he is featured, Lessons of Extreme Job-Hunting. Below is a brief excerpt, followed by a comment by me and then a more pointed comment by a WSJ reader.

Joblessness transformed Joshua Persky, James A. Williamson III and Peggy Greco into experts about extreme job-hunting tactics.

Mr. Persky, an investment banker, handed out his résumé while wearing a sandwich board that read, "Experienced M.I.T. Grad for Hire." Mr. Williamson, fresh out of business school, taped his résumé inside the cab he began driving when he couldn't land a marketing post. Ms. Greco printed a T-shirt touting her availability for private-duty nursing, then wore it during bicycle rides around wealthy neighborhoods.

The unorthodox gambits failed these job seekers—but taught them plenty about finding work, and could provide a playbook for countless unemployed Americans. Mr. Persky learned to become a multi-faceted entrepreneur. Mr. Williamson discovered why personal networks matter. Ms. Greco recognized the importance of targeted marketing.

I've already censured myself for my previous commentary about Persky (See this post: "I have been too Harsh")¹, so I'll skip over his example. Regarding the Williamson fellow, the job he ends up with after his efforts is as an insurance agent. I'm surprised that a Wall Street Journal reporter doesn't know this, but those jobs are pretty easy to get. The initial training and stipend costs are usually a good investment for the insurance company for a simple reason: most applicants may not have the sales skills, persistence, and contacts to build a viable career as an insurance agent, but most will at least bring on some family and friends as clients before they give up. My guess is that the revenues generated by sales to those family and friends generally considerably outweigh the initial costs of the new hire.

A WSJ reader named T. Sawczyn weighed in in the comments:

Superficially obsequious and potentially self-serving compliments like the one from the recruiter above notwithstanding, I trust that the most important thing each of the profiled job-seekers has learned is the value of TARGETING their efforts to the need at hand.

I would think twice before hiring a personal nurse who rode a bicycle around "affluent neighborhoods" in a T-shirt that says "Hire me." Likewise, I question the intelligence or focus of an investment banker who thinks the best way to find a job is to wear a sandwich board. Finally, a taxi driver in a marketing job search is probably meant to be, a...taxi driver.

People, target your efforts and your job search to the correct audience. Network, direct your inquiries and make yourself a big fish in the small pond of your chosen specialty, not in the big lake of public exposure. This article and these efforts are further proof that what reigns in today's culture is narcissism and media exposure, no matter that the result of said self-exposure is nothing more than 30 seconds of fame.

Yes, none of these people was successful in their "job-search." Is anyone surprised?

¹I did also recently offer him the chance to bid on a small project I placed on Elance, but didn't hear back from him.

Hedging against Job Loss

You can't hedge against the idiosyncratic risk of losing your job, but you can hedge against rising unemployment nationally. The North American Derivatives Exchange (Nadex.com, formerly Hedgestreet.com) offers options on the unemployment rate and other economic events. I did a quick search to see if any financial writer had suggested these options as part of a strategy to hedge against the risk of unemployment. So far, I haven't found any.

I'm curious also about whether the managers of staffing firms have used these options. A number of publicly-traded staffing firms had significant amounts of net cash on their balance sheets last year; did any of them use some of that net cash to hedge against an increase in the unemployment rate? If they did, they'd have even more cash now.

Friday's Jobs Numbers

Mohamed El-Erian's op/ed in Friday's Financial Times seemed like too-gloomy a piece to link to on the eve of a holiday weekend, so I've waited until now to do so: "American jobs data are worse than we think". Excerpt:

Notwithstanding its recent surge, the unemployment rate is likely to rise even further, reaching 10 per cent by the end of this year and potentially going beyond that. Indeed, the rate may not peak until 2010, in the 10.5-11 per cent range; and it will likely stay there for a while given the lacklustre shift from inventory rebuilding to consumption, investment and exports.

Beyond the public sector hiring spree fuelled by the fiscal stimulus package, the post-bubble US economy faces considerable headwinds to sustainable job creation. It takes time to restructure an economy that became over-dependent on finance and leverage. Meanwhile, companies will use this period to shed less productive workers. This will disrupt consumption already reeling from a large negative wealth shock due to the precipitous decline in house prices. Consumption will be further undermined by uncertainties about wages.

This possibility of a very high and persistent unemployment rate is not, as yet, part of the mainstream deliberations. Instead, the persistent domination of a “mean reversion” mindset leads to excessive optimism regarding how quickly the rate will max out, and how fast it converges back to the 5 per cent level for the Nairu (non-accelerating inflation rate of unemployment).

The US faces a material probability of both a higher Nairu (in the 7 per cent range) and, relative to recent history, a much slower convergence of the actual unemployment rate to this new level.

Even former perma-bull Larry Kudlow, who was talking about "mustard seeds" months before Bernanke mentioned anything about "green shoots" couldn't put much of a positive spin on the numbers. On Real Clear Politics, Kudlow wrote:

I do the best I can to be optimistic about our nation's future. But realistically, the current picture is not particularly good.

"Tilting at Green Windmills"

In a post last fall ("A Green New Deal?"), we mentioned Van Jones's explication of the idea, advocated by many progressives, that government subsidies for solar and wind energy would spur job creation. In his Washington Post column yesterday ("Tilting at Green Windmills"), George Will draws on research from a Spanish economist who suggests otherwise. An excerpt:

WASHINGTON -- The Spanish professor is puzzled. Why, Gabriel Calzada wonders, is the U.S. president recommending that America emulate the Spanish model for creating "green jobs" in "alternative energy" even though Spain's unemployment rate is 18.1 percent -- more than double the European Union average -- partly because of spending on such jobs?

Calzada, 36, an economics professor at Universidad Rey Juan Carlos, has produced a report which, if true, is inconvenient for the Obama administration's green agenda, and for some budget assumptions that are dependent upon it.

Calzada says Spain's torrential spending -- no other nation has so aggressively supported production of electricity from renewable sources -- on wind farms and other forms of alternative energy has indeed created jobs. But Calzada's report concludes that they often are temporary and have received $752,000 to $800,000 each in subsidies -- wind industry jobs cost even more, $1.4 million each. And each new job entails the loss of 2.2 other jobs that are either lost or not created in other industries because of the political allocation -- sub-optimum in terms of economic efficiency -- of capital. (European media regularly report "eco-corruption" leaving a "footprint of sleaze" -- gaming the subsidy systems, profiteering from land sales for wind farms, etc.) Calzada says the creation of jobs in alternative energy has subtracted about 110,000 jobs from elsewhere in Spain's economy.

Lesson's from The European Parliament Elections

I meant to post a link to this earlier this week, but didn't get around to it. From Salon, here is Michael Lind's take on the victory of rightist parties across Europe in the European Parliament elections last week: "A warning for Democrats? The right just won all across Europe, thanks to nationalism, populism and recession. It could happen here too.".

Below is an excerpt from Lind's essay, followed by a few thoughts by me.

[I]t has become something of an orthodoxy among bien pensant progressives on both sides of the Atlantic that territorial nation-states are immoral because they privilege the identity of one cultural nation over others (the nation part) and because they favor the well-being of their citizens over foreigners who may be poorer (the territorial state part). Most progressives favor ending agricultural subsidies in Europe and the U.S., claiming that this would help poor peasant farmers in the global South export their way to prosperity (of course this would really benefit multinational agribusiness, not romanticized peasant farmers, but never mind). In debates about immigration, as in debates about trade, elite progressives whose own positions and incomes are secure frequently demonstrate their altruism by suggesting that it is acceptable if immigration somewhat lowers the wages of their less-fortunate fellow nationals, as long as poor foreign immigrants and receivers of remittances are thereby made better off. How generous of them!

The new pro-capitalist, anti-nationalist center-left finds allies in investment banks and college campuses but has little to offer ordinary people who view the nation-state as their agent and protector in a dangerous world. Nobody should be surprised when, in a period of economic crisis, significant parts of the population should turn to unabashed nationalists of the right, as opposed to progressives who fret that helping out their fellow citizens might be a form of discrimination against more deserving foreigners. It's true that toxic forms of racism and illiberal nationalism drive the anti-immigrant politics of the far-right parties that have benefited from protest voting in Europe. But the economic case for limiting the inflow of new workers into an economy at a time of mass unemployment is likely to seem commonsensical to many non-racist voters who do not share the new center-left's unease with national patriotism.

Lind makes some astute observations here, and Republicans can draw some lessons from this if they are willing to part company with Democrats on some of their shared orthodoxies (e.g., embrace of large scale unskilled immigration). The way to do this would be to acknowledge the challenges posed by globalization to the American middle class and offer some constructive solutions. In a recent post ("How Not to Create Broad-Based Prosperity"), we mentioned one Democrat (Matt Miller of the Center for American Progress) who acknowledged these challenges but didn't offer constructive solutions to them (e.g., Miller's proposed replacement for manufacturing jobs lost to outsourcing was to replace them with service jobs such as hospice aids; Miller proposed this without acknowledging the extent to which these jobs are currently filled by immigrant workers). I've made these points before, but two specific areas where Republicans can draw a contrast with Democrats are on immigration policy and energy policy.

On immigration policy, Republicans would be smart to buck the Chamber of Commerce's demands for cheap unskilled immigrant labor and advocate a transition to an immigration system similar to those of Australia or Canada, one that selects for immigrants with high levels of human capital. While unemployment is high, immigration should perhaps be further limited to foreign entrepreneurs who have the capital and intent to start businesses here and create jobs for American workers. To counter the inevitable accusations that anyone advocating an economically rational immigration policy is advocating it because of racism, Republicans ought to do two things. First, they ought to scrupulously distance themselves from anyone who advocates restricting immigration based on race. Racist immigration restrictionists may win elections in Europe, but they will be the kiss of death to any plans to institute a Canadian- or Australian-style immigration policy in America. Second, Republicans ought to point out that it is often minorities who are most harmed by the effects of our current immigration system. Let Democrats explain why we should import more unskilled immigrant laborers when, for example, 39.4% of African American teens are unemployed (Hat tip to Dr. Mark Perry for the chart below).



On energy policy, Republicans would be smart to continue advocating efforts to develop more domestic sources of oil, gas, and coal, while advocating an increase in nuclear power as well. Increasing domestic supplies of energy would create more high-paying jobs in the energy sector, and ensuring a large supply of relatively inexpensive energy would facilitate the creation of jobs in energy-intensive industries such as manufacturing (we noted the effect of lower energy prices on employment in a post last fall, "A Tale of Two States: Utah versus Rhode Island").

A third area where (some) Republicans may be able to draw a favorable contrast with Democrats, if they are willing to do so, is by running against Wall Street, or more accurately, running against the incestuous relationship between some major Wall Street firms and Washington. I suspect New Jersey's GOP gubernatorial nominee Chris Christie will try a version of this while running against our incumbent governor, former Goldman Sachs CEO Jon Corzine. Republicans would be smart to look for economic advisers from among the smart bankers and investors who haven't required government rescues. I don't know what John Hussman's politics are, but to the extent his policy prescriptions (e.g., making big banks eat some losses) have been ignored by the current administration, I bet Dr. Hussman would welcome a chance to advise a Republican candidate willing to listen to him. Another potential economic adviser might be Andy Beal, the self-made billionaire Texas banker who successfully navigated the credit bust.

A.O. Scott on Sam Mendes

Sam Mendes (of "American Beauty" fame) apparently has a new movie out (one I have no intention of seeing), based on a story by Dave Eggers, about an expectant hipster couple's search for a place to raise their child: "Away We Go". In his review of "Away We Go" in Friday's New York Times, A.O. Scott calls Mendes out ("Practicing Virtue, and Proud of It").

Of Sam Mendes's protagonists, the hipster expectant parents Burt and Verona (played by Jon Krasinski and Maya Rudolph, pictured above) Scott writes,

Their conversation is carefully poised on the boundary between facetiousness and sincerity, and they do things like turn unlikely words into adjectives by adding the letter Y (Burt wants a “Huck Finn-y” life for their baby) and pretend to argue about the difference between cobbling and whittling.

To observe that they inhabit no recognizable American social reality is only to say that this is a film by Sam Mendes, a literary tourist from Britain who has missed the point every time he has crossed the ocean. The vague, secondhand ideas about the blight of the suburbs that sloshed around “American Beauty” and “Revolutionary Road” are now complemented by an equally incoherent set of notions about the open road, the pioneer spirit, the idealism of youth.

Or something. Really, “Away We Go” is about the flight from adulthood, from engagement, from responsibility, even as it cleverly disguises itself as a search for all those things. But the dream of being left alone in a world of your own making, far from anything sad or icky or difficult, is a child’s fantasy. Not an unattractive or uncommon one, it must be said, and for that reason it is tempting to follow Burt and Verona into the precious, hermetic paradise that awaits them at the end of the road. You know they will be happy there. But you should also understand that you are not welcome. Does it sound as if I hate this movie? Don’t be silly. But don’t be fooled. This movie does not like you.

The comment thread on the version of this article on the New York Times website even includes some comments backing up Scott on his review. Below are two of them.

Eggers doesn't work on the screen

The story is the same kind of innocents-in-the-storm tale that a much-younger Eggers became famous on back those many years ago. But this is a variation on a now-tired Eggers theme and Scott gets that completely - to use the language of the film, a hipstery, politically correcty, don't-want-to-grow-uppy couple who can too easily see the faults in everyone else and prescribes a cure that has an icy condescension within its professed simplicity. The story, like Eggers, is getting too old.

— Ed, Rhode Island

Watch an Apple-vs.-PC ad instead

You'll be watching the same plot: Young, hip, cool-o and pretentious triumphs over old, dysfunctional and clownish. And it won't cost you anything in cash or nearly as much in time.

A.O. Scott's review totally nailed it. In addition to the smugness and condescension I'd add affectation and treacle. Another example of filmmakers who seem to assume that all they have to do is anoint certain characters as "hip" or "offbeat," and use "edgy" colors and graphics in the posters, and the Angelika Film Center crowd will start lining up with open wallets.

But if you ask me, Eggers never worked on the page, either. Always makes me think of Tevye belting out a Mad magazine version of his Fiddler showstopper: "Pre-ten-tion!!"

— TMJ, Kent, CT

If only Peggy Noonan read this blog. She could take Scott's rejection of the Mendes/Eggers weltenschauung, combine it with some personal observations about Americans wading through the Great Recession, and throw in an anecdote from her Reagan years for contrast. Then she could let it all marinate for a few days, and microwave it just before the deadline for her weekly Wall Street Journal column.

The publicity photo of Jon Krasinski and Maya Rudolph accompanied Scott's review and is credited to François Duhamel/Focus Features.

James Kynge's Thesis: "China Continental"; John Authers's Follow Up

James Kynge laid out his thesis for China's continuing growth in the wake of declining exports in a recent Financial Times column, "China Continental". Excerpt:

China is going continental. Just as the US during the 19th century underwent a transition from export-oriented growth to a greater reliance on inner dynamism, so China is looking inwards for the engine to drive its economy.

In China’s case it is still early days, but evidence suggests the conventional view of an export-dependent, river delta-driven economy no longer matches the reality. The argument here is not that trade has somehow become unimportant to China, but rather that the energy generating the world’s fastest economic growth rate this year is increasingly coming from within.

A series of indicators reveals the shift to “China Continental” – the transition of the world’s most populous country into an increasingly self-propelling economic force.

Kynge lists a few different specific metrics to back up his case, including increases in China's retail sales and domestic cargo traffic, and survey results on consumer spending intentions, before addressing China skeptics in his conclusion:

Sceptics argue that China’s performance this year has come through huge but ultimately unsustainable government intervention. Such spending, they say, will boost growth for a time but achieve little but industrial overcapacity in the longer run. These arguments are not without merit, but they miss a newer, more interesting prospect; that Chinese growth is increasingly self-generating and continentally driven.

Recent moves in the commodity markets support Kynge's thesis, as John Authers noted in his Financial Times column today ("China's health gives rise to fresh growth theory"):

Industrial commodities, that benefit most from economic growth, have surged, with lead and copper up more than 50 per cent in three months. Gold, an inflation hedge, has barely gained.

Authers went on to summarize the debate about China's economy (both sides of which have been fleshed out by Kynge and Zeihan, respectively):

As a whole, even before yesterday's strong headline to the US jobless report, world markets were plainly working on the assumption that China has saved the world from Depression. Is the market right to do so?

There are two camps. The optimistic side, laid out by James Kynge in the Financial Times last week, is "China Continental"; like the US in the late 19th century, China can turn itself into a great economic power, by building links to its interior and unleashing its buying power.

The pessimistic side suggests China has poured money into the public sector, and will merely form excess capacity. The huge demand for industrial metals may be artificial.

Electricity generation is down year-on-year. Supply managers surveys show new export orders are barely expanding. So maybe China is caricaturing the US in the 1930s, and paying some people to dig holes and others to fill them in.

If so, the gains could soon be in for another ugly recoupling. Either way, nothing just now is more important than the health of the Chinese economy.

Geography as Destiny? Zeihan on China

Below is an excerpt from the China-related part of Peter Zeihan's column The Geography of Recession.

China's core is the farmland of the Yellow River basin in the north of the country, a river that is not readily navigable and is remarkably flood prone. Simply avoiding periodic starvation requires a high level of state planning and coordination. (Wrestling a large river is not the easiest thing one can do.) Additionally, the southern half of the country has a subtropical climate, riddling it with diseases that the southerners are resistant to but the northerners are not. This compromises the north's political control of the south.

Central control is also threatened by China's maritime geography. China boasts two other rivers, but they do not link to each other or the Yellow naturally. And China's best ports are at the mouths of these two rivers: Shanghai at the mouth of the Yangtze and Hong Kong/Macau/Guangzhou at the mouth of the Pearl. The Yellow boasts no significant ocean port. The end result is that other regional centers can and do develop economic means independent of Beijing.

With geography complicating northern rule and supporting southern economic independence, Beijing's age-old problem has been trying to keep China in one piece. Beijing has to underwrite massive (and expensive) development programs to stitch the country together with a common infrastructure, the most visible of which is the Grand Canal that links the Yellow and Yangtze rivers. The cost of such linkages instantly guarantees that while China may have a shot at being unified, it will always be capital-poor.

Beijing also has to provide its autonomy-minded regions with an economic incentive to remain part of Greater China, and "simple" infrastructure will not cut it. Modern China has turned to a state-centered finance model for this. Under the model, all of the scarce capital that is available is funneled to the state, which divvies it out via a handful of large state banks. These state banks then grant loans to various firms and local governments at below the cost of raising the capital. This provides a powerful economic stimulus that achieves maximum employment and growth — think of what you could do with a near-endless supply of loans at below 0 percent interest — but comes at the cost of encouraging projects that are loss-making, as no one is ever called to account for failures. (They can just get a new loan.) The resultant growth is rapid, but it is also unsustainable. It is no wonder, then, that the central government has chosen to keep its $2 trillion of currency reserves in dollar-based assets; the rate of return is greater, the value holds over a long period, and Beijing doesn't have to worry about the United States seceding.

Because the domestic market is considerably limited by the poor-capital nature of the country, most producers choose to tap export markets to generate income. In times of plenty this works fairly well, but when Chinese goods are not needed, the entire Chinese system can seize up. Lack of exports reduces capital availability, which constrains loan availability. This in turn not only damages the ability of firms to employ China's legions of citizens, but it also removes the primary reason the disparate Chinese regions pay homage to Beijing. China's geography hardwires in a series of economic challenges that weaken the coherence of the state and make China dependent upon uninterrupted access to foreign markets to maintain state unity. As a result, China has not been a unified entity for the vast majority of its history, but instead a cauldron of competing regions that cleave along many different fault lines: coastal versus interior, Han versus minority, north versus south.

China's survival technique for the current recession is simple. Because exports, which account for roughly half of China's economic activity, have sunk by half, Beijing is throwing the equivalent of the financial kitchen sink at the problem. China has force-fed more loans through the banks in the first four months of 2009 than it did in the entirety of 2008. The long-term result could well bury China beneath a mountain of bad loans — a similar strategy resulted in Japan's 1991 crash, from which Tokyo has yet to recover. But for now it is holding the country together. The bottom line remains, however: China's recovery is completely dependent upon external demand for its production, and the most it can do on its own is tread water.

James Kynge of the Financial Times has an entirely different take on China's near-term economic prospects. We'll save Kynge's thesis for the next post, to keep this one from getting too long.

The image above comes from Zeihan's column.

John Mauldin's Latest

A few excerpts from this week's Thoughts from the Frontline newsletter, "Faith Based Economics":

On America's Fiscal Challenges:

The following headline caught my eye: "Obama Says US Long-Term Debt Load is 'Unsustainable.'" Yet they announced a $1.8 trillion deficit, which is really going to be at least $2 trillion, and are getting ready to pass health-care programs that will mean at least a trillion in deficits for as long as one can project.

How will they pay for it? Even getting rid of the Bush tax cuts will only produce a few hundred billion a year, which is nowhere near enough. They project much lower medical costs in the future, because they assume they are going to figure out ways to cut costs and make medical care more efficient¹. As if no one has ever tried that.

[...]

You cannot propose massive increases in spending without either creating crushing debt that the markets will simply not allow, pushing interest rates much higher and really slowing growth and hurting the economy. It is a simple fact that you cannot increase the debt-to-GDP ratio without limit.

We found the limit on personal and corporate debt this past year. We pushed the limits until the system crashed. And now the US government wants to basically do the same thing. They are planning to see where the limits on government debt-to-GDP will be. Unless cooler and more rational heads in the Democratic Party prevail, this is not going to be pretty. Sometime in the middle of the next decade we will hit the wall, and it will make the current crisis pale in comparison.

The only way to solve the problem is to grow GDP more rapidly than debt, and for that to happen you have to have policies which are shaped for the growth of the economy or massive savings by consumers. And right now we have neither. Cap and trade is hugely anti-growth. So are high corporate taxes, and Obama is proposing to effectively raise corporate taxes by closing loopholes for income earned outside the US. Much better would be to lower the overall corporate level to a competitive world rate and then require the offshore income to be taxed.

Some Potential Good News about Health Care:

This week I visited the Cleveland Clinic and went through their Executive Health Program (more on that below). I got to visit for several hours with my doctor, Michael Roizen, of YOU: The Owner's Manual fame (not to mention all his subsequent books). They have now sold over 20 million copies, and I highly recommend them.

I have long been a student of medical trends, and long-time readers know that I think the next really big boom will be in the biotech world. I asked Mike what three things he thought would have the biggest impact in the next five years in medicine. What he said gave me hope, because he thinks there may be some advances in medicine that could help solve some of the basic health issues we all face, and at the same time give us some relief from the high and rising costs of medical care. I was aware of most of the research, but did not know that we were as close as it appears we actually are.

Briefly, he feels there are three developments in late-stage trials that could have major impacts. The first is the development of sirtuin, which so far seems to be delaying the effects of diabetes but also seems to work for a host of diseases that are inflammatory in nature (including many heart-related issues). It essentially delays the symptoms for 30-40 years. While the current trials are for very specific diseases, he thinks sirtuin will have a wide applicability and that it could be huge, as inflammation is the cause of a number of diseases. This could prolong useful life and forestall a number of debilitating conditions.

Second, there is a late-stage-three trial due out soon that promises to increase muscle mass. I have been reading about such developments, but was not aware that something might be available within a few years. This promises to help people stay active a lot longer than currently possible, which will be a good thing if we are going to live longer.

And finally, there is a study and trial which shows that DHA may delay the onset of Alzheimer's disease, which eats up a significant portion of US medical budgets.

It would be a sad irony if pending universal health care legislation leads to price controls which dry up the funding for these potentially cost-saving advances.

¹Megan McArdle had a good post on this on her Atlantic blog earlier this week, "Medicare is going to bankrupt us, which is why we need universal health care". Excerpt:

Perhaps predictibly, someone showed up in the comments to my post on Medicare and Social Security to argue that liberal analysts have very serious plans to cut Medicare's costs, which is why we need universal coverage, so that we can implement those very serious plans.

I hear this argument quite often, and it's gibberish in a prom dress. Any cost savings you want to wring out of Medicare can be wrung out of Medicare right now: the program is large and powerful enough, and costly enough, that they are worth doing without adding a single new person to the mix. Conversely, if there is some political or institutional barrier which is preventing you from controlling Medicare cost inflation, than that barrier probably is not going away merely because the program covers more people.

John Mauldin, Best-Selling author and recognized financial
expert, is also editor of the free Thoughts From the Frontline
that goes to over 1 million readers each week. For more
information on John or his FREE weekly economic letter
go to: http://www.frontlinethoughts.com/learnmore

China's Economic Transition

China's exports were down 22.6% year-over-year in April, continuing a six month negative trend. That's the obvious cloud in China's economic forecast, but in an article in yesterday's Financial Times ("Chinese tap an inner dynamic to drive growth"), James Kynge highlighted the silver lining:

Just as the US during the 19th century underwent a transition from export-oriented growth to a greater reliance on inner dynamism, so China is looking inwards for the engine to drive its economy.

In China's case it is still early days, but evidence suggests the conventional view of an export-dependent, river delta-driven economy no longer matches the reality. The argument here is not that trade has somehow become unimportant to China, but rather that the energy generating the world's fastest economic growth rate this year is increasingly coming from within.

A series of indicators reveals the shift to "China Continental" - the transition of the world's most populous country into an increasingly self-propelling economic force. There are caveats, of course, but first the evidence.

Retail sales have held up much better in China this year than in other big economies, growing at a real 15.9 per cent in March year-on-year. But more important than the overall trend is the composition of the retail spending.

The most robust consumer spending figures are coming from inland and lower-tier cities rather than from the traditional growth powerhouses clustered around the Yangtze and Pearl river deltas.

Kynge also notes another sign of this transition, "that domestically bound cargo traffic through ports is increasing year-on-year, while foreign trade volumes are slumping".

The photo above, of a Wal-Mart in Chongqing, comes from the USDA's Foreign Agricultural Service. Chongqing is one of the lower tier cities Kynge referred to in his article.

Alloy Steel's 10-Q

Alloy Steel International (OTC BB: AYSI.OB) filed its 10-Q today (summary; full filing). Another break-even quarter: $39,000 of net income on $1,479,774 of sales. As I mentioned in a recent post ("Run Silent, Run Deep"), I had expected a loss this quarter, so I'm (mildly) pleasantly surprised the company was able to break even during what might turn out to have been the worst quarter of the current global recession. Judging from the price action today though, others had higher expectations. Management offered this comment on the quarter and the company's prospects going forward:

The decrease in sales for the period is representative of the general downturn being experienced in the world economy. The number of orders received by the Company have declined as demand for our product reduced as various mining companies announced that new mining projects were being delayed and/or existing mining projects were being wound back until demand for commodities increased. The Company has submitted tenders for the supply of Arcoplate where possible and is confident that these will be successful with orders likely to be received in the next three to six months. The Company has continued to promote its product in the market place as a superior option for maintenance, as well as seeking entry into other markets which were previously limited by the Company’s ability to meet the demand existing prior to the economic downturn. The Company is confident of being able to present its product well in these new markets, and anticipates additional orders will be generated from these new locations.

Updated Altman Z-Score for Alloy Steel

In a previous post ("Using the Altman Z-Score to Calculate the Risk of a Company Going Bankrupt"), we described the Altman Z-Score model for manufacturing companies:

The Altman Z-Score is a model developed in 1968 by NYU Finance professor Edward Altman (pictured above) to predict the likelihood of a company going bankrupt within the next two years. According to Investopedia,

[R]eal world application of the Z-Score successfully predicted 72% of corporate bankruptcies two years prior to these companies filing for Chapter 7"

In creating the Z-Score model, Professor Altman studied an initial sample of 66 firms, half of which had gone bankrupt, and looked for the balance sheet and income statement ratios that had the most predictive value. Dr. Altman settled on these five ratios¹:

T₁ = Working Capital / Total Assets
T₂ = Retained Earnings / Total Assets
T₃ = Earnings Before Interest and Taxes / Total Assets
T₄ = Market Value of Equity / Total Liabilities
T₅ = Sales/ Total Assets

He then assigned weightings to them based on their predictive values to create his model:

Z Score Bankruptcy Model:

Z = 1.2T₁ + 1.4T₂ + 3.3T₃ + .6T₄ + .999T₅

Based on this model, a Z-score below 1.8 means bankruptcy is likely within two years; a Z-score between 1.8 and 2.99 is a gray area; and a Z-score above 2.99 means there is little likelihood of bankruptcy within the next two years.

In that post, we noted that the Altman Z-Score for Alloy Steel at the time was 4.89. I re-ran the calculation today using the updated numbers and got an Altman Z-Score of 4.19. Unsurprisingly, it's lower than last time, given the drop off in sales and earnings, but still well above the 2.99 level, above which the model predicts little likelihood of bankruptcy within the next two years.

Special Recession-Buster Offer to Readers of The Hackensack

And everyone else who lives near a participating store: According to Bargainist, tonight is 31-cent scoop night at Baskin Robbins. You have until 10pm (HT: Cheryl).

The image above is from Intracto.

"Mad Ireland"

That was the headline of Megan McCardle's post on her Atlantic blog in response to Paul Krugman's New York Times column today about Ireland, "Erin Go Broke". In his column, Dr. Krugman suggested that Ireland got into trouble (it's economy is projected to contract by as much as 10% this year) because it was too free market oriented, noting that Ireland was ranked #3, behind only Hong Kong and Singapore, on the Heritage Foundation's Index of Economic Freedom. What Krugman didn't mention is that Australia, which was ranked #4 on that Index last year (and is ranked #3, switching places with Ireland, on the 2009 Index of Economic Freedom) is weathering the economic storm much better than Ireland or the United States. Australia is in a recession now, but its economy is projected to contract by less than 1% this year. So perhaps having a free market economy wasn't the proximate cause of Ireland's economic troubles.

Megan's post in response to Krugman's column isn't worth quoting here -- the best part of it was the headline, in response to which I wrote,

Hey, is that an allusion to Auden in the headline (from his poem "In Memory of W.B. Yeats"*)? If so, nice: the sign of a tasteful and expensive education (to borrow Neal Stephenson's phrase).

[...]

*I'm thinking of the great line "Mad Ireland hurt you into poetry", which I think of whenever I flip the channels and see Celtic Woman on a local PBS station. I wonder if "Mad Ireland" hurt them into doing their 50-piece Enya covers.

The photo above, of what apparently are the stars of Celtic Woman, is from the Celtic Woman website. Note that the neither the photo nor the name "Celtic Woman" gives a sense of the scope of the enterprise that is Celtic Woman. It appears to be comprised of dozens of Celtic women, along with dozens of Celtic men.

Costco Takes an Interesting Tack in Responding to the Recession

We noticed something new at our local Costco last weekend: USDA Prime steaks. Previously, the butcher section of the Hackensack Costco only carried the lower grade, USDA Choice. We picked up some Prime-grade rib eye steaks for $8.99 per lb. After marinating them in a little red wine (a drinkable $4 dollar bottle of Chilean Shiraz from Costco's liquor store), Worcestershire sauce, olive oil, and steak seasoning, I threw them on the outdoor grill for ten minutes, flipping them once half way through. Cooked medium rare, they were excellent. With a Choice steak, there's usually 10% or 20% of it I don't want to eat and I end up feeding to the dog; with this one, he just got a couple of tiny pieces.

Interesting tack for Costco, going upmarket a little in a recession. It probably makes sense. Last summer, Ruth's Chris offered a special dinner for two for $89, and, today I heard a radio commercial for a similar $90 deal at one of Manhattan's upscale steakhouses, Ben Benson's. Upscale steakhouses are going a little down market, and Costco's going a little upmarket: they're both competing for customers who want prime steaks but don't want to pay prime prices for them.

The image above, of the Prime-grade rib eye steaks, comes from Costco's website. According to the site, these are 1855 Brand steaks, packaged for delivery. The steaks we bought were cut by the in-store butchers and were less expensive.

Has Greg Mankiw Jumped the Shark?

You be the judge. From his "Economic View" column in the New York Times yesterday, "It May Be Time for the Fed to Go Negative":

Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.

That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10.

Of course, some people might decide that at those rates, they would rather spend the money — for example, by buying a new car. But because expanding aggregate demand is precisely the goal of the interest rate cut, such an incentive isn’t a flaw — it’s a benefit.

Would your first response to this scenario be to buy a new car? I bet a lot of people would decide instead to buy gold, or to exchange their U.S. dollars for the currency of a country less likely to pick a number out of a hat and invalidate a tenth of its currency.

Later in his column, Mankiw offers a more reasonable way that the Fed could create negative real interest rates, by committing to a certain level of inflation (presumably one higher than the Fed's current 2% target). Is this the best way to spur aggregate demand though? If this is a balance sheet driven recession, as some observers have termed it, and the problem is that many consumers can't service their debts, why not deal with that more directly?

For those whose mortgages are underwater, restructuring them using John Hussman's idea of property appreciation rights might make make sense. That would lower monthly borrowing costs for those mortgagers and enable them to increase their discretionary spending. For mortgagers who aren't currently underwater, the idea of Glenn Hubbard and Christopher Mayer, to use the GSEs to lower mortgage rates down to their historic spread of about 1.6% above 10-year Treasuries might make sense. According to Yahoo! Finance, the average rate on 30-year fixed rate, conforming mortgages today is 4.88%; since 10-year Treasuries currently yield 2.75%, under the Mayer and Hubbard plan mortgage rates might average 4.35%. Refinancing higher-rate mortgages at 4.35% would also lower borrowing costs and enable tens of millions of Americans to increase their discretionary spending.

The image above, of the Happy Days character Fonzie (played by Henry Winkler) jumping the shark¹ comes from Media Bistro.

¹For those unfamiliar with the phrase, see the Urban Dictionary's definition of "jumping the shark".

An Economic Stimulus Idea That Seems to Work

One economic stimulus idea that has been proposed a number of times is for the government to spur auto sales by offering a voucher good towards the purchase of a new car¹ to owners of old cars. The first I remember reading of such a proposal was last summer, but here are a couple of more recent examples, from the Brookings Institution ("Refuel Economy with Cash for Old Cars") and from the chairman of Ford in the USA Today ("Cash in Old Cars for New Ones"). As the Brookings piece notes, Germany included this sort of voucher program as part of its stimulus package it implemented in January. The German version offers vouchers of 2,500 euros to citizens who scrap cars that are at least nine years old. According to an article in today's Financial Times ("Berlin hit by cost of car incentive scheme"), this German stimulus program is having a big effect, both in Germany and in other parts of central Europe. A few excerpts from the article make this point:

“In February and March, we made about three times the sales we had in the first quarter of last year,” says Bernd-Uwe Prochnow, sales director at a Volkswagen dealership in Frankfurt. “And the first quarter of last year wasn’t bad at all.”

Car sales nationwide rose 11.9 per cent in February, making Germany the world’s only bright spot for the car industry.

[...]

Car-scrapping incentive programmes introduced by Germany and other European Union countries² are having a dramatic impact on central European car factories, and could help boost the region’s slumping economies, write Jan Cienski in Warsaw and Thomas Escritt in Budapest.

The turnround at factories making smaller and cheaper cars has been striking. During much of November and December, the Dacia factory in Pitesti, Romania, stood empty, its workforce at home on 80 per cent pay. However, Dacia, owned by France’s Renault, produces the €5,000 ($6,600, £4,500) Logan, Europe's cheapest production car, which has become a winner thanks to Germany’s €2,500 government rebate available for new car purchases.

Recently François Foumont, Dacia's general manager, said surging west European demand meant exports would account for three-quarters of the company’s production this year, against two-thirds in 2008. Dacia said it sold 25,500 vehicles in Germany last year, and German orders this year already exceeded that number.

In the Czech Republic, Skoda, a subsidiary of Volkswagen, has seen its sales to Germany more than double to 11,000 in February, and the factory in Mlada Boleslav has gone back to full-time production after working only four days a week in January.

Petr Vanek, a spokesman for Hyundai, which has a factory in the Czech Republic, said the plant shipped 20 cars a month to Germany in January and February, but last month delivered more than 2,000. Hyundai is now hiring about 500 workers.

Fiat, which makes small cars in southern Poland, exported 47,417 cars in March, almost 10,000 more than in the same period a year ago.

The image above, of a welder working on a Logan sedan in the Dacia factory in Romania, comes from this ViaMichelin.com site

¹Some have proposed making vouchers good for the purchase of newer used cars too, which would indirectly boost new cars too.

²The article mentions that France offers a voucher program as well, but the French vouchers are worth only 1,000 euros.

Late Scone Availability as a Bearish Indicator for Starbucks

I'm writing this from a local Starbucks, and it's quiet enough here that I overheard someone inquiring about a blueberry scone in the pastry case. Last year, the scones tended to sell out here (and at other local Starbucks stores) by early afternoon. There's also Top Pot¹ apple fritter sitting in the case. That's another morning item that would typically sell out before the early afternoon.

The image above, of the blueberry scone, is from Flicr.


¹The Top Pot locations in Seattle have great coffee and fresh donuts, by the way. Too bad there isn't a local chain like that here. I think it would do well.

Alloy Steel Update

Ugly tape for Alloy Steel International (OTC BB: AYSI.OB) on a down day. Looks like a flat-lining EKG. No company-specific news today, but there have been some tentatively positive indicators related to the metals sector recently¹. Picked up a few more shares today at .29.


¹E.g.,

- Temasek, the $134 billion Singaporean sovereign wealth fund, recently hired Chip Goodyear, former CEO of blue chip miner BHP Billiton, as its new chief (Wall Street Journal: Temasek Shakes Up Its Top Ranks -- Ho Ching Out, 'Chip' Goodyear In at Singapore Fund; a Commodity Push?)

- China bought a stake in (over-levered) blue chip miner Rio Tinto (BBC: China takes a stake in Rio Tinto)

- The Baltic Dry Index was up 147% year-to-date as of February 17th (Bloomberg: "Shipping Index Surge Signals Commodity Currency Gains"). It's up about 166% as of today (but still down steeply from its 2008 highs).

On the other hand, the continuing global recession is obviously bearish, and as reader Sivaram noted in a recent comment thread ("Mohnish, How Are You Feeling"), Mohnish Pabrai mentioned in his annual investor letter that he has turned bullish on the commodity sector, which, given his recent track record, could be considered a bearish indicator.