The Decline Of Small Business And The Middle Class

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The only way to not just survive but thrive as an entrepreneurial enterprise is to destroy fixed costs and labor overhead.

It is not coincidental that the middle class and small business are both in decline. Entrepreneurial enterprise and small business have long been stepping stones to middle class incomes and generational wealth, i.e. wealth that is passed down to future generations rather than consumed. As the headwinds to entrepreneurial enterprise and small business rise, the pathway to middle class prosperity narrows.

The Washington Post published a study that found U.S. businesses are being destroyed faster than they’re being created. While not exactly a surprise, it was sobering evidence that small enterprise is in structural decline:

The decline of small business also hurts employment. Successful small businesses expand and hire employees. As small businesses close, jobs vanish en masse.

I have addressed this systemic decline many times, for example: The Decline of Self-Employment and Small Business (April 22, 2013)
Here's Why Small Business Isn't Hiring, and Won't be Hiring (July 11, 2011)

What are the headwinds to entrepreneurial enterprise and small business? Here are a few key dynamics:

1. Barriers erected by cartels and the government. Cartels prosper by eliminating competition, and the easiest, cheapest way to restrict competition is to influence government to create regulatory barriers that raise the cost to levels no small business can afford. There are dozens of examples of regulations that do little to "protect the public" (the usual rationalization) whose primary intent and effect is to suppress competition.

Sickcare and higher education, to take two egregious examples, are protected from real competition: there is little real transparency in pricing and little accountability for the efficacy of the product (diplomas, wellness).

2. Overcapacity. Supply exceeds demand in almost every nook and cranny of the global economy. There aren't many high-value opportunities to pursue because every field is already crowded or restricted.

The market ultimately sets the value of any output. You can ask $30 for a lunch plate but the market will determine the value. If your cost is $20 per plate and the market value is $15, you will lose money and go out of business.

3. High cost structure. Many people are calling for small businesses to pay their employees a living wage. I understand the emotional source of this demand: a desire to close the income gap and raise the standard of living of the working poor. But since the market sets the value of any enterprise's output (good or services), and the business has fixed costs (rent, utilities, business licence fees, taxes, inventory, back-office overhead such as accounting, etc.), a business can only pay wages and labor overhead out of gross profit–what's left after fixed costs are deducted from revenue.

Fixed costs and labor costs are both skyrocketing. Commercial landlords have inflated expectations of rent, thanks to the Fed-induced real estate bubble: since they overpaid for the building, they need to charge high rents to cover their mortgage payments and property taxes.

As I have explained in previous entries in this series on the middle class, the costs of labor overhead–healthcare insurance, pensions, payroll taxes, worker compensation, etc.–are rising. That leaves less available for wages.

Local governments are responding to their own soaring healthcare and pension costs by raising junk fees and taxes on small business: in many areas, a new small business faces a blizzard of fees for licenses, permits, etc.

The fundamental context of our economy is not conducive to small business or conventional employment: the cost of human labor keeps rising while technology that replaces human labor gets cheaper; fixed costs keep rising while overcapacity and anti-competitive barriers reduce high-value opportunities.
Any enterprise exposed to free-market forces must create value. If businesses can only create low value good and services, i.e. goods and services with thin margins, they can only pay low wages–not just to employees, but to the owners/entrepreneurs.

The only way to not just survive but thrive as an entrepreneurial enterprise is to destroy fixed costs and labor overhead. The food services enterprises that will thrive are those that share the expensive fixed costs of a kitchen. The enterprises that thrive will not own vehicles, they will share vehicles. The enterprises that thrive will not have employees, they will draw upon self-employed people who organize to complete a specific project/task and share the revenue.

The way to destroy fixed costs and labor overhead is to pay no business rent, own no vehicles, have no employees, owe no debt, own your own tools/means of production and nurture human and social capital. This model for small enterprise is overturning all the skimming cartels and bureaucracies: commercial real estate, local government fees and property taxes, etc. etc.

The future of middle class prosperity is entrepreneurial enterprise and joining the class of Mobile Creatives who minimize fixed costs and overhead and maximize productive cross-fertilization of skills, human and social capital and debt-free ownership (or shared access to) the means of production.

I cover all of this in my new book Get a Job, Build a Real Career and Defy a Bewildering Economy, which is in essence a how-to guide on becoming a Mobile Creative as a means of securing middle class prosperity in the emerging economy.




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March Wholesale Inventories Surge In Boon To Negative Q1 GDP, Bust To Q2 GDP Forecasts

Wall Street has a problem. In all their excitement about how terrible Q1 was – and ths how awesome Q2 and beyond will be – it forget to check in with the firms that were busily stacking inventories in their snow-covered factories around the nation. Wholesale inventories rose 1.1% in March (which is still in Q1 remember) – smshing expectations for the 3rd month in a row (all in Q1 remember) and the 2nd biggest spike in 2 years. Each time we have seen such a spike, the following months saw a notable decrease. Desk chatter is already of a 0.3% boost to Q1 GDP and a 0.2% cut to Q2 GDP – just as hope was getting going once again.

 

 

If we build it – they might come – or we’ll leave it on dealership floors… and stop stacking.




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Early Friday Humor: BofA Revises Long-Term GDP Forecast, Sees No US Recession During Next Decade

Who cares about their atrocious Q1 GDP forecast (because of “snow” of course), or how much El Nino, La Nina, or any other climatic conditions will impact their Q2, Q3, Q4 and so on economic prediction?

Bank of America that’s who.

In what should be the biggest joke of the day, Bank of America has just released its GDP forecast not for the next several quarter, but making a mockery of the IMF’s 2022 Greek GDP forecast, it predicts US growth for the next decade!

The punchline: after expecting a surge in growth to 3.4% in 2016, the bailed out bank tapers off its forecast which evens off at 2.2%… some time in 2025. And throughout this period its crack economist team headed by Ethan Harris anticipates precisely…. zero recessions.

Indeed, in what will be a first time in history, the US is expected to grow for 16 consecutive years since its last official, NBER-defined recession (which “ended” in the summer of 2009) without entering a recession.

Here is how Harris explains this joke:

Obviously, there is considerable uncertainty in forecasting many years out, so these should be viewed as rough baseline numbers. For example,if history is our guide, at some point in the next decade the US will experience a recession, but predicting a recession far in advance is almost impossible.

Well, why not. Considering Biotech ETFs just arbitrarily exclude any negative and low earnings companies from their basket P/E calculation, it only makes sense that when predicting US growth one simply excludes all the recessions.

More humor from Bank of America:

Long-run forecasting is very different than short-run forecasting. Some of the key assumptions we use are as follows:

 

1. We expect real GDP growth to converge to potential growth after 2016, which we expect to be around 2.2%.

2. We expect that the long-run unemployment rate (the NAIRU) resides around 6%, due in part to demographic factors.

3. We expect the Fed to on average hit its 2% target for the PCE deflator, and the other inflation numbers are modeled off that assumption.

4. We expect interest rates to converge to slightly lower long-run levels due to ongoing fiscal headwinds and lower potential growth

Or, said otherwise, “we took a long-term GDP chart and extrapolated.” Hence: value added.




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The Sheer Idiocy Of Markets Is Back: BEAT Edition

First it was Tweeter (TWTRQ), then Nester Entertainment (NEST), and then Oculus VisionTech (OCLS)… and now – courtesy of Apple’s planned acquisition of Beats, the total muppetry that we call a ‘market’ has bid shares of BioTelemetry (BEAT) up over 4% this morning…

 

 

h/t @BarbarianCapital




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The Early Verdict Is In: Apple Is Down One Beats

Immediately ‘excretive’? It seems the early sentiment regarding Tim Cook’s decision to purchase private company Beats is that it is not helping… (likely more crucially… it’s $3.2bn that is not going to buybacks and the market is upset about that). It’s early yet though…

 




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Highlights From The Ukraine Civil War: Mariupol Soldier Firing RPG Caught On Tape

When it comes to people-vs-tank videos, Tienanmen Square reigns supreme; but as tensions escalate hyperbolically in Eastern Ukraine, the following clip of a Mariupol soldier taking things into his own hands – and firing an RPG into the face of two oncoming tanks – confirms this nation’s divide is growing wider by the day….

  • THREE DEAD, 25 WOUNDED IN MARIUPOL CLASHES, LOCAL GOVT SAYS

As RT reports, the Victory Day ‘celebrations’ spilled over into deadly clashes between police and pro-Russian separatists after Kiev’s forces are using heavy weaponry and tanks in the eastern city of Mariupol. Sadly, we suspect, Mariupol may become the next Odessa this weekend.

 

Here’s how it started…

 

And here’s how he finished it…

 

But, as RT reports,

Kiev’s forces are using heavy weaponry and tanks in the eastern city of Mariupol to storm the local Interior Ministry building, where police have barricaded inside. After residents began flocking to the scene, Kiev fighters opened fire on civilians.

 

Many people came to mark Victory Day, but as the reports of shooting started coming in, they moved on to show support for a few dozen policemen who had barricaded inside the building, refusing to take orders from Kiev.

 

Federalization supporters screamed “Fascists!” as the Kiev forces approached.

 

One of the armored vehicles then opened fire at a group of unarmed civilians, according to a self-defense forces’ representative.

 

 

Ten people with gunshot wounds have been taken to one of the hospitals in Mariupol, local media reported.

 

Also, according to the 0629.ua news portal, “a tank was seized at the crossroads of Lenina and Torgovaya streets by the representatives of the Donetsk People’s Republic.”

 

Mariupol’s residents have put up barricades in the streets, burned tires and turned over cars.

 




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The Worst Risk/Reward Trade on Wall Street

By EconMatters  

 

 

The Rigging

 

So a bunch of folks in Hedge Fund Land have this idea that they can force a bit of a squeeze in the bond markets, and all the sudden the boring old bond market has been on the media roadshow by firms trying to talk their book, and get others to follow suit, and go long the bond market. 

 

It has gotten so bad that these same “investors” have started piling into the futures market with some short-sighted notion that they can affect bond prices by driving the futures prices. If we look at the 10 Year Yield it has stayed constant between 2.58-2.62 for the most part since the employment report. However, the futures market for the same 10-Year has all the sudden jumped from the normal correlation earlier in the week to the bond yield to aggressively ahead of the 10 year yield.

 

Furthermore, the price action of this 10 year futures contract all the sudden started acting very strangely whereas the 10-year actual bond yield would move but the futures contract would barely budge. This for experienced traders says somebody is propping up the contract, and refuses to let the contract fall regardless of what happens in the bond market within possible reason. It all the sudden is a one sided market with somebody protecting their position until they are forced out of the trade.

 

Worst Risk & Reward Trade on Wall Street

 

There are a lot of bad trades on Wall Street, there are a lot of not-so-smart people managing money, it really is all about sales in this industry, i.e., AUM (assets under management). But the goal of this trade is to take the 10-year yield down to the 2.49 level give or take a few basis points. So let’s get this straight, these people are trying to make 10 to 12 basis points on a trade while risking 75 to 150 basis points conservatively in the next 6 months. 

 

Furthermore, they have proposed this trade when the Federal Reserve is actually getting out of the business of buying bonds, and we just had a 300k jobs report which we have been waiting 6 years to finally realize. Great timing geniuses, of all times to be short yield, this is about the worst time in history to be shorting yield from a risk reward standpoint. What do you think is going to happen to inflation numbers once these minimum wage plans get enacted in raising these wages across the board in the economy – inflation spike in terms of massive pass through by Corporations. What do you think is going to happen in three weeks on the next employment report when the trend in the jobless rate declining and another 250k plus hits the wire? The job market finally starts kicking and you want to short Treasury yields, that isn`t a good long-term strategy for maintaining those AUM as Thursday`s Bond Auction reinforced that nobody wanted those 30-year Treasuries with this low of a yield – that is a sucker`s bet!

 

Where do you think Treasury Yields are going to be by year end with no Fed buying whatsoever? You think a 2.60 yield is going to inspire investors other than our government to buy these treasuries given the inflation risk that ultimately hits after the job market becomes tight, wages increase pushing cost through to compete for workers, and boom all the sudden the PPI & CPI inflation gauges spike to 3%, and everybody rushes to get long yield as an inflation hedge.

 

I could continue to elaborate on why this is such a bad trade, and the geniuses can load up all they want on 10-year futures contracts, but this isn`t the oil market – a largely paper market these days. Somebody actually has to be willing to buy a Treasury with a 2.5% yield on a Ten Year timeframe, and risk losing boatloads of principal in the process.

 

Ukraine &Russia

 

This has become one of the most overhyped Geo-Political Event in recent memory. The US isn`t going to war with Russia over Ukraine, Obama made the mistake of even being involved – this is Ukraine for crying out loud. One of the most corrupt countries in the world, and base camp for hackers around the world.  

 

The US should let Russia do whatever they want in Ukraine. There is an old adage if a competitor is trying their best to sabotage themselves, don`t stand in their way. Russia will look back very unfavorably at any morass they get into with Ukraine – another Afghanistan headache for them. 

 

The Russia-Ukraine event is a red hearing, and overhyped by news media looking to bolster ratings in a pretty boring world news wise. It doesn`t matter one bit if Russia invades Ukraine – great for them they now have a bastion of internet hackers with all their associated international baggage to try and manage – good luck with that one.

 

Risk & Reward

 

In conclusion this trade is one of the worst setups I have come across lately, and I cannot believe this many so-called money managers are pushing this at investor conferences. Analysts who know nothing about bonds are now on CNBC talking about yields on the 10-Year with nonsensical technical analysis jargon that forgets the main point – all previous prices were artificially affected by a Fed that is getting out of the market – Hello! The incompetence on Wall Street just never ceases to amaze me; there are some not-so-bright people in this industry. Yeah maybe there is a case when the employment reports were coming in around 90k, but certainly when we are upwards of 200k and trending higher on the employment report, this has got to be one of the worst possible times from a risk/reward standpoint to be shorting yields!

 

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The Bubble Expands: “No Money Down” Loans Come To Asia

Submitted by Simon Black of Sovereign Man blog,

Remember all of those credit card and loan offers you used to receive in the mail?

Bad credit? No credit? No problem.  0% APR for the first six months. Free balance transfers. No money down. And my personal favorite– no credit check.

These were all classic signs that the mother of all liquidity bubbles was upon us.

Think about it– would anyone in his/her right mind throw a bunch of money at some random guy on the street to go buy a new digital TV without so much as checking his references or requiring a sizeable down payment?

Of course not.

But if you and I wouldn’t do something so careless, then why would a bank?

More importantly, why would a bank not only make a loan like that, but do it thousands of times over? And use OUR money to make those loans?

They’re supposed to be conservative financial stewards, not drunken sailors.

We know how it turned out. This reckless lending spawned by a multitude of freshly printed money on the part of central banks nearly brought down the financial system.

Looking at the expansion of credit across the West, though, it’s happening again. Fool me twice, shame on me.

But this is a worldwide phenomenon now. My partner Tim Staermose and I were talking about it this morning, as he’s currently traveling in the Philippines.

When he went to collect the mail at his old office address yesterday, one of those credit card offers was waiting.

It was sent by a local bank, according to them because Tim is a long-standing customer.

Curiously, though, his account at the bank has less than $400. They know nothing about his ability to repay. They have no clue if he is gainfully employed, or even where he lives. But they sent a pre-approved credit offer regardless.

Another bank– a Philippine branch of a large US bank, mailed him an offer for a “no questions asked” cash loan of about US$11,000, to be paid back over a period of time of his choosing.

And of course, real estate agents are out all over town flogging Philippine investment properties, offering ‘no money down’ deals.

People only make such an offer if they

1) Expect everything to keep rising forever [which is a really baaaaad notion], or

2) They have so much money to deploy, they are forced to make rash decisions and assume tremendous risk just to be able to invest.

Both of these are incredibly dangerous and lead to disastrous consequences.

We remember the last time people thought that ‘real estate can only increase in value…’ Or the last time banks were making no money down loans.

Yet markets, bankers, central bankers, and politicians all have very short memories. This time, it always seems, will be different.

It never is.

But everything is now so interconnected that a credit unwinding in a place as small as the Philippines could actually have a substantial impact on the rest of the world.

It was the same during the Asian Financial Crisis in the late 90s, and exactly the same in 2008 nuclear banking meltdown.

The dominos in the global financial system are spaced so closely together you can hardly see any daylight between them. And a tiny central banking elite is lording over them all, clumsily and hastily cramming even more dominos onto the table.

This isn’t an environment where traditional financial thinking is going to prevail.

From ‘buy and hold’ index investing to the solvency of our banks to the basic premise of paper currency, nothing can be taken for granted any longer.

Real assets– productive land, precious metals, private businesses, etc. are much safer alternatives right now.

One of these days, someone is going to bump the table and all the dominos will start to fall. You won’t want your savings anywhere near it when that happens.




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Russia Celebrates Victory Over Nazi Germany As Putin Visits Newly “Acquired” Crimea

A day after Russia shocked the world with an impressive demonstration of military preparation for what it dubbed was a “massive nuclear attack“, the country is celebrating its traditional May 9 national holiday which marks the Soviet victory over Nazis in World War II. Among the people watching the traditional and impressive military demonstration on Red Square was Russian president Vladimir Putin.

This is a full replay of what he saw.

“It’s a day when we all especially keenly feel what it means to be faithful to the motherland and how important it is to be able to defend its interests,” Putin said at the Moscow parade. “It’s a holiday when the all-triumphant power of patriotism celebrates victory.”

However it is not Putin’s presence as the rally that was notably, but what he did after, when hours after the he watched the tanks rumble on Red Square Putin flew to Crimea for the first time since its annexation, to oversee Russia’s newest territorial expansion. This happened even as both Ukraine, Germany and the head of NATO all voiced strong objections to such a visit by Putin which not only formalizes the expansion, but spits in the eye of Western attempts to contain the Ukraine conflict and/or de-escalate:

German Chancellor Angela Merkel said three days ago a visit by Putin to Crimea would be regrettable.

 

“The situation there is so grave that a trip like this could provoke greater violence,” Tatyana Stanovaya, an analyst at the Moscow-based Center for Political Technologies, said by phone May 7. “The visit would appeal to Russians at home who are happy to have Crimea back in the country’s fold.”

Ukrainian Prime Minister Arseniy Yatsenyuk said yesterday he’s concerned that Russia is “planning provocations” today.

 

Yatsenyuk told reporters in Kiev today that a nationwide dialogue aimed at preserving national unity would start May 14, according to the Interfax news service.

 

The Kiev government, which took over after Kremlin-backed President Viktor Yanukovych was toppled by protesters in February, opposes the referendums on secession and says it won’t talk to those involved in separatist violence. Putin says only talks that include the pro-Russian groups can succeed in easing tensions.

While we commiserate with the completely helpless and without leverage Ukraine government, as well as the reliant on Russian gas Germany, perhaps consider this a preview of what Putin will do next year when long after East Ukraine aka “Novorossiya” has seceded from the west, the Russian president will have a land route from the Kremlin all the way to Sevastopol. He may even ride a bear all the way from Point A to point B. Bare chested.




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