Tuesday, March 31, 2009

Working for Servants

Funny how our managed depression is being administered by a large group of people whose jobs are not really impacted by this financial meltdown. They have some of the best health insurance coverage on earth, and they get defined benefit retirement (with healthcare coverage!), with cost of living escalators, if they hit any of the following three criteria:

  • At least age 55 with 30 years of service or more.
  • At least age 60 with 20 years of service or more.
  • At least age 62 with 5 years of service or more.

There are adjustments based on when you were born, but the above summary is pretty accurate. Let’s not even talk about the military. Lots of these “well-benefitted” workers live in and around a city, with escalating real estate prices and soaring rents, where job security is never an issue, and layoffs are not remotely in the cards.

The city is Washington, D.C., and most of the “servants” are protected by our federal Civil Service laws. While a vast majority of Americans are making less (assuming they still even have jobs) in this trashed economy, these folks are benefitting from cheaper loans and bargains from national companies and automakers trying to find a way to stay in business. As the economy contracts, as prices for goods and services fall, our civil servants get more buying power, just as our tax dollars are rising, our deficits soaring. Sure, they don’t have upside; they signed on in a different time. And most of them are incredibly value contributors to our national value proposition. I know; I was born and spent my early years in D.C., and my father, step-father and mother were all federal employees.

But seriously, those of us in the private sector who still have jobs are facing salary cuts and rising benefit costs even as our taxes rise. Imagine what would happen if the average federal civil servant were asked to take even a 10% pay cut?! Screams! Yet no one has suggested that their federal benefits be curtailed along with the pain the rest of America is required to endure. I’d love to retire after five years of work, but we know this was created to cover those who are brought to Washington under a political aegis.

Bottom line: how can people who are completely isolated from economic devastation, whose neighborhood and metropolitan area (okay, the subprime buyers in the DC area suffered the same fate as their brethren across the nation – a high default/foreclosure rate), is barely impacted by all this economic pain have the slightest empathy for the rest of the country which, depending on the region and the local industry, is suffering beyond measure? Even most of the “government contractors” in and around the city, as well as most of the local service and retail businesses in the area, are doing pretty well. This was same the story during The Great Depression.

Would we be getting a different result, a more rapid response, a more sympathetic ear and a more responsible solution if Washington were forced to apply the same economic contractions to their federal workforce imposed by the real world on the rest of America? After all, if federal employees get cost of living increases, shouldn’t they get the same reality adjustments in a downturn, one many actually blame in significant part on government employees not doing their jobs, turning a blind eye to obvious abuses?

I’m Peter Dekom, and sooner or later, a lot more Americans are going to be asking their elected representatives the same question.

Monday, March 30, 2009

Auto Pilot

So the government pushes GM’s CEO out the door – and American businesses shake their heads at the level of government inference… even though it is taxpayers’ money being begged for. The government gives GM 60 days to get real and Chrysler 30 days to get a partner. CEOs all over America “sweat fear” as the feds hint that banks may not be as strong as they are telling you, that some of the biggies may need some serious federal capital infusions to survive. As Wall Street shudders and the market plunges, a chorus of “wait until you see the terrible earnings and the horrible contraction-in-the-first-quarter-GDP reports” fills the business news channels.

GM’s plans still carry too many old and expensive “out of touch managers” and a healthcare and pension plan for workers that I would die for – so would most Americans (except, of course, federal employees). Chrysler killed innovation when they separated from Daimler-Chrysler – developing new vehicles and future-looking engineering was just too expensive. They literally have nothing new of any significance on the boards and have no real template for the massive construction of smaller, more fuel-efficient cars. To get the capacity for this huge market, they literally need a partner that is already in that smaller car business, like Nissan or, as luck would have it, Fiat. The government said what everyone already knew.

So the market elation of last week seems to be nothing more than traders’ feeling like they really did hit a bottom, and they had better climb on the bandwagon before market soared upwards. Everybody seemed to forget the government’s admonition (the Federal Reserve to be specific) that “bottom” may come late this year or early next year. It didn’t say “at the end of March of 2009,” even though the stock market is a “leading economic indicator.” It just doesn’t start leading that far in advance. The unemployment numbers will get worse long before they get better; we have a way to go.

But why would the government even care about letting Chrysler and GM continue? Why not save the taxpayers a bundle and just let them fail. Do we need them around just to provide customers with government-backed warranties? To make parts for all of those cars already on the road? You might like to know that the new government-backed warranty plan doesn’t help those who already own cars made by these companies. The March 30th NY Times: “The administration’s plan to stand behind new-car warranties for G.M. and Chrysler is intended to reassure consumers worried about buying domestic vehicles. And to a large extent, the plan should do exactly that. But people who already own a G.M. or Chrysler vehicle are not covered by this program and it also does not cover safety recalls, which can occur years after the warranty expires.”

Are people even interested in buying Chrysler or GM products anymore? What do you think the resale value on a car from one of these companies will be? GM and Chrysler are already tagged by consumers as damaged goods. The March 29th Los Angeles Times provides the indisputable truth: “Since the first congressional hearings on the auto industry in November, U.S. sales by GM and Chrysler have fallen a combined 45% compared with the year-earlier period; all other carmakers slid only 33% during that time… By comparison, Ford Motor Co., which has not accepted any government aid, saw its share of the retail car market rise for four consecutive months through January, the first time that's happened in 14 years… In the first two months of this year, the number of buyers considering a GM or Chrysler vehicle fell 12% and 33%, respectively, according to CNW Marketing Research, which specializes in the auto industry. At the same time, Ford saw a 12% increase in consideration.”

How’s this for truth? If GM and Chrysler fold, they take with them thousands of parts manufacturers who supply Japanese and German carmakers too. A vast portion of every American car made is an assemblage of components from long list of “out-sourced” parts suppliers. The build everything from seats to brakes. Ever drive through Wisconsin , Ohio , Indiana , western Pennsylvania … all over the U.S. , but particularly in the rust belt… and look at all those small factories? Ever wonder what a whole lot of them make? You got it! Car parts for almost every car manufacturer that makes cars in the U.S. , from Honda to Ford, from Toyota to General Motors. Take GM and Chrysler out of the mix, and virtually every one of those parts suppliers will fail too. Then the other car manufacturers will be up a creek, even those who were smart and managed their businesses well.

So if I get this right, we are being blackmailed by the insurance industry, particularly AIG, because if there is massive failure in this sector, Americans will be walking around without insurance (or have to rely on state-backed reserves)? And we are being blackmailed by the financial sector, because if we do not rescue the biggest failures, this managed depression will be around for at least a decade as markets struggle without credit. But on top of all of this, if Detroit fails (I mean totally liquidates versus restructuring in or out of bankruptcy), all of the rust in the rust belt snaps, and all car manufacturers in this country run out of parts. Even in Chapter 11 reorganization, GM and Chrysler can’t get the financing they need, in this shredded credit marketplace, without government intervention.

We can “just say no” and watch this malaise linger for a decade or more, or we can grit our teeth, swear loudly, and do the best we can with what we’ve got. Wonder how the G-20 economic summit will work out? Wanna guess? Our managed depression is already known all over the earth as an “American-caused” meltdown.

I’m Peter Dekom, and I approve this message.

Sunday, March 29, 2009

Irreconcilable Differences

Time for the Easter bunny again; he winters with Santa Claus ‘cause the old man is otherwise occupied. But these two quasi-governmental figures do bring to mind how legislators pass bills they don’t (and often can’t – blame it on complexity or length) read or are based on assumptions everyone should know are kind of… er… wrong. Like using 2008 income numbers, where one quarter of the year was mired in a meltdown, to project 2009-2010 revenues that governments might use as a tax base… years in which the number of jobs generating revenues will have sunk to record lows along with corporate profits and income from assets sales at below their original value. Duh!

California is busy refiguring its budget that now shows an $8 billion tax revenue shortfall, and Congressional Democrats are slicing and dicing their own President’s “honest” budget (where stuff like the wars in Afghanistan and Iraq are no longer special bills, disaster relief is actually anticipated and the annual rush to amend Medicare to keep from running out of money is reflected) when they saw that $2.3 trillion additional and unexpected long term deficit his budget would generate.

Funny, Congress is playing with numbers, even though they are aware that in the long term, they are going to put a whole lot of this back. And we wonder why Wall Street has no potholes… just loopholes that got us into this mess. We love to “change the assumptions,” alter the language, and hope that this will fix it all. The national pastime has long since ceased being baseball (was it that strike?) – it’s playing with numbers to make stuff look good, even if it isn’t.

Running governments is tough, behemoths that defy simplistic analysis, particularly when you are married to outworn slogans (lowering taxes will solve everything – money will “trickle down” and make us all better) or pledges made when times were different. Or how about voting for the sole purpose of being reelected, ready to sway to follow the “voter sentiment du jour” rather than lead (which is why they were elected?). And yet, year after year, the trend only gets worse because the media keep running polls on just about every subject, polls which legislators check before casting a crucial vote.

Or a trend that we are watching as our Congress splits along party lines on almost every issue… Why? Because if you are a Republican and you support the President, you don’t get in any credit for new ideas and you raise the value of the other party’s issues! But if you vote against everything proposed and something goes wrong, you can always say, “I told you so,” and ride the coattails of negativity to victory in the next election. Not that the Democrats didn’t do the same thing when they were an minority across the board.

As we track global solutions to global issues, we’ve already seen how the U.S. and much of the world are split between emphasizing stiff new financial regulations and de-emphasizing more stimulus packages, that old, “why can’t everybody just get along” refrain echoes in my aching head. Doctrines and assumptions seem to kill more people than bullets in this modern era. They justify those folks we call “terrorists,” just as they justify our governmental representatives’ actions that deeply impact our lives. In my own country, I wonder how a Congressman or woman would vote without polls, without doctrinaire mandates, with real experts providing real numbers, doing pragmatically what’s best for America? Looks like I’ll never find out.

I’m Peter Dekom, and I approve this message.

Saturday, March 28, 2009

How Wide is the Atlantic?

The leaders of the G-20 (the world’s economic powerhouse nations) will begin deliberating the global response to this managed depression starting on April 2nd. We’re watching pronouncements from Washington, particularly from our regulatory agencies, about a new world order. Treasury Secretary wants the power, much like that accorded to the FDIC regarding its member banks, to take over and restructure ailing companies – particularly in the non-bank financial/insurance sector – and expand regulatory power over previously largely unmonitored hedge funds and private equity, anything big that can impact the economy.

The timing of this escalating “corporate governance” rhetoric is not fortuitous. It is an obvious, if not anxious effort, to find some degree of commonality between stimulus-averse mega-European powers who, for the reasons discussed later, think that the U.S. efforts to use direct government intervention to create jobs and save companies are a recipe for inflationary disaster. Instead, Europe will try and steer the main focus of the G-20 summit in London away from the American prescription of “more stimulus packages” to the European mantra of “more regulatory oversight so this mess can never happen again.”

It is interesting to explore why there is such a rift between the U.S. and its European allies over what needs to be done to begin a global “fix” of the markets. I’ve cited the historical reasons in an earlier blog, but it bears repeating: after World War I, the triumphant allies so drained loser-Germany’s coffers under the guise of seeking reparations that inflation skyrocketed and literally destroyed the German economy, enraging its citizens. It was in this economic maelstrom that Adolph Hitler was able to rabble-rouse and come to power, the direct cause of World War II, which devastated Europe infinitely worse than had the preceding Great Depression. Europe remembers this debacle as if it were yesterday, and rampant inflation (which comes with creating massive deficits for massive stimulus packages) is viewed as worse than deep dark economic contraction.

There is also resistance to President Obama’s call for more stimulus spending by other governments because some of these nations believe they’ve already committed enough funds, relative to the size of their economies. “Indeed, in terms of immediate stimulus, according to calculations by the International Monetary Fund last month, Germany has committed to stimulus spending this year equal to 1.5 percent of the country’s gross domestic product, compared with 0.7 percent in France and 2 percent in the United States.” March 27th NY Times.

Some European economists see the U.S. package at creating longer-term infrastructure but doing very little for incentivizing consumers to spend money now. They contrast this direction with, for example, a German cash subsidy to trade in old cars for new ones that resulted in 22% more vehicle registrations last month than from the same month in 2008.

But there are other socially relevant reasons why Europe may not actually need the same kinds of “stimulants” that President Obama believes America is required to restart our economy. And much of that has to do with the social “safety nets” that have been in place in Europe for many years that still do not exist in the United States. Workers are better protected with vastly higher unemployment benefits and have healthcare through the national governmental programs. So they are not as hesitant to spend when money does come their way, because they know that the basics are covered… hardly the case in the U.S.

French and German citizens didn’t have the same subprime real estate bubble we experienced (the don’t have the same level of a housing meltdown), and very few people have their retirements tied up in any way with the stock market. So with retirement income secure, there is much less fear in these larger, more stable European nations, not the case with the economies of eastern Europe and even mainstream European Union nations like Spain or Greece.

American policy-makers suggest that Germany and France are about to get a belly punch as the contraction about to hit Europe could contract the bigger economies by 6-7%. With France and Germany feeling the impact of the downturn last, the Washington officials argue, they seem to be underestimating the inevitable body slam that has crushed so much of the rest of the world. Without getting more “stimulants” into the local economies, Washington maintains, they simply are not prepared for what is to come… a problem for the entire global recovery.

But for many in the world, this economic mess is a product of following what many believe was the American ideal of capitalism. As the world markets have plunged, so has America’s ability to serve as the global economic leader it once was. Our legendary and historical cries for free and open trade are increasingly falling on deaf ears. While the world still buys into President Obama’s charismatic presentation of American ideals, it is equally clear that the perception of America has materially been changed.

The March 28th NY Times: “‘There is a direct challenge under way to the paradigms that America has been trying to sell to the rest of the world,’ said Eswar S. Prasad, a former China division chief at the International Monetary Fund. The American banking collapse, which precipitated the global meltdown, has led to a fundamental rethinking of the American way as a model for the rest of the world… ‘Emerging markets now think they can do what they want without hectoring from the United States’”

Lots of theories, the big test is still to come, but it will be fascinating to watch the exchange in London starting April 2nd. You may not know it, but your future well-being could certainly be determined by the decisions that begin with this G-20 summit.

I’m Peter Dekom, and I approve this message.

Friday, March 27, 2009

Happy Trailing to You

One of the saddest parts of this meltdown is how long it is lasting. And one of the harshest realities in any deep recession, or as I prefer to call it because we have not seen numbers like this since The Great Depression, a “managed depression,” is the fact that unemployment is a trailing economic indicator. While the stock market recovers earlier – it is one of the “leading” economic indicators because it trades on expectations – employers do not rebuild their workforce without actual increases in demand, so unemployment often continues well beyond the time when economists will pronounce that we have reached bottom and may begin to rise, however slowly, from the ashes.

When the first quarter contraction (which we won’t know until next month) is added to the 6.2% contraction of our gross domestic product in the last quarter of 2008 (the worst since The Great Depression, 4.9% in the early 1970s had the previous record), the magnitude of overall economic decline will be staggering. Signs from Washington that the worst is over really means that we sort of know where all the bodies are buried, but we still have a lot of digging to do. The fact is that new jobs and replacing the old jobs that were not rendered obsolete (any so many were) does not occur in this environment. Employers need to know that their additional products and services will be purchased before they hire, not that they hope the buyers might be out there if they make or provide more.

So assuming the pundits are remotely accurate in their prognostication that the end of 2009 or beginning of 2010 will be “bottom” (some think the stock market has already hit bottom – I personally don’t – when the market sees what the “toxic asset” plan will really do to the bank’s ability to lend…), unemployment will continue to rise even after that occurrence. The UCLA Anderson School of Business just released their sobering “Forecast.” They’re seeing a national 10.5% unemployment rate (11.9% in California) as hitting bottom sometime in the middle of 2010. We’re not even in the middle of 2009 yet! That’s a loss of 7.5 million jobs due to this managed depression.

When you apply the alternative measurement multiplier that I have used in past blogs, based on government statistics (adding those who want full time jobs but only get occasional or part time work and those who just don’t know where to look anymore to the raw unemployment number, which only covers people who are actively looking for work who do not have part time or occasional work), 1.86, the numbers get downright gruesome. That 10.5% number comes out to 19.5% (virtually one in five Americans in the workforce!!!), and 11.9% is over 22% in this alternative measurement. Anderson suggests that high unemployment will continue into 2012 and maybe beyond!

The UCLA report indicates that these alarming numbers are the result of a fall in our national net worth of $9 trillion in stocks and $5.5 trillion in home values. As taxes rise at the state and national level, money that might have gone to rebuild some of these losses will go to the government, which may further erode our net worth. Yet, clearly the state governments, who cannot “print money” like the feds, have to get their revenues from somewhere. Today, the most coveted asset of all is a job!

No one really knows exactly when or where this will all end. Everything is a best guess, but a major natural disaster, global trade issues, the price of oil or the continued unraveling of our banking system could make the above numbers worse. On the other hand, if the banks recover their lending practices and home prices bottom out earlier, we may have some better news. The bottom line: don’t let recent rises in the stock market fool you. We are nowhere near out of the woods. The economy will continue to erode for a while. The key is to keep your eye on the rate of erosion – if that actually slows down, believe it or not, that’s actually good news.

I’m Peter Dekom, and I am trying to keep it real.

Thursday, March 26, 2009

The Other Bailout

You could measure the good times… Money was plentiful, and politicians wanted to spend increasingly more in this one core area where they knew they could get votes. Sound politics. Over the last two decades, spending in this basic state governmental arena quadrupled, which according to a March 2009 report from the Pew Center on the States (“The Long Reach of American Corrections”), increased faster than any other market segment except healthcare. Yup, if you got tough on crime – the politicians cry for the last three decades – you incarcerated more inmates (we have only 5% of the world’s population but 25% of the world’s inmates), kept them in prison longer (the U.S. is among those countries on earth with the longest average prison sentences) and built more prisons.

But while annual “per inmate” costs ranging from $25,000 to $45,000 a year (averaging around $35,000) were once great subjects for bond issuances and spending increases (tough on crime!)… it was a vengeance that was affordable only in vastly better times. Strangely enough, with all the special handling required, and all the lawyers and courtrooms needed in “automatic appeal” death sentences, the cost of executing criminals turns out to be vastly more expensive than keeping the perp in prison for life.

How about this quote (cited in the above Pew Report) from David Keene, President of the American Conservative Union: “The fact that so many Americans, including hundreds of thousands who are a threat to no one, are incarcerated means that something is wrong with our criminal justice system and the way we deal with both dangerous criminals and those whose behavior we simply don’t like.” Look at how many addicts are behind bars, many of whom would fare infinitely better in a drug treatment program. We sure have a lot of folks in the criminal justice system right now – in jail, on parole or on probation – 7.3 million Americans, well over 2% of the entire population.

Those three strikes laws putting criminals in prison for rather low level felonies on that third strike is a classic example of a law who time has passed. Maybe habitual criminals need to be put away for long period of time, but the definition of an “habitual criminal” cannot be derived from a mathematical formula. Besides, states (not to mention the federal government) have a big recession to deal with, and the $47 billion that the states spent on their criminals in 2008, well, as the above quote suggests, there must be a better way.

We are beginning to see those changes in the waterfall of “reform” that is pouring over the criminal justice system. The other day, New Mexico Government Bill Richardson signed bill banning capital punishment – for some this was a humanitarian gesture, but for most legislators, it was an easy cost-savings fix. The March 24th NY Times: “Some states, like Colorado and Kansas , are closing prisons. Others, like New Jersey , have replaced jail time with community programs or other sanctions for people who violate parole. Kentucky lawmakers passed a bill this month that enhances the credits some inmates can earn toward release… Michigan is doing a little of all of this, in addition to freeing some offenders who have yet to serve their maximum sentence.” Even the longer sentences are finding “sympathetic” (yeah, right!) legislators willing to reconsider.

New York is in the process of repealing some of the longest drug-related sentences in the country, including mandated minimums for lower level offenses. These harsh statutes (commonly referred as the Rockefeller Drug Laws) were passed during a heroin epidemic in the 1970s. The new emphasis will be on enforceable treatment implemented through New York ’s growing “drug court” system.

The handwriting is smeared upon the wall: “‘In California we are out of room and we’re out of money,’ said the state’s corrections secretary, Matthew Cate. ‘It may be time to take some of these steps that we should have taken long ago.’” NY Times.

In a bizarre twist, shutting down prisons has drawn a different kind of wrath from communities where they are situated – as prisons close, jobs are lost and local businesses that have come to rely on the flow from the paychecks of corrections officers and the vendor orders to supply the facility are shutting down. Not so much the NIMBY (“not in my back yard”) cry we’d expect. Prisons have been the training ground for criminal skills, recruitment centers for gang activity, accelerants of HIV (then spread through the communities where the prisoners go upon release) and have crushed more than one inmate’s long-term career prospects in any field.

So while this meltdown is thoroughly unpleasant and unlikely to end anytime soon, the silver linings may actually help reduce crime rates in the future, create alternatives to harsh prison sentences and make America a safer and better place to live… just because vengeance is so damned expensive!

I’m Peter Dekom, and I approve this message.

Wednesday, March 25, 2009

Write on! Write off!

Treasury Secretary Timothy Geithner has announced the toxic asset plan! So now investors can get government loans to lift (buy) those terribly depreciated “toxic” assets (now politely referred to as “legacy assets”) off the books and records of those big old banks. Without those nasty old assets, the conventional wisdom goes, the banks will now be free to rise from the ashes and lend again. Well, not exactly. Unfortunately, existing accounting rules let banks to carry these debt instruments/loans on their books at their original value but require a set-aside percentage of the losses expected over the lifetime of the loan.

So, if a bank wants to discharge that loan asset in an auction under the new Treasury plan, well the minute the asset sells at auction, the value becomes the selling price. And since the selling price is very likely to be less than that asset was carried on the books of the bank, guess what happens?

Once the balance sheets are adjusted to the lesser value reflected in the cash selling price of the toxic assets (except in the very, very unlikely event the bank carried that asset on its books at a lower value than the sales price), particularly as the federal regulators apply the “stress test,” the banks will actually have less value on their balance sheets, which will require more investment capital, most likely from the government, to generate true lending capacity. Ouch!

So maybe the banks won’t sell these assets to avoid the above embarrassing situation? Sheila Blair, the FDIC head, politely indicated that the decision to sell such assets would be “in consultation with the regulators.” Does this mean the government would force banks to sell the assets? Frankly, we just don’t know the rules yet, but trust me, this is not the clear-cut winner that made the market soar almost 500 points after the announcement. Good news for the buyers of the assets – the government will lend you the money and take part of the risk; bad news for the banks – if you sell the asset, you are probably tanking your own balance sheet, and it looks like the government plans to do some pushing.

As is normal in the case of new government programs, as one delves into the details, the golden goose may be a spray-painted, air-brushed pigeon. A train wreck if you want another image. From the March 24th Financial Times (FT.com): “Richard Bove, an analyst at Rochdale Research, wrote in a note to clients: ‘[The plan] will not happen because it would destroy bank capital. It might cause a bank to fail the new stress tests under way. Banks will not take this risk.’”

FT.com continues: “Policymakers say the Geithner strategy is intended to fix the disconnect between the market and the banks by restoring investor confidence in their financial statements… Outside investors and bank executives are miles apart in their assessments of the true capital position of the banks, making it impossible for them to agree a price at which to recapitalise. [yes, it is the British spelling!]” It seems rather obvious that the feds – Treasury, the FDIC and the Federal Reserve – plan on getting the banks to deal with this asset valuation issue, one way… or another. It won’t be pretty.

I’m Peter Dekom, and there seems to be a catch.

Tuesday, March 24, 2009

Fall in the Spring

Making stuff, what everyone believes is the core of any economy, is the next market sector to take the brunt of this market collapse. Machines, manufacturing, material… are where 18 percent of this planet’s jobs are. Look at the contraction numbers in that manufacturing sector compared to a year ago (NY Times, March 19th): Europe down 12 percent; US 11 percent; Brazil 15 percent; Taiwan, 43 percent; China, 17 percent. Exports are sinking even faster: “Germany’s exports down are 20 percent from a year ago, Japan’s have plunged 46 percent, and in the United States, exports fell at an annualized rate of 23.6 percent in the fourth quarter of 2008… [China] more than 25 percent and millions of factory workers being laid off.” (same article)

People who have lost their jobs who think they might, or who are earning less (or fear they will), don’t buy. Even as the price of gasoline is really cheap compared to last year at this time, Americans are driving less, in record-breaking numbers. With unbelievable discounts, consumers aren’t buying. With cheap car prices and financing from the car companies, consumers aren’t buying. The fashion industry is gathering on a tall cliff as a combined army of bulldozers pushes toward them - no factoring (the ability to borrow on what people owe you), no credit for expansion, and consumers staying away from high-end clothing as if it carried the bubonic plague. Think you’ve seen sales so far? Wait till the liquidators arrive.

So if your country’s economy side-stepped the banking crisis, because that’s not where you generate much of your gross domestic product (like China), you now get to enjoy financial despair generated by the contraction in buying habits from consumer countries where the financing was vastly more important (like the U.S.) in generating wealth. While the U.S. generates only 18% of its GDP from manufacturing, China makes about one third of its GDP from marketing. And this contraction also slams jobs and further challenges the financial markets… a big spinning downward spiral, unless government invention or “no place left to fall” halts the plunge.

Nobody wins this one, but though Chinese banks have money (lots of ours - $2 trillion worth in reserves), they really cannot expand their manufacturing capacity (no buyers!), so guess what they are doing? If you’ve reading my blogs, you know exactly what they are doing! Training the workers to have better skills, building long-term efficiency-enhancing infrastructure and buying technology-based (but economically distressed) companies in foreign countries. So while there is plenty of suffering to go around, China actually can deploy all those vast currency reserves to buy itself a brilliant future… and our value impairment has actually created a need in our business world for them to do just that – buy us!

We are focused on fixing our banking system, and while our stock markets reacted really well, at least initially, to Treasury’s new announced “toxic relabeled legacy" assets purchase plan, there is still much skepticism in play about how well it will work and what the auction pricing method will really do to the balance sheets of the banks. More government funding for more “plans” still stirs the inflation worries down road, and, despite her initial statement on March 23rd that she will continue to buy Treasuries, China must ultimately take care of her own people first and deal with an over-reliance on manufacturing for exports. The warnings have been issued; the writing is on the wall.

I have spoken about how someone seems to have hit the “reset” button – to conform (maybe even a bit too much) artificially-inflated assets bought with very cheap borrowed money to our new and “real values” and economic realities. But that may not have been the only button that someone pushed. Someone seems to have also pushed the “national wealth transfer” button as well. As we watch the dollar fall as the Federal Reserve increases the money supply, who cares if you aren’t really buying much? If other countries are even worse off than you are?

But if values collapse as prices increase due to currency devaluation (“stagflation”), where’s the fun in that? Especially if it’s your currency that’s collapsing against other countries whose currency does not? Ni-how! (Hello in Mandarin!). One’s a buyer looking for values; the other’s a seller desperate to stay alive. Guess who’s who? Hmmm, Western investment bankers have some major new buyers; high-end real estate brokers will soon…. Not everyone suffers equally.

As a final note, to all of us who were and remain outraged at the AIG bonus debacle, there is a letter you might want to read from AIG soon-to-be-gone executive vice president, Jake DeSantis, to see the other side of this debate: http://www.nytimes.com/2009/03/25/opinion/25desantis.html

I’m Peter Dekom, and I wish someone would make the bad man stop!

Monday, March 23, 2009

Next! Or Not?

In politics, when the sh#t hits the fan, and when it is a very, very big piece of sh#t, somebody big has to take the fall. When Congress, the American people and even the business sector itself lose confidence… and President of the United States is about to take the blame, time to find the goat! But who can that be? An elected Senator from Connecticut who can’t be fired? Can’t be a Federal reserve Chairman who can’t be fired… hmmm…. who could it be? We need someone who can be fired, who is an appointee who serves at the “pleasure” of the President. Who is it that will have AIG on his face?

How about senior political appointee who almost didn’t get confirmed because he didn't pay Social Security and Medicare taxes for several years while he worked for the International Monetary Fund and employed an immigrant housekeeper who briefly lacked proper work papers?

Would that include the Indispensable Man who suddenly became the Indecipherable Man who never really did flesh out that Obama administration-macro-economic-rescue-plan explanation in a speech made on February 10th as the world looked to the U.S. government to explain with some focus exactly what was their path to fixing the financial markets? A speech, where the “stress test” was first mentioned that was so short on specifics that it managed to disappoint Wall Street and Main Street in one breath? Could a new presentation of a new plan save the day?

How about a senior government official who claimed that he didn’t know about the AIG bonuses until March 5, at which point he immediately tried to stop them (well not exactly immediately)… in spite of this little piece of information in the March 19th New York Times: “Career staff officials at the Treasury, Fed and Federal Reserve Bank of New York exchanged e-mail messages about the A.I.G. bonus program as early as late February, according to a person familiar with the matter. A.I.G. itself revealed the bonus plan in regulatory filings last September.”

How about a government appointee who also claimed even when he found out about this bonus plan, he really didn’t know how big it was: “I was informed by my staff of the full scale of these specific things on Tuesday, March 10… As soon as I heard about the full scale of these things, we moved very actively to explore every possible avenue — legal avenue — to address this problem.”

I’m thinking about an Obama administration official who admitted (on CNN, March 19th) that his department had asked legislative sponsor, Democrat Chris Dodd (chairman of the Committee on Banking, Housing and Urban Affairs who initially denied that he had done so… but had a change of recollection), to add a loophole in the stimulus bill to let AIG-like bonuses to be paid out by companies who received government bailout cash. This official explained: “We wanted to make sure [the bill] was strong enough to survive legal challenge.” And these words: “You know, it's my responsibility… I was in a position where I didn't know about those sooner, I take full responsibility for that."

Well, if you work on “the Street,” and if you are a betting man or woman, chances are you’ve already made the bet… Treasury Secretary Timothy Geithner is eyeing the door. But he has one more test, and passing it could save his job. If the financial markets don’t respond (on a sustained basis) well to his most recent major proposal, discussed privately between highly placed fund managers and Geithner Sunday afternoon, with a vigorous chorus of support, if they do not buy into the specifics of his toxic assets structure (outlined below), it is difficult to see how he can continue to function as Treasury Secretary, notwithstanding President Obama’s statements that he wouldn’t even accept Geithner’s resignation if tendered. This plan goes to the essence of his job description.

NY Times columnist Paul Krugman has already challenged Geithner in what he believes is an outdated plan he calls “cash for trash” that was dumped in the last six months of the Bush administration. Krugman: “And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they're doing. It's as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street. And by the time Mr. Obama realizes that he needs to change course, his political capital may be gone.”

While there has been support for the effort - Berkeley professor Brad DeLong is one – doubters like Krugman and Former IMF economist and current MIT professor Simon Johnson seem strongly negative. The March 23rd theDeal.com: “Critics say that in its unwillingness to get tougher--take over banks, fire managers, etc.--the administration is repeating the mistakes Japanese regulators made after Japan's bubble burst in the early 1990s. In this analysis, we're headed for an era of zombie banks and a lost decade like the one Japan suffered.” At first blush, however, the DOW reflected massive optimism that the plan offers hope as the market soared. Time will tell if this initial reaction can be sustained.

Here are the broad strokes of Treasury’s proposal to incentivize private investors to commit between $500 billion to $1 trillion to buy revalued “toxic” assets (whose price will be determined through an auction format, obviously at a steep discount off the face value) off the books of our financial institutions: 1. the FDIC (accessing money from the Federal Reserve) will set up investment partnerships and lend up to 85% of purchase price of these assets 2. Working through four or give investment firms, the Treasury will provide government matching funds to private investors to buy the assets, and 3. Treasury (along with the Federal Reserve – a move that may further accelerate inflation as the Fed recently already committed to buy $1.25 trillion in existing government-guaranteed mortgage-backed securities) will expand its lending capacity to help buy such assets through the Term Asset-Backed Securities Loan Facility. The government will start the plan with $75-$100 billion of money left over from the Troubled Asset Relief Program, but clearly much more of a government commitment required to incentive the private sector.

These potential private buyers (mostly hedge funds and private equity players) are looking very carefully at the popular and Congressional mood to limit executive bonus compensation, including adding new taxes, which they say will kill their appetite to help the government with their “clean up banks” balance sheet plan. Except for pre-existing restrictions, Geithner assured the fund managers that no such “limits” would be added to this new program. Chief Whitehouse economist, Christina Romer explained on Fox News why this group of fund managers should be viewed positively: “What we’re talking about now are private firms that are kind of doing us a favor, right, coming into this market to help us buy these toxic assets off banks’ balance sheets.” Will the specifics save Geithner’s credibility and his job? We’ll see.

Wonder if there is a “credit default swap” margin on that one? Does he really deserve to go so soon in his tenure? After all he doesn’t even have his staff in place yet. Hey, this is politics, and well, they might just need that goat. But if the new plan works, can Geithner move from goat to hero?! Let’s hope so!!! It means the plan works!

I’m Peter Dekom, and I’m wondering too.

Sunday, March 22, 2009

What If?

Been playing a game of “what if” with some stock brokers, sophisticated investors as well as my son, who’s a pretty knowledgeable financial analyst in a world that doesn’t really seem to value those financial skills right now (they will!). In my March 19th “To Air is Human” blog, I noted that the Federal Reserve’s $1 trillion increase in money supply (the virtual printing of money) to buy Treasury notes and certain government-guaranteed, mortgage-backed securities, resulted in an immediate and obvious fall of the U.S. dollar against gold and most major currencies. Inflation. Everybody knows that.

And we are going to need to issue more Treasuries to fund an even bigger deficit than even our worst critics imagine. It seems that the Obama administration made its original deficit projections based on expected revenues that would be generated if we “recover” more quickly than other government agencies think we will. The March 20th NY Times: “The Congressional Budget Office placed a new hurdle in front of President Obama’s agenda on Friday, calculating that the White House’s tax and spending plans would create deficits totaling $2.3 trillion more than the president’s budget projected for the next decade.” That’s $9.3 trillion in total additional deficits over the next decade! A stimulating observation.

Conservative German bankers scowled and joined with French financial gurus who, despite pleas from the Obama administration to the contrary, have already given a pretty strong indication that they really do not favor the kind of deficit-creating stimulus package that America has already passed and other struggling European Union economies (like Greece, Spain, Italy and Ireland) are begging for. This schism threatens to tear the EU apart, but it’s really hard to convince France and Germany that incurring large deficits and risking Hitler-fomenting hyper-inflation is better than a down-and-dirty depression.

France and Germany still remember a decimated post-World War I Germany that literally fell apart from hyper-inflation, generating suffering that gave a demon like Hitler the platform he needed to ascend to power. The feelings are strong and run deep. The resulting World War II was really devastating to these countries… worse than the depression. These Europeans just want more oversight, more regulation – a “never again” scenario – not more government stimulus. We’ll see this divergence between their focus and the American position at the up-coming (April 2nd) London economic summit of the Group of 20 industrialized and developing nations.

So if Europe doesn’t play the stimulus game, even if the EU falls apart and some of its major banks fall because of all those bad loans to Europe’s subprime equivalent – Eastern Europe, and the U.S. continues to borrow itself silly to effect a “recovery,” by definition the dollar will fall relative to the Euro as well as currencies from other economies that don’t have the same levels of national debt. As prices rise, even skyrocket, we get inflation. If we get inflation too soon, we get a tanking economy with rising prices – stagflation. But if we experience some serious inflation in the distant days of “recovery,” ask yourself a question: who benefits?

Well, if you have millions of houses under water (worth less than their mortgages) but financed with lowered interest rates, inflation probably artificially raises their prices (but not necessarily their value)… maybe enough to make homeowners feel rich again. Takes care of lots of folks who mistakenly thought their homes were their savings account. And higher dollar values for real estate sales, rent, etc. generate additional tax revenues for the government.

If the price of imports increases significantly because it takes more dollars to buy them, Americans will be forced to import less – don’t think China is missing this, by the way – they are focusing on reducing their reliance on exports to the U.S… which includes buying a whole lot less petroleum-based products, like oil! Kind of makes alternative energy more economically viable, an Obama priority even though cheap oil today has side-tracked most Americans’ concern about rising energy prices and made alternative energy too expensive to implement.

U.S. companies that create internationally valuable products or services will find their exports more competitive and their stock price adjusted to the global value of what they produce. If those products/services take more local U.S. dollars to buy, and stock prices rise to reflect that adjustment even though the real value of the companies as compared to their international counterparts is really the same, the stock market shows “appreciation.” And on sale by a U.S. taxpayer, the “appreciated” difference becomes a taxable revenue stream.

Assuming that foreign nations, who bought our Treasuries to support our deficit, still hold dollars in that distant recovery future, we can pay them back at the low fixed interest rates with less valuable dollars… but note China is about to use vast amounts of her currency reserves to buy foreign companies with technology values to her economy. She may not elect to keep those dollars as some of us might wish, and her leadership has been less than subtle in pointing this reality out to the Obama administration.

Okay, we get humongous, double digit interest rates (but interest income is taxable), as we did in the late 1970s/ early 1980s (as the Fed knee jerks to tame inflation – traditionally its biggest nemesis), which makes home-buying more expensive and business growth more difficult to finance. This can create another recession. Folks on fixed incomes can’t afford to live, and U.S. Treasuries are going to be very difficult to sell (absent that humongous interest rate) in that nasty future.

Isn’t playing “what if” fun? If you have some additional thoughts or even if you disagree (it could be “why not” too), hey, throw them into the comment section.

I’m Peter Dekom, and I approve this message.

Saturday, March 21, 2009

The Supremes

Diana, Flo and Mary? I’m showin’ my age, but there are oldies stations… Who’s that singin’ Stop! In the Name of Love? Oh my God, it’s Barack Obama doin’ one of those YouTube thangs. Sounds more like rap, though, just words, and the rhyming a bit flat… but he is congratulating Axis of Evil (okay, not his chorus line anyway) Iran on their springtime holiday (Nowruz – Persian New Year). Talkin’ about r-e-s-p-e-c-t (just a touch of Aretha Franklin) and historical accomplishment. Wishin’ them well and hoping to parlay with them real soon. Signalin’ change. Okay, he did add that if Iran wanted to play with the rest of the world, that such international stature “cannot be reached through terror or arms, but rather through peaceful actions that demonstrate the true greatness of the Iranian people and civilization.”

Enter the “other Supreme” – Iran’s Supreme leader (he speaks for God, as we all know), Ayatollah Ali Khamenei with his back-up singers. The massive crowd, gathered in the town of Mashhad, was feelin’ it as they join in one of their favorite rap tunes, Death to America! He watched the Obama-rap video, but I guess he wasn’t feelin’ it. Courtesy of the March 21st New York Times, I will present the Ayatollah’s rappin’ response, albeit not exactly in the order that it was “sung out”:

“They chant the slogan of change but no change is seen in practice. We haven't seen any change... He [Obama] insulted the Islamic Republic of Iran from the first day. If you are right that change has come, where is that change? What is the sign of that change? Make it clear for us what has changed... Have you released Iranian assets? Have you lifted oppressive sanctions? Have you given up mudslinging and making accusations against the great Iranian nation and its officials? Have you given up your unconditional support for the Zionist regime? Even the language remains unchanged... They say [the Obama administration has] stretched a hand toward Iran... If a hand is stretched covered with a velvet glove but it is cast iron inside, that makes no sense.”

My foot’s a-tappin’… picturing the warmth of American hostages held for 444 days starting in 1979, when, after a violent regime change, another Ayatollah (Khomeini) and the U.S. ended diplomatic relations. Picturin’ the warmth back as President Bush created the profoundly unuseful “Axis of Evil” label in a 2002 speech – Iran was at the top of the list.

Iran wants nukes. I can hear the tune: Back in My Nuclear Arms Again. So, satisfied? Iran has gained credibility – even among its perennial enemies, the Sunnis who violently disagree with Shiite/Iran’s mystical view of the Qu’ran – by supporting fundamentalist Sunni Hamas fighters against Palestinian Fatah and in their armed conflict with Israel. They’ve always supported the Shiite Hezbollah in Lebanon, as they made strikes into Israel.

Iran makes political capital – and distracts the Iranian people who face financial ruin as their oil-based economy sinks to even greater depth – by “blaming it on the Americans and their Zionist ally, Israel.” They really need an America to hate. But do they really want to risk having their nuclear facilities taken out by an American-sanctioned Israeli preemptive strike… or even direct U.S. involvement? Is that a real possibility? Have we reduced our import of oil to make that move (which most certainly will cause a major spike in oil prices)?

Was there a glimmer of hope in the Ayatollah’s refrain, “should you change, our behavior will change too”? Will Barack have to sing, You Just Keep Me Hangin’ On? Or is there something that he can do about it? I guess You Can’t Hurry Love.

I’m Peter Dekom, and I can see you all wincing.