Un for the Road

He allegedly has traveled on false passports (like his older brother), is clearly his daddy’s favorite and seems to share his father’s disdain for the rest of the world. He’s got a weight problem, purportedly suffers from diabetes and high blood pressure, and the above photograph (taken when he was eleven years old) is the only confirmed picture of him that resides outside of his native land. Now in his mid-twenties, this lad has an older brother and a younger sister from his father’s marriage to his local opera star mother, although there are two additional half siblings around as well.

While we can never be 100% sure what is going on, this young man’s father, Kim Jong-il (“Dear Leader”), has named him the heir apparent as the next North Korean leader (presumably for life). Kim Jong-il, himself the son of the previous North Korean dictator, Kim Il-sung (“Great Leader”), suffered a stroke last August, and health issues prompted the sixty-seven-year-old to name Kim Jong-un as his successor. What is shocking is how little is known about this clearly inexperienced “son of the boss,” who is about to take over a nation that is profoundly isolated from the rest of the world, defiant to the demands of both regional and global powers and armed with fully-tested nuclear weapons and the missile systems to deliver those weapons presumably to American shores.

If Communism had any roots as a populist movement, that impression has most certainly died in North Korea, where leadership appears to be remarkably like a fully descendible monarchy. They might as well call them “kings” or “czars.” There is absolutely nothing “populist” about this ruthless family, a fact which seems to embarrass even the leaders of the Peoples Republic of China. Jong-un grew up in a household filled with decadent vestiges of the Western world – swimming pools, water fountains, bowling alleys, billiard rooms, inline skating tracks, a beach, Jet Skis and horses according to the June 14^th New York Times – but no one is particularly sure of exactly who he is.

The Times: “Analysts are divided over whether Kim Jong-un also attended the school in Switzerland. They say he was enrolled from 2002 to 2007 in the Kim Il-sung Military University, a leading officer-training school in Pyongyang, the capital, but was taught at home. The son, these accounts say, is about 5 feet 9 inches tall and weighs more than 200 pounds.” Some say he even speaks English, relatively fluently. He apparently likes Japanese cartoons, is even a fan of Arnold Schwarzenegger (in his Terminator role) and plays basketball.

The hidden story has to be with the “deal” that Kim Jong-il had to make with his military leadership to permit the announcement in the first place. Clearly, determined generals could have easily derailed the elder statesman’s efforts to place his younger son on the throne, and if the young successor doesn’t “play ball” with the military leaders that surround him – at least until he has demonstrated skillful manipulative political skills – no one would be surprised to see a “transition” to an entirely different leader. What compromises were made?

Are the current spate of missile and nuclear tests that the North has promulgated against the protests of the rest of the world the result of a diabolical agreement with the military? Will extreme deprivation continue to be the lot of the vast majority of North Korean citizens? Will saber-rattling escalate to the actual deployment of the litany of military horrors clearly within the control of the North Korean leadership? Are the North Koreans really thinking of firing a missile towards Hawaii?

I’m Peter Dekom, and I wonder every day.

Painful Irregularity

How do you feel about banks which have received TARP money joining with other banks to defeat legislation that would benefit individual taxpayer-consumers? That they are using our money to our detriment? How about using that same TARP money to pay lobbyists to push back against the move towards more stringent regulation of financial institutions? Troublesome? How about the fact that their efforts appear to be paying off?! Big time!

Banks let the administration get the headlines, as long as they are getting the dollars. For example, the banking industry successfully lobbied Congress to eliminate a provision in the bankruptcy act that would allow judges to reset the principal amount owed by defaulting homeowners. The June 5^th New York Times: “The defeat of the bankruptcy proposal is a testament to the enduring influence of banks, even as the industry struggles financially and suffers from its role in the economic crisis… It also shows that in the coming legislative battles that will shape the future of the economy, the financial industry — through a powerful and well-financed lobbying force — may have a far stronger hand to play than might seem evident.”

Lawmakers who voted for the provision gave varying excuses from not wanting to interfere with the current banking process to fearing that mortgage rates might rise. The Times goes on: “In the end, the banks’ startling success in defeating the provision, which was pushed hardest by Senator Richard J. Durbin, Democrat of Illinois, caught even their lobbyists by surprise. Not only did the banks defeat the [above] cramdown provision, but they walked away with billions in new bailout money… The housing bill Mr. Obama signed on May 20 saves banks and credit unions at least $13 billion in special fees that they would have had to pay to replenish dwindling deposit insurance funds.”

As we struggle with new regulations to prevent the chaotic patterns of greed, stupidity and excess that generated the current financial meltdown, as well look to regulating instruments like credit default swaps or structures like private equity and hedge funds, and as we take on the challenge of debt-rating agencies, it is indeed painful to watch taxpayer money being used to hold back the tide of financial transparency and responsibility, because the banks and other financial institutions want to continue to play in back rooms in the dark.

On June 9^th, the Department of the Treasury opened the door to letting 10 of the 19 largest U.S. banks begin the process of repaying their TARP money, which will ultimately remove several layers of regulation from those institutions – even as the signals of future economic declines (from consumer credit card defaults to parallel losses in commercial real estate loans) remain on the near-term horizon. Indeed, the stock market, skeptical of the “negotiated” results of the government’s “stress test” in the first place, greeted the Treasury announcement with a drop in the DOW.

Indeed, the initial flurry towards are “ground-up” rewriting of our financial regulatory schema seems to have subsided. Lobbyists from the financial industry pressed across the board, no doubt reminding elected officials as to who funds their campaigns. In the end, the mass of the American individual taxpayers are the big losers, even helping to finance a calculated lobbying effort against ourselves!

The Obama administration’s new plan is focusing very heavily on expanding the power of the Federal Reserve, since over-borrowing was at the heart of the financial meltdown, but this is hardly the ground-up change every thought would occur. The June 17^th Washington Post: “The plan calls for a council of regulators to consult with the Fed, including the Treasury secretary and the heads of the other financial regulatory agencies: The Securities and Exchange Commission, Commodity Futures Trading Commission, the Federal Housing Finance Agency and the agencies that regulate banks. A primary task of the council would be to recommend which large, globally interconnected firms are too big to fail and should be subject to more rigorous oversight. But the council will not have the authority to oppose decisions made by the central bank.” And the lobbying from hedge funds, credit default traders, private equity and the big financial institutions are fighting to minimize even these new rules.

Making matters even worse are the interagency regulatory turf wars that seem to contradict each other, like the battle that has emerged between Sheila Blair of the FDIC, and John Dugan, Treasury’s comptroller of the currency, both extremely involved in bank regulation and both holdovers from the Bush administration. According to the June 13^th New York Times, Dugan “blasted a[n FDIC] proposal to impose stiff new insurance fees on banks as unfair to the largest banks, which he regulates,” while Blair “could barely hide her contempt. The large banks, she said, had wreaked havoc on the system, only to be bailed out by ‘hundreds of billions, if not trillions, in government assistance.’ She added, ‘Fairness is always an issue.’”

So our regulators are slowing the “fix” with their internecine disputes, and we are still looking at the same basic structures that failed in the past to fix our future. The June 9^th theDeal.com reviews the Wall Street Journal’s take on the situation and adds a spin of their own: “The Wall Street Journal [put] flesh on a story that's been emerging for the [past few weeks], and was pretty obvious before that: The White House is giving up on any real institutional restructuring in its regulatory reform proposals. Instead, sources within the administration say the effort will focus on convincing Congress to tighten up the rules, and eliminate the gaps.

“Well, this is discouraging, though not surprising. Institutional overlap, bureaucratic divergences, a rat's maze of offices and rules has long been symptomatic of the reality that we had a festering regulatory problem. Some basic restructuring of regulatory bureaucracies has long been seen as a precursor to more fundamental and more difficult issues. Now we seem to be skipping that restructuring because it's too difficult politically. From a pure budgetary standpoint, it's also crazy to have four bank regulators when the industry has converged enough to require one.

“And what is the logic of splitting derivatives regulation between the Securities and Exchange Commission and the Commodities Futures Trading Commission? Does anyone really believe outside Congress that complex issues underlying derivatives really have anything to do with pork bellies and corn futures?” So our elected leaders are prepared to throw their constituency under a financial bus to make sure that we minimize bureaucratic turf wars and don’t turn off potential campaign contributors? They’ll “tighten up” the existing regulations, but we shouldn’t expect the massive reform pledged by the administration and virtually every federally elected official? What’s wrong with this picture, and what are you going to do about it?

I’m Peter Dekom, and I am feeling the steam of anger building.

Loose Change 2

Protests are mounting in the streets of Iran against the recent “reelection” of Mahmoud Ahmadinejad, despite governmental bans on such disturbances. The arrest of dissents, the long arm of the incumbent power slapping down the opposition, are now part of a global perception of Iranian election irregularities. Half a million strong gathered in Tehran to voice their disaffection for the vote. The government continued to disrupt texting capacities and even some cell phone service (a policy pursued even during the last stages of the voting process itself). It got so bad that Iran’s Supreme Leader, Ayatollah Ali Khamenei, has called for a high level inquiry into the claimed voting irregularities – funny, think they’ll really look?! Don’t hold your breath! A reelected Ahmadinejad makes the U.S. nuclear policy in the region infinitely more difficult.

In Pakistan, with popular support, the military has begun a long-avoided press against the most powerful segments of Taliban militancy, both in the northern regions of Swat and Dir, and now in the southernmost area of Pakistan, South Waziristan, along the border with Afghanistan. The rising tide of Taliban militancy has been liberally unchecked as both Pakistani leaders and voters perceived that attacking this fundamentalist group was responding to American pressures to fight “terrorism,” an exceptionally unpopular theme in the region. When the Taliban finally overplayed their hand and threatened the incumbent government and popular control of the nation state, the people understood that this was not their problem, and the U.S. had little to do with it.

In Israel, hardliners have finally voiced a willing, if not extremely limited, acceptance of the possibility of a separate, but completely demilitarized, Palestinian state. The June 14^th New York Times quotes Israeli Prime Minister Benjamin Netanyahu: “In this small land of ours, two peoples live freely, side-by-side, in amity and mutual respect. Each will have its own flag, its own national anthem, its own government. Neither will threaten the security or survival of the other.” Of course, Palestinian authorities quickly rejected this conditional solution.

North Korea is witnessing a transition from the rule of the 67-year-old Kim Jong-il to his very mysterious younger son, Kim Jong-un, in his mid-twenties. Seemingly the result of a compromise with its military hierarchy, which may explain the recent spate of nuclear tests, this impending change is yet another indication of regional instability.

What does all of this mean for us? Well, I can remember in years past how Americans feared the malevolent forces of communism in Russia and China and how we looked at Japanese manufactures are cheap and poorly-made substitutes for American manufacturers. Picture all those “captains of industry” long since gone, replaced by the kids you went to school with. I remember rapidly and continually rising housing prices and a stock market that just couldn’t quit.

Change. It’s the only thing that doesn’t. And people inherently form their opinions at one critical stage in their lives, many refusing to alter their perceptions even after decades of evidence to a completely contrary world. They even pass on such outmoded opinions to their children, often fostering inaccurate and even dangerous perceptions from generation to generation. They live in the past and project that vision to govern future conduct.

In a world of rapid and often crushing change, it is very interesting to ask yourself what you think about each material segment of the world, the economy, the varying political systems around us and your vision of the future. Those who fall back on simple labels (we are too “socialist” or “free market”) are most likely to cling to past perceptions without making the necessary adjustment to a world that defies simplistic labeling. Look at the world through eyes as fresh as you can make them. It is indeed a scary place, but at least we need to look at it for what it really is… and know that what it “really is” may be very different tomorrow.

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

Better to Speculate than Never?

Here are a pile of facts. Oil is trading at about half of its all-time high (over $147 last year), but double what it was trading at just a few months ago. Experts have noted that demand for gasoline has remained low and is expected to decline 3% over 2009. Governmental policies are clearly reducing gas consumption (increasing efficiency by 30%) through new fleet average mileage requirements announced by the Obama administration in May: “While the 30 percent increase translates to a 35.5 mpg average for both cars and light trucks, the percentage increase in cars would be greater, rising from the current 27.5 mpg standard to 39 mpg starting in 2016. The average for light trucks would rise from 24 mpg to 30 mpg.” MSNBC.com (May 19^th) OPEC isn’t even trying to push the prices higher by withholding supply – there’s lots of oil on the market. It’s not the “nasty Arabs, crazy Iranians and out-of-their-mind Venezuelans.”

Then why are gasoline prices skyrocketing as demand is falling? Instability in Iran , especially because of the recent presidential election? The hardliners in Israel opposing the Obama’s push for a middle ground? Not really… it’s that “market crash causing” demon coming back again – speculation. With few clear vectors to profits, commodities are increasing in popularity for those with doubts about the future and who want something tangible to put their money into. Since real estate is still plunging (some predict as high as a 41% default rate in commercial real estate in the next 18 months), the only tangibles of value they see are commodities… and oil and gold are the kings of that market. Lots of investors think the stock market is still too unstable to be the primary investment vehicle.

Oh, and there is another demon based on the U.S. government’s need to borrow massively (selling its treasuries, diluting the value of its currency) to fund the huge deficits to which we have committed to “stimulate” ourselves out of this mess. As a result of that harsh reality, the dollar is falling against the average global currency values, even though many predict that Europe will “recover” more slowly (even reach “bottom” later) than the U.S.

According to the June 13^th SmartMoney.com: “As the U.S. government goes hat in hand borrowing money to fuel unprecedented deficits, the rest of the world (our creditors) is understandably concerned…. After all, more than 50% of the world's debt is denominated in dollars. As the greenback falls, those creditors, most notably China , get paid back with something much less than they bargained for. Indeed, the U.S. Dollar Future Index, a measure of the greenback against a basket of major currencies, has crumbled nearly 11%, to less than 80, from a 52-week high of more than 89 in early March. That might not sound like much, but it has some pros feeling certain that a full-blown currency crisis is only a matter of time.”

In a strange way, those countries that have hard value commodities (e.g., oil in Canada, minerals in Australia) have been currencies of choice for some commodities traders – a double-down against both the fall of the dollar and increased value of underlying commodities, which are themselves rising because of speculation and inflation. Little bits of news “fuel” oil speculators’ investment strategies. Lots of folks were thinking that the “barrel/dollar” linkage would soon be replaced by some other currency or bundle of currencies, but when Russian finance chief Alexei Kudrin said that the dollar will be around as the standard by which oil prices are measured, oil prices dipped on June 15^th.

As speculators buy oil futures because they are betting on the increase in the value of oil, obviously more buyers in the marketplace makes the price of oil go up. So guess what, the speculators’ “belief” that oil prices will rise is vindicated, so more folks buy oil futures – oil prices continue to rise. Okay. But if the demand for oil does not rise to meet the price expectations of the speculators… on one fine day… one might suspect that the reverse waterfall, taking the price of oil down rapidly. Yeah… unless the dollar falls even more…

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

Cars Célèbre!

Tell me where it hurts, bunky. Ouch, in that old rust belt, eh? Right there in the automotive industry? Wow, can I sympathize with that. Yeah, I’m feelin’ your pain! Think about it. In the 1950s, 5% of our workforce was in the automobile industry; in 2007, it was down to 3%, but today, according to the June 9^th NY Times, it’s down to 1.5%!

Michigan is suffering with a higher unemployment rate (12.7 percent in direct unemployment) than any other state, even California . The Times tells us: “The fallout has been even worse in heavily populated southeastern Michigan . Manufacturing jobs in the seven-county region that includes Detroit have fallen 51 percent since the beginning of the decade, and auto-related positions have fallen 65 percent.” They’re closing eight prisons, canceling 130 bridge and road repair projects (they can’t even come up with funds to match federal money), all to meet an expected $1.4 billion budgetary deficit.

Although Michigan ’s budget problems pale in comparison California’s $24 billion short-fall, the bigger issue is where the long-term jobs will come from. California seems to have a higher probability that it can reinvent its economy after this economy stops melting; Michigan is looking everywhere, from venture capital start-ups to motion picture production for answers. The state is using tax incentives to lure new business, but the number of jobs lost in this environment is truly difficult to replace even under the best of times.

Despite some fairly wonderful universities and lots of cheap housing and industrial buildings (or you can call them what they are: shuttered factories that are falling apart and lots of bulldozed neighborhoods with an occasional house in places like Detroit ), the magnitude of this transition away from heavy manufacturing is incalculable. Where do you start?

What worse, the literal destruction of the America automobile industry as we know it has cost millions of jobs all across America . It’s not just the folks working for the big carmakers in Michigan or Ohio or the dealers and their mechanics; it hits financing companies, advertising agencies, media companies where they used to advertise, etc. I’m sure losing car ads helped accelerate a sinking newspaper industry to the bottom. Almost 30% reduction in overall advertising in papers has been lost, and it’s falling still (okay, the Internet didn’t help).

The Times reminds us also about the role of cars in past economic difficulties: “The automakers have historically played a big part in ending recessions. Car companies, in the past, would increase production and add workers to satisfy pent-up consumer demand after a downturn. But now, the industry’s troubles may be prolonging the misery… ‘If not for the problems in the auto industry, this recession would have been much milder,’ said Ben Herzon, an economist at Macroeconomic Advisors, in St. Louis , Mo. ”

But mismanagement, over-zealous unions and reckless choices during a period of rising fuel costs could not withstand the additional pressure of a collapsing economy where consumer demand would drastically alter. The big car companies just assumed, like so many others, that good times and rising values would absorb any economic mistakes they may have made along the way. When the good times stopped, all the pigeons came home to roost. It is a pretty common story across our nation; it’s just that the automotive industry is so huge. Or at least it was.

I’m Peter Dekom, and I am deeply saddened by it all.

Loanly

Picture Scrooge McDuck – if you can remember those Disney cartoons – and see him bathing in his money vault, diving into piles and pools of dollars and other untold riches. Hold that image. Imagine a graduate of a top graduate school of business… a year out from that cap and gown thang… checking out having made $400,000 between salary and bonus in his first year of work. Millions a year were the expectation after a relatively short tenure with the company. Hold that image.

Private equity was a path to riches. These firms, most of them non-publicly-traded and not subject to much government scrutiny, controlled one of the largest investment segments in the United States. Their money came from mega-wealthy investors, big institutions – from legendary insurance giants to the most prestigious financial companies, pension plans and anywhere else pools of capital concentrated.

Their basic business practice was to find companies, private and public, that could be “cleaned up” (unnecessary workers laid off, new management added, a few mergers added if attractive, new financial structuring)… then buy these companies with as little of a down-payment as they could justify and borrow the rest (debt was far and away the largest component of the cost of buying the company – multiples of the equity). Debt was plentiful, cheap, and had a ceiling on the rate of return (interest, basically, but there often was a component of convertibility into common stock for part of that debt), and most of the profits stuck to the private equity managers and their investors.

But what was best about that debt? The private equity film didn’t borrow a penny! Instead, they used the cash flow of the company they were buying to borrow that money, pledge its assets, and sink or swim with all that debt. The private equity firm that set up the deal was only minimally at risk (their down-payment). So a small investment leveraged up into a very large buying ability.

After the company was “cleaned up,” it could then be sold to another corporation or, very often, flipped back out as a publicly traded corporation. The rates of return on these deals were astronomical, all predicated on lots of cheap debt and a rising stock market. From about 2003 well into 2007, these companies particularly raked in the profits. But when debt dried up and the markets crashed in 2008, so many of those over-borrowed (“over-leveraged”) acquired companies slid way down in value (often eating up most if not all of the private equity company’s down-payment), and without cheap debt (how about any new debt?), new deals could not be financed anyway. Not to mention that without a strong stock market, you can’t get rid of a “cleaned up” company to make that profit.

But there’s still a lot of money sitting around with nothing to do, nowhere to go. According to the June 9^th theDeal.com: “Buyout firms now command some $470 billion in committed but uninvested capital, according to consulting firm McKinsey & Co. Moreover, sponsors usually only dream about this sort of investment environment, with countless companies begging for capital, banks and other capital suppliers on the sidelines, and deal values way down. Prices have tumbled so steeply, one sponsor remarks, that even debt-free investments done today could bring sterling returns after the economy turns back up.” If anyone would lend you money…

For all those MBA candidates vying for those lucrative jobs in private equity, the opportunities have, for the most part, vaporized. We are unlikely to see, in the lifetimes of most of us, the ability to borrow so much (relative to the down-payment) so cheaply every again. Regulators are eying this market sector in order to assess exactly where new regulations will be imposed. Scrooge McDuck-wannabees will be frustrated.

And in a chorus of dropping shoes, there are victims among these firms, yet to be counted. theDeal.com again: “But for now, that alluring prospect is vying for sponsors' attention with a worrisome, brewing development that could lay waste private equity returns and foster an industry shakeout. Though previous downturns have forced slews of poor performers, including some well-known names, from the business, the body count this time could be great. The problem lies in the staggering amounts of equity and debt capital that poured into LBOs from 2004 to 2007. From 2012 to 2014, about $430 billion of senior debt tied to that deal spree is set to come due. And unless the leveraged loan market roars back to life by then to accommodate a mass of refinancings -- something experts consider doubtful -- an avalanche of defaults could wipe out much of the equity the buyout industry wagered on scores of deals.”

Just remember that bankrupt companies like Linen ‘n Things, Tribune Co. and Chrysler were all financed this way. And that’s just a drop in the bucket.

I’m Peter Dekom, and I thought that you might like to know.

Shoes without Soul

Phil Spektor’s wife misses the sex because of her husband’s incarceration while the rest of America is getting screwed? Whadyathink about Countrywide Financial CEO Angelo Mozilo’s getting sued by the Securities and Exchange Commission for civil fraud in connection with his alleged “deliberately misleading investors about the significant credit risks being taken in efforts to build and maintain the company’s market share”?

Private internal memos circulating suggest he had already labeled the subprime mortgage market that represented the backbone of his company’s growth as “poison” and “toxic,” while touting his stock to the world (it is now a part of the Bank of America). There were a few other executives named in that suit. Is a criminal prosecution in the cards as well? Mr. Mozilo had quite a reputation as a well-tanned clothes horse… but will there be another wardrobe choice in his future?

With unemployment numbers rising (to 9.4% of basic unemployment, over 17% if you take into consideration those who want jobs but have either stopped looking or can only get occasional or part-time work) – albeit at a slower pace – Americans are both frustrated and angry at the unregulated business moguls who took advantage of a nation’s leaders who conveniently chose to let business pretty much regulate itself and looked the other way as they cut corners. Bernie Madoff is the poster-child for a laissez-faire government that allowed hog-slop-motivated-money-gorgers create sophisticated and complex structures that the overwhelming majority of Americans could never understand but were built on the backs of completely unregulated economic madness accelerated by both bad credit ratings and a system that created almost unlimited money to borrow to feed the monster we call our “recession.”

People are finding cheer in unemployment statistics? We’re still losing jobs and will lose a pile more… but we’re not losing quite as fast as some feared. Wow, sure makes me grin, ear to ear… the thought of double digit unemployment through most if not all of 2010. And that credit freeze that was supposed to be thawing… well if you are seeing that thaw anywhere, please let me know. If you want to buy a car or a house below $500K, you might score or if you are a big corporation, you might be able to “float some debt” out there… but the rest of it still seems to be a distant dream.

There are still lots of shoes yet to fall… beyond what we’ve seen to date… more credit default swap issues (loan default insurance, in effect), credit card delinquencies and the very questionable future of the commercial real estate market, to name three. The June 5^th theDeal.com: “If a new Moody's Investors Service report is to be trusted, don't believe the hype when it comes to predictions that the worst is over for the banks. The rating agency released [June 4^th] a report predicting roughly another ‘$470 billion in [pretax] of loan and security losses and write-downs in 2009 and 2010.’” Moody says it could even go higher, to $640 billion, in 2010. Hmmm, that doesn’t augur particularly will for unthawing the credit markets. And still we see that stock market ebb and flow on the daily news. What are they drinking or… well… you know.

Unfortunately, the trend lines are still pointing down. Consumer confidence may be rising based on statistical polls, but the plain fact is that consumers are still postponing any purchase that they can. Oil prices are rising, not because we are a carefree American society driving everywhere, but because of a general anticipation of global demand, the instability of the dollar and the reentry of speculators who are betting more on commodities than currencies. And then there’s all that “other stuff” noted above.

We’re not getting out of this mess anytime soon, and so learning how to cope in a world of less as the dollar continues to sink appear to be the “new skill for the future”… assuming you get around the job thang and the credit thang and the “what happened to my retire account and house value” thang.

I’m Peter Dekom, and I have this “seasick” feeling again.

An Oily Chicken in Every Pot

For critics of Russia’s Prime Minister (and termed-out former President), Vladimir Putin, the dramatic fall in oil prices at the end of 2008, which collapsed the buying power of the ruble, contracted the GDP, destroyed jobs by the millions and devastated the Russian stock market, was “all good” news. It seems that what was perceived as Putin’s draconian hold on the source of political power was proportionately linked to the price of oil. Similar stories have been told of Venezuela ’s Huge Chávez and Iran ’s Mahmoud Ahmadinejad; with expensive oil, they had money to offer blessings to followers and sympathetic global leaders.

When oil prices fell, so did their ability to sway their followers and influence alliances. Unlike the oil-rich Sheikdoms, which have very few residents and lots of oil, these nations had larger populations with larger needs. And promises were made that no longer could be funded; foreign debts needed to be paid. People seeking political reform hoped that this economic devastation would at least motivate change.

Okay everybody, the price of oil is rising. When it fell below $40/barrel (almost to $30!), things looked pretty bleak for global leaders whose power floated on oil. But that was then, and the price of oil looks very much like it is headed towards the OPEC target of $75/barrel, still about half of its all-time high ($147.27 to be exact) in 2008 in July after some announced Iranian missile tests. With Fed Chairman Bernanke chastising Congress on June 3^rd over spiraling federal budget deficits and the likely increased cost of borrowing to finance them (which will fire up inflation), in dollar terms – even assuming the oil-rich nations continue to value oil in dollars – that cost could spiral even higher. We’re in the mid-$60s/barrel now.

Things are not exactly rosy in Russia yet – her stock market is still 44% below the 2007 market high, but whose isn’t these days – but instead of a “let’s change it all now” vector of reform, those who might have otherwise challenged the incumbents are forced to adopt a more “we have just have to wait and see” attitude. One dollar change in the price of oil translates into $1.7 billion a year according to some Russian analysts.

The June 3^rd New York Times: “‘The oil price is going up, everything seems to be in order, so why change?’ Sergei M. Guriev, dean of the New Economic School in Moscow and a board member of the state-owned Sberbank, said by telephone. ‘If oil prices go back to where there is no budget deficit, then it will be business as usual.’…State banks, for example, are rolling over loans to failing companies rather than requiring them to restructure in bankruptcy, as is the case with General Motors in the United States , on the premise that the Russian economy will quickly turn around, along with the value of oil… ‘The big problem with this crisis is it may be too short for Russia ,’ Roland Nash, the chief strategist at Renaissance Capital, a securities firm in Moscow , said in an interview.”

In the end, the price of oil is inevitably heading upwards – it is a commodity that is in high demand that is of limited supply. For those who thought alternative energy was a nice theory but hardly an immediate necessity in a time of falling oil prices, it is time to think again. The value of America ’s political and economic power cannot constantly revolve around a black or brown unctuous sticky substance. The future of great nations should not rely on the compressed rot of millennia of dead plants and animals. And it doesn’t really matter that much if that oil is found here in the U.S. – it is a commodity… demand anywhere will drive the price up everywhere. “It’s the economy, stupid!”

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

Dressed for Distress

A friend of mine (my very Web-master) here in Los Angeles was browsing about for “buys” on houses across the U.S., since even with this meltdown, Los Angeles is still pricey by comparison… even as the State faces a nose-dive into governmental poverty hell. He found a “pretty nice” house (3 bedrooms, 2 baths, good-sized living room, dining area and family room) in Detroit for $10 grand. Pictures online looked good too. Google Earth produced a different view of that house: a solitary structure in a neighborhood that had otherwise been bulldozed into rubble. That’s “Managed Depression 2008+” Detroit style.

With General Motors and Chrysler in bankruptcy and restructuring for the next few months, the rarest assets on earth appear to be good jobs. You can’t give away for free some of the Riverside/San Bernardino housing tracts built for the subprime buyers – starter home far away from anything you’d like to do or anywhere you might have to work.

In my own business, media and entertainment, we’ve seen over 60,000 lay-offs with more coming. Construction cranes hover motionless over partially constructed office towers in various part of L.A. On the other “coast,” I hear you can get some quality “alone time” at mid-day on Wall Street… on what they used to call a “work” day. OK, the Goldman bankers are still raking it in, and advisors in the distressed properties business are locked in fits of smiling ecstasy.

But one of the hardest hit sectors of our economy is luxury goods. If you’re mega-rich and didn’t invest with Bernie, maybe your billion is down a couple of hundred million, but that shouldn’t crimp your style. But for those parading on the edge of “lookin’ and actin’ wealthy” while they are “livin’ on the next big deal” (let’s just call that “ Hollywood ” for short), you can’t pimp your style when the next big deal is neither big nor next. Since a huge component of high-end luxury goods are purchased by people with expectations of riding to the next level, when the ride gets shut down, the first to go are those shimmery threads.

I’m not feelin’ your sympathy, but maybe you’re not focusing on where the sympathy should, I believe, be given. It’s not to the shoppers – that’s for sure – but without their dollars, stores are folding right and left, owners are filing for bankruptcy, clerks making almost nothing are going to make even less. The manufacturers are cutting back, tailors and seamstresses are being let go, fabric orders are way down, and even top designers are folding their tents. The May 28^th NY Times: “Christian Lacroix, the French couturier whose artistic and exuberant pouf dresses propelled him to fame in the 1980s, became the latest victim of the global financial crisis …when the fashion house bearing his name filed for court protection from creditors. [the French equivalent of Chapter 11]”

Some of the “top shops” remaining on Santa Monica ’s chi chi Montana Avenue are experiencing 60% drops in sales. Dozens of empty stores line the once-impenetrable boulevard. Trendy Melrose Avenue is mirroring the process. Barney’s can get plain silent in the middle of the day. The shoppers’ll be back… ok some of them might be back.

And let’s face it, whether reasons of corporate frugality, government mandate (hello TARP!) or just ‘cause they’re not in a partyin’ mood, life’s getting’ really tough out there: “For Randy Fuhrman, a Los Angeles event planner whose clients have included Barbra Streisand, Steven Spielberg and Walt Disney Studios, business began heading south last October. Private and corporate clients canceled holiday parties that had been months in the planning, in some cases forfeiting thousands of dollars in venue deposits. Even now, Fuhrman said, some customers who have money despite the stock market dive seem too embarrassed to spend it.” June 2^nd Los Angeles Times.

In the end, the suffering of those who have fallen sends a small but very nasty shiver of delight down the spines of many who always wondered “why not me?” But when you think of all the people up and down the line, who work hard for an honest living that hardly qualifies as much more than ordinary, well… we really are all in this together.

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

Unemployment is Job One

Conventional wisdom held that because hiring and firing is so much easier in the United States than in “socialist” Europe – where getting rid of an employee is not so simple and not so cheap – the United States ’ flexibility would always generate better employment statistics than Europe could. After all, you don’t hire folks when you understand all the fringe benefits you will have to pay, the social taxes and the severe restrictions and costs of firing anyone who has been with the company even for just a few years. As result, smart folks have said for years, job creation in Europe would always be more difficult than in the U.S.

Well, welcome to the “d”epression of 2008-???? The May 22^nd New York Times (when the numbers are adjusted, to compare apples to apples, for the way such rates are calculated): “In April, the rate in the United States rose to 8.9 percent. When the European figures are compiled, it seems likely that the American rate will be higher for the first time since Eurostat [the European Union’s official statistical bureau] began compiling the numbers in 1993… For men, the unemployment rate in the United States surpassed that of the 15 original European Union countries in December. By March, it was 9.5 percent in the United States , compared with just 7.5 percent for women. The figures for men and women in the 15 European countries, however, are close together, at 8.4 percent and 8.5 percent.” And it sure looks like the U.S. unemployment rates are just about to exceed those of Europe … and just keep on going up.

Why? The very safety nets available in Europe actually make it easier, with government support, to keep lots of people in jobs that would have been cut in the U.S. Also, normally, when work gets bad in one spot in the U.S. , workers tended to move to places where employment is brighter. Well, there aren’t too many places in the U.S. where jobs are flowing, and moving means you might have to deal with selling your old house in markets where houses just aren’t selling or where you have to sell at such a loss that moving is emotionally unavailable. And try to get a loan in a new market if you want to buy a house… when your down payment is still sitting in unsaleable real estate.

Housing booms and busts in Europe are not pandemic; places like Spain and Ireland suffered from these housing crises, and their unemployment rates trend significantly higher than the European average (making them look more like the U.S. , especially in the big housing bust states). But the rest of European housing didn’t crash and burn as in many areas in the United States .

Changes in U.S. work habits are afoot. Americans are slowly moving away from a world of corporate employment with pension and health benefits, a corporate ladder to climb, and time-with-the company benefits into a world of telecommuting or serving as independent contractors, engaged to perform specific jobs for a specific term (often extended), folks who often are left to fend for themselves when it comes to medical and retirement benefits. It just costs too much to provide these perks, and this economy has sent a pretty clear message to our workforce: don’t count on anything a company might promise you, because bad economic times can wipe it all away; take care of yourself!

The May 22^nd Time Magazine (in a series of articles entitled “The Future of Work”): “It costs the average American company more than $14,000 per year to provide coverage to an employee and her family. The employer response: shift more of that growing burden to workers. As a result, companies have seen their health-care spending rise 29% over the past five years, but employees have seen their outlays — for premiums, co-pays and deductibles — rise 40%... Retiree health care is getting whacked hardest — just when the boomer generation needs it most. Of the employers surveyed, 45% have already reduced or eliminated subsidized health-care coverage for future retirees, and an additional 24% are planning to do so or considering it.

“Corporate pensions, the third leg of the proverbial retirement stool (the other two being Social Security and personal savings), are also being eroded as the foundering stock market wreaks havoc on employer pension funds. At the end of 2008, employer-sponsored pension plans were underfunded by more than $400 billion, according to Mercer, a management-consulting firm.”

The values in work are changing with the generations that are moving in and up. Time again: “‘Paying your dues, moving up slowly and getting the corner office — that's going away. In 10 years, it will be gone,’ says Bruce Tulgan, head of the consulting firm Rainmaker Thinking, based in New Haven, Conn., and author of a new book about managing Gen Y called Not Everyone Gets a Trophy. ‘Instead, success will be defined not by rank or seniority but by getting what matters to you personally,’ whether that's the chance to lead a new-product launch or being able to take winters off for snowboarding. Tulgan adds, ‘Companies already want more short-term independent contractors and consultants and fewer traditional employees because contractors are cheaper. And seniority matters less and less as time goes on, because it's about the past, not the future.’”

Maybe Europe’s subsidized system will fail in the end as well, since they are competing against increasingly better-educated workers from places like India and China , where employment costs are just a fraction of what they are in the West. Whatever happens, don’t expect the future of “employment” to look anything like what it seems today.

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

Governments Suck

Credit markets are frozen except for a rarified few who can take advantage of government programs, buy a car funded by a car company, float their own paper or have incredible banking relationships. For most of us, well… borrowing is relegated to asking a neighbor for a cup of sugar. While there is a lot of equity (okay, a lot less than before the meltdown) looking for places to go, if its credit you’re seeking, you are probably out of luck.

Hear that “sucking sound?” It’s the noise governments make when they suck global credit into their mouths to build deficits to generate stimulus packages as a substitute for dried up consumer demand. Globally, we’re looking at trillions of dollars of governmental borrowing. In the U.S., Germany, the U.K…. and the list goes on. We know the obvious problem – we have to pay rising interest costs against bigger aggregated deficit – but there is another huge elephant in the room. The global lending capacity seems to be absorbed by governments leaving individual and corporate borrowers, when credit markets unfreeze, to compete for a smaller pool of capital available for private lending, paying higher interest rates, because the big governments have used up so much of the available lending pool.

For every point that interest rates for the U.S. government rises, another $50 billion gets added to our annual payout obligation. The June 4^th New York Times: “‘It will be more expensive for everybody,’ said Olivier J. Blanchard, chief economist of the International Monetary Fund in Washington. ‘As government borrowing in the world increases, interest rates will go up. We’re already starting to see it.’… Since the end of 2008, the yield on the benchmark 10-year Treasury note has increased by one and a half percentage points, rising to 3.54 percent from 2 percent, the sharpest upward move in 15 years. Over the same period, the yield on German 10-year bonds has risen to 3.57 percent, from 2.93 percent. And British bond yields have increased to 3.78 percent, from 3.41 percent.”

For corporate and job growth, the lack of private lending capacity – even the eventual cost of borrowing based on rising interest rates – adds an additional brake on longer-term “recovery” (whatever form that might take). Fed Chairman Ben Bernanke’s warning to Congress on June 3^rd address this threat of ever-spiraling costs to service our massive deficit. At the end of 2008, our net deficit represented 41% of our gross domestic product; by the end of 2010, that number should rise to 65%. People are also assuming that we will always be able to feed at the international debt trough.

But what if the world stops buying our debt? Do we look like California and destroy the government’s ability to provide basic services? Like Argentina in the hyper-inflationary days when a suitcase full of currency might buy you a cup of coffee? With all of this government competition from many nations, we know that the old law of “supply and demand” will make interest rates skyrocket as more nations compete for international loans.

All these numbers seem confusing to most folks. So maybe some overall observations of what might happen are worth considering. If our borrowing is relatively greater than that of other countries, the buying power of the dollar will fall; everything we import (like oil) will rise in price while everything we export with rise in dollar-generating capacity. Unfortunately, we import significantly more than we export, so the net cost is huge. Further, if you are an individual or a business, and if you need to borrow money for any purpose, you can expect interest rates to rise, maybe into double digits, across the board. Companies won’t be able to grow as fast, the cost of consumers goods that require debt (cars, homes, appliances, etc.) will rise, and that's a recipe for inflation.

So what do we do? Stop the stimulus package and let the economy tank for a decade? Tough issues, but anything that is in that stimulus package that creates long-term value, like paying for better schools or funding research, is more of solution than a cost. Creating programs just to please political constituencies may be politically necessary, but the long-term cost could have a devastating impact. In the end, it is incumbent on American voters to understand the choice and the ramification of those choices.

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

101 Years

Although once unthinkable, the inevitable finally occurred last week when General Motors, the former standard bearer for American Industry, filed for bankruptcy. Like the venerable George Burns, the company that made it to the ripe old age of 100 years, didn’t survive beyond that magical number. Oh well. The bulk of GM’s viable assets will be sold off, mostly to a newly formed operating company in which the company’s bondholders will hold a 10% stake with options (warrants) to buy 5% more.

The current collective bargaining agreement with the United Autoworkers will fall by the wayside, labor costs (wages and benefits) will drop, jobs will be cut by the thousands, plants will close, the U.S. government will infuse cash, and a new mini-behemoth will emerge to continue the tradition. Unfortunately, the “new” GM will stare into the ugly eyes of a managed depression, where consumers truly are putting off major purchases until the credit freeze ends and job markets stabilize.

Even as GM will have to arrange credit for car loans, average consumer FICO credit scores are plummeting; there are simply going to be fewer people willing to buy cars and even fewer qualified to pay for them. With the job market expected to stay down through most of 2010, and with residential and commercial real estate still tumbling, how is GM going to rebuild sufficient volume to survive? Filing Chapter 11 is a restructuring; it does not mean that the new company can actually compete in today’s environment.

AOL’s Daily Finance (May 28^th): “GM's long-term problem is still sales. The domestic vehicle market was over 16 million units four years ago. This year that number may drop to 10 million. GM is still losing market share and that figure dropped below 20 percent in the company's last reported quarter, the first time in memory that it has been that low.” Think Toyota , Ford and Hyundai want GM to expand their market share? That they will just roll over and play dead as GM’s new union concessions make their products more affordable?

There are fewer willing buyers out there, and the car companies are going to have to convince those willing to buy that they provide value, sustainable long-term service capabilities (and that parts will be there), that their warranties are solid, that quality has not suffered (in fact that it will be better) and that resale values will sustain. Perhaps the car makers can convince a few consumers who are on the fence to jump down and take advantage of the bargains.

But the same consumers are in the same crosshairs of each of the car manufacturers, and with the economy in a long-term stall, perhaps the world really doesn’t need as many automobile manufacturers as exist today. Does the U.S. really need three domestic companies? Does it help that Japanese automakers have lots of plants here in the U.S. ?

Daily Finance: “If the Japanese and Korean imports and a relatively healthy Ford … push GM's market share toward 15 percent in the US , the Chapter 11 will not have meant much.” Auto parts manufacturers are beginning to fall by the wayside too. Visteon and Metaldyne Corp, companies that supply components for U.S. carmakers, have just filed for reorganization under U.S. bankruptcy laws as well.

Will Fiat-Chrysler and General Motors, in any configuration, still be around in five years? Ford, which has side-stepped most of the disasters that have bedeviled its U.S. competitors, also has to survive in this contracted economy. It’s a complex puzzle, but without a steady stream of consumers with cash (or access to credit), what will the America automobile manufacturing landscape really look like when the dust settles?

I’m Peter Dekom, and I just wonder.