Updaate: Saab is saaved!

GGMM haas found a buuyer for Saab.

American Disease, 2010

Ann Elk: Where? Oh, what is my theory? This is it. My theory that belongs to me is as follows. This is how it goes. The next thing I'm going to say is my theory. Ready?

TV Interviewer: Yes.

Ann Elk: … This theory goes as follows and begins now. All brontosauruses are thin at one end; much, much thicker in the middle; and then thin again at the far end.

(From Monty Python’s Flying Circus)

I too have a theory, which is to say it is a theory and it is mine. I hope it’s a bit less silly than Ann Elk’s theory, but in any case let’s try it on. The next thing I’m going to say is actually not my theory, but another theory, which is someone else’s and got me to thinking about my theory.

This other theory is something called Dutch Disease, which is an economic diagnosis of the Netherlands’s loss of competitiveness in goods producing industries following a 1959 discovery of natural gas off its North Sea coast. In the simplest terms, this led to inflows of investment, which pumped up the exchange rate and altered terms of trade in such a way that exports became uncompetitive. In this perverse fashion, Dutch Disease describes how a lucky strike in natural resources creates not employment and growth but unemployment and stagnation.

America, my theory proposes, has a version of that, only the resource is money. I want to name the problem “American Disease,” but I read in an article by Bryan Caplan that that's the name of a syndrome of Americans living beyond their means. Actually the problem I pose is closely related, just as H1N1 influenza is closely related to other strains of the flu. Perhaps I can say “American Disease, 2010” to differentiate it from old established strains, or should I call it “California Disease” to reflect the fact that the disease has advanced furthest in the Golden State?

America is a country with real natural resources, of course, but the high costs of extraction and environmental compliance and restrictions on land use places them increasingly out of reach. In the days when the country did produce resources and processed them into manufactured goods which foreigners bought, the U.S. generated a vast amount of wealth, much of which was invested in buildings and infrastructure. These remain visible in the present day, residual wealth as monuments to our peak of economic power.

(Exactly the same is true of Argentina, by the way, which was the wealthiest country in the world 100 years ago and still has the buildings and boulevards to prove it, even though Mr. Juan Peron and the generals set the country on an unusual course from first world to third world status.)

Now, even after the financial crisis, America’s most important industry is finance, broadly defined. The financial industry differs from the auto industry and the chemicals industry in one interesting respect. The auto industry inputs steel, glass, and plastic and outputs autos; the chemicals industry inputs primary and intermediate materials and outputs finished chemical products – in other words, they work on raw and intermediate goods and change them into something else. Most industries do this. But the finance industry has money both as input and output – it changes money’s form but not its nature in its processes. Money is both the input and the output, the resource base and the finished product.

The American finance industry is competitive, one of the nation’s success stories in terms of services exports. Our political class, which increasingly impedes us from taking coal out of our mountains, irrigating our farmlands, and manufacturing products with processes that are not squeaky clean, has long promoted clean, non-polluting financial services, and it has prospered as the industry prospered.

However, I believe that too much money in an economy based on financial services has given us a condition akin to Dutch Disease. It could probably be shown that the maintenance of the U.S. as a financial center has made the American dollar stronger than it would otherwise have been, reducing our competitiveness in global markets for tradeable goods and services. Moreover, the high level of compensation in the financial industry and supporting services has probably driven up wages and benefits right across the U.S. labor economy, another blow to the competitiveness of any entrepreneur bold enough to defy the odds and manufacture a product for sale in America.

While the American political class stands in the way of development of our (real) natural resources and domestic manufacturing, it does see the residual financial wealth of the nation as a resource that it can cut and drill and strip mine – endlessly, in fact, as it recognizes no restraint on the size of resource, but treats it as effectively infinite. The people entrusted to run the country give no thought to the necessary diminution of the resource as taxes, penalties, and compliance costs leave less and less to reinvest, even as the potential returns on investment are inevitably being reduced. They use static models that fail to capture the fact that producers will not produce – or innovate, or hire – out of sheer altruism and public spirit while the returns on their capital and labor are collapsing.

The impoverishment of the United States by the Argentine model is thus well under way.

Oh, and why do I say California has the most advanced case of the “American Disease, 2010?” Well, just look at the Golden State. There is oil offshore, but its development is not permitted. Manufacturing is being driven out. And the Central Valley is experiencing 40% unemployment in agriculture in order to protect mudfish habitat; but California's fiscal position continues to deteriorate as its political class absolutely will not live within its means, as dictated by the state’s reduced economic circumstances.

As California is the United States only more so, California’s political class is America’s in microcosm, with all its pathologies subjected to magnification.

The mindlessness with which the American money resource is to be run down puts me in mind of a passage from Atlas Shrugged:

As they proclaim their right to consume the unearned, and blank out the question of who's to produce it—so they proclaim that there is no law of identity, that nothing exists but change, and blank out the fact that change presupposes the concepts of what changes, from what and to what, that, without the law of identity no such concept as 'change' is possible. As they rob an industrialist while denying his value, so they seek to seize power over all of existence while denying that existence exists.

Shutters are closed up & down Main Street but Wall Street is in the money.

Shutters are closed up and down Main Street but Wall Street is in the money. How could that be? The bull market in stocks has gone farther for longer than I thought possible.

Just surveying the salient points of the economic situation in 2009 led me to a more bearish view. The anti-business party controls the presidency and both houses of Congress, and they are turning the bad US fiscal situation disastrous. They are in love with budget-busting, price-increasing government solutions: stimulus programs that are really giveaways to Democrat constituencies, universal health care, a cap-and-trade energy regime. But in the hard-pressed profit-seeking sector, labor faces an employment outlook as bad as any time in the last twenty-five years, and the government's response is make-work schemes that waste money and; management is unable to plan in the rapidly changing tax and regulatory environment.

So again, what possible reason is there for the stock market to rally this hard? It must be discounting a much better day ahead, a day that according to a strict economic accounting is not easy to see. I said in July:

Some of this bounce is almost certainly due to the business and investment interests of this country re-assessing President Obama's grand and ambitious schemes and concluding that they represent impossible over-reach. Rightly or wrongly, they came around to the view that most of this stuff will never come to pass. On this view, Obama has expressed extreme initial positions just as a negotiating tactic to get more than he could with conventional bipartisanship, but less than he asks. Republicans and responsible Democrats in Congress will push back on the crazier ideas. The American people will not go along, will resist with mute passive aggressiveness and loud argumentation, once the full implications are clear. And if it is not just a tactic, if Obama really insists on every bit of what he says, Republicans will gain enough seats in 2010 to apply the brakes, if not an outright majority. One way or another, the entire Obama agenda can and will be resisted.

As the popularity of Barack Obama, congressional Democrats, their radical leftist economic schemes and unconstitutional power grabs plumb new depths, this is seeming more and more likely. They have mounted a counter-revolution to the American Revolution, and Americans are not standing for it.

Without doing anything to deserve it, the nominally pro-business, nominally loyal opposition Republicans stand to benefit from the ass-whipping American voters are fixing to administer to Democrats in November. To really capitalize, the Republican leadership needs to learn from the Tea Party movement, which has emerged over their heads as the true opposition to the schemes of the left. If the leadership gets smart and understands that the American people demand a response to fiscal sanity, national security, and constitutional government, their recovery can be remarkable and enduring.

Of course the poet WB Yeats used the language better than I can when he told his political opponents in the Seanad Éireann:

You victory will be short, and your defeat final, and when it comes this country will be transformed.

Ardently to be wished.

Jobs Summit at the White House

From Politico 44: You're invited -- On the jobs summit list ...

"CONFIRMED ATTENDEES INCLUDE: Eric Schmidt, Google; Randall Stevenson, AT&T; Surya Mohapatra, Qwest ; Frederick Smith, Fed Ex; Brian Roberts, Comcast; Bob Iger, Disney; James McNerney, Boeing; Andrew Livens, Dow; Peter Solmssen, Siemens; Stephanie Burns, Dow Corning; Phaedra Ellis Lamkins, Green for All; Reed Hundt, Coalition for the Green Bank; Larry Mishel, EPI; Alan Blinder, Princeton; Paul Krugman, Princeton; Joe Stiglitz, Columbia; Bob Greenstein, Center on Budget and Policy Priorities; and Jeffrey Sachs, Columbia. PLUS SMALL BUSINESS OWNERS, including David Ickert, Air Tractor; Woody Hall, Diversapack; and Rose Wang, Binary Group. AND Anna Burger, Change to Win; Leo Gerard, United Steel Workers; Joe Hansen, United Food and Commercial Workers; Randi Weingarten, AFT; Mayor Frank Cownie, Des Moines; Mayor Julian Castro, San Antonio; and Mayor Ed Pawlowski, Allentown, Pa."

In other (Grayling) words, we have (1) big contributors whose large corporations have been laying off workers, (2) union leaders who represent barely one-in-ten US workers and whose grasping has sent jobs overseas, (3) leftist economists, (4) war-horses of the DC policy establishment, (5) members of the red-green coalition, (6) political allies, and (7) a few small business people of whom nothing is known.


THE CRISIS IN EMPLOYMENT IS REAL. Nothing that will come out of this jobs summit will have any effect on it, however. Exhorting industry to hire will not. Shaming banks into extending more credit to business will not. Temporary subsidies and $3000 new-hire tax credits will not. Make-work schemes will not. Enterprises will not hire or commit any new resources as long as their tax and regulatory regimes are totally unsettled, as they are with this anti-enterprise statist administration. Business owners do not know what they face in terms of higher taxes and giant mandates for health care, cap-and-tax, and other pet "make-the-rich-pay" schemes of the left. But they do know for certain that these things will be burdensome, and maybe fatal. No sensible business person will hire or invest under such threat.

Better to milk your business for cash to consume while you can. Maybe now's the time to move offshore. The Chinese Communists are more business friendly than the US Democrats, and probably easier to deal with than the United Steel Workers or United Food and Commercial Workers.

Laura D'Andrea Tyson Moots New Stimulus

VP Joe Biden says they misread the economy and maybe that's needed.

Minority Whip Eric Cantor says sure, let's talk about it.

Stock market votes on the idea, down 140.

UPDATE for market close: down 161. Ouch.

Financial Market Conditions at Mid-Year

As one of the many Americans who depends on a positive business and investment environment for his prosperity, I regarded the election of Barack Obama as president with Democrat supermajorities in the House and Senate with some concern.

More than the usual number of my fellow businesspeople and investors went over to that side, contrary to their own interest as it always seemed to me. Of course many of these unlikely Obama voters were as eager for hope and change after eight years of George Bush as anyone else. But if they gave consideration to the implications of Democrats supermajorities led by Obama for the economy from which they draw life and livelihood, they allowed their desire to believe to outweigh more sober analysis.

Obama took them in with the charisma, the gaseous uplift, and the promise of racial reconciliation; they convinced themselves that the redistribtionist, high-tax, anti-business, anti-capital policies to which he rallied his party constituted red meat for the Democrat base, not a program for governing.

This misapprehension survived the election, and permitted modest financial market recovery through the end of December 2008, followed by modest declines through Inauguration Day. On Inauguration Day, President Obama delivered a speech that any fair-minded listener would have to admit was far less than a rhetorical tour de force, and far more evocative of class envy and racial struggle than everyone expected.

Financial markets tanked that day and kept tanking for weeks, pressured further by the stimulus package that offered precious little real economic stimulus, but rather a shocking grab bag of packages to traditional Democrat constituencies, with not the merest nod to the rights or concerns of the minority.

We experienced headlong collapse from Inauguration Day through first week of March. Obama Democrats in the business and investment community awoke too late to the realization that the Democrat program now encompasses nationalization of vast swathes of industry on the pretext of emergency (autos and banks) or necessity (health care); that owners' property rights are provisional and expendable; that the ideological attachment of our rulers' to the green agenda trumps their duty of care to the free-market economy; and that they mean to bleed the productive sectors of the economy to feed the non-productive to the fullest possible extent they can get away with.

So far, so bad. But then something interesting happened -- we had a dramatic bounce in stock markets from March through early May. Some of this is probably discounting the possibility of a 1929-37 depression, correctly. Some might even be what I regard as an unrealistic pricing in of a rapid economic recovery, when what we still have in prospect is a deep and long recession as in the 70s and early 80s.

But some of the bounce is almost certainly due to the business and investment interests of this country re-assessing President Obama's grand and ambitious schemes and concluding that they represent impossible over-reach. Rightly or wrongly, they came around to the view that most of this stuff will never come to pass. On this view, Obama has expressed extreme initial positions just as a negotiating tactic to get more than he could with conventional bipartisanship, but less than he asks. Republicans and responsible Democrats in Congress will push back on the crazier ideas. The American people will not go along, will resist with mute passive aggressiveness and loud argumentation, once the full implications are clear. And if it is not just a tactic, if Obama really insists on every bit of what he says, Republicans will gain enough seats in 2010 to apply the brakes, if not an outright majority. One way or another, the entire Obama agenda can and will be resisted.

This is a bull item in the market since March.

After stock price gains of over 30% from March to May, markets have stalled since then, and fallen into a few air pockets. The public policy problems for the markets at this point remain the administration's apparent readiness to overturn our carbon energy-based economy and its radical intentions toward the 15% of the economy that health care represents.

But the overarching sentiment problem comes from yet another reassessment among business people and investors: even if the entire Obama agenda can be resisted and its worst effects rolled back later, on this new view a tremendous amount of violence can still be done to the U.S. economy now. In the meantime, we are still losing jobs at a sickening pace while Obama and the Congress waste unimaginable sums of money on projects lacking any other point beside paying off their friends and allies.

In the background the Chinese, our principal creditors, are objecting more and more forcefully to American fiscal unsustainability and the debasement of the U.S. Dollar that this portends. The managers of other erstwhile basket-case economies, Russia, India, and Brazil, tut-tut their agreement and back calls for changes to the global reserve system.

At the very least, these mid-year movements call upon investors to review their portfolio allocations with care. My own view is currently defensive on U.S. Dollar assets, light in risk assets in general, and seeking for growth mainly in Chinese stocks.

Japan's Golden Week Is Almost Upon Us

Back when I was working for Argonaut Capital in the 90s, Japanese stocks were part of my coverage. It was four or five years into the bear market that followed the 80s boom. The Japanese authorities had noticed that doing almost anything was better than opening the exchange for trade, so they multiplied meaningless holidays and started taking any excuse to close. Or so I remember the manner in which Golden Week became almost an entire week off from the end of April into the first week of May.

I noticed that one of the most powerful seasonal tendencies in the financial markets was for the Nikkei stock index to break shortly before or after Golden Week and decline meaningfully in percentage and time terms. "Sell in May and Go Away" is an adage quoted by stock traders everywhere, but counter to that there is also the market lore of the summer rally, which endures because it works sometimes. But not, it seemed, in Japan, where the very name "Golden Week" seemed a black joke. Leaden Week for financial markets was more like it.

This observation was bankable. In every year of the decade of the 90s, the Nikkei dropped substantially from its pre-Golden Week highs; the biggest drop was 39%, the smallest 9%, the average about 20%.

In 2000 I presented original research on the effect in the late lamented worldlyinvestor.com (hey there Jeremy Pink! Lay off the Dim Sum, will you?) I forecast the same thing to happen that year, and it did: a 20% drop a few weeks after Golden Week, a 30% drop within a few months.

In 2001, the Nikkei peaked in May and plunged.

In 2002, it rose in May but collapsed later that summer.

In 2003,the pattern failed for the first year in fourteen as the index rose 10% in May and kept on trucking.

In 2004, there was a modest 10% loss.

In 2005, there was again no playable decline around Golden Week. However in 2006 there was a rapid loss of 2500 Nikkei points.

Then in 2007, the peak did not arrive until the first week in July, and in 2008 the market rallied in May but began the collapse from which it is still suffering in early June.

One might conclude that the pattern is no longer reliable. Possibly as the effect became more widely known it has been arbitraged away through the action of traders. I always felt things changed since 2000 with the inclusion of a number of key technology shares in the Nikkei that year at very high weightings and the near disappearance of financial sector weightings. Over time the Nikkei has become more like a Nasdaq proxy, and the Nasdaq is having a pretty good year in 2009, all things considered.

I'm positioning for the thing to work again this year, even though at time of writing the Nikkei is only at 8686. That's still 1900 points above its low for the year, at a time that the economy is contracting at rates approaching 10% per annum, world markets may have run out of puff, and there are few redeeming factors in sight.

Freddie Mac CFO -- Apparent Suicide

Freddie Mac's Acting CFO David Kellerman, age 41, has been found dead in his home this morning in an apparent suicide.

I wonder if Senator Charles Grassley (R-IA) will now step forward to cite Mr. Kellerman's example with approval.

Worst Market Day in Six Weeks

I know a lot of market participants have been looking for this break long before today. My sense has been that they are wrong and the market recovery in the six weeks through Friday can carry a long way, surprise everyone, and ruin the bears' year as the prices will be set by investors looking beyond the current recession earnings trough. At the moment, I am holding on to that view. But I can be persuaded that I am wrong, and switch my position accordingly.

Recently I have had correspondence with Professor Christopher Mayer of Columbia Business School, regarding his Mayer-Hubbard Plan and my Household Initiative Plan. He says he has been in Washington lately and senses a real loss of momentum for all these plans. I think you can generalize that. There has been a loss of momentum for all the administration's economic schemes as they have had other things on their plates such as foreign summitry, stem cells research, climate change, torture memos, and so on and so forth. Also, Congress has been on Easter recess. It may be a coincidence that the market took a swan dive on the day Congress returned and the administration held its first cabinet meeting. But on the other hand it may not -- market participants have ample cause for concern about the administration of the TARP, the independence of the Federal Reserve, the possibility that Ben Bernanke is not reappointed, and the dawning realization of the scale and scope of the budget deficit to come. And with government back in full domestic operation, players may be pricing that in, and the previous six weeks could turn out to have been a pleasant holiday from hard reality.

Standard and Poors 500 Index going to 100?

My correspondent Ted Kavadas writes great stuff at Prosperity by Pen, which is on the blogroll. He has an article entitled "A S&P500 Target of 100? Impossible, Improbable, or Impending?" It relies on the fact that there is little technical support between recent S&P 500 Index lows and 100, and little in the way of current earnings to prevent the index from crashing to such a level.

It's interesting as his work always is. And from the point of view of gaining publicity for an idea it never hurts to be extreme . . . wasn't Harry Dent calling for Dow 45,000 before he decided that the Dow has strong support down around zero? (I did this myself once, calling for an Indonesian Rupiah at 10,000 to the dollar at a time when it was around 1,700 -- but I was not extreme enough as it ultimately went north of 15,000)

The first material critique I make to the argument is that markets do not look only at current year (year 1) earnings, but look beyond the earnings trough, whether that is this year or next year or whenever. Market participants can be wrong about that and need to reset expectations, but there is no way they drive the S&P to 100 based on current year earnings estimates, without other things happening (e.g. the financial system collapses despite all efforts, terrorism hits us at home in a spectacular way, Obama embraces Chavez-ism.)

Second, market participants have already largely discounted the work product of the analysts, who have proven again that as a group they are no use under deeply cyclical conditions. The shock value of their downgrades is more limited now. Certain analysts who have made particularly good calls are exempted from the criticism that they don't know how to analyze in this economy, but even they are finding it hard to shock the market at this point.

Third, given the cyclical conditions, participants will prefer to consider earnings over a longer segment of a full cycle than just one year. I have heard of people calibrating valuation to an average over ten years. No one can forecast year 10 earnings for any company, but if investors are finding this approach works for them that's great.

Fourth, and maybe the big one. Let's not forget that current earnings are heavily penalized by non-cash charges. This is the central problem of our markets today, the fact that charges required by mark-to-market accounting have demolished the capital of the financial system, requiring markdowns and charges on assets even if they are performing. It's madness, but it's the system we have now. If you are of the opinion, as I am, that much of this capital destruction is unreal and unnecessary, then true earnings, though depressed, are still higher than reported. It is not only financial companies that are taking these charges because they are forced to. Other companies are "kitchen-sinking" their earnings in order to get out whatever bad news they could conceivably ever have at a time when markets are inured to bad news. Hence Nike recently wrote down Umbro, which they bought mere months ago and now declare impaired, taking a heavy hit to earnings in the current period. This charge is wholly discretionary. They did not have to take it now or probably ever. This is why some participants prefer cash flow to manipulable reported earnings. Earnings lie, cash flows tell the truth.

Buy a suit at Jos. A. Bank, let them give you a bank!

Gosh, I'm so sick of their commercials. Where do they get the goofball with the infinitely joyful sing-song voice, who is always offering ever more fantastic deals on clothing that no one needs!

Buy three suits, get five free!!! For what, dude? Don't have no job, don't need no suit!

Or if you had a job to which you might otherwise have worn a suit, the Security Department of your company has sent out a memo telling you to dress like a plumber or electrician just in case demonstrators think you're a bonus recipient and throw garbage at you, or worse.

This is my modest proposal to Jos. A Bank. It's a variation of the old wheeze where you open a CD at the bank and they give you a toaster. I'll buy the goddam suit, and I'll allow you, Jos. A. Bank, to give me a bank. You've got banks, right? That's why you're called that! Plus, if you don't have enough banks to give to the thirteen men in America today who might be persuaded to buy a junky suit if they got a bank with it, you can get more from the TARP. A suit is body cover, and what better to cover bodies than TARP?

Great deal. You unload surplus suits, government unloads surplus banks, I recapitalize my bank by taking Bazooka Joe wrappers and S&H Green Stamps to the Fed discount window. Everyone's a winner.

Coming Soon: New Currency Order

Whatever you think of the young administration of President Barack Obama, you have to admit the man does not lack for ambition. He promised that sea levels would fall and the lame would walk, and everyone understands that will take at least a couple more months. But taking over the motor industry, well that's just the work of a couple of the President's bright sparks over the weekend. It's great knowing that I'll be able to go into my Congressman's constituent services office when I need parts for my old Dodge truck.

My sources in Washington tell me that the next thing to come out of the salvation lab is a major currency reform. The American Dollar, the Yankee Greenback, it has served us so well for so long, but now it's lame too. Better just to repudiate all claims and start over, as they are wont to do in the countries of South America that have lately emerged as models of public administration.

I hear the new buck will be called the O-buck, and this is its symbol:

Christina Romer on Fox News Sunday

The Congressional Budget Office has pronounced the multi-trillion dollar Obama Budget too expensive and too wildly optimistic on out-year economic growth projections. Challenged on this, Christina Romer answers back that the CBO's out-year GDP growth estimates of 2.2-2.3% are too pessimistic.

Those are sluggish numbers, but the CBO is taking on board the fact that our economy will be lugging an incomprehnsible debt level. Usain Bolt is the world's fastest man, but I, fat and 46 years old though I am, might just beat him over 200 meters if he has to carry a sixty-pound bag of concrete under each arm and I do not.

It is kind of the same thing for the poor, downtrodden American economy. Given ten trillion dollars of debt to lug, and looking forward to the day when barely one-third of the people are carrying another third in government employment and the final third on government assistance, it will be a wonder if the economy does even as well as OMB assumes.




The Household Initiative Plan is posted at Household Initiative Plan Blog.

At least he didn't say "Inherited"

AIG Chairman and CEO Edward M. Liddy has an op-ed in the Washington Post entitled "Our Mission at AIG: Repairs, and Repayment" this morning. He is trying to justify the payment of the $165 million bonuses. Good luck with that there, Mr. Liddy. But for one thing we can be grateful: in telling the tale of his appointment at AIG after the hapless Martin Sullivan, he spares us the word "inherited."

I suppose that word is government property.

The Coming Real Estate Recovery -- By The Numbers

I have been analyzing real estate and construction since 1991. I can’t even say that our current real estate collapse is unprecedented, because to me it’s not – I went through the Asian Financial Crisis, and this is like that. As a matter of fact, the Hongkong real estate slump of 1994-95 was pretty serious even before the Big One two years later. And Japan's real estate collapse has been both huge and enduring.

But I well remember my first AFC trip to the region. I had been correctly bearish in 1997 and I was analyzing from afar, unwilling to allow myself to make the trip in case my natural sympathy with people should overcome my brutally harsh analysis. So instead of my usual five-times-a-year Asia trips, I took no trips in 1997. Finally in the first quarter of 1998 I was sure things were as bad as they were going to get, and I did not have to worry about personal contagion any longer. I flew into Seoul, and was driven immediately in a black car to the Bank of Korea. Along the way I saw the debris from anti-government demonstrations and grafitti saying “IMF = I AM F¿¢KED”. The last two hundred yards of the way to the BOK, the car went slowly enough for me to see the sad, sunken faces looking with deep suspicion at a foreigner in a limo on his way to the central bank.

From Seoul I flew to Singapore on a Singapore Airlines wide-body aircraft with exactly three passengers on it, just me and a honeymooning couple.

In Bangkok, I visited the offices of one of the big commercial real estate brokers, where the Englishman in charge appeared a broken man. We looked out over the vast city with its forest of cranes all idle for the first time in memory. “No one will build another class A building in Bangkok for fifteen years,” he said.

But he was wrong. Capital did re-form in the real estate markets, and things were humming again inside of three years.

That’s good, and I expect we can look forward to some similar unexpectedly rapid recovery. But enough talk already. What do the data say we can expect here? Let’s dig into the housing market data.

For a long time I have resisted the popular Case-Shiller 20-City Housing Index, for many reasons. I think Shiller’s nutty professor act is off-putting, as is the false precision in the reports, the short history, and my sense that it is hard to index lumpy and illiquid stuff like houses. But everyone now uses it, so I have to relent.

I refer to short history -- Professors Case and Shiller only reach back to 1987, which misses the booms and busts of the seventies and early eighties. I can’t deal with that, so here’s what I did. I took their data, and lined them up with Census data going back to 1959, data that HUD also reports. I did some regressions and other hand-waving trend analysis to try to extend the Case-Shiller Index back in time.

Hey, if hand-waving is good enough for the Treasury Secretary, it’s good enough for me.

I got GDP, PCE Housing, and 10-year Note Yield data (the latter my mortgage interest rate proxy) from my good friend Fred at the St. Louis Federal Reserve Bank, and lined that up with the housing index stuff reported by the good professors and massaged by me.

Six recessions have been observed since 1959. Twenty quarters (five years) after trough recessionary conditions, the average increase in the price index has been 46.3%, the median increase 55.2%, the maximum 79.8% and the minimum -0.3%.

Eight interest rate spikes over the same period have seen the average price increase 30.0% twenty quarters later, or 34.5% on a median basis. The maximum increase was 75.9% and the minimum -22.3% (i.e. a more than 20% drop, in the period in which we now find ourselves).

There have been only five episodes of declining prices, of which this is by far the worst. Twenty quarters after the midpoint of these episodes, prices are 18.8% higher (average), 17.1% (median), 75.7% higher at best and down 28.3% at worst. But leaving out the current episode, which I suppose is not finished, the figures are respectively 46.3%, 55.2%, 79.8%, and -0.3%.

Food for thought.

The Contributions of AIG in Perspective, & Who Wrecked Them

I just spent an hour today going through American International Group's last twenty years of Annual Reports, finding out how much tax AIG has paid over the last 20 years, working out estimates of how much tax its employees have paid on their incomes and how much has been remitted to the Treasury on dividends paid by AIG to shareholders on previously-taxed income.

The numbers I come up with are $35 billion of income taxes paid until the company tumbled into loss for its 2008 fiscal year. Taxes on salaries and dividends through 2008 I estimate at another $20 billion, for a total tax rake-off of around $55 billion.

What I cannot work out as easily is how much tax has been paid by service providers, lessors and so many others who prospered when AIG prospered. It would also take study to quantify the other economic benefits conferred on the cities and towns in which AIG operates, and the contributions AIG made to all the good causes it has supported so generously down the years.

As black as the company is now painted by career-making politicians, including some who now advise AIG personnel to commit suicide out of shame, one must try to remember that there were many benefits of AIG's rise and rise and rise. Far from being a criminal enterprise or a ship of fools, AIG was one of the greatest American companies, right up until it was wrecked by the incompetents brought in after that great man of the people, Eliot Spitzer, made it his special project to destroy Hank Greenberg and the company he built.

Senator Chuck Grassley (R-IA) on AIG Execs

. . . calls upon them to commit suicide.

Is there any limit on how low politicians will stoop to pander to the current populist trend? Is there a whole hell of a lot of difference between this and incitement to riot?

This is beyond sick, and must be opposed. Shame.

"I Blame the Recession" . . . the wisdom of a 14-year-old

True story. Yesterday as I was driving my 14-year-old daughter to school, the AM stations we normally listen to at that time for business, news, weather and traffic were all in commercial breaks at the same time.

So we switched over to 92.3 for the first (and probably last) time since K-ROCK signed off and the dopey Z100 wannabe top-40 station came on.

There was some gal I've never heard of singing a Top 40 song I don't know. It sounded like Katy Perry, but without the soul.

Cyrenah asked, "Dad, WTF?"

I explained that K-ROCK was gone and this is what we have instead.

And she said, "I blame the recession."

I asked her why.

"Everything that sucks is because of the recession."

Bernie Madoff Court Appearance Tomorrow

Beg your pardon for being away from the blog -- pressure of some document preparation with a Friday deadline.

I just want to take note that Bernie Madoff will appear in court tomorrow, reportedly to plead guilty to eleven counts of various frauds.

My opinion since the beginning of this scandal is that he should have been remanded to custody immediately. His lingering under house arrest in the opulent penthouse apartment has mocked his victims and demonstrated how unseriously and inconsistently our system treats white collar crime.

In New York a fellow of a different color or different profession than Madoff would see the inside of Rikers Island if he were charged for the theft of my wallet. Madoff stood accused of a $50 billion fraud initially, now apparently upgraded to over $60 billion. For perspective, consider that the initial insured loss in the 9/11 attacks was determined to be $11 billion.

Employment in Manufacturing & Government & the Deficit with China

Around the 20th of January, I heard a couple of talkers on business news and talk radio note that government employment had exceeded manufacturing employment in the United States. When I looked into it, I found the origin of this meme at a blogpost of Fabius Maximus entitled America passes a milestone!, with interesting charts and analysis. The charts are from subscription site Contrary Investor. Instapundit, Dr. Melissa Clouthier and Citizen Paine are among the analysts who picked up the story from Fabius, and well done to him.

But I wanted to see the original data, and I found it on one of my favorite sources for primary material, the website of the Bureau of Labor Statistics, for which the relevant interactive dialog box is here.

It is the work of a few minutes to find that, yes indeed, according to BLS, the non-seasonally-adjusted figure for workers employed in the goods producing sector of the US economy was set preliminarily at 21,404,000 for 2008, down from 22,221,000 in 2007, while the comparable employment-in-government figures were 22,457,000 preliminarily for 2008, up from 22,203,000 in 2007.

The services sector is bigger than both put together, with a preliminary 115,648,000 employed for the year 2008.

It was two days after Fabius's article that Timothy Geithner had his confirmation hearings in the Senate Finance Committee. One of the hostile Senators, Jim Bunning (R-KY), roasted Geithner over the US-China trade and financial relationship. He got started in his opening statement:

Thank you, Mr. Chairman.

The financial crisis we are experiencing today did not happen overnight and it could have been avoided. As Mr. Greenspan now admits, the easy monetary policy that he and Mr. Geithner championed at the Federal Reserve created an asset bubble. Large capital inflows from countries like China, for the purpose of keeping its currency low, contributed to the bubble and they went unchecked. But, the collapse of the bubble would not have been so devastating if Mr. Geithner had been effective in his role as a regulator. . . .

. . . and in questioning he was if anything tougher, blaming Chinese manufacturers and workers, in effect, for the financial crisis in which we now find ourselves. This, I believe, is a dangerous new aspect of international financial and trade relations, as I stated in my posting of January 26.

It strikes me that there is a direct line between the manufacturing implosion and the current account deficit with China and certain other trading partners, if anyone just cared to draw it. And there's not a thing Mr. Geithner could have done about it in his role as a regulator.

The capital inflows that so trouble Senator Bunning are just the flip side of America's trade deficit with that country. It's a matter of double-entry accounting identities, rather than any cunning device to "keep its currency low."

It can be shown -- I have done the work, and will put it here at some point -- that a portion of the trade deficit with China is really with American companies who have investments there.

Nevertheless, it is clear that the US economy has gone post-industrial.

Our trading partners will not buy our manufactures if we do not manufacture.

They will buy very little of the output of our large and growing government sector.

They will buy some of our services, but of course in these times of financial crisis and straitened circumstances, they too have less need of the financial and creative services in which American business specializes.

Our trading partners will buy hardly any of the spa, tanning, psychotherapy, handyman, coaching, self-actualization, pet grooming, personal-shopping, kitchen-designing, dog-walking, SAT-essay tutoring, Search Engine Optimization consulting, skateboard training, party-planning, eBay-auctioning, credit-counseling, baby-sitting and similar personal services in which a huge number of Americans now occupy themselves and try to scratch a living.

An entrepreneurial Chinese person might as well try his hand at manufacturing. An entrepreneurial American might as well shoot himself in the head as try his hand at manufacturing. The thought of going into the business of manufacturing a product for sale, with all the nightmares of taxation and regulation that go with that in the United States in the year 2009, is not for the faint-hearted among the business-minded.

And that is why perfectly serviceable industrial parks near my home in New Jersey are rented out to ballet schools, medical offices, day care centers, basketball clinics, gymnastics facilities, skate parks, senior centers, art studios, martial arts gyms, fitness centers, churches, mosques, schools, and even government offices, but hardly at all to industry.

If this cannot be changed -- and if anything the anti-manufacturing tide is still at the flood stage -- then how can the US current account deficit be anything but a huge long-term structural problem for us?

The Household Initiative Plan is posted at Household Initiative Plan Blog

China's fiscal deficit -3% of GDP

What is the US up to now in the Obama budget, 8%? 10%

Big Economic News From China

We have CCTV4 (China Central TV Channel 4) in our house and at the moment Premier Wen Jiabao is delivering a major speech about economic stimulus. Here are a few of my notes.

The Chinese Communists are cutting corporate taxes, cutting capital gains taxes, cutting stock transfer taxes, promoting the motor industry and the housing market, promising to complete major recovery efforts for the Sichuan earthquake zone this year, and committing themselves to major infrastructure projects, agricultural and rural development, and much more. They are not giving up on their earlier forecast of 8% GDP growth for 2009.

Premier Wen's delivery is certain and confident. He is at pains to remind government officials that this is the people's money they are committing, and not "yi fen" (one penny) is to waste. The objective is to increase productivity in the Chinese economy and support employment in productive industry, and not promote make-work schemes or screwdriver assembly industry. Apart from this feint in the direction of industrial policy, the plan is highly market-oriented. It is detailed, fully-formed and ready to implement.

The Chinese Communist Party, which once said "Whatever you do never forget Class Struggle," has forgotten class struggle. There is apparently nothing in the Chinese plan for condoms, community organizers, or Maglev trains from senior politicians' districts to Disneyland.

You just have to be bullish on China. It is hard to argue that China will not emerge from the current financial crisis relatively stronger than before.

More later.

Why Worry About the Capital Gains Tax Rate?

GE's drop below $6 is symptomatic of the fact that the investor class of this country has huge capital losses to write off against gains for the next many years. Our losses will outlast this current anti-capital, anti-business government.

GE joins the -90% club.

Confiscation of Retirement Assets?

There is a lively discussion under way at the Legal Insurrection blog with a post "The Revolt of the Kulaks Has Begun." In the comments it is suggested that the administration will come after tax-advantaged savings assets of American retirement savers.

This is dynamite. It is hard to believe the administration would overreach this way, but congressional Democrats exposed them to the charge by taking advice from Teresa Ghilarducci, a critic of the retirement savings system at the New School. In effect she suggests confiscating private accounts and supplying guaranteed government accounts in their place.

Promoting my Household Initiative Plan or something like it is one way to make the administration tell us what it really has in mind for private retirement accounts.

I have been making free-market proposals to liberalize the current rules for the 46 million IRAs, SEPs, SIMPLE and Keogh retirement accounts and permit them to invest in real estate without the heavy restrictions which pertain to them now. Retirement-minded people who are in good shape, not behind on their bills, and not struggling, could benefit from this opportunity to use retirement savings to take advantage of low real estate prices in popular retirement areas.

If you believe that the money people have contributed to their retirement accounts belongs to them, then it should be their free choice to do with as they think best, to take advantage of such opportunities as they perceive, or to bail themselves out of the trouble they are in. And if the administration thinks differently, then it would have to knock down proposals like my HIP.

Let's speak more generally about the restrictions and penalties that apply to these accounts. They are making a terrible situation even worse by restricting liquidity. Many people are being severely penalized for tapping their retirement accounts in order to try to save their homes and credit scores. Others who are behind on their mortgages and other bills, thereby damaging their credit, are nevertheless unwilling to incur the penalties they would pay to access their money in these accounts to get current on their bills. This is just madness. For the duration of the crisis, let's free things up, and let people access their own money in these accounts to work themselves out of trouble without penalties.

The Household Initiative Plan is posted at Household Initiative Plan Blog

The Question of Capital Flight

In better times, I was a money manager. My first job was analyzing Asia-Pacific stocks for one of the world's largest pension funds, and my first boss was a very smart, savvy Hongkong Chinese person. I had coffee with her recently and she says she is certain that this country is already experiencing capital flight. Capital flight is one critical step beyond "capital strike," which is how Larry Kudlow on CNBC characterizes it. If true, this is a big problem for a country with a current account deficit such as ours.

The Household Initiative Plan is posted at Household Initiative Plan Blog

Household Initiative Plan to Rescue Real Estate

Here's a new plan for America's housing problem called the Household Initiative Plan. It’s called that because of all the plans out there it is the only one that asks little of the Treasury, Federal Reserve, or other government agencies besides non-interference in what millions of responsible householders could do for themselves on their own initiative.

My Household Initiative Plan will act to revive the real estate market by attacking three parts of the problem together. It reduces the unsold housing inventory and arrests the decline in home prices by helping liquidity re-form in the real estate market. It does this by making available an untapped source of capital that has previously been hard to access: the IRAs, SEPs, SIMPLE and Keogh plans of American retirement savers. According to the Investment Company Institute, there were over 46 million of these retirement accounts at the most recent survey in 2007, holding an incredible $4.5 trillion. No doubt some has gone in the financial market collapse, but it is still a great deal of money even by current jaded standards.

While it has been possible to buy real estate with IRA funds all along, the heavy restrictions and complicated regulations have kept people from doing so. This plan calls for suspending the restrictions and regulations on the use of IRAs for real estate purchase.

At present, if you buy property through your IRA, you do not own the property, the IRA does. You cannot pay the taxes and maintenance expenses of the property, the IRA has to have enough funds to cover them. You cannot make personal use of the property while the IRA owns it, it must be held only for investment until distribution upon your retirement. You cannot manage the property, the IRA trustee has to designate a manager. You cannot collect rents, they have to be paid to the IRA. You can apply monies from more than one IRA account to the purchase and expenses, but in effect you cannot buy the property with a mortgage simply because no lender is going to have IRA accounts as mortgagors.

At least for the duration of the economic crisis, why not liberalize and simplify the system, so that more people might take advantage of low real estate prices using IRA money that they have but would not think to use for this purpose? Let's allow people to take as much of their money as they want out of IRAs, SEPs, SIMPLE and Keogh plans, without taxes or penalties, for any real estate purchase – investment property or principal residence, first, second, or seventh home. They can then write contracts and take title as real persons in the regular way, without the complication of having a trustee execute these instruments on behalf of the IRA. Subject to market conditions and substantial down-payments, buyers should be able to get mortgages for regular-way purchases.

Let's permit buyers using IRA funds to pay property taxes and maintenance expenses and collect any rents of the property either personally if they prefer, or through the IRA if they can. On an investment property, if they receive net investment income personally, it can be taxable, if through the IRA, then not. That will provide an incentive for directing investment income back to the retirement accounts. If the property is used as the principal personal residence of the owners, the normal mortgage interest deduction can apply. If it is a vacation home, then perhaps disallow that, because there has already been a tax advantage conferred by the liberalized use of the IRA monies.

If a property paid for with IRA funds is sold before the owners' retirement, there are at least two sensible ways of handling the net proceeds. They can either go into another property without any capital gains tax but also without the further complication of a Section 1031 Exchange. Or the proceeds can return to the IRA, without fees, taxes, or penalties. Also – and this is important – if the account holders suspended IRA contributions after their property purchase, they should be permitted to catch up on their contributions and top up their accounts to the full extent that they could have funded their accounts under IRA rules.

The idea of my Household Initiative Plan is to make things easy for people to choose to use their IRA assets to buy real estate now. It removes the preference for financial assets over real assets and places both on a level playing field. Financial experts will object that retirement-minded investors should prefer stocks at today's low prices. However, real estate is also very cheap now, particularly in popular retirement regions of the southwest and southeast, and there is no way of knowing whether houses or stocks will treat people's money better in the coming years. As they always say, past performance is not an indicator of future results, but it is noteworthy that even after its sharp decline, the broad real estate asset class has performed better than the S&P500 over the last ten years.

The key point at this time of financial uncertainty is this: The people's money in IRA accounts belongs to them, and it should be their free choice to do with as they think best. If their choice can help the national prosperity as they prosper themselves, and at no additional public expense, what could be better for the general welfare?



D.H. Smith, Mt. Freedom NJ, 2/16/2009
Cross-posted at Household Initiative Plan Blog
Glad to get your feedback at "the.grayling at gmail dot com"

Notes on the HIP

1. The careful reading and valuable insights of Harriet Baldwin, Charles Burns, Timothy Gildner, Cameron Adams, Swee Hsien Tsung and Terry Zou are gratefully acknowledged.

2. Other plans to fix the housing market focus variously on one or more parts of the problem: they aim to shore up the capital of banks, re-constitute the mortgage markets with private or government investment, re-work loan terms to mitigate foreclosures and keep people in their houses, clear the market oversupply of houses, and stop the spiral of house price declines. No single plan acts upon all of parts of the problem. Most act upon more than just one part. No useful plan acts upon only one.

3. The following are the key points of the well-known real estate plans, no doubt digested to the point that their originators would not recognize them:

a) The Zingales Plan (Luigi Zingales, of the University of Chicago) -- A decline in an index of local property prices triggers a government-mandated reduction of principal balance on securitized mortgages; lenders thus crammed-down may recapture some of future price appreciation in underlying assets.

b) The Columbia Plan (Glenn Hubbard and Chris Mayer, Columbia Business School) -- Calls for nationalized institutions Fannie Mae and Freddie Mac to provide home loans to new and existing borrowers with positive equity on such terms as would be available were markets working normally e.g 4.75% for 30 year loans.

c) The Feldstein Plan (Martin Feldstein, Harvard) --Proposes “mortgage-replacement” loans from the treasury at low cost (e.g. 2%) for all mortgage holders, up to 20% of their outstanding mortgage debt, to reduce their cost of debt service. These loans are full recourse, in first place ahead of mortgage, and aim to reduce the incentive for owners to abandon their properties.

d) The Immigration Plan suggests allowing an increased flow of immigrants to take up the excess housing stock.

e) The National Association of Realtors Plan: Expand and extend the home purchase tax credit, increase conforming loan limits, use TARP funds for mortgage interest buy-downs, and keep banks out of Realtors’ traditional business.

f) The National Association of Home Builders Plan: Extend tax credits of 10% of purchase price up to $22k to all new home buyers, and use TARP funds to buy down interest on conforming mortgages.

g) The Fix Housing First Plan (Sen. Johnny Isakson, Republican of Georgia, et. al.) -- Extend tax credits as per the NAHB plan, applicable to 2008 income tax, and make them monetizable, so that buyers can apply them at closing.

h) The Stimulus Plan as signed on 2/17/09 -- Expanded a program of $8000 tax credit for first-time homebuyers, repayment not required.

4. Most of the well-known real estate plans have their good points, but the one thing none of them do is allow the American people a free choice to apply their own existing resources in the service of their own economic interests.

Some Reaction to the HIP

I ran the Household Initiative Plan by the strong free market advocates of the Ayn Rand "Atlas Shrugged" group on Linkedin, and got back strong opinions. One comment:

“The defect [of the HIP] is that it's just minor tinkering. Instead, let's repeal the community investment act, privatize or abolish the GSEs. Repeal the income tax, lay off all government employees . . . this plan is illogical since it seeks to artificially make real estate go back up again . . . "

Another:

"The defect [of the HIP] is that is a plan and a planned economy never works. You describe it as a plan to turn the housing market around. Around from what and in which direction? I don’t know if real estate has to come down [and] neither do you . . . the only way to know what should happen is to free the market and watch it work."

I answered as follows. First, there is no way that liberating 46 million accounts and trillions of dollars constitutes minor tinkering.

Second, I think my use of the word “plan” has caused more grief than the actual contents of the plan. Among strong free market believers it is a word that elicits negative reactions. I only chose the word plan in order to try to compete for attention among all the other plans that are out there -- Zingales, Hubbard/Mayer, Feldstein and all the rest. I could have called it a proposal, an idea, or following an ancient Fed official, a banana.

My plan, or banana if you object to the word plan, is non-interference, a level playing field, clearing away the regulatory debris, and letting the owners of capital decide how to apply their capital.

The "planned economy" is not part of my proposal. On the contrary the "planned economy" was introduced to this situation years ago when the current structures of IRAs, Keoghs, SEPs Simples and all the IRS apparatus that goes with them were created. By the way, it should be understood by one and all that this whole apparatus was a giant gift for investment companies, banks, financial planners and accountants.

Surely I am not the only one with money in IRAs, losing money in financial assets and thinking about the future, who might choose to buy a condo in Florida instead with the money if the restrictions were lifted. That would be my choice, freely made, well considered, possibly wrong, but I'm willing to take the risk on that if I am permitted and not ask for a bailout if I am wrong. If someone else chooses to stick with their Fidelity and Putnam funds, I would be the last to tell them they can't.

At least for now, the money in these accounts belongs to the people who own the accounts. (There are professors at the New School who are advising the administration to do something about that too.) Let the people make their own choices. I don't see how that can be objectionable.

Still More Reaction to the HIP

I got a valuable contribution from my best college friend. He writes:


Dave,

. . . First, the biggest problem is selling the idea. It sounds good, but who in the government is going to buy it? Democrats don't trust that people are smart enough to be able to handle their own retirement accounts - isn't that the purpose of Social Security? The cushion that an IRA, et. al., offers is still a piece that is supposedly handled by people that have some idea as to what they're doing - not Joe Bag O'Donuts next door. Republicans don't think that people with small investments are worth supporting in this measure, as they get their support from those money managers who are handling all the IRAs. You're going to take away their revenue stream.

Second, it seems that more people have problems with their existing mortgages. Emptying out their IRAs will have already occurred in some cases, in an attempt to stave off that foreclosure. Others will have to figure out how to draw out that IRA to buy fresh real estate while still being upside down on their existing mortgage. How do you handling buying a $300k home, with your $250k IRA when you already owe $250k on a house now valued at $200k? Insert whatever relevant numbers you want here, the problem is still the same.

Third, how do you convince people that investing in real estate is a good idea. [My city] ranks third among emptying cities. There's a glut of available real estate, and the prices continue to drop, but even those people with money are refusing to part with it - at least not for tickets that pricey. It's the same reason car sales have dropped. You can survive in a house with drafty windows and too small rooms, while you wait for the recovery. You can milk another 20 thousand miles out of that car, squirreling away the finally-relieved car payments, rather than upgrade, just to make sure that HP doesn't decide to downsize your department.

All that being said, I do think that your idea seems worthwhile. The problem has always been what the Dutch discovered hundreds of years ago - it's all just a bunch of tulips. Speculation leads to false value leads to soaring investment, finally to gossamer worth. When you discover all it ever was is a flower, then it all falls down on itself. Real estate has a quantifiable value. While it may not always be monetary, it is always concrete in its being. (Picture bad pun here.)

Hope that helps.



I replied as follows:


Hey there, I really appreciate you looking at it and giving me this well-considered feedback.

I'm a strong free market guy, so my best hope of sponsorship is not in either of the parties as you say, but in think tanks like Cato, Hudson, AEI. If they get behind something like it, the Republicans may pick it up in their role as opposition.

There is nothing for Republicans from Wall Street anymore, and no risk in attacking the franchise of the investment companies, banks and financial advisors.

You allude to a major problem that bothers me too: the fact that people are struggling when they have money that could help them, or are being subjected to penalties when they go into that money. I think it would be best to get rid of these penalties for the duration of the crisis. (Or forever.)

The candidates for buying condos in Florida and Phoenix are not the people who are upside down in their principal residence. They are the ones who could take $75k out of their accounts and finance $25-50k . . . in other words, buyers who would buy with a low loan-to-value ratio, if not a zero LTV.

I would be the last guy to try to convince anybody that they should do this or that with their money. Some people would make this choice freely if it were open to them. I sure would. That said, I believe the loss of confidence in financial assets will last for many years, while there is some baseline real-life demand for real estate. As you say, it is concrete and you can live in it.

If governments gets things wrong now and print money to paper over the cracks in the system, we will get to where you need bushel baskets of dollar bills to buy a Big Mac. The gold price is telling you there is real concern about this outcome. Real estate prices are indexed for inflation, but financial asset prices generally are not.

With Deepest Sympathy . . .

. . . for your lost fortune

Federal Open Mouth Policy is a Big Sell

The first time I realized that the Federal Open Mouth Policy is a Big Sell was over a year ago, when Fed Chief Ben Bernanke made some innocuous remarks about financial conditions that at that point did not yet rise to the level of panic. The stock market sold off hard.

Bear Stearns rescue -- short term relief, after which market sold off hard.

The statements that have followed every one of the Fed's and Treasury's Sunday evening interventions -- short term relief, after which market sold off hard.

Every one of these schemes to expand the type of security they'll take at the Fed window to include S&H green stamps, Pokemon cards, Indian wampum and pocket lint -- short term gain, after which, well, you know.

TARP, TALF . . . barf.

George W. Bush, Ben Bernanke, and Hank Paulson -- just the headline on CNBC that any of them would make any kind of a statement those last many months of 2008 unleashed a blizzard of sell orders. If the latter two had to go to Congress, same thing, only worse. It has been singularly unedifying to see the people who run the world questioned by the likes of Maxine Waters, Ron Paul, and Bernie Sanders.

The sands ran out of the glass on the hapless Bush administration, and everyone hoped for change. Just the good feeling and positive energy engendered by the new Obama administration would improve the economy in short order, or so I was told by business friends including some Wall Street people.

The Inauguration Address went over like a lead balloon. Big, big sell.

But there were high hopes for the Stimulus Bill . . . until that turned out to be a carnival of wasteful payoffs to favored constituencies, of which capital is emphatically not one. Sell.

The president's first press conference. Surely even his fans can't think this was a great performance. Apart from the oddly angry demeanor, the one takeaway is the he didn't want to steal the thunder of Treasury Secretary Timothy Geithner. Geithner, the indispensable man who had to be confirmed, despite his defects, because he is the career financial policy fixer who lives breathes eats and drinks financial and economic policy, and only he can prevent the ailing system of free market capitalism from falling about our feet. He will have a banking plan for us the next day. Can't steal his thunder.

The finger was on the sell button, but we held back on pressing it.

It turns out there's no thunder! Timothy Geithner may be a career financial and economic policy geek whose entire life has been preparation for the moment. He may have been Treasury Secretary in waiting for many months, during which time he presumably could have given some thought to our systemic issues and what he might like to do to address them. But on the day he had nothing. The indispensable man had no plan. There was some hand waving and some expressions of good intentions. What a disappointment. Big, big sell.

The bank chieftains went to Washington to get punched out by Congress. You knew what to do. It's become routine.

So yesterday we had the housing plan, and a speech by Ben Bernanke at the National Press Club. Bernanke sounded at ease, and very sensible. What do you know . . . these have actually been taken on board without another tsunami of selling. Maybe the capital interests of this country are exhausted, or have put as much into gold and Chinese stocks as they care to for now, or maybe they actually think that socializing the debts of the fiscally unsound is the way to move America forward.

Or maybe they will wait till later in the day. It's early yet.

While I wait, I'll express my hope that everyone in government would reconsider their open mouth policy for a while.

UPDATE: No mistake, they sold it hard in the afternoon. After the close, a few companies blew up, portending more of the same tomorrow.

MORE UPDATES: The selling continued all week, taking the indices down to 1997 levels. In other words, if you have been investing since 1997, you needn't have bothered.

NY Fashion Week . . . Not What It Once Was

Just as Wall Street is not merely a street but a designation for the entire far-flung financial world of which it is the center, so Seventh Avenue is not just an avenue but the symbol of the American fashion and retail industry. Wall Street and Seventh Avenue are New York's #1 and #2 major businesses, and they have both fallen on hard times.



A couple of years ago, when Bryant Park wanted to kick out Fashion Week, there was so much lamentation and gnashing of teeth from designers that IMG and Bryant Park had to extend the arrangement. Now, with the economy in the tank, many designers have decided there are better things to do with a few spare hundred thousand dollars than spend them on twenty-minute shows in the tents.

Who has opted not to show in the Bryant Park tents? Carmen Marc Valvo, J. Mendel, Vera Wang, Sass & Bide, Betsey Johnson . . .

This may be all for the best. The excess of NYFW, like the excesses of the industry it showcases, had reached an extreme point. There was too much on the schedule, too much traffic, too many celebrities, too many paparazzi. It was becoming a burden on the people to whom it is supposed to targeted, buyers and editors. Some of them will be glad to get back to viewing collections from committed designers under more suitable conditions.

In the mean time that means less of this:



and this:



Sigh.

No Bailouts for Commercial Real Estate

I heard this news from Diana Olick on CNBC and read the Reuters article about it on forexpros.com -- MIT's Center for Real Estate says commercial real estate prices fell 10% in the fourth quarter of 2008, according to an index they track of sales by institutional investors. But we know real estate is crummy without benefit of indices.

And we know why. Real estate people are always bullish. They never ask whether the office park or regional mall they are building on marginal sites miles from anywhere or right next to existing space that is 80% let is a good idea. If they have money to build, they build. When money was free, developers built mindlessly and sprawl became more than ever a blot on the American landscape, with results you can see. Now financial companies that are retrenching don't need office space, and Circuit City and Linens & Things are two of the chains whose space is going begging.

So real estate people are going begging for their piece of government pork.

This must be resisted.

We think rules for bail-outs have to limit them to industries the failure of which will cause systemic failure for the economy overall, or that employ huge numbers.

Commercial real estate industry does not qualify on either count. If commercial real estate employs half a million people directly, that would be a lot. And if the worst that happens is that the commercial mortgages of loser developers with marginal properties go bad, then that is going to be among the least of the hits the economy takes in the course of this financial crisis. It will not be Armageddon. Lenders will take a haircut; get in line with everyone else. Some viable properties will be taken over and operated by lenders, who are insitutional investors with real estate that they own. Some will be sold on to new investors at low prices that give them an opportunity to profit.

Some may be converted to alternative use, in the same way that a lot of surplus industrial space in Newark and Paterson is used for churches and mosques.

Some, let's face it, can just be abandoned, monuments to greed and stupidity in a bygone era of American economic history.

Set Rules for Bailouts Now!

If we are giving up free market purism for the duration of the crisis maybe we could at least set rules for bail-outs. These are absolutely necessary. Markets abhor uncertainty, and the ad hocery we have had in the last several months pumps up the uncertainty. It is part of what is killing us -- this one gets rescued on easy terms, this one survives but its shareholders are snuffed, that one is allowed to go under. The sane investor looks at this and says, "I'm out of here."

So Bail-outs should only be considered if:

(1) industry impairment is likely to cause a systemic failure for the economy as a whole.

or

(2) the employment impact of the industry's collapse are unacceptably high.

The financial industry qualifies under (1) -- without a financial system, ATMs have no money, checks don't clear, and we are in the stone age.

The auto industry qualifies under (2) -- not only scores of thousands of Detroit Three employees are wiped out, but also millions more working for the transplants, the dealers, the suppliers who make thousands of the parts that go into vehicles, and in all kinds of jobs in towns across the country where car and parts factories operate.

The snowboard industry does not qualify.

The commercial real estate industry does not qualify.

Larry Flynt and the porn industry do not qualify. The Detroit Lions do not qualify. The City of Philadelphia does not qualify.

Kung Pao Chinese Stocks Ding

I worked in China from 1986-88. People I trained were later instrumental in the establishment of Chinese securities markets. Some of what I did, as theoretical as it seemed then, helped lay a basis for their subsequent development. Before there were Chinese stocks, I owned Chinese bonds. When the first issue of Chinese shares was offered to foreign investors, China Southern Glass in 1991, my company bought in.

I have been involved in modern China’s financial system since before its creation, and stayed involved continuously. So let’s declare biases honestly and note that I am not impartial. I am called a China hand by my Chinese friends, and dismissed as an apologist by . . . others. I’m not a dreamy China head (though I did go through that dreamy China head phase for about three weeks in 1986). I am sharply critical of what I see as deficiencies of their system.

I have been fortunate to make money in Chinese financial markets. Sometimes it has been a simple matter of doing the diametric opposite of whatever the top Wall Street firms advise in their China strategy. But when they have gotten it right and their clients have done well, as during the latest Chinese bull markets, it has been a wonderful thing to see. I’m glad so many people have good success, because in the 90s it sometimes seemed that everyone who ever invested in China lost money and ended up sour on the experience.

Certainly there have been problems that have bedeviled the Chinese markets all these years.

As a nominally communist country, China struggled at first with the very concept of financial markets. When they began to be introduced in the late 80s, they were described as “experimental.” The designation endured for a long time. It is not much of an endorsement, is it? “Welcome Capitalist Roaders to Invest in Our Experimental Markets that We Might Shut Down if We Don’t Like the Way it Goes.”

If markets were purely experimental, the social scientists running the experiment figured they might as well do lots of trials. To that end, the Chinese markets have been finely sliced and diced like Kung Pao Chicken Ding. The authorities set up a Shanghai A share market for local people and a Shanghai B share market for foreigners. Then they replicated the pair in Shenzhen – that’s four venues in China for the trading of Chinese shares. Two classes of Chinese shares, the H shares and the Red Chips, traded in Hong Kong. There were N shares, for which the initial listing was on the NYSE – China Brilliance (CBA), Shandong Huaneng (SH), and Huaneng International (HNP). Later they lost control of the process, and various stray Chinese companies did IPOs in Singapore, Tokyo, Sydney, London, and I lose track of where all else. There has been a major boom in backdoor listings of Chinese companies on junior stock exchanges around the world.

And that’s a big problem – no one can keep track. If I want Italian shares, I pretty much know where to look. If I want Chinese shares, where do I start?

(I met a Chinese market regulator, an executive of the Chinese Securities Regulatory commission, in May 2007 during the raging bull market. He was in a self-congratulatory mood, and invited me to offer congratulations too. I demurred, and instead took the opportunity to point out that their sclerotic regulatory process had prevented too many decent Chinese issuers from doing IPOs in the Chinese markets where home-team investors would most welcome them, sending them instead to go for Rube-Goldberg RTO and SPAC listings on junior stock exchanges abroad where they would struggle to gain a following or a fair valuation.)

The B share markets in particular became bogged down in a morass of low liquidity and poor quality. There were a few corporate governance issues. Many foreign institutions believed that the Chinese securities market experiment was designed to let the Chinese government move garbage off its books into foreign portfolios. I have had big investors tell me with a straight face that they assumed the Chinese meant to hose them.

Some of the international stock offerings have had that effect, but I don’t believe it was ever intentional or malicious. The Chinese thought they would impress us by making their biggest enterprises available to us – their giant steelworks, shipyards, and petrochemical complexes. It turns out that bigger is not better. The social burdens on these cities-within-factory were hard to lift.

It can be quantitatively proven that the closer a share gets to the domestic Chinese investor the better the average quality, if such a concept can be distilled from growth rates and balance sheet items. H shares that do not also list A shares are worse than H shares that do, and A shares that do not issue any class of share to foreigners are of the best quality. I have done the work on this. I’ll report the research in this space shortly.

More than one fund manager has rejected my research finding, without offering to rework the numbers. But the alternative is to believe that they have sold us better stuff than they sold themselves. Does that make sense to you? No, it is intuitively hard to accept. It could not be, because whole attractive parts of the Chinese economy, including retail/wholesale trade and part of the telecom and media space, have been off limits to foreign investment in the past or even now. That alone would raise the quality of the average domestic Chinese share, and it has nothing to do with the Chinese government going out of its way to dump its garbage on foreigners.

If you run an international mutual fund, then the Chinese markets are just one part of your opportunity set. Given that they are sliced and diced beyond comprehension and riddled with pockets of low liquidity and poor quality, you could always make the case that it’s more bother than it’s worth.

But if you are a domestic Chinese saver, then Chinese A shares are a huge part of your opportunity set. As a Chinese investor, what alternatives do you have? Interest rates on bank deposits have been reduced from 24% to very, very small, bonds are not popular, and real estate is relatively illiquid. And some of the stocks in the opportunity set are really good after all.

For most of the time, this fact has eluded detection by the so-called experts of Wall Street, who have not generally examined domestic Chinese shares as long as they remained off-limits to their international clientele. But one feature of this latest bull market has been that some foreign investors are gaining access to the domestic Chinese opportunity set, while some Chinese investors are venturing abroad. That means Chinese investors, at least the biggest exemplars of the breed, are now clients of Wall Street, and Wall Street had to open its mind and its eyes and assign some analysts to take a look at the A shares.

Formerly, when the A share markets have gone crazy on the upside every once in a while, the foreign brokers who ostensibly “cover” Chinese markets have had nothing to say. These periodic bull moves have been totally incomprehensible to them. Don’t they just prove how stupid and gullible the Chinese individual investor is? Well, no . . . there has been another obvious conclusion, but these foreigners have not always had enough information to arrive at it. That conclusion is: some domestic shares are good, and there is a time and place to buy them, if you can.

China is complicated. More than once I have had to argue with analysts over points of fact – not opinion, fact -- arguments of the Kafkaesque “Black is white” variety. Well, the facts are sometimes obscure. So who does Wall Street send to deal with this most confusing and delicate market? Often its youngest, least experienced, least capable analysts, of course! Since China is relatively speaking a small part of the global opportunity set, why send a top gun analyst? You need that guy back in Hongkong to write the thirtieth report this week on HSBC.

So what is changing these problems? The passage of time. The action of price, making China a bigger piece of global market capitalization, bringing in more investors in the good times and lately attracting more critical scrutiny in the bad. How about regulation? The financial markets’ place in modern China is not the subject of an experiment anymore. They are clearly here to stay. With this belated acceptance the worst of the slicing and dicing should be undone. Short of allowing A and B share markets to merge, the regulators can easily allow domestic investors to gain access to B and H shares and expand foreigners’ access to A shares. My sense is that China emerges from the current global financial crisis with its relative position enhanced compared to other economic players. It has national savings, it has surpluses, it can adjust policy at short notice. Sclerosis now is a bigger problem for the developed west.

I still hope for root and branch restructuring of the regulatory system that allows these changes and many others to come more quickly. But my CSRC official as well as many other Chinese advise me not to hold my breath. Even though it is a relatively new bureaucracy, it is still a bureaucracy, and an entrenched, calcified one at that.

Trade Restrictions? Won't Help You

The administration, the managed-trade segment of the policy establishment, and the labor unions should consider the experience of the auto industry. General Motors, Ford and Chrysler strong-armed Japan’s auto industry to accept voluntary export restraints (VERs) in the mid-80s. The results of the VERs are named Lexus, Acura, and Infiniti. The Japanese motor industry drove up-market and developed an unassailable reputation for superior quality, not only in their luxury marques but across their full lines. Meanwhile the market share of U.S. motor nameplates dropped from 74% in 1985 to barely 60% in 2004 in spite of the VERs. Now it is worse, and one or more of Detroit’s former big three may not survive.

VERs made negligible difference to Detroit's rate of market share erosion. Take a look market share data from 1970 through 2004 (Sources - US Dept. of Commerce, Ward’s Automotive Yearbook, D H Smith):

Beat up trade partners over exchange rates? No!

American trading experience with Japan shows there’s much more to trade balances than just the exchange rate, and beating up trading partners over exchange rates is useless. In 1985, the Japanese yen traded at 250 to the dollar, and Japan ran a $46 billion surplus with America. In spite of billions wasted by the Bank of Japan in costly and ineffectual currency market intervention between 1985 and 2005, the value of the yen more than doubled to 109 per dollar. During the same two decades, Japanese industry suffered barriers against its motorcycles, semiconductors, and steel in the U.S. market, accepted voluntary export restraints on cars, and localized production in America through its investments of over $100 billion. Neither the huge currency appreciation, nor the restraints on trade, nor the transplanting of Japanese industry stateside prevented Japan’s trade surplus with the U.S. from rising to $75 billion by 2004.




(Source: US Dept. of Commerce, DH Smith)

Consider America’s trade deficit with China – it certainly is growing, having quadrupled between 1996 and 2004. Note that this was a period during which the dollar/renminbi exchange rate was stable to within 1.1%. During the exact same period, the Mexican peso declined by about one-third against the dollar. If the exchange rate were the principal factor in relative competitiveness, we might expect Mexico’s export performance in the United States market to be better than China’s. In fact, Mexico did increase its surplus by a factor of three — a strong performance, but not as strong as China’s.

Government Bailout for Snowboarding!

I had been going to write that slogan on my truck in grease pencil as a joke. Tonight, government aid to the snow and boardsports industry is apparently a reality, all joking aside. See $70M DOLLARS ALLOCATED BY U.S. DEPARTMENT OF EDUCATION FOR PRODUCT PURCHASES THAT GET YOUTH ACTIVE; SNOW SPORTS PRODUCTS QUALIFY at leading boardsports industry website Transworld Business.

Dude, where's my Senator, man?

Banking for Smart People who aren't Bankers

Those "For Dummies" books and "Complete Idiots Guides" always rubbed me the wrong way. Who buys this stuff? "Hey, I'm a complete idiot, that's for me!" Uh-uh. You're smart and so am I. So let's talk about banking. I'd like you to understand, in simple terms, what's going on when they build a pyre of French antique commodes where Nassau runs into Broad at the corner of Wall Street and start burning bankers alive.

For the show trials they are a'comin. There is a lot of outrage that Uncle Sugar has provided bank capital and weeks later those damned banks are still not lending it. Well, let's examine that.

Basic banking is just a little more complicated than regular industrial enterprises. In a regular industrial enterprise the raw material is, say, habanero peppers and the end product after some processing is hot sauce. For a basic bank, the raw material is money and the end product, after no real processing, is also money.

So an investor -- you remember investors, right? they used to have money to invest -- an investor or investor group gets a bank charter, puts capital in to capitalize their bank, and opens for business. The bank charter allows the bank to take deposits and make loans. The bank loans its deposits. It does not loan its capital. Its capital sits in the vault.

That sets up popular misconception number 1: that having new capital from Uncle Sugar, banks should be lending it. No they shouldn't.

Banking regulations permit banks to lend out up to twelve times their capital.

What about deposits? Simple, plain vanilla banking is taking in deposits, and making loans. The bank pays as little interest as it can on deposits, and charges as much interest as it can on loans (plus points, fees, service charges, and whatever else it can get away with). The difference between interest and fees charged on loans and interest paid on deposits is profit.

The limit on the bank's lending is capital, not loans. If the bank wants to grow, that is to lend more, it needs more capital. A bank that lends less than its capital would permit is considered a conservative bank -- it has a capital surplus backstopping and its lending activities.

As for loans and deposits, the bank can lend out less than it takes in, the same amount as it takes in, or more than it takes in. If it lends out less to regular borrowers than it takes in from depositors, that excess doesn't sit in the vault. The bank buys bonds -- corporate bonds, government bonds, mortgage bonds, whatever. (A bond is just a loan in the form of a security.) If the bank wants to lend out more than it actually has from depositors, it can bid for deposits by raising the interest it pays, it may be able to borrow from the Federal Reserve, or it can borrow from other banks in a huge inter-bank market. Have you been hearing anxious talk about LIBOR, and not knowing what that is? LIBOR is the London Inter-Bank Offer Rate, a rate at which banks commonly lend to each other on a short-term basis.

Banking is a great business . . . you make a margin between what you give and what you receive. It is not a large margin as a percent of the loans and deposits, but because those are a multiple of capital, the returns on capital are large. Or they should be. But then there are losses.

Losses. Ugh. Banks expect that a small percentage of the loans they make to go bad. Some borrowers just get in trouble, some are crooks who never intended to pay back. In that case the bank forecloses on the house or repos the car, and takes what it can recover.

What the bank never expected was that so many of the mortgage bonds would go bad. Those bonds were supposed to be safe. Isn't that why Moody's and S&P put their great triple-A ratings on them?

So the bank looks at its loans and its bonds, and instead of a profitable portfolio it has bad loans, loans in collection, real estate on its own books losing value while no one maintains it and lawyers fight over it, and triple-A rated mortgage bonds in default. These losses are reported on the Profit and Loss Statement, and also charged against capital on the Balance Sheet.

Capital. You remember capital. Capital limits the loans that the bank can make. If the bank loses capital, it loses lending capacity. It can lend less to borrowers. Loan limits get cut. Lines get called, or not renewed.

When you multiply this effect by ten thousand banks across the national economy, you get a liquidity crunch and the economy judders to crawl almost immediately. You probably remember when it happened this time around: it was right around the day when Lehman Brothers went belly-up and we all realized how bad things were. We held our wallets closer, and stopped opening them for discretionary purchases. The economic motor slowed as if its power cord were yanked from the wall socket.

Banks can lend less, but with individuals and businesses cleaving tightly to their wallets, borrowers want to borrow even less. This answers popular misconception number 2: with new capital from Uncle Sugar, banks' capital is not constraining lending and liquidity should immediately re-form in loan markets. No it shouldn't. At this point the problem is not so much supply of loans. It is demand for loans.

With the economy slow and uncertain, everyone pulls back. If unemployment is rising, jobs are scarce, pay raises are hard to come by (and bonuses are made illegal by Acts of Congress), it is absolutely rational behavior for consumers to cut back on their use of credit. If business opportunities are thin on the ground and companies lack confidence, it is absolutely rational for business owners to hunker down, defer capital projects and try to cut back their demand for working capital.

There are some complications that I haven't got into here. I have tipped my hat to the ratings agencies, who have screwed up big time. I believe the standards-setting organizations for accounting and auditing have made this situation worse than it it needs to be by forcing banks to recognize losses too early on loans that can be worked out, crushing their capital. I have not talked about the Federal Reserve, the operations of which influence the price and availability of money.

What is the cure? I just alluded to part of the cure, it is that which cures all ills -- time. Given time, banks can work out of losses on many bad assets. Given time, individuals and business owners will regain confidence and begin to demand loans again.

Next, price. The Federal Reserve has hooked up the economy the a veritable firehose of liquidity and reduced the price to about zero. That lets banks cut their lending rates to levels that bring back prospective borrowers and yet still allows them to make a great margin.

Also, money. Banks are being recapitalized as the leaders of the industry and government figure out how to deal with the upsurge in bad loans. It is not only government money coming in to recapitalize banks, but also private capital that banks call upon from those that still have it. This also takes time (see above).

Hang in there. It gets better.

Following a thread about Quiksilver at "Transworld Business"

I'm following this thread about Quiksilver at "Transworld Business".

Quiksilver (ZQK) is the market leader in action sports gear, practically the originator of the category, owner of the Quiksilver, Roxy, and DC Shoe brands. It was formerly in ski through Rossignol and golf through Cleveland Golf. Those were bad outings of which the less said the better; however, they are part of the reason Quiksilver finds itself in some financial distress, with a stock price bouncing between $1 and $2 and a debt load that is a multiple of the common equity value.

I'm involved in the action sports gear industry peripherally, in apparel more generally, and I really believe Quik is in the right market space. Action sports gear has wiped out urban hip-hop as the uniform of choice for kids who don't want to wear only Aero, Eagle, and Abercrombie. As an analyst, I have worked on all the players in the category, the bigs (Nike and VF Corp) the less bigs such as Volcom, and the former big ZQK.

I observe on that message board that posters who say they work at Quik HQ in Huntington Beach say they are (rightly) proud of the company's heritage but fearful of the current direction and the future. And they are getting heavy pushback from people who are hoping that things are better than they say.

In the course of my analytical work there have been many examples of the objective facts showing that a company is in trouble, maybe a goner, and people bitterly fighting me on it. A lot of them do not ever want to give weight to negative information. Many investors live in hope, and if you tell them anything that is not hopeful, they accuse you of a sinister plot to panic them out of their position so you you can scoop it up on the cheap and make the fortune that is rightly theirs.

Moreover, many American individual investors don't get the whole concept of equity dilution at all. That is to say, they can't get their heads around the idea that, for example, Citigroup could survive but the common shareholders get wiped out. (On the other hand, Asian investors understand dilution very well. Abusive rights issues and insider self-dealing have been problems in Asian markets.)

I do not know whether DC Shoe is going to be sold at a valuation that alleviates Quiksilver's debt problem or not. I do not know whether there will be a bid for the whole company that gives common shareholders any take-over premium above the current share price.

No one knows these things.

That's why ZQK shares are valued where they are.

But there are a few things I think I know.

One is that when people who work for a company tell you it's not going well, it's probably not a sinister plot to scoop up your shares on the cheap, and you would have rocks in your head to dismiss what they say right out of hand.

Another is that time and gravity are on the side of Nike, VF, or others who might want to acquire these brands or the whole company. Unless Quik sells DC for a high price, or otherwise find a way to get its debt down, or gets saved by a miracle recovery in credit markets, or persuades Congress that the Surf & Skate industry is a vital national asset that requires a rescue, it has an intractable problem, valuable brands or no.

Another is that the Quiksilver, Roxy, and DC brands are indeed valuable, but periods of financial distress are not the best for capitalizing on these values. I'm concerned that the distress and the pressure will tend to wear the company down and put it in a harder negotiating position.

Will Exxon Apologize? Who will be first to denounce XOM?

AP Headline: "Exxon Mobil shatters US record for annual profit". Published Friday January 30, 8:32 am ET. See it here.

"Where is the outrage?"

Welcome " Water Investor", who wants to waterboard Thain

Thanks for swinging by and leaving comments.

The Water Investor wants to waterboard John Thain.

The aesthetics of John Thain redecorating his quarters and angling for a bonus at a time of economic distress are questionable, but the ethics are not if this was a matter of private contracts, mutual agreement, no coercion, and no deception.

And we are not yet at the point of waterboarding people for aesthetic reasons.

If you take their money you will take their direction

President Obama took another shot at Wall Street today. "I saw an article today that indicated Wall Street bankers had given themselves $20 billion worth of bonuses. That is the height of irresponsibility. It is shameful."

We are uneasy about the anti-business tone being taken by the new administration and Congress. There's a ready market for this kind of populism, but after the bankers are burned alive on pyres of corporate jets and commodes, the economy catches no rise thereby.

American businesspeople are facing a world in which all their contracts and undertakings are examined line-by-line by government officials, second-guessed by PIRGs, NGOS, and the media (which is doing such a bang-up job managing its own affairs after all), and subjected to subpoena or prosecution by career-making politicians.

To advance themselves, they will not scruple to destroy you.

If you take their money, you will have to take their direction. Simple as that.

Dangerous New Phase of Financial Crisis (5/6)

Tuesday the stock market motored higher on the hope (HOPE) of a good bank/bad bank solution to the bad debts of the US financial system and a groundswell of sentiment that neither Europe nor America would go down the road of widespread financial company nationalization. But today (Thursday) we have had the opposite . . . influential financial deepthinker Nassim Nicholas Taleb calling for nationalization, realization that the good bank/bad bank solution will take a long time if indeed it ever happens, and Meredith Whitney's prediction that it would do no good even if it could be worked out. There is also growing dissatisfaction with the emerging government stimulus package, which is shaping up to be short on objectively stimulative taxation and spending features and long on giveaways to favorite constituencies of the Democratic party. With no brakes on their power for the first time in almost thirty years, the Democrats have a long list of people to thank with favors.

In between Tuesday's up market and Thursday's down we have had the results of the Federal Reserve Board's meeting. It seems to me their non-political management is far more important at this time than the political machinations around the change of government. And it is all good, unambiguously so. The Fed indicates that it recognizes the gravity of the financial situation and stands ready to buy any security and backstop any systemically important actor as long as we are in this. Its balance sheet is wholly at the call of the nation. That means a firehose of liquidity, which we are already seeing in monetary aggregates. This has never failed before, and won't fail this time, but the lag with which it operates is unpredicatable. Hang in there.

Economists Gone Wild!

Or, "Dangerous New Phase of Financial Crisis (5)". It didn't take long at all for the anti-China recriminations over the financial crisis that I discussed in my last post to jump from the WaPo to other media.

University of Maryland professor Peter Morici just went berserk on Bloomberg TV tonight. Shouting down Hongkong-based anchorwoman Catherine Yang, he screamed that China is the most protectionist country in the history of the world, and predicted riots in the streets of Shanghai.

He is a regular guest, and always animated, but losing it and getting personal with the anchor has to be a bit unusual.

Dangerous New Phase of Financial Crisis (4)

From the official designation of China as a currency manipulator, it is but a short step to actually blaming China for the whole financial crisis, as the Washington Post does in an article entitled "An OPEC Lesson for China".

When I heard about the article, I thought it had to be satirical. I thought you would have to be joking to assert that it was the Chinese who did this to us, forcing cheap money on American financial institutions to on-lend to subprime borrowers who couldn't pay back. But apparently they're serious. Expect to hear more of this, as well as outraged push-back from the Chinese whose narrative is that it is American dissipation and profligacy that is responsible for the economic mess of the entire world.

Dangerous New Phase of Financial Crisis (3)

Let me just send you to the account in The Independent newspaper of the UK: "America Goes Green" The title tells you a lot, but there is much more. As the article says, "Tilting at Mr Bush has become a hallmark of the Obama presidency," and today's windmill is the Bush admininstration's approach to environmental regulation of the motor industry, CAFE standards and so on.

The light touch is going away. At a time when the US auto industry is fighting for survival, this administration wants to lay whole new environmental regulatory and compliance burdens on them. I really don't believe they can bear up.

Dangerous New Phase of Financial Crisis (2)

In the inaugural address and on every subsequent working day of the new administration, the president has made remarks related to the economy and the financial situation. I already commented on the political theater aspects of the inaugural address; these were fully understandable, and even necessary.

But in the following days, the president has kept up the same line of discourse -- hammer the previous administration, talk down the economy. This is not uniting the public or restoring confidence, but rather the opposite. If there is very much more of this kind of talk, it will reinforce the lack of confidence in the economy and deepen the recession.

On Friday the president lowered himself to comment disparagingly on the office renovations of John Thain, late of Merrill Lynch; hours later he told congressional Republicans, "You can't just listen to Rush Limbaugh and get things done."

Both Thain and Limbaugh are private citizens engaged in legitimate business, just like the other bankers and business-people that the administration appears to want to use regularly as foils in their play.

I expected this to be a less business-friendly administration, but I admit I did not expect it to be outright anti-business, or that there would be personal attacks on individual private citizens engaged in legitimate business. There is just something not right about an American president going in for this stuff . . . is "unseemly" the word for it?

Dangerous New Phase of Financial Crisis (1)

For no particularly good reason, Tim Geithner on Friday in his confirmation hearing set off after China, declaring it a currency manipulator in decidedly undiplomatic language.

China is a major trading partner and a principal creditor of the United States. At a time of financial stress maybe a little more delicacy is called for in this key relationship. Or if not, then batten down for capital flight and a dollar crisis.

FT reports China hits back in kind, says of Geithner: "This is a sign of his immaturity and his inability to do such an important job."

Not a good start. Not change I can believe in.

Just sayin'.

Note the political theater aspect of some of the economic discourse

In this trading week, the DJIA has been down 300+, up 200+, and as I write this note, down another 200+.

A significant part of Tuesday's drop occurred during and after Barack Obama's inaugural address. Whether you were wowed by the address or not, you have to admit there was a lot less gaseous uplift than we have come to expect from his speeches, and a bracing amount of sober description of the economic problems we now face.

There was also considerable weakness during our up 200+ Wednesday, as Treasury Secretary nominee Tim Geithner was telling the Senate Finance Committee confirmation how gravely serious these problems are.

Unquestionably, there are real difficulties now, but it is necessary to bear one thing firmly in mind when the new president and his administration talk down the US economy. This is necessary and effective political theater. Now that they have taken ownership of the situation:

1) The new administration has to blame everything on the old administration.
2) They have to accentuate the old administration's responsiblity for all problems, so that they can take full credit for their remediation.
3) They have to set low expectations that they can expect to exceed.
4) And they have to enhance the crisis atmosphere, because that is the environment most receptive to their proposals for radical action.

I recall dark days during the Asian Financial Crisis, one of the several hundred-year floods I have experienced in an 18-year financial career. It was Christmas week, 1997. In Korea, Kim Dae-Jung won the election to succeed Kim Young-Sam, and the next day he made his inaugural speech. In so many words, this what he said: "Wow. Holy $h|t. Things are way more screwed up than even we thought. I don't know whether we are going to go bust tomorrow or the day after tomorrow."

The KOSPI did another belly-flop off the 10-meter board. But recognizing the speech as just great political theater rather than pure reasoned analysis, I thought that market break was buyable. And that buy turned out very well indeed.

If the theatrical elements follow the same script, this market break may also turn out very well, or so I may, ahem, hope.

The administration has a fine line to walk, however. They want to pursue the script only far enough to meet their political objectives, but not so far that everyone takes an even greater fright than they already have, killing confidence and tipping the economy into a depression from which it can't be pulled out.