Sunday, February 7, 2010
Pearls of Wisdom...?
Thinking back on President Clinton and President Bush sitting together as friends to discuss lessons learned in life, there are two observations that stick in my mind. First, President Clinton said that, as he aged, it becomes increasingly important to talk with others long enough to find something they agree about. Of course, it is easier to renew a discussion if the last one ended pleasantly. Second, President Bush said the only way he could save the American financial system and prevent a depression was to “swallow my principles”. i.e., minimize Federal involvement in the economy. I could see that caused him a good deal of anguish. Clearly, he did the right thing . . . but is it ever right to expect a person to swallow their principles? Or, do we have the right to expect others to swallow their principles for the good of everybody else?
Saturday, February 6, 2010
Chest Pains...?
Some analysts worry about a double-dip recession. While I am not worried about that, I do worry the economy will suffer a “heart attack”, which usually comes from the world of finance. For the last 10 days, the world markets have worried about sovereign debt. This is definitely a chest pain and should not be ignored. The problem started with the PIGS (Portugal, Italy, Greece, and Spain) and should be contained within Europe. However, we remember the “Asian Contagion” a decade ago, when a regional problem spread throughout the world. That could definitely happen again, starting in Europe.
But, there is a difference. Asian had no European Union, to backstop individual countries. This 11-year-old Union of 16 nations cannot allow one of their own to default on its debt. So, when do chest pains stop and a heart attack begins? If the European Union does not help their sick members, I will be selling stocks. It is not imminent as Greece has two bond issues this month. If they sell easily, there may be little for the EU to do. If not, it will be time for the Union to step up to the plate. If they don’t, there goes the Union, and there goes the Euro! They have no choice.
Saying the financial sector is unhealthy is like saying your heart is bad. As Bob Doll, who is Chief Investment Officer of massive BlackRock, said yesterday “this is not the last credit problem we’ll hear about”. He’s right . . . unfortunately!
But, there is a difference. Asian had no European Union, to backstop individual countries. This 11-year-old Union of 16 nations cannot allow one of their own to default on its debt. So, when do chest pains stop and a heart attack begins? If the European Union does not help their sick members, I will be selling stocks. It is not imminent as Greece has two bond issues this month. If they sell easily, there may be little for the EU to do. If not, it will be time for the Union to step up to the plate. If they don’t, there goes the Union, and there goes the Euro! They have no choice.
Saying the financial sector is unhealthy is like saying your heart is bad. As Bob Doll, who is Chief Investment Officer of massive BlackRock, said yesterday “this is not the last credit problem we’ll hear about”. He’s right . . . unfortunately!
Friday, February 5, 2010
Remenbering Civility
I try to use this blog to discuss economic events and changes in the investment climate, hopefully in an understandable way, preferably with a touch of whimsy. I assiduously avoid talking of personalities, with the recent discussion of Bernanke being an exception. But, I cannot resist this opportunity.
Long time readers know my greatest fear is that America is no longer governable, that our unique brand of democracy has become obsolete. The D’s and the R’s of DC have so polluted the “Well of State” that we are no longer governable . . . by anybody! Today, I was fortunate to listen to President Bill Clinton AND President George W. Bush sit on the stage together and talk. That’s all, they just talked like two old friends.
During the terrible tsunami a few years ago, President Bush (41) and President Clinton became good friends. (Clinton even slept on the floor one night, so the older Bush could use the one available cot.) That friendship has continued to grow over the years. Now, President Bush (43) and President Clinton are working together on relief for Haiti, and they have also become friends. Am I more surprised or shocked? When President Bush told his mother, Barbara, he was on his way to appear with President Clinton, she instructed him to “say hi to your step-brother”.
Do you hear the theme song from Twilight Zone playing?
Cats and dogs can play together, like it used to be in Washington when elected officials were civil to each other, before gerrymandered districts insured the election of extremists from both parties, before elections required officials to return home every weekend to raise funds instead of networking with fellow legislators of both parties, and before each party had their own cable channel.
Clinton was not surprising. His responses were thoughtful, sensitive, nuanced, but ponderous. (However, he did look much older and had an alarming amount of age spots on his hands.) Bush was still “preachy” in his responses but absolutely stole the show with some great one-liners. For example, when asked how he would have prepared differently if he had known he would someday be President, he replied that he “would have been much better-behaved in college”! Where was this guy during his eight years in the White House?
Anyway, I’ll talk about their policy differences another time. For now, it is simply uplifting to see politicians being decent and civil to each other. Of course, neither one lives in Washington any longer . . .
Long time readers know my greatest fear is that America is no longer governable, that our unique brand of democracy has become obsolete. The D’s and the R’s of DC have so polluted the “Well of State” that we are no longer governable . . . by anybody! Today, I was fortunate to listen to President Bill Clinton AND President George W. Bush sit on the stage together and talk. That’s all, they just talked like two old friends.
During the terrible tsunami a few years ago, President Bush (41) and President Clinton became good friends. (Clinton even slept on the floor one night, so the older Bush could use the one available cot.) That friendship has continued to grow over the years. Now, President Bush (43) and President Clinton are working together on relief for Haiti, and they have also become friends. Am I more surprised or shocked? When President Bush told his mother, Barbara, he was on his way to appear with President Clinton, she instructed him to “say hi to your step-brother”.
Do you hear the theme song from Twilight Zone playing?
Cats and dogs can play together, like it used to be in Washington when elected officials were civil to each other, before gerrymandered districts insured the election of extremists from both parties, before elections required officials to return home every weekend to raise funds instead of networking with fellow legislators of both parties, and before each party had their own cable channel.
Clinton was not surprising. His responses were thoughtful, sensitive, nuanced, but ponderous. (However, he did look much older and had an alarming amount of age spots on his hands.) Bush was still “preachy” in his responses but absolutely stole the show with some great one-liners. For example, when asked how he would have prepared differently if he had known he would someday be President, he replied that he “would have been much better-behaved in college”! Where was this guy during his eight years in the White House?
Anyway, I’ll talk about their policy differences another time. For now, it is simply uplifting to see politicians being decent and civil to each other. Of course, neither one lives in Washington any longer . . .
Sunday, January 31, 2010
Prepare for Boredom...?
Wall Street attaches some significance to the “January Effect”, which basically says that January predicts the whole year. In fact, when the market is up in January, it is usually up 10.4% for the whole year. If it is down in January, the year is essentially flat. January 2010 was down 2.9%, suggesting a flat year. Since the market was so hot the last part of 2009, a cooling off period is quite appropriate and probably good for us.
Another rule of thumb is that, during election years, the second half of the year is better than the first half. The thinking is that uncertainty about the election outcome is greatest early in the year, but the “smart money” already has the election figured out before it happens, reducing uncertainty.
This suggests that 2010 will be a boring year for traders, who make short term bets, and a good year for investors, who invest in long term trends, so they can think about those long term trends. For those who need to worry, think about the problem of sovereign debt in general and Greek bonds in particular, as well as the continuing lack of transparency for the derivatives, which Warren Buffet defined as “financial weapons of mass destruction” and were a huge contributing factor to the Great Recession.
Worry is never boring . . . darn it!
Another rule of thumb is that, during election years, the second half of the year is better than the first half. The thinking is that uncertainty about the election outcome is greatest early in the year, but the “smart money” already has the election figured out before it happens, reducing uncertainty.
This suggests that 2010 will be a boring year for traders, who make short term bets, and a good year for investors, who invest in long term trends, so they can think about those long term trends. For those who need to worry, think about the problem of sovereign debt in general and Greek bonds in particular, as well as the continuing lack of transparency for the derivatives, which Warren Buffet defined as “financial weapons of mass destruction” and were a huge contributing factor to the Great Recession.
Worry is never boring . . . darn it!
Friday, January 29, 2010
Successful Rehab?
Today’s announcement that the GDP grew at 5.7% was clearly good news. In addition, the Chicago Purchasing Managers Index jumped from 58.7 in December to 61.5 in January. If that wasn’t enough, consumer sentiment increased from 72.8 in December to 74.4 in January. What a great day!
OK, celebration over . . . the question immediately becomes whether the good news is sustainable? Or, is this just an inevitable snapback from inventory levels being depleted during the Recession and now being re-built?
As I’ve written before, this economy is showing a Nike-shaped recovery, i.e., a rounded bottom with a slow recovery. The damage was too profound for a rapid recovery, and the current political disarray is not helping. Nonetheless, the recovery will continue, just not as sharply as today’s numbers indicate. But, as cardiac patients can progress successfully before having another heart attack, I am currently concerned about the problem with Greek bonds. Their debt substantially exceeds their GDP (roughly 120% vs 80% in the US). Their profligate ways have caught up to them, and they are having trouble selling more bonds, to keep spending without raising taxes. Holders of existing bonds have gotten crushed. Farmers are already blocking roads to demonstrate against cutting farm subsidies and other governmental services. It is all too reminicient of the “Asian Contagion” in the late 1990s. This could be different, if the European Union will use this opportunity to show a benefit to membership, like providing tax benefits for Europeans who buy Greek bonds, for example. But, it bears careful watching!
In 2007, the world economy had a cardiac event, originating from the financial systems. If we have another one in the near future, it will be from soverign debt. But, how do you make a soverign government rehab itself?
OK, celebration over . . . the question immediately becomes whether the good news is sustainable? Or, is this just an inevitable snapback from inventory levels being depleted during the Recession and now being re-built?
As I’ve written before, this economy is showing a Nike-shaped recovery, i.e., a rounded bottom with a slow recovery. The damage was too profound for a rapid recovery, and the current political disarray is not helping. Nonetheless, the recovery will continue, just not as sharply as today’s numbers indicate. But, as cardiac patients can progress successfully before having another heart attack, I am currently concerned about the problem with Greek bonds. Their debt substantially exceeds their GDP (roughly 120% vs 80% in the US). Their profligate ways have caught up to them, and they are having trouble selling more bonds, to keep spending without raising taxes. Holders of existing bonds have gotten crushed. Farmers are already blocking roads to demonstrate against cutting farm subsidies and other governmental services. It is all too reminicient of the “Asian Contagion” in the late 1990s. This could be different, if the European Union will use this opportunity to show a benefit to membership, like providing tax benefits for Europeans who buy Greek bonds, for example. But, it bears careful watching!
In 2007, the world economy had a cardiac event, originating from the financial systems. If we have another one in the near future, it will be from soverign debt. But, how do you make a soverign government rehab itself?
Monday, January 25, 2010
A Thousand Points??
CNBC super-star Jim Cramer said the loss of either Fed Head Ben Bernanke or Treasury Secretary Tim Geithner could cause the Dow to immediately drop a thousand points. If either happened un-expectedly, Cramer might be right, but I doubt either will happen. Ben Bernanke is clearly guilty of not seeing the recession coming, but very few economists did. However, once it happened Bernanke was extraordinarily innovative combating it. He used everything in his toolbox and then invented some more. If only to unwind what has been done, it is in the best interest of the United States that he be re-appointed, and I’m confident he will be.
I’m more agnostic about Tim Geithner. There is no pending Senate action on him anyway. However, he has done a good enough job to keep his job, but this is an election year, and a sacrificial lamb may be required. The market will most assuredly not drop a thousand points if he resigns “to spend more time with his family”. He will then be inundated with job offers and become a wealthy man.
President George H. W. Bush used to talk about a “thousand points of light” illuminating our nation’s future. Two of them would be Bernanke and Geithner.
I’m more agnostic about Tim Geithner. There is no pending Senate action on him anyway. However, he has done a good enough job to keep his job, but this is an election year, and a sacrificial lamb may be required. The market will most assuredly not drop a thousand points if he resigns “to spend more time with his family”. He will then be inundated with job offers and become a wealthy man.
President George H. W. Bush used to talk about a “thousand points of light” illuminating our nation’s future. Two of them would be Bernanke and Geithner.
Thursday, January 21, 2010
More Form Than Substance
The Tea Party demonstrators were livid at the big banks, especially when the taxpayers had to bail them out. It is fair to say that profits were privatized, while losses were socialized. This means the banks and their shareholders got to keep the profits, while the taxpayers got to pay for their losses. Their anger is understandable. President Obama, anxious to prove he has heard the Tea Party complaints, went on the attack today.
During the Clinton Administration, the Glass-Steagall Act was repealed. This law kept commercial banks separate from investment banks. Commercial banks accept consumer deposit and commercial loans. They are more conservative, and commercial bankers make decent salaries. Investment banks help companies raise money from the stock and bond markets. Most of the new financial products like derivatives were developed by and traded by the investment banks. They are not as conservative, and investment bankers make huge, maybe obscene, salaries. The President’s comments would start separating the two functions again.
Today, the stock prices of the big banks got crushed, but a curious thing happened. The regional banks, like SunTrust, did great. Clearly, the market sees them as the winner in this effort to re-regulate an industry that needs to be re-regulated. Bringing back Glass-Steagall would help reduce risk but is also unnecessary, if we would start by enforcing the existing regulations. (The Bernie Madoff scandal is a perfect example of that.) Many analysts agree with that position. But, we ALSO need meaningful punishment for excessive risk-taking. There are many bond salesmen who lost their great jobs and are now unemployed, but sitting on some beach AFTER making millions of dollars. Why wouldn’t they take excessive risk?
Today’s comments by the President were required political theatre, and I expect the big banks to recover shortly, once the uncertainty wears off.
During the Clinton Administration, the Glass-Steagall Act was repealed. This law kept commercial banks separate from investment banks. Commercial banks accept consumer deposit and commercial loans. They are more conservative, and commercial bankers make decent salaries. Investment banks help companies raise money from the stock and bond markets. Most of the new financial products like derivatives were developed by and traded by the investment banks. They are not as conservative, and investment bankers make huge, maybe obscene, salaries. The President’s comments would start separating the two functions again.
Today, the stock prices of the big banks got crushed, but a curious thing happened. The regional banks, like SunTrust, did great. Clearly, the market sees them as the winner in this effort to re-regulate an industry that needs to be re-regulated. Bringing back Glass-Steagall would help reduce risk but is also unnecessary, if we would start by enforcing the existing regulations. (The Bernie Madoff scandal is a perfect example of that.) Many analysts agree with that position. But, we ALSO need meaningful punishment for excessive risk-taking. There are many bond salesmen who lost their great jobs and are now unemployed, but sitting on some beach AFTER making millions of dollars. Why wouldn’t they take excessive risk?
Today’s comments by the President were required political theatre, and I expect the big banks to recover shortly, once the uncertainty wears off.
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