Tuesday, October 25, 2011

Everyone relives the last crisis. In 2008 it was the banking system which melted down. Today the banking system is better although not all the way back and the trouble lies elsewhere.  I believe the general economy is just OK. Most business people I speak to say business is still not where they would like it but it is better than last year. Business people do not sit still, when a recession hits they change their behavior by working harder, trying new approaches, restructure pricing and try to take advantage of missteps by the competition. All these steps are beginning to pay off a little. There is no way the economy is going to roar until the housing sector works through all its issues. This will take 10 years which started in 2007. As long as the weakness persists in this sector inflation and interest rates will remain low. So where does the current concern in re the economy come from? I believe it is the public sector. This is true in both the US and Europe and Asia, it is true for countries, cities, states, towns etc.

Meredith Whitney in an effort to publicize her new firm made a wildly inaccurate prediction of billions of municipal defaults in the US. What she should have said was the key to the recovery is dependent on fiscal policy at every level and the strains under which the public entities are struggling make this almost impossible for the economy to expand. They will have trouble meeting their current obligations over the next few years. This second statement has the advantage of less hyperbole and also it is true. Examine the State of Rhode Island, the country of Greece, the city of Harrisburg and you will find a laboratory to study the financial troubles affecting every public subdivision in the world. Again it is a moving target and public officials have to respond to the new realities. You see this in California, Wisconsin, NY, NJ, hopefully Italy and Greece. It will cut across all party lines because there is no choice. It the end we should have a different concept of Government responsibility and services and people will adjust. Stayed tuned to the public sector for keys to the economy , the banks will weather the storm

Monday, October 24, 2011

The economy is beginning to show the effects of the public sector cut backs. It does not take a Harvard PHD to understand that when states and municipalities cut back the amount of money they spend it will slow down economic activity. Every talking head on TV who is surprised at a possible second leg to the recession has just not been paying attention to fiscal policy. In addition the reluctance on part of Congress to stimulate the economy will add to the downturn. This is a deliberate policy choice and there are people who believe reining in government spending is the most important priority for the US.

One of the benefits of a recession is it will highlight problem areas in the economy. The country has the opportunity to take corrective action to set our long term house in order. States are mandated to produce a balanced budget and many have responded by cutting spending, decreasing employment and employee costs, redoing benefits for future hires and upping user fees. The part of the budget which lends itself to abuse is estimating future tax receipts. This area has shown weakness in recent weeks. Tax collections are below what states have anticipated because the economy is slow and this is leading to revenue shortfalls in the current fiscal year. The bright spot is that tax collections are ahead of 2010 but not at the level predicted for 2011. Clearly the estimates are off base but they provide a cheap political fix to pretend the budget will be balanced. The exposure of these gimmicks is a benefit of an economic slowdown. We need clear, realistic and frank discourse concerning public finance and government spending and because there is no place to hide we are finally getting it.

RANDOM COMMENT: The trouble with Washington is personified by Eric Cantor. Eric was scheduled to make a speech at the Wharton school but cancelled because there might be Occupy Wall Street protesters present. Instead of presenting his ideas to people who might disagree; Eric skipped the speech and posted his speech on line. This is not leadership it is cowardice.

Monday, October 17, 2011

On May 25, 2010 I wrote the following:

It’s all Greek to me

In a past column I discussed the crisis in Greece as a proxy for a wider problem in the world economy.  Current headlines bear out this prediction.  The point I was trying to make is that there is nothing unique about the Greek financial situation. We now see the Spanish Banks are in play soon to be followed by the Italians and Portuguese. The second point I believe bears repeating is that the same situation exists in the United States in re municipal finance.
The bond markets are skittish because 2008 has proven that we cannot know how and where the crisis will manifest itself. From January 2007 through the fall of 2008 the talking heads on TV assured us the “crises” was over about 18 times until finally they threw in the towel and declared things would be bad forever.

Currently money is flowing into short US Treasury bonds as a “safety” trade and there is selling pressure on the stock market.  What is an investor to do?

1.       Accept reality: the country is in a serious recession and even though there are some signs of life it is going to take time until the problem is solved and sustainable economic growth can resume.

2.       Understand that not everything about a recession is bad. The country has financial problems that need to addressed like run away employee benefits in the public sector, complete lack of regulatory oversight, no viable risk management on Wall Street and wasteful government spending at all levels. The country is ready to attack these issues in a real manner.  It will be difficult but necessary.

3.       Don’t Panic: Not every company or household experiences an economic downturn the same way or at the same time. There are investment opportunities created as companies respond to the economic challenges facing them.

4.       The US economy is a powerful force that continually reinvents itself. Look at the major companies which did not exist thirty years age (Dell, Microsoft, Google etc) and realize that there are opportunities every day.

5.       Take your time; the economic slowdown gives the investor more time to research investments and makes a rational decision, the smart investor will use it.

I do not mean to suggest that the economic pain is over. Many households and businesses are going through an extremely difficult time and it is going to be a while before it ends. Capitalism is a harsh system because the creation and destruction of enterprises does not happen in a vacuum and the impact on the people involved can serious. The smart investor will understand the current downturn is ongoing, significant and creates opportunity, all part of the economic cycle of capitalism.

Still valid 1 1/2 years later

Wednesday, October 12, 2011

The current slate of potential Republican candidates for the nomination is a “Confederacy of Dunces” to borrow a phrase from John Kennedy Toole. The gibberish they feel necessary to spout on economics is embarrassing. Is it too much to ask that one of them shows some backbone and stands up for something that makes sense or is actually good for the country? Some want to jail the Federal Reserve Chairman, some want  the banking industry to be allowed to gouge the consumer, some want the banking industry destroyed, some want no regulation on Wall Street, some want no taxes on our most fortunate citizens, some don’t want to improve our infrastructure. This collection of idiots has not produced one workable idea concerning our economic problems. This is especially true of Romney who as Governor of Massachusetts showed promise, innovative approaches and flexibility. Lost in all the over the top babble from this group is the needs of the country and the citizens who are affected.

College kids cannot find work, laid off workers cannot get rehired, China and the Far East are becoming larger and larger economic competitors, we are still dependent on foreign oil which tortures our foreign policy. Why don’t they care? Why don’t they have any ideas? Why do they advocate the exact same policies that produced the economic malaise? Why don’t they deal in reality? Is there some IQ test to run for the Republican nomination that eliminates all people who score over room temperature? What happened to the Grown-ups in the GOP?

Every instance when a potential candidate has shown some moderation the far right attacks and the candidate retreats faster than a speeding bullet. Rick Perry felt it was unfair to children of illegal immigrants to be charged out of state tuition at Texas schools. He reasoned it was not their fault and getting a good education would ultimate make them better citizens, yet he couldn’t backtrack fast enough when the wacko’s attacked him. Mitt Romney worked out a health care plan that benefited the citizens of his state when he was governor but has gone to great lengths to deny it even exists. If you are trying to get a leadership job (President of the US) shouldn’t you show some real leadership by stating what you believe, acting on it and standing up to those who disagree?

Monday, October 3, 2011

One of the lessons we should have learned from 2008 was that the crises and financial meltdown was a true systematic failure. Currently the banks are fighting increased oversight and any attempt to reign in their risk appetite. One of the most powerful tools when someone wants to rewrite history is nomenclature. If you follow the business channels, the Wall Street Journal and other media outlets you will notice a subtle shift in references to 2008. Now everyone is talking about the Lehman collapse as if that was the major problem in 2008. This trivializes the event. Lehman was a major firm and part of the problem but it was not the only company to collapse. The list includes, Bear Stearns, Wachovia, Fannie Mae, Freddie Mac, Washington Mutual, Merrill Lynch, AIG, CIT, General Motors, MBIA, and AMBAC. Companies that came close to failing include Morgan Stanley, Citibank, Goldman Sachs, GE Capital, and a host of commercial banks to numerous to mention. Along with these failures or near failures there was a steady stream of hedge funds and special investment vehicles that disappeared also.

The cause was a reckless use of leverage for short term gains with a complete disregard for the longer term consequences. Now Wall Street is acting as if Dick Fuld and Lehman Brothers was the only problem. One hears constant references to “worse market since Lehman collapsed” “not since the Lehman collapse” etc. Beware this line of thought, it will lead us right back down the rabbit hole. September of 2008 was a disaster but it was not caused by one firm but rather the entire industry who are now trying to pretend they had no hand in the debacle and it was the responsibility of one firm.

This is the banking equivalent of the Wizard’s  “Please ignore the man behind the curtain”