Tuesday, December 18, 2012

No matter what deal is finally agreed to by the politicians in Washington it will act as a brake on the economy. Reduced Government spending and higher tax rates for the wealthy will lower the national growth rate. This is not complicated, it is simple economics. One would hope the negotiators would be sensible enough to pick a target growth rate and try to craft an agreement that will start to solve some of our long term issues without suppressing the economy too much. The effects of misplaced aggressive austerity measures can be seen in Europe where there is bubbling civil unrest because the economies are contracting. The contracting economy decreases the opportunities for the unemployed and the young people entering the work force while reducing government tax revenues. The solution to massive budget deficits and runaway government spending will take a long time, it cannot be corrected in a year.

For all you fans of financial scams, next year should be a banner year. Pay particular attention to "crowd funding" and "non-publicly traded REITs". I believe both of these are "unborn sorrows ripe in fortune's womb" to quote the Bard. When these scams finally land we should think about going after regulators who should be on the case but once again are MIA. One of the regulatory bright spots in 2012 is the retirement of Mary Shapiro. Mary, who held significant positions at FINRA before moving to the SEC, proved just as ineffective at both agencies. I can't think of any financial scandal that occurred during her tenures that she had any clue was coming. If any reader knows of any, please let me know.

Monday, December 3, 2012

As the year draws to a close I have some random thoughts about the economy;

I believe we are going to go off the "fiscal cliff". This is a bet on the inability of Congress to agree on what day of the week it is rather than any analysis of our economic situation.

I think it is time for the leadership of the House of Representatives to lay out their fiscal plan in mind numbing detail. This would start a much needed debate about the direction of the country.

I think the economy is doing better and the real estate market is showing signs of life. The American voter will always vote the economy so the takeaway from the election is that most people think the economy is doing well and are optimistic about the future.

I don't think going off the "fiscal cliff" will be that devastating. It will certainly be deflationary and push the economy towards a recession but since I believe the economy is stronger that the talking heads on TV are saying I think the country will skirt a recession and stay in positive territory. It will be close.

I think that nothing has been done about the Greek crisis other than that some near term liquidity has been provided. Two years ago I was quoting a senior government trader as saying it is a "liquidity solution to a solvency problem" and that is still the case.

I believe next year will see Italy join the ranks of bailed out Euro members.

I think 2013 will be a pivotal year for the municipal bond market as financial stress on cities, states and local entities will change the way the market looks at credit quality. I expect more Chapter 9 filings, more privatization and more conflict with public employee unions. How it shakes out is anyone's guess, stayed tuned.

Friday, November 16, 2012

The presidential election is over. One of the interesting outcomes of the contest is the use of the Super PAC money and corporate donations set in motion by the Supreme Court's ruling in the Citizen's United case. Donors like Sheldon Adelson spent over 50 million dollars in support of a candidate who lost. This is a tremendous redistribution of wealth. Mr. Adelson has recycled a significant amount of money to media outlets, copy writers, admen and political consultants. This amounts to a private economic stimulus program. I assume the wealthy donors are concerned with tax policy and part of their contribution was to ensue US tax policy would remain friendly. Just how much extra tax will Mr. Adelson have to pay on an annual basis that would justify a 50+ million effort?

After every election half the country is disappointed, I understand that because I have only voted for the winner 4 times out of 11 presidential elections. We owe the winner, who represents the majority of the country some leeway to implement their campaign promises. The American people generally vote the economy, if the incumbent is reelected the people are saying the economy is OK, if the economy is not OK we elect the challenger. Whoever loses needs to accept the result and go gracefully into the good night. Mr. Romney does not need to vilify the electorate by impugning their motives. We are not all on the dole, most people want to work and create a good life for their family so we need to stop the talk about how half the country are moochers and somehow the Administration ladled benefits on part of the population for their votes. Mr. Romney did not convince enough voters that he was a better alternative to Mr. Obama, period.

Speaking of going gently into the good night Alan Greenspan who as chairman of the Federal Reserve could not have been more wrong or have chosen a worse policy for the US needs to disappear from the airwaves. We should have some minimum standard for past performance before we allow a person to air their opinions in public again. Whatever standard we decide is right Mr.Greenspan will certainly fall short.

Friday, November 2, 2012

Hurricane Sandy has landed in New York and New Jersey. Amid the destruction some very positive things have emerged. Andrew Cuomo, Michael Bloomberg, Chris Christie and Barack Obama once more showed us that public servants work for the public. The governors and the mayor marshaled the forces at their disposal and got out in front of the storm with warnings and evacuations. They are working tirelessly to help their citizens come back from the devastation which will take a long time. The President has visited the area and is bringing the full resources of his office to provide what the states need. It is nice to see politicians of different parties forget the rancorous verbal jousting and concentrate on getting something done for the public. The national debate has been hijacked by blithering idiots like Grover Norquist, Glenn Beck and the like who would have you believe the secret to happiness is carrying a gun and shutting down the Federal Government.  For the love of God just shut up!

Better people are better. That silly little expression is what we tell ourselves when we look to hire a new employee. If you appoint an incompetent like Michael Brown to head FEMA you will be unable to get a 12 oz bottle of water delivered to a major American city short of 4 days. Likewise if you appoint a failed congressman like Christopher Cox to head the SEC Wall Street will drive the banking system off a cliff  fueled by greed. Pop quiz: Who is currently head of FEMA? Answer: nobody knows and that is how it should be, because when it works correctly we do not need to know.

The impact of the storm is enormous in the tri-state area. One of the great things about people is their willingness to help their neighbors. They just show up with a broom or chain saw and with a brief nod pitch right in. I believe this is true in all disasters in the country regardless of the region and it doesn't matter what your religion or politics are, it is just people helping people. We need leaders who will focus on this aspect of our national character and not seek to exploit petty differences.

Friday, October 26, 2012

In January of this year I predicted that Barack Obama would be reelected in a close race with Mitt Romney based on the fact that the US economy would be in some form of OK. I still believe that and we will find out in two weeks. Most people I know have already decided who they will vote for and cannot wait for the election to be over so we can get on with our lives. I have said before that who ever wins will be facing difficult choices and the decisions made will have significant impact on the economy in the next few years.

One of the markets I follow closely is the municipal bond market. There have been a number of municipalities that have filed for Chapter 9 bankruptcy protection in the last year and the resolution of these filings will have a huge impact on municipal finance. So far there has not been a clear pattern emerge concerning the discharge of debt, union contracts, employee benefits and a host of other issues. Once these issues start to be decided, municipal bond holders will be forced to reevaluate their holdings and look more closely at their standing in the court process. There are important differences between Chapter 9 and commercial bankruptcies (Chapter 11 etc.). This link outlines some of the considerations and criteria necessary for a filing for Chapter 9 protection. http://rseelaus.com/municreditwatch.shtml

Since the 1970's the use of the bankruptcy code by US businesses has been on the rise. If you are a bondholder in a bankruptcy you have seen your investment wiped out with the stroke of a pen. Sometimes in a large bankruptcy like GM 35 billion in debt is replaced with a very small amount of stock in the new company. Jack got a better deal than that for his cow when he swapped it for magic beans. If municipalities can successfully void interest and principal payment the politicians will drive a truck through that loophole rather than correct the long term problems of employee benefits and wasteful spending. Stay tuned.

Thursday, October 11, 2012

In today's economy we have to take our victories in small doses. Last Friday the unemployment number was down as a result of more people working. The hook in the number was that many of the people had to take part time jobs. This is how the system works, first you look for a comparable job to the one you lost but eventually you must face reality and start to rebuild your career somewhere even if it is part time, seasonal or temporary. I believe most people like to work and feel productive and they would rather be doing something than sitting idle. It never made any sense to me when politicians talk about how people are living this wonderful life on food stamps and unemployment checks.

The housing market is showing signs of not being completely dormant. The foreclosure rate is dropping. Again a small victory. The Federal Reserve has been throwing low interest rates at the real estate market for four years now and if we didn't see some signs of life by now there would be no hope for the economy.

In 2009 I said that if you believe the current slump should be dated from 2007 we as a country would be fortunate to emerge from it in 10 years. I still believe that to be true. We have made some progress, the fact that we opted for stimulus initially gives us a better chance than Europe to correct our macro imbalances in the future, but I think we still have a ways to go. The next administration will be faced with a difficult set of choices comparable to the ones the current administration faced their first day in office. I hope that whoever is elected decides to play in the real world and not some gated community of economy fantasy that seems to be a large part of campaign rhetoric.

Friday, September 28, 2012

The last thing a business man wants to do is create a job. For the past twenty years the direction of business is to run a bigger entity with fewer employees. This is the tech revolution. This process is the cruel calculus of capitalism. If you don't keep up, you will be left behind. The private sector is doing what it always does in terms of reinventing itself to stay relevant and in business.

The public sector is a different story. The first thing a politician wants to do is create a job. The politician's own job depends on it. The current  recession has slowed this process as states and cities face the fact that they cannot afford to keep paying the salaries and benefits promised to the public workers. One would hope that during our national campaigns there would emerge a meaningful debate about what we, as a society want from our government. The present cost of government is not sustainable yet everyone wants services to remain the same. It doesn't work like that, there has to be a trade-off between costs and services and we need to prioritize. We cannot have it all.

Random thoughts at the end of the third quarter 2012

We have absolutely no idea what is going on in China and how their economy is really doing (not well I think).

Nothing has been settled or changed or solved in re Greece, Spain, etc.

The social unrest in Europe augers for a difficult year ahead for policy makers world wide

Based on the recent European elections it seems that the wealthy euro countries are still committed to working the situation out.

Whatever tenuous grasp Moody's Investor Service had on reality was severed last week with it's announcement about the rating of US Bank corp. Moody'd said it is worried not about US Bank but that the other banks in the area are recovering and they might present more competition. Moody's is apparently worried about  " U.S. Bancorp's long-term ability to sustain its consistent, superior performance in light of increasing competition" to use Moody's own words. If only Moody's had conducted it's business as well as US Bank we might have avoided the financial meltdown of 2008.

Wednesday, September 19, 2012

Economic policy has social implications. I don't want to be too negative, but the social unrest in the world is increasing. In Madrid there was a demonstration against the austerity measures which numbered 65,000 people (the estimate was from the government not the organizers). There was also a huge demonstration in Lisbon the same day. The dilemma facing policy makers in every country including the US is what measures to take to rein in runaway spending and debt in a way that is politically viable. Economies do not exist in a vacuum. The mark of an effective government is its ability to steer large complex societies without causing counter productive social disruptions. The current fiscal policy debate in this country consists of one side who regard any compromise on any economic issue as treason and the other side who doesn't have a thought in their collective heads. This doesn't bode well for the Republic.

I know it is the silly season of politics but at some point shouldn't the person running for office be out of second chances? How many times can a candidate or an office holder say," that's not really what I meant to say" or" I misspoke"? If you want to hold high office shouldn't you be able to express yourself correctly the first time? How hard is this?

Finally, I believe the economy is still in some sort of OK going into the election. It feels like it is pausing which I view as temporary until the November elections after which I expect a pick up based on the resolution of uncertainty rather than an endorsement of the victorious party.

Tuesday, September 4, 2012

As a small business owner (R.Seelaus & Co., Inc. employs 55 people) I am discouraged by the senseless chatter of the politicians and TV commentators about small business.

First: Nobody starts out to create a “small business”; we all want to create the next Microsoft
Second: We are not motivated by taxes, we are motivated by revenue and profits. If we have to pay taxes it means we are successful. We would rather pay fewer taxes, of course.

Third: We live in the reality based community. We are driven by opportunities.  We don’t hire people because we have “confidence” that Congress will address the deficit; we hire people because we see the chance to expand our profits.

Fourth: We are dependent on infrastructure. We need an environment that allows us to conduct our business efficiently. R. Seelaus & Co., Inc. is located in Summit, NJ. The town is accessible by two interstate highways, two NJ toll roads and a rail line. This is important for our employees and clients.  If politicians want to help they should engage in a meaningful discussion of the infrastructure needs of the country both cyber and physical.

Random Thoughts:

  • Pressure on the euro will come from the wealthy nations thinking of leaving the currency 
  • The Federal Reserve has done everything it can to stimulate the economy. QE3 will not make any difference to the economy. The Fed wishes the public to think it is still capable of helping the economy but the reality is we are dependent on Fiscal policy at the state and national level.
  •  Leadership in regulatory matters concerning Wall Street has moved to NY State and NYC while the SEC and FINRA continue to be ineffective.

Tuesday, August 21, 2012

Part of the revisionist history of the financial crisis that is driving me nuts is the Lehman Brothers bankruptcy. If you listen to the media, the financial crisis was caused by somebody buying a home in Detroit they couldn't afford and Lehman declaring bankruptcy. The financial meltdown in 2008 was the result of reckless behavior by everybody; big spending fiscal policy, incredibly bad monetary policy, reckless borrowers and lenders and incompetent regulators all compounded by Wall Street greed. It was a lethal brew. The Government could have just as easily let Morgan Stanley or Goldman Sachs go out of business as opposed to Lehman. I am not defending Lehman in any way and I believed they deserved to go under. It was the way they were allowed to close that created the subsequent problems in the market especially for commercial paper. By the time Lehman went belly up, Bear Stearns was long gone, Countrywide and Merrill had been absorbed by Bank of America, Fannie Mae and Freddie Mac had been nationalized because of insolvency, IndyMac Bank had been closed, the US Treasury was pumping money into AIG like it was a second job, and Washington Mutual and Wachovia would be gone in the next two weeks. Everyone of these institutions were guilty of too much leverage with a rapidly declining balance sheet. Lehman was the poster child for this problem but it was not an orphan.

Decisions matter. Because this is a presidential election year there is concentrated focus on economic issues. As the public debate rages I think it is important to remember that the country is facing choices in its fiscal policy and these choices will matter. The next administration will be faced with the choice of stimulating the economy or cutting the deficit. It is important to note that not only the policy direction but the implementation of the policy is important. If the policy is to reduce the deficit, it does no good to cut social programs if you concurrently increase defense spending. If you wish to stimulate the economy through tax cuts it matters which segment of the population gets the tax cut. The financial meltdown of 2008 was the direct result of bad choices, it did not have to happen. Hopefully the country will learn from past mistakes, certainly there is no evidence that Wall Street has learned anything i.e. JP Morgan, MF Global, and Knight Capital.

Monday, August 6, 2012

Knight Capital now takes its place in the long line of Wall Street failures. If you think that Washington, the SEC, FINRA, the Federal Reserve, or the banking industry have learned anything from the 2008 meltdown, you must be in a parallel universe. One would think that after Lehman Brothers, Bear Stearns, Wachovia, Washington Mutual, Merrill Lynch etc. went out of business and the world wide banking system was a heartbeat away from total collapse that the survivors would be more careful in their actions. Instead we have had in quick succession MF Global, JP Morgan and now Knight Capital. The common theme is the boys have no idea what they are dealing with in terms of risk. Stop the madness!!

Just to recap
MF Global allows the head of the firm (who is in fact the risk control officer's boss) to trade an enormous position. Who is going to tell him to stop?

JP Morgan loses 5 Billion dollars in a department that the senior management encouraged to take huge positions. The bank's position is" we are big and we can absorb the loss easily". The loss is still 5 BILLION  DOLLARS.

Knight Capital in a rush to meet a deadline introduces an automated trading interface with the NYSE without proper safeguards. The system cannot handle the trading and they lose 400 million in about an hour.

We will now witness the usual Congressional inquiry, the usual SEC promise to do something and the usual talking heads on TV huff and puff about how this never should have happened.

All this begs the question "What's next"? It is illogical given recent history to not expect there are other events already set in motion that will wreak havoc in the future. There is absolutely no evidence that anything has changed since 2008. In fact the recent events are all the more egregious because with a little analysis they are all preventable. Keep your helmet on, the next preventable financial disaster is lurking.

Friday, June 22, 2012

Things have occurred this week which makes me think we are through the looking glass:

Moody's Investor Service has downgraded the US banks. Moody's announced in February they were going to downgrade the banks, in effect stating their conclusion before they did their analysis. During their "comprehensive review" they missed the JP Morgan debacle thereby putting to rest any claim to actually understand these financial institutions. Leading up to the financial meltdown of 2008, Moody's and Standard & Poor's were selling their ratings for money to Wall Street firms who were slapping their AAA's on absolute junk mortgage bonds. Today Moody's does not have a clue about the financial health of anything and the sound you hear after their latest pronouncements is laughter.

The other day I saw Alan Greenspan on television talking about the US economy. Alan who is vying with Arthur Burns for the title of Worst Fed Chairman Ever, did not understand how the economy was doing when he was privy to all the information at the Fed's disposal. Is the media so desperate for content they have to drag out the former chairman, whose policy decisions would have to rally to get to disastrous? We are still paying the price for his incompetence and will be for another 5 years.

I am sure both Barack Obama and Mitt Romney are smart guys .Mitt Romney's current economic suggestions for the US are a combination of the worst of the previous administration, that lead to the financial meltdown in 2008, combined with all the policy mistakes Europe made post meltdown, which are pushing their economies into recession. The Obama administration seems uncertain about which course they should pursue, one day leaning towards stimulus and the next day flirting with austerity. The voters need better than this. The economy is a serious issue and deserves a serious discussion. 

Tuesday, June 19, 2012

"The best lack all conviction, while the worst
 Are full of passionate intensity." - WB Yeats

This quote neatly summarizes the current state the world. Whether it is politics, investments or economic policies nothing seems to be related to anything else.  Normally an investor can relate various events to other occurrences and draw some rational conclusions about market direction or make an economic forecast. In today's world there are no rational conclusions to be drawn. Historical relationships between investments, patterns, co-relations, etc do not make any sense in today's environment. Buyer beware!  

Europe is approaching their problems like a group of firemen trying to put out a house fire one room at a time. Unless the Europeans admit the whole house is on fire and work on a total solution, there will be no resolution. Today China and Indonesia were telling the Europeans that enough is enough, quit pretending Spain / Greece / Ireland / Portugal etc. are isolated events. 

Wednesday, June 13, 2012

Certain things about the current European situation are obvious. The Spanish banks hold billions of euros worth of bad real estate loans. The Government has arranged for the banks to receive billions of euros of money so people will be confident that they will be able to meet their obligations. Meanwhile the Spanish government pursues austerity measures guaranteed to make the economy (and the bad real estate loans held by the bank) worse. Where do they think this will end? Is there an alternative system of math that allows this to all work out? You can't contract your economy to get out of a recession.

Up next on our European Financial crisis hit parade: Italy followed by France.

There is an article this morning about Morris County NJ. Morris County is an affluent county in an affluent state and the article points out the use of food stamps is up 240% since the start of the recession. Economics is more than just numbers, in this silly season of overheated political rhetoric we should keep in mind that all our political/economic choices affect real people. If we decide to cut state employees we should realize someone just lost their job. This does not mean we shouldn't make these choices but we should be aware of the human cost involved.

Thursday, May 31, 2012

It is the end of May and the world seems headed off an economic cliff. A few months ago I said that I expected one more "safety trade" when all the liquid money in the world would be invested in either US Government bonds or London real estate. I don't know anything about the London real estate market but the US government market is on fire.

Elsewhere, undeterred by either facts or experience;

The Europeans still act like there is a solution the Greek situation,.

US bankers still believe they understand the complex financial instruments they have created and continue to trade.

Investors still think tech stocks must go up and if they don't it merits a congressional investigation

Finally, US Investment Banks are awaiting the latest pronouncement from Moody's about their credit rating. Moody's who missed the recent JP Morgan debacle expects people will still believe they have a clue. I cannot say for certain whether the US Banks are either good or bad, all I know is they are in better shape than a year ago. Consequently if Moody's lowers the ratings they will be admitting they had no idea a year ago about the financial condition of the banks.

Monday, May 14, 2012

Forget the regulatory questions, forget the political fall out, forget the Volcker rule debate, how the hell can the management and board of Directors at JP Morgan allow a trading position at risk to create such a large loss? After 2008 when the effects of unbridled leverage and unchecked risk devastated the worldwide financial system it is beyond irresponsible to do it all over again. Have they learned nothing? It would be better if the two billion loss (and counting) was caused by a rogue trader in Hong Kong. This group was the pride and joy of the bank and had the expressed blessing from top management on down. Stop the madness! Throw the bums out! "Too big to fail", how about" Too Dumb to Let Live"? The bank can absorb the loss relatively easily but that is not the main point, the focus should be on the inability of the people in charge to make intelligent decisions about their business and their company. We are only three and a half years removed from the financial crisis and if you don't understand the lessons of 2008 you should not be allowed near the live ammo.

The corollary to this is once again the regulators, rating agencies and banking authorities had no idea; thereby cementing their place as part of the problem.

Wednesday, May 9, 2012

Things I like about the US Economy;

Recent surveys show CEOs and salespeople are feeling confident about the future,
Tax receipts are higher than anticipated in most states, indicating greater taxable activity in the private sector
Commodity prices are stable to flat
Interest rates are low and will remain low for at least a year

Things we are going to have to learn to live with in the US economy;

Higher than normal unemployment
Sluggish housing and real estate sector
Continual cut back in the public sector both in services provided and employee benefits

Things I worry about (domestic edition);

People running for office or actually in office who advocate the exact same policies that created the 2008 meltdown
Unreasonable belief in what Paul Krugman terms the “confidence fairy” (This is the theory that if we adopt austerity measures that slow our economy, small businesses will run out and hire people)
Moody’s Investor Service in an attempt to make people forget their incompetence and contribution to the financial crises will do something really stupid even for them. (downgrade everyone and everybody just to keep their name in the news)

Things I worry about (international edition)

Nothing has been done about the euro situation.
Everybody is in agreement about the solution to the Greek crisis except the Greeks
The political reaction to the bad choices the European and English authorities made when faced with stimulus / austerity options two years ago

Monday, April 30, 2012

The financial press seems surprised that Spain and England are slipping back into recession. Since the response of those countries to the financial meltdown of 2008 was to implement austerity measures, which means cutting government spending, there was no other possible outcome. It is not rocket science. The US chose stimulus first and today we have an economy with sluggish growth and an increase in the budget deficit, but we have the means to address the deficits and excessive federal spending. As I mentioned before the government must save the economy first and then it will be in a position to address the longer term structural issues. In the US the private sector is doing fine while the public sector is in contraction. The overall effect is enough growth to allow us to work on our large fiscal problems.

Things I believe about the US economy:

Unemployment will remain high. Perhaps we need to rethink our educational assumptions. As a country we think that if you graduate from a prestigious college after paying enormous tuition the world will greet you with open arms. Most employers will tell you that upon graduation, the student does not know how to do anything useful.

Real Estate prices are still in a correction and the final correction will surprise all of us who own houses. All it takes is a ride around the neighborhood to see sales are sluggish and all the press about an incipient recovery might just be the Real Estate agents pumping up the business

Interest rates and inflation will remain low. Occasionally there will be a spike in the price of a particular commodity but overall prices will increase modestly.

All these factors mean growth will be sluggish but unlike the Europeans positive.

Wednesday, April 18, 2012

Earlier this week the shareholders of Citibank rejected the pay packages granted by the board to the top executives. It is a non-binding vote but 55% of the shareholders basically told the people running the bank "we don't think you are worth it". Good for them. Citibank couldn't get the go ahead from the Fed to increase their dividend but they want to pay the head of the bank 15 million dollars. Why? This vote is great on two levels. First it tells the bank the shareholders are not going to be sweet talked into giving away money to executives who don't perform and second it indicates that shareholders are getting more involved in the working of the companies. Both trends are a signal that some good is coming out of the 2008 debacle in the financial sector.

Europe continues to bubble along. This week it is Spain's turn to be put under the microscope. The Spanish economy has close to 25% unemployment, Argentina just seized a significant part of a Spanish oil company's South American holdings, the Spanish banks are under pressure concerning their solvency, and the borrowing cost for the Spanish Government went up at the last auction. It is like a logic test; complete this sentence- Iceland, Ireland, Greece, Portugal, Spain ___. The winning answer is Italy. International investors have to be heading for the hills; the hills in this case are either London real estate or the US Government market.

There are indications that the NYC real estate market is showing signs of life. Recent statistics and news articles point to an increase in properties selling. This does not seem to be the trend in the surrounding suburbs where things are sluggish. Maybe the NYC activity is pent-up demand or the benefit of low interest which makes buying cheaper than renting. The unusual part of this scenario is Wall Street did not have a good year in re compensation and a pick up in NYC real estate would seem to be an anomaly.

Wednesday, April 11, 2012

Europe reminds me of an outing I once attended. The outing was for bond traders after a really nasty stretch in the market. I would walk up to a trader from another firm and ask " How are you doing?" and they would all reply "we are doing fine but I hear so-and-so is getting crushed" I would then approach so-and-so and ask the same question and get the same reply all the way around the room. The European countries are all in the same bucket and the European Central Bank has bought some time by increasing liquidity recently but by no means is any of it over. Stayed tuned and keep your helmet on.

As the presidential race starts in earnest I hope the conversation will be focused on big issues and big ideas. I saw an ad for Citibank in the Times over the weekend. The ad traced major efforts by the bank since it's inception in the 1800's. The print copy shows a time line and lists the bank's efforts i.e. financed the Panama Canal, supported the Marshall Plan etc. The bank's most recent accomplishment according to the ad is they are the first credit card approved for Google wallet. The bank apparently equates the Panama Canal with a credit card you can use with an electronic encyclopedia. Somewhere Teddy Roosevelt is rolling in his grave. We need to build for the future and invest in our infrastructure. Currently one political party's platform is to drill for oil everywhere and don't pay for birth control pills. The other party can't seem to articulate a reason why they passed health care reform or what exactly the Dodd- Frank bill means.

I have mentioned previously that the US economy paused or flattened out during the 1Q 2012. I think this is reflected in the current sell off of the stock market. I think economic activity is still some form of OK and will continue for the next few years. The Federal Reserve will disappear from the scene the closer we get to the election and since interest rates are so low there is nothing more for them to address. I don't think there will be any more quantitative easing nor should there be. They best policy is to let the economy recover slowly, accept the economic dislocations associated with this and build a solid foundation for the future.

Monday, April 2, 2012

The first quarter of 2012 is in the books. Stocks were up, oil was up, US Treasuries were down, car sales were up, US corporate debt was up and housing was sluggish. This scenario points to a consensus that the economy is in some stage of a recovery. I think this is true. Business people will tell you that while business is not where they would like it is definitely better than last year and they are hopeful about the future. At the end of the last administration and the beginning of the current one the executive branch and Federal Reserve chose to bail out the financial sector and stimulate the economy. Our current recovery indicates that these decisions were correct. The next part of the process should be getting our spending and borrowing under control. This is the tricky part of the equation given the current rancorous political environment and our addiction to low interest rates. Weaning the country and the government off these extremely low interest rates will be a difficult test for the Federal Reserve.

After 2008 the regulators (FINRA, SEC, Controller of the Currency etc.) always talk about "lessons learned" rather than dealing with their complete failure to do their jobs in a professional manner. What I don't understand is how can a MF Global situation occur in 2011 and why are the same people still in charge of the regulatory agencies?

Nobody contributed more to the financial crisis than Moody's Investor Service. Now Moody's is desperate to prove they are relevant and are taking every opportunity to make pronouncements about credit and sovereign debt without ever having established they possess any ability in these areas.

Monday, March 19, 2012

The US economy gave a good account of itself for the fourth quarter 2011 and the stats from that period are reflected in the current stock market. In the first quarter of 2012 the economy has clearly slowed or flattened out. The rising oil price based on uncertainty in the Middle East is causing the economic pause. I think this is a good thing. The longer and slower the economic recovery is the better we will be in the long run. We have structural problems and these need to be addressed. I believe the current administration was right to push a large stimulus bill early in 2009, without which we would not have an economy to discuss. I believe the opposition is right to resist further federal spending because it is not needed and the private sector needs time to work. Clearly the stimulus spending exacerbated the deficit and now that the economy is recovering we should address the deficit issue. I believe and have said many times both sides of the issue must be used to solve the problem i.e. lower spending and higher taxes. Anyone not willing to use both options is not serious about solving the deficit problem.

The above issues are coming together at the state and local level. Since 2007-2008 we have a blue print for financial institutions and what to do if they are insolvent. We do not have a similar plan for state and local governments if they become insolvent. The benefits promised to public employees are too large and are accruing at too rapid a pace. I believe before the final chapter is written the public will realize that not only should new employees not be under the same system but we cannot afford to pay the benefits already promised to retirees.  I don't think the math points any other way. As the public begins to realize just how much funding is necessary to get even with the benefits already promised I expect a rancorous public debate. We can't chase our tail forever on this issue. We, as a country need to think of broad solutions and ask the big questions. Why do public employees have pensions and not 401(k)'s and IRAs? If your life expectancy is longer should your retirement age be raised? If the state of NY pays for your medical insurance shouldn't you be required to be treated in NY?

It is going to be an interesting process, stayed tuned.

Monday, March 5, 2012

The Federal Reserve has kept interest rates at an all time low for years now. This fiscal policy is in response to the banking crises of 2008 and is an acceptable policy to try to stimulate the economy. This is a two edged sword like many policy choices. On one hand, the interest component of US Government debt is very low which is helping to contain deficits. On the other hand, any entity with a defined benefits pension plan will suffer because they need a certain level of return to make their plan work. It is acceptable for these plans to predict a certain level of return and base their contributions on these assumptions. What has happened over the last few years is that the level of return in the fixed income portion of the portfolio has been less than anticipated. The low returns are causing a shortfall which must be made up by increased contributions. This is true for GE and major corporations as well as states and municipalities.Last week a number of companies acknowledged this problem. Unfortunately the state governments which a year ago seemed like they were willing to face this issue are backsliding. California, where the legislature is unwilling to deal with the issue and NJ where the governor has suddenly resorted to pie in the sky assumptions are the most obvious examples. Make no mistake this issue is widespread, significant and still getting worse.

The Greek bail out will come to a head this week. In the next few days private investors will either agree to accept a voluntary haircut on their Greek bonds or not. Without 75% participation the deal will fail, Greece will default and the Credit Default swaps will be triggered. I have to believe that more than 25% of the Greek bondholders have some sort of credit protection and will not opt for a voluntary solution, which will cause a default. I believe this is priced into the market already.

Question of the week: Why is Mary Shapiro still head of the SEC?

Wednesday, February 22, 2012

It is fitting that there is an announcement in the papers about an upcoming auction of Edvard Munch's painting "The Scream" because as one looks at the financial state of the world we all want to scream.

Greece has managed to force the Europeans to loan that country enough money to pay back what Greece owes to the Europeans. As the head of a reporting government dealer trading desk told me "It is a liquidity solution to a solvency problem". Greece is like your brother-in-law who always needs money. He keeps borrowing from everyone and promises to do something different but never does. All you hope for is that the latest loan will last a few months longer than the last one. One thing is certain, Greece and your brother-in-law will be back!

The governor of NJ Chris Christie has put forward his new budget. The Governor is predicting revenue growth of 7% to pay for increased spending. The latest six months of NJ state revenue has been $326 million below expectations. Also included is a predicted return on the state pension funds of 8.25% when the return for last year was 1.7%. This proposal is being used to justify an income tax cut. The George W. Bush administration showed us that if you cut taxes and increase spending the economy will respond in the short term, but you will be presented the bill later. We are still paying the bill presented in 2008 and most states including NJ have taken significant steps to improve their long term projects. Now is not the time to back slide into feel-good economics. Chris Christie has positioned himself as a tough guy. Now is the time to be a man and do what is right in the long run rather than what is politically expedient.

Another rating agency (Fitch) has sprung into action, they are concerned with the situation in Greece. They announce today a "default" was highly likely. Can't fool those guys. Since the current loan is predicated on a write down of holdings of Greek bonds of 50%+ I am pretty sure the investors in Greek bonds already knew that.

Friday, February 17, 2012

Congress seems like it is breaking its deadlock of not being able to agree on anything. This is a good thing. We need the give and take of different ideas to make progress in dealing with issues. Unfortunately the current agreement to extend the payroll tax cut is ill conceived. The $20 per week benefit offered by the payroll tax cut is unnecessary. The cost of this tax cut / loss of revenue versus the stimulus benefit to the economy is mismatched. One of the ways to address the deficit problem is to use any increase in economic activity to withdraw any tax break or special program and let the economy absorb the hit. Twenty bucks a week does not mean much to most working people but the cost is almost 100 billion to the deficit. I know some people will be affected, but by and large most wage earners will not. We do not need it and it should not be extended. Yes this will slow down the recovery a little but we need to look at both spending and revenue to correct the deficit problem. This is a perfect place to start.

Other countries can provide a real time demonstration of how our current options will play out. Look at Portugal. The country accepted funds and agreed to austerity measures. Certain people seem to be surprised by the fact that their economy is slowing down. Of course it is slowing down. Once the government stops spending economic activity will slow down. What the politicians should tell the Portuguese people is the truth; that the austerity measures will suppress your economy for years. Getting their fiscal house in order will benefit the Portuguese economy in the long run but in the short run it will prolong their current slump. This is true everywhere, so when a politician tells us cutting government spending will create jobs what he is carefully omitting is the job creating is in the future not the present. Again I have no problem with this debate, I only think we should be more willing to have it honestly and not pretend there are no economic consequences to our choices.

Lastly, why is Moody's still in business?

Wednesday, February 8, 2012

Groundhog Day 2012

In the movie Groundhog Day, Bill Murray kept reliving the same day. As I scan the news around the world it seems we are caught in the same loop;

Everyday the financial press reports we are getting closer to a deal on the bailout for Greece. The bondholders are resigned to a haircut on their principal and interest, the government is looking at austerity measures, the northern Europeans are not happy but will agree to the funding, etc. And everyday the people of Greece indicate they will not go along with any of it. They want the money but are not willing to pay the price necessary to get their fiscal house in order. We are no closer to a deal today then we were last year at this time. In March of 2010 I wrote an article about the Greek crises and near as I can determine the people of Greece are not on board in any way at all and never have been.

The US Congress is talking about the extension of the payroll tax cut, the extension of unemployment benefits and a continued level of Medicare / Medicaid payments to doctors. This is the same piece of legislation they passed in December for two months because they cannot agree about anything. Today the same old arguments and accusations are flying around the halls of Congress. Why aren't the members of the House and Senate embarrassed about how dysfunctional they are? Don't we the people deserve better? In business everyone makes compromises all day long in order to get something done. All these politicians talk endlessly about the private sector. If any of them actually had to work in the private sector they would starve to death.

Monday, January 30, 2012

Does anyone think Greece hasn't already defaulted? I define default as showing up at the bank and not getting the interest or principal you are owed. In the immediate future there is no chance of showing up at the bank and getting all your money for Greek debt, what is being negotiated now is just how much of your money you won't get. Current estimates are for 30 cents on the dollar. All parties to the deal are acting like they still have a choice as to whether or not they will do the deal. The reality is simple, the deal must be done and all they are arguing about now is price.

Other considerations in the European situation are the credit default swaps (CDS). US banks with exposure to Greek, Spanish, Italian etc debt will hedge their long position by buying credit default insurance which would pay them if there is an event of default on the underlying sovereign debt. The ECB and the EU countries are trying to work out the Greek situation voluntarily which means these particular hedges are worthless as protection for the banks who own them. The financial industry has fought any attempt to centralize the tracking of CDS and consequently nobody has a handle of this side of the equation. This is AIG all over again.

Under the Heading of "Same old same old" the following;

Moody's admitted this morning, according to the Financial Times, that it "did not have any understanding" that MF Global , the failed futures broker had placed a $6.3bn proprietary bet on the debt of European sovereigns until a week before it failed.

According to the Wall Street Journal today, the regulatory authorities say they might never know what happened to the money at MF global. We are three years after the financial meltdown caused in large part by regulatory incompetence and the people who are supposed to enforce the rules to protect the public are still clueless. Bernie can you hear me?

Facebook is cranking up for an IPO which would value the company between $75bn and $100bn. It is an advertising delivery system aimed at people who find every detail of their own life fascinating. I know the business model works for Facebook but does it work for the advertisers? Tech bubble anyone?

Wednesday, January 18, 2012

Why do S&P and Moody's rate sovereign debt? Do we need these people to tell us about the US or any other major country's financial picture and assign a rating? The short answer is no. They are in the news recently announcing rating changes in a desperate attempt to prove they still matter. After their complicity and culpability in the 2008 financial meltdown it is a wonder they are still in business and not in jail. Congress is continuing to investigate their role and far be it for me to expect Congress to do anything constructive, they might just get this right by accident.

It is bonus season on Wall Street and the news is not happy for the employees. The good news is for the shareholders. Certain firms are beginning to fundamentally restructure their approach to compensation and are putting in mechanisms that allow the firm pay out some comp over a period time. This will align the traders and the stockholders interests. By putting a larger component of stock in the overall compensation and deferring the cash payout for a time the employee will have very real interest in building the franchise and working for the long term. People on Wall Street work hard and expect to be paid well. Most of us went into the business because we felt there was a greater chance to be overpaid than in other industries. This is still true but it will be over a longer time than previously.

States continue to lead the fight for fiscal responsibility. Look at NJ, NY, Wisconsin, California etc and you will see the Governors fight the same battle;to rein in public spending, get control of the education budget and reform the tax code to make the state more attractive to businesses. This cuts across party lines and I believe enjoys wide spread support among the voters. The lesson to be learned from Scott Walker and Wisconsin is to make headway on the problem but don't overreach and spike the ball for ideological victories. Do what needs to be done; the public will accept the austerity measures but understand everything will affect people in a real way and there is a human cost to all policies.

Tuesday, January 10, 2012

Things that seem obvious to me:

The purpose of Private Equity companies like Bain Capital is to make as much money as possible in the shortest amount of time for themselves and their investors;

The country can’t continue to keep borrowing and spending forever, eventually the accounts must be balanced;

Rich people should probably pay a little more in taxes;

Entitlements could be cut or means tested without harming the economy or the people who need the support;

The housing market will be weak and sluggish for another five years;

Government’s investing in the infrastructure of the nation is a good thing for both the country’s future and the current economy;

The defense budget is too large and could take reductions without ever affecting national security;

The fiscal measures implemented by the various states which bring public employee benefits more in line with the private sector enjoys wide spread support cutting across party lines;

Three years after the financial meltdown there are a lot of settlements between banks, Insurance companies, mortgage servicers etc. every day, which is how the system eventually resets itself;

Economic activity will be lumpy in 2012 with strength in consumer discretionary spending and weakness in all things housing related.

The economy will be some variation of OK going into the November election.

Wednesday, January 4, 2012

As we enter the silly season of political theater it is good to remember that there are only two ways the government can create jobs. Draft everyone into the army or stimulate the economy by spending. All the noise about tax breaks and budget balancing giving the business owner confidence to hire people is nonsense. The business owner will follow economic opportunity and if the economy is expanding business will expand along with it in an effort to make more money. If you want to shrink government spending you will curtail economic activity. I am not arguing for either course but pleading for the idiots in Washington and the news media to at least use simple accurate economic concepts. If you believe that balancing the budget right now is the absolute best thing we can do for future generations that's fine, just admit it will increase unemployment in the short run and prolong the current slump. If you think job creation is most important please recognize that at some point the debt will need to be addressed either by lower government spending including entitlements and / or higher tax collections.

Ten years ago the tech bubble broke causing untold damage to the investor. I have always contended that the investing public has a 10 year memory. As I see increased IPOs for companies like Groupon, Pandora and Zinga it seems like the lessons of the late 1990's and 2000 are being forgotten. The investors seem to be infatuated with companies that have a suspect business model or an interesting way of looking at earnings. "Beware of Geeks bearing gifts."