Friday, December 13, 2013

Today Senator Patty Murray and Rep Paul Ryan are touting a new "bipartisan" budget deal. A better name for the deal would be "business as usual". We are witnessing the triumph of the military industrial complex as they have successfully reinstated spending to pet defense contractors while promising that we will save some money in the future on something or other.  Murray who represents Washington state where I believe every other person works for Boeing and Ryan, who receives significant campaign contributions from defense contractors, have returned to business as usual in our nation's capital. Their bill is being strongly defended by John Boehner who hails from Ohio where we manufacture the Abrams tank which is then driven to Nevada and stored in the desert because nobody needs all the vehicles we are producing. The sequester is not an ideal choice for fiscal policy but at least the spending cuts were across all sectors. This current "deal" signals that nothing is changed.

Pope Francis has made numerous statements recently about economic inequality. I think this is a good thing. Some commentators took exception to this (i.e. Larry Kudlow) as if economics exists in a vacuum. Larry seemed to be outraged that the Pope didn't say you should make all the money you can all the time with little regard for the consequences. I don't think basic human concern for the impact of economic events on the lives of people is off limits. Life has to be about more than money. In New Jersey, the state  recently gave approval for on line gambling . At the same time, in response to the Affordable Care Act, the state took no steps to make health care available on line..  I am not endorsing the Affordable Care Act nor condemning gambling, I just think is sad that the state has these priorities.

Wednesday, October 30, 2013

"Alan Greenspan, won't you please go home"

The only thing worse than the policies pursued by the former Fed chairman is the current book tour he has embarked upon to try to convince somebody he wasn't at fault for the 2008 financial crises. Alan has appeared everywhere recently to tout his book "The Map and the Territory". Greenspan is trying to justify the enormous mistakes he committed by implementing a deeply flawed monetary policy. Like all "experts" who are found to have feet of clay Alan acts like nobody could have foreseen the crash or everybody thought alike. This is 100% wrong. He was head of the Federal Reserve for god's sake! He is equating his knowledge with the average cab driver in NYC as to what is going on in the economy. Personally I think this is unfair to the cabbies who I believe had a clearer picture than Greenspan. Alan was too busy lapping up adulation from Congress to pay much attention to his real job.

The simple facts are that Greenspan was appointed by Ronald Reagan in August 1987. This was just in time to reap the whirlwind from the stock market crash in October and the Saving & Loans crises following the implosion of the junk bond market (not his fault). That economic set back was a mini 2008 and all the lessons that remained unlearned about unregulated lending activity by financial institutions came back to bite us in 2008. He had firsthand knowledge of how these events unfolded but now wants to believe that somehow people have changed the way they behave and "nobody" could have known.

In a larger sense it is time for many of our "leaders" to move on. Just because a guy has a dark suit and speaks in a deep voice the media acts as if everything he says is solid gold. This is regardless of the abysmal record of the individual's performance. So in addition to Mr. Greenspan, Larry Summers, Robert Rubin, Dick Cheney, John Bolton etc. should have the decency to exit stage left and be heard no more. This is based on their record of being wrong in most of their decisions and policies. It clearly transcends party affiliation.

Wednesday, October 23, 2013

The Government shutdown / debt ceiling breach is behind us for now. The "leaders " in Congress indicate they get the message that this type of brinkmanship is unacceptable to the business community and the saner of their constituents. The news media is acting as if the problem has been solved and reason and compromise have prevailed. Fat chance. During the government shut down more obscure Congressmen were on national news broadcasts than ever before. This is free money as far as a politician is concerned. First term Representatives from small states were sought after by CNN, Fox, NBC, etc. to recite their party's talking points as if they actually understood what they were saying. The only thing we can be sure of is that the "shutdown" taught Congress how wonderful all the media attention is for Congressmen. The economic incentives are now aligned to motivate Congress to keep doing what they are doing.

The history of the US is filled with demigods and charlatans who make a lot of noise and are dismissed by rational people as a mere annoyance. These people are dangerous and should not be dismissed lightly. They can cause serious harm to the country or the economy. We all need to remember politicians like Senator Joseph McCarthy and Senator Huey Long.

Tuesday, October 1, 2013

The silly season is upon us. Apparently the House of Representatives flunked 6th grade civics and doesn't really understand how our system of government works. If you want to get rid of a law you need to pass the new law in both houses and send it to the President to sign and if the President vetoes it you need a super majority to overturn it. This would entail making a coherent case for the new law and working hard to convince people that this is in their best interest. It is much easier to keep shouting to people who agree with you and avoid the messy process of actually doing something constructive. I guess we get the Congress we deserve. As an aside I do not know whether the Affordable Health Care Act will be good or bad, I do know as a business owner for 30 years that the current system is too expensive and inefficient.

I think if Congress is willing to "shut" the Government they should go all the way. Close the airports, the ports, the interstate, stop funding for Congress including pay for members, don't send Social Security checks, turn out the lights in the Capitol, tell the soldiers to go home, stop the defense plants in the congressional districts, etc. The current shut down has all the sincerity of a TV "reality" show. Just when you think Congress can't sink any lower they manage to lower the bar, again.

Thursday, August 29, 2013

Wall Street is constantly changing. If you listen to the news media you would think that everything remains the same until Congress or the SEC decides to increase regulation or get more involved. That is not the case. Recent volatility in the financial markets have an very important lesson for the immediate future and provide an insight into the state of the US markets. This lesson is lost on most bond fund managers, which is why if you are invested in a bond mutual fund you have been getting killed recently. Wall Street has been quietly cutting their risk profile,not in response to the hue and cry of Congress but because a lower risk profile make better economic sense in terms of profitability. The fact that the big trading firms are less willing to carry inventory means that when institutional investors want to sell large blocks of bonds the price will drop farther and quicker than expected. A study of the corporate bond market in the late spring / early summer or the municipal bond market this summer will illustrate this point.

Wall Street firms have learned lessons from the financial crash of 2008, mutual fund managers have not.

Congress, who never cease to amaze, is warming up for another bogus discussion of the debt ceiling. Since all revenue bills must originate from the House the fact that the House is now considering not authorizing the funds to pay for the laws they have enacted makes less sense that usual. It is the equivalent of holding a gun to their own head and threatening to shoot themselves unless you stop them from doing what they just did. This is not fiscally responsible, it is just stupid.

Monday, August 5, 2013

Random thoughts upon returning from vacation;

S & P is running radio ads touting what consummate professionals they are and how they " have taken to heart the lessons learned in the financial crisis" . What they have neglected to do is take responsibility for their actions in creating the aforementioned "financial crisis". S&P is acting like the financial crisis was some random event rather than a completely preventable occurrence if firms like Moody's and S&P had done their job.

Why does everyone admire JP Morgan as the "good" bank? In the last year they have admitted their risk controls are non existent (London Whale), paid large fines for manipulating both the natural gas and aluminium markets and been knee deep is the bogus financing that wrecked Jefferson County Alabama. If they are the good guys, what do the bad guys look like?

Fabrice Tourre of Goldman Sachs has been convicted of securities fraud in a highly publicized case recently. Maybe all the young hopefuls who swallow the Goldman Sachs kool-aid will pause when confronted with an ethical dilemma and at least think about it before trying to prove how clever they are. Secondly, does anyone think that Fabrice's boss had nothing to do with the fraud?

Nothing has changed in Europe in re countries like Greece, Portugal, Spain, Italy, Ireland etc. The only hopeful sign is that now the European Central Bank (ECB) realizes they must try to stimulate the economy. The bank tried to solve the liquidity and fiscal crisis by contracting economic activity through "austerity." I am not sure what economic theory they were using.

Thursday, June 6, 2013

In the Wall Street Journal on June 4, 2013 section C page 1 there was an article which discussed the fact that an entity lyrically titled the "Financial Stability Oversight Council" (FSOC) which is led by the Treasury Department has decided they should designate certain companies as "systematically important" and should therefore "keep an eye" on these companies. 

As a bit of background the voting members of the FSOC are; 
And who did these worthies decide they should keep an eye on? Wait for it -  AIG

AIG are you kidding me? Five years after the financial crisis when the egregious behavior of AIG almost ended western civilization as we know it, and these protectors of the commonweal are just now getting to the point where they believe they should watch AIG to make sure they don't do it again. You can't make this stuff up!! The amount of money the US taxpayer had to pony up to bail out the company and its trading partners (read JP Morgan, Goldman Sachs, Morgan Stanley etc.) was astronomical. The fact that AIG even exists is an artificially created miracle. Is there anyone in DC that understands what happened in 2008? 

I don't want to be too negative but with public servants like the above it might be time to stock up on bottled water and canned goods and head to northern Idaho. I don't like our chances.

Tuesday, May 21, 2013

 They are back! The rating agencies (Moody's, S&P And Fitch) who didn't have the good sense to crawl under a rock and die for their part in the 2008 financial crises have returned. After indeterminable testimony before Congress where the CEO's all swore their behavior did not reflect the high ethical standards of the company, the agencies are up to their old tricks. An article on Bloomberg titled Ratings Shopping Revived in Asset-Backed Rebound discussed the fact that the rating agencies seem to be selling their expertise again to the highest bidder. The quote below is from the article and sums it up rather neatly;

 “Imagine the pharmaceutical industry having six FDAs, all competing to approve drugs,” said Rob Dobilas, who founded Realpoint LLC, the credit-rating company bought by Morningstar Inc. in 2010, referring to the U.S. Food and Drug Administration. “Everyone would be dead.”

The rating companies like to hide behind the bogus theory that they provide some kind of objective evaluation on securities when they are in the business of selling their ratings for money. I have news for the CEO"S who testified before Congress, their egregious behavior was exactly who they are. Their behavior reflected their ethics and standards perfectly.

Monday, April 29, 2013

In February, I wrote about the budget game I called "Cancel the football program." The first winner in the game is the FAA and their furlough of the air traffic controllers. They took the path of maximum inconvenience for the public and parlayed it into getting a release of long term capital improvement funds to cover wages. "Special Assist" goes to every member of Congress who voted for this supposed fix to the sequester. Congress ( both House and Senate) tried to force themselves to actually make policy by imposing the automatic cuts if nothing got done. Now they are in the position of working diligently to avoid even that consequence of their ineptitude. In the weeks to come I expect every other agency involved in the sequester to try the same thing.

There was a good article in the Financial Times this weekend concerning the debate about austerity vs stimulus as the better policy for the current state of the US economy. The article reviews the experience of England, Ireland, Japan and Spain to their austerity policies and the attendant problems and progress. It seems like all major world economies are regressing to the middle as the severe austerity countries (Ireland, Spain) are beginning to pursue expansion mostly in response to high unemployment and the stimulus countries (US) are beginning to address long term debt levels. As I stated earlier this year I believe the sequester will not be enough to push the US economy into negative growth. It will however slow things down.

Wednesday, April 17, 2013

The commodity markets are telling us that the world economy is slowing down. Besides gold dropping like a rock, many other commodities are weak. This is based on perceived weak demand for commodities in the future. With Europe and England making a conscious decision to opt for austerity a few years ago the last glimmer of a growing economy was the US. We have not actually felt the effects of the sequester but the perception that the US is willing to forego growth and cut government spending to start correcting the deficit is enough to push the world economy onto a slower track. In the US, this slower track will manifest itself by showing lower growth and lingering unemployment into late 2015. For the rest of the world, the effect will be magnified when combined with their existing austerity measures.

Europe has not made much progress with their existing problems. Portugal and Ireland requested and received an extension on their bail out payback. Greece is same old, same old. The unemployment numbers in countries like Spain and Italy are enormous. There seems to be a recognition that the EU should look to a more pro growth and a less austere monetary policy. It is impossible for any economy to correct its deficit or overspending history without growth. No growth, no increase in tax receipts, no increase in job creation, no decrease in unemployment. All this talk about confidence and job creation is hokum because unless a business senses an opportunity to expand it will not add jobs.

The commodity markets are pointing to a worldwide contraction, the bond market is on board, the train is leaving.

Monday, March 18, 2013

Ina Drew testified before the Senate last week .Ms Drew was one of the highest paid people at JP Morgan Chase. During her last two years of employment in 2010 and 2011, she made over 15 million dollars per year. She was the Chief Investment Officer and supposedly watching the risk levels of the firm's proprietary investments. When asked about the "London Whale" debacle which blew a 6 billion dollar hole in the bank's profit, in the department she was in charge this was her reply,

 "things went terribly wrong" she said, adding that some of the large purchases of derivatives last March "were not bought to my attention on time"  -  WSJ March 16,2013

Here we have an executive making 15 million dollars a year, sitting in her office waiting to be told what is going on in her department. Hello! anybody home? Just what did Ina think her job was?

A special award for Corporate double speak and responsibility evasion goes to American Airlines. As the company emerges from bankruptcy, they are petitioning the judge overseeing the process for a 20 million dollar bonus for the Chairman of the company, Tom Horton. Tom, who led the company into bankruptcy, jammed the workers and stuck it to the investors is worth it because according the Andrew Backover an American Airlines spokesman,

“The relief requested will appropriately motivate a strong management team during the integration process to ensure the value potential of the merger is realized,”   -  Bloomberg News 3/16/13

Translation: Unless you reward management for bad behavior, we will not do the work we are getting paid to do in the first place. These people don't even have enough self perception to be embarrassed. Nothing has changed on Wall Street, we are still through the looking glass.

Monday, March 4, 2013

"Even if you depreciate the exchange rate you can't create more fish"

This quote from a governor of the Iceland Central bank illustrates an important consideration in all of our current economic discussions. Mar Gudmundsson was talking about a lower than expected export boost to the Iceland economy from a favorable exchange rate. What he is pointing out is that all economic policy has to exist in the real world. The world is finite, there are only 24 hours in a day, there is only so much oil in existence, etc. No matter how things sound in theory they must be applied in a lumpy, inefficient, chaotic world. At least in Iceland they are willing to face reality.

Compare and contrast Iceland's approach to the debate in the US. John Boehner said on Sunday that he was "not sure" if the sequester would hurt the economy but he was "concerned " about it. I have news for the Speaker, it will hurt (have a negative impact) the economy. That is not open to question. The question the Speaker and indeed the entire government should be focused on is whether we believe this slowing of the economy is warranted as necessary to long term economic health and is there a more efficient way to cut the budget so we get maximum impact from the cuts. In the late 1970's Paul Volcker forced the US economy into recession to get rid of double digit inflation. It was painful but necessary and set the stage for years of growth and prosperity. Until the politicians are willing to publicly acknowledge simple economic concepts we will be stuck in this repetitive cycle of nonsense. Decreased government spending will slow the economy down, that is a fact, whether or not this is the right time to do this, is an opinion. Very smart people disagree on the timing, that is fine, we need to let the debate air and pick a course of action.

Thursday, February 21, 2013

The Pentagon is currently engaged in a marketing scheme which I like to call "Cancel the football program".  Every city and town in America has seen this before. Wherever there is a movement afoot to reign in the school budget because there is a bloated administrative structure or employee benefits have gotten out of control the first thing the entrenched bureaucracy says is they will be forced to cancel the most popular program like football in an attempt to rally support and maintain spending at the same wasteful level as before. As the March 1 sequestration approaches the Pentagon and their congressional supporters (which consists of all 100 Senators and 435 Congressmen) start screaming about weakening our national defense or talk about cutting benefits to our service people or veterans. What they are trying to protect is massive wasteful government spending that goes to their home state or district. We have enough tanks which the army says it doesn't need, or planes that don't fly all that well, or ships that leak. Politicians on both sides of the aisle are talking out of both sides of their mouths when they pretend to be concerned about the deficit caused by runaway government spending. The defense budget contains a large measure of corporate welfare.

Consequently I think a 10% cut across the board is probably a good thing, I would like to see the budget for Congress be included in this sequestration also.

The only ray of hope I see in this mess is people are finally admitting that reduced government spending will cost people their jobs. This has always been the case, it is simple economics. During the campaign it seemed as if the laws of economics were suspended as candidates tried to make people believe reduced government spending would create jobs. It won't. As a country we need an honest debate about economic choices and not live in some la-la land of economic fantasy.

Friday, February 8, 2013

This week the Department of Justice (DOJ) announced they are pursuing Standard & Poor's for fraud because of their behavior during the sub prime mortgage era. The DOJ contends that the rating agency knew the securities they were rating AAA were not that creditworthy and they were influenced by the fees they were collecting rather than any objective analysis. I have been in the bond business for 40 years and an announcement like yesterday's is equivalent to coming down on Christmas morning and finding a pony under the tree. Finally the Feds are saying publicly what every bond market professional believes 100%. The rating agencies were selling ratings to the Wall Street banks with intentional, callous and complete disregard for the investors they claim to be protecting. Bond market professionals have been complaining about the mercenary nature of the rating agencies since I got into the business in 1972. I know it is too much to hope for but I would love to see Moody's be next.

I think across the board cuts in government spending is a good idea. I would argue that a 10% initial cut might be a little heavy but a 5-7% cut I believe would be absorbed by the recovering economy and while it will reduce growth it will not push us into a contraction. Everyone in the country knows we spend plenty of money on defense, education, social security etc., so a reduction should not affect the quality of life. I hope we don't have another last minute session of Congress where the Senators and Congressmen find a way to protect the status quo and try to sell us on the idea that they have actually made progress on the fiscal situation. Cut everybody equally and move on.

Friday, January 25, 2013

How many times are we expected to buy the Brooklyn Bridge? Congress has decided to postpone the debt ceiling debate until May while they work on spending cuts. But this time they are "really, really really, really" going to address the issue. Fat chance. How dumb do we look? I have a better idea, why don't they go into a room and work out the details of exactly what they think we should do in a comprehensive form and present their ideas to the voting public. Is that too much to ask? The argument at the moment is stuck on one side saying "we don't want to pay for the spending we have authorized until you guys cut entitlements" and the other side counters with "we aren't going to do that". So the solution is to delay the confrontation another three months and run to a 24 hours news network and explain how it is not their side's fault.

What is even more unbelievable is the financial press is acting like this time is different.

Same Old / Same Old Department:  According to a NY Times article this weekend three Senators who receive heavy contributions from drug maker AMGEN managed to insert a $500 million price break in the fiscal cliff resolution bill that will be paid for by higher cost for Medicare. So the next time you hear Max Bacus (D- Montana) or Orrin Hatch (R- Utah) or Mitch McConnell (R- Kentucky) talk about cutting the deficit or fiscal responsibility you will know they mean it for everybody but the drug company that owns them.

Wednesday, January 16, 2013

Like most Americans I am fed up with the Senate and the House of Representatives. Over the years they have passed spending bill after spending bill and now they want to debate whether or not we should pay for the programs they instituted. If they don't want to pay for them then they should cancel them. How hard is this? Don't try to sell me some nonsense about fiscal responsibility, if Congress were fiscally responsible we wouldn't be having this discussion. The country has bigger issues than a made for TV drama about the debt ceiling.

There are signs of intelligent life starting to emerge, even on Wall Street. The board of JP Morgan has reduced Jamie Dimon's comp because of the trading loss in London. It is difficult to feel bad for someone who has to struggle through the winter on only 11 million dollars but the fact that the London loss was his fault and it is recognized as such publicly is a step in the right direction.

The US economy feels a little sluggish which I believe is due to all the noise about the "cliff". I believe the real estate sector will continue to improve, the earning of major US companies will be fine and the private sector will expand as the recovery continues. Congress has just approved a 60 billion stimulus package in hurricane relief and any spending cuts that Congress manages to pass will be minor. It is almost like the current uproar about gun control will give the politicians in DC the perfect cover to avoid any real progress on the deficit. In an ideal situation, the recent minor tax increase combined with a minor reduction in government spending, plus an improving economy should create better deficits numbers by year end. Stay tuned.

Wednesday, January 2, 2013

On Monday December 31, 2012 I bought some call options on the S&P 500 (SPY) because in the midst of all the noise about the fiscal cliff I believed that Congress only cared about how bad they would look if they did nothing. I am pretty sure Congress doesn't think in terms of what is good for the country they only think about what is good for Congress. I thought that if they did something (anything) the stock market would react on the upside only because Congress wasn't totally dysfunctional. This morning I sold the options for a profit. I did it as soon as the market opened because I think once the markets realized how little the House and Senate managed to do the rally would fizzle pretty quickly. This is a pretty silly way to make investment decisions.

2013 will be a difficult year for the markets. I expect:

The political situation remains confused and contentious and rancorous and ineffective.

Bond yields will remain low but there will not be the price appreciation witnessed over the last few years.

Stocks should be everyone's first choice and if the politicians don't manage to kill the economy, equities could be in line for a solid year.

With low interest rates I expect the housing sector will continue to improve.

Private sector credit quality will continue to improve and municipal sector credit quality will continue to slide.

I think John Boehner is done as Speaker of the House