Sep 30 2009

The Way We Were

“Lehman’s fall over a nerve-racking weekend a year ago pushed the financial crisis, which had begun months earlier with the subprime mortgage meltdown and the rescue of Bear Stearns Cos., to a terrifying new level.  Lehman’s bankruptcy, the largest in U.S. history, shocked investors who had expected the federal government to step in with a Bear-like 11th-hour rescue.  Its fall unleashed fears of a depression triggered by a domino-like toppling of battered financial institutions.” – Walter Hamilton

 

Having been born when I was, I missed the Great Wars, the first Great Depression, and the Cuban Missile Crisis.  My memories actually begin during the war in Vietnam and except for a few bumps here and there, I have enjoyed a relatively stable and secure life.  I took much for granted in my progressively improving life until exactly September 11, 2001 – and suddenly it was all so interrupted and uncertain.  I wasn’t personally impacted.  I didn’t lose any family or friends, nor was my career in jeopardy – but no matter how hard I tried to convince myself everything would be fine again, I couldn’t get back to where I had been.  Gradually over the next five years or so, despite growing turmoil around the world, I started to feel more settled once again.  Then in the summer of 2008, it was apparent we were in for a rough ride.  Once again the month of September delivered a world-altering event.  This time it fortunately didn’t bring physical death and destruction but it did bring the end of several storied financial institutions along with hundreds of banks around the globe – and no one will ever know just how close we came to a complete financial collapse.

 

Here we are a year later and I would be very interested to learn how others feel.  I have been doing my best to focus on work and family without dwelling on all the troubling news.  On one hand I recognize that the economy has stabilized and the stock market is recovering quite steadily, but on the other hand it seems many of us are quite apprehensive and anything but confident or carefree.  There is no silver bullet to fix all our economic woes.  In fact, many organizations and individuals will be forced to deal with the de-leveraging process for years to come.  Our governments can only do so much and it scares me to think of the growing deficits around the globe.  At the same time, everything seems to move faster in the Internet age, so just maybe the recovery will quickly gain traction.  I predict that we are two years away from real recovery (significant job and economic growth) – but I would be happy to be wrong as long as it happens sooner.  What do you think?

 

 

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Aug 30 2009

Contrasts in Asia

Published by under Global Economy

“When [unpopular governments] appear in other countries, there are movements in which people express their anger and demand change.  But this doesn’t happen in Japan because the LDP has held power for so long that the people have abandoned the possibility of standing up.”  – Yukio Hatoyama, 2001

 

I just spent the last two weeks in Asia, first in Japan and then in South Korea.  When I arranged the business trip several weeks prior, it certainly didn’t occur to me that I would have the opportunity to experience first hand such a significant moment in the history of both countries – and especially in Japan.

 

As of this morning, Yukio Hatoyama’s Democratic Party of Japan (DYP) has taken control of the Lower House and is now the ruling party.  In case you don’t know, this is major news considering the more conservative Liberal Democratic Party (LDP) has ruled for over five decades!  When I was in Japan, most people I talked to seemed to already know what the outcome of the election would be – and by our standards were acting quite blase.  Of course it is unlikely that a Japanese person would show too much emotion to a foreigner such as myself.  Several did admit that they doubt the DPJ will make significant progress, but they also acknowledged the LDP must take credit for too many squandered opportunities.

 

It is interesting to note that Mr.  Hatoyama comes from a wealthy, accomplished family, and has an interesting background, but this will be his first significant leadership role.  Not unlike the Democrats in the U.S., the DPJ promises to restore the anemic economy.  The problem is – there are no easy solutions.  Along with record public debt (greater than U.S.), Japan has one of the world’s worst demographic problems.  The low birthrate will create an environment in the next several decades where there will only be two working people per each pensioner.  This, of course, is a completely unsustainable situation.  I believe many average Japanese people are aware of the problems and this largely explains why the overall mood is less than uplifting.

 

A short distance over the Korea Strait, conditions are not so good either.  South Korea’s exports fell for a tenth consecutive month as demand for the country’s cars, electronics and materials continued to slide.  However, as reported by Bloomberg, “A weaker currency has helped South Korean exporters perform better than their Asian neighbors during the deepest global recession since the Great Depression.  Exports in Japan fell 36.5% in July from a year earlier, compared to Korea’s 21.8% decrease.”  Clearly, as bad as the economy is compared to a couple of years ago, it could be worse…and the Koreans seem to be taking it in stride.  From what I could determine, they continue to act rather upbeat and I found it quite remarkable to hear the public cheers and exuberance when they finally managed to launch a satellite – even if it did overshoot its orbit and fail to function properly.  Maybe one of my business contacts put it best, “The South Koreans are considered the Irish of Asia for good reason – they always recognize opportunity and they will work tirelessly to create a better future for themselves.”

 

As a final comment, regardless of where I have travelled this year, everyone is hopeful that the U.S. economy recovers quickly and remains strong in the future.  This is probably such a universal theme because – for as the U.S. economy goes – so goes the world…or so it would seem.

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Jul 25 2009

All that Glitters is Goldman Sachs

“If America is circling the drain, Goldman Sachs has found a way to be that drain – an extremely unfortunate loophole in the system of Western democratic capitalism, which never forsaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.”  – Matt Taibbi

 

While many companies and individuals have been devastated and are only beginning to recognize encouraging economic signs, Goldman Sachs reported record 2nd-quarter earnings of $3.44 billion, or $4.93 a share, blowing away the analysts’ consensus forecast of $3.54 a share.  If you work for Goldman, you are probably feeling pretty good right now – at least about your compensation.  It is just possible that Goldman will come to regret achieving this remarkable profitability when the rest of the world is suffering.  It is as though they have suddenly reached the pinnacle and in the process they have drawn the wrath of the masses.  Many are suggesting that Goldman Sachs is playing with a stacked deck, and from what I have read I tend to agree.  But…I also recognize that most companies and individuals would gladly game the system (the way Goldman apparently does) if it meant they would enjoy the same remarkable success.

 

Let’s be honest – it’s easy to sit on the sidelines or from an unfavorable position and take potshots at Goldman.  We should really ask ourselves if we would actually slack up on our potential if we were in the same position.  I think the answer is no…we would not.  We would ride the wave until we could ride it no longer!  I only wonder if Gordon Gecko (Stanley Weiser’s brilliant character in Wall Street) was correct when he said, “…greed, for lack of a better word, is good…and greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA.”  The rest of the world is wondering too – and only time will tell…

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Jun 26 2009

Jewel in the Crown

Published by under Global Economy

“Civilizations have arisen in other parts of the world.  In ancient and modern times, wonderful ideas have been carried forward from one race to another…But mark you, my friends, it has been always with the blast of war trumpets and the march of embattled cohorts…This, many other nations have taught; but India for thousands of years peacefully existed.  Here activity prevailed when even Greece did not exist…We, of all nations of the world, have never been a conquering race, and that blessing is on our head, and therefore we live…” – Swami Vivekananda

 

A couple of weeks ago I travelled to New Delhi, Mumbai and Kochi (near the cape) on business.  India is a land of such incredible social diversity and cultural complexity.  If you have been there, you know that words alone cannot describe the experience.

 

Improvement opportunities abound and the quality of life for millions is quite dreadful, but there are some good things to report as well.  For one, India’s GDP is still one of the fastest growing at ~6.5%.  Many Indians were expecting to surpass China this year and although this now seems unlikely, being a close second is nothing to sneeze at.  According to the people I spoke with, they haven’t noticed much of a slowdown so far.  The banks are still lending, capital and construction projects are not being cancelled or delayed, and domestic flights are at capacity.  According to EconomyWatch, the Indian government has earmarked 23.8 trillion rupees (US $560 billion) for infrastructure upgrades.  It expects to fund 70% of the project costs with the other 30% being supplied by the private sector.  Ports, airports, roads and railways are all seen as vital for the Indian economy and have been targeted for investment.

 

I must admit, I’m not ready to pack up and move there yet, but I do look forward to witnessing India’s progress over the next ten to twenty years.  I suspect if they can somehow figure out a way to control the population and improve the standard of living for all, India could find itself in a position of global significance.

 

 

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May 25 2009

You Can’t Lose in Real Estate – Hmm…

“Real Estate cannot be lost or stolen, nor can it be carried away.  Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” – Frankin D. Roosevelt

 

The economy of the Southeastern U.S., where I live, has been fueled largely by real estate transactions for the past ten-plus years.  From my travels throughout the U.S., I believe this to be the case in most regions.  Just about every individual, company, or organization has derived income or at least some degree of financial gain from the sale of residential or commercial real estate.  In addition to the agents, bankers, attorneys, architects, engineers, contractors, suppliers, truck drivers, etc. who are reeling because of the crash, now city, county, state and federal governments along with hospitals, schools, development authorities and everyone in between is feeling the pain.

 

Even worse, countless people who financed the purchase of a house over the past two to four years now sit on an upside-down mortgage.  This of course means that they owe the bank or mortgage company more than the house is worth in the market place.  This is a problem for the individual and the bank and it highlights another problem.  Not only have the banks loaned money for single-family residential real estate, but many have also loaned billions of dollars for luxury multi-story condos and residential developments that are now worth a fraction of what they were valued at just a few years ago.

 

I mention all this not to depress anyone further, but because I believe real estate can be a good place to invest once again (eventually), but not if speculation continues to be as prevalent in the future as it was over the past five years.  Real estate will only gradually increase in value if a large percentage of the purchasers intend to occupy or utilize the properties and can legitimately afford to meet the loan requirements.  When it seems like everyone you meet is flipping real estate for a profit, you better stay clear because it is only a matter of time before the bubble will burst.

 

Along with real estate, the broader global economy is in shambles too, and this is largely because we ignored basic business fundamentals – namely real value creation.  Over the past 10 to 15 years, many of the brightest minds rejected careers in science, engineering and corporate business and instead chose finance for a shot at the big time on Wall Street.  They learned quickly and helped develop extremely innovative and complex derivatives and financial models (see www.bankingwithjimmy.wordpress.com for more insight).  Mostly what they did was manipulate and game for their own significant gain – instead of contributing to the process of creating value.  There is certainly a place for finance, but real value creation comes from the goods being manufactured or the services being provided – not super complex derivatives that hedge or leverage and make a few individuals extremely wealthy while wiping everyone else out.

 

So once again – we have the opportunity to rise from the ashes.  Hopefully we can learn from our foolish greed and “irrational exuberance” and avoid another global economic disaster for the next fifty years or so.

 

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Apr 30 2009

The Communists That We All Depend Upon

“Of all the inventions that have helped to unify China perhaps the airplane is the most outstanding.  Its ability to annihilate distance has been in direct proportion to its achievements in assisting to annihilate suspicion and misunderstanding among provincial officials far removed from one another or from the officials at the seat of government.” – Madame Chiang Kai-Shek

 

It occurred to me recently while I was watching coverage of the G-20 in London that despite the reality that the United States and China are something less than allies in a diplomatic sense, the two countries are certainly joined at the hip economically.  This amuses me greatly when I think about what many of us in the U.S. – at least of my generation – were taught in school about China and communism in general.

 

Coincidently, yesterday I received an article published by Wharton Business School that included some very interesting facts and figures that support my observation above.  Most amazing, “China’s foreign exchange reserves have increased sharply over the past decade, from $216 billion in 2001 to $1.52 trillion in 2007, then $1.95 trillion in 2008.  Some estimates put the current figure as high as $2.3 trillion.  As a percent of GDP, China’s foreign exchange reserves grew from 15.3% in 2001 to 45% in 2008.  Economists estimate that about 70% of those reserves are held in dollar-backed assets.  China now holds as much as $1.36 trillion in U.S. securities and government debt.”  For more, read Attached at the Wallet: The Delicate Financial Relationship between the U.S. and China.

 

Most believe that China merely considers U.S. Treasury-backed debt the safest investment they can make, but others are suspicious that China is primarily keeping the value of the Yuan low and the U.S. economy as liquid as possible in order to sell more Chinese goods.  I am convinced the truth lies somewhere in between.  It is quite clear that unless China just wants to wipe out the whole global economy (which seems unlikely) – then these two super powers will continue to operate in much the same manner.  The U.S. certainly needs China to continue buying her debt and China needs the U.S. to keep buying Chinese products – and all the other countries are essentially on the sidelines hoping that nothing happens to damage this relationship beyond repair.

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Mar 25 2009

Did We Go Too Far?

“Since Thomas Rowe Price, Jr., founded our company in 1937 – in the heart of the Great Depression – the firm has witnessed many market downturns, including the long slow 1973-74 bear market…the bursting of the technology bubble in the early 2000s and subsequent broad market decline.  Although the magnitude and duration of the declines have varied, one thing has held true.  The markets have always come back.” – Edward C. Bernard, Chairman, T. Rowe Price

 

It has been a rough ride now for a long time – so much and for so long that I am reluctant to make any suggestions or even mild predictions on when we will begin to see anything significantly positive.  I don’t know about you, but it is impossible for me to grasp the enormity of the trillions of dollars of “toxic” debt that we are only beginning to understand.  The financial casualties and corresponding numbers are so far-reaching and incomprehensible that it makes my head spin.  I think it is safe to say that every individual and institution on this planet has been affected by now.

 

Of course this major economic mess has become the ultimate political debate in the U.S.  Finger-pointing and highly charged theatrical accusations prevent constructive consensus.  If there is a proper path for steering the world out of this mess – we can’t even come close to agreeing on what it is.  I tend to believe this is a classic example of a situation where “there are no answers – only choices.”  Being more of a Keynesian economist than anything else, I do believe that it is in the best interest of everyone for the government to step in and take action – to ensure liquidity, minimize systemic failures, and support the creation of jobs.  The real question for me is – how far should the government go?  Just maybe the burden being created is too great.  Maybe this is deficit spending beyond what we can ever hope to recover from – I just don’t know! 

 

In the early 1930s, President Roosevelt was criticized for not preventing more bank and business failures – which prolonged the Great Depression.  Some (Democrats) are convinced that Roosevelt acted brilliantly, while others (Republicans) blame him for everything bad that has happened over the past sixty years.  One thing that most seem to agree on is that it took World War II to bring prosperity back – at least in the U.S.  Well…I for one would rather not experience a world war – so let’s hope and pray we have taken the proper course of action.  Please feel free to post your good news!

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Feb 28 2009

The Wizard Speaketh

“The stupefying losses in mortgage-related securities came in large part because of flawed, history-based models used by salesmen, rating agencies and investors.  These parties looked at loss experience over periods when home prices rose only moderately and speculation in houses was negligible.  They then made this experience a yardstick for evaluating future losses.  They blissfully ignored the fact that house prices had recently skyrocketed, loan practices had deteriorated and many buyers had opted for houses they couldn’t afford…Investors should be skeptical of history-based models.  Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive.  Too often, though, investors forget to examine the assumptions behind the symbols.  Our advice: beware of geeks bearing formulas.” – Warren Buffett, February 2009

 

I for one have the utmost respect and admiration for Mr. Buffett and although even “The Wizard of Omaha” isn’t always right, he certainly hits the nail on the head more often than not.  So while I have about given up on offering insight at the moment (at least until we hit bottom), I won’t hesitate to direct you to the annual Berkshire Hathaway shareholders letter that just hit the web.  I strongly suggest you read Mr. Buffett’s commentary and carefully consider what he has to say.  You never know, your future prosperity might just depend upon it.  To the Shareholders of Berkshire Hathaway, Inc.:

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Dec 31 2008

2008 – The Economic/Financial Year in Review

“And ye, who have been met with Adversity’s blast, And been bow’d to the Earth by its fury; To Whom the twelve months, that have recently pass’d Were as harsh as a prejudiced jury – Still, fill to the Future! and join in our chime, The regrets of rememberence to cozen, And having obtained a New Trial of Time, Shout in hopes of a kindlier dozen.” – Thomas Hood

 

For me personally, and I suspect for countless others as well, 2008 was a year that will be hard to forget.  As with any period of time, there were good things that happened, but the widespread economic distress, a number of devastating world events and a particularly nasty U.S. presidential election leaves me grateful that 2008 is behind us.  I haven’t a clue what is just around the corner, but for the moment let’s all be hopeful that 2009 will be a better year.

 

Before we completely move on – I thought it would be fun to list a few events from each month…lest we forget completely.  So hold onto your seat!

 

January 2008 – 1.  Crude oil prices surge past $100/barrel on New York Mercantile Exchange; 2.  Gold reaches new record of $865.35/ounce; 3.  Dow Jones Industrial Average fluctuates around 12,000 with several significant drops upon news of probable recession.

 February 2008 – 1.  President Bush announces Federal Budget of $3.1 trillion and near-record deficit of $410 billion; 2.  U.S. Congress approves $168 billion Economic Stimulus Package; 3.  The Northern Rock Bank is formally nationalized by the British Government.

 March 2008 – 1.  A U.S. Dept. of Labor report shows that the U.S. economy lost 63,000 jobs in February; 2.  The price of Gold reaches $1,000/ounce for first time ever; 3.  U.S. investment bank Bear Stearns gets emergency funding from J.P. Morgan Chase with Federal Reserve Bank of New York backing.  Bear Stearns is ultimately purchased by J.P. Morgan Chase for $10/share.

April 2008 – 1.  EU announces investigation into bailout of Northern Rock Bank in United Kingdom; 2.  The World Bank announces a package of emergency measures to tackle the dramatic rise in basic food prices which has led to civil unrest in much of the developing world; 3.  The S&P/Case-Shiller Index of U.S. real estate pricing shows decline of 12.7% from February 2007 to February 2008 with 12 of 17 regions showing declines.

 May 2008 – 1.  U.S. Federal Reserve System auctions off over $24 billion in treasury securities to help relieve the subprime mortgage crisis; 2.  Crude oil futures contracts reach $120/barrel on the New York Mercantile Exchange for the first time; 3.  The U.S. Fed reports that the industrial output of factories, mines and utilities fell by 0.7% in April in a broad-based decline led by motor vehicles.

 June 2008 – 1.  Bank of England says that new mortgage approvals in the U.K. in April were at record lows; 2.  Ireland’s ESRI says the country is in grip of a recession for the first time in 25 years; 3.  General Motors announces it will close pickup truck and SUV plants in Canada, U.S. and Mexico eliminating over 10,000 jobs.

 July 2008 – 1.  Fed Chairman Ben Bernanke assures U.S. House of Representatives Financial Services Committee that Fannie Mae and Freddie Mac are in “no danger of failing”; 2.  Zimbabwe introduces new 100-billion-dollar bank note as annual inflation rate hits 2.2 million %; 3.  Governor of California Arnold Schwartzenegger acts to end budget crisis by firing 22,000 state workers and cutting the pay of 200,000 more.

 August 2008 – 1.  United Kingdom home repossessions rise by 48%; 2.  Unemployment in U.S. rises to 5.7% which is highest rate in 4 years; 3.  New York Attorney General Andrew Cuomo reaches a $7 billion settlement with Citigroup to buy back auction rate securities from about 40,000 clients.

 September 2008 – 1.  Despite growing unemployment and economic woes, Boeing machinists strike against Boeing over outsourcing, job security, pay and benefits; 2.  AIG seeks emergency $40 billion loan from the U.S. Federal Reserve; 3.  Bank of America negotiates to buy Merrill Lynch for $38.25 billion in stock; 4.  Lehman Brothers files for Chapter 11 bankruptcy after British Bank Barclays and Bank of America pull out of emergency buyout talks; 5.  Goldman Sachs and Morgan Stanley, the last two independent investment banks on Wall Street, become bank holding companies as a result of the subprime crisis.

 October 2008 – 1.  President Bush signs $700 billion bailout bill after it passes the House of Representatives; 2.  German Chancellor Angela Merkel announces that Germany will explicitly guarantee the deposits in banks held by its citizens; 3.  Dow Jones Industrial Average drops 800.06 points, its biggest intraday drop ever; 4.  Dow Jones Industrial Average falls to 8,579.19 points; 5.  Global markets fall steeply on fears of a major global recession; 6.  G7 finance ministers announce a plan to combat financial crisis by using “all available tools” to support key institutions and prevent their failure.

 November 2008 – 1.  Barack Obama is elected President of the United States of America and promises to do everything possible to stabilize the economy and bring greater prosperity to all Americans; 2.  U.S. Government announces second bailout of AIG Group for roughly $150 billion which is the single largest bailout of a private company in U.S. history; 3.  Crude oil futures close at $54.95/barrel; 4.  Citigroup announces it will cut 75,000 jobs by early 2009; 5.  IMF approves $2.1 billion rescue package for Iceland following its complete financial wipeout.

 December 2008 – 1.  U.S. Dept. of Labor reports non-farm payrolls contracted by 533,000 in November, worse since 1974; 2.  President Bush announces $17.4 emergency bailout of General Motors and Chrysler to protect each from bankruptcy; 3.  On the final day of the year, the Dow Jones Industrial average ends up 108 at 8,776.39.

 

Let us ring in the New Year with optimism and never in our lifetimes forget what created the Great Financial Tsunami of 2008.

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Dec 25 2008

‘Tis the Season

“What is Christmas?  It is tenderness for the past, courage for the present, hope for the future.  It is a fervent wish that every cup may overflow with blessings rich and eternal, and that every path may lead to peace.”  – Agnes M. Pharo

 

Probably like you I am feeling slightly more subdued this Christmas.  This is not to suggest that I am not hopeful or that I don’t have much to be grateful for.  I realize that I am far better off than much of humanity and I feel blessed to have a great family, my health, a home, a job, etc.  At the same time this has been a sobering year for most Americans – present company certainly included.  All I have to do is check the value of my stock portfolio and suddenly a wave of queasiness washes over me.  The financial tsunami that has reached nearly every corner of the world by now started here in the good ole U.S. of A.  Our collective greed and short-sighted foolishness has at least temporarily knocked us way below the lofty position we enjoyed for so long.  As a student of history I know we can come out of this in a better place and I firmly believe we will.  For now we must deal with our mess by remaining optimistic, working hard to truly add value in whatever we do for a living, and helping as many others as we possibly can.

 

What is my point in saying all this?  Well I just want to spread the news that we are all on this ride together – now probably more than ever in the history of mankind.  So on this one day in the year of our Lord 2008, I suggest you push all this mess aside and find a reason to think about the meaning of Christmas.  A baby was born in a manger over 2,000 years ago and he grew into a man that would change the world forever.  He wanted us to care for one another and be willing to forgive.  He also made it quite clear that it is far more important to give than to receive.

 

Merry Christmas.  Peace on Earth and good will to all men.  May this day be the beginning of a brighter future for us all.

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