Dec 31 2009

2009 – The Economic/Financial Year in Review

“After the pact, the Royal Navy was required to scrap the Grand Fleet’s backbone.  The Admiralty pledged itself never to build a naval base in Hong Kong.  England’s absolute command of the seas, so vital to the Empire, was over.  Britannia no longer ruled the waves, not because world opinion objected, but because, having spent 5,000,000 pounds sterling during the war, it simply couldn’t afford to.” – William Manchester, The Last Lion

 

It might not be apparent why I included this passage which describes how dramatically Britain’s course was altered following World War I.  I would like to believe this isn’t indicative of where the U.S. is heading following the second Gulf War, but there are certainly parallels that should be considered.  While I don’t believe a diminished future is sealed for the United States of America quite yet, it should be clear that our current course could easily lead us to become a second-rate world power.  It is not possible for a single country, no matter how big and powerful, to please and/or protect all the humans on the planet.  Enough said.

 

I think most will agree that 2009 is ending with a slightly positive momentum compared to where we were a year ago.  Just for fun, here is my annual recap…and here’s to a better 2010 – because we all know there is plenty of room for further improvement.

 

January 2009 – 1.  The U.S. Congressional Budget Office estimates the federal government will run a $1.2 trillion budget deficit in fiscal year 2009 and that the enactment of the economic-stimulus plan would increase that deficit; 2.  The Bank of England cuts interest rates to 1.5%, its lowest level in its 315-year history; 3.  Icelandic prime minister Geir Haarde announces the collapse of his coalition government in the wake of the country’s financial crisis.

February 2009 – 1.  California’s government goes broke and issues IOUs on all expenditures not required by law; 2.  Bankruptcies in the United Kingdom rose during 2008 by 50% to an all-time high; 3.  The Dow Jones Industrial Average and S&P fall to their lowest levels since 1997.

March 2009 – 1.  The UK’s government increases its ownership stake in Lloyd’s Banking Group from 43% to approximately 60%; 2.  Japan’s economy posts a record deficit of 172.8 billion yen; 3.  Premier Wen Jiabao says China may introduce a new stimulus package if the current financial crisis intensifies and he also expresses concern over U.S. Treasury securities.

April 2009 – 1.  The Group of 20 announces a US$1 trillion agreement to combat the current financial crisis; 2.  China imposes pay limits for executive officers of state-owned financial institutions; 3.  China’s economy grows by 6.1% in the first quarter 2009, the lowest increase since 1999.

May 2009 – 1.  The Eurozone’s 16 national economies contract by 2.5% throughout the first fiscal quarter of 2009.

June 2009 – 1.  General Motors, once the largest and most powerful corporation in the world, files for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code; 2.  Iceland’s rate of unemployment reaches 11.8%.

July 2009 – 1.  General Motors emerges from bankruptcy protection after 40 days under court supervision; 2.  China’s foreign exchange reserves reached a record US$ 2.13 trillion; 3.  The Dow Jones Industrial Average closes above 9,000 for the first time since January.

August 2009 – 1.  Hong Kong posts 3.3% growth over its previous quarter, far exceeding predictions, signaling an end to its recession; 2.  The U.S. budget deficit will reach $1.6 trillion, the highest ever recorded; 3.  The Democratic Party of Japan wins 308 seats in the 480 seat House of Representatives, ending nearly 50 years of control by the Liberal Democratic Party.

September 2009 – 1.  The G-20 Finance Ministers outline plans for banking reform, including tougher regulation of financial institutions.

October 2009  – 1.  The International Monetary Fund states that the global economy is “recovering faster than expected”, raising its forcast for global growth to 3.1% for 2010, up from 2.5%; 2.  The Dow Jones closes above 10,000 points for the first time in more than a year.

November 2009 – 1.  Dubai World, the state-owned real estate and ports giant, asks for a moratorium on its US$59 billion in debt until at least May 30, 2010; 2.  The Central Bank of the United Arab Emirates announces it will provide liquidity to Dubai banks.

December 2009 – 1.  The FDIC, which insures deposits in U.S. commercial banks, runs a deficit of US$ 8.2 billion; 2.  Japan unveils a 7.2 trillion yen stimulus package to strengthen the country’s economy amid signs it is weakening; 3.  140 U.S. banks failed in 2009.

 

And so…raise your glass to a better 2010 for all.  Cheers!

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Nov 25 2009

The Season of Gratitude

“Gratitude unlocks the fullness of life.  It turns what we have into enough, and more.  It turns denial into acceptance, chaos to order, confusion to clarity.  It can turn a meal into a feast, a house into a home, a stranger into a friend.  Gratitude makes sense of our past, brings peace for today and creates a vision for tomorrow.”  – Melody Beattie

 

From now until the New Year we are expected to contemplate the good things in our lives and hopefully bring some happiness to those we care about.  If this is not on your agenda then you are certainly missing out.  There is plenty of time for striving and dissatisfaction – so make the most of this gift.  Be grateful and generous every chance you get.

 

Much has changed since the financial meltdown began in September 2008, just over a year ago.  And while it remains less than rosy, I think most will agree that recovery has come sooner than expected.  This is not to suggest that the millions of people around the world that are unemployed, bankrupt, or both are feeling good right now – but it could easily be far worse.  I predict it will be a long time before we get back to an easy time of prosperity for nearly all.  In fact, I seriously doubt real estate will be the same in my lifetime – but overall it will be better for most.  In the meantime (especially during this Season), I suggest you thank God for the good things in your life and be a source of encouragement for others.

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Oct 30 2009

Keep your friends close and your…

Published by under Global Economy

“We are business partners who share material interests rather than common values.  Obama wants us to become strategic partners or friends but we aren’t either of those.” – Yan Xuetong

 

I am not convinced anyone really knows what China is up to – maybe not even China.  Is China now suddenly a peaceful giant more focused on improving the standard of living and quality of life of her billion-plus citizens or are the leaders strategically positioning the country for world domination?  We do know more about the current position than where the Chinese actually want to be.  For example, we know China has bailed out the U.S. to the tune of over a trillion dollars (in treasury securities, etc.) and the two countries are mutually dependent to a large degree.  We also know China is aggressively building military strength and developing advanced technologies for space exploration.

 

Rather than surmise what China’s real intentions are, I thought it would be more useful to include a few interesting points from lecture recently presented by the former Chinese Ambassador Ma Zhengang at the London School of Economics and Political Science (15 Oct 2009).  According to Ambassador Zhengang:

 

1.  “China is the third largest economy and the third largest trade power in the world with the largest foreign reserves.”

 

2.  “With the end of the cold war between the two superpowers, people all over the world were expecting of peace and development in real earnest.  But their fond dream was frustrated by the hegemonical ambitions of the United States.”

 

3.  “As the only superpower in the world, the U.S. cherished a blind belief in unilateralism and tried to build up an international order dominated by itself.  They failed to see the world trend towards multi-polarity and the development of globalization, and announced arrogantly that the U.S. could go it alone”.

 

4.  “The world balance of power is undergoing changes of great significance.  This has begun to reshape gradually the whole international landscape, politically, economically and socially.”

 

5.  “The development of globalization has made countries in the world much more linked and connected, and interests are increasingly interwoven.  Under such circumstances, any action from selfish motives with an aim of profiting at the expenses of others would often bring harm to oneself.  There is less and less room for zero-sum games.  Mutual cooperation for win-win results has become a universal concept and a new catch word of the time.”

 

6.  “The global financial crisis begun in the United States swept rapidly over the world and almost in an instant took the world economy from boom to bust.  Many parts of the world have plunged in a grave depression.”

 

 7.  “The present international system, including the international financial system, is in for major changes.  Reform is imperative.”

 

8.  “As the largest developing country with one fifth of the world’s population, China’s emergence as a global power is certainly the most influential event in the present epoch.”

 

9.  “The total purpose of China’s development is for the continuous raising of quantity and quality of the Chinese people’s life, material and cultural, and contribute to the progresses of the world, but not for world domination and hegemony.”

 

10.  “China’s development is mainly relying on China’s own human and material resources, but not on external expansion and plunder.”

 

11.  “China stands for common development and common prosperity.  China cannot develop in isolation from the rest of the world, nor can the world enjoy prosperity and stability without China.”

 

12.  “China is promoting building a harmonious world of lasting peace and common prosperity.  The key concepts are: Peace, Cooperation, Win-win Results, Diversity and Tolerance.”

 

What do you think – do you buy it?

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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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Apr 07 2009

Our Two Favorite Investment Geniuses

“I will die and go to hell if it’s a Ponzi scheme – it’s no Ponzi scheme…if it is a Ponzi scheme, why are they finding billions and billions of dollars all over the place?” – R. Allen Stanford

 

Well, I didn’t do very well last month with only one post, so I will try to do better in April.  I thought it was about time we revisited the status of Messrs. Madoff and Stanford.  As most of you probably noticed, there has been a good deal of continuing coverage on Mr. Madoff, but Mr. Stanford hasn’t received much national coverage since the initial story broke.  I say lucky Mr. Stanford – right?  Unfortunately for him and his business associates, just because the media has other fish to fry doesn’t mean the SEC does – but more on that in a minute.

 

It shouldn’t be such a surprise to Mr. Bernard Madoff or his family and business associates that when you deceive a whole slew of powerful people and institutions and oh, by the way, burn through $50 billion of other peoples’ money – you might just be sued by some of the victims.  This of course is exactly what is happening and let me just add that those doing the suing are going after every penny or any asset with tangible value.  Madoff started transferring assets and sending money to family members almost immediately, but he has clearly been found out – so the lawsuits will ensure that what remains will probably mostly end up with the lawyers – but better than Madoff or anyone he wants to have it.  Bernard’s brother Peter recently received some bad news when he learned that he had to return the vintage Aston Martin that was purchased for him last year – if this was only his biggest problem.

 

As for Mr. Stanford, he vehemently denies any wrongdoing and maintains that the SEC decided to make his company the scapegoat after completely missing the Madoff scam for two decades or longer.  Apparently, while there are some shady things that went on at Stanford Financial, they hadn’t yet spent the entire $8 billion that they brought in with high-yield CDs and there is some indication that significant assets are still held by the firm.  This hasn’t discouraged the SEC and according to spokesman John Nester, “We stand by our allegations.”  And there you have it.  I bet James M. Davis and Laura Pendergest-Holt are hoping all the money can be accounted for – or they will be joining R. Allen in the pokey for a long time!

 

 

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