Posts Tagged: Geithner

American Society / Business / The Federal Reserve — 0 Comments
10
Mar 11

Single Malt Scotch Index Redux

Occasionally I visit Warehouse Wines & Spirits in New York City.  No, I am not a paid booster for this store.  But clearly, it has become a must for aficionados searching for premium single malts at discount prices. (Note – there are other good single malt shops in the city such as Park Avenue Liquors and Skyview Wine and Spirits).  Besides indulging in the eternal quest for the perfect single malt, I view my pilgrimages as windows into what is happening in the economy.  Single malt is a pursuit of the upper middle class (or those aspiring to be) and a relatively small luxury item, compared to cars, furs, mansions and private jets.

Observations from the Warehouse Battlefield

First, gone is the variety of single malts available for sale.  For example, Warehouse used to carry four or more expressions of Laphroaig; now it carries two. The same reduction has occurred in its Talisker line.  Second, on the remaining lines, significant discounts have largely disappeared.  On some items prices have been increased from $5 to $10 per bottle.  Third, the most promoted single malt has been Lagavulin 16-year-old.  As I have mentioned in previous blogs, this particular bottling reached a low price of $47.99.  It has since experienced two price increases to the current $54.99.  This is still quite a bargain compared to prices across the river in New Jersey where it sells for as much as $95 per bottle.

Why Is This Important?

While it appears trite or silly to discuss single malt scotch, it is a good indicator of what is happening in the upscale import market.  Single malt is priced in Euros (I was surprised as I thought it would be in British pounds).  The price increases in this market reflect price increases in imports generally.  It also demonstrates that at least in the upscale New York City beverage market, demand has picked up somewhat and importers and retailers have some pricing power.    Even at this discounter, prices have increased 10-20%.  The era of single malt deflation is at an end, as my Single Malts I Like Ever (“SMILE”) has risen.  See Update on Deflation

One has to wonder how much prices have risen for more other necessary, important and basic commodities.  Further, it is interesting that our choices are beginning to contract.  My guess is that down the road Americans, who heavily rely on imports, will be “treated” to further diminishing choices, and higher prices on less desirable merchandise.

Thank you, Dr. Bernanke and Mr. Geithner, for trashing the dollar.  I will not be drinking to you.

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13
Sep 10

One Year of Blogging

After one year of blogging on economic, corporate, social and political issues, I thought I would try to make sense out of trends:

  • The rule of law has taken a major hit in the United States.  Some examples of this phenomenon are the unlimited guarantees to Fannie Mae and Freddie Mac, guarantees to banks and favored companies, and Federal Reserve purchases of mortgage backed securities. See Shredding the Social Fabric
  • We have exposed monetarist and Keynesian economic solutions as intellectually bankrupt.   Amazingly, the decision makers who believe in these theories have not been fired.   More amazingly, with all the evidence that we are still mired in a deep recession, we keep trying the same tired strategies.
  • Obama’s economic acumen and performance has been disappointing.  His monomaniacal focus on a health care bill that the country cannot afford hampers new hiring.  Worse, it enriches the insurers and big pharmaceutical companies.  And worst, he has wasted important political capital.   Further, with his tepid financial reform bill he missed a real opportunity to address citizens’ concerns about the excessive power of Wall Street.
  • Congress should be tried for malpractice.   Members of Congress did not read the financial reform or the health care bill.  Nancy Pelosi had the temerity to implore Congress to pass these bills so she and the public could find out what is inside.
  • The Executive Branch and Congress appear to be for sale to the highest corporate bidder.  Industry lobbyists essentially control Congress and the executive branch.
  • Where has leadership gone?  Congress used to produce real leaders: Everett Dirksen, Hubert Humphrey, Robert Taft, William Fulbright, Sam Nunn, Henry Jackson and others.  We may not have agreed with their views, but they were serious, well-respected, independent minded individuals.   We never doubted that these leaders put the country’s interests first.  The Executive Branch also produced great leaders.  Compare past Secretaries of the Treasury– Andrew Mellon, Douglas Dillon and Lloyd Bentsen– to the flawed and unworthy Timothy Geithner.
  • Political clout, not reason and merit, determine current policy.   GM, GE, the banks, municipalities and others were saved from extinction because of campaign contributions and union ties.  Picking winners and losers based on political considerations generates cynicism and undermines the guarantee of equal protection under our laws.
  • Zero interest rate policies encapsulate everything that is wrong with our current system.  We have impoverished the thrifty and the prudent and rewarded the profligate and the incompetent.   On the backs of savers, we have bailed out the banks.  This is particularly heinous because the victims of this policy are the retired and elderly who have watched their savings dwindle and their retirement lifestyles vanish.  An economic policy which encourages savers to speculate in the stock market or buy junk bonds is unconscionable.
  • Promises of better corporate behavior after passage of Sarbanes-Oxley have been false.  Congressional pressure on the Financial Accounting Standards Board to suspend mark to market accounting has created the “extend and pretend” economy.  We no longer properly recognize losses; banks know this and refuse to lend knowing they can obfuscate the true state of their balance sheets.  More damaging, the true financial condition of the banks leads investors to purchase equities essentially under false pretenses.  Many of the bank stocks have declined significantly from their peaks.
  • Culturally, extend and pretend has permeated beyond our financial culture.  BP and the government hid many facts about the Gulf oil spill.     Even now we probably do not know the full extent of the damage and independent researchers have been denied access to information.
  • Corporate Boards of Directors are still not paying attention. In the case of Mark Hurd the violation of corporate financial policies was rewarded with a generous severance package.  (Trust in a corporation is predicated on the integrity of their financial policies.)   His unemployment did not last very long, as Oracle recently named him co-president.  Did character matter to Oracle or its Board?  Does anyone have any shame anymore? Was the HP Board afraid to fire Hurd for cause?
  • We are becoming a divided country.  The government protects the rich and the poor.  The middle class is being economically squeezed by inflation in basic goods, unemployment or the threat of it, rising health care and education costs and diminished retirement savings.   All these things plant the seeds of political upheaval.
  • Finally, blogging serves an important purpose in presenting an alternative viewpoint to mainstream media.  Blogging is the antidote to endless economic cheerleading by paid media and government officials. Blogging has become the new millennium’s populist forum. For example, bloggers steadfastly maintained that we have not emerged from the recession/depression and there were never any “green shoots” of recovery.  The mainstream media now feigns surprise at reports of economic weakness and prognostications of a double dip recession.

Watching the passing parade of economic and political folly is both depressing and exhilarating.  Depressing because we believed there would be a change in business-as-usual Washington.  Exhilarating because the public is awakening to the fact that they have been misled.  And that augers a change in the status quo and perhaps a better tomorrow.

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American Society / Economics / Financial / International Finance / Political / Technology — 0 Comments
26
May 10

The Failure of the Technocrats

The Bible has some great story lines.  The inhabitants of Babel built a huge tower to the heavens to challenge the Master of the Universe.  Of course they failed; the tower first burned and then was swallowed up by the earth.  And the Master punished them with a fitting and eternal dilemma: the world’s people no longer were able to understand each other.  They would forever after have seventy different languages, live in different locations, and most importantly have different mindsets and worldviews.  My own additional take on the moral of the story:  when man believes he can control the entire universe and challenge the Deity, he is asking for trouble and retribution from the Master.

It is not unreasonable to postulate that we have made technology and its enhancements into a deity of sorts.  Without question, in several ways, man is pushing the ethical boundaries of its use of technology   This is not anti-technology rant, as there is much good in technological innovation,  but rather a comment on hubris and limits.  Perhaps it is worth thinking about whether or not we are courting some divine retribution of our own.

The Financial Crisis

At the core of the financial crisis is the naïve belief that we can control risk with numbers and computers. The inherently risky subprime crisis and debacle is the most spectacular example.  Look at the components: first, mathematical modeling of historical default rates.   Next, customer “choice” in risk level, when really the product carried risk level for everyone.  Then, bogus “protections” in the form of derivative “insurance” and “AAA ratings” that offered no protection at all.   Mathematicians used their own models to demonstrate the safety of their products.  Their marketing departments brilliantly sold us on core assumptions that were not true: US house prices would always increase in price; subprime mortgages would default at the same historical rates; homeowners would do everything possible to hang onto their homes; and counterparties underwriting the risk would be fine to pay creditors in the event of massive default.

As we now know, these assumptions were horribly wrong.  Mathematicians and Wall Street learned little from the 1998 failure of Long Term Capital Management where interest rate, equity and currency modeling diverged from historical patterns.  The result was near destruction of the financial system.

Deepwater Horizon

It is now more than five weeks after the Deepwater Horizon oil spill, and we appear no closer to staunching the spill at the source.   Americans have given little thought to the complexity of drilling in 5000 feet of water into 13000 feet of rock.  Oil and gas pressures are enormous and literally destroyed the blow out preventers.   The US Coast Guard has characterized the process to cap the well as challenging as the Apollo 13 rescue.  We do not even have a good estimate how much oil is spilling each day.  The original 5000 barrel per day estimates have been supplanted by scientific estimations of 40,000 to 100,000 barrels per day; a disaster the magnitude of the Exxon Valdez occurring every couple of days.

Our thirst for oil has led us to the outer boundaries of man’s capability to control the consequences.

Enter the Technocrats

Perhaps it is time to re-think the role of technocrats in society.   We have believed the mainstream media’s propaganda that with the right science, math or technology we can control the universe.   This attitude is no more in evidence than in the hubris of Bernanke, Geithner, Summers and Obama that they have conquered natural economic cycles and protected us from another depression.

In fact, we do not know if we have entered a second downturn.  However, we should be highly skeptical if not outright disdainful of any all-knowing group of technocrats.  Man is having trouble controlling “smaller events” like one oil well or one country’s subprime market.  Our own economy is complex and exists within a more complex backdrop of global events like a crashing Euro, Chinese inflation, diminishing energy resources, conflict in the Middle East and other interlocking problems.

Adjusting a couple of economic dials through deficit spending, bailouts and artifice will probably end in tears.   The European Commission and the Obama Administration would be better served re-reading the Tower of Babel story and holding off self-congratulations in any language.

We have heard “mission accomplished” one too many times.

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4
Apr 10

Nothing from Nothing

Nothin’ from nothin’ leaves nothin’
You gotta have somethin’
If you wanna be with me…
I’m not tryin’ to be your hero
‘Cause that zero is too cold for me

Nothing from Nothing – Billy Preston

Zero interest rates have a clear and pernicious effect upon the elderly. See Is The Administration Determined to Make the Elderly Poor? Worse, this policy has broader implications for all savers and our national competitiveness. A robust household saving rate is integral to investment and long term American prosperity.  America’s two major competitors have healthy household savings rates, Germany (10.9 % in 2008) and China (30% in 2009) vs. 1.8% in the US in 2008.  Not surprisingly, the export led economies of China and Germany have fared better than the US during the financial crisis.  And while the mainstream media has not focused on the zero interest rate strangle hold, more voices on the subject are appearing.

Genesis of the Problem

Our low savings rate has been US economic policy for the past decade.  An “emergency” interest rate cut to near zero has followed every financial crisis from the dot.com bubble burst to the housing market crash.  Unfortunately, these “emergency rates” have robbed savers, pension funds and insurance companies.  In a recent Wall Street Journal op-ed Charles Schwab laid out the problem of seniors in particular:

Today’s historically low interest rates may be feeding banks’ profitability, but they are financially starving our seniors.

In February 2006, when Ben Bernanke was first sworn in as chairman of the Federal Reserve, the federal-funds target rate stood at 4.5%. That same year, the average yield on a one-year certificate of deposit was 5.4%. A retiree who diligently saved for a lifetime and had amassed a nest egg of $100,000 could count on an added $5,400 in retirement income per year. That may not sound like much to the average Wall Street Journal subscriber, but for a senior on fixed incomes that extra money improved the quality of his life.

Today’s average rate for an identical one-year CD is roughly 1.3%. On the same nest egg, that retiree will now get annual payout of just $1,300—a 76% decline in four years. See Low Rates are Squeezing Seniors

The Administration is Tone Deaf

Mr. Schwab is way too well mannered in his criticism: banks are now profitable at the expense of the entire economy, and the government endorses this policy.  Tim Geithner on the Today Show almost offhandedly asserted that:

It’s “deeply unfair” that some financial institutions that got taxpayer-paid bailouts are emerging in better shape from the recession than millions of ordinary Americans.

Geithner also argued that President Barack Obama had no choice when confronted with a financial crisis. See Pickpocketing Trillions from the People to Give to the Oligarchy was Deeply Unfair

What Secretary Geithner did not mention is that the banks can now virtually mint money by way of this zero interest rate policy.  The Secretary portrays himself as a powerless actor when in reality he is an architect of this policy and could encourage the end of this detrimental policy.

For Every Action There is an Equal and Opposite Reaction

From 1959-1994 the historic savings rate averaged 8.45%.  Given the damage done to net worth in the recession we need to return to that savings level or higher.  However, the government focused on restoring consumption with the “cash for clunkers” program and new home buyer tax credits.  Provisions of the new health care legislation (which imposes a 2.9% Medicare tax on “unearned income;” that is, interest, dividends, etc.) further discourage savings.

Finally, a graphic rendering from Michael Panzner of how low interest rates undercut savings attempts:

Panzner Savings Chart

The savings problem falls heavily to baby boomers heading into retirement.  In the recently released Employee Benefit Research Institute 2010 Retirement Confidence Survey 27% of participants had less than $1000 in savings and 54% had less than $25,000 of savings. (Primary residence value is excluded in this analysis, but we know how variable and ephemeral that asset can be.)  With a zero interest rate policy we are encouraging those who should not be speculating to invest in an overvalued stock market or take inflation risk with longer dated fixed income products. Worse, people are dipping into savings for living expenses.

Charles Schwab concludes with a plea for the government to keep the plight of the seniors in mind.  We need an outcry from pension funds, insurance companies, AARP, Congress and others who rely on safe fixed income investments to stop the insanity. We need to stop artificially depressing interest rates.  Messrs. Geithner and Bernanke: ’cause that zero is too cold for me (and for the country).

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American Society / Economics / Financial / Political / Uncategorized — 0 Comments
26
Nov 09

Can We Continue the Status Quo?

Every so often one comes across a brilliant essay that cuts to the heart of the problem.  Writing for the Prudent Bear in “Wanted: Iconoclasts,” Martin Hutchinson identifies the rising political anger at the “partnering” of the Obama Administration and Wall Street:

In such an atmosphere, with unemployment above 10% and rising, and U.S. living standards descending inexorably towards those of the Third World, it is not surprising that the public beyond the Washington Beltway is in an iconoclastic mood. Its iconoclasm is rational, economically speaking. The tight oligopoly of Wall Street is profiting excessively from its 2008 bailout by taxpayers, with the payments to Goldman Sachs and others on the AIG credit default swaps coming to seem increasingly misguided and possibly corrupt, given Goldman Sachs’s close connection with the Treasury Secretary Hank Paulson who disbursed taxpayers’ money in such an unproductive manner. AIG and Citigroup remain in business, with even AIG Financial Products, the cause of much of 2008′s pain, still in operation. Fannie Mae and Freddie Mac remain dispensing their guarantees to the housing market, noticed by the media only at the end of each quarter as they tote up their losses and demand further billions of the taxpayers’ money. The economically damaging subsidies to home purchase, diverting as they do scarce U.S. capital towards yet more unproductive housing, have just been extended both in time, for a further six months and in scope, to existing homeowners. The economic recovery, such as it is, appears to [be] sic producing almost no jobs but only an ever-widening spiral in commodity prices, affecting the costs of everything the public consumes and eroding the value of its meager savings.

Mr. Hutchison levels his criticism of the management of the financial crisis at the behavior of Obama, Bernanke and Geithner, whose knee jerk response was to maintain rather than reform system.  They chose to bolster bankrupt financial institutions at taxpayer expense. Further, they chose zero interest rate policies which punish savers and trillion dollar deficits ad infinitum which punish all taxpayers and future generations.  They created a giant irrational structure. (See Why Do All Irrational Structures Fail?).

Offering Solutions

Mr. Hutchinson does not deliver a jeremiad.  Instead, he departs from dire rants and prognostications and points to a rational way out of the ongoing crisis.  Recognizing that the current economic-political trajectory we are currently on is unsustainable, he provides policy prescriptions to end the crisis:

It will thus have become obvious that the housing market needs to be restored to a fully private market state, in which government subsidies are confined to the truly indigent. Zombie banks must be closed down, while the beneficiaries of “too big to fail” must be forced to slim down and divest operations until they are of a size where failure is conceivable. Commercial banks will simply become regional entities, whose failure would damage a regional economy but not the entire financial system. The trading behemoths will be broken into several competitors, whose market share will be too small for them to profit from “insider information” about market flows – a modest transactions tax will also reduce trading’s dominance. Home mortgages will once again be granted locally, with derivatives and securitization technology used only to prevent cost squeezes in high-growth areas. The obvious cost reductions in health-care, eliminating the current system’s cross-subsidizations, will be legislated to reduce the sector’s oppressive cost growth. Public expenditure generally will be put on a strict diet, with expansionist foreign policy ended, both in its belligerent and its globalist forms.  Finally, monetary policy will set interest rates at a level that rewards savers properly and prevents bubbles.

Conclusion

Staying on our current course of action is irrational.  Mr. Hutchinson clearly links together politics and economics.  Often economists take a narrower view, ignoring political realities.  Since this is not a normal recession and has all the hallmarks of a depression, “business as usual” policy measures taken to date have been ineffective and have deepened the crisis. There is a growing political reaction among the masses of Americans who face unemployment, inflated gasoline prices and foreclosure.  Democratic losses in recent elections were an early harbinger of that discontent.  There is still time for Obama, Bernanke and Geithner to become iconoclasts, break with orthodoxy and restore economic growth which will benefit all Americans.  Continuing the status quo will be harmful to the current ruling political class, the Wall Street elite and the economy.

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Financial — 0 Comments
11
Sep 09

Can You Invest in the US Equity Markets?

In the past there were investment benchmarks that a serious investor could examine before making a decision on what stock to buy.  Classic fundamental benchmarks were discounted cash flow, free cash flow, price earnings ratio, book value and other value determining measures.   Technically-oriented investors could examine 50 and 200 day moving averages, support and resistance lines, short sales coverage ratios, accumulation and distribution patterns among a myriad of indicators.  That was the world that existed pre-autumn 2008.  Then the new “Save the World” trio of Paulson, Bernanke and Geithner took unprecedented steps of direct government intervention to pick stock market winners and losers.  Add the Obama administration’s aggressive interventional programs such as healthcare, unionization and energy. We have now transformed from a free market economy where companies rise and fall on their business acumen to a state dominated economy where success is determined by political acumen.

We have turned classical economics on its head.  In the market place, weak companies with political connections are saved and efficient companies are punished.  I will return to the punishing of efficient companies later in this posting.

Much has been written about the financial industry.  But examine the automobile industry and the unprecedented level of government intervention.  The government has demonstrated that it will stop at nothing to “save” the Big Three American automakers and their union jobs. First, at the expense of creditors, government has intervened in the bankruptcy process to ram through pre-packaged bankruptcies and reorganizations.   Government now appoints management and favors unions.  It also guarantees new loans so these companies can borrow at favorable interest rates.

With the government firmly entrenched in the car business why not have a cash for clunkers program?  Demand is artificially stimulated for a short period of time under the guise of better gas efficiency and economic stimulation.  A few obvious flaws with this program:  1) we may have merely shifted future demand to the present with an almost certain drop in future demand; 2) politically we cannot limit the program to the Big Three since many of the most fuel efficient cars are foreign made by companies such as Toyota and Honda, thereby adding to our trade deficit; 3) many of the “clunkers” were probably quite serviceable vehicles and owned outright with no debt. Instead, we have induced consumers to take on more debt and 4) if we are truly interested in fuel efficiency why are encouraging an auto-centric, long commute, shopping mall culture when mass transit is woefully inadequate.

I have only picked one set of companies, the US Big Three, but this type of interventional behavior knows no bounds: GE, AIG, money center banks, credit card companies, builders, airlines, money market funds and the list is virtually endless.   All an industry needs is a good lobbyist, some union support or an “End of the World” story and the government coffers are emptied. It beats the hard work of developing new products and services, funding these new products and services, marketing, billing and collecting that real world companies face without government intervention.  The efficient company must compete in the capital markets for scarce capital with these government supported enterprises.  The efficient company must pay more for such capital, which is the lifeblood of the business, which ultimately is reflected in product and service pricing, profit margins and ultimately stock market valuation.

As we go forward, technical and fundamental analysis is probably useless.  What is needed is a bona fide political analyst to help with the next company to be showered with government largess.   Perhaps we need a new index – Government Owned and Dominated 500 – the Deity index.  There must be an investment bank (with assistance from the Treasury) already cobbling together an exchange traded fund.  I would submit it is near impossible to safely invest in the US equity markets when the playing field has shifted from economics to politics.

Note -Nothing in this post or blog constitutes investment advice.  Consult your own investment adviser for such advice.

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