Winston Churchill once said, "The Americans can always be trusted to do the right thing, once they have exhausted all other possibilities."
Well fine, the administration’s recent message to the vehicle industry, although not our "Drop Dead" of earlier sketches, comes close. The Bush administration caved to these guys; it fell for their swoon song - a melt down if GM goes. What utter nonsense. No body believes that any more; if they do, they’re dupes.
Obama’s message to corporate America - don’t look to get in line. It won’t be there. Very good. Very healthy. The guy has actually done something right.
Robert Craven
Monday, March 30, 2009
Monday, March 23, 2009
ENOUGH
This am we have a program from Treasury that appears to be constructive, and will go a distance in finding a home for the garbage on banks’ balance sheets. Next, to the broader picture.
We are forced to take much on trust. The band aid put in place by the G-20, Q4, prevented a world credit meltdown, or so we are told. We believe that is true. Now we are told that firms like AIG or Citi, or GM are too big to fail. But where do we draw the line, and how? When do we say "No" to further bailouts; when do we resist further government intervention in our marketplace? Or should we? How can we become empowered? How can we acquire a handle?
Two schools of thought come to mind, residing at opposite ends of the spectrum: 1) Socialists avow gov’t ownership of productive resources. Their answer is "Always", the more the better. Most Americans reject that premise. 2) The so-called Austrian School of Economics would answer "Never", not in any circumstance. Leave the economy alone, it is self-correcting. Certainly the process of creative destruction has placed the American free market first in the world; it is that process which Treasury Sect Andrew Mellon once said means, "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. Values will be adjusted, and enterprising people will pick up from less competent people." In other words, once the bust comes, the only cure is to let it run its course; allow the malinvestments to go bankrupt and let the market reallocate the capital to productive uses. Certainly this should apply to most portions of our economy today, our view, including the likes of GM. Anything else - simply a delay of the inevitable.
The glitch unfortunately, something neither Mellon nor the Austrian School’s von Mises nor others of this persuasion could have foreseen - the interlocking of the world’s financial/credit markets. Thus for some of these institutions (as detailed in earlier sketches) we need to bite the bullet, at least for now. But past that it is key that each and every one of us hold our legislators’ feet to the fire and say "Stop", enough is enough. First, turn these deals back to the private market as soon as possible. Next, do not nationalize resources such as medicine, energy and education; stop as soon as possible overriding contracts; above all, stop taking assets from competent people and giving them to incompetent people.
We have a right to be pissed. And we have an anchor in judging just what we will accept, and what we will not. It’s called common sense. We may not all be financial engineers nor have ever encountered a swap but so what? It is our $ being tossed around. We don’t know if we will get any of it back; our future and that of our offspring are at risk; we are darn sure fit to judge. Now is the time to draw the line and understand that it is not always better to do something than nothing, and insist that our elected officials understand likewise. That is, most interventions do more harm than good. A quick glance at economic history shows that substituting political agendas for business judgement during periods of panic is bound to fail. It never worked before and it never will.
But readers need not accept our word. A man who fought for this very thing, who championed the free market after the fall of communism, who never has taken capitalism for granted - Czech President Vaclav Klaus. Klaus said during a recent speech at Columbia Univ that massive gov’t spending in the US and tighter regulation will simply prolong the recession, and urged Obama not to endanger the free market in his response to the crisis. "I am therefore convinced that fighting for freedom and free markets, something we always appreciated here in this country (the United States), remains the task of the day," said Klaus.
Indeed it does.
Robert Craven
We are forced to take much on trust. The band aid put in place by the G-20, Q4, prevented a world credit meltdown, or so we are told. We believe that is true. Now we are told that firms like AIG or Citi, or GM are too big to fail. But where do we draw the line, and how? When do we say "No" to further bailouts; when do we resist further government intervention in our marketplace? Or should we? How can we become empowered? How can we acquire a handle?
Two schools of thought come to mind, residing at opposite ends of the spectrum: 1) Socialists avow gov’t ownership of productive resources. Their answer is "Always", the more the better. Most Americans reject that premise. 2) The so-called Austrian School of Economics would answer "Never", not in any circumstance. Leave the economy alone, it is self-correcting. Certainly the process of creative destruction has placed the American free market first in the world; it is that process which Treasury Sect Andrew Mellon once said means, "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. Values will be adjusted, and enterprising people will pick up from less competent people." In other words, once the bust comes, the only cure is to let it run its course; allow the malinvestments to go bankrupt and let the market reallocate the capital to productive uses. Certainly this should apply to most portions of our economy today, our view, including the likes of GM. Anything else - simply a delay of the inevitable.
The glitch unfortunately, something neither Mellon nor the Austrian School’s von Mises nor others of this persuasion could have foreseen - the interlocking of the world’s financial/credit markets. Thus for some of these institutions (as detailed in earlier sketches) we need to bite the bullet, at least for now. But past that it is key that each and every one of us hold our legislators’ feet to the fire and say "Stop", enough is enough. First, turn these deals back to the private market as soon as possible. Next, do not nationalize resources such as medicine, energy and education; stop as soon as possible overriding contracts; above all, stop taking assets from competent people and giving them to incompetent people.
We have a right to be pissed. And we have an anchor in judging just what we will accept, and what we will not. It’s called common sense. We may not all be financial engineers nor have ever encountered a swap but so what? It is our $ being tossed around. We don’t know if we will get any of it back; our future and that of our offspring are at risk; we are darn sure fit to judge. Now is the time to draw the line and understand that it is not always better to do something than nothing, and insist that our elected officials understand likewise. That is, most interventions do more harm than good. A quick glance at economic history shows that substituting political agendas for business judgement during periods of panic is bound to fail. It never worked before and it never will.
But readers need not accept our word. A man who fought for this very thing, who championed the free market after the fall of communism, who never has taken capitalism for granted - Czech President Vaclav Klaus. Klaus said during a recent speech at Columbia Univ that massive gov’t spending in the US and tighter regulation will simply prolong the recession, and urged Obama not to endanger the free market in his response to the crisis. "I am therefore convinced that fighting for freedom and free markets, something we always appreciated here in this country (the United States), remains the task of the day," said Klaus.
Indeed it does.
Robert Craven
Friday, March 6, 2009
Equity Market - "Outlook"
Free-market pricing is too complex for any one individual to completely understand or predict. Bond market, stock market, the dollar - a galaxy of contradicting or reinforcing factors - an immense stew of input that somehow sculpts a closing price, every day. No one, not even Buffett, understands the process (as he has just learned). Certainly not those pundits on the many networks who offer false comfort every evening, pretending they know - an act of fraud.
What we do know is that the Dow is off 30+% since Obama was elected, 45% since the crisis came to a head. We did not predict the crisis but we have isolated the primary cause. Globalization and contagion compounded errors made initially in the US. Late Q4, major central banks successfully prevented a melt down. It was not a solution, only a band aid.
There are a maze of factors which impact the Dow: Bk of Eng policy, GM’s whining, China’s stimulus package, the weather. And there will always be surprises. In investing, the business of the future is to be dangerous. What we may do however is to stand back, away from the thicket, not expecting to predict a turn or bottom necessarily but to at least corral the odds and bring them into our camp. To be, if not more right, then less wrong.
We can learn to become good listeners. Market reaction, hindsight, has signaled that banks/credit must be addressed first. Because Obama has refused to do that the equity market has suffered significantly. There are many other causes of course, some known and some not. The "stimulus" plan is seen by reasonable observers as at best a wash, the stuff for our political blog but not this one, so likely little market-moving impact there. But the budget is seen by reasonable observers as this: Big Government as the ultimate hero; the private sector at best in a supporting role. Who that does not live under a rock does not understand that to the equity market, this is poison? All of it is corrosive to the economic fabric of this country.
The market has told us part of what it needs, that is, that which will provide sustenance. By listening we may not have the Holy Grail but we’ll have a leg up. Thus, until Obama 1) maps a plan for the banks, 2) quits lying about "investment" vs "spending", and "savings" and 3) shows the world markets that he is not a far-left ideologue, meaning he will not try to transform health care, education and energy as the stock market fears he will, be content to stay close to home.
Robert Craven
What we do know is that the Dow is off 30+% since Obama was elected, 45% since the crisis came to a head. We did not predict the crisis but we have isolated the primary cause. Globalization and contagion compounded errors made initially in the US. Late Q4, major central banks successfully prevented a melt down. It was not a solution, only a band aid.
There are a maze of factors which impact the Dow: Bk of Eng policy, GM’s whining, China’s stimulus package, the weather. And there will always be surprises. In investing, the business of the future is to be dangerous. What we may do however is to stand back, away from the thicket, not expecting to predict a turn or bottom necessarily but to at least corral the odds and bring them into our camp. To be, if not more right, then less wrong.
We can learn to become good listeners. Market reaction, hindsight, has signaled that banks/credit must be addressed first. Because Obama has refused to do that the equity market has suffered significantly. There are many other causes of course, some known and some not. The "stimulus" plan is seen by reasonable observers as at best a wash, the stuff for our political blog but not this one, so likely little market-moving impact there. But the budget is seen by reasonable observers as this: Big Government as the ultimate hero; the private sector at best in a supporting role. Who that does not live under a rock does not understand that to the equity market, this is poison? All of it is corrosive to the economic fabric of this country.
The market has told us part of what it needs, that is, that which will provide sustenance. By listening we may not have the Holy Grail but we’ll have a leg up. Thus, until Obama 1) maps a plan for the banks, 2) quits lying about "investment" vs "spending", and "savings" and 3) shows the world markets that he is not a far-left ideologue, meaning he will not try to transform health care, education and energy as the stock market fears he will, be content to stay close to home.
Robert Craven
Tuesday, March 3, 2009
US Banks, follow up
Simply throwing $ at the likes of Citi or GM is a fool’s errand and we all realize that now. For example, in exchange for the $17+ bln Bush gave GM and Chrysler, they were required to come up with a plan to regain viability. They have. They need another $22 bln! Too much. Scare tactics by the near-deceased bore fruit - "GM dies and we all die". This panicked most of Congress. But taxpayers have seen through that tactic; most Americans have now come to agree with our earlier assessment for the vehicle industry - Drop Dead.
Ideally we want to rely on the time-tested process of creative destruction for all of the economy, the workings of a free market. Should we have done that with the banks, simply stepped away? Was von Mises right? Well, ya, but then we’d all need to know where the grubs are located. So the answer is "No," at least for what we encountered Q4 - the liquidity crisis and contagion.
For banks unfortunately we must compromise, at least for some and at least temporarily. This is because some non-banking parts of banking companies are so large and entwined that their failure will impact all of us. Should have been regulated earlier along with the twins you say? Maybe so but here we are. In our Feb/24 sketch we touched on two methods we think would accomplish this resuscitation, neither necessarily mutually exclusive of the other, and both time tested (in the case of full yet temporary nationalization - Sweden).
Peter Morici, now a prof a the Univ of Maryland Bus School and earlier, chief economist of the US International Trade Comm expands on one of them: "No solution to preserve private banking can be found without halting the free fall in housing prices. That will require an aggregator or bad bank to purchase about $2 trillion in mortgage-backed securities at current mark-to-market values on the banks books. It could be capitalized with $250 billion in TARP funds, $250 billion in share sales to private shares, and $1 trillion in bonds. Banks and others could be paid for securities with 75 percent in cash and 25 percent in aggregator bank shares." He goes on: "Performing triage—leaving alone mortgages that will be repaid, reworking those that could be repaid with some adjustments in principal and interest terms, and foreclosing on the rest—the aggregator banks could fix the number of foreclosures and limit the fall in housing prices. As many mortgages would be saved, the aggregator bank, like its predecessor the Savings and Loan Crisis RTC would likely earn a profit for investors."
Makes sense. Ready Geithner, Obama? The "stress tests" are fine, a good idea. Let’s get to it.
Robert Craven
Ideally we want to rely on the time-tested process of creative destruction for all of the economy, the workings of a free market. Should we have done that with the banks, simply stepped away? Was von Mises right? Well, ya, but then we’d all need to know where the grubs are located. So the answer is "No," at least for what we encountered Q4 - the liquidity crisis and contagion.
For banks unfortunately we must compromise, at least for some and at least temporarily. This is because some non-banking parts of banking companies are so large and entwined that their failure will impact all of us. Should have been regulated earlier along with the twins you say? Maybe so but here we are. In our Feb/24 sketch we touched on two methods we think would accomplish this resuscitation, neither necessarily mutually exclusive of the other, and both time tested (in the case of full yet temporary nationalization - Sweden).
Peter Morici, now a prof a the Univ of Maryland Bus School and earlier, chief economist of the US International Trade Comm expands on one of them: "No solution to preserve private banking can be found without halting the free fall in housing prices. That will require an aggregator or bad bank to purchase about $2 trillion in mortgage-backed securities at current mark-to-market values on the banks books. It could be capitalized with $250 billion in TARP funds, $250 billion in share sales to private shares, and $1 trillion in bonds. Banks and others could be paid for securities with 75 percent in cash and 25 percent in aggregator bank shares." He goes on: "Performing triage—leaving alone mortgages that will be repaid, reworking those that could be repaid with some adjustments in principal and interest terms, and foreclosing on the rest—the aggregator banks could fix the number of foreclosures and limit the fall in housing prices. As many mortgages would be saved, the aggregator bank, like its predecessor the Savings and Loan Crisis RTC would likely earn a profit for investors."
Makes sense. Ready Geithner, Obama? The "stress tests" are fine, a good idea. Let’s get to it.
Robert Craven
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