Blue Penguin Report

Bringing the gifts that my ancestors gave,
I am the dream and the hope of the slave.
I rise.

The reason is clear: We have an economy that increasingly rewards education and skills because of that education.

Come on people now! Smile on your brother. Everybody get together. Try to love one another right now.

When Rick Snyder (R) took office in Michigan he immediately cut spending on education and the film industry (we are a union business that trains their own) and offered HUGE incentives to big business. The film industry here, once a white boys club, increasingly embraced minorities and trained them. With a lack of support for the education of the inner city poor where can they possibly go but to lower income jobs? So apparently “Give me your poor, your tired, your huddled masses…” no longer applies in this country.

A 2009 study by Pew Research showed the drop in household wealth for Hispanics was a whopping 66%, while Blacks faired little better losing 53% of wealth over four years (2005-2009).

Click chart to enlarge

The percent of our revenue from business income is one of the lowest of any European and Asian society, those countries make closer to double the percent of GDP vs. the U.S.

SS = 865 Billion
Individual Income = 899 Billion
Corporate = 191 Billion

All of us came here from somewhere, the exception being native Indians, and benefited from the ideas in Emma Lazurus' (born of Portuguese Jews) poem.. And some very smart wealthy men (including the President) have said they would gladly pay higher taxes to keep this idea alive.

Click chart to enlarge

A Pew Center and CBO study named these as the main reason for a decline in U.S. financial standing:

▪ Revenue declines due to two recessions, separate from the Bush tax cuts of 2001 and 2003: 28%
▪ Defense spending increases: 15%
▪ Bush tax cuts of 2001 and 2003: 13%
▪ Increases in net interest: 11%
▪ Other non-defense spending: 10%
▪ Other tax cuts: 8%
▪ Obama Stimulus: 6%
▪ Medicare Part D: 2%
• Other reasons: 7%

I opened my film business in 1991 hiring crews of up to 30, employing four, reps in the Midwest and New York plus summer interns, greatly improved a 6500 square foot studio, provided food for neighborhood down and outs and was bringing in business from all over the country. By 2005 most of the assets had been sold and what was once a high tech studio remained shuttered for over five years and the neighborhood declined.

This period represented a switch from a democrat in the Governor’s office to a Republican one, but was mostly under a Clinton presidency. Under Grandholm 2003-2011 the studio became a nursing school and the neighborhood thrived. Young creatives moved to Detroit started high tech businesses like mine and I had more offers to work feature films than I could handle.

I rode out the first recession, but saw the second one coming as the automotives continued to spend, not on the future, but on the cash cow, the SUV. Many of them now support the film industry and Detroit Mayor Dave Bing is working to keep the city growing with a new incentive for employees to move downtown called “Live Detroit”.

From Crain’s Detroit Business:

“Here's how the incentives work: New homeowners can receive a $20,000 forgivable loan; new renters a $2,500 rental allowance (and $1,000 for the second year). In addition, existing renters will receive $1,000 for renewing a lease, and existing homeowners can receive matching funds of up to $5,000 for exterior improvements on projects of $10,000 or more.”

For me it’ll be back to high tech with the hope that the Republicans, who seem to always make a creative girls life miserable, will realize after the terrible news from Norway that some of the Tea Party types they have aligned with will ruin this economy and send its poor and its huddled masses packing.

These are the member countries of the Convention on the Organisation for Economic Co-operation and Development on the chart above.

Click here

Posted by M. Hannington at 06:39 PM | Permalink | Comments (0) | TrackBacks (0)

By Matthew Storey

“The liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it comes stronger than their democratic state itself. That, in its essence, is fascism - ownership of government by an individual, by a group,”

“There are many ways of going forward, but only one way of standing still.”

“Rules are not necessarily sacred, principles are.”

“One thing is sure. We have to do something. We have to do the best we know how at the moment. If it doesn't turn out right, we can modify it as we go along.”

"(the problem)...is not that the system of free private enterprise for profit has failed in this generation, but that it has not yet been tried.''

Franklin D. Roosevelt (32nd President/1933-1945)

“It's a recession when your neighbor loses his job; it's a depression when you lose yours.”

Harry S Truman (33rd President/1945-1953)

Recession?

Depression?

As Harry Truman puts it, the difference is likely to come down to ones own personal situation - but technical indicators define them differently as well. The easy answer for Recessionary definition is two successive quarters of decline in Gross Domestic Product (GDP), but this is imprecise since so many variables outside of GDP impact upon society - GDP can stabilize (and has) while unemployment continues to rise (it is) and create a situation where the recession is technically 'over' at the same time that more and more citizens are feeling its sting and falling away from prosperity. Economists have responded to this reality by defining recession more broadly as lasting from the moment economic activity peaks to the time it hits bottom, but, again, this has little real world correlation, since recessionary forces begin long before they are registered in markets and job rolls and last long after those begin to recover. Depression is typically seen as a more severe (10 to 20% decline that sustains itself beyond the two quarter rule for recession) version of the same phenomena.

Definitions aside, all Americans, regardless of their personal situation, recognize a dramatically different economic reality than we've known has descended upon us.

Ten years ago, our markets were the envy of the World, our currency was robust, our National balance sheet showed a surplus for the first time in nearly three decades of deficits and America was seen as stalwart economic partner by the World. Today the market (Dow, S&P 500) is rebounding from a 50% decline, but still well off levels of two years ago, technology and entrepreneurial indicators (venture capital, NASDAQ, IPO offerings) are at levels 40% of where they were in 1999. The US Dollar, which was pegged to trade at 1.06 to the Euro, actually drove the Euro to .86 of a Dollar a decade ago, today that Euro will fetch you almost $1.50, the Yen is at record levels relative to the dollar and the international trading consortiums who have dealt in dollars since their inception are drafting new plans to shift to a basket of Yen, Yuan and Euro as the dollar underpinnings further erode behind an American balance sheet drowning in red ink. Unemployment is surging past 10%, vast armies of Americans are living on Government subsistence (Michigan, a state of 10 Million plus has 20% of its population on Government relief). 1/6th of Americans have no Health Insurance. American manufacturing, technology, agriculture are all stagnant and surviving on a mixture of government investment and legacy business, not thriving on new markets and profits.

It is a turning point.

How did we get here?

Let's take a look....

Genesis of the Crisis

In the midst of the great boom of the '90s, Markets, consumers, investors and employees were all thriving in part because of a decision to bring Technology directly to consumers and end users rather than shuffling it through DARPA (Defense Advanced Research Projects Agency), who are the guys in Government suits who show up in your middle school Math class to abduct the brainy kid with bad posture and shuffle her off to secret installations all over the world along with the other million smart kids they've nabbed.

In the '90s, the smart kids were left in the light and sold on the market and ideas and dollars flowed. Defense was still on the cutting edge, but the move towards private sector became more seamless. Clinton Administration Treasury Secretary Robert Rubin believed that high earners and business people would pay modestly higher taxes for greatly enhanced growth and that this growth was already in the system, just needing to be allowed to breathe. President Clinton invoked the word 'Digital' at every economic or educational speech and the administration was happy to work towards commoditizing commodities, meaning they viewed commodities from the demand side - wanting to maintain stability of supply and modest prices that would be used to fuel economic growth in knowledge based industries.

While these goals were met, and wildly successful, they were perceived as negative by several constituencies. In Texas and throughout the Oil Patch, the de-emphasis of Oil (a barrel of West Texas crude sold between $12-24 per barrel during the Clinton years), raw materials and extraction industries did not remove profitability from these industries - which would be destructive to industrial goals, but it DID remove windfall profit at precisely the moment huge fortunes were being amassed by Technology entrepreneurs. To a Houston Oil Man, a staunch Conservative, having coin was not sufficient to account for the indignity of seeing some snot nosed twerp getting paid for something as trifling as an idea!

As my Texas uncle told me in 1971, Texas economics hinge on three things.

1.) Price of Oil (energy)
2.) Defense Contracts (defense)
3.) Price of Cattle (agriculture)

Texas, and much of the heartland, is a net producer of raw materials, which makes its interests run towards higher prices for those materials and towards industrial utilization of them - drill for Oil, align with Saudis and Venezuelans (at least before Hugo) and get an army moving in the Middle East who will be pump - pump - pumping it up the Kazoo while stomping on some party deemed an enemy by BOTH Texas and Riyadh.

The American economy, on the other hand is a net CONSUMER, what generates profits for raw materials producers cannibalizes growth throughout American industry and dramatically reduces buying power for American consumers while destroying savings for both. Rubin sided with America, believing that the producer states would simply re-jigger their economies to take advantage of the knowledge based gold rush, sans the metal.

Meanwhile, on Wall Street, the Bull Market was perceived as very much a mixed blessing. While burgeoning markets and record trading activity are an unambiguous positive, information technology and the Internet allowed more and more investors to do their own research, trade their own accounts and drive the fee and commission based business models that had sustained profitability, ever downwards. The Rubin market was an INVESTOR market, with day traders flourishing in every small town and low-cost brokerage firms chewing away market share and profitability from the banks. When you hear Business reporters refer to the 'Market' - they mean 'The Investment Banks', in the '90s they became decoupled from that status (as is appropriate) and also faced higher taxes on their fortunes. Like the Oil men, everyone was making money but the spread between Oil/Wall Street wealth and the commoners out there working, inventing, investing was undergoing a dramatic democratizing.

Democratic change was occurring in the workplace as well. Decades removed from the 'Organization man' in the 'Grey Flannel suit' ('Mad Men', if you will), the '90s saw a new generation of geeks, nerds and self-starters move into the workplace and bring their teva sandles, high-top chucks and t-shirts with them. Shiny wing-tips with $5,000 business suits, long the uniform of elitism in business and an important bulwark for the established wealth centers of Houston and Manhattan were suddenly becoming the symbol of anachronism. Meanwhile, on the Left Coast, far from Texas or Morgan Stanley, small armies of young professionals toting laptops and cellphones made their way to Silicon Valley corporate parks - first in a Honda, later a Lexus, but always casually dressed and communally focused. And if the kid in shorts and the rock t-shirt felt his job didn't offer enough playtime or an open enough office culture, he could just pop the clutch over the next rise to a new gig with a handsome raise.

Americans read about the goings on in Silicon Valley and the culture became obsessed with the 'New Economy', but the reality was the 'New' was only happening in a fraction of the overall and the 'Old' were planning a counterattack all along. Ironically, it was the engine behind much of the new growth that would hand them their opportunity and subvert much of the positive change.

On Sand Hill Road in Menlo Park, California, an Artichoke heave from Stanford University sit a group of Venture Capital firms whose early investments in companies like NetScape, Sun, Yahoo generated vast fortunes, added to fortunes built upon earlier generations of Silicon Valley winners (Intel, Apple, Silicon Graphics) and validated the Venture Capital math, which essentially worked like this:

*Hire Technology minds and put them next to financial minds.
*Send them in teams amongst smart kids with ideas.
*Seed the best of these ideas with stages of capital investment, while retaining huge percentages of Equity.
*Sort through the winners and losers, cutting off the flow on dead ends and accelerating the progress of triumphs.
*Remove the impediments to progress of the successes by supplying senior management, accounting, legal, manufacturing and marketing through three types of consortiums modeled on '80s Japan:

Types of Keiretsu:
Kigyō shūdan (企業集団): horizontally diversified business groups
Seisan keiretsu (生産系列): vertical manufacturing networks
Ryūtsū keiretsu (流通系列): vertical distribution networks

A continent away from Wall Street, this model was wresting control of business finance towards the West, empowering a generation of Engineering minds and it was WORKING. America was reaping the benefits of this tension between coasts and between old and new manner of business, the Nations coffers were filling up from tax revenue and nobody was barking because everyone was making money.

But Wall Street always makes money, and bypassed industrial giants began to see that their vast resources could be used to buy up what they could not create. Sand Hill Road, who understood the process best of all subverted their own model out of greed and competitive zeal. Instead of seeding a bevy of companies, waiting patiently to see which ones held promise and nurturing them through the stages necessary to becoming first a going concern and THEN a Public Company, through an IPO (Initial Public Offering) - which is the PAYDAY for the venture capitalist, the investment banking firm handling the transaction and the company founders/employees...the firms saw a ravenous market for new companies and decided to eliminate the staging of the process, believing, correctly, that hungry investors and hungrier East Coast investment bankers would drive up the price of anything they got their hands upon. Whereas earlier offerings were legitimate companies with breakthrough products, the new waves amounted to little more than a marketing effort - patch on a logo, a catchy slogan, some theme music and make some commercials...Engineers built a culture of entitlement in record time to match the ones they were seeking to overthrow. The 'Old Boy Network' became the 'New Boy Network', and then the two networks decided their interests overlapped.

Piles of worthless new stock flooded Wall Street, Sand Hill Road cashed in and sought to propagate the scam for as long as possible. Meanwhile, investors, who had read of the miraculous growth of earlier stage, well tended companies flocked to pour their hard earned into the new paper mache, Earnings never arose because most of these companies had no rationale for being publicly traded companies other than a desire by their founders to get paid, get out, and repeat the process...

It was the death of the boom.

The aggrieved industrials pounced on the cash poor companies left in the wake of the sell-off and the 'New Economy' became a wholly owned subsidiary of the Old one. Innovation left and marketing ruled, the Win-Tel (Microsoft - Intel) cartel swept up the remnants of the best and brightest, tightened the reins on pay packages and lifestyle accommodations and the passed over Houston oil man and Wall Street behemoths planned their return to an exalted perch atop the American economy where they could bleed off dollars and get fatter...but they needed a champion.

Enter George W. Bush, son of the President who Clinton took over from, who had done his best to funnel massive public resources towards Bankers, Energy concerns and Defense contractors during his single term with a nifty war on those pesky Iraqis, a super keen bailout of the Savings and Loans who'd stolen everything they could before failing and a nice, stagnant economy for everyone else, which allowed the exalted status quo to thrive.

Dubya had all of his Father's leanings, but was disdainful of concern for the larger economy, being a Midland, Texas kid who saw the world through the lens my Uncle provided all those decades ago. He got elected despite losing by half a million votes and continued to make war on math, and logic. He declared an interest in generating job growth in 'Energy', hired a commodity guy, Paul O'Neill, CEO of Alcoa (Aluminum) as Treasury Secretary and a Oil/Defense guy, Dick Cheney, CEO of Halliburton as Vice President, while his buddy Ken Lay and the boys at Houston based 'Enron' were deep into scamming the previously haughty state of California out of their cash for bogus energy contracts. Bush got elected in the Heartland and his concerns were theirs.

Knowledge was out, extraction was in.

War, of course, was next on the menu to complete the trifecta.

The next time he uses the word 'Digital' will be the first.

Shifting the largest economy in the World 180 degrees is like turning an Oil Tanker in a bathtub. Grinding on top of the tech selloff was bound to lead to recession, but 9/11 offered political cover to complete the plan.

California made money in the '90s while Texas suffered, and they flipped roles in the '00s. New York gets theirs no matter who is calling the tune.

All of that made the following a foregone conclusion.

On August 8, 2007, more than 70 years after FDR and The New Deal, interbank lending spreads became prohibitively wide as individual banks assessed their internal risk exposure and surmised they were in a heap of trouble if things were allowed to go 'too far'.

For the previous half decade, the golden goose of an economic boomlet built had been built upon;

* Laissez faire regulation of institutional Market players, such as Banks, Investment Banks, Insurance Companies, Multi-National Corporations(which Webster's defines as 'a doctrine opposing governmental interference in economic affairs beyond the minimum necessary for the maintenance of peace and property rights'). This was a system favored by Calvin Coolidge (30th President/1923-1929) ('the business of America is business') and continued, with disastrous results, by his successor, Herbert Hoover (31st President/1929-1933).

It was FDR who came in to clean up their mess in 1933.

It was the Bush White House who resurrected Coolidge's approaches to the economy in 2001.

* An emphasis upon Structured Finance 'products' in OTC (Over The Counter) Derivatives (Financial instrument that derives from another financial instrument). Derivatives are regulated when traded on an Exchange, with clearly defined parameters and available to any willing participant. OTC Derivatives, however, are customized to hedge risk and leverage profit on a case by case basis and traded between market principals themselves, each party choosing to price them according to their own internal standards. These products, by themselves, are not a problem, and are traditionally utilized in underlying asset classes that are regulated and well understood by all parties, there are four principal asset classes typically underlying derivatives:

Equities
Commodities
Interest Rates
Currencies

But, in the Bush years, Banks pushed hard for more liquidity in the OTC markets, where profit (and compensation) would not be restricted by the supply/demand realities of actual asset classes. They looked towards Credit/Debt Markets and found deep oceans of cash that could be bundled into loosely defined instruments and traded amongst market players, with each participant adding a 'market multiple' on their balance sheet, despite the fact the underlying instruments had defined terms and profit particulars.

A mortgage (or any debt instrument - even a 'adjustable rate') has a defined amount of interest income associated with the instrument (variable within interest rate movements for adjustable, but still able to be calculated within historical parameters and finite for a 'fixed' rate mortgage).

When a stock is issued, it can be traded in regulated markets for whatever price can be agreed upon between buyer and seller. The stock has a price which is defined by its market multiple, meaning price of the traded security can be a multiple of the underlying companies intrinsic earnings or 'book value'. Buyer and seller have access to the information relating to earnings and book value and can determine for themselves what multiple they are willing to accept for the stock.

The purchaser of a stock selling at a P/E (price divided by earnings = multiple);

Ex: XYZ Corporation has earnings of $1 per share and the stock is trading at $15, that is a P/E of 15 times earnings.

...is willing to pay a multiple because he/she believes the earnings will go UP, which will increase the price of the stock if the market continues to assess a multiple of 15 and the market may also note these increased earnings and assess an even higher multiple, which means the stock has no finite upside limit. Many stocks DO trade without earnings or underlying 'book value', as well, but in all cases, the corporation is a going concern that operates a business, it CAN and often does, generate profits that justify the speculation, and in all cases, the limit of risk exposure is built into the share price (if you pay $5 for a share and the company goes belly up, you are out $5).

A Fund is a bundle of stocks, most of which trades at a multiple of its underlying value, which can contract or expand depending upon market sentiment, but the avenue for increased prices (profit) EXISTS and is well understood.

A CDO or MBS is a bundle of mortgages or debt instruments for which the underlying instruments have a FINITE level of income/profit within tight parameters of interest rate movements. Every time these instruments are sold at a higher price, the purchaser is applying equity-like expectations where they do NOT apply. The mortgage will not earn a dime more than as written, bundling has no impact upon this. The multiple, applied and agreed to between unregulated parties who price it on their balance sheets according to their private determinations of ability to resell the instrument at an even higher multiple has no underlying basis in reality. Add in the fact that the underlying economy was experiencing contractions in employment and compensation, which impacts upon the ability of debtors to make payments and increases the possibility of default.

So you have a finite instrument, multiplied, sold and resold with phantom assumptions and then massive defaults against even the initial finite profit potential of the instrument.

Gee, what could go wrong?

*Real estate gains built upon loose credit, low interest rates and those structured finance products (MBS - Mortgage Backed Securities, CDO - Collateralized Debt Obligations). In this construction, the Federal Reserve, concerned about the collapse of the Technology driven Equity markets in 2000 and the 9/11 attacks of 2001 and prompted by an administration seeking to move away from Technology and knowledge based industry towards a commodity/real estate driven economy, lowered Interest Rates (which is known as 'accommodative'). Realtors were flooded with new brokers (many of whom had made money as stock brokers in the previous decade) who were anxious to cash in on what President Bush called 'an ownership society'. With low interest rates and easy loans for developers leading to increased supply, brokers could push mortgages and with lower regulation and oversight, these mortgages could be extended to lower credit worthy customers and, since the mortgages were then bundled and sold off to investment banks as MBS - you had a Ponzi Scheme to make Bernie Madoff look like a piker!

Inevitably, Banks who built balance sheets on whispy fantasies while draining off the actual C-A-S-H in compensation, threw up their arms in dismay and asked their buds in the White House for a patriotic salvage.

Bear Stearns, Lehman, AIG...you know the rest.

How did it start? You've just read how, the same way it always has. Capitalists have no conception of how much is 'too much' and that is why Government regulates business and re-distributes the gain, to keep the wheels of society properly greased. Since Teddy Roosevelt took on the Gilded Age Robber Barons, the entrenched wealth has bickered and blustered about this arrangement, but John D. Rockefeller, the Wealthiest American of his time, Bill Gates and Warren Buffett, the richie-riches of OUR time all understood that for them to continue flourishing they would have to SPEND their gains and inject capital back into the system - through foundations dedicated to progress, through taxes on property and holdings and through inheritance taxes. It is not the the having of wealth that makes one seek to chisel out, many of the wealthiest are eager to contribute - they understand the model American economics depends upon. It is those with feudal designs on America who are the scourge, the ones who FDR rightly condemned for subverting 'free' enterprise with nefarious constructs greased with mythologizing so intrusive that poor people who lack health insurance, cash, jobs or a future parade around spouting feudal slogans that only serve to further denigrate their OWN lives at the nourishment of those who mean them the most harm.

America's economy, culture and political discourse are broken. We cannot begin to fix that until we restore accountability for the events we have discussed here and create a path that rewards innovation, retires stagnancy and holds back resources for the next wave, the next generation, the next ideas.

Next week, we will discuss how that can work...we know how we got INTO Recession, now we have to discover how we get OUT.

Posted by Matthew at 08:09 AM | Permalink | Comments (3) | TrackBacks (0)

By Red Sox Steve

This week especially, I'm inspired by what I see when I walk around my neighborhood and on TV, what I've experienced living here for the past half-decade (has it been that long?), and what I think of where I live: New York City.

First things first - when I came here, I was a kid. Like everyone who shows up here from wherever they come from, I thought that I was going to make a big splash. Intrepid, well-dressed, professional. It was easy - be ambitious and confident all the time and you can make it here. Uh, actually, it's not that easy - New York City is a huge place, and guess what? Everyone who lives here and everyone who wants to live here, who plans on living here, or who even dreams of living here is in on the secret: this is one special place, a place where lots of hungry people congregate to build their own fortunes, start their careers, and build their lives. It's a place where dreams can be made, and it is a place where dreams come to die.

Don't want to dwell on the philosophical. That's not what this is about. This is about this place. I'm especially inspired this week, of all the weeks I've been here, because of what happened in Flushing and in the Bronx. In the middle of the worst economic crisis since at least WWII, businessmen, politicians and blue-collar workers have come together to create two world-class sports stadiums, with a new football stadium coming our way out in the Meadowlands. Both Citi Field (Mets) and Yankee Stadium hosted their first of many MLB games this week.

Hundreds of thousands of people have been positively impacted by these events - and I'm not just talking about the fans. Iron workers, construction foreman, laborers, architects, landscapers, and stadium workers all have had steady work for the last three years because of the efforts taken to continue with construction of these amazing ball parks. The construction began on Citi Field and (the New) Yankee Stadium in 2006. This means that the start of the project took place in a much different economic and political climate than we have today, which proves how fast fortunes (especially those that are wrongly distributed!) can change. In 2006, cash was easy to come by - Wall Streeters and billionaires (like the Wilpons who own the Mets and the Steinbrenners who own the Yankees) were raking it in, the tax collector was their friend en absentia, property values were skyrocketing, and the New York city economy was booming, just like it had many times before. The municipality was even ready to engage New York's resources further by bidding on the 2012 Olympics, which would have required the spending of over $1 billion to construct an appropriate stadium in Flushing, Queens.

Fast forward to Opening Week 2009. We have a new president, and a multi-layered economic crisis that we have to deal with. Credit was historically easy to get back in 2006. Liquidity was available for any type of mortgage imaginable, and now we are facing the worst housing crisis in over 50 years. Banks grew ever larger by lending money, and insurance companies suddenly turned into hedge funds. Billionaires threw lavish soirees where the champagne flowed and the hangers on congregated; A staple of corporate life, the office holiday party, grew more and more extravagant; nothing was too costly when the bosses showed their appreciation, and, perhaps ultimately the most destructive factor of all, bonuses were bigger than ever. Those one time payouts to employees, aptly named for a time when they weren't relied on for ACTUAL income, became a "wink-wink" part of the white-collar workplace. "Yours is big, mine is big, but are we actually worth that much more to the company? No matter! Let's call our real estate agents!"

Large financial companies have been reduced to nothing but "toxic assets". One ideology has been replaced by another via the voting booth, and all of a sudden the world now sees again, whether any one individual agrees with him or not, what it's like to have a president who listens. The thing about the overall crisis is this: From the economy of the 1990s where fortunes were made and lost, we got the internet, cell phones, and technology for all to consume and make use of. Nations respected us; those that pumped oil truly feared us (look at the price back then); those that shared our goals wanted to work with us. 2000. America lurched back to the right - the technology bubble burst, and gave way to a finance bubble, a credit bubble, a housing bubble, an energy bubble. The danger signs were everywhere that this was a return to feudalism for America - home ownership suddenly became our top economic goal, oil crossed $120, $130, $140, spending in Iraq was up, government tax receipts were down... it was a disaster waiting to happen. 2008. Our governmental ideology changed again - back to a center-left - and now we are again in the midst of reorganizing our national priorities. Clean energy technologies, hybrid autos, military technology, national scientific research initiatives, and international collaboration with our economic counterparts all over the world has once again returned to the forefront of America's goals.

21st century american life has begun and when we hit mid-century the world will be a much different place because of the things happening today. The 2059 world we are heading for will be unrecognizable to someone living in 2009; just as 1959 was incomprehensible when considered in 1909. We are on the dawn of an Asian century - all over the Asian sub-continent, billions are hungry for new technologies, new opportunities, and new lifestyles. America, and most of the western world will watch in awe as both India and China rise and ultimately begin to lead the way. To an American born after 1950, but before 2000, this will be the reality that we will be forced to adapt to, and the old way, the "American" way, will continue to fade for us, like the British empire before it, the Spanish empire before it, the Roman empire before it, and the Egyptian and Persian empires before it. How will you react when you wake up in 2059?

Posted by Red Sox Steve at 04:17 PM | Permalink | Comments (0) | TrackBacks (0)

By Red Sox Steve

"We invented solar technology, but we've fallen behind countries like Germany and Japan in producing it. New plug-in hybrids roll off our assembly lines, but they will run on batteries made in Korea."

- President Obama speech February 24, 2009

The evidence has been clear for some time - outside of the technology-led boom of the 1990s, the United States has fallen farther and farther behind other nations in innovating and exporting goods for almost 40 years. Japan and South Korea implemented policies decades ago which led them to the forefront of export-driven growth of high-technology products, making the transition that the United States has yet to make: from an economy based on heavy manufacturing to one based on a hybridized form of manufacturing AND high-tech development.

The histories of Japan and South Korea are turbulent - Japan joined the Allies during WWI, invaded China in 1937 (imagine THAT happening today?), then signed up with the Axis powers and attacked Pearl Harbor... they were hit by 2 nuclear bombs within a few days of each other, and that was all before 1950; South Korea, devastated by US attack in the 1950s, still has a DMZ and Kim Jong Il and his nuclear arsenal on the other side.

Meanwhile, the United States was in the process of creating the largest middle class in history, sending returning GIs to college on the government's dime, and with all the optimism going around, boys and girls got cozy and created the baby boom, fueling the auto industry and an expansion into suburban, single-family homes. In the western world, the United States led all nations politically and economically, and it seemed as if nothing could stop us from prosecuting our world view in our sphere of influence and picking on the Communists and extremist Muslims whenever we thought the situation called for it.

How times have changed.

After the end of WWII, the Japanese were the first in the region to set up an innovation-centered, export-led economic growth model, and, by the 1950s and 1960s, phased in heavy industry (steel, petrochemicals, and machinery production) as well as plastics, automobiles and electronics and phased out industries like coal-mining and textiles. They focused on producing things that were more innovative, scientific and technologically based; the products of the future which were soon to be exported all around the world.

“We live in a market economy; it is the market that will pick the winners and losers. We should not deprive people of their right to earn a living and support their family and to have a comfortable and acceptable lifestyle, simply because they happen to be on the political [sic] incorrect side of today’s equation."

- U.S. Rep. Jim Sensenbrenner, R-Wis., ranking Republican on the House Select Committee on Energy Independence and Global Warming, Jan 15, 2009

The fact is the Japanese have been doing the exact opposite for decades now. Through what was called the MITI (Ministry of International Trade and Industry, now called METI - Ministry of Economy Trade and Industry), starting in 1949, they focused on nurturing steel, chemical and electronics based industry. This is essentially a branch of the government that assists in determining the economic structure and focus of the Japanese economy. When the risks of entering into new industries such as chemicals were initially too heavy for private industry to bear, the government provided lending and guarantees that allowed new technology to form and flourish, and then handed the reigns over to private industry. It was the government that provided the "start-up" money for these types of ventures, phasing in private control only later.

When the Japanese didn't have a needed technology, there was no need to create it from scratch; the MITI got together with private industry participants and formulated acquisition strategies to obtain needed technologies from beyond their borders - they then put scientists and engineers to work improving them. By providing subsidies, loans, guarantees, and aggregating human capital the MITI has been able to influence the development of Japanese industries for decades. They started formulating practical solutions to practical problems years ago... by the 1980s and continuing today, Japan has made up considerable ground, and have even become world leaders in sectors like automobile, semiconductor and electronics production.

The history of Samsung provides an illustrative example of South Korea's economic development: In the 1930s, it was a rice mill, by the 1950s, it had morphed from a foodstuffs (raw material used in food production) company into a sugar refining company, transforming again into a textiles company (by using engineers from Germany!), and then in the 1960s was able to diversify into newspapers, construction and insurance. By 1969, Lee-Byung Chull, the company's founder, moved into electronics.

Samsung's success in the semiconductor industry followed a time-worn pattern: just like he had done in the rice and textile industries, Lee acquired skill sets and technologies that already-existing participants had used to become successful. He set up joint partnerships, and licensing agreements which provided the way forward. When Lee decided to bet Samsung's future on semiconductors in 1983 (by investing over $100 million), his Japanese contacts wouldn't give him the time of day (they already understood that they were well on their way and wanted to eliminate the competition), so there was only one place to go: East to Silicon Valley. Samsung acquired a license for a 64K chip (old hat tech now, but it was cutting edge at the time) and became a major player in the semiconductor industry.

Like Japan, Korea's government provided a base: in 1962, the Economic Planning Board was established, and along with the Ministry of Commerce and Industry, closely managed the process of technological development. By 1965, electronics was one of the industries chosen by the government to assist with an export-led growth strategy. Later in the decade the Koreans established greater leverage in the industry: they entered into joint ventures with American and Japanese industry leaders at the time.

Korea didn't stop copying the Japanese there - they formed the KEIC in 1967, grouping electronics manufacturers into a single organization: the Korea Electronics Industry Cooperative. By 1973, then President Park Chung-hee again used government resources to supply additional capital and technological resources to the electronics and semiconductor industries. The Koreans were well on their way to becoming global competitors.

Innovation and export-led growth have nothing to do with WHO comes up with the idea, but rather THAT the idea is thought-up and implemented. A half-century ago, Japan and Korea were devastated economies working their way towards recovery. Their commitment to long-term improvements versus short-term gains brought all their critical institutions onto the same page: it was and still is critical to Japan and Korea's future that these institutions work together to develop an economy based on innovation and export. When their national well-being was hanging in the balance, it was incumbent on government and private industry to recognize that their respective fates depended on an understanding of the industries under their control - which ones to let whither and which ones to seed for the future:

"The capitalist economy is not and cannot be stationary. Nor is it merely expanding in a steady manner. It is incessantly being revolutionized from within by new enterprise, such as the intrusion of new commodities or new methods of production... Any existing structures and all the conditions of doing business are always in a process of change. Economic progress, in capitalist society, means turmoil."

- Joseph Schumpeter, 1942

Posted by Steve at 02:23 PM | Permalink | Comments (1) | TrackBacks (0)

By Red Sox Steve

"Let us pledge that by 1980, under Project Independence, we shall be able to meet America's energy needs from America's own energy resources."

Richard Nixon in a speech given Nov. 7, 1973

We aren't even coming close.

T. Boone Pickens, the CEO of BP Capital in Dallas, has been an oilman for his entire working career. My criticism of him is this: He's essentially ignored all scientific evidence and national security concerns related to the US import of oil from foreign sources for decades. It's about g'damn time someone with his breadth of experience and credibility tells everyone what he's known for years: dependence on FOREIGN sources of a NON-RENEWABLE resource for our energy needs will continue to become severely expensive for the United States and the rest of the world. Welcome to the party Mr. Pickens.

Putting the criticism of him aside, this 80 year old oil billionaire deserves GREAT CREDIT for telling the truth: we need a solution to our power needs that can be put in place right here at home, stopping the flow of dollars to Iran, Russia, Saudi Arabia, Venezuela, and, unfortunately, even Canada (sorry PM Harper!). Pickens appeared at the National Governor's Association meeting this past weekend to discuss the severity of the problem, and his Pickens Plan is a solution worthy of attention at the highest levels of our government.

Let's have a look at some of the facts Pickens is working with, which put the severity of the problem into perspective and inform the discussion of a possible solution:

1) The average US oil well produces 5 barrels per day, while the average Saudi oil well produces 5,000 barrels per day.

2) In 1970, 24% of oil used in the US was imported. In 1990, 48% was imported and in 2008, it was 70%.

3) In 2004, OPEC nations earned $250 billion dollars. In 2008, their combined revenues were over $1 trillion.

4) 57% of oil the US imports comes from the Middle East, Africa and Venezuela.

5) In September 2008, Pickens met with Obama and McCain informing them that battery based power doesn't move heavy vehicles, like 18 wheeler trucks.

6) 10 million vehicles in the world run on natural gas, 142,000 of which are located in the US.

7) According to a study done by 3 Tier Inc. of Seattle, the area from Texas to Montana/North Dakota is home to the largest source of wind power anywhere in the world. In 3 small Texas towns, over 9000MW of electrical power will soon be generated by windfarms, with the largest in the world being located in Pampa, Texas (4000MW).

There is no reason that available wind power should go unharnessed - it is a renewable resource that can be accessed relatively cheaply once the turbines have been constructed, we can construct the turbines here in the United States, and this work can be done where it is needed most: in the midwestern states that have been hit the hardest by the departure of mass manufacturing companies. Local production of turbine parts can be done by companies like Cardinal Fastener out of Cleveland - they have made specialty bolts for everything from the Golden Gate Bridge to the Statue of Liberty.

Private AND public money, along with private AND public entities need to work together to innovate our way out of this problem. The same concept of public-private partnerships needs to be applied in infrastructure investment and broadband integration. The federal government has put $43 billion towards energy upgrades, and now it is up to DOE scientists and companies like Cardinal Fastener to get to work figuring out how to get as many megawatts into as many homes, offices, and automobiles as possible from a gust of wind.

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There is nothing that can be done to stem the foreclosure crisis.

Over the last decade, housing prices have skyrocketed, only to come plummeting back to earth when investment banks could no longer fool the market about the true value of a mortgage-backed security. The banks continued to try to slice and dice (they called it "re-securitization". seriously.) to keep the mortgage origination game going, but all they got in the end was zero. zip. zilch. nada. Almost all banks have lost money, some have closed down, and many have lost their jobs.

The government saw what was happening and has pumped billions upon billions of dollars into the "financial system" to stem the tide of foreclosures. TARP I - $350 billion, which bought a guy a new toilet for his now former office, and awarded billions in bonuses to folks who were going to be made redundant just a few weeks later did nothing for the housing market.

And that was all before the new guy took the White House.

Obama in - stimulus passes... money for energy, benefits, health care, tax cuts, shovel-ready projects. It's a road to somewhere.

Last week in Arizona, President Obama announced that TARP II would be routed into Fannie and Freddie, allowing persons who are able to keep making payments to remain in their homes through refinancing. Fannie and Freddie can now make loans guaranteed by the government - customers who meet certain requirements can refinance, all at the taxpayer's expense.

I'm not here to slice and dice how TARP II money will be spent - I'm here to save the government $350 billion. The overall problem is multi-faceted, and TARP II will not even slow the problem down:

1) there is no shortage of housing supply in this country, there is a shortage of AFFORDABLE housing. In other words, prices have to come down to allow folks who wish to do so to buy a home. Homes in the housing market, just like stocks in the stock market, or food in the super market needs to be attractively priced in order to attract buyers and sellers into the market. Prices will come down because they have to in order to reach a more economically acceptable level - pumping money into the system was what got us here. Doing the same thing will not get us out.

2) Guaranteeing loans using government money means the government needs to print the money first which means more US Treasury Bills go to China... this will force the dollar's value in only one direction: down. In the last few years, as the federal reserve has lowered interest rates (at attempts to buoy the housing market), this had the twin effect of pushing energy prices up. There is no doubt that we are working on solving the energy problem, but in February 2009, we are still highly dependent on oil for energy (see above...:) ) - a weaker dollar may cause, as it has in the past, an increase in energy prices which is the last thing America needs right now.

3) a great deal of foreclosures are on subprime loans, furthermore "jumbo" loans (over $417,000) are not made by Fannie and Freddie, so, this plan does nothing for either subprime or jumbo borrowers, and subprime loans were the loans that caused the first stages of this crisis.

4) home values are dependent on one thing: the wage of the occupant(s). People are continuing to lose their jobs in record numbers (February jobs report comes out March 6th) - homeowners can not continue to make monthly payments because there is declining available employment. Result: foreclosure.

Richard Florida of the Atlantic Monthly explains why now more than ever, it is not a good idea to be rooted to a certain geographic location (Arizona and Nevada, especially). The most responsible thing I have NEVER heard a president say is, "home ownership is not for everyone", but it's just about the only true statement that can be uttered. As much as many want to try, and as much as many want to believe, the "American Dream" (home, cars, etc.) has no retail value in a 21st century world.

With that, I will leave you with Guru on the true meaning of the American Dream:

"The 'American Dream' isn't dead. It can NEVER die, because the America Dream is - 'we hold these truths to be self-evident, that all men are created equal' and 'bring me your tired, your poor, your huddled masses yearning to be free'...

Nothing in there about your housing preference, your transportation preference, your jumping-on preference...

A Free Society, 'of the people, by the people, for the people' can easily handle the same personal decisions that Cavepeople understood 15,000 years ago with neither guidance nor opinion from their neighbors.

After all 'the only thing we have to fear is fear itself'.

Posted by Steve at 01:00 AM | Permalink | Comments (1) | TrackBacks (0)

By Red Sox Steve

Welcome Back!

Congress is in recess this week, so C-SPAN came up with a little bit of diversity in its programming... certainly a good thing as I am tired of the discussion on bailouts, banking, mortgages, etc. The stimulus has passed and, in the short term, yours truly will benefit from the 65% COBRA subsidy as part of the unemployment benefits package. With an eye on the longer term, stimulus money will be put towards scientific research & energy efficiency, the benefits of which can - and will - be realized both here and abroad.

Let's discuss a few broad points on where our current administration sees our scientific efforts leading us:

Steven Chu, the Nobel prize winning Secretary of the Department of Energy has been on the job for 3 weeks. In his interview today (if you guessed that I saw it on CSPAN, give yourself a prize!) he reminds us that DOE funding in the past has contributed greatly to the body of scientific research (biological, physical, computorial) which has, in turn, affected our national cultural and economic well-being, and that this will continue into the future. He also made some comments about the energy-efficient, "smart" electricity grid, whose construction will be funded by stimulus money. The efforts being made to support scientific research and modernize the national power grid will certainly contribute to a digital, energy efficient future.

Chu also discussed ties between the US & India: The US signed a nuclear power treaty with India in October 2008, allowing India to expand its nuclear power industry, subject to periodic inspections. Specifically, India can now utilize civilian nuclear technology exported from the U.S. Chu didn't further discuss relations between the two countries.

His take on how scientific research will flavor relations between the US & China: there is NO doubt that as over 300 million Chinese move into cities and their surroundings, construction will need to go in one direction: UP! As Chu states, the US & China can each benefit from the construction of energy efficient residential and commercial buildings, with the goal of those buildings using 70% less energy than is used today. Furthermore, Chu stated that these two nations can work together on the construction of more energy efficient manufacturing facilities. In other words, the Chinese will supply the labor, demand and construction capital, while the US will supply the technology and know-how (both born out of capital investment in research); a clear win win for both nations.

The DOE, which has won more Research & Development awards than any private sector organization, will have a lot to say on our scientific, energy-based future. Chu's analysis provides us with an understanding of where dollars and brain power will be directed, as we innovate ourselves out of the current recession and into the 21st century!

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Consumer demand and petroleum needs in the Plastics Industry:

We know now that the days of western nations producing things in massive quantities (automobiles, steel beams, computers) is just about coming to an end, as we transition into a 21st century world. Events in the chemical industry, while nuanced, are no different.

The annual global consumption of plastics (thanks Plunkett's!) is over 180 million metric tons, and, as we examine everything found in the average home - plastic bottles, appliances, automobiles, computers - we are looking at plastics plastics and more plastics. In places like India and China, demand for these items will increase as household wealth increases.

India’s largest chemicals producer, Reliance Industries Ltd., is investing $6 billion to double an already-existing refinery (Jamnagar) and construct two 500,000 ton-per-year polypropylene (a carbon based chemical that comes from petroleum, used to make plastics) plants by 2009. The government is also playing along: customs duties for bulk plastics such as PVC (polyvinyl chloride), LDPE (Low-Density Polyethylene), and polypropylene fell from 10% to 5% in the 2006 national budget.

The production of plastics by the chemical industry requires that 30 million barrels per day of petroleum are consumed. SABIC (Saudi Basic Industries Corporation) is constructing plastics manufacturing companies in the Saudi cities of Al-Jubail and Yanbu... Oman, Kuwait, the UAE, and Bahrain are making similar efforts. In fact, Dow was close to entering into a joint venture in Dec 2008 with the Kuwaiti company, Petrochemical Industries, to create the largest polyethylene (another carbon based chemical that comes from petroleum) producer in the world until the Kuwaiti parliament voted in opposition to the deal.

Investing in valuable assets for the long term means looking at long term trends - in this industry, "the trend is your friend" - because plastics generally make things lighter, flexible and more durable, and because demand for plastics depends on household wealth in countries like India and China (middle classes in those places will be larger AND wealthier tomorrow than they are today...), it's a safe bet that companies meeting these demands will be profitable for a long time.

Posted by Steve at 05:20 PM | Permalink | Comments (0) | TrackBacks (0)

Arbitrage (ärb-träzh) is defined as "The purchase of securities on one market for immediate resale on another market in order to profit from a price discrepancy." In the financial world, it is a way to exploit differences in order to make money. On an investment bank's trading floor, this must be done quickly (in seconds and minutes rather than hours and days) in order to realize a profit, before the gap closes. In other areas, the trends work much more slowly, but are just as evident - understanding where these gaps are closing will help us know where things are headed.

1) Housing in the US & UK - there are few better examples of the closing of a previously ever-widening gap than the repricing of the housing markets in these countries, which is actually a main piece of evidence that supports a growing trend: All over the world, hundreds of millions are rushing to join the middle class - Indian, Chinese, Vietnamese, Brazilians, Mexicans, and Latin Americans who have known only poverty for generations are developing their economies and spreading the wealth quickly enough that millions of migrant workers move (hence the term "migrant") into urban areas to pursue economic opportunities not previously available to them or their parents. They are forming an emerging middle class (homes, cars, credit cards, home computers, white-collar jobs), for the first time. In the US & UK, the middle classes are feeling a squeeze - capital is flowing away from all the accoutrements of middle class lifestyle in the developed world - retirement security, home and car ownership, job security; these have all been artificially revalued over the last 30 or 40 years by middle classes in wealthy countries, and now the bill is coming due. In other words, by doing the same types of jobs for years now (auto industry and steel industry, I'm looking at you!), the developed world hasn't managed its resources effectively. Think of it like a smart but unmotivated high school student (ask my parents... they've observed this first hand) - smart enough to be with the smartest, so only a lack of MOTIVATION can serve as an impediment to success. We've got to do better, clearly, so that all nations around the world can justifiably exploit their relative economic advantages (thanks David Ricardo! - wikipedia people...) - in the United States (and Italy, France, UK and Germany), this has nothing to do with how many cars, steel beams and mortgage-backed securities are produced, but has EVERYTHING to do with how much value we add to the overall economy. "Buy American" in the stimulus package? Are you fugin' kiddin? Get it out!

Watching the CNBC report "House of Cards" - essentially a post-mortem on housing, mortgage lending and consumer spending - helps elucidate what was going on: the US mortgage origination market was essentially trying to put the cart before the horse: lend lend lend at ever lower interest rates (adding liquidity and debt to the market, but producing nothing of VALUE) and home values will continue to increase in perpetuity, right? Fill in the blanks: mortgage lenders make money, mortgage sales people make money, wall street banks make money, but neither the home nor the mortgage backed security has any greater VALUE. This has all come to a screeching halt, and the trend comes into clearer focus - the middle class lifestyle is expanding to the developing world; capital must flow in that direction in order to fuel this expansion, and it is flowing away from elements of developed world economies that are no longer "givens". Tighten your belt, it's going to be a bumpy ride.

2) Oil and Finance - Over the last few decades these industries have seen billions of dollars flow in their direction, setting their own records for quarterly profits, only to break them 3 months later... have you noticed? Well, that's all coming to a grinding halt - it's safe to say that Shell, Saudi Aramco, JPMorgan Chase, Goldman Sachs, have all had as big a piece of a global economy as they are going to get, UNLESS they adapt their business models to the changing times. If humanity is going to move into the 21st century with an ever-expanding middle class, then global capital flows and energy consumption habits must change to reflect the reality that living standards all over the world are on the upswing, not just in wealthy countries. Contrary to the last few years (I acknowledge - this isn't a bold prediction: we are already seeing this happen) money will start to flow AWAY from these industries and TOWARDS ideas that move the world into the 21st century.

3) Chemicals and Technology - if Exxon and Bank of America are going to have a smaller piece of the economy in the future, then Apple, Intel, Dow and DuPont will have a bigger piece of it. My research on Intel tells me that they have been committed to innovation since their founding - compare the number of semiconductors and micro-processors in the 2009 world as compared to the 1969 world... cell phones, laptops, Palm pilots (remember those?), DVD players, cable boxes, missile guidance systems, UAVs (unmanned drones). A full digitization of society is where we are going and Intel and Apple are going to help us get there - I wrote about it last week.

Since Democritus coined the phrase "atom" (Greek for "uncuttable" - shit! Since then science has even proved that untrue!) over 2,000 years ago, mankind has studied the effects of combining different atoms and molecules... this work continues today and Dow and DuPont are critical to this effort. Each of these multi-national companies is over 100 years old - they've survived WWI, the Great Depression, WWII, the break-up and subsequent reunification of Germany, etc, all because they commit their resources to chemical innovation - the constant construction and recreation of the molecular world for practical uses. Because of what has happened in the global economy over the last few months, capital has flowed away from these companies as well, but it has nothing to do with their business model. In other words, these companies will be doing MORE business 10 and 20 years from now than they are doing now; and, hopefully, companies that pump oil from the ground or lend the same dollar to 30 people, will be doing less. It's all about recognizing the trend and finding the arbitrage.

Posted by Red Sox Steve at 07:08 AM | Permalink | Comments (0) | TrackBacks (0)

January's numbers are not good - soaring unemployment claims and foreclosures, record falls in home prices, the worst January EVER for the S&P 500, retail sales for 4Q2008? way down. retail sales for January? way way down, billions of dollars in losses being reported in industry after industry, corporate layoffs in the tens of thousands, you get the point. Our worst fears about how bad the economy actually is are coming true, and the average American is learning how to do with less whether he likes it or not.

In Washington, Lindsey Graham and Chris Dodd can't seem to agree on how to use the stimulus, speaking of which, we might either be moving from $800bn to $900bn or $700bn... (what's $100bn anyway)? Neil Barofsky, the top TARP cop (say that three times fast!) was in front of the Senate Banking Committee AGAIN as our government tries to figure out what happened to the FIRST tranche of $350bn that was supposed to be used to halt the mortgage crisis and instead went to trips on private jets, trash cans and bonuses for the people who made the mess while even yours truly got the heave-ho from the finance business.

To top it off, the Russians yet again reminded the rest of the world of their desire for control of Central Asia... strong-arming the government of Kyrgyzstan to remove the US military's access rights to a base there... which the army uses to fly supplies into Afghanistan.

We are in a mess.

The stimulus is supposed to put the US economy back on solid ground, but that's only if we agree on how to implement it. As Guru said on Thursday, we can't have tax cuts for automobile purchases, we can't have tax cuts for home purchases... we can't reward the practices that got us here in the first place. The "American Dream" of a home and a car has no retail value in a 21st century world. People can certainly live where they want to live, and drive what they want to drive, but using financial schemes like securitization and tax rebates to reward those practices isn't the best idea IF you want to live in a 21st century world. Will it drive profit for auto companies, construction companies, and banks? Of course - if there are sellers and buyers in a free market system, there is a profit to be made... a benefit to be had.

But this will not get us where we need to go. It's no secret that the auto industry has gone hat in hand to the government multiple times since the Carter administration or that they've marketed their product so effectively, even a teenage girl can get a testosterone boost from sitting in the driver's seat of a Ford F-150, but that will not get us where we need to go.

We've built single family home after single family home in city then suburb then exurb... there was no shortage of credit to build all the houses, roads, sewers, electricity and telephone lines that these communities will ever need - police, fire, ambulance, it's all there. By no stretch of anyone's imagination are those communities energy efficient or economical for a 21st century world; that will not get us where we need to go.

Imagine, for a moment, a world where the sale of a home won't produce a windfall for the seller. In other words, it's just a place to live - all property owners pay taxes, so that's another obligation to consider when determining a property's "value". When all the costs associated with "ownership" are taken into account (remember kiddies, until that mortgage is paid off, the BANK owns the HOME, and the RESIDENT owns the MORTGAGE), it's tough to call it an asset. You can't sell it because you'll lose money, you can't borrow against it because new lending standards are tougher... it's just a place to live. Residential property ownership has nothing to do with 21st century businesses, and that's a good thing because very little has actually changed about the concept of "home" in the last few centuries... it's just a place to live.

We need to put the past behind us. The wiggle room that America had as a global economic power is gone. We need to work peer-to-peer with Japan, China, the EU, India, etc. to cement our place in a multi-polar world. Our politicians need to stop discussing how many homeowners and banks and car buyers and carmakers will get bailed out and simply say, "no more." This isn't Republican v. Democrat, at least from my point of view. I've seen (CSPAN is MY reality TV!) both Democrats and Republicans make idiotic arguments about tax cuts for homeowners and carbuyers part of the stimulus package... sure, it's what is wanted, but not what is NEEDED; jeez Senator Mikulski from Maryland, that's what got us into this mess in the first place.

A 21st century stimulus package would look something like this:

1) infrastructure - we need better roads, better bridges, better harbors, better transport, better airports, better energy grids

We need an economy based on brain power - how to do things better, faster, more economically, more energy efficient. Putting money into projects that makes transportation of people, goods and services safer, more secure and more reliable and consumes LESS energy... there is no better idea than that to prepare America for Century 21. If China has (electromagnetic!) trains that go over 300mph, so should the United States.

The home-made bullet train "China Star", with a maximum speed of 270 kilometers per hour (167 mph) and a maximum capacity of 726 passengers, became operational on the Qinhuangdao-Shenyang Railway Line on August 16, 2005. [chinadaily.com.cn]

2) technology development - nanotechnology, medical research, stem cell research, space travel, ocean exploration, broadband and cellular expansion

We need to commit ourselves to incorporating state of the art technology into every aspect of our lives - health care, communications, shipping & logistics. If nearly everyone in South Korea has internet access, shouldn't we put some money towards that in the United States?

3) energy - a category all its own...

We need to use funds to get OFF oil and gas; and innovate our way into more efficient and less environmentally destructive energy sources for the 21st century. We have been unable to use our clearly superior military to defeat those that supply the world's energy AND wish us harm at the same time, and we cannot drill our way out of this one (Sarah Palin, I'm looking at you!).

4) education - better schools, more math & science, better paid teachers, more technology in schools, fewer student loans.

It really isn't that tough - 1-4 above get us closer to the 21st century than anything else; Attention given to auto companies, homeowners and banks puts us further and further behind.

What we NEED, but not what we WANT is the TRUTH. Relationships are tough that way - "no honey, that dress doesn't make you look fat!" It's not easy.

To borrow from the Obama campaign, "the fierce urgency of now" requires that we get real about what is to come - China and India are moving quickly, Russia and the Middle East HATE us, while Asia, the EU and Latin America want to work WITH us. Focusing on bail outs for the banks and tax cuts for car purchases has a name... it's called "planned obsolescence". We have to throw our fantasies about the 2 car, home-owning "lifestyle" out the window because that is only going to make our path to the 21st century more painful. The stimulus package is how we get our economy out of the ditch, but if we kid ourselves about how we got here, we'll be kidding ourselves that we are actually back on the road.

Posted by Steve at 10:24 PM | Permalink | Comments (2) | TrackBacks (0)

Yesterday we took a broad overview of America's Economic standing amidst the World and broke down some of the elements that have led us to this point.

Today, I want to break out the elements of the Economy itself and take a deeper look at what is working and what is broken.

1.) The US Dollar

Guru has been a Euro Bull since Dubya's election and those positions have paid off handsomely. The European Union enjoys serious structural advantages as an ECONOMIC entity that make its currency a safer harbor than Dollars in the current climate. Among these are;

* EU Countries are under no illusions about sharing a 'common culture' or 'language'. Instead of bending over backwards to pretend that Poland, Holland and Spain are culturally 'united', the structure allows each country to BE who they are and focuses on areas where they CAN find common ground - basic economic reporting, central bank standards, common currency, freedom of movement, labor and capital (with some limitations). In the USA, economic linkage is taken for granted, but Political and Cultural fantasies about our commonality (say between Vermont, Illinois and South Carolina) lead to distortions of purpose and can invite Political manipulation of statistics and tax revenue. Whereas an EU country knows that other countries will pour over its books with a fine tooth comb and that those countries have no more interest in covering up deficiencies than you have in doing so for THEM, the numbers are assured of a strong component of accuracy. In America, a National Politician...lets just use an initial, say....'W', who may have electoral strength in one region but not another, is likely to be tempted to shift goods, services, tax policy etc. in favor of his support and away from an honest economic model. When this happens, the numbers cannot be relied upon to a great degree of accuracy and finding the ACTUAL national position can be a chore. This is the OPPOSITE of what currency traders want to see in a Nation.

* EU countries compete with one another and are somewhat constrained by the rigorous standards of the EU charter, in terms of their debt, their employment, their expenditures...this makes the EU far more conservative than the USA. In some periods of High Growth, the US model can dramatically outperform the EU - in THIS climate, the opposite is true.

* EU countries are, largely, shielded militarily by NATO and have little reason to ramp us Defense spending to the levels of the US. While America funds two Wars at its poorest moment, EU countries can focus those funds and energies upon their economies and their citizens. A HUGE advantage for the currency.

Many of these same arguments augur well for Japan and the Yen as well. Japan has limited Military, post WW II, a conservative approach to budget matters, saving, R&D expense...an educated populace who are, for the most part, socially coherent and savings focused. Additionally, Japan is the most reliable global partner likely to benefit from China's growth and America's weakness. Japan and China are working to smooth over political differences and it makes sense to suspect Japan will eventually grow its portfolio with China at the expense of the US and UK.

Guru owns 80% Cash in Blue Penguin's portfolios, 48% Yen, 32% Euro and 20% Equities.

It is extremely difficult, at the present time, to make a case for a 'Strong Dollar', based upon the level of debt the US holds currently, the policy posture of taking on dramatically MORE debt, the military expenditures and the interest rate scenario (see below). That said, the Obama administration IS actually a 'Strong Dollar economic team...Geithner, Summers and Clinton are all likely to weigh in towards strengthening and Obama is on board, the question is - when will conditions allow such a strategy?

Not in 2009, from Guru's point of view.

2.) Interest Rates

Interest Rates are near zero and there are simply no scenarios that make an increase likely in the near to mid-term. There ARE several GOP Senators and Congressman, who are sounding warnings about interest rate increases - but their Supply-Side ideas have been so roundly and consistently repudiated by actual DATA over the past decades, it is difficult to not lump this too in with 'Voodoo' as Papa Doc Bush (thanks Gil-Scot Heron) called it way back in 1980.

The Credit binge has come crashing down and the Credit ERA appears likely to have gone with it. Less liquidity is likely to be the rule, regardless of the recovery, as banking and lending institutions will be forced to account for their past disregard for risk and regulators are likely to impose stronger oversight and standards. How this will play out for homeowners, small businesses, households is simply unknowable at such an early date in the recovery plan. For now, no upside risk.

3.) Employment

We all read the same numbers....76,000 laid off last Monday, 7,000 Starbucks workers on Friday, 7,000 Macy's workers today...4% at Morgan Stanley today...Chrysler pushing yet ANOTHER buy-out package note to auto workers -TAKE THE PACKAGE and leave with something to show for your time, don't end up like Lehman or Bear, Stearns workers...N-A-D-A!

Again, not much to add here. Times are terrible, massive layoffs are coming and our entire economy is going to endure a wrenching restructuring. It HAS to happen, we can't continue with the policies and businesses of a different epoch and we must allow time for the new economy to develop.

In the meantime? Live below our means, pay rigorous attention to developments (read your BPR!) and keep your risk profile low. If you CAN hold Euros or Yen, do so.

Guru will give you some stocks each Friday that can be relied upon in this climate, but they should hold money you can afford to leave IN the market. Cash is safe and suggested, but the dollar situation will erode some of its value - so not too much. PAY OFF DEBT with excess, do not owe anyone if you can avoid it.

Tomorrow, Steve is here with you, and Weds., Guru will be discussing the Real Estate Market, region by region. Hope to see you here.

Posted by Matthew at 11:09 PM | Permalink | Comments (0) | TrackBacks (0)

Russia is the most expansive nation in the world. From Sakhalin Island in the east to St. Petersburg in the west, Russia covers a significant portion of the northern hemisphere. During the Cold War, Russia dominated the political (i.e. ideological) and economic reality for all nations residing on the "other" side of the Iron Curtain. In terms of mineral resources, Russia has everything from nickel (world's largest producer in 2005) & iron ore (5th largest producer in 2006) to natural gas & oil, and is one of the world's leading producers and exporters of steel.

Because Russia possesses a great deal of the world's mineral and oil wealth, it is in Vladimir Putin's interest that energy security and price stability for commodities remain relevant in the 21st century (from a speech at the World Economic Forum Wednesday ):

"Every one of us realises that sharp and unpredictable fluctuations of energy prices are a colossal destabilising factor in the global economy. Today’s landslide fall of prices will lead to a growth in the consumption of resources.

On the one hand, investments in energy saving and alternative sources of energy will be curtailed. On the other, less money will be invested in oil production, which will result in its inevitable downturn. Which, in the final analysis, will escalate into another fit of uncontrolled price growth and a new crisis."

He's living in the past. During the 19th century to the 20th century, commodities were central to economic planning for all nations, for one reason or another. This cannot continue as we move towards a digital age. Read the rest of the speech - doesn't sound like he's all that concerned with 21st century life to me! He's looking at the world through oil-colored glasses...

Copyright 2006, Alexander Nemenov AFP/Getty Images

Part of the reason that things like "energy security" and "price stability" sound so reasonable to a westerner is that we've heard US presidents assure us that it is in our best interests to pursue such policy goals (see "war in Iraq"), but yet we've NEVER actually been able to achieve them. Oil and other minerals are and always have been NON-RENEWABLE RESOURCES; the days of getting natural gas and oil out of the ground are numbered, and Putin has no idea how he will remain in control of this massive nation when there is no more oil wealth to be had; what is his endgame strategy? That day is coming, and he knows it. This speech and his recent actions have everything to do with Russia's desire to augment its own economic interests (oil, gas, minerals) and CONTROL a piece of the world's energy supply.

When Putin decides to take over the operations of a state-owned oil company in order to pester its neighbors, or when he finally gets to speak to the world in Davos, saying that things need to be "safer" for the energy market, he's essentially overstating the role that oil will have in the 21st century. Perhaps, no single event will serve to propel humanity into the future more than when we break our reliance on oil and gas for energy. Even India understands this - they hope to increase production of NUCLEAR power steadily through 2050. If that's not forward thinking, I don't know what is!

The story of the 21st century will NOT be written by those who have access to minerals, the way the 19th and 20th centuries were. Furthermore, the end of the cold war and the dawn of an Indo-Sino 21st century means that all nations have to adapt to a "multi-polar" existence including Russia (and the United States!).

Russian citizens are victimized by their autocratic government. Putin couldn't run for President a third time, so he installed Dmitry Medvedev, and then promoted himself to Prime Minister. When it comes time to shut off energy to Europe, Putin does it. When Russia needs to speak at Davos, Putin does it. When a Russian reporter speaks out against the government, she is mysteriously killed.

In 2009, the global economy is the weakest it has been in many years (some say since the '80s, some say since the '30s... either way, it's pretty bad), and this leaves developed and developing nations alike vulnerable to attacks and manipulations by those who despise us, Putin among them. What the west (along with China & India) will have to do is work together to focus on renewable sources of energy, and, in the meantime, carefully but forcefully manage relations with Russia. We now know that because Russia possesses a great deal of land, oil, and minerals, it will do everything it can to ensure that the world's economic structure will depend on such things. It is in the best interests of nations focused on using the 21st century to transition humanity into the digital era to work together to isolate and minimize the impact that autocratic, commodities-based governments will have on our world. Putin's actions have more to do with CONTROL and POWER than PROGRESS - this will do nothing to get mankind from where we are to where we need to be.

Posted by Red Sox Steve at 04:35 PM | Permalink | Comments (1) | TrackBacks (0)

In business negotiations, international relations, and politics, it is important to understand who is operating from a position of weakness and who is operating from a position of strength.

Ecuador is a small South-American country heavily reliant on the export of renewable and non-renewable natural and mineral resources for revenue. According to an EIA report, Ecuador's oil exports accounted for about 33% of all its tax revenues in 2007, 80% of its energy consumption comes from oil, and 17% comes from hydroelectric sources.

Let's have a look at some recent events:

- due to the passing of legislation which raised taxes (to 99% of revenues) on foreign oil companies operating in Ecuador in October 2007 (when Ecuador joined OPEC for the 2nd time), Brazilian oil company Petrobras was forced to return an Ecuadorean oilfield to Ecuadorean hands

- in September 2008, Ecuadorean President Rafael Correa used the military to assist in the takeover of Brazilian construction company Odebrecht which was working on a hydroelectric dam project, criticizing Odebrecht for faulty construction

- Furnas, a Brazilian state-owned energy company was also expelled from Ecuador in October 2008

- In response to these events, Brazil recalled its ambassador from Quito in October 2008.

Brazil is much larger and more economically diverse than its smaller neighbor. While both nations are commodities rich countries, and suffering from a burst in that bubble, Brazil has still been able to act as a net creditor to Ecuador: it lent funds from its development bank - Banco Nacional de Desenvolvimento Econômico e Social (BNDES) for projects such as the dam in Ecuador, proving that it has cash to work with as well as a functional, diplomatic and forward-thinking government. President Correa is taking more of a leftist/ideological approach, aligning himself with Hugo Chavez in Venezuela (richer than Ecuador) and Evo Morales of Bolivia (poorer than Ecuador). I just don't see Lula sidling up to Hugo and Evo in quite the same way! Why, when it is a given that Ecuador's natural resources are so critical to its well being (tax revenue and energy needs), AND it is basically getting a hydroelectric dam for free, would it agitate its much larger and more powerful neighbor?

This is less about the row between Ecuador and Brazil than it is about the near-term future of 2 developing nations from the same region of the world, with common physical and historical attributes.

Brazil has benefitted from being a commodities exporter during a commodity boom (2002 - 2008), and has done its best to diversify its growing economy in the process. For example (as opposed to the United States), Brazil is in the perfect position to continue to mine iron ore and manufacture and export steel: it is the 9th largest steel producer in the world as of the end of 2007; it not only exports much of its ore, it also ships about 33% of all its steel production overseas.

Ecuador, seems to be operating AGAINST the overarching political trends both globally and in the region. Globally, Ecuador is joining OPEC again after leaving in 1992, and is its smallest oil producing member. Regionally, Correa freely agitates Brazil, and closely aligns himself with Chavez and Morales, the two most outspoken leaders in the region. Ecuador seems to be doing everything it can to destabilize regional relations, while Brazil, the largest economy in South America, seems to understand that it must smooth over relations with its less powerful neighbors because it has every intention of continuing to do business regionally and around the globe with countries like Argentina, France, the US, China, and even Russia.

Ecuador has made some severe miscalculations about the strength of both OPEC and its neighbors in refusing to allow Brazilian companies to do business there - and is thus outmatched by its much larger (in population, economy, acreage...) neighbor to the southeast. Brazil, while affected by the global economic crisis like all other countries, is making efforts to keep things in the region as stable as possible, while recognizing that its relationships are both contained in and extend beyond the borders of South America. Forward thinking indeed!

Posted by Red Sox Steve at 04:02 AM | Permalink | Comments (6) | TrackBacks (0)

As we discussed yesterday in 'The Ice Flow' ('Living in the Country you Have...'), the usual suspects are busy clamoring for 'Tax Cuts' amidst the greatest shortfall in revenues and greatest demand for government expenditures in the history of this Republic.

Did you get that? Not chastened by the spectacular failure of supply-side ideas in the past eight years, featuring Tax cut after Tax cut and MASSIVE expenditures on War that they attempted to categorize as 'off budget' (as if such a thing could exist!) they are left only to play the only note they know...privatize, de-regulate, cut revenue...and they will happily lead their devoted adherents to the same place they've driven the National Balance Sheet...

Over...

the...

Clifffffffffffffffffffff~!

But, as we do have serious budgetary problems and SYSTEMIC concerns about growth, employment and infrastructure - it is time for the Obama administration to announce a Tax plan that will, UNQUESTIONABLY save American taxpayers TENS OF BILLIONS, if not HUNDREDS OF BILLIONS, of Dollars in every fiscal year from this one forward. This simple policy change will simultaneously remove the corruption and thievery of a Halliburton, the unsupervised activity of Blackwater and other rogue 'security consultants', the lobbying budgets of major corporate vendors, while providing serious bang for the buck to the American taxpayer.

What is the Policy?

'The American Taxpayer Does NOT Pay Retail'

Simple. If a manufacturer wants to provide products to the American people, he must find a way to cut his costs and to do so without cutting his workforce. If he doesn't want to sacrifice his profit margin, he doesn't have to accept Taxpayer orders for goods. If a consultant or service provider doesn't wish to forego self-determined profit levels, they too are under no compulsion to provide services to the Taxpayer.

The American taxpayer has been asked to shoulder the burden imposed by the horrific failure of policy in this decade, they have been asked to send money to BANKS! (who, formerly, it should be noted, are the places that Taxpayers went to RECEIVE money) and, to nobody's surprise, the money that was sent to the Bankers ($350 Billion) promptly disappeared, was not used for the purposes the Taxpayer specified, has done nothing to salvage the Banks and has simply provided them with a new focus - lobbying for M-O-R-E. The American taxpayer has been asked to shoulder the burden imposed by the inability of the Automobile industry to use its vast revenues to create an environmentally responsible, 21st Century conveyance (look for Thursday's column - 'What to do with GM and the American Auto Industry' for more detail!). The American taxpayer is currently being lobbied by every known industry, individual and constituency for financial assistance, almost all of whom, unapolegetically continue to decry 'Socialism' (having never worried BEFORE about their rampant hypocrisy, why start?).

Do you know what happens when everybody wants what only YOU have?

It means you dictate the terms. You call the tune. You have the 'walkaway' power, which, Red Sox Steve will tell you, is the MOST powerful component in any negotiation.

America needs LOTS and LOTS of stuff. We need Military equipment for dealing with a hostile world, we need Wind Turbines, Solar Panels, Geothermal structures, Nuclear Power Plants for dealing with the fossil-fuel nightmare in our economy and our environment. We need bridges repaired, roads repaved, fast trains designed, built, and run effectively. We need hydroelectric dams and levees on our shorelines, as Holland has, so that the rising Seas don't turn the Atlantic and Pacific coasts into New Orleans. We need schools, rental housing, community centers, day-care centers, health-care centers...

S-T-U-F-F.

And the companies or individuals who will PROVIDE that material and expertise are hurting for customers who can pay. The American Taxpayer WILL pay, but, like Wal-Mart...the big Dog chews the bone in a manner of his own choosing. YOU, American Taxpayer, on the hook for this country, past errors and future prospects ARE that big Dog.

The MOMENT Barack Obama and his budget director announce this change, that American Taxpayers will be establishing rigorous guidelines on pricing and accepting NO cost overruns, NO White Collar wealth creation (on our dime), NO blue collar 'featherbedding' and establishing guidelines for retroactive 'givebacks' from industries and vendors who have been found to have gouged the American Taxpayer in the past... 

 A whole lot of folks are going to become apoplectic!

They will say that the 'Business of America is Business' and the American Taxpayers, historians that they are, will calmly note that those were the words of Hebert Hoover, whose policies drove us into the ditch that FDR lifted us from, based as they were upon a Feudalist economic theory that was proven erroneous in 1500. They will say that these policies, in which a majority of the people's interests are served at the expense of a tiny minority are examples of 'Socialism', and the American Taxpayer, rigorous observer of Global trends will note that these socialist methods don't seem to be harming China, Brazil or Spain and don't seem to be making them any less free, either. In fact, they seem to be having the OPPOSITE effect, and if you don't buy that, ask someone who is 50 years old about Spain under Franco, China under Mao or Brazil under Medici in the 1970's!

And when the shouting dies down, the facts will remain. American business NEEDS the business and the American People NEED the stuff. Those businesses who can provide it at fair prices, stripped down from retail, will continue in business and thoe who cannot - will not.

That philosophy has a name as well.

It's called 'Capitalism' and it is EVERY bit as responsible for those gains in those Socialist countries I listed as the Socialism they incorporate does. It is the reality of a decades long 'Cold War', which was won by a score of 51-49, not the 85-15 the cheering throngs would like to believe.

Ridding ourselves, as our President advises, of 'childish things' means ridding ourselves of fantasy notions about history, about economics, about human behavior...

FIXING this mess requires treating problems with a 'What Works' series of solutions, some from Capitalism, some from Socialism. Education and Energy work best under Socialism, Baseball and Entertainment work best under capitalism. Government purchases from Private businesses need to be put on a path that will work best for the American taxpayer and the American people.

Today. 

Posted by Matthew at 10:18 PM | Permalink | Comments (0) | TrackBacks (0)

Recently, because of the global economic crisis, we are seeing that developed countries (in addition to China) are taking the approach of issuing more debt and appending those funds to policies focusing on effective nationalization of the banking industry and additional efforts on infrastructure development and energy conservation.

There are a few players that are left out of this game and one of them is Mexico which is facing a severe - and sustained - devaluation of its currency.

A quick analysis of the numbers:

August 1, 2008, 1 US dollar (USD) bought you 9.94 Mexican Pesos (MXN)
October 1, 2008, 1 USD bought 10.95 MXN
November 4, 2008, 1 USD bought 12.52 MXN
January 20, 2009, 1 USD bought 14.02 MXN

Let's look at oil prices (light sweet crude) during that same period:

August 1, 2008, $125/barrel
October 1, 2008, $98/barrel
November 4, 2008, $70/barrel
January 20, 2009, $40/barrel

We can see a relationship forming - as the price of oil drops, the Mexican currency becomes worth less and less in relation to the dollar (you get more pesos per dollar, so the peso is worth LESS).
Mexico is the 6th largest oil producing country in the world and exports approximately half of its production; contrast that to the US which produces about 50% more oil than Mexico, but still has to IMPORT 6 times the oil that Mexico EXPORTS!)

It is undoubtedly better for consuming nations that the price of a barrel of oil decrease, however it can be harmful for oil producers/exporters when an unforeseen drop in the oil price occurs. This situation caused another problem in Mexico: large corporations such as Gruma (corn flour & tortillas), Cemex (cement) and Comercial Mexicana (retail) lost hundreds of millions of dollars... they bet the wrong way when they had to predict the future value of the mexican peso.

Prior to the summer of 2008, petrodollars were flowing into Mexico as oil prices rose. This caused an increase in the value of the peso - foreign purchasers had to buy pesos in order to purchase one of Mexico's most important exports: oil. As those purchases were taking place, currency markets reflected the fact that the peso was strong relative to the dollar (generally a worthless currency as oil prices rise - see for yourself on Yahoo Finance.

As the value of the peso rose, Mexican companies saw what appeared to be a clear trend - it seemed that the peso would continue to strengthen into the future, so it was wise to buy a currency futures contract: the owner of the contract is essentially able to lock in the price at which a peso is purchased at some point in the future. There is a catch, however. The catch is that if you own a futures contract you have to post "margin" - you have to give a currency exchange some of your own money in order to stay in the game... this money remains in your "margin account". In case you can't meet the terms of the contract, the exchange takes your margin and closes you out.

Essentially, Gruma, Cemex, etc. all were continuing to post margin. They bet big bucks that the peso would continue to strengthen against "reserve" currencies like the dollar and euro; when the peso weakened, their margin requirements went up (nearly every single day), and bingo! they lost hundreds of millions of dollars. Comercial Mexicana's losses ($1bn) were so bad that they had to file for bankruptcy.

You see, it's all connected - oil prices, energy export & consumption, exchange rates today, exchange rates in the future, political cycles (pretty easy to figure that putting a democrat in office in the US would drive oil production up and prices down - the Saudis want to stay in business too!), international relations.

As a people looking forward we need to figure out how to break that destructive relationship - markets will always be markets, they will always move in one direction or another, someone will always win and someone will always lose; but it's the correlation between currencies and oil prices that's causing devastation in developing nations like Mexico = the price of a barrel of oil changing over the course of just a few months caused severe damage to the Mexican economy just as it was starting to slow down the damage done in the US and Europe.

Posted by Red Sox Steve at 02:05 PM | Permalink | Comments (2) | TrackBacks (0)

Were any of your ancestors born in Italy?

In February of 2008, I learned from a coworker that because I have Italian heritage, I may qualify for Italian citizenship - this news has changed my outlook on a great many things. Let's be clear first: gaining Italian citizenship means gaining entry to the EU; I could work, live and travel in any of 27 member countries and join a population of over 500 million citizens.

In my view, the EU is the most modern form of international government on earth. What is well known is that Americans and the rest of the world now deal with EU countries in commercial terms via the Euro, which replaced many other European currencies in circulation as of Jan 1, 2002. What isn't well known, or at least as highly regarded by nations outside the EU, is that the legislative EU which meets in Brussels, has a rotating 6 month presidency... it was Slovenia's turn, then France's turn, now the Czech Republic's turn... you get the point.

Further to that, the combination of economies, languages, histories and cultures which fall under one legislative umbrella give the EU significant bargaining power, especially in trade and energy agreements.

On Jan 1, 2009, Russia turned off the spigot of natural gas that it supplies to much of Western Europe. I read in the FT that Germany gets 30 percent of all natural gas it uses from Russia, and Italy 17 percent, making these the 2 biggest consumers of Russian natural gas by far. So what's the big deal about the Ukraine? Well, first of all, Ukraine serves as the "middle man" for 80 percent of all Russian natural gas destined for the EU. Germany and Italy are the largest and 4th largest economies in the EU respectively (AND have months of reserves along with the capacity to purchase energy in other ways from other sources), and Russia is one of the main trading partners for the EU. Lots of economic heavyweights are involved here.

To make a long story short (too late!), shutting off natural gas supplies to punish the Ukraine and hurting the end-user, who happens to be one of your main trading partners in the process caused a major international "kerfuffle" (yeah, I said it!).

There's a lot going on here - we've seen since the summer that Russia seeks to assert its dominance over its former satellite states... bringing us back to the Cold War era... at least on THAT side of the Iron Curtain. A military invasion of Georgia during the Olympics; just as the world is filled with Hope (capitalized because I think Obama may have copyrighted it) because the world's most powerful nation is getting a new leader... Moscow decides to show Kiev who's boss in the energy delivery business, threatening to deliver natural gas (measured in thousands of cubic meters... that's an SI volume measurement for you non-scientists out there) only if the Ukrainians promise to pay twice the price. Heat in some countries was off for days... in Eastern Europe... in the middle of the winter. Russia knew what it was doing. Just as the Olympics were getting underway in Beijing in August, Russian tanks rolled toward Tbilisi, Georgia. Anything to make a scene,
 right?

As a citizen of the world, I have to remember that this type of thing is a risk to the security and well-being of many powerful nations; it isn't wise for one major world power to be seen to be a threat to another; Sure, the Ukraine was stuck in the middle (look at a map - it really is!), and felt a literal and figurative chill in its relations with Russia, but Russia's actions were also felt in Germany and Italy, who both hold MAJOR sway in the EU.

EU officials at first, tried to play "nice", encouraging the Ukraine and Russia to settle this dispute, but had to deal with the fact that it too, is caught in the middle (question - what color house did the quote below come from? answer below):

"We urge both sides to keep in mind the humanitarian implications of any interruption of gas supply in the winter. The predictable flow of energy to Ukraine and the rest of Europe... is essential for stability and reliability in regional and global energy markets."

Answer: The WHITE House, on Jan 2, 2009.

Russia, by threatening the Ukraine, has also threatened major powers in the EU; all this did not go unnoticed by the United States.

Here's a prediction for 2009: Russia will continue, via either military might or access to natural resources, to be a threat to peace and stability whenever it sees an opportunity.

Maybe I'll wait until summer to go to the EU... it'll be warmer then.

Posted by Red Sox Steve at 01:00 AM | Permalink | Comments (0) | TrackBacks (0)

I've been researching the piece on the steel I just wrote (The Future of Steel) for about 2 weeks; I read a book published in 1999 on the steel industry in China (so many predictions, so many miscalculations), and another book published in the early 1980s on the history of the steel industry in the developed and developing world. At those two points in time, the industry found itself at different points along the same trendline… Chinese steel production was on the upswing and western world steel production was undergoing a downturn.

I just read an interesting piece in the NY Times which dovetails with what we’ve previously discussed: steel production in the US has been long since dead as a serious economic contributor to life here, especially in places like Erie, PA, and Youngstown, Ohio – midwestern places that were reliant on mass manufacturing to remain relevant in a constantly evolving global marketplace.

David Streitfeld's piece in the NY Times on Jan. 8, 2009 (For Pittsburgh, There’s Life After Steel) shows us that what is required is an effort towards "deindustrialization" (That's not a word used often in mass media, but I'm sure we will hear it more and more!) and diversification of local economies. Steel production on a mass scale was prosperous for the United States at a different time, when the world was in a phase of development where developed (f/k/a "first world") countries dominated the economic and political landscape on this side of the iron curtain. The United States had conquered its enemies from sea to shining sea in WWII and then went back for more in Korea in the 50s. Those that opposed the United States were weakened by these events, while the United States began to produce and grow significantly.

To take a quote from the article mentioned above, it is as if Mr. Harold Miller, commenting on Pittsburgh, read last week’s Blue Penguin Report: “The emphasis was on fighting the presumed causes of the decline by getting rid of low-cost foreign imports or providing more subsidies. The assumption was that steel will come back and we’ll go back to the way we were.”

You see, dear reader, we are not going back to how things used to be. Mass-manufacturing industries that have evaporated and have gone offshore are NEVER coming back, and their departure left some of these midwestern towns to become wastelands of poverty, despair, and lacking in opportunity for tens of millions of people.

All around the United States, the areas that are the most prosperous, like New York City, Chicago, Boston, and San Francisco are places where massive amounts of people live, and have very diverse economic bases. Places like Detroit, and smaller places like Bethlehem, PA, and Akron, Ohio need to think very seriously about what Pittsburgh is doing and imitate it as best they can, and if the federal government needs to assist, then so be it – we cannot ghettoize these places because they are shells of what they once were. Smaller midwestern towns where it isn’t practical to consider a NY/SF model of development are much more capable of identifying with – and benefitting from – the transitional model set up by Pittsburgh. What’s more important is that they can learn to cope with the inevitable “deindustrialization” (there’s that nasty word again!) that first needs to occur in smaller places so that they can grow and change in tandem with the modern world as we move into the 21^st century.

What is provided by Pittsburgh’s experience, and is needed in every town up and down the Allegheny, Monongahela and Ohio rivers is a plan for middle America; a plan for the cities and towns that have been so heavily dependent on heavy-industry for growth and prosperity. We must help these towns to do whatever they can to focus on (an important phrase that we will focus on here at vagabondguru.com more and more…) THE FUTURE.

Posted by Red Sox Steve at 02:49 AM | Permalink | Comments (0) | TrackBacks (0)

Since we recently found out that consumer spending in the US in December was down 2.7%, I thought I should send this out into cyberspace...

In November 2008 - I read an editorial in the Financial Times I thought was a complete joke!  I put a letter to the editor together, but never sent it out. I share it with you below, along with the piece I read: China needs a true change of course

Dear Sir,

I usually react to what I find in the FT in 3 different ways: 1) agreement that the author is restating my point of view for all readers, 2) equanimity - it is just news and analysis of news, after all, 3) incredulity - I might have to turn the pages upside down to truly believe what I am reading. The Editorial Comment from Tuesday Nov. 11th, "China needs a true change of course" falls into the third category.

I disagree that that the Chinese economic model should readjust to focus more on consumption at home. Having grown up in a quintissential American suburban community, and now living in a rent-controlled Manhattan apartment, I have been able to weigh the need to embrace consumerism, and I just don't see my own - or anyone else's for that matter - consumption as being a sustainable model for growth. Rather, I'm now seeing that buying so much "stuff", and making a commitment to purchase the latest and greatest consumer based items is a little silly, especially in the face of an economic crisis.

Simply put, in November 2008, I would not recommend to a dear friend or family member that they consume more and decrease their household savings. I would, however, recommend that he or she emulate the Chinese (and many other Asian economies for that matter): cut down on consumption and increase household savings. Both China and the United States are contrasting examples of the idea that businesses, nations and people are better off if they produce and sell more than they buy.

Sincerely,

Red Sox Steve

 

China needs a true change of course

Copyright The Financial Times Limited 2009
Published: November 10 2008 19:56 | Last updated: November 10 2008 19:56

After the co-ordinated rate cut in October, the Chinese cut interest rates in a show of solidarity. Now the rest of the world is talking about fiscal stimulus, and China is charging ahead. The State Council has announced a vast fiscal stimulus programme to pull China through the coming grim years. The stimulus, however, is taking the wrong form. Rather than trying to prop up the Chinese economy as it was, this is an opportunity to turn it into the economy China wants – one where consumption at home has more than a cameo role. The government must seize it.

There should be no surprise that China is slowing down. A global slowdown was bound to hit the world’s second-largest exporter. The International Monetary Fund now sees Chinese output, which grew by 11.9 per cent in 2007, growing by 9.7 per cent in 2008 and 8.5 per cent in 2009. This sounds strong to western ears, but few countries can absorb 3 percentage point falls in annual growth without problems.

Having cut interest rates three times within the past month, the Chinese State Council has now taken the advice of the IMF and the World Bank, and authorised $586bn of stimulus spending over the next two years. Housing, utilities, disaster relief and transport are expected to be the main beneficiaries.

Parts of this scheme have been announced before; so the true size of the new stimulus is not clear. But the problem for China is not whether it can build enough train lines, ports, pipes and houses to weather a global slowdown. It is that the Chinese economic model needs a substantial redesign.

China’s growth to date has been phenomenal, but it was based on exports and investment, at the expense of consumption. China almost aimed to be a supersized South Korea: in 2005, capital investment made up more than half of China’s gross domestic product. The capital-intensity of its growth also meant profits grew strongly as a share of GDP. But employment growth has slowed since the 1980s, so workers have gained small benefit.

With an undervalued renminbi also making imports dear, the Chinese public has proved loath to spend. China has far too little dom­estic consumer demand. Where­as household consumption made up more than half of China’s GDP in the 1980s, it now contributes little more than a third.

In the absence of a domestic safety net, Chinese household savings have been as high as a quarter of disposable income. In addition, corporate and government savings have soared. Overall, China has been saving close to 60 per cent of GDP. This contributed hugely to the global savings imbalance. Some of the deepest roots of the current crisis lie in the plugging of western deficits with Asian savings.

The Chinese government recognises that it must build domestic consumer demand, but it is time for the leadership to put its money where its mouth is. Alas, the planned stimulus does not attempt to boost public and private consumption. It aims, instead, to keep the economy ticking over until it can start exporting again. This will not work. This is the golden opportunity to redirect the pattern of growth towards consumption and away from the previous massive reliance on exports and investment.

In a country with light household taxes, there is little room to do much with cuts. A cash rebate would be more effective. Public spending on schools and health services would also help, directly and indirectly. Since fears about paying for health and education keep savings high, this would also encourage household consumption.

China’s leaders were right to propose a fiscal stimulus. But they will be missing a chance for meaningful reform if they focus on pouring concrete, and do not look at promoting household spending, as well. China’s problem is more than a mere global downturn. Its development model is no longer sustainable. The time for change is now.

Posted by Red Sox Steve at 01:00 AM | Permalink | Comments (0) | TrackBacks (0)

Been running fro and to, and haven't filed the columns that have been super-colliding around my faux-fur covered noggin...so lengthy has been the delay, the material is threatening to 'break contain' and push itself out one of my ears, or worse, directly through my prodigious forehead.

Being sufficiently neurotic at present to fervently wish to prevent disfigurement due to idea suppression...I am going to riff on some pressing recent items, beginning here with the…

Bernie Madoff Circus.

Guru is a Dog Walker in his free moments, dutifully arriving twice daily on East 64th Street to spend time with my beloved charge, Chester.

Two weeks ago, I noticed a guy standing in the middle of 64th St. angling a TV Camera upwards at the building across the street from Chester’s home.

The next day, there were three cameras and a huddle of reporters milling about.

In a week, there were six TV trucks with telescoping antennae on their roofs, complete with wires and staff running everywhere on the block, herds of reporters and cameramen huddled for warmth and anguished looking building staff and area residents trying to make sense of the commotion/intrusion.

The moment that I figured out why they were there (Madoff lives there) and began to chuckle, a beautiful young au pair, Megan (a friend with whom Guru recently shared a haunted elevator ride) who resides across the hall from Chester’s apartment bounded from the building we were entering and leaned over to me conspiratorially to say…

‘I just can’t believe what this neighborhood is coming to!’

How hilarious.

How ironic.

Certainly the arts patron, Bernie would appreciate the Operatic quality of the ‘help’, opining on the depravations of gentry. That neither she nor Guru fit the labeling hardly matters.

Two things are true.

People screw other people over. There are no exceptions for ‘class’, station or address.

People tell themselves lies to assuage their insecurities. It is why you hear a universal declaration at the sight of calamity. Regardless of location…

‘This sort of thing doesn’t happen here’.

It just did.

Overandover.

And it isn’t nearly finished.

It’s happened before, to Guru!

10 years ago, in 1998, Guru lost the bulk of his pile when he placed it behind some data provided by Bernie Ebbers, CEO of WorldCom and some reassuring analysis from Investment industry 'legend', Salomon Brothers Analyst, Jack Grubman.

In little more than a year, I went from being a wealthy Venture Capitalist and Investment Banker with homes in San Francisco, South Beach and Gramercy Park to being busted. My lady left. My clients left. My property and business were gone

Turned out that Ebbers created a labyrinth of falsehoods and Grubman’s integrity was purchased to provide the cover. Grubman looked me right in the eye when he told me Worldcom was solid and my modest ‘fortune’ safe.

He’d known otherwise for Eighteen months.

That both men are now in jail was little solace to my pocket, nor to those clients and friends who rely upon me for responsible, financial advice and protection.

What it did provide me, in forfeit of my hard-earned coin - was a lesson.

Substantial loss invariably provides this.

It is the paradox of experience - what teaches hurts and progress depends upon being taught. To go forward, all things human - individual or collective - must absorb a 'hit', the organism that uses the lesson to adapt in appropriate ways will evolve into something else...but it will go on.

That which refuses to incorporate the new reality, will perish.

Those who have lost all or most of what they had and cling to the assumptions that got them in that position will continue to flounder.

Un-economic assumptions are like bad construction plans.

All that has been built upon a faulty premise will fail. The timing can be lost amidst sufficient smoke and mirrors, but sooner or later…

As Machiavelli noted:

'Innovation makes enemies of all who prospered under the old regime'

The lesson that I took upon my return to the working class ten years ago (from whence I hailed), was:

a.) Live BELOW my means.
Broke, I have more than I USED to. Not only do I know I can cope with modest living, it is where I am most comfortable.

b.) Invest with my brain, not my balls, not my heart, not my opinions about unrelated topics.
I MADE the pile by thinking for myself and using the combination of outsiders perspective and insiders camouflage that define me. Those elements allowed me access to the Grubman’s of the world. Star-struck and self-satisfied, I stopped thinking and started telling myself things that have nothing to do with the value of an investment.. I never took someone else’s word to verify facts, then I did …
B-O-O-M.

c.) Mom WAS right (as was Joe Biden’s)
'You are not better than anyone and nobody is better than you'
Every person, making the trek from ‘have-not’ to ‘have-some’, has to deal with his or her internal sense of ‘station’. For many of us, Mom’s wisdom is challenged as soon as the transition is made from ‘us’ to ‘them’...

It’s all bullshit.

Ego-Management is requirement number one. Every man mentally adds inches when the zipper closes, and every woman understands - the push-up bra or ‘Spanks’ can move flesh around.

Those gains are to be lost. It’s a ‘zero-sum’ game.

The term that describes this phenomenon is ‘Illusion’. In society, illusions can be entertaining diversions. In finance, they separate you from your coin.

All energy that is diverted to social, ethical, cultural considerations is counterproductive to making sound economic decisions. Never internalize a sense of superiority OR inferiority, deal with people and situations as you find them, sans preconceptions or filing system. What requires sorting, be it person or security will reveal itself in the data (experience), using shorthand to do so only serves to obscure reality.

It wasn’t the fraudsters who did me in. It was lifestyle choices that required me to generate returns for income in perpetuity. Hamsters call this ‘on the wheel’. Thus motivated, I looked at investment – not in terms of what ‘was’, but rather in terms of what was NEEDED.

Doesn’t work that way.

If your mortgage broker, stock broker, investment banker was more concerned with their personal circumstance than the soundness of an economic proposition, that proposition was compromised. If a succession of administrations has fostered a mindset disproved in Feudal times to become re-invigorated, that makes no more sense in a modern context than asking a Cabal of ‘Celibate Old Men’ to render social policy for ‘Sexually Active Young Women’ to follow.

And that of course would just be silly.

Ya dig?

The same relentless forces that make it uneconomic to pay 21st Century factory workers the real wages they could expect 50 years ago make it unfeasible to compensate executives as they could be a decade past.

Time marches on.

The difference between what Madoff did and what Stanley O’Neill at Merrill Lynch, Richard Fuld at Lehman and Jimmy Cayne at Bear Stearns pulled has nothing to do with morality. It is simply a difference in their business structure. The CEO’s of Public Investment Banks evaporated the same billions of client equity and skimmed the same millions of firm money for lifestyle. That they did in the plain light of day what Madoff did in shadow is the difference that Private Equity creates.

Madoff’s clientele are, by the SEC’s definition, ‘Sophisticated Investors’, who are supposed to have the ability and discretion to manage their assets from an informed position and to whether any losses that may arise through the depth and breadth of their assets. Such private arrangements DO circumvent regulatory and reporting requirements, that is their structure and it is understood by every investor – even preferred, the lack of reporting and oversight has significant tax and performance advantages.

The downside?

That can be measured in the lag between Bear Stearns blowup and Madoff’s. Both played and lost the same game. Bernie kept the dire circumstances hidden six months longer, but reality bites, no matter how long it takes to be revealed.

Calling this a ‘Ponzi’ scheme is misleading, a result of our tabloid culture and the need to boil down all events into shorthand. It sells copy and grabs eyeballs. The reality is that ‘schemes’ of this type pre-date Language, let alone poor Ponzi! The larger reality is that such ‘schemes’ are in place at every financial institution in the world. Every bank depends upon paying out withdrawals from new deposits and keeps the bulk of deposits invested on the bank’s behalf. If everyone rushed to the bank to redeem just as those investments tanked?

Bernie!

This is why ‘Bank Run’ is the world’s scariest phrase, in Hoover’s day or Dubya’s. It is why committed cold warriors have been tripping over themselves to socialize American businesses. Nobody wants to deal with the change this portends, so they punt. Next thing we’ll see, some may suggest that we prop up the long dead Automobile industry with a rationale that expired in the Ford administration, simply to avoid admitting that the ‘American Dream’ is going to require an overhaul.

Oh wait…

Here’s the good news! It’s easier to overhaul a dream and restructure an attitude than it is to prop up something that needs to die. Let us hope that the new administration has the courage of those convictions and the commitment to make new lives for Americans based upon what is achievable in a 21st Century context than a fantasy built upon 19th and 20th Century models that have been gone since my Grandmother’s ’69 Buick Wildcat ruled the road.

What occurred a generation ago in the working class and has been ongoing in the middle-class since Reagan is now coming to roost amongst the richest Americans.

It is all the same phenomenon.

The table built upon a faulty premise known as ‘Trickle Down’ has collapsed.

It is a good thing.

America is a Cheese cellar and the Cheese has been disappearing at an alarming rate. Discovering that there are rats in the cellar should not be seen as a horrifying surprise, but rather as a logical revelation.

Posted by Matthew at 03:33 PM | Permalink | Comments (0) | TrackBacks (0)