Big Money Behind Little Dollars

Anyone following the financial headlines has to marvel at the game of steal the bacon being played out by three very similar companies, Dollar Tree, Dollar General,and Family Dollar Stores  Their merchandise is consumable products -- paper products, cleaners, clothing, gadgets and chachkas and the like -- primarily aimed at low- and middle-income consumers.  Most of the goods are imported from cut-rate factories in China or 3^rd world countries. Basically, Family Dollar Stores has been the object of takeover bids by their rivals, Dollar Tree and Dollar General. 

Although we’re talking about a generally low margin business, there are a lot of consumers in this category, and the owners of these businesses know it.  So what is Family Dollar’s 5.36% operating margin and almost $10 billion in sales (that’s a lot of purchases at $1.00 each:-) worth to the highest bidder, Dollar General: $9.1 billion.  It’s amazing that low margin businesses can carry this kind of price, but we’re talking about next to nothing interest rates, so just borrow it!  And of course there is the magic of synergy.

But if you look at the principals and the major individual stockholders of these three businesses, making millions of dollars personally in compensation and stock options every year, it brings up the issue of the 1% and the huge disparity of income between them, their employees and their customers. That’s the sad reality of the issue, the magnitude of that income discrepancy unprecedented until Wall Street overshadowed Main Street.

Maybe all three can get together as General Family Tree Dollar Stores?  Cheap goods for the poor and riches for the job creators!  Money rules!

Pass It On

This is a must-read open letter to JP Morgan's President, Jamie Dimon, written by Josh Brown over at The Reformed Broker. It is in response to Dimon's comment “Acting like everyone who’s been successful is bad and because you’re rich you’re bad, I don’t understand it.” Although Brown's entire letter is a must read, one quote strikes at the heart of the matter:

"No, Jamie, it is not that Americans hate successful people or the wealthy. In fact, it is just the opposite. We love the success stories in our midst and it is a distinctly American trait to believe that we can all follow in the footsteps of the elite, even though so few of us ever actually do.

So, no, we don't hate the rich. What we hate are the predators.

What we hate are the people who we view as having found their success as a consequence of the damage their activities have done to our country. What we hate are those who take and give nothing back in the form of innovation, convenience, entertainment or scientific progress. We hate those who've exploited political relationships and stupidity to rake in even more of the nation's wealth while simultaneously driving the potential for success further away from the grasp of everyone else."

Supporting articles I've written on related topics include one on the Occupy Wall Street movement, another on corporate governance and compensation, and one on the need for a "new economic morality" -- among others!

But, well done, Josh Brown, a brilliant letter to a typical corporate type and indeed, that is the problem, not compensation per se.

Pass it on!

Market Melt-Up

Buy, buy, buy, -- be it at Target, Walmart or the NYSE. Everything is coming up roses. Does this mean one can "blame" Obama? Surely, FOX will have an interesting take on this. "GOP comes to the rescue of the payroll tax extension!" Or, "GOP forces China to cut bank reserve requirements to spur world growth!" Or, "GOP threat of not raising taxes on the wealthy leads to the better than expected ADP employment report as job creators plan trickle-down hiring." Or, "GOP considering not abolishing the Federal Reserve as the Fed says it is ready to act if USA hurt by any European banking crisis."

Whatever the reason, stock markets are surging, for this moment at least (DJIA up over 400 points as I write this). But in this see-saw, roulette investment world, one cannot imagine what the future will bring, not to mention even 4.00 pm.

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Corporate Governance Gone Wild

Here is something for the Occupy Wall Street crowd to get specific about: CEO salaries have become obscene. Even new shareholder "say on pay" rules have not reversed the tide, shareholders being led by management's "recommendations" like lambs to the slaughter.

By 2009 the average CEO pay at S&P 500 companies was $9,246,697, including salary, stock and option awards, bonuses, pension and deferred compensation and other compensation (like the use of the corporate jet, when reported).

Compensation for these so called "job creators" has risen to 262 times that of an average worker by 2005, up from 24 times in 1965, about the time I entered the work force with my first job in publishing at $100 a week. If I had learned my ultimate boss earned 24 more times than myself, I think I would have understood, but 262 times? Today it takes the average S&P 500 CEO one working day to earn what his/her average employee earns in an entire year.

There are two issues that get wrapped around these facts for the Occupy Wall Street crowd. First how did salaries get so far out of balance? Then, why would a flat tax or any kind of reduced income tax at these lofty levels help the economy and create jobs?

Here is but one anecdotal example which helps address this issue, Eugene M. Isenberg's (the CEO and Chairman of Nabors Industries Ltd., a Bermuda registered drilling rig contractor) severance package of $100 million. (See the Wall Street Journal's A Very Rich Adieu for Nabors CEO)

This nifty package comes after compensation of "almost $750 million since 1992, including the value of his exercised stock options, according to Standard & Poor's ExecuComp," So that's about $850 million paid to one person over about twenty years, or about $43 million year after year after year. Meanwhile, "the Nabors stock has underperformed the S&P 500-stock index for the prior one-year, five-year and 10-year periods".

It is unclear whether the corporate jet is included in the compensation figures. "Records of Nabors-operated jets have shown frequent stops in Palm Beach, Martha's Vineyard, Mass., and New York, places where Mr. Isenberg has homes. A Nabors spokesman said previously that the company had offices in Palm Beach and Martha's Vineyard and that Mr. Isenberg is frequently in New York on business." Guess there is a need for off shore drilling offices at some of the most upscale neighborhoods in America.

This is but one example of corporate governance gone crazy, Boards rubber stamping their approval of insanely generous compensation packages for CEOs, justifying their actions based on the (wink, wink) peer review system. Hey, look at these other overpaid executives at competitors, we have to keep up with them! Meanwhile (wink, wink), Board of Director positions are in theory subject to shareholder approval, but in practice management has played a major role in selecting and retaining board members. Board compensation of S&P 500 companies is now $234k per year for a few hours work each month and frequently they serve on the Board of more than one company. This compensation package is up 10% from the prior year (how many average employees received 10% increases last year?). So reciprocal scratches of the proverbial back have to be commonplace. Shareholders and Occupy Wall Streeters, unite!

Then, is it reasonable to tax someone who "makes" $43 million a year at a higher rate than his/her average employee making (in this case) probably less than 1/500th of that salary? You bet it is. And is this executive, competent though he may be, creating more jobs because he is taxed less than he ought to be? No way. Innovators and entrepreneurs create jobs, foremost example of course being Steve Jobs, and they are not primarily motivated by compensation and are they are not deterred from their calling by taxes.

American Dream Diminished

Owning a home was once a cornerstone of the American Dream. Go to school, work hard, get married, buy a home with a mortgage, have children, try to give them better opportunities than you had, work hard some more to pay off the mortgage, retire and do the things you couldn't do while you were working. It all sounds prosaic now, even old fashioned, but I suppose if I had to describe my life in a few words, that description would be a rough outline. Lucky for me, I loved my work so I never thought a moment about following just about the same blueprint as did my parents.

They were children of the Great Depression and after the war, the urge to own a home was overwhelming, a symbol of financial security and success. Levittown became the poster child for postwar suburbs throughout the country, and upon my father's return from WWII, they immediately bought their first house, around the corner from my grandparents' home, and blocks from my other grandparents, in Richmond Hill (borough of Queens in NYC). I think they paid less than $5,000 (this is 1946 mind you) and we lived there until I was 13 when we moved to a larger home, in a "better section" of the same community. Both homes still stand today, remarkably unchanged as these photos from Google Street Views attest. Those were the only homes they owned during their entire lifetimes.

By comparison, our home-owning has been more prolific (and equally remarkable, our past homes have been renovated to such a degree they are now nearly unrecognizable). After renting apartments in Brooklyn and the upper West Side of Manhattan, we finally ultimately moved to Connecticut where I was then working, first renting a small house in Westport, and then finally buying our first home which was almost across the street from where we were renting. It was 1971, the beginning of a steady increase in real estate prices and by 1974 we sold that first home and moved into a larger one in neighboring Weston where we lived for the next 22 years and raised our family.

The 1990s saw a moderation of real estate prices -- even a decline in some areas. It was the time of the savings and loan crisis, but with our children out on their own or off to college, our two acre home in Weston seemed unnecessary and we wanted a home in a "neighborhood" and by the water, so we sold and bought a 100 year old cape on the Norwalk River in East Norwalk. We thought that might be our home for the rest of our lives but, unexpectedly, my working life was at its end four years later and that is when we decided to move to Florida, the fourth home we've owned and, who knows, perhaps our last.

But, someplace along the way, the American Dream of home owning has become an American Nightmare. Foreclosures and the federal takeover of Fannie Mae and Freddie Mac are just ongoing symptoms of the developing crisis that has stemmed from the housing bubble of 2000-2007, mortgages being eagerly issued by banks with zero down to less than credit-worthy buyers, or to those in the "business" of flipping homes for profit, these loans condoned or even mandated by government. This activity and Wall Street's eagerness to cash in by taking inappropriate subprime loans and rolling them into exotic collateralized mortgage obligations, "rated" AAA by another accomplice in this crime against the American Dream, the rating agencies, conning investors into thinking they were getting a "guaranteed" return on a "riskless" investment, fueled the fire.

Also complicit is the Federal Reserve. By addressing the crisis with "Quantitative Easing" the Federal Reserve has postponed the day of reckoning. By Federal Reserve Chairman Ben Bernanke's own admission in a November 2010 Washington Post opinion piece, it is the "wealth effect" of past QE's that has contributed to the stock market's recovery, saying "higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending." This Fed induced bubble simply accelerates the "boom bust cycle," one that may end ugly when 'the can' can no longer be kicked down the road.

We all see the macro effects of QE, the rise in speculative investments, animal spirits being drawn out by low interest rates, a surge in commodity prices (of which there are relatively fixed amounts in relation to monetary creation out of thin air) but the gorilla in the room is our state and local governments. There has been a sudden flood of articles about their failing finances; a Google search will unleash an avalanche of them and I've written about this before as well.

In a nutshell, our state and local governments have promised too much in their pension obligations and now that the revenue tide is running against them with lower property tax revenues from falling real estate prices and foreclosures, not to mention their poor fiscal habit of financing certain projects with the assumption there will always be the opportunity to roll over debt with more debt in the future, the homeowner finds himself in the crosshairs. The cavalry of the Federal Reserve which rode to the rescue of banks and AIG has decided to leave municipalities and homeowners to their own devices, Bernanke saying "we have no expectation or intention to get involved in state and local finance. [States] should not expect loans from the Fed."

Consequently, it is now a vicious cycle, lower property values begetting a smaller pie for municipalities, which results in millage increases being levied by local taxing authorities, which in turn results in still lower property values. Being a homeowner today leaves one obligated to share in the past profligacy and poor planning of one's local government. Many would have difficulty selling their homes at any price to escape this obligation, turning the American dream of home owning into a nightmare.

Obama’s First Year

Yesterday’s Palm Beach Post carried an outstanding editorial, putting Obama’s first year into perspective, and I sent a letter to the editor yesterday as well. The timing of each was particularly apt as the editorial appeared the day after Brown’s victory in Massachusetts, a clear wake up call, and my letter pointed out the need to listen more to Paul Volcker if we are going to achieve some real financial reforms and, eureka, today I learned that Obama is going to finally back some of Volcker’s ideas. At long last!

The Post editorial, A clear-eyed look at Obama's first year in office makes many excellent points:
* [He faced] not just an economy on the verge of the deepest recession in 70 years but unrealistically high expectations

* [Although he has had varying degrees of success,] he has stuck to the agenda he touted as a candidate

* The GOP strategy from the start has been to oppose and deceive…Given recent poll numbers Republicans seem to be succeeding with their strategy of opposition and an appeal to ignorance or short memories. Republicans invoke Ronald Reagan. But the Reagan tax cuts — which had bipartisan support — passed Congress in July 1981, and unemployment kept rising for 18 months. It was 7.2 percent when Mr. Reagan took office and peaked at 10.8 percent, the postwar high, before coming down.

* The worst aspect of the last year has been the spillover of illegitimate criticism from the campaign. It is the criticism — most of it on the Internet and talk TV and radio — that attacks Barack Obama as less of a person, less of a patriot and thus undeserving of the presidency….Out of this rage comes the bizarre call to "take back our country" from where it supposedly has drifted in just 365 days.

* We’d like to take back the country, too, but we'd like to take it back from a media/political culture that lives only in the moment

* The problems that Mr. Obama inherited were caused by Democrats and Republicans, Wall Streeters and Main Streeters. If some Americans just are waking up to the fact that we're spending beyond our means, their previous silence makes them partners in crime. It was fanciful to think that Barack Obama could change in one year the Washington that for decades has resisted institutional change. It also is ridiculous to think that somehow he has ruined the country in one year. We are back from the brink of one disaster but far from real economic recovery.

* Mr. Obama deserves decent marks, but he can do a lot better. That's what new presidents have the rest of their term to accomplish. An impatient America must wait longer to truly judge Barack Obama.


My January 20 letter in response follows. If it appears in the newspaper, it will be in a truncated form, so here is the full-blown version…

To the Editor:

How appropriate that your excellent editorial should appear the day after Scott Brown’s victory in Massachusetts. How sadly ironic, and ominous, that Ted Kennedy’s seat should go to one who opposes the very programs his predecessor would have supported.
Your editorial sprinkles some reality dust on the whole matter, reminding us that even though we, and especially the Republicans, have deified Reagan, he too had first year shortcomings not unlike President Obama. And how quickly we forget (or the media helps us forget) that today’s economic and foreign policy problems are ones the present administration mostly inherited. And as you say, we are all complicit in the matter. Only a few years ago many Americans thought they were living the good life, using their homes as piggy banks to finance excess. We were once a nation which once relied on the production of real things, but became focused on “paper asset” appreciation.

Nonetheless, the clarion call of the Massachusetts election does underscore some serious weaknesses of the Obama administration, most notably, in my opinion, the failure to achieve real banking reform. Yes, we needed first to rescue the entire financial system, but we continue to sacrifice Main Street at the altar of Wall Street and people are angry. Who truly believes the economic crisis is solved rather than being merely postponed? This issue becomes conflated with others like healthcare, the anger simply spilling over from one to the other.

Interestingly, Obama had enlisted Paul Volcker, who helped rescue our financial system in the early 1980’s, in his campaign and once elected exiled him to the minor post of chairman of the newly formed Economic Recovery Advisory Board. He has been calling for sweeping banking reform measures such as bringing back some of the best points of the Glass-Steagall Act separating investment and commercial banking, arguing that the best way to avoid “too big to fail” is make them so they are not too big and consigning riskier financial activities to hedge funds to which society could say: "If you fail, fail. I'm not going to help you. Your stock is gone, creditors are at risk, but no one else is affected."

Instead, the Obama administration has engaged in political rhetoric on this issue, like taxing banks and criticizing bank bonuses (although indeed they are outrageous). We need a new economic morality and that is what the Obama administration has failed to address, certainly deserving as high a priority as healthcare, and has failed to heed Paul Volcker’s sage-like advice.

On a more serene note….

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And to All a Good-Night!

How many times does one have to see a version of Dickens’ A Christmas Carol to say “enough?” Never, I say, as every generation can find it’s own version, just as Hollywood always seems to find another way to rework the story. Today, the tale could be a morality play about our financial times, Scrooge being played by a Wall Street Banker du jour, Tiny Tim by a child lacking health insurance, Bob Cratchit by someone in foreclosure, while the unemployed gather beneath the robes of the Ghost of Christmas Present. Past or present Chairmen of the Federal Reserve could play the ghosts. I pick Paul Volcker for the Ghost of Christmas Present, as he seems to see things the clearest. Naturally, Bernie Madoff must play the part of Jacob Marley wearing his chains forged of Ponzi links.

For me, the classic tale still elicits an emotional response, especially the versions that come closest to Dickens’ original text. So in that spirit, I offer a couple of photos of our Xmas past, in our home in Connecticut where the holiday really felt like Christmas:

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And this one from Florida Christmas Present, where it will be 80 degrees and one of the high points is the annual Christmas Boat Parade. It’s a Humbug, I say!

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Pull Up! Pull Up!

Like many people, I feel disillusioned by the first year of Obama’s Presidency. This is probably more my problem as he is a mere mortal and inherited so many crises, long time in the making, deeply ingrained, that he would have to be Superman, flying around the world to turn back the clock of time, to undo faulty foreign policies, reconnect the dollar to some form of the gold standard, change the unrealistic long term promises of Medicare and Social Security, roll back the deregulation of our financial institutions, and I could go on and on, but you get the picture of, perhaps, a society in a spiraling decline. Despite our cries of “Pull up! Pull up!” the ground closes in.

I still think the President could have devoted more of his first year to policies addressing what I called a “new economic morality.” Instead, he had focused more on healthcare, not that that is not also important. But Main Street seems to have been sacrificed at the altar of Wall Street and we are angry. Who truly believes the economic crisis is solved rather than being merely postponed? Let another generation deal with it, the same response of previous administrations. How long can we kick the proverbial can down the road? What kind of healthcare can this nation have if it is bankrupt?

So, I confess, I got caught up in “the dream,” the fantasy that one man, Mr. Obama, could make such a huge difference and in such a short time. I’ve been chastened by disillusion. The extent of my buying into the dream at the time is borne out by an email I had sent to a friend, a mother of a young family, suggesting she read my then recent blog entry. I quote this is below, and I conclude with that entire entry:

“Did you enjoy the inauguration? To me, it was one of those great moments in American history, and I am glad to have been around to witness it and not just read about it. What Obama does with this opportunity, is anyone’s guess but I pray it turns out well for your children’s sake and for those of my grandchildren, if I should be so lucky.

I had an interesting experience the day before the inauguration, Martin Luther King Jr.’s birthday. First, I was plagued by dreams so I got up at about 5.00 am and began to write in my blog. It just flowed as if someone else was writing it. I usually don’t post stuff I write until I have time to ruminate about the piece and do some editing, but that morning was different. So here is what I wrote: http://lacunaemusing.blogspot.com/2009/01/early-in-morning.html

After posting this, I went out for my usual walk as the sun was rising, wearing my radio earpiece. The station was playing the famous Martin Luther King, Jr. speech, “I Have a Dream.” What a magnificent, poignant rhetorical piece, so apt on the eve of this particular Inauguration day. I had forgotten its details (although I watched it live in 1963). So as I walked, I listened, and suddenly in the western sky, with the rising sun, a broad, magnificent rainbow appeared. It deepened during my entire walk and as King’s speech ended it faded (I could get spiritual over this).”

Monday, January 19, 2009
Early in the Morning
It is early in the morning on the eve of President-elect Obama’s inauguration – in fact very early, another restless night. When it is so early and still outside, sound travels and I can hear the CSX freight train in the distance, its deep-throated rumbling and horn warning the few cars out on the road at the numerous crossings nearby.

Perhaps subconsciously my sleeplessness on this, the celebration of Martin Luther King’s birthday, relates to the incongruous dreamlike images of the bookends of my political consciousness, from the Little Rock desegregation crisis of 1957, the freedom marches that culminated with the march on Washington in 1963 and Martin Luther King’s historic "I Have a Dream" speech, to the inauguration tomorrow of our first Afro-American President. All this breathtaking demonstration of profound social change in just my lifetime.

Much has now been said comparing Obama to Lincoln. In my “open letter” to Obama that I published here last May http://lacunaemusing.blogspot.com/2008/05/open-letter-to-senator-obama.html I said “Your opponents have criticized your limited political experience, making it one of their main issues in attacking your candidacy. Lincoln too was relatively inexperienced, something he made to work to his advantage. Forge cooperation across the aisle in congress, creating your own ‘team of rivals’ as Doris Kearns Goodwin described his cabinet in her marvelous civil war history.”

The Lincoln comparison is now omnipresent in the press, not to mention his cabinet selections indeed being a team of rivals. But I am restless because of what faces this, the very administration I had hoped for: a crisis of values as much as it is an economic one. The two are inextricably intertwined.

I am reading an unusual novel by one of my favorite authors, John Updike, Terrorist. One of the main characters, Jack Levy laments: “My grandfather thought capitalism was doomed, destined to get more and more oppressive until the proletariat stormed the barricades and set up the worker’ paradise. But that didn’t happen; the capitalists were too clever or the proletariat too dumb. To be on the safe side, they changed the label ‘capitalism’ to read ‘free enterprise,’ but it was still too much dog-eat-dog. Too many losers, and the winners winning too big. But if you don’t let the dogs fight it out, they’ll sleep all day in the kennel. The basic problem the way I see it is, society tries to be decent, and decency cuts no ice in the state of nature. No ice whatsoever. We should all go back to being hunter-gathers, with a hundred-percent employment rate, and a healthy amount of starvation.”

The winners in this economy were not only the capitalists, the real creators of jobs due to hard work and innovation, but the even bigger winners: the financial masters of the universe who learned to leverage financial instruments with the blessings of a government that nurtured the thievery of the public good through deregulation, ineptitude, and political amorality. This gave rise to a whole generation of pseudo capitalists, people who “cashed in” on the system, bankers and brokers and “financial engineers” who dreamt up lethal structures based on leverage and then selling those instruments to an unsuspecting public, a public that entrusted the government to be vigilant so the likes of a Bernie Madoff could not prosper for untold years. Until we revere the real innovators of capitalism, the entrepreneurs who actually create things, ideas, jobs, our financial system will continue to seize up. That is the challenge for the Obama administration – a new economic morality.

It is still early in the morning as I finish this but the sun is rising and I’m going out for my morning walk. Another freight train is rumbling in the distance. I hear America singing.

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Einhorn’s Speech and Bubble Du Jour

Sometimes you come across a point of view on our economic crisis that provides such clarity you want to share it. Such is the case with David Einhorn’s recent speech at the Helbrunn Center for Graham & Dodd Investing. Einhorn is President and founder of Greenlight Capital, a money management firm that specializes in long-short value oriented investments, and he is the author of Fooling Some of the People All of the Time, the story of Greenlight’s short sales of Allied Capital and the subsequent controversy that became highly publicized. I learned of this speech from a blogger colleague over at Fund My Mutual Fund but undoubtedly it has been widely circulated by others as well.

I have selected some salient points from the speech and post them here. If you read these, go to the entire speech, as quotes out of context cannot convey the full measure of Einhorn’s well-reasoned arguments. While his value oriented investing style will remain his approach, the current crisis has convinced him to include gold in his portfolio, something most value investors find antithetical.

I wonder what he thinks about the rise of the Dow to more than 10,000, a sixty percent “recovery” from its earlier lows. Late last year I had posted a summary of the Wall Street Journal’s headlines all of which were decidedly negative, the perfect contrarian indicator. Now, the market is being bid up with talk of green shoots and improving earnings. An anecdotal observation regarding the latter is the recently announced “improved” earnings (that is, a positive comparison to expected earnings, not normalized ones) of many of the Dow’s major components seem to be accompanied by a shortfall in revenue, in other words earnings that come as a result of cost cutting, particularly layoffs and hiring freezes. Corporations cannot sustain earnings growth without revenue growth and the latter cannot happen while real unemployment rates stubbornly remain in double digits leaving the consumer on the ropes.

The illogical exuberance of the market lately is in lock step with the dollar’s decline as interest rates have also disappeared into a black hole. Stocks have just become another commodity, with a more limited supply than the government’s ability to manufacture dollars. As the headlines of almost a year ago signaled a bottom, perhaps the recent introduction of the Porsche Panamera, a $133,000 four door sedan with a 500 horsepower twin turbo V8 that can reach 60 mph in a mere 4 seconds – the perfect car for the bailed-out gang on Wall Street in this energy-challenged age – foreshadows a new bubble.

Here are some salient points from David Einhorn’s speech (Value Investing Congress David Einhorn, Greenlight Capital, “Liquor before Beer… In the Clear” October 19, 2009) which should be read in its entirety here:

* As I see it, there are two basic problems in how we have designed our government. The first is that officials favor policies with short-term impact over those in our long-term interest because they need to be popular while they are in office and they want to be reelected. …. Paul Volcker was an unusual public official because he was willing to make unpopular decisions in the early ’80s and was disliked at the time. History, though, judges him kindly for the era of prosperity that followed. Presently, Ben Bernanke and Tim Geithner have become the quintessential short-term decision makers. They explicitly “do whatever it takes” to “solve one problem at a time” and deal with the unintended consequences later.

* The second weakness in our government is “concentrated benefit versus diffuse harm” also known as the problem of special interests. Decision makers help small groups who care about narrow issues and whose “special interests” invest substantial resources to be better heard through lobbying, public relations and campaign support…. [A]t some level, Americans understand that the Washington-Wall Street relationship has rewarded the least deserving people and institutions at the expense of the prudent. They don’t know the particulars or how to argue against the “without banks, we have no economy” demagogues. So, they fight healthcare reform, where they have enough personal experience to equip them to argue with Congressmen at town hall meetings. As I see it, the revolt over healthcare isn’t really about healthcare, but represents a broader upset at Washington.

* The financial reform on the table is analogous to our response to airline terrorism by frisking grandma and taking away everyone’s shampoo, in that it gives the appearance of officially “doing something” and adds to our bureaucracy without really making anything safer. With the ensuing government bailout, we have now institutionalized the idea of too big-to-fail and insulated investors from risk. The proper way to deal with too-big-to-fail, or too inter-connected to fail, is to make sure that no institution is too big or inter-connected to fail. The test ought to be that no institution should ever be of individual importance such that if we were faced with its demise the government would be forced to intervene. The real solution is to break up anything that fails that test.

(As a follow up to this last point, see today’s New York Times article: “Volcker’s Voice Fails to Sell a Bank Strategy: The former Fed chief said the giant banks must be broken apart and separated from risky trading on Wall Street, a view not shared by many in the White House”)

* Rather than deal with these simple problems with simple, obvious solutions, the official reform plans are complicated, convoluted and designed to only have the veneer of reform while mostly serving the special interests. The complications serve to reduce transparency, preventing the public at large from really seeing the overwhelming influence of the banks in shaping the new regulation. In dealing with the continued weak economy, our leaders are so determined not to repeat the perceived mistakes of the 1930s that they are risking policies with possibly far worse consequences designed by the same people at the Fed who ran policy with the short term view that asset bubbles don’t matter because the fallout can be managed after they pop.

* Over the next decade the welfare states will come to face severe demographic problems. Baby Boomers have driven the U.S. economy since they were born. It is no coincidence that we experienced an economic boom between 1980 and 2000, as the Boomers reached their peak productive years. The Boomers are now reaching retirement. The Social Security and Medicare commitments to them are astronomical. When the government calculates its debt and deficit it does so on a cash basis. This means that deficit accounting does not take into account the cost of future promises until the money goes out the door.

* [T]he Federal Reserve is propping up the bond market, buying long-dated assets with printed money. It cannot turn around and sell what it has just bought. ….Further, the Federal Open Market Committee members may not recognize inflation when they see it, as looking at inflation solely through the prices of goods and services, while ignoring asset inflation, can lead to a repeat of the last policy error of holding rates too low for too long.

* I subscribed to Warren Buffett’s old criticism that gold just sits there with no yield and viewed gold’s long-term value as difficult to assess. However, the recent crisis has changed my view. The question can be flipped: how does one know what the dollar is worth given that dollars can be created out of thin air or dropped from helicopters? Just because something hasn’t happened, doesn’t mean it won’t. Yes, we should continue to buy stocks in great companies, but there is room for [another] view as well. I have seen many people debate whether gold is a bet on inflation or deflation. As I see it, it is neither. Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Gold did very well during the Great Depression when FDR debased the currency. It did well again in the money printing 1970s, but collapsed in response to Paul Volcker’s austerity. It ultimately made a bottom around 2001 when the excitement about our future budget surpluses peaked. Prospectively, gold should do fine unless our leaders implement much greater fiscal and monetary restraint than appears likely. Of course, gold should do very well if there is a sovereign debt default or currency crisis.

* For years, the discussion has been that our deficit spending will pass the costs onto “our grandchildren.” I believe that this is no longer the case and that the consequences will be seen during the lifetime of the leaders who have pursued short-term popularity over our solvency.

On the lighter side of things, here is something I caught at Westport Now, the online newspaper that covers Westport, Connecticut, where I worked for so many years. Our first office was built on the site of an old New England lumber yard, on the Saugatuck River at 51 Riverside Avenue, and I recognized the building, the one on the left, in Westport Now’s recent photograph, the same fall colors ablaze as I remember them nearly forty years ago…

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Goldman Insatiable Sachs

While Citigroup, Bank of America, and Morgan Stanley, Troubled Asset Relief Program recipients are finding ways to circumvent TARP compensation restrictions, Goldman Sachs, having “paid back,” those funds, may brazenly pay out some $773,000 per employee as total compensation in 2009. This comes on its reported net earnings of $1.81 billion and revenues of $9.43 billion for the quarter ending March, 2009, a nifty operating profit of almost 20% in the depths of the “Great Recession.” Don’t get me wrong, I’m all for profit and the capitalist system, but Goldman had taken TARP funds, and was the largest recipient of AIG TARP money due to collateral calls on mortgage related Collateralized Debt Obligations, and presumably AIG (we, the taxpayer) may be on the hook for more. The herd of financial firms has thinned and we have handed them monopoly-like power.

While I recognize that the financial mess was primarily an inherited one by the Obama administration, we are not addressing the toxic assets that are still haunting the books of many financial institutions. Bad mortgages and a weak real estate market persist, and unemployment continues to grow. We may have forestalled the complete seizure of the financial system, but the structural weaknesses remain, and taxpayers are underwriting a postponement of a solution, benefiting financial institutions such as Goldman.

Paul Krugman at the New York Times makes these key points about GS’ earnings and compensation plans in his column, The Joy of Sachs:

First, it tells us that Goldman is very good at what it does. Unfortunately, what it does is bad for America.

Second, it shows that Wall Street’s bad habits — above all, the system of compensation that helped cause the financial crisis — have not gone away.

Third, it shows that by rescuing the financial system without reforming it, Washington has done nothing to protect us from a new crisis, and, in fact, has made another crisis more likely.

His conclusions are must reading. Wall Street seems to be calling the shots in Washington, all of this while reported unemployment flirts with 10% and with real unemployment substantially higher as dispirited workers who have given up looking for a job, or part-timers who want a full-time job, are not even counted. Sounds like a good time for record payouts at Goldman Sachs.

As Mary Elizabeth Lease wrote in the early 1890’s, “It is no longer a government of the people, by the people, and for the people, but a government of Wall Street, by Wall Street, and for Wall Street.” Hat tip: Got Shares? (GotShares.com)

Ambushed

Jim Cramer walked into Jon Stewart’s studio last night and instead of his trademark rolled-up sleeves, he might as well have been dressed like a clown, ready to take a big cream pie in the face, intended for CNBC rather than Cramer personally, although he is emblematic of his “news’ organization deserting its traditional 4th estate role for that of an “infotainmentmercial.” Cramer at least is somewhat honest about his role. Some other CNBC “reporters” have become clandestine right-wing cheerleaders.

I deserted CNBC as a serious source for financial news the day that Lehman went under last fall as I was watching CNBC’s “Squawk Box” and the show’s Cheerleader-in-Chief, Joe Kernan, made some sort of a statement criticizing the critics of Lehman’s leader, Dick Fuld, reminding them that poor Mr. Fuld had lost a fortune in the value of Lehman stock, conveniently neglecting he had extracted $484 million in salary, bonuses and stock options since 2000, failing to mention the equity value of Lehman had been built on spurious leverage. “Squawk Box” itself has turned into quick sound bites and chatty banter, and when they do have a serious interview, they superimpose sound effects, whooshing noises of charts, stock quotes, inundating the senses akin to watching a video game. Some of CNBCs confrontational interviews border on a financial version of the Jerry Springer show.

What a reversal of roles, the host of a comedy show becoming a spokesman for the questions the supposedly serious financial station failed to ask. Stewart was unrelenting in his probing and Cramer, to his credit, simply ate humble pie. I think he knows Stewart is right asking such questions as: Who is CNBCs audience, the Wall Street traders or us stooges trying to keep our 401ks afloat in a “fast trading” environment promoted by CNBCs endless litany of buy, sell, buy, etc.? How does this help us? Shouldn’t CNBC be asking the tough questions of Wall Street instead of gaming our pensions? Wasn’t CNBC, supposedly knowledgeable about financial matters, remiss in not recognizing that consequences of infinite leveraging would surely end in calamity? Isn’t there a measure of responsibility that goes with reporting, and the freedom of the press, especially for a news platform that purports to be serious? “Let’s face it, we’re both snake oil salesman, but at least we [the Comedy Channel] label our product as such.”
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