Friday, February 06, 2009

Uncle Sam Outdoes The Mob

I read yesterday's Wall Street Journal piece detailing how the US government, primarily in the form of Fed Chairman Ben Bernanke, muscled BofA CEO Ken Lewis into a bad deal for his shareholders.

From the article, it's clear that Uncle Sam has rapidly replaced organized crime as a businessman's worst nightmare.

How in the world have we gone from a democracy of relatively freely-operating businesses, to a nation in which our own government coerces businessmen to behave against the best interest of their owners, in only a few months?

This is why I oppose continuing heavy Federal intervention in the private sector, under the excuse of a recession.

It's one thing to nationalize commercial banking in the long term interest of a more stable monetary and economic environment. But that doesn't require government purchase of those banks. Simply new operating rules, to which the affected firms' owners will adapt. As the value of commercial banking declines, so, too, will compensation, returns, profits, etc.

But to have government buy into firms, and then coerce their decisions with threats of replacing executives, withholding further funding, and who knows what else, is hardly how we, in America, have seemed to want to conduct private enterprise.

I found the article chilling in its description of how Bernanke and his colleagues rode roughshod over private property rights in the name of the 'public good.'

Perhaps better, further-seeing monetary supply management by the Fed, and more reasoned, less panicked reactions by Treasury and the Fed during 2007 & 2008 would have resulted in a smaller, but healthier financial services sector.

Anna Schwartz was right. The problem isn't liquidity, it's not knowing the long term solvency of commercial banks.

If affected shareholders and institutions had been allowed to fail, healthy banks allowed to assume the remnants, and bad loans written off, then there would now be room for whatever new capital is appropriate for the commercial banking sector.

Instead, we have a mess on our hands. We have the nation's money supply authority muscling private institutions to do the government's bidding, or else.

A very sad state of affairs.

Harry Markopolos' 15 Minutes of Fame

I caught the Congressional testimony of self-designated Madoff investigator and portfolio manager Harry Markopolos this past Wednesday. It was quite a show. In effect, Harry got his 15 minutes of Warholian fame, and, boy, did he make the most of it.

It's hard to decide which was more stomach-churning; the sight of Markopolos puffed up with self-importance, pontificating on all sorts of matters about which he has little knowledge, or; various Congressional members hanging on his every word, as if he receives Truth directly from God.

Perhaps the most chilling moment was when Markopolos, in response to a question, solemnly recommended that SEC personnel be compensated by bounties from pursuing investigations. Imagine the world which that would create. Numerous Inspector Javerts accusing many investment managers, rightly or wrongly, since they would pay no penalty for an erroneous accusation.

If SEC personnel made money by successful prosecutions, it logically follows that they would simply charge as many managers as possible, figuring that some would either pay or confess to a lesser crime, just to be rid of the investigation.

With sensibility like this, do you really want Congress listening to Markopolos?

Among other comments the manager made, he personally gave himself credit for several unnamed, large funds not having invested with Madoff. We don't know, of course, if any of that is true. Much of Markopolos' energy and verve seems to stem from being ignored by many people, including SEC regulators, for several years.

Having happened to turn his anger against Madoff into a lucky strike, Markopolos isn't about to go quietly into the night, say, like Sully Sullenberger, the skilled US Air pilot who made the safe landing of his commercial passenger jet into the Hudson River a few weeks ago, without loss of life.

No, Markopolos is going to make this Congressional appearance pay, and pay big. He served notice that he would be filing a formal accusation of another 'mini-Madoff' the next day with the SEC, in order to claim the bounty on the case.

The thrust of Markopolos' testimony, and that of the questions of the mock-shocked members of Congress in front of whom he appeared, was that every one of Madoff's 'victims' should have been better-protected by the SEC. As if the SEC can, and should, prevent every single investor from hurting themselves by throwing caution to the wind, ignoring obvious signs of deceit, and violating prudent investment principles.

We'll never have enough money or people at the SEC to personally hold the hand of every retail, or institutional investor.

The truth is, as I've written several times, here, here and here, for example, the so-called victims in the Madoff case were greedy, blind, and chose to ignore obvious signs of trouble, such as custody reports from an independent, reputable custodian. Neither the SEC, nor the government, will ever successfully protect investors from their own stupidity.

Let's hope Congress doesn't listen to carefully to this self-obsessed and self-congratulatory investment manager.

Thursday, February 05, 2009

Dick Armey On Hayek vs. Keynes

Former GOP House Majority Leader and economic professor Dick Armey wrote an insightful column in yesterday's Wall Street Journal. Eschewing a detailed analysis of the current mega-spending bill which the President and Democratic majorities in both Houses of Congress wish to pass, Armey instead returns to fundamentals of economics. He begins by writing,

"In the long run, we are all dead," John Maynard Keynes once quipped. An influential British economist, Keynes used the line to dodge the problematic long-term implications of his policy proposals. "

It is significant to Armey that Keynes never answered for the long term impacts of his great idea, governmental deficit spending.

Armey continues by drawing a contrast rarely made, between Keynes and his contemporary and critic, Fredrick Hayek,

"According to Nobel economist Friedrich Hayek, a contemporary of Keynes and perhaps his greatest critic, Keynes "was guided by one central idea . . . that general employment was always positively correlated with the aggregate demand for consumer goods." Keynes argued that government should intervene in the economy to maintain aggregate demand and full employment, with the goal of smoothing out business cycles. During recessions, he asserted, government should borrow money and spend it.

Keynes's thinking was a decisive departure from classical economics, because arbitrary "macro" constructs like aggregate demand had no basis in the microeconomic science of human action. As Hayek observed, "some of the most orthodox disciples of Keynes appear consistently to have thrown overboard all the traditional theory of price determination and of distribution, all that used to be the backbone of economic theory, and in consequence, in my opinion, to have ceased to understand any economics."

Classical economists up to that time had emphasized a balanced budget and government restraint as the primary goals of fiscal policy. The simplistic notion that "aggregate demand" drove investment and employment threw all of that out the window, but it had one particular convenience for policy makers. Government spending is, according to Keynes's construct, a key component in determining aggregate demand, so more spending, even to resod the Capitol Mall or distribute free contraception, drives the economy in the short run."

This is a really significant point, because Armey reminds us, or, if necessary, teaches us that, prior to Keynes entirely theoretical addition of 'macro' economics to the then-dominant microeconomics, the former was largely a definitionally equivalent of money supply, velocity and GDP, arising from the summation of microeconomic activity.

Prominent Keynesians such as Paul Samuelson, through his best-selling textbook, conveniently trotted out Say's law and gently mocked it, neglecting to ever include Hayek's contrasting views.

In the current era, however, Hayek's intellectual descendants are more numerous and vocal. Armey closely marries the political with the economy, uniting the two parts of the originally-named study of political economics by continuing,

"A father of public choice economics, Nobel laureate James Buchanan, argues that the great flaw in Keynesianism is that it ignores the obvious, self-interested incentives of government actors implementing fiscal policy and creates intellectual cover for what would otherwise be viewed as self-serving and irresponsible behavior by politicians. It is also very difficult to turn off the spigot in better economic times, and Keynes blithely ignored the long-term effects of financing an expanded deficit.

It's clear why Keynes's popularity endures in Congress. Intellectual cover for a spending spree will always be appreciated there. But it's harder to see any justification for the perverse form of fiscal child abuse that heaps massive debts on future generations."

This passage nicely captured a key, real issue in applied Keynesianism. I've noted that the effects of huge deficits, at this time, will likely cause significantly higher inflation and interest rates for Americans. Moreover, Armey, and Buchanan, address the human behavior realities of public deficit spending which Keynes ignored.

Returning to Hayek, Armey writes,

"Hayek, who famously debated Keynes in a series of articles after the release of "General Theory," gave what I believe to be the most devastating critique of government action to stimulate "aggregate demand." Hayek viewed the boom and bust of the business cycle as primarily a monetary phenomenon created by governments' artificial inflation of money and credit.

Sound money policy, conversely, allowed the disparate knowledge of millions of economic actors to be conveyed through the price system, rationally allocating capital and labor through relative prices. The problem with government attempts to manipulate the economy through fiscal policy -- spending that takes resources away from those who are productive and redistributes it to politically favored interests -- is that it is audacious. It assumes that government knows better how to spend and invest than individuals acting in their families' best interest.

"The real question," according to Hayek, "is not whether man is, or ought to be, guided by selfish motives but whether we can allow him to be guided in his actions by those immediate consequences which we can know and care for or whether he ought to be made to do what seems appropriate to somebody else who is supposed to possess a fuller comprehension of the significance of these actions to society as a whole."

Again, Hayek tackled Keynes on aspects of his theory for which the General Theory has no response. It's easy to see in Hayek's critique the brilliance he possessed in noting how Keynes casually swept away the microeconomic resource allocation mechanisms which underpin all economics, and simply assumed away the very real problem of how government would better allocate resources, sans price signals, than individuals would with the same resources, or more.

If there were ever a valid argument for preferring tax cuts for individuals and corporations over government spending, Hayek delivered it.

Armey concludes with a very common sense summation of Hayek's observations,

"In reality, no one spends someone else's money better than they spend their own. The charade of the current stimulus package, chockablock with earmarks to favored pet constituencies and virtually devoid of national policy considerations, is the logical consequence of Keynesianism in action. It is about politics and power, not sound economics, and I believe that the American people will reject it."

Let's hope Dick Armey is right, and that American voters let their Congressional members know it.

Wednesday, February 04, 2009

Mr. Citrus Opines on Chinese Imports, Gold & The Recession

I ran into a friend on Sunday with whom I had a fascinating 'catch up' conversation.

While I thought I'd first written about him almost two years ago, it seems, when I search this blog for references to him, I can't find any. So I must have only intended to write the post I imagine recalling.

For both anonymity, and appropriateness, I shall call my friend Mr. Citrus.

You see, he owns and operates the dominant fresh citrus juice-for-cooking-and-beverage business in the US. You know those little lemon- and lime-shaped plastic squeezie things you find in the produce aisle? That's him.

And of all the gyms in the world, he happens to belong to mine. Well, my old one, and, probably, soon, my new one, as well.

One day, I'll write more elaborate post about Mr. Citrus, but for now, suffice to say he's a European immigrant of more than a decade. He conceived his business- the importation of fresh, dated lemon and lime juice- shortly after arriving in the States. While it's been a long haul, he has overtaken the once-king of the market, RealLemon.

Just in case someone from a competitor finds this post via Google, I will keep the information he shared with me somewhat disguised.

Mr. Citrus told me that January sales were up at one of the highest rates ever. To him, it is logical, as he saw sales growth like this during a prior recession.

I asked about a similar-looking squeezie product I'd recently seen, and he dismissed it as a knock-off which isn't coming close to bothering his business. When I observed that I found it at a local, large grocery chain, where his products are absent, he snorted and said,

'(That chain) has the most corrupt buyers in the business. They have a supplier of lime juice who is local to their corporate headquarters, and someone is getting paid off to stock them. Therefore, they only want my lemon juice.'

Back a few years ago, when he explained the nature of his operations, which I'll share in another post, I asked him why a local premium grocery chain's fresh, soft fruit prices were double that of the other major chains. He replied that, due to a quirk in that chain's distribution process, they double-shipped those fruits to a local warehouse, then back to each store, incurring added costs.

From such small details, pricing gaps can occur.

On Sunday morning, however, our discussion turned to US macroeconomics, the recession and the 'stimulus' package. Being from Europe, still traveling there frequently, and a quintessential small, entrepreneurial businessman, I was interested in Mr. Citrus' opinions.

First, he agreed that the so-called stimulus won't work. But, thanks to global economic weakness, he doesn't think the immense added US debt will drive the price of the dollar down. Rather, he felt, it will drive up interest rates to fund the debt, as well as stoke inflation.

He continued by sharing that he had observed what asset strategies did well in the 1930s. Consequently, he's buying residential real estate in Switzerland, for use as a main residence, if necessary, as well as precious metals. This is a guy who has at least one other local business besides citrus distribution, and could easily afford to scoop up local, undervalued real estate. But he's not.

Then he launched into a well-reasoned argument, in common with some leading economists, that the US is about to foolishly rely on an unfriendly power, i.e., China, to hold and continue funding our debt. Being European, he is fairly sensitive to currents of international economics and influence.

On that subject, he began to recount a recent business event which ended with him impassioned and red-faced.

Mr. Citrus' business practices all adhere to ISO 9000 standards. As he put it, they are the international gold standard for importation. So when a Federal inspector visited his offices recently to inquire as to his various certifications for importation, Mr. Citrus greeted him by saying something like,

'I'm glad someone finally asked to see my ISO 9000 certificate. You're the first person who has done so.'

He was shocked when the government agent replied,

'Well, that's very nice. But it doesn't meet our USDA rules.'

I won't bother with the details of the apparently-heated interchange that followed, which left Mr. Citrus agitated just in retelling the story.

But he made two very interesting points.

First, he noted that by insisting on a totally separate set of import rules, the USDA risked making US businesses globally less competitive, since they would focus on a rule set unique to the US, but inappropriate for global business.

Second, as he noted to the government agent, the USDA rules allow one exception- China. If you ship anything from China, the importation rules are suspended.

Mr. Citrus then drew the obvious conclusion. China, he said, had used its financial influence with America to obtain for itself carte blanche exemptions to import regulations and standards to which all other countries are held.

In his conversation with the agent, Mr. Citrus noted the expense he incurred to comply with ISO 9000. And that, maybe now, he'd simply reroute all his shipments through China, in order to lessen costs and quality.

He doesn't really intend to do this, but the threat was ironic.

And his story was very eye-opening. If this has already happened prior to flooding global financial markets with another trillion dollars in US obligations, what other standards will Congress and the current administration relax, on the quiet, in order to fund our debt?

Tuesday, February 03, 2009

Tivo's Next Step: The Internet?

As my Comcast system upgraded to digital, they cleverly rendered my old VCR's multi-channel tuner useless, since anything I recorded had to come through my television's feed from the digital cable tuner.

Thus, I lost the ability to watch one program while recording another. Stripped of every American's God-given right to do this, I recently purchased a TiVo unit for simultaneous digital video recording, and all the other benefits of the service.

In particular, I wanted to also stream instant NetFlix content to my television, rather than simply my desktop computer.

As I have using the TiVo unit for a month or so, I began to consider how it can and probably will morph into a general purpose web content player.

For example, within a week of setting up the TiVo unit, it underwent a few automated software upgrades, integrating the NetFlix feed more seamlessly into the menu.

My TiVo accesses NetFlix through a wireless adapter which gives it access to my home computer network. While I can't program NetFlix choices on the TiVo controller, TiVo can access my NetFlix account on its own to retrieve my selections.

Thus, it would seem only a matter of time before TiVo provides a feature on its own website that would let me either type in my preferred websites, or simply import my web browser bookmarks, so that I can access this menu on my television screen via TiVo's content menu.

Once I can do this, TiVo would let me watch various programming websites, such as HuLu, as well as NBC's own content, delayed, on its website.

As I discussed this with my business partner Sunday morning, I remarked that, once TiVo does this, I am just one step away from cancelling my cable television service.

The only missing content would be my two primary news channels, CNBC and Fox. Once I could stream these, I'd be ready to cut the cable connection, slicing my monthly content delivery bill in half.

I went exploring yesterday, and found that CNBC offers a premium content subscription of roughly $10/month which provides a video stream of their channel. So that fits the model about which I hypothesized over two years ago in a post about the eventual disintermediation of cable by individual channels offering separate internet-based viewing for a monthly fee.

Fox has some video streams, but I haven't yet found one that matches what is broadcast on their channel live. It's probably there somewhere. If not, they surely can do what CNBC is doing, at their whim.

So there you have it. Just about two and a half years after my post regarding the necessary hardware and software for television viewing of internet web content, it's basically here. One software tweak by TiVo, and it's done. I'll have TiVo for access to online weekly programming, including news programs, either free or paid, and Netflix for my movie content.

Retail Selection & The Recession: The A.T. Cross Case

After this most recent Christmas' shopping season, local malls had markdowns well into the range of 50%. My younger daughter caught onto this quickly, saying to me,

'Dad, if I had the money right now, I'd be buying a lot, because these prices are so low.'

Pondering the losses these retailers were taking, it occurred to me that we will not soon see such merchandise assortment at our local retailers. Whether its size, color, or style, you can bet that what inventory is carried will be well into the broad middle swath of sizes and styles.

In this vein, I want to relate the long search I undertook for a rather simple item- a replacement for the fine blue ink cartridge in my 20+ year old Cross pen.

A.T. Cross pens are not anywhere near the price and prestige of a Mont Blanc. Yet, try to find refills, or even the pens, in today's retail market, and you will be disappointed.

The local paper-and-gift emporia at which they were once a graduation gift staple are now gone. Our own town's retailer closed after Christmas three years ago.

Big box office suppliers don't carry them, to my knowledge. And the Staples aisle in my local Stop & Shop only had a single package of two medium black ink refills.

Despite roughly a month of visiting local drug, grocery and office supply stores, I found no fine blue ink refills.

Then it hit me where I needed to look.

In an economy where you sell a rather low-value item of medium price, through a channel that is disappearing, how do you remain viable? Assure a presence for buyers who value your brand?

I Googled "A T Cross," and immediately found their website.

Could it be that the internet is the best thing that ever happened to A.T. Cross? Perhaps so.

Their website is very well designed, with a very easy-to-find section for buying refills. On their own site, Cross can feature selected products, as well as cleanly display each and every item they offer- something my local gift store never did. They offer discounts for multi-pack refills, with low shipping costs. The refills arrived within the week.

I could go on about Cross, but my point is that I believe the pen-and-gift merchant provides a good example of what other retailers will be doing in the future.

That is, relying on internet site sales for serving customers with less mainstream tastes. It's the perfect solution.

As it is, I buy a lot of clothing for myself and my children from LL Bean, and other select online retailers.

Why not J Crew and Gap?

In a rather ironic twist, the old "bricks vs. clicks" war of retailing may have been given a huge push toward clicks because of this past Christmas' dismal retailing results.

Monday, February 02, 2009

Robert Shiller's Wacky Spending Recommendation

Last Tuesday's Wall Street Journal featured an editorial by Yale economist Robert Shiller entitled, "Animal Spirits Depend on Trust." It may well be the wackiest, nuttiest piece yet in defense of the pork-laden "stimulus" bill now rolling through the Democratic-controlled Congress.

Shiller begins by stating,

"President Obama is urging Congress to pass an $825 billion stimulus package as soon as possible. But even that may not be enough to stabilize the economy, since it fails to take into account the downward spiral of animal spirits that is underway and may continue to worsen."

It's hard to believe that anyone could criticize this massive spending bill as being too small. But Shiller does just that. In order to justify his premise, Shiller then launches into a refresher on- what else- Keynesian economics. Referring to Keynes major work, The General Theory ..., Shiller writes,

"But lost in the economics textbooks, and all but lost in the thousands of pages of the technical economics literature, is this other message of Keynes regarding why the economy fluctuates as much as it does. Animal spirits offer an explanation for why we get into recessions in the first place -- for why the economy fluctuates as it does. It also gives some hints regarding what we need to do now to get out of the current crisis.

A critical aspect of animal spirits is trust, an emotional state that dismisses doubts about others. In talking about animal spirits, Keynes sought to convey the message that swings in confidence are not always logical. The business cycle is in good part driven by animal spirits. There are good times when people have substantial trust and associated feelings that contribute to an environment of confidence. They make decisions spontaneously. They believe instinctively that they will be successful, and they suspend their suspicions. As long as large groups of people remain trusting, people's somewhat rash, impulsive decision-making is not discovered."

What Shiller fails to note is that nobody has ever demonstrated that artificial, government-funded spending of a specialized or short-term nature, can restore 'animal spirits.' I would venture to suggest that only private capital can do that. As I wrote here recently, Paul Samuelson's genius in devising the accelerator-multiplier theory was recognizing what natural rhythms of economic cycles must occur, and how, for growth to return to an economy.

Never the less, Shiller continues,

"The danger at this point is that if the actions we take are not aggressive enough to have a substantial, visible impact on the economy, then confidence will continue to plummet. The Obama administration estimated its initial $775 billion stimulus package would shave about 1.8% off the unemployment rate from what it would otherwise be. Even so, by the time any package takes full effect the unemployment rate may be substantially higher than it is today.

So what must we do to revive our animal spirits and economic growth? We must be certain that programs to solve the current financial and economic crisis are large enough, and targeted broadly enough, to impact public confidence. Not only do we need a fiscal stimulus significantly greater than the proposal that is currently on the table, government action is also needed to take the place of the credit markets that seemingly worked so well when animal spirits were high. The Treasury and the Federal Reserve not only need a fiscal target, they also need a credit target. This should not be a dollar number, but rather a target for how the credit markets should behave. The goal should be that those who would normally receive credit in times of full employment can once again find it easy to do so, at rates with realistic risk premiums."

Surely, this is very scary stuff. Can you imagine the mediocre civil servants at Treasury setting 'credit targets?' My God! This is sounding like the last Soviet 7-year plan.

Rather than such meddling in capital markets raising public confidence, it almost certainly will destroy such confidence. The current, badly-implemented and conceived TARP program, which, by the way, Shiller lauds, has caused investors to step back from bank equities, since it's not clear what will happen next with Federal intervention.

Shiller concludes his loopy editorial with this stunning piece of advice,

"In due course our animal spirits will once again turn positive, but we would rather that happen this year or the next rather than five or 10 years from now. There is only one way to speed this process: greatly expand governmental support of credit markets and pass a much larger fiscal stimulus plan than is now proposed."

Honestly, it's hard to believe someone stupid enough to write this is a professor at any major US university. If pulling out of recessions were really as simple as government spending a few hundred billions, we'd have done that in the past, and could point to it as a success.

But you can't. Because it has never happened. Economic cycles have to wait for those 'animal spirits' which so fascinated Keynes to naturally recover. Not be fooled by some trumped-up government printing press activity.

In the current situation, what we would see, were Shiller's raving to be implemented, is much higher inflation and interest rates, as buyers of US dollars and Treasuries correctly viewed the implicit devaluation of US government dollar-denominated obligations.

Let's hope nobody takes Shiller seriously, and that he visits his university's medical center to get the appropriate medication that will control this type of lunacy in the future.