Friday, April 02, 2010

Today's Employment Numbers

It's just after 8am and I'm listening to CNBC's morning program. The March employment numbers are due at 8:30, so a handful of talking heads are arguing about them, and the economy.

As usual, economic no-nothing Steve Liesman is involved, imagining himself to have a clue about economics.

Bob Barbera, ITG chief economist, the program's obligatory liberal economist, is a guest host. Mark Zandi, the perennial S&P economist and someone who actually focuses on this topic for a living, is on hand.

And, finally, the token supply-side economist, former Bear Stearns chief economist, now NY Senate candidate, David Malpass.

In the runup to the release of the numbers, there was a spirited argument between Malpass and Barbera. The former argued that employment, even if up, is essentially counting government hires as the private sector shrinks. Malpass lamented the huge government footprint in the private sector and its crowding out of both private investment and jobs.

One of the more laughable moments came when CNBC senior economic idiot Liesman tried to argue that near-zero rates are beneficial for funding the "marginal business."

Having just come through a long period of too-low rates which stoked marginal housing development and, consequentially, a serious recession, it's hard to believe anyone who even remotely follows economics would argue that ultra-low rates promote healthy economic growth.

That he does so is a measure of just how stupid Liesman actually is.

Malpass correctly argued that rates have to rise in order to clear out questionable business growth, and, that, ideally, government would get out of the way. He reminded everyone that all the federally-generated liquidity wasn't funding business loans but, in reality, cycling back into Treasuries.

Barbera then attacked Malpass for daring to question government intervention, citing "50 years of classical recovery pattern." According to Barbera, as day follows night, recessions must be ended by hefty doses of federal intervention.

Nevermind Alan Reynolds' piece last August in the Wall Street Journal which exposed this myth for what it is. Reynolds' research provided evidence that the greater the scale of government intervention, the longer and deeper the economic contraction. To repeat his conclusion,

"On the contrary, recessions have become longer as the U.S. government (and the Fed) became larger, more expensive, and more involved in the economy. Foreign countries in which government spending accounts for about half of the economy have also suffered the deepest recessions lately, while economic recovery is well established in countries where government spending is a smaller share of GDP than in the U.S. In short, bigger government appears to produce only bigger and longer recessions."

Funny how so many economists, or those who pretend to be, choose to simply ignore evidence and continue to parrot how wonderful heavy-handed government intervention is for economic growth.

As I write this sentence, it's 8:26, and the CNBC panelists are giving their predictions just prior to the release of the numbers. Malpass forecasts a positive, six-figure number, 250,000, I think, but cautions that what is crucial is the private sector component, not the government.

And the number is.....

+162,000 total.

+110,000 private sector.

9.7% unemployment rate.

positive prior-month revisions.

6.5MM out of work six-months or longer, an all-time high (Santelli will not be surprised).

Overall, a mild expansion of jobs, but hardly a sign of robust recovery.

Thursday, April 01, 2010

Sandy Weill's Citigroup Officially Dismembered Today

It took years...many years.....but Sandy Weill's original, unwise and unwieldy merger of Travelers and Citibank was dissolved today with the IPO of Primerica.

After probably inducing then-Treasury Secretary Bob Rubin to look the other way while he smashed Glass-Steagal, Weill hired Rubin as the non-executive Chairman of the merged firm. It didn't take long for Weill to manage to toss former Citibank CEO, his alleged co-head of the merged firm, out a window, leaving Weill to play with his new, hydra-headed toy.

That was 1998-2000.

Ten years on, Weill's monstrosity has been significantly dismembered with the separation of its insurance and banking components.

The nearby price chart for Citigroup and the S&P500 Index shows how badly the universal bank performed since Weill's grand mistake.

In the same timeframe, the index was down only slightly.

Too big to fail? How about just too big to be managed by anyone, and, instead, just limp along losing shareholders' wealth?

Am I the only person who doesn't completely understand why Sandy Weill wasn't sued by shareholders?

Polaroid: A Schumpeterian Tale

I noticed an unassuming little lifestyle story in Friday's Wall Street Journal. Eric Felten's tale of Polaroid's struggles in the age of digital photography was couched as a warm and fuzzy story, but it actually portrays the gritty operation of Joseph Schumpeter's theory of creative destruction.

It's worth reading the article, if you subscribe to the Journal. Basically, an Austrian, Florian Kaps, saw evidence of a continuing market for instant camera demand. He located, bought and then resold old Polaroid film stock. Kaps offered to buy what remained of Polaroid's equipment and rights from the current owners.

Instead of a reply, he was invited to the closure of Polaroid's last remaining facility, in Holland.

In a very 'It's A Wonderful Life' sort of twist, the machinery hadn't yet been destroyed, and the factory, due to the recession, wasn't going to be rehabbed right away. Kaps raised money from friends and family, got the facility and machinery, plus, with a team of fellow engineers, managed to develop (no pun intended) a reasonable facsimile of the chemical formulation to make new/old instant film.

He now markets Polaroid instant film from his website,, and, according to the Felten, will add color film to his black and white stock this summer.

To me, the most interesting facet of this story is how perfectly Schumpeterian it is. Polaroid's entire business essentially went to zero value, based on older assumptions and processes. But there was some latent demand for the products and supplies.

It took literally near-total destruction of Polaroid's business assets before a new player could afford to buy the remaining assets and begin producing film for the existing base of cameras on an economic basis.

In a way, it's inspirational. So long as there is some demand left for products or services, it's possible for another investor to buy remaining assets at market-clearing prices, then, with that lower cost base, continue to meet demand economically.

Markets are wonderful mechanisms. They allow prices to rise, or fall, to levels which facilitate continued operation of businesses, where economically feasible. Or kill them, when it's not.

Sometimes, when you swear a business is or ought to be dead, market forces still allow them to continue, albeit at a tiny fraction of their prior size. But they still meet customer needs and earn revenue and, apparently, even a little profit.

Wednesday, March 31, 2010

Toyota, DOT, NASA & Ray LaHood

This week's engagement of NASA by Transportation Secretary Ray LaHood marks a new low in government harassment of companies in the private sector.

As I mentioned in passing in this post last month, Mr. LaHood was my 7th grade civics teacher. In writing that post, I checked his bio, and found that his brief teaching job at my Catholic primary school was essentially his only private sector employment. After that, he worked in a youth program elsewhere in Illinois, then became one of GOP House Minority Leader Bob Michel's staffers.

I point this out to provide an example of how professional, career politicians wreak havoc on companies attempting to operate in our mixed economy.

Mr. LaHood, having noted that his own DOT investigators found no smoking gun involving electronic controls in Toyota acceleration systems, is extending the witch hunt by calling in NASA engineers.

It's a travesty. How many investigations must Toyota endure? Where is the due process?

The way LaHood is operating, it's as if Toyota is presumed guilty, and the Transportation Department will continue to investigate for an unspecified length of time, until it finds 'something.'

Any findings of 'no cause' won't stop him. Or the witch hunt.

Granted, having been accused of attacking Toyota on behalf of government-owned GM, Mr. LaHood has provided a fig leaf by claiming to have NASA investigate acceleration systems on vehicles of many vendors. But one senses this is just a formality.

After all, Toyota is the company that was recently persecuted by a Congressional committee. Does anyone really believe LaHood expects NASA investigators to find problems where none have been alleged, outside of Toyota?

This farce is yet another example of what is continuing to go seriously wrong in our nation, as government interferes to ever greater degrees in the operation of businesses.

Tuesday, March 30, 2010

The Grand Inquisitors

I think we've finally reached the point of total hilarity and Kafkaesque intrusion of government into the private sector.

Democratic Representatives Henry Waxman and
Bart Stupak are shocked....SHOCKED!!!!!....that some companies have publicized higher expense recognitions they are making in the wake of the recent passage of a universal health care law.

The Congressmen, angered at being embarrassed by the reaction of some in the business community to the new realities of health care insurance expenses, are demanding the appearance of the presumed-guilty executives before a Congressional Committee.

Of course, this is perhaps extra embarrassing for Stupak, because he pretended to agonize over the pro-life consequences of the bill, before caving in for a meaningless executive order. Now, his faux pro-life cover blown, he also looks stupid for having voted for a bill that will, contrary to his colleagues' and his own affirmations, raise the costs of doing business.

Caterpillar, John Deere, Verizon and a few other companies, in compliance with the Congressionally-mandated Sarbanes-Oxley law, adjusted their expenses for the effects of the new health care law only days after its passage.

Now, they are being called to task for obeying that law.

You see, many in the business community warned over the past year that passage of this ill-advised legislation would result in higher costs to businesses. But Democrats ignored this, as they ignored any suggestions for health care reform which would not result in a totally socialized health insurance and care system.

Now that the law has been passed, by the thinnest of party-line majorities, Democrats in the House are outraged that their claims are being disputed by some executives at large US companies.

It should be quite the show. After all, Sarbanes-Oxley makes it a crime for executives to sign off on corporate filings which they know to be false. So we know this week's disclosures of the higher expenses are real, and true. Otherwise, the affected executives could be charged and convicted of perjury and violations of Sarbanes-Oxley.

Of course, it's ironic that the CEOs being summoned to Washington would, if they used the same approach to accounting that Congress used in the bill, and which the CBO blessed, they'd be in jail. The assumptions and tax/benefit mismatches, intentionally gamed by Democrats and the president to force a misleading, nonexistent 'savings' in the federal budget, wouldn't pass GAAP muster.

The inconvenient truth, to use a popular leftist phrase, is that economic realities are hitting the idealistic, misleading Democratic claims for the health care sector reorganization within a week of the bill becoming law.

Think of how much more bad news will be coming from the private sector as a result of this bad law in the coming months, prior to the November mid-term elections.

Monday, March 29, 2010

Chase's Private Equity Deals

This morning's Wall Street Journal contained a small piece highlighting Chase's private equity group bidding $6/share for the outfit that produces American Idol.

The article was attempting to be wry in its scepticism over the price and proposed deal. The quasi-analysis focused on the production company's contract with Fox to air a few more seasons of the program, and Simon Cowell's recent departure from the firm.

Bottom line, concluded the piece, is that Chase may be overpaying for the small firm's current assets and management.

That's not what struck me about the article, though.

No, what I saw was yet another case of a federally-, meaning taxpayer-insured financial institution playing roulette with our money.

First, why on earth should taxpayers even allow a federally-insured bank to have a private equity unit? Private equity is all about risk. About bidding on existing firms, typically with more debt than is in the current structure. That's the easiest way for a private equity firm to bid over current market valuations, i.e., put in less equity, borrow more money and toss it to current owners.

Fine if you're, say, TPG. Or Cerberus.

Ooops! Not Cerberus, actually, after the GMAC and Chrysler fiascoes.

And that's my point.

Dress it up any way you like, Chase's private equity group is essentially taking on obligations, by way of borrowed money, used to pay off the current owners of CKX. If the deal doesn't work as envisioned, shareholder equity is the first call for repayment of the debt.

But, ultimately, the last resort is you and me, via the FDIC and Treasury.

This is why the Volcker Rule makes so much sense. And causes such outraged opposition in the banking sector.

Jamie Dimon obviously would love to keep this sweet, one-way risk spreading deal.

You and I should not want that.

And don't be fooled by the implication that Chase is so large that it can absorb the risk. If their private equity group is too small for the risk to matter, it's too small to really affect earnings or valuations.

If it's not, it's too risky for a taxpayer-guaranteed bank.


At a minimum Chase should be forced to separately organize and incorporate the private equity group, with equity capital that is off-limits for use against the bank's other activities. Further, the private equity unit shouldn't be allowed any leverage whatsoever. Of course, in today's private equity world, that would make it extremely disadvantaged. It would, could be little more than an investor in the deals of others, because it would never be able to offer competitive bids for companies based on all-equity funding. But to allow such an entity to borrow is to basically recreate the flawed Citigroup SIVs of several years ago.

In effect, this little thought experiment demonstrates why allowing a federally insured bank to gamble with businesses like private equity or proprietary trading is nothing more than playing with taxpayer funds. Heads, Chase wins. Tails, taxpayers lose.

How is it, two years after Bear Stearns' collapse, we still allow taxpayer-backed financial institutions to take large leveraged investment bets?

Have we, and, most importantly, our pompous, pontificating Congressional members and federal regulators, learned nothing?

Evidently not.