Back in January of this year, I wrote this post concerning the escalating tab for Ken Lewis' purchase of CountryWide in 2008 for BankAmerica, of which he was CEO. I wrote then,
"So that makes the running tab for Countrywide $9B, when you include the $18/share purchase of Countrywide equity in August of 2007 for a total of about $2B. By the way, when Lewis made the January purchase, Countrywide's stock was less than half its August price, or $8/share.
According to the Journal article, a Sanford Bernstein analyst assesses the additional put back risk to BofA at as much as $4B."
On Wednesday, current BofA CEO Brian Moynihan settled outstanding claims on Countrywide bonds and 'defective' mortgages for $8.5B and $5.5B, respectively, plus an additional $6.6B prospectively for future costs and losses against old Countrywide business.
Adding this $20.6B in losses to the prior $9B cost, and you get the Wall Street Journal's subheadline $30B cost of Countrywide to BofA. They printed this comment regarding the deal Lewis so extolled at the time he made it in mid-2008,
" 'It turned out to be the worst decision we ever made,' said one Bank of America director who voted for the Countrywide deal. "
According to the Journal piece, this may not be the end of BofA's losses on the deal.
My old mentor at Chase Manhattan Bank, Gerry Weiss, made sure several of us who worked for him got plenty of contact with the bank's EVPs, Vice-Chairman, CEO and Chairman. He used to say that many of them woke up in the morning saying, as they looked into the mirror to shave,
'God, don't let them realize today how incompetent I really am and how little I actually know about what I'm doing.'
Next time you read or hear about some large US bank CEO making an incredible acquisition, think carefully about whether you believe him or her.
Citigroup should have been bankrupt by now, and is still headed by an inexperienced, over-matched former middle-office manager of an investment bank. Wells Fargo is choking on its own acquisition of Wachovia's problems from Golden West, the former California S&L, as well as its own real estate portfolio. Chase remains simply slower and stodgier than the other large commercial banks, thus having accidentally avoided the worst of the last financial crisis.
Ken Lewis' type of self-inflicted fiasco at BofA could easily happen again.
Friday, July 01, 2011
Thursday, June 30, 2011
US Money Market Funds & Euro Bank Debt
Perhaps, like you, I was horrified to read the Wall Street Journal's lead staff editorial on Monday and, that same day, to see clips of Ben Bernanke's testimony played on business cable channels confirming that their is concern at the Fed regarding substantial US money market fund holdings of European paper. No doubt bought and held for the higher yield on said paper, reflecting its greater risk. Duh.
To connect the dots, European banks hold lots of Greek debt. Greek debt has fallen in value due to that country's ongoing fiscal crisis. It's generally believed that European banks have not chosen, nor been forced by European financial regulators, to write down their Greek debt to market price levels.
Thus, it's highly likely that many European banks have overstated asset values. Their short-term paper, held by US money market funds, are thus vulnerable to default, in the event that something sets off a chain-reaction of Greek debt default and subsequent further devaluation of Greek debt held by the European banks.
How in the hell can this have happened in the wake of the US financial crisis of 2008? Between the multi-billion dollar bailouts, radical new regulatory law, and Federal guarantees of money market fund assets, you'd think our financial regulators would be on top of this one.
What's the difference between allowing banks with FDIC-insured deposits to engage in risky trading and underwriting, and allowing federally-insured money market funds to buy the short-term, unsecured debt of European banks holding Greek debt?
Only the matter of the specific risky activities, not the probably outcomes, nor the inherent risks.
As the Journal editorial expressed, our "regulators miss the systemic risk right in front of them."
This is neither trivial, nor a joke. Our vaunted Congress and federal regulatory agencies have already failed to head off yet another risky activity by private financial sector players.
To connect the dots, European banks hold lots of Greek debt. Greek debt has fallen in value due to that country's ongoing fiscal crisis. It's generally believed that European banks have not chosen, nor been forced by European financial regulators, to write down their Greek debt to market price levels.
Thus, it's highly likely that many European banks have overstated asset values. Their short-term paper, held by US money market funds, are thus vulnerable to default, in the event that something sets off a chain-reaction of Greek debt default and subsequent further devaluation of Greek debt held by the European banks.
How in the hell can this have happened in the wake of the US financial crisis of 2008? Between the multi-billion dollar bailouts, radical new regulatory law, and Federal guarantees of money market fund assets, you'd think our financial regulators would be on top of this one.
What's the difference between allowing banks with FDIC-insured deposits to engage in risky trading and underwriting, and allowing federally-insured money market funds to buy the short-term, unsecured debt of European banks holding Greek debt?
Only the matter of the specific risky activities, not the probably outcomes, nor the inherent risks.
As the Journal editorial expressed, our "regulators miss the systemic risk right in front of them."
This is neither trivial, nor a joke. Our vaunted Congress and federal regulatory agencies have already failed to head off yet another risky activity by private financial sector players.
Wednesday, June 29, 2011
Jobs, Growth & The US Economy 1939-2011
Michael Spence's recent Wall Street Journal editorial discussing types of jobs, and "Why the Old Jobs Aren't Coming Back," got me to thinking about a much longer cycle of employment and growth in the US economy.
Some pieces become watersheds for me, and, like the occasional piece by Brian Wesbury, Alan Reynolds or Robert Barro, Spence's recent piece is for me right now. It is the catalyst that has allowed me to reshape a number of ideas and observations into a more coherent fabric than I was previously able to do.
Nobel Laureate Spence distinguished "nontradable" jobs which produce goods and services which "must be consumed where they are produced," from "tradable" jobs which can produce exports. He wrote,
"Nontradable job growth can't mask the declines in the tradable sector any more. The structural problem demands a structural answer."
Well, what if there is no long term answer? At least, an answer that everyone's going to find acceptable over the long term.
Spence mentions Germany, which has heavily-unionized labor, limiting
"wage and salary growth as part of a restructuring in the period 2000-05, allowing it to compete more effectively in exports and the tradable sector than other advanced countries."
That's a fairly serious admission of a very undesirable solution, i.e., deliberately slashing standards of living in an advanced economy in order to try to compete with lower-wage nations in tradable goods and services. Frankly, it doesn't strike me as a sustainable approach in any advanced economy where citizens' aspirations and expectations have been raised by decades of cossetted, unrealistic long term economic conditions.
Why would that be necessary if an economy like Germany or the US could train its least-productive workers to be more productive, thus offsetting their higher wages and maintaining their higher standards of living?
I think the answer lies in trade, evolution of various geographic parts of the globe, and the natural refusal of humans to see bountiful periods as fleeting and a lucky combination of factors which won't be occurring again, at least not foreseeably.
Consider this view of the US economy from the mid-1930s to the present.
Having futilely borrowed and spent like crazy, FDR's federal government found itself, by late in the decade, as Roosevelt's Treasury Secretary put it, to paraphrase,
'billions in debt and the unemployment rate no lower.'
But, luckily for the US, economically, at least, a world war came its way. By the late 1930s, FDR and Congress were re-arming America. This was yet another example of an aphorism popular in my youth, i.e.,
"Elect a Democrat president and go to war."
Digging holes, then filling them in, or doing other non-economic work with federal borrowing, didn't do the trick in the 1930s or, for that matter, in 2008-11, either. But spending on defense to prepare for war with a German madman, well, that's different.
Never mind that munitions were expended, tanks, planes and ships destroyed. Men and women killed in the millions. In the short term, people went back to work and, after the Allied victory in 1945, peacetime economies could pick up where they left off.
Oops....not all of them. Europe and Japan were in ruins. South America and Asia remained relatively undeveloped economically, certainly no challenge to the one remaining economic superpower with a now-trained workforce and plenty of invested capital plant and equipment- the US.
From 1945 until roughly the mid-1970s, America was luckier than smart. Many of the jobs available in the burgeoning US economy which supplied the world were blue collar, middle-class building jobs which were within the reach of high school-educated workers, e.g., auto assembly, steel making, heat-beat-and-bend manufacture, transportation, and construction, to name a few.
Without serious global competition to provide downward pressure on goods and services prices, labor costs and benefits soared, with no difficulty in sight to funding lavish defined benefits for private and public sector workers alike.
The good times had arrived and would roll forever! After all, it was America, the mightiest economic and military power on Earth.
However, thirty years on, by the mid-1970s, the ruined Allies and losers of WWII, Germany, Italy and Japan, had rebuilt their economies and infrastructures to the point that they began to be serious global competitors. US auto and steel industries were the first to feel the impact, being among the lowest value-added sectors with the lowest-skilled labor. As such, they were most easily priced out of the market, as the unionized US work forces in those industries refused to absorb pay and benefit cuts, choosing instead to penalize new workers entering those industries as US capacity shrank amidst crippling, bankrupting losses.
Look at the recent union contract settlements in the airline, auto and public sectors. It's still the solution of choice for unionized workers in vulnerable sectors,
'I'm in the union, I have my time in, and I've got mine. Pull up the ladder and screw the younger workers coming in behind us.'
That's almost an exact quote from my New Jersey teachers' union friend concerning the current situation affecting his union, job, pension and health care benefits.
Meanwhile, by the end of the Reagan era of lessened regulation, lower taxes and renewed US economic growth, the nature of job growth was already changing. White-collar jobs requiring more education and an ability to use technology such as computers began to move the US to a more service-based economy. Truth is, after Reagan, we've never had robust economic expansions following recessions in which overall employment growth across education and skill levels participated equally.
Recently, say, since 2000, the internet and rapid global transportation of components, combined with a maturing Europe and a growing, better-educated India, China and Southeast Asia, have rendered even many of the formerly-unassailable high-paying US service sector jobs tradable and vulnerable to price competition.
While your local grocer and dry cleaner remain relatively unaffected in terms of competition, but not necessarily in terms of demand, jobs in legal services, banking, equity research, chemical research and the like have begun to move abroad as transnational firms locate those functions where productivity is highest. Indian financial analysts are sufficiently good to offer reasonable quality, yet be much less expensive and, thus, more productive analytical product than their US counterparts.
While growth in revenues and profits for America's S&P500 firms continues apace, thanks to the global coverage of many of the firms in terms of both facilities and demand, the domestic employment picture in the home economy of the index, the US, is much bleaker.
Every nation has some bottom quartile of adults in terms of intellect, skills and education. In fortunate times, the nation can employ those people in lower-value-added jobs like construction, basic materials extraction or simple fabrication of materials and goods.
But the days of America being competitive at producing commodities is long gone. And, with it, I believe, a brief, probably unreproducible period from 1945-1970, in which lesser-educated and -intelligent Americans could make middle-class wages and enjoy "30-and-out" careers with bountiful pensions and healthcare.
My late father's cohort, he being born in 1927, enjoyed this golden era. Those before did not, nor those who followed.
It seems to me that Americans have become used to two generations, my father's and the early baby-boomers, of economically-lucky circumstances and have cemented their financial life expectations at an unsustainable level.
Today, the only long term sustainably-competitive businesses and jobs are those which can continue to innovate, create value and move forward technologically and in terms of meeting consumer needs. Static professions and jobs are all seeing declining wages and benefits.
I've been fond of saying for several decades, upon hearing or reading pleas from unemployed Americans in sectors such as footwear production, logging, steel, mining, or auto assembly,
"Do you really want a job in those industries anymore? Do you really want to take a competitive wage to make shoes when Asians are doing the same job for a fraction of what you hope to be paid? But can't be paid anymore because the shoes you make will be too expensive for other Americans to buy?"
Thus, it was disappointing to hear the president claim just yesterday, in Iowa, that America needs more manufacturing jobs, and to 'make more things.'
First, economic resource allocation is best done by market forces, not government mandate. Second, last I read, within the past two years, the value of American manufacturing output has remained fairly steady at about 20% of GDP for decades. However, due to the forces I've mentioned in this post, lower value-added products requiring less-skilled manufacturing have not survived competition with overseas sources. Further, again, due to the technologies and capital involved in on-shore manufacturing,increased productivity in such advanced products which are more difficult to manufacture have resulted in fewer workers producing the same, or more, value-added. This is a very conventional economic model- applying more capital to the production of higher-value products which require more advanced technology and fewer workers per dollar of output.
For better and for worse, we've evolved a global trading system in which all economies are now easily linked. David Ricardo would be quite at home with the economic rules of our world. But there are challenges.
Today, I can visit a local grocer and buy soft fruit from South America, fresh fish from the coast of another country, and the like. But the same global trading economics which allow that have closed US fisheries and led American fruit growers to hire migrant laborers at low wages and no benefits to compete with overseas goods.
While I'm not happy to acknowledge this, I must admit that today's interlinked global economy can no longer inexpensively shield and support the lowest quartile, decile, or whatever economically-determined least-productive, -skilled and -employable portion of any nation's workforce.
Nobody's worried about the workforce at Google, Amazon or Facebook. But the marginal banker, auto assembler or generic factory worker is a real problem for all of us. If they can't be re-employed at anywhere near their historic standards of living, how does that affect and change the US?
Spence wrote, in closing,
"Can business, government, educators and labor come together to tackle the structural employment challenge head-on? Some will say that in the present political and fiscal climate, this is highly unlikely. They may be right. But it is a choice, a collective choice. We can invest in future growth and employment of an inclusive kind, or not. If we do, it will take significant shared sacrifice."
His identification of the challenge seems correct to me, but not his vision of a solution. I really don't think it's about better education or some grand government-business entity "investing in future growth" anymore.
Here's what the modern interlinked global economy has done. It's forced economically-mature, once-vibrant advanced economies to decide, with their antiquated mix of unions, defined benefit pensions and health care systems and raised expectations, how to deal with the costs of supporting the now-unemployable citizens who have been taught for one or two generations to expect lavish standards of living by historic comparison.
A well-educated, bright, risk-taking young person who is comfortable with a long, changing, working life will probably get a reasonabl facsimile of "the American Dream." Others will not.
I think it's time we acknowledged that, in America, a high-school graduate with an average intellect and skill set has a near-zero chance of achieving "the American dream" of a good-paying, secure job leading to a comfortable, decent home, spouse and family, health care, pension, vacations and a pleasant retirement after age 70.
Thanks to the global ubiquity of better education, I would guess that even an average US college graduate can't count on that dream anymore, either.
But it's not just because of the US government's 80-year binge of deficit spending. Rather, it's this global economic linkage, combined with profoundly bone-headed, behavioral- and expectations- altering, fraudulent promises of defined-benefit schemes. A topic about which I'll write in an imminent post.
Spence correctly fingered the necessary economic accommodation in his German example, but I doubt it went far enough. Economic evolution is making more and more formerly-nontradable goods, services and jobs tradable. So economic growth and employment are likely to exist not among the most productive nations, but the most productive people in most nations which fully-participate in the global economic system.
America won't, as a nation, I believe, be able to protect and employ it's least-productive citizens without paying unaffordable social costs. The time for that has long since passed, and, absent another devastating, global-economy-wrecking war, natural disaster or crisis, I don't see it ever returning.
This isn't a pleasant scenario. However, my background as a strategist, especially under my mentor, Gerry Weiss of GE and Chase Manhattan Bank, taught me that strategic options and realities are periodically unpleasant. But that doesn't make them untrue or unlikely.
Those who delude themselves into believing there is some undefinable, indescribable better, rosier scenario than the plausible, describable, even existing and self-evident ones facing them, are destined to learn the hard way they were wrong. At great pain and expense.
Some pieces become watersheds for me, and, like the occasional piece by Brian Wesbury, Alan Reynolds or Robert Barro, Spence's recent piece is for me right now. It is the catalyst that has allowed me to reshape a number of ideas and observations into a more coherent fabric than I was previously able to do.
Nobel Laureate Spence distinguished "nontradable" jobs which produce goods and services which "must be consumed where they are produced," from "tradable" jobs which can produce exports. He wrote,
"Nontradable job growth can't mask the declines in the tradable sector any more. The structural problem demands a structural answer."
Well, what if there is no long term answer? At least, an answer that everyone's going to find acceptable over the long term.
Spence mentions Germany, which has heavily-unionized labor, limiting
"wage and salary growth as part of a restructuring in the period 2000-05, allowing it to compete more effectively in exports and the tradable sector than other advanced countries."
That's a fairly serious admission of a very undesirable solution, i.e., deliberately slashing standards of living in an advanced economy in order to try to compete with lower-wage nations in tradable goods and services. Frankly, it doesn't strike me as a sustainable approach in any advanced economy where citizens' aspirations and expectations have been raised by decades of cossetted, unrealistic long term economic conditions.
Why would that be necessary if an economy like Germany or the US could train its least-productive workers to be more productive, thus offsetting their higher wages and maintaining their higher standards of living?
I think the answer lies in trade, evolution of various geographic parts of the globe, and the natural refusal of humans to see bountiful periods as fleeting and a lucky combination of factors which won't be occurring again, at least not foreseeably.
Consider this view of the US economy from the mid-1930s to the present.
Having futilely borrowed and spent like crazy, FDR's federal government found itself, by late in the decade, as Roosevelt's Treasury Secretary put it, to paraphrase,
'billions in debt and the unemployment rate no lower.'
But, luckily for the US, economically, at least, a world war came its way. By the late 1930s, FDR and Congress were re-arming America. This was yet another example of an aphorism popular in my youth, i.e.,
"Elect a Democrat president and go to war."
Digging holes, then filling them in, or doing other non-economic work with federal borrowing, didn't do the trick in the 1930s or, for that matter, in 2008-11, either. But spending on defense to prepare for war with a German madman, well, that's different.
Never mind that munitions were expended, tanks, planes and ships destroyed. Men and women killed in the millions. In the short term, people went back to work and, after the Allied victory in 1945, peacetime economies could pick up where they left off.
Oops....not all of them. Europe and Japan were in ruins. South America and Asia remained relatively undeveloped economically, certainly no challenge to the one remaining economic superpower with a now-trained workforce and plenty of invested capital plant and equipment- the US.
From 1945 until roughly the mid-1970s, America was luckier than smart. Many of the jobs available in the burgeoning US economy which supplied the world were blue collar, middle-class building jobs which were within the reach of high school-educated workers, e.g., auto assembly, steel making, heat-beat-and-bend manufacture, transportation, and construction, to name a few.
Without serious global competition to provide downward pressure on goods and services prices, labor costs and benefits soared, with no difficulty in sight to funding lavish defined benefits for private and public sector workers alike.
The good times had arrived and would roll forever! After all, it was America, the mightiest economic and military power on Earth.
However, thirty years on, by the mid-1970s, the ruined Allies and losers of WWII, Germany, Italy and Japan, had rebuilt their economies and infrastructures to the point that they began to be serious global competitors. US auto and steel industries were the first to feel the impact, being among the lowest value-added sectors with the lowest-skilled labor. As such, they were most easily priced out of the market, as the unionized US work forces in those industries refused to absorb pay and benefit cuts, choosing instead to penalize new workers entering those industries as US capacity shrank amidst crippling, bankrupting losses.
Look at the recent union contract settlements in the airline, auto and public sectors. It's still the solution of choice for unionized workers in vulnerable sectors,
'I'm in the union, I have my time in, and I've got mine. Pull up the ladder and screw the younger workers coming in behind us.'
That's almost an exact quote from my New Jersey teachers' union friend concerning the current situation affecting his union, job, pension and health care benefits.
Meanwhile, by the end of the Reagan era of lessened regulation, lower taxes and renewed US economic growth, the nature of job growth was already changing. White-collar jobs requiring more education and an ability to use technology such as computers began to move the US to a more service-based economy. Truth is, after Reagan, we've never had robust economic expansions following recessions in which overall employment growth across education and skill levels participated equally.
Recently, say, since 2000, the internet and rapid global transportation of components, combined with a maturing Europe and a growing, better-educated India, China and Southeast Asia, have rendered even many of the formerly-unassailable high-paying US service sector jobs tradable and vulnerable to price competition.
While your local grocer and dry cleaner remain relatively unaffected in terms of competition, but not necessarily in terms of demand, jobs in legal services, banking, equity research, chemical research and the like have begun to move abroad as transnational firms locate those functions where productivity is highest. Indian financial analysts are sufficiently good to offer reasonable quality, yet be much less expensive and, thus, more productive analytical product than their US counterparts.
While growth in revenues and profits for America's S&P500 firms continues apace, thanks to the global coverage of many of the firms in terms of both facilities and demand, the domestic employment picture in the home economy of the index, the US, is much bleaker.
Every nation has some bottom quartile of adults in terms of intellect, skills and education. In fortunate times, the nation can employ those people in lower-value-added jobs like construction, basic materials extraction or simple fabrication of materials and goods.
But the days of America being competitive at producing commodities is long gone. And, with it, I believe, a brief, probably unreproducible period from 1945-1970, in which lesser-educated and -intelligent Americans could make middle-class wages and enjoy "30-and-out" careers with bountiful pensions and healthcare.
My late father's cohort, he being born in 1927, enjoyed this golden era. Those before did not, nor those who followed.
It seems to me that Americans have become used to two generations, my father's and the early baby-boomers, of economically-lucky circumstances and have cemented their financial life expectations at an unsustainable level.
Today, the only long term sustainably-competitive businesses and jobs are those which can continue to innovate, create value and move forward technologically and in terms of meeting consumer needs. Static professions and jobs are all seeing declining wages and benefits.
I've been fond of saying for several decades, upon hearing or reading pleas from unemployed Americans in sectors such as footwear production, logging, steel, mining, or auto assembly,
"Do you really want a job in those industries anymore? Do you really want to take a competitive wage to make shoes when Asians are doing the same job for a fraction of what you hope to be paid? But can't be paid anymore because the shoes you make will be too expensive for other Americans to buy?"
Thus, it was disappointing to hear the president claim just yesterday, in Iowa, that America needs more manufacturing jobs, and to 'make more things.'
First, economic resource allocation is best done by market forces, not government mandate. Second, last I read, within the past two years, the value of American manufacturing output has remained fairly steady at about 20% of GDP for decades. However, due to the forces I've mentioned in this post, lower value-added products requiring less-skilled manufacturing have not survived competition with overseas sources. Further, again, due to the technologies and capital involved in on-shore manufacturing,increased productivity in such advanced products which are more difficult to manufacture have resulted in fewer workers producing the same, or more, value-added. This is a very conventional economic model- applying more capital to the production of higher-value products which require more advanced technology and fewer workers per dollar of output.
For better and for worse, we've evolved a global trading system in which all economies are now easily linked. David Ricardo would be quite at home with the economic rules of our world. But there are challenges.
Today, I can visit a local grocer and buy soft fruit from South America, fresh fish from the coast of another country, and the like. But the same global trading economics which allow that have closed US fisheries and led American fruit growers to hire migrant laborers at low wages and no benefits to compete with overseas goods.
While I'm not happy to acknowledge this, I must admit that today's interlinked global economy can no longer inexpensively shield and support the lowest quartile, decile, or whatever economically-determined least-productive, -skilled and -employable portion of any nation's workforce.
Nobody's worried about the workforce at Google, Amazon or Facebook. But the marginal banker, auto assembler or generic factory worker is a real problem for all of us. If they can't be re-employed at anywhere near their historic standards of living, how does that affect and change the US?
Spence wrote, in closing,
"Can business, government, educators and labor come together to tackle the structural employment challenge head-on? Some will say that in the present political and fiscal climate, this is highly unlikely. They may be right. But it is a choice, a collective choice. We can invest in future growth and employment of an inclusive kind, or not. If we do, it will take significant shared sacrifice."
His identification of the challenge seems correct to me, but not his vision of a solution. I really don't think it's about better education or some grand government-business entity "investing in future growth" anymore.
Here's what the modern interlinked global economy has done. It's forced economically-mature, once-vibrant advanced economies to decide, with their antiquated mix of unions, defined benefit pensions and health care systems and raised expectations, how to deal with the costs of supporting the now-unemployable citizens who have been taught for one or two generations to expect lavish standards of living by historic comparison.
A well-educated, bright, risk-taking young person who is comfortable with a long, changing, working life will probably get a reasonabl facsimile of "the American Dream." Others will not.
I think it's time we acknowledged that, in America, a high-school graduate with an average intellect and skill set has a near-zero chance of achieving "the American dream" of a good-paying, secure job leading to a comfortable, decent home, spouse and family, health care, pension, vacations and a pleasant retirement after age 70.
Thanks to the global ubiquity of better education, I would guess that even an average US college graduate can't count on that dream anymore, either.
But it's not just because of the US government's 80-year binge of deficit spending. Rather, it's this global economic linkage, combined with profoundly bone-headed, behavioral- and expectations- altering, fraudulent promises of defined-benefit schemes. A topic about which I'll write in an imminent post.
Spence correctly fingered the necessary economic accommodation in his German example, but I doubt it went far enough. Economic evolution is making more and more formerly-nontradable goods, services and jobs tradable. So economic growth and employment are likely to exist not among the most productive nations, but the most productive people in most nations which fully-participate in the global economic system.
America won't, as a nation, I believe, be able to protect and employ it's least-productive citizens without paying unaffordable social costs. The time for that has long since passed, and, absent another devastating, global-economy-wrecking war, natural disaster or crisis, I don't see it ever returning.
This isn't a pleasant scenario. However, my background as a strategist, especially under my mentor, Gerry Weiss of GE and Chase Manhattan Bank, taught me that strategic options and realities are periodically unpleasant. But that doesn't make them untrue or unlikely.
Those who delude themselves into believing there is some undefinable, indescribable better, rosier scenario than the plausible, describable, even existing and self-evident ones facing them, are destined to learn the hard way they were wrong. At great pain and expense.
Tuesday, June 28, 2011
Pepsi Under CEO Indra Nooyi
This morning's Wall Street Journal featured a Marketplace section lead article on PepsiCo's performance under CEO Indra Nooyi.
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Specifically, the article detailed the slide of the company's premier brand, Pepsi, to number 3 among US sodas, trailing not only Coke but, now, Diet Coke, too. Still, it was relatively reserved in criticizing the Indian-born CEO.
Nooyi has been CEO of Pepsico since 2007. Googling her yields a series of results which echo the theme of the Journal's article, i.e., that she took pains to herald her change of focus of the firm to healthier drinks like Gatorade, the company's Quaker Oats unit, and, generally, avoid 'selling flavored colored sugar water' charges.
Now, it appears she went too far in ignoring Pepsi's own health, leading to a disappointing performance.
The nearby chart displays the past five years of share price changes for Pepsico, CocaCola and the S&P500 Index. Pepsi has outperformed the S&P by less than 20 percentage points over the five years, but trails Coke by some 40 percentage points.
I don't typically analyze either company, since neither usually survive my equity portfolio selection process. Thus, I've mostly seen Nooyi's appearances on CNBC, which loves to showcase a foreign-born female as CEO of a large, iconic US firm.
Too bad it looks like she's messed up. According to the Journal piece, she starved the flagship brand of attention and ad dollars, resulting in its slipping relative to the two Coke brands.
Further, she more or less prominently dedicated Pepsi to 'healthy' products, resulting in the very profitable and popular snacks and sugary drinks being either mis-positioned or left less-well-attended. Meanwhile, the article reports that the healthy, "good for you" product portfolio at Pepsico accounts for only 20% of revenues.
Perhaps the fundamental question is whether shareholders of the company are well-served when the larger flagship Pepsi and Frito-Lay brands that are salty, sugary, less "good for you" but very much in demand by US consumers, are shunted aside in favor of Nooyi's focus on changing Pepsico's image to that of a healthy food purveyor.
As recently as this late this winter, Pepsi had only matched the S&P in performance over the period since 2007, suggesting that Nooyi isn't doing much for her shareholders. Certainly not compared to CocaCola, the price series for which broke cleanly above and away from Pepsi and the S&P in mid-2007. Coke's share price premium shrunk last year, but never evaporated, and it has enlarged its premium over Pepsico and the Index since then.
It's interesting to me that the Journal piece is the first really negative one about Nooyi since she became Pepsico CEO. It makes one wonder whether the business media have been reluctant to criticize a politically correct CEO, requiring more time and evidence of slack performance for even a relatively weak article like today's to be published.
Given all the adulation Nooyi receives for being an Indian-born woman who is now running Pepsico, one might wonder, given her performance thus far, which is somewhat erratic and far from stellar, just what she can mentor and teach all the women for whom she is apparently now a shining beacon of hope?
Nooyi has been CEO of Pepsico since 2007. Googling her yields a series of results which echo the theme of the Journal's article, i.e., that she took pains to herald her change of focus of the firm to healthier drinks like Gatorade, the company's Quaker Oats unit, and, generally, avoid 'selling flavored colored sugar water' charges.
Now, it appears she went too far in ignoring Pepsi's own health, leading to a disappointing performance.
The nearby chart displays the past five years of share price changes for Pepsico, CocaCola and the S&P500 Index. Pepsi has outperformed the S&P by less than 20 percentage points over the five years, but trails Coke by some 40 percentage points.
I don't typically analyze either company, since neither usually survive my equity portfolio selection process. Thus, I've mostly seen Nooyi's appearances on CNBC, which loves to showcase a foreign-born female as CEO of a large, iconic US firm.
Too bad it looks like she's messed up. According to the Journal piece, she starved the flagship brand of attention and ad dollars, resulting in its slipping relative to the two Coke brands.
Further, she more or less prominently dedicated Pepsi to 'healthy' products, resulting in the very profitable and popular snacks and sugary drinks being either mis-positioned or left less-well-attended. Meanwhile, the article reports that the healthy, "good for you" product portfolio at Pepsico accounts for only 20% of revenues.
Perhaps the fundamental question is whether shareholders of the company are well-served when the larger flagship Pepsi and Frito-Lay brands that are salty, sugary, less "good for you" but very much in demand by US consumers, are shunted aside in favor of Nooyi's focus on changing Pepsico's image to that of a healthy food purveyor.
As recently as this late this winter, Pepsi had only matched the S&P in performance over the period since 2007, suggesting that Nooyi isn't doing much for her shareholders. Certainly not compared to CocaCola, the price series for which broke cleanly above and away from Pepsi and the S&P in mid-2007. Coke's share price premium shrunk last year, but never evaporated, and it has enlarged its premium over Pepsico and the Index since then.
It's interesting to me that the Journal piece is the first really negative one about Nooyi since she became Pepsico CEO. It makes one wonder whether the business media have been reluctant to criticize a politically correct CEO, requiring more time and evidence of slack performance for even a relatively weak article like today's to be published.
Given all the adulation Nooyi receives for being an Indian-born woman who is now running Pepsico, one might wonder, given her performance thus far, which is somewhat erratic and far from stellar, just what she can mentor and teach all the women for whom she is apparently now a shining beacon of hope?
Monday, June 27, 2011
Private Equity Goes Public
A recent Wall Street Journal article spotlighted the growing trend for private equity firms to go public. Included in the group were Apollo Global Management, Blackstone, Och-Ziff, Fortress and, soon, Carlyle Group.
Here's the passage that purports to explain the trend,
"Many of the firms speak of talent they can recruit and retain using shares. Some have said their primary duty remains to investors in their funds, not public shareholders."
Face it' those are lies. The only reason private equity firms go public is, as I wrote in posts regarding Blackstone's transition to having public owners four years ago, is to sell at the top of their valuations, relative to where the private equity firm owners see their firms' near-future valuations.
The real allure of working for a private equity firm is to have one's sizable compensation participate, at least partially, in the firm's own deal funds. To work for a firm unemcumbered by so much of the regulation of publicly-held financial sector firms. And to be part of a shadowy elite in the financial services world. None of that remains when the firm goes public.
In my last Blackstone-related post, I wrote,
"Which goes to prove my contention that you never, ever want to be on the other side of an IPO of any equity-oriented investment bank.
First, they don't sell at a trough. They are smarter than that. If they are selling, why on earth do you want to buy. Their very sale means they think the asset- their firm- is overvalued. In each case here, the founders were correct. If anything, you should consider buying puts on the shares, rather than buying the equities.
Second, these firms are not managed the same way when so much cash is off of the table. Either the founding owners can now take excessive risks with outsiders' money, or they might just take it easier, having realized billions in cash returns. Either way, the prior track records of prudent, steady returns is probably over."
I don't believe any of that has changed.
Despite the Journal's piece suggesting that private equity firms which go public may become more "professionally-managed" and invest more in running their firms, as well as build brand value, I think something else is afoot.
All you have to do is look at the long, 40-year experience of former Wall Street partnerships gone public. Generally, owners cashed in at the top, took excessive risks with new shareholders' money, and took formerly-nimble, lean firms, turned them into slower, overly-manned and -regulated public entities, and diluted their performance.
The public isn't buying into or getting what the former private owners enjoyed.
Further, if private equity firms go public to attract more capital, that means the barriers to entry of the sector are falling, more capital will chase the same amount of deals, and profit margins will fall as risk rises.
Which is pretty much happened with the old Wall Street partnerships. Many went out of business or were acquired. In short, this phase is suggestive of a move of the sector to maturity, not a more profitable era.
Perhaps larger in scale and gross profit dollars, but on lower margins and with higher risks.
As always, investor/buyer beware.
Here's the passage that purports to explain the trend,
"Many of the firms speak of talent they can recruit and retain using shares. Some have said their primary duty remains to investors in their funds, not public shareholders."
Face it' those are lies. The only reason private equity firms go public is, as I wrote in posts regarding Blackstone's transition to having public owners four years ago, is to sell at the top of their valuations, relative to where the private equity firm owners see their firms' near-future valuations.
The real allure of working for a private equity firm is to have one's sizable compensation participate, at least partially, in the firm's own deal funds. To work for a firm unemcumbered by so much of the regulation of publicly-held financial sector firms. And to be part of a shadowy elite in the financial services world. None of that remains when the firm goes public.
In my last Blackstone-related post, I wrote,
"Which goes to prove my contention that you never, ever want to be on the other side of an IPO of any equity-oriented investment bank.
First, they don't sell at a trough. They are smarter than that. If they are selling, why on earth do you want to buy. Their very sale means they think the asset- their firm- is overvalued. In each case here, the founders were correct. If anything, you should consider buying puts on the shares, rather than buying the equities.
Second, these firms are not managed the same way when so much cash is off of the table. Either the founding owners can now take excessive risks with outsiders' money, or they might just take it easier, having realized billions in cash returns. Either way, the prior track records of prudent, steady returns is probably over."
I don't believe any of that has changed.
Despite the Journal's piece suggesting that private equity firms which go public may become more "professionally-managed" and invest more in running their firms, as well as build brand value, I think something else is afoot.
All you have to do is look at the long, 40-year experience of former Wall Street partnerships gone public. Generally, owners cashed in at the top, took excessive risks with new shareholders' money, and took formerly-nimble, lean firms, turned them into slower, overly-manned and -regulated public entities, and diluted their performance.
The public isn't buying into or getting what the former private owners enjoyed.
Further, if private equity firms go public to attract more capital, that means the barriers to entry of the sector are falling, more capital will chase the same amount of deals, and profit margins will fall as risk rises.
Which is pretty much happened with the old Wall Street partnerships. Many went out of business or were acquired. In short, this phase is suggestive of a move of the sector to maturity, not a more profitable era.
Perhaps larger in scale and gross profit dollars, but on lower margins and with higher risks.
As always, investor/buyer beware.
Friday, June 24, 2011
The Perils of Technology Investing: RIM & Cisco
I'm always surprised when media pundits and analysts are surprised that one-time dominant technology firms exhibit flagging total returns. Consider two recent examples, RIM, the maker of the Blackberry, and Cisco.
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The nearby price chart for the two firms and the S&P500 Index for the past twelve years demonstrates several points.
The first is that buy-and-hold for technology stocks is very risky, even coming in different varieties of risk. For example, RIM rose, then fell precipitously in the early 2000s, only to rise stupendously by 2008, then stall and falter. Such volatility would have tried any shareholder's patience.
Meanwhile, Cisco entered its lost decade after the late-1990s technology stock bubble collapse. Both would have been good bets, in 2000, to hold, if you believed in long-cycle holding for technology issues.
However, of all the companies to experience Schumpeterian dynamics, I suspect technology firms are the most vulnerable.
Why?
Because, being at the cutting edge of technology probably attracts more smart, well-funded and motivated competition than being in, say, laundry detergent. The intricacies and dynamics of early-users and trend followers, plus the nature of technologically-based competition can cause market shares to plummet almost overnight.
Prior to the iPhone, who would have foreseen RIM's demise? But what was an interesting sideways expansion by Apple of its iPod vehicle into personal communications has essentially wrecked RIM, probably for good.
Technology companies seem to be especially vulnerable to what my old Chase Manhattan boss and mentor, Gerry Weiss, and his former GE colleagues Don Heaney and Jack Grossman, identified in the 1970s as competition from different arenas.
What they meant by the term and characterization is exemplified by Apple's iPhone. A company from one sector finds that its strengths and capabilities would completely undermine the business models of existing firms in another sector, creating a new competitive arena. The new entrant, Apple, rewrites the rules and redefines the nature of competitive offerings in the existing sector.
In contrast, Cisco seems to have succumbed to conventional competitive forces in its traditional product/markets while squandering resources on new products which didn't develop profitably. This is a more classic example of how technology firms age and die. Their original business segments become saturated or attract competition, while their new initiatives prove to be less successful than their original ones. Growth slows, spending on new products fails to ignite new profit streams, and the company's total returns stagnate as investors become disenchanted.
I read with some humor this morning's Wall Street Journal piece involving Ralph Nader. According to the article, Nader first bought Cisco shares in 1995, and, by 2000, his $1MM position constituted a third of his portfolio.
"At Thursday's closing price, his stake is valued at $278,460....."Just think of what people who have been loyal to them have endured (Nader) said. It's absurd." He said he didnt' sell his Cisco stake because he thought the shares would rebound."
I actually laughed when I read that quote of Nader's. Loyalty? To a technology company? What does Nader think equity invesetment is, a close friendship? Nader's experience demonstrates how not to approach investing in technology firms.
The only thing that's absurd is Nader's blind faith that a firm leading one of the hottest technology areas of the 1990s- network routers' would retain its dominance and relevance in the same manner for another decade.
Technology issues offer prospects of rapid gains, but rarely have successful second acts. My equity portfolio strategy profited nicely from owning Cisco at one time, but it never re-entered the portfolio after 2000.
Buy-and-hold investment styles in specific technology companies is risky and typically unsuccessful due to the dynamic and hyper-competitive nature of the segment.
The first is that buy-and-hold for technology stocks is very risky, even coming in different varieties of risk. For example, RIM rose, then fell precipitously in the early 2000s, only to rise stupendously by 2008, then stall and falter. Such volatility would have tried any shareholder's patience.
Meanwhile, Cisco entered its lost decade after the late-1990s technology stock bubble collapse. Both would have been good bets, in 2000, to hold, if you believed in long-cycle holding for technology issues.
However, of all the companies to experience Schumpeterian dynamics, I suspect technology firms are the most vulnerable.
Why?
Because, being at the cutting edge of technology probably attracts more smart, well-funded and motivated competition than being in, say, laundry detergent. The intricacies and dynamics of early-users and trend followers, plus the nature of technologically-based competition can cause market shares to plummet almost overnight.
Prior to the iPhone, who would have foreseen RIM's demise? But what was an interesting sideways expansion by Apple of its iPod vehicle into personal communications has essentially wrecked RIM, probably for good.
Technology companies seem to be especially vulnerable to what my old Chase Manhattan boss and mentor, Gerry Weiss, and his former GE colleagues Don Heaney and Jack Grossman, identified in the 1970s as competition from different arenas.
What they meant by the term and characterization is exemplified by Apple's iPhone. A company from one sector finds that its strengths and capabilities would completely undermine the business models of existing firms in another sector, creating a new competitive arena. The new entrant, Apple, rewrites the rules and redefines the nature of competitive offerings in the existing sector.
In contrast, Cisco seems to have succumbed to conventional competitive forces in its traditional product/markets while squandering resources on new products which didn't develop profitably. This is a more classic example of how technology firms age and die. Their original business segments become saturated or attract competition, while their new initiatives prove to be less successful than their original ones. Growth slows, spending on new products fails to ignite new profit streams, and the company's total returns stagnate as investors become disenchanted.
I read with some humor this morning's Wall Street Journal piece involving Ralph Nader. According to the article, Nader first bought Cisco shares in 1995, and, by 2000, his $1MM position constituted a third of his portfolio.
"At Thursday's closing price, his stake is valued at $278,460....."Just think of what people who have been loyal to them have endured (Nader) said. It's absurd." He said he didnt' sell his Cisco stake because he thought the shares would rebound."
I actually laughed when I read that quote of Nader's. Loyalty? To a technology company? What does Nader think equity invesetment is, a close friendship? Nader's experience demonstrates how not to approach investing in technology firms.
The only thing that's absurd is Nader's blind faith that a firm leading one of the hottest technology areas of the 1990s- network routers' would retain its dominance and relevance in the same manner for another decade.
Technology issues offer prospects of rapid gains, but rarely have successful second acts. My equity portfolio strategy profited nicely from owning Cisco at one time, but it never re-entered the portfolio after 2000.
Buy-and-hold investment styles in specific technology companies is risky and typically unsuccessful due to the dynamic and hyper-competitive nature of the segment.
Thursday, June 23, 2011
Large US Bank Performance In The Wake of Concerns Over Increased Capital Requirements
Tom Brown's announcement in early June that he had bought BofA shares for his sector fund. That post was on June 3rd, so Brown bought no later than that- perhaps in late May, perhaps earlier that week.
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On June 9th, I wrote this post discussing the subsequent call by various regulators for large "too big to fail" banks to hold from 3% to perhaps 7% additional capital.
As of yesterday, the major US banks included in the nearby price chart, have all declined since late May. The S&P500 Index is about flat.
We don't know precisely when Tom Brown bought his fund's BofA shares, but all of the banks shown- Citigroup, Chase, BofA and Wells Fargo- have declined absolutely and relative to the S&P for the past three months.
No wonder Brown was cheering on Jamie Dimon's objections to the sensible call for these banks to be capitalized as, well, banks, rather than unsecured loan providers.
Could it be that between the divestitures and closures of now disallowed businesses, and the specter of higher capital requirements, these banks are in for a long term correction down to price levels more consistent with giant, slow-growing, government-insured deposit-taking financial utilities?
As of yesterday, the major US banks included in the nearby price chart, have all declined since late May. The S&P500 Index is about flat.
We don't know precisely when Tom Brown bought his fund's BofA shares, but all of the banks shown- Citigroup, Chase, BofA and Wells Fargo- have declined absolutely and relative to the S&P for the past three months.
No wonder Brown was cheering on Jamie Dimon's objections to the sensible call for these banks to be capitalized as, well, banks, rather than unsecured loan providers.
Could it be that between the divestitures and closures of now disallowed businesses, and the specter of higher capital requirements, these banks are in for a long term correction down to price levels more consistent with giant, slow-growing, government-insured deposit-taking financial utilities?
Alan Meltzer On Alan Blinder's Keynesian Position
In yesterday's post I discussed Princeton economics professor Alan Blinder's poorly-reasoned editorial warning of a shortfall of government spending.
It turns out that Blinder's piece was just a part of a larger current exchange in several venues between liberal Democratic Keynesians and their adversaries who espouse more modern economic theories.
On Tom Keene's noontime Bloomberg program he described the Krugman/Blinder Keynesian position versus that of Alan Meltzer and other more modern economic thinkers, then had an on-air talk with Meltzer.
Meltzer noted that Krugman and, by inference, Blinder, espoused a rather old, primitive Keynesian brand of economic theory which ignores the last few decades of rational expectations work.
Specifically, Meltzer discussed more recent economic work showing that investors and consumers take note of government actions and develop expectations as a result which then affect their behavior.
These reactions involve several of the points I made in yesterday's post, i.e., expectations by consumers and investors regarding future tax and interest rates affect their behavior in a very dynamic and sensible manner. Some of that effect can result in a sort of palsy, in which both spending and investment await less government intervention and more predictable behaviors.
Meltzer's comments added an interesting dimension to the exchange because, without appearing mean-spirited, he basically characterized Blinder, Krugman and their kindred economists as rather backward and primitive, clinging to a discredited, eighty-year-old theory which has been eclipsed by new theory based upon empirical research.
Between Reynolds' empirical work undercutting traditional Keynesian stimulus programs, and the Nobel-prize winning work of Lucas and Prescott on rational expectations, it's difficult to understand why any thinking person would take Blinder's and Krugman's ideas seriously.
While I didn't read about Lucas' work while in college or graduate school or, for that matter, years after that, I noticed something which the linked site attributes to him, i.e., that modern Keynesians tend to build econometric models which are bereft of explicit theoretical bases or explanations, as well as being susceptible to only fitting periods on which they were calibrated, rather than being generically effective at prediction of consumer or investor behaviors.
It turns out that Blinder's piece was just a part of a larger current exchange in several venues between liberal Democratic Keynesians and their adversaries who espouse more modern economic theories.
On Tom Keene's noontime Bloomberg program he described the Krugman/Blinder Keynesian position versus that of Alan Meltzer and other more modern economic thinkers, then had an on-air talk with Meltzer.
Meltzer noted that Krugman and, by inference, Blinder, espoused a rather old, primitive Keynesian brand of economic theory which ignores the last few decades of rational expectations work.
Specifically, Meltzer discussed more recent economic work showing that investors and consumers take note of government actions and develop expectations as a result which then affect their behavior.
These reactions involve several of the points I made in yesterday's post, i.e., expectations by consumers and investors regarding future tax and interest rates affect their behavior in a very dynamic and sensible manner. Some of that effect can result in a sort of palsy, in which both spending and investment await less government intervention and more predictable behaviors.
Meltzer's comments added an interesting dimension to the exchange because, without appearing mean-spirited, he basically characterized Blinder, Krugman and their kindred economists as rather backward and primitive, clinging to a discredited, eighty-year-old theory which has been eclipsed by new theory based upon empirical research.
Between Reynolds' empirical work undercutting traditional Keynesian stimulus programs, and the Nobel-prize winning work of Lucas and Prescott on rational expectations, it's difficult to understand why any thinking person would take Blinder's and Krugman's ideas seriously.
While I didn't read about Lucas' work while in college or graduate school or, for that matter, years after that, I noticed something which the linked site attributes to him, i.e., that modern Keynesians tend to build econometric models which are bereft of explicit theoretical bases or explanations, as well as being susceptible to only fitting periods on which they were calibrated, rather than being generically effective at prediction of consumer or investor behaviors.
Wednesday, June 22, 2011
Alan Blinder's Latest Attempt To Revive Keynesian Economics
I know Princeton economics professor and former Fed member Alan Blinder is a liberal Keynesian economist. But in yesterday's Wall Street Journal editorial, he displayed an ability to play fast and loose with contexts, as well as so narrowly define terms and situations as to make his points irrelevant.
He began by writing,
"Right now, I'm worried about the damage that might be done by one particularly wrong-headed idea: the notion that, in stark contrast to Keynes's teaching, government spending destroys jobs.
No, that's not a typo. House Speaker John Boehner and other Republicans regularly rail against "job-killing government spending." Think about that for a minute. The claim is that employment actually declines when federal spending rises. Using the same illogic, employment should soar if we made massive cuts in public spending—as some are advocating right now.
Acting on such a belief would imperil a still-shaky economy that is not generating nearly enough jobs. So let's ask: How, exactly, could more government spending "kill jobs"? "
Blinder is engaging in incredibly literal interpretation of a statement that isn't meant to convey what he chooses to draw from it.
To begin with, empirically, Alan Reynolds has done research, about which he wrote in a Journal editorial, which has effectively dismissed the contention that government intervention in recessions helps economies. I mention this because later in his editorial, Blinder appeals to empirical evidence, or the lack of it.
Regarding 'job killing government spending,' it's not meant to be a direct and simple logical proposition as implied by Blinder's semantics. Rather, in the current context, with pre-existing uncertainty regarding government extra-legal intervention in business sectors (health care, autos, finance, insurance), aggressive regulatory actions (energy, autos, finance, health care), combined with record government debt and deficits, further deficits or higher taxes to finance more spending is seen as driving businesses to refrain from domestic expansion and/or new hiring. Additionally, the increasing deficits are expected to lead to higher rates on government borrowing demanded by investors, which will raise the deficit, which will eventually require, combined with the other economy-retarding government policies, higher taxes.
These are nuances points, but Blinder's not interested in the reality of nuances as he continues,
"The generic conservative view that government is "too big" in some abstract sense leads to a strong predisposition against spending. OK. But the question remains: How can the government destroy jobs by either hiring people directly or buying things from private companies? For example, how is it that public purchases of computers destroy jobs but private purchases of computers create them?
One possible answer is that the taxes necessary to pay for the government spending destroy more jobs than the spending creates. That's a logical possibility, although it would require extremely inept choices of how to spend the money and how to raise the revenue. But tax-financed spending is not what's at issue today. The current debate is about deficit spending: raising spending without raising taxes."
Blinder is wrong on both points. It's precisely government's ill-advised spending that is at issue. Such as bailing out GM, rather than letting it be reorganized through conventional bankruptcy. Plus, such government spending inevitably invites cronyism, e.g., Jeff Immelt's GE and its curious ties with the current administration and benefits from all manner of environmentally-related government-procured favors.
Further, "tax-financed spending" is indeed part of what's at issue today. In order to avoid further borrowing, the current administration is using the debt limit crisis to try to force higher tax rates and new taxes.
Blinder continues to write,
"For example, the large fiscal stimulus enacted in 2009 was not "paid for." Yet it has been claimed that it created essentially no jobs. Really? With spending under the Recovery Act exceeding $600 billion (and tax cuts exceeding $200 billion), that would be quite a trick. How in the world could all that spending, accompanied by tax cuts, fail to raise employment? In fact, according to Congressional Budget Office estimates, the stimulus's effect on employment in 2010 was at least 1.3 million net new jobs, and perhaps as many as 3.3 million."
Well, as Blinder would know if he read the business press of the past few years, most of that so-called stimulus was used to fund transfer payments to state and local governments. It didn't create jobs, but it may have maintained some. Blinder evades the question of whether simply leaving the governments to resolve their own longer term fiscal situations wouldn't be better for the nation in the first place.
Oh, those pesky details that fall outside of economics.
Then Blinder turns to the fabled "crowding out" effect,
"A second job-destroying mechanism operates through higher interest rates. When the government borrows to finance spending, that pushes interest rates up, which dissuades some businesses from investing. Thus falling private investment destroys jobs just as rising government spending is creating them.
There are times when this "crowding-out" argument is relevant. But not today. The Federal Reserve has been holding interest rates at ultra-low levels for several years, and will continue to do so. If interest rates don't rise, you don't get crowding out."
I don't believe it's quite that simple just now. Rather than crowd out private investment via higher rates, perversely, private lending is stalled because everyone knows current rates don't cover risk. Especially when we just suffered through a residential housing-initiated financial crisis triggered by the Fed's low-rate policies.
Did you really forget that already, Alan?
Plus, the crowding out now occurring is businesses expecting higher taxes at some point to pay for all the deficit spending. That's implicitly crowding out domestic investment as businesses wait for the uncertain other government fiscal shoes to drop in the form of new taxes or higher tax rates.
Blinder then offers this,
"In sum, you may view any particular public-spending program as wasteful, inefficient, leading to "big government" or objectionable on some other grounds. But if it's not financed with higher taxes, and if it doesn't drive up interest rates, it's hard to see how it can destroy jobs."
He simply ignores the transmission effect I noted in my earlier comments, i.e., deficit spending means higher future taxes, in part due to the US government's debt becoming objectionably large to global investors. How Blinder can ignore this is a mystery to me, unless it's because he is an economist, not a financier.
Blinder then appeals to his liberal colleague Paul Krugman's argument,
"Let's try one final argument that is making the rounds today. Large deficits, it is claimed, are creating huge uncertainties (e.g., over what will eventually be done to reduce them) and those uncertainties are depressing business investment. The corollary is a variant of what my Princeton colleague Paul Krugman calls the Confidence Fairy: If you cut spending sharply, confidence will soar, spurring employment and investment.
As a matter of pure logic, that could be true. But is there evidence? Yes, clear evidence—that points in the opposite direction. Business investment in equipment and software has been booming, not sagging. Specifically, while real gross domestic product grew a paltry 2.3% over the last four quarters, business spending on equipment and software skyrocketed 14.7%. No doubt, there is lots of uncertainty. But investment is soaring anyway."
I suppose this is where economists show their ignorance of actual business operations. Business spending by US corporations doesn't mean that spending occurs in the US, or employs more workers in the US. Much of the growth of the S&P500 corporations recently has been overseas, not in the US. Blinder and Krugman fail to distinguish between domestic and foreign investment, spending and hiring by US multi-nationals.
Finally, Blinder closes with,
"Despite all this evidence and logic, some people still claim that fiscal stimulus won't create jobs. Spending cuts, they insist, are the route to higher employment. And ideas have consequences. One possibly frightening consequence is that our limping economy might have one of its two crutches—fiscal policy—kicked out from under it in an orgy of premature expenditure cutting. Given the current jobs emergency, that would be tragic.
Yet it is undeniable that we have a tremendous long-run deficit problem to deal with—and the sooner, the better. So it appears we're caught in a dilemma: We need both more spending (or lower taxes) to create jobs and less spending (or higher taxes) to tame the deficit monster. Can we square the circle?
Actually, yes. Suppose we enacted a modest fiscal stimulus program specifically designed for maximum job creation. My personal favorite is a tax credit for firms that add to their payrolls, but there are other options. And suppose we combined that with a serious plan for reducing future deficits—and enacted the whole package now. Then we could, in a sense, have our cake and eat it, too."
I disagree with Blinder's contention that "we need ..... more spending." Blinder seems unwilling, Keynesian that he is, to simply accept the conclusions of Reynolds' empirical work on the ineffectiveness of government fiscal expansionary policies, and let the US economy endure the natural cycles that private savings, spending and investment will cause.
Many observers, myself included, feel that government spending is the wrong response to the current economic situation. Better to trim government borrowing, by cutting spending, thus improving prospects for Treasury debt offerings and avoiding higher tax rates and new taxes, to leave more money in the private sector. That money will either be spent, or invested, according to private sector appetites, leading, either way, to economic growth.
Why can't we just do that? Allow the private sector to spend and invest its own money as it chooses, rather than force it to either disgorge its money to the government via taxes, or force it to take on liabilities as our government continues to borrow- and spend- on the private sector's account?
He began by writing,
"Right now, I'm worried about the damage that might be done by one particularly wrong-headed idea: the notion that, in stark contrast to Keynes's teaching, government spending destroys jobs.
No, that's not a typo. House Speaker John Boehner and other Republicans regularly rail against "job-killing government spending." Think about that for a minute. The claim is that employment actually declines when federal spending rises. Using the same illogic, employment should soar if we made massive cuts in public spending—as some are advocating right now.
Acting on such a belief would imperil a still-shaky economy that is not generating nearly enough jobs. So let's ask: How, exactly, could more government spending "kill jobs"? "
Blinder is engaging in incredibly literal interpretation of a statement that isn't meant to convey what he chooses to draw from it.
To begin with, empirically, Alan Reynolds has done research, about which he wrote in a Journal editorial, which has effectively dismissed the contention that government intervention in recessions helps economies. I mention this because later in his editorial, Blinder appeals to empirical evidence, or the lack of it.
Regarding 'job killing government spending,' it's not meant to be a direct and simple logical proposition as implied by Blinder's semantics. Rather, in the current context, with pre-existing uncertainty regarding government extra-legal intervention in business sectors (health care, autos, finance, insurance), aggressive regulatory actions (energy, autos, finance, health care), combined with record government debt and deficits, further deficits or higher taxes to finance more spending is seen as driving businesses to refrain from domestic expansion and/or new hiring. Additionally, the increasing deficits are expected to lead to higher rates on government borrowing demanded by investors, which will raise the deficit, which will eventually require, combined with the other economy-retarding government policies, higher taxes.
These are nuances points, but Blinder's not interested in the reality of nuances as he continues,
"The generic conservative view that government is "too big" in some abstract sense leads to a strong predisposition against spending. OK. But the question remains: How can the government destroy jobs by either hiring people directly or buying things from private companies? For example, how is it that public purchases of computers destroy jobs but private purchases of computers create them?
One possible answer is that the taxes necessary to pay for the government spending destroy more jobs than the spending creates. That's a logical possibility, although it would require extremely inept choices of how to spend the money and how to raise the revenue. But tax-financed spending is not what's at issue today. The current debate is about deficit spending: raising spending without raising taxes."
Blinder is wrong on both points. It's precisely government's ill-advised spending that is at issue. Such as bailing out GM, rather than letting it be reorganized through conventional bankruptcy. Plus, such government spending inevitably invites cronyism, e.g., Jeff Immelt's GE and its curious ties with the current administration and benefits from all manner of environmentally-related government-procured favors.
Further, "tax-financed spending" is indeed part of what's at issue today. In order to avoid further borrowing, the current administration is using the debt limit crisis to try to force higher tax rates and new taxes.
Blinder continues to write,
"For example, the large fiscal stimulus enacted in 2009 was not "paid for." Yet it has been claimed that it created essentially no jobs. Really? With spending under the Recovery Act exceeding $600 billion (and tax cuts exceeding $200 billion), that would be quite a trick. How in the world could all that spending, accompanied by tax cuts, fail to raise employment? In fact, according to Congressional Budget Office estimates, the stimulus's effect on employment in 2010 was at least 1.3 million net new jobs, and perhaps as many as 3.3 million."
Well, as Blinder would know if he read the business press of the past few years, most of that so-called stimulus was used to fund transfer payments to state and local governments. It didn't create jobs, but it may have maintained some. Blinder evades the question of whether simply leaving the governments to resolve their own longer term fiscal situations wouldn't be better for the nation in the first place.
Oh, those pesky details that fall outside of economics.
Then Blinder turns to the fabled "crowding out" effect,
"A second job-destroying mechanism operates through higher interest rates. When the government borrows to finance spending, that pushes interest rates up, which dissuades some businesses from investing. Thus falling private investment destroys jobs just as rising government spending is creating them.
There are times when this "crowding-out" argument is relevant. But not today. The Federal Reserve has been holding interest rates at ultra-low levels for several years, and will continue to do so. If interest rates don't rise, you don't get crowding out."
I don't believe it's quite that simple just now. Rather than crowd out private investment via higher rates, perversely, private lending is stalled because everyone knows current rates don't cover risk. Especially when we just suffered through a residential housing-initiated financial crisis triggered by the Fed's low-rate policies.
Did you really forget that already, Alan?
Plus, the crowding out now occurring is businesses expecting higher taxes at some point to pay for all the deficit spending. That's implicitly crowding out domestic investment as businesses wait for the uncertain other government fiscal shoes to drop in the form of new taxes or higher tax rates.
Blinder then offers this,
"In sum, you may view any particular public-spending program as wasteful, inefficient, leading to "big government" or objectionable on some other grounds. But if it's not financed with higher taxes, and if it doesn't drive up interest rates, it's hard to see how it can destroy jobs."
He simply ignores the transmission effect I noted in my earlier comments, i.e., deficit spending means higher future taxes, in part due to the US government's debt becoming objectionably large to global investors. How Blinder can ignore this is a mystery to me, unless it's because he is an economist, not a financier.
Blinder then appeals to his liberal colleague Paul Krugman's argument,
"Let's try one final argument that is making the rounds today. Large deficits, it is claimed, are creating huge uncertainties (e.g., over what will eventually be done to reduce them) and those uncertainties are depressing business investment. The corollary is a variant of what my Princeton colleague Paul Krugman calls the Confidence Fairy: If you cut spending sharply, confidence will soar, spurring employment and investment.
As a matter of pure logic, that could be true. But is there evidence? Yes, clear evidence—that points in the opposite direction. Business investment in equipment and software has been booming, not sagging. Specifically, while real gross domestic product grew a paltry 2.3% over the last four quarters, business spending on equipment and software skyrocketed 14.7%. No doubt, there is lots of uncertainty. But investment is soaring anyway."
I suppose this is where economists show their ignorance of actual business operations. Business spending by US corporations doesn't mean that spending occurs in the US, or employs more workers in the US. Much of the growth of the S&P500 corporations recently has been overseas, not in the US. Blinder and Krugman fail to distinguish between domestic and foreign investment, spending and hiring by US multi-nationals.
Finally, Blinder closes with,
"Despite all this evidence and logic, some people still claim that fiscal stimulus won't create jobs. Spending cuts, they insist, are the route to higher employment. And ideas have consequences. One possibly frightening consequence is that our limping economy might have one of its two crutches—fiscal policy—kicked out from under it in an orgy of premature expenditure cutting. Given the current jobs emergency, that would be tragic.
Yet it is undeniable that we have a tremendous long-run deficit problem to deal with—and the sooner, the better. So it appears we're caught in a dilemma: We need both more spending (or lower taxes) to create jobs and less spending (or higher taxes) to tame the deficit monster. Can we square the circle?
Actually, yes. Suppose we enacted a modest fiscal stimulus program specifically designed for maximum job creation. My personal favorite is a tax credit for firms that add to their payrolls, but there are other options. And suppose we combined that with a serious plan for reducing future deficits—and enacted the whole package now. Then we could, in a sense, have our cake and eat it, too."
I disagree with Blinder's contention that "we need ..... more spending." Blinder seems unwilling, Keynesian that he is, to simply accept the conclusions of Reynolds' empirical work on the ineffectiveness of government fiscal expansionary policies, and let the US economy endure the natural cycles that private savings, spending and investment will cause.
Many observers, myself included, feel that government spending is the wrong response to the current economic situation. Better to trim government borrowing, by cutting spending, thus improving prospects for Treasury debt offerings and avoiding higher tax rates and new taxes, to leave more money in the private sector. That money will either be spent, or invested, according to private sector appetites, leading, either way, to economic growth.
Why can't we just do that? Allow the private sector to spend and invest its own money as it chooses, rather than force it to either disgorge its money to the government via taxes, or force it to take on liabilities as our government continues to borrow- and spend- on the private sector's account?
Tuesday, June 21, 2011
Holman Jenkins On Bank Bashing
Holman Jenkins, Jr., of the Wall Street Journal wrote a thoughtful, if somewhat murky piece in this past weekend's edition of the paper.
Entitled Why We Aren't Bashing Banks, Mr. Jenkins seemed to attempt to address a number of specific topics related to the Greek and European debt/bank crisis, including responding to left-wing economist Paul Krugman.
What interested me about Jenkins' article, however, were two of his contentions.
The first is that
"politicians find no upside in bashing bankers right now for good reason, since the whole game- 100%- is maneuvering the European Central Bank and its chief Jean-Claude Trichet into a more pliant mood so they will prop up Europe's banking system to permit sovereign debt restructuring to go ahead."
In effect, Jenkins, along with others, alleges that the truth is that bankers bought now-nearly-worthless Greek sovereign debt which, if carried at its correct value, would result in insolvent banks, a severely damaged European banking system, and, for good measure, no more private banking institutions to roll over and hold more of the rotten paper while the European Union figures out what to do about the mounting financial problems of larger EU countries, such as Ireland and Spain.
Thus, despite criticisms of cronyism, the regulators and central bankers are seen to be bailing out Greece, in order to bail out Europe's banks. And right now, that more or less equates to Germany bailing out the EU's banking sector.
My own fascination with this situation is how twisted and selective our international central banking and regulating authorities have become, such that they implicitly suspend the need for banks to recognize losses in value of assets they hold, so soon after the recent financial crises which involved precisely this sort of phenomenon.
Ask yourself why anyone in his right mind would own equities of large banks when such flagrant misstatement of asset values is allowed. If it weren't sanctioned by regulators, it would be called what it is- fraud.
Jenkins' second topic of interest was this passage,
"Here's guessing that a world without too-big-to-fail banks would not be bereft of financial innovation or diversified services aimed at every kind of customer."
He's probably right. My original research on consistent total return performance took place when I headed the research function at then-independent Oliver, Wyman & Co, revealed that the worst-performing financial institutions were the broadly-diversified banks. They hit every financial pothole which occurred- credit cards, mortgage lending, third-world debt, etc. The most consistently-superior performing firms were the more focused asset managers, credit card lenders and mortgage banking firms.
When income from diversified business mixes isn't used to prop up ailing units and mask weaknesses, firms tend to either succeed or fail rather dramatically.
Whether that would happen again, or not, I can't say. It may well be that we've had more financial innovation than any global economy can stand for a while. But, as Jenkins implies, with smaller, more nimble and focused financial institutions, profitable innovations would succeed, others would not, and investors in and lenders to such enterprises, rather than taxpayers, would enjoy the appropriate consequences.
Entitled Why We Aren't Bashing Banks, Mr. Jenkins seemed to attempt to address a number of specific topics related to the Greek and European debt/bank crisis, including responding to left-wing economist Paul Krugman.
What interested me about Jenkins' article, however, were two of his contentions.
The first is that
"politicians find no upside in bashing bankers right now for good reason, since the whole game- 100%- is maneuvering the European Central Bank and its chief Jean-Claude Trichet into a more pliant mood so they will prop up Europe's banking system to permit sovereign debt restructuring to go ahead."
In effect, Jenkins, along with others, alleges that the truth is that bankers bought now-nearly-worthless Greek sovereign debt which, if carried at its correct value, would result in insolvent banks, a severely damaged European banking system, and, for good measure, no more private banking institutions to roll over and hold more of the rotten paper while the European Union figures out what to do about the mounting financial problems of larger EU countries, such as Ireland and Spain.
Thus, despite criticisms of cronyism, the regulators and central bankers are seen to be bailing out Greece, in order to bail out Europe's banks. And right now, that more or less equates to Germany bailing out the EU's banking sector.
My own fascination with this situation is how twisted and selective our international central banking and regulating authorities have become, such that they implicitly suspend the need for banks to recognize losses in value of assets they hold, so soon after the recent financial crises which involved precisely this sort of phenomenon.
Ask yourself why anyone in his right mind would own equities of large banks when such flagrant misstatement of asset values is allowed. If it weren't sanctioned by regulators, it would be called what it is- fraud.
Jenkins' second topic of interest was this passage,
"Here's guessing that a world without too-big-to-fail banks would not be bereft of financial innovation or diversified services aimed at every kind of customer."
He's probably right. My original research on consistent total return performance took place when I headed the research function at then-independent Oliver, Wyman & Co, revealed that the worst-performing financial institutions were the broadly-diversified banks. They hit every financial pothole which occurred- credit cards, mortgage lending, third-world debt, etc. The most consistently-superior performing firms were the more focused asset managers, credit card lenders and mortgage banking firms.
When income from diversified business mixes isn't used to prop up ailing units and mask weaknesses, firms tend to either succeed or fail rather dramatically.
Whether that would happen again, or not, I can't say. It may well be that we've had more financial innovation than any global economy can stand for a while. But, as Jenkins implies, with smaller, more nimble and focused financial institutions, profitable innovations would succeed, others would not, and investors in and lenders to such enterprises, rather than taxpayers, would enjoy the appropriate consequences.
Monday, June 20, 2011
Dominos, Jack Welch & CNBC: Recipe for Disaster?
For the past few weeks, CNBC has been playing trailers of its new reality business consulting program starring ex-GE CEO Jack Welch and his latest wife, Suzy. Today's trailer and, evidently, the current 'client,' if one may use the term, is Domino's Pizza.
My first reaction was to remember an old Greek aphorism which says, to paraphrase,
'You cannot give what you do not have.'
What, precisely, does anyone think Jack Welch has, or ever had, in the way of demonstrating consistently superior management leading to similar total return performance? Let's dispense with his current wife, Suzy, who once was, I believe, editor of the Harvard Business Review. I haven't heard HBR cited as a valued business literature resource for over a decade. And Suzy was only an editor when she met and subsequently had the affair with Welch which contributed to ending his then-current marriage. Which is to say Suzy Welch's involvement seems to be exclusively the result of her current marriage.
Welch was CEO of GE from 1981-2001. Yahoo's stock price chart function isn't allowing comparisons now (or perhaps anymore), but this prior post contains the chart I want to display and, conveniently, is also one of the topics on which I'll remark shortly.
![]()
The chart from that post, reproduced nearby, doesn't include dividends, which would affect both series. But what it still illustrates is how closely GE tracked the S&P500 for most of the first decade of Welch's tenure as CEO.
I had the occasion to meet with him in the mid-1990s when I was with Andersen Consulting, now known as Accenture. Back then I was using the DowJones price series, rather than the more appropriate S&P. However, even with the S&P the point I made to Welch which got him scribbling on his copy of my presentation, exclaiming,
"Nobody's ever shown me this before,"
is still evident. If you look carefully at the blue curve around 1982-3, you'll see a near-vertical rise which lifted the then-ailing conglomerate's performance up above the S&P's, and was retained for nearly eight more years.
I contended to Welch that this was the initial benefit to GE's total return which his triage among the inflationary climate and GE's moribund businesses left to him by Reg Jones produced. At the time, amidst unreliable GAAP numbers due to rocketing inflation, Welch resorted to managing by market share and its growth. This was unquestionably an astute and, ultimately, successful approach. Though it earned him the moniker Neutron Jack for cutting GE's workforce, it produced excellent performance for years. But after that, for the remainder of the decade, GE largely tracked the equity indices without significant, lasting outperformance. This was what had shocked Welch as he stared at the simple but powerful graphic I had presented to him.
By the time I met with Welch, GE had become a lopsided giant, with a fast-growing, risky financial services arm outstripping the slow-growing industrial units.
Ultimately, GE's total returns of the late 1990s were produced from two sources- analysts' belief in Jack Welch and his consistent production of dividends, and a ballooning finance business which benefited from the overall halo effect on such businesses. On both an absolute basis, and relative to the S&P, GE has never again reached the heights it attained in Welch's last year.
Upon taking over as CEO at GE, Jeff Immelt was immediately assailed for the same accounting practices in units such as power generation for which pundits had given Welch a pass. GE Capital, which had lost Gary Wendt, the architect of its expansion, a few years earlier, no longer powered the conglomerate's growth.
Thus, it's unclear exactly what Welch left of enduring value at GE, given that, within months of his departure, the company's total returns fell off a cliff.
Since Welch constantly preached about good management, one would think that choosing an able replacement and handing off GE in decent shape would be key to Welch's being judged a success.
But that's not what happened. Immelt proved incapable of handling GE, which has, under his misleadership, managed to squander all of the performance margin it had accreted since 1962. Not to mention that little matter of requiring a federal government bailout under TARP to avoid insolvency in 2008-09.
Elsewhere, Welch's spawn did little better. Bob Nardelli had to be chased out of his CEO position at Home Depot, while Jim McNerney's 3M and Boeing both have struggled.
Then there is the question of Welch's major acquisitions, which I would suggest were RCA and Kidder Peabody. The latter was the subject of a huge scandal literally the week during which I met with Welch in the mid-1990s. The linked post referenced earlier in this piece discussed the RCA acquisition, ending with these observations,
"1986 was a long time ago. Many analysts from that era are retired, and the tenor of those times is long forgotten. But revisiting the event of GE's acquisition of NBC is important, if only in fulfillment of the time-honored saying reminding us that those who don't learn from history are doomed to repeat it.
From a sufficiently long perspective of time, it is clear that NBC was never the magical acquisition Welch imagined. If it was the reason for a spurt of market outperformance in Welch's latter years, then it should have been spun off or sold at its peak, rather than be ridden down in value to its current situation.
Either the acquisition, or its management and disposal, were flawed. And there's no telling how much management distraction NBC caused during its years in the GE corporate portfolio.
I think that, by all accounts, GE's acquisition of NBC was a mistake at the outset, was a drain on GE's management, and was ill-managed in terms of timing the firm's exit from the unit as its value deteriorated in the rapidly-changing media environment of the internet and digital era."
In line with my continuing theme regarding GE, Welch made the firm an even more unnecessarily-diversified firm in an era in which the raison d'etre for such diversified conglomerates had long-since disappeared. If anything, Welch should have been spinning the major units of GE into separate businesses and dissolving the firm that he had run for two decades.
At the dawn of Welch's tenure, diversified conglomerates were already dinosaurs, due to falling brokerage rates. With the appearance of large discount retail brokers like Charles Schwab, there was no purpose, other than employing a bunch of headquarters staff, Welch and his CFO, for GE's existence in the form Welch had inherited.
Welch's decade of superior performance at GE was apparently more the result of luck and the bounce-back from his adroit initial handling of the mess Jones bequeathed to him. My old boss and mentor at Chase, Gerry Weiss, who had been the senior corporate planning officer at GE before being recruited by David Rockefeller, always contended that Welch should have been handsomely compensated for handling the mess he inherited, and dispatched by the end of the 1980s. His long-term growth efforts resulted in disaster for the firm.
Moreover, Welch never ran a retail business. He was a chemistry PhD who rose to run the plastics business and, from there, GE. GE, for that matter, has never been a retail presence, either.
So, if you're the CEO of Dominos, and you know all this, what is it that you think Jack Welch can do for your company? Do you want what happened to GE after Welch's magic touch to happen to your pizza delivery firm?
So just what would Welch uniquely bring to the pizza chain, if his accomplishments at GE melted away so quickly? He doesn't have a track record as a successful consultant to numerous companies in various industries.
What's the point of Welch's CNBC program if he can't provide what he never had in the first place?
My first reaction was to remember an old Greek aphorism which says, to paraphrase,
'You cannot give what you do not have.'
What, precisely, does anyone think Jack Welch has, or ever had, in the way of demonstrating consistently superior management leading to similar total return performance? Let's dispense with his current wife, Suzy, who once was, I believe, editor of the Harvard Business Review. I haven't heard HBR cited as a valued business literature resource for over a decade. And Suzy was only an editor when she met and subsequently had the affair with Welch which contributed to ending his then-current marriage. Which is to say Suzy Welch's involvement seems to be exclusively the result of her current marriage.
Welch was CEO of GE from 1981-2001. Yahoo's stock price chart function isn't allowing comparisons now (or perhaps anymore), but this prior post contains the chart I want to display and, conveniently, is also one of the topics on which I'll remark shortly.
The chart from that post, reproduced nearby, doesn't include dividends, which would affect both series. But what it still illustrates is how closely GE tracked the S&P500 for most of the first decade of Welch's tenure as CEO.
I had the occasion to meet with him in the mid-1990s when I was with Andersen Consulting, now known as Accenture. Back then I was using the DowJones price series, rather than the more appropriate S&P. However, even with the S&P the point I made to Welch which got him scribbling on his copy of my presentation, exclaiming,
"Nobody's ever shown me this before,"
is still evident. If you look carefully at the blue curve around 1982-3, you'll see a near-vertical rise which lifted the then-ailing conglomerate's performance up above the S&P's, and was retained for nearly eight more years.
I contended to Welch that this was the initial benefit to GE's total return which his triage among the inflationary climate and GE's moribund businesses left to him by Reg Jones produced. At the time, amidst unreliable GAAP numbers due to rocketing inflation, Welch resorted to managing by market share and its growth. This was unquestionably an astute and, ultimately, successful approach. Though it earned him the moniker Neutron Jack for cutting GE's workforce, it produced excellent performance for years. But after that, for the remainder of the decade, GE largely tracked the equity indices without significant, lasting outperformance. This was what had shocked Welch as he stared at the simple but powerful graphic I had presented to him.
By the time I met with Welch, GE had become a lopsided giant, with a fast-growing, risky financial services arm outstripping the slow-growing industrial units.
Ultimately, GE's total returns of the late 1990s were produced from two sources- analysts' belief in Jack Welch and his consistent production of dividends, and a ballooning finance business which benefited from the overall halo effect on such businesses. On both an absolute basis, and relative to the S&P, GE has never again reached the heights it attained in Welch's last year.
Upon taking over as CEO at GE, Jeff Immelt was immediately assailed for the same accounting practices in units such as power generation for which pundits had given Welch a pass. GE Capital, which had lost Gary Wendt, the architect of its expansion, a few years earlier, no longer powered the conglomerate's growth.
Thus, it's unclear exactly what Welch left of enduring value at GE, given that, within months of his departure, the company's total returns fell off a cliff.
Since Welch constantly preached about good management, one would think that choosing an able replacement and handing off GE in decent shape would be key to Welch's being judged a success.
But that's not what happened. Immelt proved incapable of handling GE, which has, under his misleadership, managed to squander all of the performance margin it had accreted since 1962. Not to mention that little matter of requiring a federal government bailout under TARP to avoid insolvency in 2008-09.
Elsewhere, Welch's spawn did little better. Bob Nardelli had to be chased out of his CEO position at Home Depot, while Jim McNerney's 3M and Boeing both have struggled.
Then there is the question of Welch's major acquisitions, which I would suggest were RCA and Kidder Peabody. The latter was the subject of a huge scandal literally the week during which I met with Welch in the mid-1990s. The linked post referenced earlier in this piece discussed the RCA acquisition, ending with these observations,
"1986 was a long time ago. Many analysts from that era are retired, and the tenor of those times is long forgotten. But revisiting the event of GE's acquisition of NBC is important, if only in fulfillment of the time-honored saying reminding us that those who don't learn from history are doomed to repeat it.
From a sufficiently long perspective of time, it is clear that NBC was never the magical acquisition Welch imagined. If it was the reason for a spurt of market outperformance in Welch's latter years, then it should have been spun off or sold at its peak, rather than be ridden down in value to its current situation.
Either the acquisition, or its management and disposal, were flawed. And there's no telling how much management distraction NBC caused during its years in the GE corporate portfolio.
I think that, by all accounts, GE's acquisition of NBC was a mistake at the outset, was a drain on GE's management, and was ill-managed in terms of timing the firm's exit from the unit as its value deteriorated in the rapidly-changing media environment of the internet and digital era."
In line with my continuing theme regarding GE, Welch made the firm an even more unnecessarily-diversified firm in an era in which the raison d'etre for such diversified conglomerates had long-since disappeared. If anything, Welch should have been spinning the major units of GE into separate businesses and dissolving the firm that he had run for two decades.
At the dawn of Welch's tenure, diversified conglomerates were already dinosaurs, due to falling brokerage rates. With the appearance of large discount retail brokers like Charles Schwab, there was no purpose, other than employing a bunch of headquarters staff, Welch and his CFO, for GE's existence in the form Welch had inherited.
Welch's decade of superior performance at GE was apparently more the result of luck and the bounce-back from his adroit initial handling of the mess Jones bequeathed to him. My old boss and mentor at Chase, Gerry Weiss, who had been the senior corporate planning officer at GE before being recruited by David Rockefeller, always contended that Welch should have been handsomely compensated for handling the mess he inherited, and dispatched by the end of the 1980s. His long-term growth efforts resulted in disaster for the firm.
Moreover, Welch never ran a retail business. He was a chemistry PhD who rose to run the plastics business and, from there, GE. GE, for that matter, has never been a retail presence, either.
So, if you're the CEO of Dominos, and you know all this, what is it that you think Jack Welch can do for your company? Do you want what happened to GE after Welch's magic touch to happen to your pizza delivery firm?
So just what would Welch uniquely bring to the pizza chain, if his accomplishments at GE melted away so quickly? He doesn't have a track record as a successful consultant to numerous companies in various industries.
What's the point of Welch's CNBC program if he can't provide what he never had in the first place?
Friday, June 17, 2011
Banks, Capital Requirements & The S&P500
CEOs of large US banks have raised an alarm recently due to the recommendations by several regulators, including members of the Fed and FDIC, for higher capital requirements. Some have suggested an extra 3%, bringing the large-bank level to around 10% of risk assets, while others have mentioned 14%.
Predictably, the CEO of at least one large bank, Chase, has warned that higher capital levels will result in higher lending rates and overall operating costs, as well as lower profit levels. These comments are meant to scare regulators away from imposing higher risk capital levels.
However, Chase' Jamie Dimon, aside from having an obvious interest in lower capital requirements, also lacks perspective. He spent the bulk of his career assisting his one-time mentor, Sandy Weill, in the brokerage industry. The sorts of retail brokers at which Dimon cut his teeth didn't engage in much risk-taking activity, so they were highly-levered.
But a more appropriate perspective on the current debate involving large US commercial bank capital levels should take us back to the 1920s. The events of the 1930s, in which then-integrated commercial and investment banks, such as the forerunners of today's Citi and Chase, improperly sold questionable investments from one side of their bank to customers on the commercial side of the bank, resulted in the Glass-Steagal Act. The Act broke up banking into its investment and commercial pieces.
Up until the 1970s, commercial banks, the retail deposits of which were FDIC-insured, didn't typically engage in much risky activity outside of conventional lending. Even that resulted in the occasional large regional bank failure, such as First Pennsylvania, Seattle First and the like.
However, with the complete removal of Glass-Steagal, commercial banks were allowed to function as investment banks, but retained federal deposit insurance. This oversight effectively resulted in the federal government subsidizing, via deposit insurance, the risky activities of trading and underwriting in the investment banking side of these newly-integrated large US banks.
Earlier this week, I saw an analysis on Bloomberg predicting that as commercial banks divested or closed newly-prohibited trading businesses, their profits would fall, bringing down equity indices of which they comprise something in the neighborhood of 20%. This sort of statistic, combined with the specter of higher capital levels and resulting lower profits, is being trumpeted as the reason to reject such calls for more bank capital.
However, I believe this is incorrect reasoning. What I believe is correct is to ask why equity indices such as the S&P500 allocate so much weight to financials. As integrated, risky companies, financials may well have merited such weight.
But now, the large US commercial banks are more properly viewed as financial utilities. As such, they don't merit a large presence in the S&P, nor should they be expected to be engines of high and consistent total return delivery for their shareholders.
This may not be to the liking of Jamie Dimon and the CEOs of Citi, Wells Fargo or BofA. But it's reality.
After the tremendous cost to taxpayers of the financial crisis of 2007-08, in which large US commercial banks with insured deposits played a corresponding major part, even if they didn't initiate the crisis, it's understandable that capital requirements would be increased and risky activities prohibited.
As I have written in prior posts, the basic business of lending and safekeeping money, plus some ancillary trust and processing businesses, are the core of what large US financial utilities, a/k/a large commercial banks, perform. Those aren't a huge part of the American economy, nor should they be. Such businesses aren't high growth businesses, either.
Regarding interest rate levels, who's to say they should not be higher? Large bank profits rise with interest rates- why didn't Dimon mention that? Further, we didn't have a crisis three years ago because rates were too high- it was because they were too low. And still are.
Cries of 'foul' by large bank CEOs and analysts stem from a refusal to acknowledge reality- both recent past, current and future. The days in which banks such as Citi, Chase, Wells Fargo and BofA may be expected to rival Google or Apple as consistently high total return performers are over. They are now meant to be fairly safe, unexciting basic financial services firms which don't engage in overly-risky activities.
That's the reality of the new financial landscape. And it's consistent with such an environment that those large banks should carry more capital, the better to avoid needing taxpayer funds to rescue them from insolvency in the future.
Predictably, the CEO of at least one large bank, Chase, has warned that higher capital levels will result in higher lending rates and overall operating costs, as well as lower profit levels. These comments are meant to scare regulators away from imposing higher risk capital levels.
However, Chase' Jamie Dimon, aside from having an obvious interest in lower capital requirements, also lacks perspective. He spent the bulk of his career assisting his one-time mentor, Sandy Weill, in the brokerage industry. The sorts of retail brokers at which Dimon cut his teeth didn't engage in much risk-taking activity, so they were highly-levered.
But a more appropriate perspective on the current debate involving large US commercial bank capital levels should take us back to the 1920s. The events of the 1930s, in which then-integrated commercial and investment banks, such as the forerunners of today's Citi and Chase, improperly sold questionable investments from one side of their bank to customers on the commercial side of the bank, resulted in the Glass-Steagal Act. The Act broke up banking into its investment and commercial pieces.
Up until the 1970s, commercial banks, the retail deposits of which were FDIC-insured, didn't typically engage in much risky activity outside of conventional lending. Even that resulted in the occasional large regional bank failure, such as First Pennsylvania, Seattle First and the like.
However, with the complete removal of Glass-Steagal, commercial banks were allowed to function as investment banks, but retained federal deposit insurance. This oversight effectively resulted in the federal government subsidizing, via deposit insurance, the risky activities of trading and underwriting in the investment banking side of these newly-integrated large US banks.
Earlier this week, I saw an analysis on Bloomberg predicting that as commercial banks divested or closed newly-prohibited trading businesses, their profits would fall, bringing down equity indices of which they comprise something in the neighborhood of 20%. This sort of statistic, combined with the specter of higher capital levels and resulting lower profits, is being trumpeted as the reason to reject such calls for more bank capital.
However, I believe this is incorrect reasoning. What I believe is correct is to ask why equity indices such as the S&P500 allocate so much weight to financials. As integrated, risky companies, financials may well have merited such weight.
But now, the large US commercial banks are more properly viewed as financial utilities. As such, they don't merit a large presence in the S&P, nor should they be expected to be engines of high and consistent total return delivery for their shareholders.
This may not be to the liking of Jamie Dimon and the CEOs of Citi, Wells Fargo or BofA. But it's reality.
After the tremendous cost to taxpayers of the financial crisis of 2007-08, in which large US commercial banks with insured deposits played a corresponding major part, even if they didn't initiate the crisis, it's understandable that capital requirements would be increased and risky activities prohibited.
As I have written in prior posts, the basic business of lending and safekeeping money, plus some ancillary trust and processing businesses, are the core of what large US financial utilities, a/k/a large commercial banks, perform. Those aren't a huge part of the American economy, nor should they be. Such businesses aren't high growth businesses, either.
Regarding interest rate levels, who's to say they should not be higher? Large bank profits rise with interest rates- why didn't Dimon mention that? Further, we didn't have a crisis three years ago because rates were too high- it was because they were too low. And still are.
Cries of 'foul' by large bank CEOs and analysts stem from a refusal to acknowledge reality- both recent past, current and future. The days in which banks such as Citi, Chase, Wells Fargo and BofA may be expected to rival Google or Apple as consistently high total return performers are over. They are now meant to be fairly safe, unexciting basic financial services firms which don't engage in overly-risky activities.
That's the reality of the new financial landscape. And it's consistent with such an environment that those large banks should carry more capital, the better to avoid needing taxpayer funds to rescue them from insolvency in the future.
Thursday, June 16, 2011
Regarding The Recent Equity Market Turmoil
There's little doubt that the mechanics and dynamics of the US equity markets changed as of late April and early May. The latter timeframe saw volatility begin to rise, while the S&P peaked on May 2nd, falling nearly 9% since then.
At times like these, I consider how different equity portfolio management styles react and perform under such conditions.
As I've written in prior posts, the framework and structure of a quantitative approach to equity portfolio management gives me confidence in relying on my tools, signals and consistent management methods. I can't fathom how a qualitative manager responds to such rises in volatility and a plunging index.
For example, my signaling tools for long/short allocation are still, despite the recent market decline, displaying values associated with long positions. Thus far, June's S&P total return is nearly -7%. A few more months like this and the signal will turn to short allocations. But it's quite likely that the next few months will see the indicator remain long. It's September and after that appears to be the worrisome period. However, while I simulate its behavior, I don't forecast the indicator- I use its contemporaneous output. That's one of the benefits of having time-tested, non-forecasted, quantitative components of a quantitative equity management system.
Thus, I was mildly surprised by the reaction I recently received from someone presented to me as a formerly-successful hedge fund manager. This recent post concerning a networking situation gone wrong due to a friend's inept and lying contact. The same contact made much of connecting me with the alleged hedge fund manager whom I'll call L.
The initial feedback was that L was seriously interested in learning more about my portfolio management approach and performance. But after a few days had passed, I grew sceptical. I requested L's email and sent him my one-page description, along with an invitation to discuss my approach at our mutual convenience. Several days passed with no reply. Not knowing L, nor having spoken with him, and seeing his non-response as possibly a change of mind, or, more likely, wrong information in the first place regarding his interest level, I forwarded my initial email with another suggestion that we talk or meet. Later that holiday weekend, L sent me a reply which read, in part,
"I personally have no need for a black box. I had a partner that left me 20 years ago to work on his algorithmic program. I am aware of all the success stories and I'm sure your is as prudent as the rest. I've seen some very sophisticated programs but in the end nothing that has held up to the tests."
I had to laugh when I read L's response, as it contained such a mix of naivete, bad thinking and errors of logic.
First, why would someone being approached to invest in or back an equity management process believe he will remain 'in the dark' regarding said process? While I've never relinquished control or shared possession of my software code, I've explained how my quantitative process works in detail to former partners. Only an idiot would believe that the process would remain a 'black box' to him.
By the way, even a fundamentals-based analytical type of manager who pores over 10Ks is a quantitative manager. Quantitative means numeric, and probably algorithmic, but not necessarily advanced physics or calculus.
Second, it seems that a long-ago slight by L's former partner has left him biased against all quantitative equity management processes.
Finally, the assertion that "nothing...has held up to the tests" suggests some pretty faulty logic circuits in L's brain. For example, just that week, one of the world's larger hedge funds announced that it was creating a new quantitatively-managed fund.
Several of the best-known and -performing hedge funds, including Jim Simons' Renaissance, are quantitative. So I guess they have passed "the tests."
Precisely which "tests" L is referring to is a mystery to me, and I've been involved in equity management since 1997.
Then, again, considering the wild goose chase on which I was led with the contact's first allegedly valuable network connection, I have my doubts that L had, in fact, developed, built and sold a successful equity management business. Or that he even has substantial funds to invest in one now, either.
There are varying preferences for returns, consistency, etc., over varying periods of time by individual investors or backers of hedge funds and equity management ventures. But, to my knowledge, there is no single set of "tests."
What I wondered, in contrast, was, if L doesn't like quantitative, disciplined, rigorous approaches to equity management which at least have the advantage of being able to be backtested, what does he prefer- totally subjective managers with no ability to retroactively model their selections and performance? If he's worried about "black boxes," does it get any blacker and more impenetrable than an individual manager's undocumented mental meanderings?
Equity markets like those of the past few months and, probably, the next several, always lead me to wonder why anyone would risk their investments on pure, inexplicable subjective hunches without any sort of objective guidelines or rules.
At times like these, I consider how different equity portfolio management styles react and perform under such conditions.
As I've written in prior posts, the framework and structure of a quantitative approach to equity portfolio management gives me confidence in relying on my tools, signals and consistent management methods. I can't fathom how a qualitative manager responds to such rises in volatility and a plunging index.
For example, my signaling tools for long/short allocation are still, despite the recent market decline, displaying values associated with long positions. Thus far, June's S&P total return is nearly -7%. A few more months like this and the signal will turn to short allocations. But it's quite likely that the next few months will see the indicator remain long. It's September and after that appears to be the worrisome period. However, while I simulate its behavior, I don't forecast the indicator- I use its contemporaneous output. That's one of the benefits of having time-tested, non-forecasted, quantitative components of a quantitative equity management system.
Thus, I was mildly surprised by the reaction I recently received from someone presented to me as a formerly-successful hedge fund manager. This recent post concerning a networking situation gone wrong due to a friend's inept and lying contact. The same contact made much of connecting me with the alleged hedge fund manager whom I'll call L.
The initial feedback was that L was seriously interested in learning more about my portfolio management approach and performance. But after a few days had passed, I grew sceptical. I requested L's email and sent him my one-page description, along with an invitation to discuss my approach at our mutual convenience. Several days passed with no reply. Not knowing L, nor having spoken with him, and seeing his non-response as possibly a change of mind, or, more likely, wrong information in the first place regarding his interest level, I forwarded my initial email with another suggestion that we talk or meet. Later that holiday weekend, L sent me a reply which read, in part,
"I personally have no need for a black box. I had a partner that left me 20 years ago to work on his algorithmic program. I am aware of all the success stories and I'm sure your is as prudent as the rest. I've seen some very sophisticated programs but in the end nothing that has held up to the tests."
I had to laugh when I read L's response, as it contained such a mix of naivete, bad thinking and errors of logic.
First, why would someone being approached to invest in or back an equity management process believe he will remain 'in the dark' regarding said process? While I've never relinquished control or shared possession of my software code, I've explained how my quantitative process works in detail to former partners. Only an idiot would believe that the process would remain a 'black box' to him.
By the way, even a fundamentals-based analytical type of manager who pores over 10Ks is a quantitative manager. Quantitative means numeric, and probably algorithmic, but not necessarily advanced physics or calculus.
Second, it seems that a long-ago slight by L's former partner has left him biased against all quantitative equity management processes.
Finally, the assertion that "nothing...has held up to the tests" suggests some pretty faulty logic circuits in L's brain. For example, just that week, one of the world's larger hedge funds announced that it was creating a new quantitatively-managed fund.
Several of the best-known and -performing hedge funds, including Jim Simons' Renaissance, are quantitative. So I guess they have passed "the tests."
Precisely which "tests" L is referring to is a mystery to me, and I've been involved in equity management since 1997.
Then, again, considering the wild goose chase on which I was led with the contact's first allegedly valuable network connection, I have my doubts that L had, in fact, developed, built and sold a successful equity management business. Or that he even has substantial funds to invest in one now, either.
There are varying preferences for returns, consistency, etc., over varying periods of time by individual investors or backers of hedge funds and equity management ventures. But, to my knowledge, there is no single set of "tests."
What I wondered, in contrast, was, if L doesn't like quantitative, disciplined, rigorous approaches to equity management which at least have the advantage of being able to be backtested, what does he prefer- totally subjective managers with no ability to retroactively model their selections and performance? If he's worried about "black boxes," does it get any blacker and more impenetrable than an individual manager's undocumented mental meanderings?
Equity markets like those of the past few months and, probably, the next several, always lead me to wonder why anyone would risk their investments on pure, inexplicable subjective hunches without any sort of objective guidelines or rules.
Wednesday, June 15, 2011
Anatomy of a State's Ill-Considered Tax Policy
Last week the Wall Street Journal featured Illinois' recent tax hikes in its lead staff editorial. Normally, a topic like this would be more appropriate on my companion political blog. But I think this merits treatment here, instead.
For several years now, as I've written in prior posts, more of my business blog writing has been devoted to government actions, primarily because, since 2008, so much of the so-called private sector has been either infringed upon, taken over by or otherwise heavily influenced and affected by government activity to overwhelming extents.
In the case of this topic, the situation was set up by years of profligate state spending and giveaways to unions in the form of pensions and compensation for government employees. As an attempt to fill state budget gaps, Illinois' Democratically-controlled legislature and its Democratic governor enacted tax increases which effectively raised personal rates 67% and corporate rates to a 9.5% level, which the Journal reports as "fourth highest in the nation."
Predictably, many large Illinois corporations promptly let it be publicly known that they were considering relocating out of the state, due to the sudden rise in tax bills.
Caterpillar, Motorola Mobility, Sears, Navistar Continental Tire, U.S. Cellular, Chrysler and even Groupon all used the ploy to extract tax givebacks of varying sizes from the state. The governor, Pat Quinn, used these occasions to claim he was working hard to keep business in the state.
The irony, of course, is priceless. The state raises tax rates, then trumpets its efforts to offset the loss of economic activity as businesses respond to the higher rates. But the underlying process of funding the state government has been corrupted, as the Journal editorial describes,
"The victims are the thousands of businesses that don't get the favors, and an overall state economy that is less attractive for employers. That's one reason Illinois has ranked 47th of the 50 states in job creation in the last decade, and has lost more private jobs (360,000) than the entire private work force of Delaware...
Illinois is proving what bookshelves full of studies have found: Handing out special favors one business at a time is politically corrupting and an ineffective economic development strategy. A sounder way to create jobs is to provide a welcome tax and regulatory climate for all businesses. Some states, such as Arizona, constitutionally prohibit politicians from granting special favors to a business or citizen."
Today's Journal has a second part to the editorial, reporting that financial market giant CME Group is now threatening to leave the state if it, too, does not receive some special tax relief.
According to the Journal, Illinois' increased tax rate is expected to capture around $6B, of which something like a quarter of a billion dollars is now being forgiven as political favors from the governor.
Is this any way to run a state? Or a country? Because we all know that Congress does exactly the same thing with the federal tax code. Special exemptions are created by Senators and Representatives for businesses which fit suspiciously complicated descriptions which- surprise surprise- result in a company in their state or district enjoying some tax break.
When are citizens, at taxpayers and voters, going to catch on to this bi-partisan scam which saps national economic activity while fostering tens of millions of dollars in economically unproductive lobbying for tax relief?
The net result is to transform what could be simpler, lower-rate tax systems for state and federal governments alike into complicated traps, partial escapes from which are granted by elected politicians in return for various favors- campaign donations, jobs for friends, or public relations events showcasing how the official 'saved' jobs by giving a company a special tax break.
If the tax break was a good economic move, why was the tax rate raised in the first place?
By the way, since it's topical in a political sense this week, Rick Perry's Texas has created more jobs in the past decade than any other state.
It has no state income tax- and, thus, no tax rates from which companies need to spend money to escape. And less political corruption.
For several years now, as I've written in prior posts, more of my business blog writing has been devoted to government actions, primarily because, since 2008, so much of the so-called private sector has been either infringed upon, taken over by or otherwise heavily influenced and affected by government activity to overwhelming extents.
In the case of this topic, the situation was set up by years of profligate state spending and giveaways to unions in the form of pensions and compensation for government employees. As an attempt to fill state budget gaps, Illinois' Democratically-controlled legislature and its Democratic governor enacted tax increases which effectively raised personal rates 67% and corporate rates to a 9.5% level, which the Journal reports as "fourth highest in the nation."
Predictably, many large Illinois corporations promptly let it be publicly known that they were considering relocating out of the state, due to the sudden rise in tax bills.
Caterpillar, Motorola Mobility, Sears, Navistar Continental Tire, U.S. Cellular, Chrysler and even Groupon all used the ploy to extract tax givebacks of varying sizes from the state. The governor, Pat Quinn, used these occasions to claim he was working hard to keep business in the state.
The irony, of course, is priceless. The state raises tax rates, then trumpets its efforts to offset the loss of economic activity as businesses respond to the higher rates. But the underlying process of funding the state government has been corrupted, as the Journal editorial describes,
"The victims are the thousands of businesses that don't get the favors, and an overall state economy that is less attractive for employers. That's one reason Illinois has ranked 47th of the 50 states in job creation in the last decade, and has lost more private jobs (360,000) than the entire private work force of Delaware...
Illinois is proving what bookshelves full of studies have found: Handing out special favors one business at a time is politically corrupting and an ineffective economic development strategy. A sounder way to create jobs is to provide a welcome tax and regulatory climate for all businesses. Some states, such as Arizona, constitutionally prohibit politicians from granting special favors to a business or citizen."
Today's Journal has a second part to the editorial, reporting that financial market giant CME Group is now threatening to leave the state if it, too, does not receive some special tax relief.
According to the Journal, Illinois' increased tax rate is expected to capture around $6B, of which something like a quarter of a billion dollars is now being forgiven as political favors from the governor.
Is this any way to run a state? Or a country? Because we all know that Congress does exactly the same thing with the federal tax code. Special exemptions are created by Senators and Representatives for businesses which fit suspiciously complicated descriptions which- surprise surprise- result in a company in their state or district enjoying some tax break.
When are citizens, at taxpayers and voters, going to catch on to this bi-partisan scam which saps national economic activity while fostering tens of millions of dollars in economically unproductive lobbying for tax relief?
The net result is to transform what could be simpler, lower-rate tax systems for state and federal governments alike into complicated traps, partial escapes from which are granted by elected politicians in return for various favors- campaign donations, jobs for friends, or public relations events showcasing how the official 'saved' jobs by giving a company a special tax break.
If the tax break was a good economic move, why was the tax rate raised in the first place?
By the way, since it's topical in a political sense this week, Rick Perry's Texas has created more jobs in the past decade than any other state.
It has no state income tax- and, thus, no tax rates from which companies need to spend money to escape. And less political corruption.
Tuesday, June 14, 2011
Bob Lutz- Savior of the Car Making World!
To read Bob Lutz' version of Detroit's decline, he personally knew better than everyone else at Chrysler, Ford and GM how to run a car company.
So how is it two went into bankruptcy and he's not running the third which is doing better?
Lutz recently had his book published, so he's on the talk show tour as the Wall Street Journal released two excerpts of the book in recent editions.
Let's just say I'm completely underwhelmed with Lutz' tale. Where to start?
Well, my first reaction, after only about half of the first Journal excerpt, was that I believe objective auto sector journalist, Pulitzer Prize winner and former Journal executive and one-time squash partner Paul Ingrassia did this all better and earlier. You can still see Paul periodically on CNBC and read his pieces in the Journal. I think he was easily two decades ahead of Lutz in recognizing the same defects at the Big Three.
My second reaction is to distrust anyone who was a senior executive with real power at failed companies who claims he knew better, but it was the culture and everyone around him who were the problems.
Lutz clearly has no shortage of ego. He constantly describes himself as a 'car guy' who knew better than everyone else at Chrysler and GM. He portrays himself as patiently teaching design teams how to do their jobs. Ruminating on whether he was really able to impart enough of his personal values about cars to the teams. Did any of it take? Was it really just Bob doing all the work after all?
Frankly, most of what Lutz revealed was, as I noted above, either already disclosed by Ingrassia years ago, or are things which most business observers with a brain had already figured out.
For example, back in the 1970s, my late father, a senior engineer and marketing executive at an American mining equipment company, remarked on how badly designed and made the expensive Chrysler New Yorker was. How you could run your finger along the hood and cut it on the raw, unfinished edge of the sheet metal.
As I'm writing this, Lutz is hamming it up on CNBC, enjoying the adulation and on-air time as he goes on and on about no-longer shocking practices at the failed US auto makers. His remarks about debates at GM regarding incentives and margins is, again, old news.
For a retired senior executive at not one, but two failed companies and a nearly-failed third one, Lutz seems to feel compelled to tell 'his' story, regardless of the fact that it's no longer newsworthy.
From what I read in the Journal pieces, it's not enough of a personal career story to be unique in that way. All Lutz' comments on air and published passages attempt to paint himself as the one enlightened guy in a car company full of 'bean counters.'
In one passage in the first Journal excerpt, Lutz dated his epiphany on some issue to fairly late in his career, which leads one to conclude that much of what Lutz claims as insight was actually, well, hindsight.
His story just doesn't ring true. Either he was an early seer who failed to lead and manage, or came late to these realizations, and, therefore, like most of those three companies' managements, was naive and dull-witted during their declines.
Which was Bob Lutz' true path? We'll probably never know. But we know which path it wasn't- enlightened and talented manager rises through embracing the truth and leads company to success.
Given that, I can't imagine spending any money to read Lutz' self-inflating stories of his days at Chrysler, GM and Ford, or his views about them now.
So how is it two went into bankruptcy and he's not running the third which is doing better?
Lutz recently had his book published, so he's on the talk show tour as the Wall Street Journal released two excerpts of the book in recent editions.
Let's just say I'm completely underwhelmed with Lutz' tale. Where to start?
Well, my first reaction, after only about half of the first Journal excerpt, was that I believe objective auto sector journalist, Pulitzer Prize winner and former Journal executive and one-time squash partner Paul Ingrassia did this all better and earlier. You can still see Paul periodically on CNBC and read his pieces in the Journal. I think he was easily two decades ahead of Lutz in recognizing the same defects at the Big Three.
My second reaction is to distrust anyone who was a senior executive with real power at failed companies who claims he knew better, but it was the culture and everyone around him who were the problems.
Lutz clearly has no shortage of ego. He constantly describes himself as a 'car guy' who knew better than everyone else at Chrysler and GM. He portrays himself as patiently teaching design teams how to do their jobs. Ruminating on whether he was really able to impart enough of his personal values about cars to the teams. Did any of it take? Was it really just Bob doing all the work after all?
Frankly, most of what Lutz revealed was, as I noted above, either already disclosed by Ingrassia years ago, or are things which most business observers with a brain had already figured out.
For example, back in the 1970s, my late father, a senior engineer and marketing executive at an American mining equipment company, remarked on how badly designed and made the expensive Chrysler New Yorker was. How you could run your finger along the hood and cut it on the raw, unfinished edge of the sheet metal.
As I'm writing this, Lutz is hamming it up on CNBC, enjoying the adulation and on-air time as he goes on and on about no-longer shocking practices at the failed US auto makers. His remarks about debates at GM regarding incentives and margins is, again, old news.
For a retired senior executive at not one, but two failed companies and a nearly-failed third one, Lutz seems to feel compelled to tell 'his' story, regardless of the fact that it's no longer newsworthy.
From what I read in the Journal pieces, it's not enough of a personal career story to be unique in that way. All Lutz' comments on air and published passages attempt to paint himself as the one enlightened guy in a car company full of 'bean counters.'
In one passage in the first Journal excerpt, Lutz dated his epiphany on some issue to fairly late in his career, which leads one to conclude that much of what Lutz claims as insight was actually, well, hindsight.
His story just doesn't ring true. Either he was an early seer who failed to lead and manage, or came late to these realizations, and, therefore, like most of those three companies' managements, was naive and dull-witted during their declines.
Which was Bob Lutz' true path? We'll probably never know. But we know which path it wasn't- enlightened and talented manager rises through embracing the truth and leads company to success.
Given that, I can't imagine spending any money to read Lutz' self-inflating stories of his days at Chrysler, GM and Ford, or his views about them now.
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