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HP surprised the market with its CEO's announcement yesterday that it is planning to spin its PC operation off from the rest of the firm.
This morning I listened to one pundit attribute this to CEO Leo Apotheker's software background, i.e., he isn't a hardware guy, so, *poof* goes the hardware unit.
I doubt it was really that simple.
Take a look at the nearby five-year price chart for HP and the S&P500 Index. Mark Hurd, the prior CEO, left under an ethical cloud at the end of summer last year. Prior to that, he'd led the firm as it decisively outperformed the index in the four years to that point. Since then, it's been largely downhill, with a few positive reversals.
For the entire period, however, HP shareholders essentially took more risk than the index for no different performance.
One of today's Wall Street Journal pieces about the HP announcement observed that the then-defining deal Carly Fiorina completed- the merger with Compaq- was now being reversed. That's true enough. And to an extent is a commentary on HP from a longer perspective.
To me, it's no accident that HP's plan to separate from its PC unit comes within a week of this post from nearly a month ago, in which I wrote,
"Despite Intel's attempts to rebut the analysts' 'death of the laptop' theme this week, I believe the latter are correct. Schumpeterian dynamics are hitting laptops with a vengeance.
Just as lighter, cheaper and better laptops eventually made consumer desktop computers obsolete, so, too, are the many X-pads, particularly the iPad, rapidly cannibalizing laptop sales growth.
Yet another reason not to sell Apple short, literally, just yet. But I wouldn't want to be caught holding equity in HP or Dell."
Dell's quarterly results disappointed investors earlier this week. Intel has been attempting to reassure one and all that its chips are too still vital, even as it has missed most of the smartphone and tablet markets.
Now HP essentially throws in the towel on a unit that it bought, rather than grew organically, while also announcing the end of its tablet and smartphone ventures.
Would Mark Hurd have been capable of leading/managing HP to a different end? Would he have materially affected the firm's outlook in the past twelve months, so that its share price wouldn't have cratered? I doubt it. Hurd couldn't personally change market demand for smartphones and tablets which affected PCs. Perhaps he'd have developed a stronger tablet entry. Perhaps not.
I see little more here than conventional Schumpeterian dynamics finally catching up to HP. It bought into business services and servers. It bought a computer business. What still works is the printer business which it has grown for decades. Printing isn't likely to entirely disappear, while PCs are fast becoming a niche commodity market. And every company depending upon PCs is fighting a losing trend.
Yesterday's 4.5% decline in the S&P, bringing the month's return down below -12%, brought forth more of the recent and continuing parade of familiar faces of market and economic punditry on the two main free cable financial news channels- Bloomberg & CNBC.
My general impressions were that CNBC seems to be using more guests who are either older and bordering on washed up, or younger and uncredentialed. In no particular order, here's what I recall from the networks' attempts to virtually hold investors' hands during yesterday's market rout.
Over on CNBC, I believe, mid-morning, economist Michelle Meyer, formerly of Lehman, then Barclays, now Merrill Lynch/BofA, solemnly assured viewers that deflation, rather than inflation was ahead for the US economy, on account of falling demand.
I've written some pieces concerning Meyer in the past. Suffice to say, I'm never impressed. Yesterday's performance indicated that she either isn't aware, doesn't understand, or simply ignores the entire Von Mises/Von Hayek/Friedman school which defines inflation as, to quote the last, "always and everywhere a monetary phenomenon." Of the two Keynesian variants of 'inflation,' demand-pull is but one, the other major source being 'cost-push,' widely seen in the 1970s. Meyer's comments were so superficial as to, for me, further discredit her as any sort of trustworthy economist.
Then, again, when have you ever seen a large bank economist of really notable quality? Back when I was with Chase Manhattan, our Corporate Planning & Development group shared the 28th floor of 1 Chase Plaza with the economics department. Dick Zecher was the chief economist when I joined the bank, but he left to run asset manager Chase Investors, being replaced by someone whose name I can't even recall. I think Mickey Levy may have been BofA's chief economist back then. I don't recall who held the post at Citigroup. But every major bank seems to feel it's necessary to spend several million dollars annually to employ a bunch of nameless, also-ran economists. To what end, really?
At noon, David Faber on CNBC had a senior equity manager, probably the CIO, from Gary Kaminsky's old firm, Neuberger Berman, along with Lee Cooperman. It was a study in 1980s equity management- two aged subjective stock-pickers kvetching about how cheap the market has become and how bright the economic prospects really are.
The guy from Neuberger at least had a tight, cogent, if risky story explaining why they were very long in oil. Cooperman, on the other hand, actually began his spiel by confessing that he's been 'wrong so far this year,' but that, hopefully, 'the year isn't over yet.'
Then he went through a sheaf of papers so thick Faber's eyes bulged, reciting all manner of comparative facts to justify his belief that the US economy was about to go on a tear- inflation down, savings up, debt down, interest coverage up, plenty of excess capacity, a weak dollar to sustain exports.
Too bad Lee missed unemployment levels and the recent anemic GDP growth, both in the US and globally, along with- how timely- that day's forecasts from major banks for lower global growth.
Every time I see Cooperman, his famous comb-over looks worse and worse. I'm waiting for the day he just spray paints hair on that head.
Sometime during the day, one of the networks- I'm guessing CNBC- had Donald Trump on a phone interview. Now, Trump admitted a few weeks ago to his first foray into equities. I recall that Intel and perhaps BofA were among his purchases. Yesterday, he was stumping for the major commercial banks, declaring that BofA was really cheap, so he bought a lot of it.
Thankfully, whichever network on which this occurred had an actual equity strategist on later who politely said that Trump, and anyone who listened to him, was making a very serious error. That the large banks were cheap for a reason- especially BofA.
Then there were the battles of competing equity strategists throughout the day on both networks. Barton Biggs was on, I believe, Bloomberg, calling this a great buying opportunity and demanding QE3 and yet another round of federal fiscal stimulus to jump-start the US economy.
I recall thinking, as I listened to this hopeful drivel, how much of an inside game punditry is on these networks. Biggs was essentially calling for ruinous national government policies which would quickly line his equity management pockets. Nothing more, nothing less.
In general, I noted a lack of:
a) credible, marquee name economists weighing in on current and probably future conditions in the US and globally.
b) equity managers with a good performance record this year and this month.
What we see, instead, is too many unproven youngsters who can't recall 1987 or 1998, and too many equity management has-beens. These two networks' guests lists are beginning to resemble the fruits of all those competing late night talk shows whose schedulers dial so many potential guests in hopes of filling their sets with some warm bodies who will prop up ad rates.
There has, of course, been much discussion of Google's surprise bid to buy Motorola's hand set company with its associated, valuable patent portfolio.
As is often the case, the Wall Street Journal's Holman Jenkins, Jr., in his weekly column yesterday, wrote what is perhaps the best overview of the situation. He characterizes Google's move as wanting to follow Apple into the territory of providing ubiquitous device access of content on a company's software platforms, from PC to cell phone to tablet.
It occurred to me that my equity portfolio selections have routinely included Apple for years, but not Google. Not ever, to my knowledge. Or, perhaps, only briefly.
Initially, the latter was too pricey. Now, it may be too sluggish, both from a revenue and total return standpoint. Consider the nearby price chart of Apple, Google and the S&P500 Index for the past five years.
Coming out of the 2008 financial and market crisis, the two companies' equity price paths began to diverge significantly by the end of 2009. The gap between Apple and Google is, to me, stunningly larger than that between Google and the index. Not surprising, mind you, but stunning, none the less.
Google has been celebrated for its record-breaking growth, and, certainly, the sources of its revenues was a departure from past technology startups. Prospering from selling participation in searches for what became the dominant online search engine was probably outside most strategists' box, as it were.
Now we see it apparently return to earth, actually buying a hardware manufacturer.
Will the senior management of Google be capable of not screwing up Motorola's business? Will they capably handle an actual physical product business? Will said business alter the market performance of Google?
All interesting and important questions.
But I wonder what the Motorola bid says about Google's business strategy, objectives, etc. Do the founders simply view the company as able to do whatever they wish? Do they have financial or strategic objectives?
The firm doesn't seem to have specific product/markets it chooses to enter first, so much as businesses it enters to prevent others, like Facebook or Apple, from expanding their own businesses in ways which could negatively affect Google's.
Thus, so much of what we see of Google's recent moves seem to be defensive. I suspect they just don't have any tangible, solid objectives, so much as a desire to protect their existing businesses from falling victim to other companies' strategies.
Perhaps they've watched the decline of Yahoo and Microsoft, and wish mostly little more than not to let the fates of those once high-fliers become that of Google, as well.
Which probably means, as wireless connectivity and ubiquity is driving so much content access to every platform, that Google's actions may become more frenzied and less integrated as uncoordinated technological advances push it into more frequent defensive moves.
Lew Lerhman wrote a timely piece in the Wall Street Journal recently reminding readers of who took the key step that led to today's weak dollar and incredibly bloated federal debt situation- Richard Nixon. On Sunday, August 15th, 1971, forty years earlier to the day of Lehrman's piece, Nixon appeared on television to announce that the US was terminating the dollar's convertibility to gold, making it a complete fiat currency.
While I do recall the event from my youth, the details which Lehrman provided were fascinating. With today's events providing more perspective, I can't help but see a lot of Obama in Nixon and his actions. A lawyer with no significant adult work experience outside of politics. An ideologue, of sorts, without understanding the ramifications of many of his ideas.
Recall, if you will or, if you are too young, learn that it was a moderate Republican president to be the first in the nation's history to impose wage and price controls without the nation being in a state of declared war.
At the time, inflation was tame compared with the later Carter era.
As Lehrman tells it, again, like Obama, Nixon prized big, sweeping pronouncements and gestures. Having been convinced of going off the gold standard by his newly-appointed Treasury Secretary, Texan John Connally, Nixon hastily gathered some advisors at Camp David that weekend to arrange the details and plan his speech.
According to Lehrman's article, only Volcker is on record as having regretted being part of the fateful decision.
Perhaps, given Europe's eventual economic palsy due to so many of it's nations becoming high-cost, high-tax and low-economic growth welfare states, the US would not have been in so much pain for very long, had we curbed spending to defend the dollar. We'd have tackled ruinous spending, the disastrous new Medicare program, and continuing deficits long before they reached their current unsustainable levels.
In retrospect, Nixon's own contribution to US profligacy was uniquely damaging because it appeared to have little immediate cost or consequence. Sure, inflation rose, but compared to the later Carter era, it was mild. The real damage was the loss of an external control- gold redemptions of dollars by foreign creditors- on US government debt and spending.
Lehrman's advocated for a return to the gold standard for years, so it was no surprise to see his name as the author of the article. With the passage of time, it seems increasingly likely that Nixon's action was the key enabling factor in the rapid decline in value of the dollar (now worth 18 cents compared to forty years ago).
I read with great interest a recent Wall Street Journal article which noted that Microsoft's Windows' market share of devices, when tablets are included with PCs, has fallen to 82%- the lowest in its history. And this year's expected sales and profits from Windows are lower than last year's.
Now there's even concern about how many third-party software writers will pay much attention to Windows 8, with so many apps to write for Apple and Android devices.
Of course, had Microsoft followed my advice and broken up its empire into operating systems, applications software, gaming and online, as I suggested years ago, this may not have occurred.
Freed from each other, operating systems and applications businesses could have each developed software not intended for use with the other. A Windows division could have expanded into developing operating systems for other devices, perhaps as an outsourced vendor. The Office group could have been freed to develop apps for any platform in which it saw profit.
Instead, now even David Einhorn is echoing my years-old call for Ballmer's replacement.
This is how companies become fodder via Schumpeterian dynamics. The growth of Microsoft's main platform, the PC, has finally given way to other devices- smart phones and tablets. And so its fortunes are probably on a monotonic downward trend after treading water for the past decade.
This morning was one of those on CNBC's Squawkbox program when its overall liberal bias was blazingly explicit.
Sure, liberal co-anchor Becky Quick was replaced this morning by the network's most conservative journalis and on-air personality, Michelle Caruso-Cabrera.
But the guest host for the morning was a guy named Harry Wilson, billed as a member of the administration's Treasury team which bailed out GM and Chrysler. During the last hour, New York Times columnist and, thus, card-carrying liberal journalist Tom Friedman served up his brand of liberal ideology, though he attempted to cloak it in the guise of being for the 'little guy.'
First Harry Wilson. This guy was some piece of work. When quizzed by Cabrera, Wilson gave an unvarnished spiel which was, I am guessing, a very close approximation of the case made inside Geithner's Treasury for raping bondholders with legitimate senior claims and shoveling money into the two automakers and/or, more correctly, their employees' union's pension funds.
The single statement which gave Wilson away as narrowminded or uninformed was, after his longwinded claim that to fail to save GM in the manner the administration did was to have brought about Ford's liquidation, his reponse to Cabrera's contradicting reply. She contended that, should things have become that bad, vulture financiers would have gladly stepped in to rescue Ford as the lone remaining Detroit-based automaker.
Wilson countered, to paraphrase,
'What, in the world's largest car market, there'd only be room for one automaker?'
Just what does Wilson think BMW, Mercedez-Benz and a host of Japanese car makers with plants south of the Mason-Dixon line are? Chopped liver?
Well, what they are, are non-unionized car making facilities.
By the way, who is to say that in such a low-margin business, the US even wants substantial assets deployed for what are, in real market terms, fairly low-paying jobs? The equity markets have signaled that GM and Chrysler weren't desirable investments with those characteristics.
Wilson belied his attempt at presenting himself as objective by clearly dismissing market/investor opinion and attempting to justify the federal government's financial override of said dollar votes.
Then the network's commercial promos billed Tom Friedman as 'the one man who can speak' on various wide-ranging business, economic and political topics. Which Friedman felt completely comfortable doing with clear confidence that he is right, and you or anyone else who disagrees with him is wrong.
First Friedman let all and sundry know that we must- must- have higher taxes. Spending cuts just aren't going to do it. No empirical evidence- just big Tom's instincts.
Then he solemnly invited America to form a vibrant third party, because Congress isn't working. That's right- the Tea Party's re-invigoration of the GOP doesn't count for s**t. Not in Tom's view.
No, you see, because it wants spending cuts, not higher taxes. And since Tom doesn't allow for that, another force must appear to rescue America.
Then Tom weighed in against Joe Kernan's charge that he is, well, what he is- a big-spending liberal apologist who works for the New York Times. Friedman declared that he was for small business and becoming a an 'innovation nation.'
Trouble is, as Rick Santelli noted a few minutes later, over-regulation along the lines of this morning's lead staff editorial in the Wall Street Journal make that unlikely in today's environment.
That's just a small example of how CNBC, by its selection of overtly-liberal guests and hosts, skews its presentation of economics, business an finance to the liberal end of the spectrum.
On Friday I wrote this post concerning banking analyst/fund manager's latest Tom Brown's latest comments praising BofA. Brown has been doing this ever since he put his fund's investors into BofA equity back in the spring of this year. I've written several pieces describing his various appearances on Bloomberg television shilling for his positions.
Yesterday came fresh news regarding Bofa's growth prospects. It announced the sale of its Canadian credit card portfolio, part of the expensive business it acquired from former credit-card segment leader MBNA, to Toronto Dominion Bank.
But that's not all. In the same Wall Street Journal article on this sale, BofA disclosed plans to sell several of its European card portfolios, as well.
Now, I distinctly recall Tom Brown talking last week about how much BofA was going to be growing earnings in the future.
But when a bank sells credit card portfolios, it's a signal that the bank is in serious trouble. Never mind the excuse BofA gave- to focus on other management issues.
Credit card lending is a core bank business. It's a bread-and-butter consumer business. A key component of relationships with consumers.
For BofA to be auctioning off its overseas credit card portfolios is to basically concede the final loss of international business which began with Sam Armacost's initial troubles back in the 1980s. Back then, BofA began dismantling its overseas network, then one of only three among American money center banks.
Since growth in the US, a developed economy, is probably going to be slower than overseas growth, BofA is essentially withdrawing from the sort of growth opportunities which Tom Brown promised would be coming in just a few years.
It's understandable, with similar examples among large US banks now over 20 years old, that many pundits and analysts aren't comprehending the gravity of this latest BofA move. But I vividly recall credit card portfolio sales as a harbinger of the decline of commercial banks. The resignation of a bank's management to balance sheet problems by, in effect, selling the silver to meet the mortgage payment.
That's what BofA is now doing.
On last Wednesday, I wrote this post discussing equity markets performances at the half-way point of the week. Since then, the S&P finished the week at a net loss of just -1.7%. But, of course, this grossly understates what actually transpired.
We saw a week of daily S&P returns of -6.7%, -4.4%, +4.6% and +4.7%. My own volatility measures jumped almost two-fold by the end of the week.
Yet at least one Bloomberg co-anchor attempted to assure viewers that it wasn't such a bad week after all, with such a modest net decline in the major equity averages.
Give me a break. The average retail investor probably bailed out somewhere near a bottom point, no doubt losing about as much as one could. This sort of behavior have been well-documented by Charles Schwab's previously-discussed research.
But I had to laugh at the Wall Street Journal's Money & Investing Section's lead article in this morning's edition. Clinging to hoary old notions of the importance of P/E ratios in a predictive sense, the article focused on recent declines in the 'P,' with forecasted declines in the 'E,' as well. Then there was the requisite nod to trailing versus forecasted earnings, etc.
Too bad none of this actually has anything to do with total returns. My proprietary research has convinced me that dwelling on P/Es is a mistake, since it's a product of primary drivers of performance, not a driver itself.
Further, it's a static measure attempting to capture time and trend. But it can't. Instead, various pundits and analysts ascribe all manner of benefits or drawbacks to using various massaged measures of the numerator or denominator in order to try to give it some rationale and technical luster.
I don't buy any of it.
Rather, I look at my market turbulence signal, and find that it is quite far from registering a market which one should leave, or short. My equity selections continue to nicely outperform the S&P.
For a lot of reasons, developed economies may be entering a period in which revenue growth for top performing firms slows. But, at least for now and the near future, it doesn't appear that it's time to panic if one holds the right equities, or even, for that matter, the S&P500.
I've written a few posts involving former banking sector analyst-cum-banking sector fund manager Tom Brown. Most notably here, here, here and here. He appears on Bloomberg with distressing frequency these days. Just like Bob Albertson- both long in the tooth banking analysts, though Brown is really now a banking sector fund manager. As such, as I noted in one of those posts, when he appears in his analyst role, he's effectively shilling for his own fund.
In that first linked post, I noted that Brown said, in an early June interview, that he'd recently gone long BofA for his fund.
How's that working out, Tom?
Let's see, the market's been whipsawed, banks have been bloodied. What line do you think Tom Brown is peddling this week?
You see, as you'd expect, Brown was on Bloomberg this week exhorting investors to buy more BofA, despite it's getting hammered far worse than the other three remaining large US commercial banks, as indicated in the nearby chart.
It was pretty sickening to hear and watch Brown dance his way to a conclusion that investors would be smart to buy BofA after the pounding it's recently taken. But, without more suckers buying it, how's Tom ever going to get his own position, now down something like 40%, back into the black? Wouldn't you like to be one of Tom's fund customers, opening your quarterly statement in a few weeks, after Brown bet so much on his favorite bank?
As I suspected, the price chart indicates that the smartest move would have been to just stay with the S&P500 and avoid the bank stocks recently. And probably for the foreseeable future, as well.
Incredibly, Brown's excuse....err.....reason for buying BofA now is that it's reward/risk is far higher than it was recently, because so much risk is gone now that it's price has sunk so low. He hurriedly mentioned something about 'sure revenues will be lower, but, gee, that risk is so low.....'
To continue the old Wall Street maxim,
'If you liked it at X, you'll love it at less than X, and marry it even less'.......I think Tom Brown's having children with BofA as it's down 40%.
You can't make this stuff up, can you?
I haven't written many posts involving Kodak. The first, in 2007, contended,
"The truth is, companies, like athletes, slow with age, then die. Aging may be prolonged. Death may come by acquisition, dissolution, or bankruptcy. But it inevitably comes. In the meantime, watching some companies is like going to a baseball game and seeing the 'oldtimers' play between halves of a doubleheader. I guess somebody has to be CEO of Kodak, IBM and Xerox, but does anyone really care anymore? Personally, I can no longer name those people off the top of my head, as I can with Google."
IBM seems to have averted death, although it's hardly a 'tech bellwether' anymore. But Kodak and Xerox are now just, well, also-rans in every sense.
The two posts I've written solely on Kodak, here and here, from late 2009, opined that the firm should just dissolve itself. In that second, most recent piece, I wrote,
"The article, and this morning's analysis, note that KKR has, predictably, feathered its nest on both the upside and downside. They get a hard 10% income stream and the best protection available on the balance sheet. If Kodak miraculously improves its condition, KKR then gets to convert warrants to own up to 20% of the company.
You have to ask, as I did this morning, reading that second piece, out of whose hide do these generous terms come?
Why, the Kodak shareholders', of course. And I didn't notice any changes in management compensation. You know, like tying bonuses or large parts of salaries to Kodak's total return."
Yesterday's Wall Street Journal featured the firm's failing fortunes on its front page. With the recent equity market gyrations, Kodak's market value has now fallen below what many observers believe is the value of its patent portfolio. Amazingly, that market value was now less than $500MM.
The nearby price chart for Kodak and the S&P500 Index over the past two years, just about when the KKR financing deal was struck, paint a catastrophic picture.
Despite CEO Perez' comments about remaking Kodak into a printing giant, the firm has lost half its value while the S&P posted modest gains. Meanwhile, KKR is sucking out those nice 10% interest payments.
I was shocked to read in the Journal piece that one of my most admired businesspeople, Rick Braddock, is an outside director at Kodak. At least he qualified his commitment to the firm's "turnaround" by adding,
"I am not going to rule anything out."
If that chart is Perez' idea of a turnaround, I'd hate to see his notion of failure.
According to the charts accompanying the Journal's article, sales at the firm have fallen from slightly over $10B in 2006 to an expected less than $3B this year. Kodak lost money in each of the past three years and is forecast to do so again this year.
Can there really be that much juice in a hoped-for dominance of printers to justify these losses? The PBGC will have to absorb what Kodak can't fund, Chapter 11 or not, so that's moot. The question has to be whether the present value of the still-to-turn-a-profit printer business really can exceed that of the firm's patent portfolio, assuming, of course, Kodak will have enough cash to make it that far.
As I did in 2009, after reading of Perez' sellout of shareholders to KKR, I continue to believe that Kodak's senior management and board are acting at cross purposes to their shareholders' interests.
If you were watching CNBC this morning just after 9AM, you saw an amazing interchange between Melissa Lee, David Faber, both veteran television anchors, and wannabe-cable anchor Jim Cramer.
I have tremendous respect for Lee, as well as her free-market leanings. I'm okay with Faber- his occasionally-revealed political sentiments are too liberal for me, but as a reporter and anchor, he's good.
So to the story......
Lee reported the news that Reuters had reported that an unidentified Asian bank had withdrawn its credit lines to/with SocGen, the large, key French bank. She stressed that the story was public on Reuters, and apparently roiling European markets, but the actual credit line act was both unverified and anonymous.
At that point, Cramer jumped in and, to paraphrase, said, with this worried, gravitas look into the camera,
'David, as a financial journalist, as you and I were in 2008, commenting on the financial crisis, we want to be careful that our reporting doesn't further provoke a crisis, don't we? We don't want to be the acetylene torch to a situation....'
First, one observes that Cramer insinuated himself into the front rank of financial journalists. Hardly something I think the broader market would embrace. I don't think Faber was particularly happy about that.
Further, Faber was clearly spooked when the camera cut to him, and bluntly retorted, again, to paraphrase,
'I'm not going to go into a discussion on reporting and journalistic ethics right now....'
He then observed that reporters always have to judge the wisdom of reporting facts which might cause further reactions.
At this point, the camera cut to an interesting shot- side-by-side separate videos of Lee and Cramer, although they were sitting adjacent to each other. It was sort of odd to see one's arm slip into the other's screen.
But it's clear the producers must have directed this shot and then quickly coached Lee to take control, because she looked right into the camera, not at Cramer, and said, again, to paraphrase,
'Our policy is to report news stories which are public and affecting markets....and the Reuters story about SocGen meets those criteria....so it's clearly something to report....'
Lee's verbiage sounded like it was taken nearly verbatim from either come CNBC policy memo, or had been crafted on the spot and fed into Lee's ear.
Lee's face, while delivering this, was not happy. Her tone was just a hair shy of publicly lecturing Cramer to keep his mouth shut about what they were covering on the air.
It was as if Cramer had broken the 'fourth wall' of the video medium, acknowledging the effects the anchors' delivery of bona fide stories could trigger in viewers. But, more than that, Cramer was not-unsubtly suggesting that he, Cramer, had to be careful because of who he is.
Personally, most people I know think he's a hot-headed buffoon. Could it be that Cramer's sudden concern with the consequences of his remarks constitutes his attempt to atone for the years when, as he has publicly acknowledged, he shamelessly manipulated CNBC floor reporter Bob Pisani to report as stories rumors Cramer originated to get stocks to run toward his positions?
Hopefully this morning's little incident is a shot across CNBC's bow to reconsider grabbing Cramer to fill in for their depleted on-air ranks since Erin Burnett's departure and Mark Haines' death.
Just a little over a month ago, on July 7th, the Wall Street Journal's Money & Investing section had, as its lead headline, "Highflier Tells Clients to Wait."
It seems that Alphonse Fletcher, said to, have "made a splash on Wall Street in the 1990s, reporting 300%-a-year returns at his firm," and "told of going 11 years without a single losing month," may have bamboozled three Louisiana public union pension boards.
Fletcher made them an offer, so to speak, which they could not refuse- "an investment assured of returning 12% a year."
When asked by the three pension boards for the return of their money recently, Fletcher "sent them promissory notes "in satisfaction of this redemption request" that pledged repayment within two years."
And you wonder why we have underfunded public pension funds? Who even knows who sits on the investment committees of these three Louisiana state public union pension funds? Somehow, I am guessing not people with requisite experience relevant to and adequate for the task.
Apparently it's not even clear just how much money Fletcher's fund complex actually runs. The Journal alleges that it is probably close to $200MM, although Fletcher, by double-counting amounts that one fund invests with another within its complex, gave a figure of some $500MM.
The story reads like Hillary Clinton's legendary gains from funds managed by "Red" Bone. In that case, Red essentially decided, after the fact, where Hillary's money had been that period, and credited her account thus.
Between the guaranteed minimum 12% return and the many cross-feeds of funds from one element of Fletcher's complex into others, one gets the sense that the same scheme was afoot in this recent case.
In the Journal's July 16-17 weekend edition, it updated the Fletcher saga. By then, all three Louisiana unions' pension funds had requested the return of their total investments of $143MM. This sum would seem to be the bulk of Fletcher's investments, if the Journal's earlier-stated, $200MM figure is close to correct.
The articles made for interesting and, frankly, fun reading. As I read each subsequent paragraph, I grew more curious as to who could possibly be so stupid as to invest so much public union pension money with a manager who promised- promised- a minimum return of 12% per annum. That's more than the S&P averaged before the recent flat decade.
Mind you, we're not talking about Steve Cohen or Jim Simons. Fletcher was described in the earlier article as a once-promising equities trader at Kidder Peabody who sued over a bonus dispute and for racial prejudice. He was involved in another racially-based lawsuit with the prominent New York city co-op, the Dakota.
Honestly, it reads like something out of a Tom Wolfe novel (Bonfire of the Vanities) except, sadly, it's all true.
I believe it was Forrest Gump, who hailed from the same general region, who said,
"Stupid is as stupid does."
Now, ask yourself, how will more federal financial regulation stop the idiots in Louisiana in charge of public union pension money from making more stupid mistakes like this in the future?
I suppose I could have written a post yesterday to bemoan Monday's sharp selloff in the major equity indices. But then I'd have missed being able to add to this post yesterday's partial recovery, and today's resumption of Monday's panicked selloff.
Where to start?
First, the most recent S&P closing high was 1345.02 on Friday, July 22. It remained above 1290 for the next trading week ended July 29, then headed downward with gathering speed last week. After the so-called debt debacle. But before the S&P downgrade.
But right after the weekend after that Friday's government's release of the recent, appalling GDP growth numbers on the 29th.
Then, throughout last week, Europe's sovereign debt crisis continued to build, finally encompassing Italy, Spain and France by the middle of this week.
Then, yesterday, you had the Fed's uncharacteristic and deeply troubling announcement that henceforth, for another two years, rates will be held at current, effectively 0% levels. First equities plunged at the admission by Bernanke of a probable continuation of the recession, followed by bottom-fishing and short-term joy at more cheap market funding, courtesy of Helicopter Ben.
Then, today, sober realizations set in that, from a global perspective, everything basically sucks, except for risky timing plays.
Ben has essentially trumpeted a cheap dollar policy, which is bound to fuel price rises, as well as technically-defined inflation. Meanwhile, the US economy continues, will continue to struggle.
By waiting until now, Wednesday afternoon, to write this, I've also enjoyed hearing a lot of stupid remarks from so-called pundits.
For example, former Goldman bank analyst, now, many years later, with Sandler O'Neill, Bob Albertson, on Bloomberg Midday with Tom Keene.
Frankly, Keene is typically smarter in his choice of guests. Albertson's really gone off his game lately, along with Tom Brown. This afternoon, Albertson evidently believed he is now an accredited macroeconomist, as he solemnly held forth on the need for an infrastructure bank to re-employ millions of idled Americans.
Well, Bob, I'll let you in on a little secret. Congress has been funding road building for decades! It never ends. And, by the way, Bob, unless you want us to build infrastructure the way Hitler built the Autobahn- with former white collar men using picks and shovels- modern infrastructure construction actually requires a fair amount of capital equipment and skilled workers to operate same.
Where do you think all that new capacity is hiding? Didn't we just have it all busy on the Great One's "shovel ready"stimulus projects?
At least Albertson came to his senses long enough to rail against more borrowing and taxing an increasingly unemployed private sector.
Meanwhile, yesterday morning, presidential economics advisor Gene Sperling's first concerns amidst Monday's market plunge was that the federal government has to, again, extend unemployment benefits "to help job creation." He actually said that- I'm not making it up.
Meredith Whitney, as usual a font of sensibility and good insights, shook her head while lamenting that sentiment this morning on CNBC.
A little later, on David Faber's noontime program, Ron Insana, a CNBC Contributing Idiot and former full-time empty suit on the markets, weighed in by solemnly decrying federal spending cuts just when the economy needs a boost.
Really? Ron, have you bothered to notice that about half of every dollar of that precious Keynesian federal spending you so cherish is borrowed? Then repaid from higher taxes with interest? What, precisely, is wrong with letting consumers keep their money and choose to spend or invest as they like? You know, the sort of behavior that drives genuine economic recoveries and expansions, instead of government-pumped flashes in the pan, like what we've seen for the past three years?
He also derided 'animal spirits,' declaring that there was just no way the US economy can recover by relying solely on private sector growth or savings. Nope. Gotta be federal borrowing from China to spend on unionized labor projects or transfer payments to the idle or retired..
As for my equity portfolios, they've done extremely well. While I've read of some horrendous losses among fabled fund managers like Brucke Berkowitz and Bill Miller, my portfolios fell less or about as much as the index on Monday, rebounded more yesterday, and are falling less today, maintaining a total rough 10% point premium above the S&P. From what I read, quite a few fund managers loaded up on large US financial equities in the past year or so.
I can honestly say, from my many posts on those sorts of firms, "I told you (not to do) so."
Honestly, what are managers like that thinking? Going after financials on some subjective trailing P/E basis or some other similar nonsense? Serves them right to take double-digit percentage losses this month for being so foolish.
My signals do not yet show that it's time to go short if you are a long-term equity investor. Yes, it's a rough few weeks. Yes, there's a growing sense of global economic trouble, over-leveraging, slowing growth and sovereign debt problems. Even a probably continuation of a recession that never truly ended in the US by all measures.
But that doesn't mean it's yet time to sell well-selected equities.
I had the occasion to reread Michael Lewis' 1989 classic book about investment banking and the first mortgage crisis, Liar's Poker.
A good friend had recently finished Lewis' Moneyball, the book he wrote about baseball team managements' use of key statistics to select and pay players. Somehow we got onto the subject of his first book, and I lent him my copy.
Upon his returning it to me last Thursday, I began to selectively reread it. Not being the sort of book that I reread often, I hadn't actually opened it, to my knowledge, in 22 years. Thus, many of the passages were quite surprising.
To give some perspective regarding some of what I recalled, thanks to the aid of Lewis' book, let me recount a story from my business youth. Back when I was in Corporate Planning at Chase Manhattan Bank, troubleshooting businesses as one of a few elite internal consultants working for Gerry Weiss, I would often be immersed in a project for months. After its completion, I'd tackle the mountain of BusinessWeeks, Fortunes and Forbes magazines which were routed through the group. What I found typical at that time was that headline issues and stories, read several months later, invariably had developed almost completely opposite of the then-breaking stories. Headlines, read 3-4 months later, often seemed ridiculous.
And so it is with the recent mortgage-originated financial debacle, thanks to Lewis' book.
First, it surprised me to relearn that Lew Ranieri's mortgage research department at Salomon was novel at the time. And that, given the prepayment option embedded in every mortgage, they had been shunned by investment banks for their unreliable duration characteristic.
Second, there had been just one CMO originated and sold before the guy who actually authored the mortgage-backed origination and trading business, Bob Dall, got the green light from Gutfreund & Co. to open for business.
Third, Salomon spent large sums on lobbyists to get Congress to enact federal legislation, overriding state laws, making it legal to issue bonds collateralized by mortgages. Further, Salomon persuaded Congress to allow government-backed mortgages to be so used. This was supremely important, because with FNMA insurance, buyers were assured that defaulted mortgages would be made good by the federal government.
Reading the evolution of the mortgage-backed business, the first time, through Lewis' telling, it's stunning to recall that from 1981-86, now approaching 30 years ago, the first mortgage boom was largely missed by First Boston (where current BlackRock CEO and founder Larry Fink was merely the head of its mortgage-backed business), Morgan Stanley, Kidder Peabody, Goldman Sachs, et. al. Most of the investment banks which did play a role poached Salomon traders in the latter years of the boom.
Fourth, the sums of money then paid to rising mortgage-backed trading superstars seems laughable now. None of the original trading wunderkinds broke $1MM in compensation for their first few years.
But perhaps the most amazing piece of history is to read Lewis' description of Salomon at its peak. With (don't laugh) a huge equity base of $3B, Salomon was unrivaled among investment banks for its scale, profits and influence. In one of the latter years of its mortgage trading dominance, Salomon's mortgage business had profits which were roughly equal to the rest of Wall Street's investment banks in total!
Here's the funniest part. I mentioned that to a friend on Friday, asking him to guess how much that profit was? He guessed, of course, in the tens of billions. In fact, at the time, around 1985-86, it was about $750-800M.
Since Lewis' book is really about himself, and not just the Salomon mortgage-backed business, it relates much of the story historically. By the time Lewis arrived as a trainee, Ranieri's operation had reached its obese, swaggering, arrogant apogee.
It took Lewis' recounting of the affair to remember how Warren Buffett became involved with Salomon, and the almost perfect parallel with his rescue of Goldman Sachs just a few years ago.
Ronald Perelman, with the backing of Drexel Burnham's Michael Milken, put Salomon into play in September, 1987. Lewis provides an extensive discussion of how Milken's junk bond empire would soon eclipse Salomon's focus on mere mortgage-backed bonds. How Salomon's corporate infighting and inept senior management allowed it to completely miss the junk bond market development until it was too late.
Also woven through the tale is Lewis' explanation of why Bill Simon was passed over for CEO of Salomon when the last family member, Billy Salomon, retired, in favor of Gutfreund, because Gutfreund sided with Billy on never taking the private partnership public. Then Gutfreund sold the firm to Phillips Brothers, a commodity giant, within just a few years. Bill Simon went on to found the LBO movement with a little deal involving Gibson Greeting Cards.
However, back to Buffett. Buffett lent Salmon a large sum to buy out most of the share that Perelman sought from then-holder Minorco, along the same lines as his recent Goldman Sachs loan- a high coupon rate and convertibility to equity at a rather attractive strike price.
That's how Buffett ended up temporarily running Salomon after the Treasury bid-rigging scandal a few years later.
There are many fascinating parallels from investment banking in the early 1980s with the runup to the financial crisis of 2007-08. But there are some important differences, too. Specifically, back in its day, Salomon managed to tower over its less-capable competitors for years as it dominated the first incarnation of the mortgage-banking market. Some twenty-five or so years later, the other investment banks had learned a thing or two, and were much quicker to jump on a developing bandwagon. As were commercial banks.
Thus the wholesale economic disaster that arrived when the federal government, led by Fannie Mae and Freddie Mac, whose involvement in mortgage-backed bonds had been engineered by Lew Ranieri back in the early 1980s, insured the bulk of mortgages, with ever-declining quality standards, which backed bonds sold to investors around the globe.
And, finally, one recalls, after (re)reading Lewis' book, that Goldman Sachs isn't the first and only investment (now commercial) bank which people love to hate. First, there was Salomon. And at the time, nobody could envision Salomon not dominating global investment banking for decades.
It's an instructive and fun reread, or, if you're too young to know of the book, first time read.
Heck, it's only August 9th. Still time to quickly step through Liar's Poker on the beach before Labor Day arrives.
As I listened to this past Friday's dismal job growth numbers and persistent high unemployment, coupled with the prior Friday's dismal GDP growth numbers, it occurred to me that, due to the misleading mythology allowed to grow up around FDR's presidency, the US now seems destined to borrow and spend its way to ruin thanks to empirically discredited Keynesian economic policies.
Let's go back to basic macroeconomics. Before Keynes.
Economies move in cycles. If there were no presumption on the part of governments to attempt to repeal the laws of economic cycles, then we'd see what was prevalent in pre-1930s America and elsewhere. Expansions eventually slow as Samuelson's accelerator-multiplier (see also here) theory kicks in,
"Stunningly simple, it seems to square, for me, at least, with human behavior. As many great economic insights do. Such as fellow Nobel Laureate Milton Friedman's concept of income as a steady, long-term expected value.
Samuelson noted that when growth slows from a higher rate, to a lower one, the mere slackening of growth is transmitted back through what we now would call the supply chain, as a series of demand reductions.
Instead of 10% more materials each year to make my products, this year, I need only 5% more.
My supplier will see a decrease in expected sales. Growth will be half of what it was, and, thus, sales fall below expectations.
While real output is still higher, the gradual cutback in production from expectations results in a contraction, as workers work to produce less. The cycle continues, and the multiplier effect, which, in forward gear, causes economic expansion, is responsible for its contraction when run in reverse.
Seen in this light, recessions which are attributable to simple changes in economic outlook can't really be affected very effectively by one-time fiscal monetary transfers."
Contraction follows expansion, then recession, followed by recovery and, subsequently, expansion.
Before America had the world's reserve currency, was the free world's economic hegemonist, and could basically print or borrow dollars at will, that's how most economies behaved.
Yes, you will now hear Keynesians decry over-savings, or the paradox of thrift, as ex-PIMCO managing director Paul McCulley did in a Bloomberg television interview on Friday afternoon. He now looks like some wild-haired ape-man, with an even more virulent streak of Keynesianism, now that he has no responsibility to PIMCO to appear the least bit economically sane.
But those arguments only appeared as Keynes wrote the General Theory and mistakenly believed that pump-priming, deficit spending, call it what you will, could actually and benevolently affect long term economic conditions positively.
We know now, decades later, that Keynes' theory was simply a sop to human desire for immediate gratification, while ignoring the very real longer-term consequences of debt, higher taxes, and reduced personal economic freedoms.
The linked post from last week, discussing the true nature of WWII as a time of immense savings and lowered consumption, setting the stage of the US economy's rapid growth in the 1950s, puts the lie to McCulley's contention regarding the so-called paradox of thrift.
The reality is that savings are collected and invested, eventually forming capital and underpinning healthy economic growth in the private sector, when natural economic forces are allowed to operate.
I believe that, much like the current mistaken belief by many that cutting social welfare programs like Social Security, Medicare, or Medicaid, constitutes a broken societal promise, the real question is whether the cure is worse than the disease.
Those social programs will never operate in a sustained fashion, designed, as they all were, with fatal flaws.
So, too, does Keynesian theory on government stimulus exist in a sort of fantasy world of arithmetic, rather than human, behavior. The reality is that the forced spending doesn't create lasting employment or economically-viable industries, but it leaves very real debt and a need for future spending reductions or increased taxes.
What was wrong with simply allowing natural economic cycles to operate in the first place, if the policies which economists have been able to develop as a method of repealing the laws of economic cycles bring side-effects which have ultimately proven worse than the original condition of naturally-occurring phases in economic cycles?
If the US federal government didn't have the monetary power of the world's reserve curency, combined with politicians of both parties who, once elected President, Senator, Representative or Fed Chairman, work furiously to retain those positions, do you really think we'd seriously be spending trillions of borrowed money to try to remove recessions and contractions from our economic cycles?
This folly has been primarly a politically-generated error. The health of the American economy doesn't require Keynesian stimulus spending- only the political careers of federal elected officials.
I could scarcely believe what I heard and read in the past day or so concerning Irene Rosenfeld's new plan to split the Cadbury-dominated snack foods of the post-merger Kraft from its groceries business.
I wrote these two posts, here and here, in September of 2009 and January of 2010, respectively.
Consider this passage from the first linked post,
"Stitzer's focus, via that strategy, becomes more evident with the next passage. The piece then quoted Cadbury's CEO again,
"I think scale works to a [point]," he said. "There's a confectionery buyer in retailers and I think you can focus on that buyer, and if you can offer chocolate, gum and candy, I think that's an advantage. What more can you offer to the confectionery buyer in the grocery store? They don't necessarily and are not generally responsible for anything but confectionery."
Putting these two views together, one what seems to be a really non-delusional, focused, in-touch CEO. One that understands his direct customers, the retail food merchant's buyers.
With them in mind, he's built Cadbury out within the scope of his current customers' pervue. But he rightly notes that Kraft primarily markets to other buyers, albeit within the same grocery store.
After the requisite administrative costs are shed, what then? What organic, post-merger accounting growth will be realized?
If anything, Stitzer is really making the case, by omission, for another approach entirely.
Why doesn't Kraft offer to sell its confectionary businesses to Cadbury for stock, and a seat (or however many make valuation sense) on the British firm's board?
That way, Kraft gets the value of scale within confectionary products, but avoids the curse of oversized conglomeration. Irene Rosenfeld's management team can focus on food products, while reaping the benefits of Cadbury's economies of scale within their category. In time, subject to deal terms, Kraft can sell its stake in the market, or to Cadbury, for a premium, while relinquishing board presence.
It argues for Cadbury's management to handle the commonly-held confectionary businesses, not for Kraft to get a larger collection of assets to mismanage."
And, then, this one from the second linked post,
"I still believe, as I did last September, that both parties would have benefited from Rosenfeld's selling Kraft's businesses which resemble Cadbury's, to the latter, taking equity in exchange.
Cadbury is simply a better management team than Kraft. If anything, I guess Cadbury shareholders should thank Stitzer and the board for getting top pound for the company, and walking away with cash after selling whatever Kraft paper they receive, while Kraft will be stuck trying to make this dubious tie-up pay off."
Funny how that worked, isn't it? A former Cadbury shareholder could soon repurchase the old Cadbury, plus some similar Kraft businesses, with the premium they received.
However, looking at the nearby price chart of the S&P500 Index and Kraft for the past two years, it appears that Kraft actually outperformed the Index. Probably on account of Cadbury, since Kraft was underperforming the Index for the five years prior to the acquisition, and still headed downward.
According to this morning's Wall Street Journal article, Rosenfeld had the idea to buy Cadbury, bundle the snack businesses, then split Kraft, as long as several years ago.
Even if true, this is corporate ego and obsession with power at its worst. The story would mean that Rosenfeld squandered Kraft shareholder money on the Cadbury premium, and on investment bankers, just to get to the point of now spending more money to split up the swollen Kraft.
Wouldn't it have been simpler and cheaper in the first place to have just approached Cadbury's Stitzer about such a combination? Rosenfeld could then have declared a special stock dividend of Cadbury shares received for the Kraft snack businesses sold the the British confectioner.
To believe that Rosenfeld's approach made more sense is to be caught up in the sort of wilderness of mirrors which can occur in large corporate managements. A lot of extra expense and effort just to allow Rosenfeld to appear to be the empress of a larger set of businesses, only to separate them once more.
One thing is true, though. According to my proprietary equity research, splitting the slower-growth grocery businesses from the higher-growth snack businesses will, indeed, allow the latter to deliver a consistently higher total return to their shareholders. The combination has certainly punished the latter, while investors price Kraft to an average that accounts for the former.
Thus my point that it made no sense to effectively destroy or mix value from Cadbury into Kraft in the first place.
I saw an excellent example of local government services waste earlier this week.
As I walked through the lobby to leave my fitness club, I saw through the large windows that a paramedic ambulance was parked outside the main entrance. This occurs occasionally when someone has been injured or suffered a medical problem while exercising.
However, parked nearby was not one, but two local police cars. And, as I drove out of the parking lot, yet another emergency medical vehicle was pulling up to the building.
Being of a certain age, my immediate thought were the lyrics from Arlo Guthrie's Alice's Restaurant, which I can't quote, because of copyright issues making them unavailable online. But, to paraphrase,
'The cops were busy using all their cop equipment which they never get to use otherwise.....'
You see, the towns out my way in north-central New Jersey have very little violent crime. Or much crime at all, for that matter. Getting onto a local police force in any of these towns is the equivalent of being paid to drive a car all day while listening to the radio. Oh, yes, and they get to carry guns to intimidate the citizenry. Let's not even discuss what their pensions will be after a mere 30 years, likely without ever drawing a weapon.
So seeing two police cars with four members of the local town's police force visiting a fitness club for someone's medical issue was more than just over the top.
It's emblematic of our society's overspending nanny-state nature.
Meanwhile, taxpayers footed the bill for the needless police time and expense, and probably the extra medical vehicle, as well.
One wonders how much of the local police budgets are padded for staff to handle unnecessary calls of this nature.
It's a small, simple story of local government excess, purchased with tax dollars. But multiply it thousands of times, many days per year, and you get some idea of why our society is costing ourselves so much more than it did mere decades ago.
Are you as sick as I am of hearing, courtesy of the recent federal debt limit debates, that 'big/rich corporations should pay more/higher taxes?'
I don't think I could watch CNBC or Bloomberg for the past month without hearing some Democratic Congress member, the president, or a liberal pundit repeat some variant of that old saw.
Trouble is, it demonstrates complete economic illiteracy by those who mouth those sentiments.
Harvard economics professor Greg Mankiw wrote in his blog, borrowing from his textbook,
"But before deciding that the corporate income tax is a good way for the government to raise revenue, we should consider who bears the burden of the corporate tax. This is a difficult question on which economists disagree, but one thing is certain: People pay all taxes. When the government levies a tax on a corporation, the corporation is more like a tax collector than a taxpayer. The burden of the tax ultimately falls on people—the owners, customers, or workers of the corporation.
Many economists believe that workers and customers bear much of the burden of the corporate income tax. To see why, consider an example. Suppose that the U.S. government decides to raise the tax on the income earned by car companies. At first, this tax hurts the owners of the car companies, who receive less profit. But over time, these owners will respond to the tax. Because producing cars is less profitable, they invest less in building new car factories. Instead, they invest their wealth in other ways—for example, by buying larger houses or by building factories in other industries or other countries. With fewer car factories, the supply of cars declines, as does the demand for autoworkers. Thus, a tax on corporations making cars causes the price of cars to rise and the wages of autoworkers to fall.
The corporate income tax shows how dangerous the flypaper theory of tax incidence can be. The corporate income tax is popular in part because it appears to be paid by rich corporations. Yet those who bear the ultimate burden of the tax—the customers and workers of corporations—are often not rich. If the true incidence of the corporate tax were more widely known, this tax might be less popular among voters."
While I have grown weary of federal elected officials of both parties displaying their economic ignorance, even as they dangerously legislate tax policy, I fault even more the business network pundits who continue to spout this nonsense without correcting the fallacy that corporations really pay any tax at all.
Ultimately, as Mankiw explained, it's taxpayers, either as company owners, consumers, or employees.
I read with interest the recent headlines that two investment funds have bought comparatively large stakes in McGraw-Hill with the aim of forcing it to break the firm up. It couldn't happen to a nicer plutocratic empire.
I've written several prior posts concerning the firm here. I recalled that I wrote this piece, noting the brief inclusion of the firm in my equity portfolio, but not that it was almost five years ago.
The intervening years have not been good to or at the firm. Thanks to Terry McGraw trying to pump growth at S&P's ratings unit on the cheap, the firm's fortunes soured in the immediate aftermath of the late-2008 equity markets collapse.
Since then, it's about paced the S&P, but that leaves it with a -20% return over the five year period, while the index has finished flat.
With its largely unrelated ratings, educational and other publishing unit, and equity data subscription business, the firm has been an unwieldy conglomerate for decades. Much like GE, it has long since lost any reason for its integrated nature.
Except, of course, the ability to employ various McGraw family members and fuel their increased wealth.
My own experiences with S&P's equity data unit have exposed that business as poorly run. Customer support from the technical people is superb, but the sales and administration are abysmal, with those employees rarely knowing what's going on with customer accounts.
A few years ago, I mentioned a particularly vexing problem to a senior executive who is also a McGraw family member. There was never a reply, indicating, evidently, a sort of supreme disconnect between the family member employees and the real operations of the firm.
It doesn't surprise me that some outsiders have detected an opportunity to buy the firm's shares now, at what they believe to be a lower value than that of the pieces of the firm, once separated. Nor does it surprise me that Terry McGraw issued a typical corporate-speak response.
But, again, like GE, non-performance is a tough sell. GE has finally begun to unravel, with the entertainment properties that Jack Welch mistakenly acquired having been sold to Comcast.
For McGraw-Hill, it's not a stretch to see the publishing pieces sold to larger competitors, or just split off, while the ratings and financial data units also go their separate ways. Leaving, I suppose, the McGraws to count their money as they gather in either the compound up in Connecticut or their place in the Adirondacks.
Like many companies long-identified with a family still involved in the firm, McGraw-Hill looks like it may be at that point where saner, smarter heads prevail and relieve the family members from making more management mistakes.
This past weekend edition of the Wall Street Journal featured an excellent editorial by Prof. Richard Rumelt entitled World War II Stimulus and the Postwar Boom. Rumelt is a professor of business at the UCLA Anderson School of Management.
Much as Amity Schlaes book, The Forgotten Man, corrected many of the economic myths which had grown up around FDR's failed Great Depression programs, Rumelt's piece highlight the real source of US economic growth during and following WWII- forced consumer savings, not government spending.
Rumelt begins his piece by observing,
"Despite two years of fiscal and monetary stimulus, the U.S. economy is sagging. This has renewed the argument over the usefulness of more stimulus, and many of its proponents make an analogy to World War II.
Last month, former Obama adviser Larry Summers put the case this way: "But for Hitler and the military buildup he caused, FDR would have left office in early 1941 a failure, with American unemployment above 15 percent and with the recovery promise of the New Deal shattered." And in 2008, Princeton's Paul Krugman referred to "the enormous public works project known as World War II."
This is received wisdom to many economists and historians, but it skates around key facts of the World War II economy. Chief among them: Government policy didn't stimulate personal consumption, as Keynesian policy makers aim to do today, but rather enforced thrift.
During World War II, there was no investment in civilian infrastructure and the government placed severe restrictions on consumption. That meant significant portions of the massive government spending went toward saving and private debt repayment. Thrift restored personal balance sheets, ultimately setting the stage for the postwar boom."
Those are the themes of Rumelt's editorial. Here are some of the supporting data he cites regarding his theses,
"In 1939, before the U.S. entered the war, about 15% of the work force was unemployed. The war eliminated unemployment by moving 11% of workers into the military, where they were indentured at low pay with little ability to purchase consumer goods. Another 5% were directly employed by the government as military support personnel.
As the military swelled, the civilian work force declined to 53.9 million in 1945 from 55.2 million in 1939. A shrinking civilian work force and surging government demand created wage inflation of about 5% per year. Higher wages, plus about 20% more hours worked, generated a 65% increase in real (inflation adjusted) national disposable income between 1939 and 1945. But, remarkably, total consumer spending did not rise to match these higher incomes. During the 1941-45 war years, over 22% of disposable income was saved.
This high saving rate was driven by fiat. Thanks to wartime rationing, Americans were only allowed to purchase small amounts of sugar, butter, meat, gasoline, tires, shoes, bicycles, processed foods and other goods. Plus, there was virtually no production of new cars, radios, home appliances or housing. In fact, when inflation and increased working hours are taken into account, consumption per hour worked actually declined for the bulk of civilians during the war. Civilian living standards stayed at Depression-era levels.
Americans' wartime savings over 1941-45 were $142 billion, about $1.3 trillion in 2005 dollars. These funds went to pay down consumer credit, buy War Bonds, and bulk up savings accounts. During the war, outstanding consumer credit fell to $5.7 billion from $7.2 billion, a 44% reduction in constant dollars.
Despite higher incomes, household mortgage debt rose only slightly during the war, falling by 17% in real terms. As a consequence, the overhanging debt that had plagued households since the start of the Great Depression was dramatically reduced and household balance sheets markedly improved.
When hostilities ended in 1945, many expected that an expanded civilian work force, plus reduced federal deficits, would bring back the depression of the 1930s. There was indeed a brief recession in 1946, but as production was rededicated to consumers and rationing was lifted, people rushed to replace rusted-out automobiles and broken-down refrigerators. The returning soldiers got jobs, moved to newly constructed housing in the suburbs, and the postwar boom was on. And it was greatly accelerated by households' renewed capacity to take on debt.
Consider the ratio of household debt to disposable income over the decades from 1919 to 2010. Data (from the Federal Reserve Flow of Funds, the Bureau of Economic Analysis and other historical records) show that the debt ratio started a sharp upswing in 1920-22 with the 1920s housing boom and the introduction of consumer financing by auto makers and producers of home appliances, rising to 41% in 1929 from 16% in 1919.
As the economy dipped into recession in 1930, household incomes fell and people made dramatic reductions in spending for consumer goods in order to hold onto their cars and homes. Falling incomes forced the debt/income ratio to a peak of 61% in 1932. By 1940, the ratio had slowly worked its way down to 40%, about where it had been in 1929. Then, with the advent of the war and rationing, the ratio plummeted to 20% by 1944-45, a level not seen since 1924.
Today, households carry a much greater relative debt burden than they did in 1929, largely due to a 25-year mortgage binge. Between 1980 and 2007, disposable income grew at 5.9% per year while household indebtedness grew at 8.7% per year—a clearly unsustainable situation. As in 1939, this hangover of debt blocks new rounds of consumption and dulls the impact of fiscal and monetary stimuli."
Stunning figures, are they not? I'm in my fifties, so I recall my late father's stories about "life during wartime." The gasoline rationing, lack of tires. Buying black market aviation gasoline which burned out the cylinders in his used car. The stories of meat, butter, sugar and egg rations. It occurs to me that my own children know nearly nothing of those privations for almost half a decade in the early 1040s.
Rumelt then turns to Summers' folly, explaining what emulating WWII's approach to economics would actually mean in today's environment,
"If one wanted to replay the economics of World War II (without the war), it would mean high consumption taxes aimed at the middle class, and putting 30 million Americans to work at minimum wage or less. No serious politician could put forward such a plan.
The difficult truth is there is no easy cure for the present hangover. Myopic policies allowed credit to be pushed over its natural limit. Credit expansion shifts consumption from the future to the present, but the future has now arrived. Policies aimed at reigniting the credit-driven consumption boom of the last 25 years won't work.
Instead of looking for a pre-election year pop, it would be wiser to focus on transitioning from credit-driven economic growth to growth that is, once again, driven by new productive investments. The key policy aims should be removing the tangle of tax, policy, regulatory and human-capital impediments to domestic private investment."
Which brings to mind, for me, this post from last Friday. Imagine! Actually encouraging people to save for purchases, rather than simply borrow for immediate gratification.
On that latter point, as if summoned by my writing this post on Monday afternoon, as I finish this, I hear Paul Krugman on Bloomberg television haranguing for, of course, more federal borrowing, higher taxes, and more spending in the face of economic softness.
Like Summers, Krugman apparently was absent from economics school the day they taught the theory of economic cycles. You know, how economies naturally move through recession, recovery, expansion, slowing, then recession again.
Trying to slice off the unwanted slow and recessionary phases, in order to have only expansions, just isn't feasible. No matter how much money government prints or borrows.
Instead, as Rumelt notes, what actually leads to robust expansion in a mature economy is capital formation based upon savings, not endless borrowing and government budget deficits.
