The Straw

Oil prices have now overloaded us. Near term, the equation no longer works.
In a survey released today only 3% of Americans believe that the high oil prices are the fault of the big oil companies. Based on the hearings in Congress this week it seems that 100% of the Senate Democrats don't agree with that assessment. 30% of the public in this survey blame Congress and 29% blame the President.
Art Cashen was asked about his outlook for the market this morning on CNBC. The long time floor guy and straight shooter just said "I'm preparing the razor blades and a warm bowl of water". Recession is now assumed.
Time to invest? or hide?

Back in Danville, Virginia

Once again here in Danville visiting my father and not much has changed. Nice looking town in the main parts, no community commercial center but a burgeoning mega store commercial strip, generally friendly people, most with low wage jobs, high crime rate issue driven by drugs and gangs, and a failing medical community. I like visiting... but more later.

Larry Page interview with Fortune magazine

Larry Page of Google was interviewed by Fortune and what follows is one of the sound bytes offered up.

"Question: So you think that geothermal and solar thermal could solve our energy problems?
Answer: Yeah, probably either one could generate all the energy we need. There's no discipline to actually do this stuff, and you can also see this vested interest, risk-averse behavior, plus a lack of creativity. It's also a timeliness thing; everyone said Sam Walton was crazy to build big stores in small towns. Almost everyone who has had an idea that's somewhat revolutionary or wildly successful was first told they're insane.
Question: Whose obligation is it to make this kind of change happen?
Answer: I think it's everyone who cares about making progress in the world. Let's say there are 10,000 people working on these things. If we make that 100,000 we'll probably get ten times the progress.
And then you compare it with the number of engineers at Chevron and Exxon and ConocoPhillips who are trying to squeeze the last drop of oil out of somewhere, and the science brainpower that's going to that. It's totally disproportionate to the return that they could get elsewhere.

Question: What kind of background do you think is required to push these kinds of change?
Answer: I think you need an engineering education where you can evaluate the alternatives. For example, are fuel cells a reasonable way to go or not? For that, you need a pretty general engineering and scientific education, which is not traditionally what happens. That's not how I was trained...If you look at people who have high impact, they are general in how they evaluate things, and that's been good(an obsession of Carroll Quigley, my Georgetown history teacher, 1967-68)...If you look at people who have high impact, in general in how they evaluate things, and that's been good pretty general knowledge. They don't have a narrowly focused education. They don't have a really narrowly focused education.
You may also need some leadership skills. You don't want to be a Tesla. He was one of the greatest investors, but it's a sad story. He couldn't commercialize anything, he could barely fund his own research.. You'd want to be more like Edison. If you invent something...you've got to get into the world, you've got to produce, make money doing it so you can fund it."

This is from th 5/19 magazine of Fortune, a terrible magazine in general but worth a full read on this at your newstand or bookstore, not worth the $4.99.

Political humor still possible

In this wearing political season it has become, it seems, increasingly difficult to find the light side. The Daily Show gives its best shot, but even there the campaign has taken its toll. With that said, it was interesting to find a speech by P.J. O'Rourke to a Cato Institute event. Whether one agrees with his Republican Libertarian views or not, read these excerpts:

---"I love gridlock. Gridlock means government can't do things. The most frightening words in Washington are 'bipartisan consensus'. 'Bipartisan consensus' is when my doctor and my lawyer agree with my wife that I need help."

---"It took a Democratic majority in the House of Representatives 40 years, from 1954 to 1994, to get that corrupt and arrogant, and the Republicans then did it in just 12. And people say we Republicans don't have a lot on the ball."

---But there is sort of a Disney factor in American politics. Think of them all as the Seven Dwarves. They're all short. They're short on ethics. They're short on common sense. They're short on experience. They're short on something. But we keep thinking one of these dwarves is going to save our Snow White butts. We've got Dopey right now. We had Sleazy before him. Grumpy lost in 2004. Sleepy was great in the '80's but he's dead.

---"Under the Democrats, the government will negotiate with drug companies for Medicare drug prices. If the government shows the same hard-headed, tight-fisted bargaining savvy negotiating drug prices that it shows negotiating defense contracts, Preparation H will cost $400."

---"Two substantive political issues are the federal budget deficit and the war in Iraq. Now, if you're electing a Democrat to control government spending, then you're marrying Angelina Jolie for her brains. This leaves the Democrats with one real issue: Iraq. And so far the best that any Democratic presidential candidate has been able to manage with Iraq is to make what I think of as the high school sex promise: I will pull out in time. Meanwhile the Republicans have got John McCain . Everybody respects John McCain: He's tough. He's consistent. He's wrong. John thinks the war in Iraq is a good idea; the electorate doesn't. It's like McCain's slogan is 'wrong and strong'."

---There is only one number that matters in politics. And you may think that that's the number of votes, but that's not the number. The number that matters in politics is the lowest common denominator. It is the awowed purpose of politics to bring the policies of our nation down to a level where they are good for everyone. No matter how foolish, irresponsible, selfish, grasping, or vile everyone may be, politics seeks fairness for them all. I do not. I am here to speak in favor of unfairness. I have a 10 year old at home and she is always saying, 'That's not fair'. When she says that, I say, 'Honey, you're cute, that's not fair. Your family is pretty well off, that's not fair. You were born in America, that's not fair. Honey, you had better pray to God that things don't start getting fair for you."

A problem with economic forecasting

The debate, or uncertainty, about the country's economic prospects is seemingly anchored by those with a highly negative outlook. Led by some journalists at major publications, a bunch of financial newsletter types, several economists with a generally leftward slant, and a few of the professional investors whose portfolios have taken big hits, this negative view portrays the U.S. at the beginning of a dust bowl, shantytown Depression. At the moment most economic data does not give any indication that this dire case is likely, or even close to being a probable scenario.



Despite that, the most negative view has, and I hate to use this word, don't know if I ever have written it, "traction". There are two reasons for this that I see, out of the innumerable choices out there.


First, an unsustainable consumer credit expansion is coming to an end. A large swath of the American public that was viewed as part of the middle class is now being pinched severely as the attainability of what was implied by that label appears to be falling out of reach. The ability to acquire one's goals was encouraged by all, from marketers to banks to car companies and even just neighborhood peer pressure, aided and abetted by the former more easy affordability of food and gas. This economic pressure is very very real for a segment of the public, and it is spreading and broadly undermining optimism. Political campaigns, notably Hillary's, that are fear and resentment based add to the pessimism. When the negative pundits speak, they have receptive listeners. That the aggregate economic numbers do not yet add up to disaster, and in fact may be the basis for a slow reopening of the financial system and the sustainability of historically positive employment numbers, does not resonate. That's understandable to some extent, as those numbers don't help a stretched budget, sell newspapers, create reputations or even attract votes.


The second reason is focused on pundits and market spokesmen in general, and why few seem to be willing to step out and accentuate the positive, or even just the mildly positive or, heck, just the neutral muddling along point of view. Simply, if one is wrong on the pessimistic side of an economic or market issue he or she is viewed a hard edged realist whose timing is off while to be wrong on the optimistic side risks being viewed as a naive fool. Why that is so I'll leave to the psychologists and social scientists, but it is true. One personal example---in the early '90's I regularly attended a large investor conference in California that, as part of the festivities, held a contest that required everyone to predict the Dow Jones Industrial Average one year later, at the time of the next conference. Several hundred portfolio managers and research analysts from across the country voted as well as a few corporate flacks like myself. From 1992 to 1996, five years, yours truly came in with the best guess three times and second once, winning wonderful magnums of Napa Valley's finest. How could that have happened given that 70 to 80% of those participating were clearly more experienced and better networked. It was simply that I actually was optimistic and covered the high end of what was the probable range of guesses. None of those many experienced investors could take that reputational risk even though many ran long only mutual fund books. Today many of those same folks, or people with similar experience, are again loathe to step forward.

This note is not meant to suggest that these are not stressful economic times. A significant readjustment in the economy on many fronts is underway. Prosperity is segmented rather than broad based. It's welcome to the global economy for real now as market based prices for fuel, food, and intellectual capital impact the U.S. more than anytime in recent history. This could soon be exacerbated soon by a Democratic president who raises trade barriers such that Walmart's low prices every day are no longer so low. These are difficult times for many. That does not mean, however, that we are on the cusp of a 1930's type debacle. It may just mean that we are in the middle of a 1990-1991 type slowdown. Focusing on reasonable and well thought out long term solutions to the economic problems that do exist and looking for ways to help bridge the gap for people in distress is what should be the points of discussion. Forecasting and, for some, reveling in the most negative scenario is not helpful, annoys me to no end, and could eventually lead to bad policy that actually extends the downturn.

"The Zen of Bobby V"

This documentary premiered on ESPN2 tonight. In its own way it is a beautiful little film. Being a baseball fan, or sports fan even, should not be seen as a requirement for watching and enjoying this snapshot of a season with Bobby Valentine as manager of the Chibe Lotte Marines in Japanese professional baseball. The film comes across as a little uneven and few documentaries could overcome the number of commercials that interrupted the flow. Watching and accompanying the eccentric and passionate Valentine in Japan is still a treat. Having learned Japanese in his '50's, Valentine has turned his suburb near Tokyo into his hometown that he bikes and walks around in like a kid. He has seemingly just morphed naturally into celebrity status in Japan as the biggest selling hamburger in the country is named after him, a beer carries his likeness and name, and his celebrity status is joyful in a country where he seems to freely mingle with everyone. This will no doubt be aired again and often in the near term and is worth a try.

FX, DPS, AIG, Rally talk

Financial news, or speculation, over the weekend included:
---Bloomberg tonight has a story headline of "Dollar Bulls Gain Control as Futures Signal Euro Close to Peak". The comment that follows says "For the first time since 2005 futures traders are turning bullish on the dollar" and quotes a London bank's FX head as saying "There is a kind of a sea change taking place at the moment" when asked about the market's view on the dollar. See the April 14th post here for thoughts on a dollar rally.
---Dr. Pepper(DPS) began trading on the NYSE last week after its spin-off from the U.K.'s Cadbury Schwepps. Barron's speculates about the lackluster early trading in the name and possible reasons why this is an under appreciated name out of the gates. While David Letterman may have once called the flagship brand "liquid manure" it has a loyal following and a solid position in the U.S. soft drink market. European recipients of the stock on spin-off may well be weak hands for such a uniquely U.S. equity and the various brands including Snapple and Seven-Up have not exactly been stellar in recent years. All the more reason for a look at the potential of this set of brands breaking out of a conglomerate suggests Barron's, especially for those with a bias for the beverage suggests eyesnotsold.
---AIG also gets a note in Barron's after its terrible quarterly report of more losses. Despite the precipitous decline in its stock price, or because of it, this name just has to be a golden opportunity at some point. The business franchise is too strong to overlook.
---Paul Lim in the NYT Sunday business section discusses whether the rally in equities since mid-March is the real thing. Just think, we've been going through a rally in the equity market. He should tell the other writers at the Times to take a look.

Consumer outlook remains guarded

The past week brought news that suggested more of the same for the broad U.S. consumer market. Consumer debt, not including mortgage related debt, rose considerably more than forecast in March indicating that consumers are stepping up their reliance on their credit cards and that the myriad incentives and discounts offered by auto makers are enticing customers into the showrooms, many to trade in their gas guzzlers for more efficient models. April sales figures for retailers showed no significant drop off in spending from already depressed levels, but did show an increasing bifurcation toward the leading discounters, Wal-Mart and Costco as well as the smaller BJs and Freds, and away from the mall based Gaps, Limiteds, and department stores. The more popular teen based stores such as Aeropostale and American Eagle had sales gains and seem unfazed thus far. If they turn down, watch out. Home prices are now predicted to decline, in the aggregate, by 9% this year with inventories remaining high and the pace of foreclosures not slowing.

What this latest data suggests is more or less as expected. What the data does not do, of course, is highlight the regional and economic class impacts of this continued financial stress that could create the next crisis, whether media driven, politically convenient, or real. It does at least show that consumers are making some rational choices in their efforts to stay on track and that teen's priorities have not changed. Higher credit card debt is understandable and not yet at an overly alarming level, a threshold that will be watched closely.

By historical standards, overall employment remains at reasonably good levels. The financial system has retrenched and can hardly pull back more. The stronger companies will ease up and begin an effort to build market share at the expense of the overly extended firms. Summer should bring more of the same and the earliest signs of stabilization will not come until September or October. Let's just get there.

Is Clinton buyout weird, or politics as usual

Last night and today there have been discussions in the media about the possibility of Hillary Clinton negotiating a buyout in order to step out of the race. As it was discussed in various print and broadcast venues, the Obama campaign would take over the the Clinton campaign debt including repaying Hillary and Bill the apparent $11.4 million that they have lent the campaign out of the $109 million net worth amassed since Bill left office. In addition the Obama campaign would accept some Clinton workers into the national campaign, praise Hillary, and give both Hillary and Bill major roles at the Democratic convention. All speculation maybe, but even as speculation does anyone think that this is a bit strange.

What is this, a banana republic election, a corporate takeover, did I hear all of this correctly. My first thought as I listened was the election in Nicaragua over a year ago when Daniel Ortega agreed to buy the support of his predecessor and former opponent by agreeing to let him keep the spoils of his corruption and not prosecute him for any of his significant fraud and malfeasance. With the support of the protected "leader's" legislators, Ortega then won the job with just 37% of the popular vote and Jimmy Carter was hauled down to bless the fairness of the election. Now this is completely different but that's the first thought that came to mind. Then as the discussions kept developing the corporate takeover model came to mind. Well-performing company X wants to takeover underperforming company Y. Company Y's CEO won't agree until, of course, he/she receives a huge payout, unrestricted use of a company plane for five years, office, secretary, car and driver for life, and a pension that is adjusted for the length of time the poor CEO would have been with the company if he had been a good leader. Company X would also agree to tolerate a few of Y CEO's favorites in key positions and shower them with gifts as well if it didn't work out.

Is it naive to think that this proposed buyout of Clinton is not just politics as usual? What is the precedent? There may be many that have not been so openly discussed, but how cynical have we become to discuss this as just a routine political event? If there is truth in this, how humiliating is it for Obama to have the Clinton pair trash him for the last six months on their own dime and then be forced by political negotiation to repay them for the gesture. How crude is it of the Clinton's to expect this, especially given that(non sequitur coming) much of this money has been accumulated through Bill's exploitation of the presidential imprimatur with hedge fund managers and foreign governments. Does anyone have a problem with this buyout idea?

Broad Based Generational Wealth Transfer Coming to an End

In recent years there has been a view expressed in the financial press that we are on the cusp of the greatest generational transfer of wealth that this country has ever seen. The question posed here is that, with the exception of the very wealthy, what if the bulk of that transfer has already occurred. It could not only mean that an expected longer term economic stimulus or stabilizer is not there, but that additional creeping economic pressure on the stretched U.S. consumer is beginning to unfold.

This thought is based on observations, anecdotes, logic and intuition. There are no statistics here, but sometimes statistics are a lagging indicator. This may be the case on this issue.

The generation passing on the wealth is the one that is now over 70 at a minimum. They cut their teeth in the work force in the 1940's and 50's, years of increasing prosperity after the end of WWII. Their careers blossomed in the 1960's and 1970's. Their pensions and savings then began to benefit from the bull market of the 80's and 90's, whose interruptions were brief in hindsight. This was the generation in which many had union contracts in manufacturing with good wages, health benefits, and pensions coming from defined benefit plans. In the white collar world the protocol of both merit and inflation adjusted wage increases was the rule, company loyalty was returned in kind, and until the early 1990's defined benefit plans led to reliable retirement income. This generation lived through or was born in the Depression and generally had spending and saving habits that reflected that experience. They saved for the future and did not spend what they did not have except on those big purchases like a home and a car that were their primary experiences with credit. They retired and now they are on the decline, having already gone to or inexorably heading to whatever's next.

Their children, the baby boomers, have also had the opportunity to have a good run at economic prosperity. They have, however, also gone through all of the changes that have led to a different landscape in our economy today. Those changes include the significant decline in the U.S. manufacturing base, the demise of the job for life bond in corporate America(both white collar and blue collar), the replacing of defined benefit plans with defined contribution plans, the significant rise in health care costs and the decline in health care benefits, and the constant reshuffling of corporate America as result of mergers, downsizing, outsourcing, and the continuing introduction of productive but disruptive new technologies. On top of these changes the mentality of much of the boomer class was one of ever higher expectations and their approach to consumption and credit was, broadly speaking, entirely different from their parents. This consumption was not necessarily driven by some materialistic flaw but by a very American belief that each generation should have a better economic life than the preceding one. In addition to securing their own slice of a good life, the boomer's expectations for and investment on behalf of their children drove their consumption.

With this generational dynamic, the wealth transfer has been ongoing, and may soon be going, going, gone in the old great middle class of America. The aging generation with its stable retirement income, home equity, and assets compounded by the market has been a backstop and a contributor to the wealth of the boomer generation. Those certain pensions supplemented by social security, those houses once almost totally equity, and those bank accounts reliably available have been generously handed down piecemeal over time, often willingly by a generation so glad to be of use and value to their children and grandchildren and at times by necessity as circumstances and missteps have made helping out a necessity . Also factor in the not so uncommon malfeasance or incompetence by probable heirs, caretakers and financial advisors and there has likely been significant diminution of this wealth over time. The money left is now being marshalled for retirement living, health care expenses, Alzheimer's care, and nursing homes as well as the continued needs of some of their now truly stressed offspring in today's economic environment.

This scenario is certainly not the case among the wealthiest of American families. That wealth transfer will be substantial. The world's greatest consumption machine, however, is the vast center of the American consumer market and one of the key underpinnings of that group's confidence is eroding just at a time of increasing stress. In fact it is already a likely component of the boomer generation's angst, the realization that they are on their own, and a consequent contributor to the uncertainty that their children feel about the future.

The observations here are not politically oriented, value based or resentment fueled. From this perspective there is an unfolding economic event that seems to not yet be recognized in any broad way. Maybe the observation is wrong, but I don't think so. If correct, the implications of this are significant. A generational wealth transfer that is already spent has economic consequences that will be evident in the near term, and political and social consequences that will play out over a longer time frame. Near term, this phenomenon is clearly fertile ground for the self help publishing niche.

New Orleans and Jazzfest Now

Visiting New Orleans and Jazzfest for the first time since Katrina led to some observations.

First, thoughts on seeing the city, which for this visitor was limited to the French Quarter, the Central Business District, Faubourg Marigny, and Mid-City fairgrounds area, are as follows:
---Great things are in New Orleans. Faubourg Marigny and its Frenchmen Street are more vibrant than ever with a music scene that alone is worth the visit. Characters of all persuasion are in abundance in the less tourist dominated areas of the Quarter and the Faubourg in general. Street musicians can pop up on any corner or at any square. Wonderful restaurants seem to be plentiful and the unique food traditions of southern Louisiana are intact, at least from an outsider's perspective. Shops, bookstores, art galleries, and music stores throughout the area are virtually all locally owned, individual enterprises, many of which are perfect to walk into for just a look around, a diversion, and some shade, even maybe to part with a little coin. And in a New Orleans tradition it's never hard to find a conversation wherever you go.
---Some things have changed of course.
Taxis are not so plentiful anymore. Swarms of individually owned big '70's and '80's GM models used to roam the streets, many with dashboards and rear view mirrors adorned with charms, tarot cards and evil eyes, many with characters driving them that were so much fun you didn't care where you were going. They're mostly gone. I asked around and those individual rolling businesses went home at night to the 9th ward and other flood stricken areas. Now there are just enough cabs, newer, and the drivers are fine, more talkative and engaging than anyplace else. But it is different from the past.
There are more disgruntled acting panhandlers during the day on side streets , not especially pleasant, but what do you expect.
While the restaurant scene in the nicer sit down upper and to some extent mid-level price scene is lively, there has been a visible drop off in the number of informal to funky low cost eateries. This trend had been going on since as far back as the '80's in the more touristy areas, but on the fringes, last time I was there, there were still loads of places where for less than $10 exceptional food was available. In the tourist areas, those places are now in spotted owl territory. In the areas on the fringes there has been a noticeable decline. Now that's sad, but I still found some. And my reach as a visitor was not to the overall city and therefore this view may well be and hopefully is a limited one.
Riding in a cab up Canal toward the mid-city fairgrounds we passed through a tent city area that was staggering. Expressways converge on elevated platforms through the center of the city just a couple of miles beyond the business district. As the cab passed through that area there were tent cities as far as the eye can see in both directions under these roads. In this country, over two and a half years after the disaster, it's a sight that's difficult to imagine. This was not some kind of government organized deal. These were improvised shacks and tents of all descriptions, crammed together in no discernable order.
Even savvy locals had warned never to go near this area, and in fact many others. To someone who had once loved to walk to and from the Quarter to the fairgrounds, it's a thing of the past. Even in good areas, caution is the byword. My new favorite singer Meschiya was at a club on Friday night that was about 10 blocks into Faubourg and she told me to recruit a local to guide me there safely. That was easy on Frenchmen, and Nelson was my talkative and great friend for the evening, just enjoying showing me around. So that's not bad.

Jazzfest was wonderful, but I can't say as always. Memories of the many '80's and '90's visits could be somewhat polished up by nostalgia at this point so comparisons are a challenge, but here's a try:
---The music is still a huge treat. There are multiple choices every hour of the day and the opportunity to see major performers in an upbeat festival setting as well as the chance, that often materializes, of just walking by a stage where a performer that you've never heard of puts the hoodoo on you, like really gets your attention.
---But many things were different and, even if inevitable, a little disappointing:
There is a big difference in the crowd. With what has happened to New Orleans, losing half the population, that had to be expected. With $50 one day ticket prices, one must surmise that it's no longer a casual event for many of the locals still there($12 in 1999), and almost impossible for many whole families to come out for the day. So the crowd is much more white, not overwhelmingly so but noticeably different from the past, and more dominated by visitors. As always the atmosphere is one of everyone getting along, but with less economic diversity apparent and fewer families it had a different feel, not a bad one but not as magic as in the past.
Then there was something that really bugged me. Many of the different crowd, and I think there must be different rules, came armed with folding lawn chairs in tow and created territories that more or less served as barricades to fluid movement in front of and around the main outdoor stages. It ruined the opportunity to "excuse me" your way close to the front of the stage of a favorite performer. I did not like those lawn chairs.
All of the food booths were there, but instead of many being run by church groups and social organizations, , more were run by restaurants and caterers. This was not done in any garish way. It all looked the same. It's just that, and here's where my memory may well be tainted, some of the food wasn't that good. At one point with a plate of red beans and rice with sausage I was sitting in the gospel tent next to an older woman who had been part of the choir in the previous group. We were chatting and I finally commented that my red beans and rice weren't as good as remembered. She looked at the plate and said "Looks like mush to me, it's not done right". She then talked about how so much was lost when so many people had to leave.

Those are some differences. As has been widely reported, the city has a long long way to go and I could see that even though I confined myself mostly to the better areas. Cleaning up that Depression era style tent city and keeping the rebuilding effort going could over time make a big difference. Getting more natives who love the place back, like one of my cab drivers who had been shipped off to Alaska but found his way back six months ago, would be healthy. That said, New Orleans may never be quite the same, but it was pleasing to find that it is still a place to be thoroughly enjoyed, MUSIC, PEOPLE, FOOD, even shops and galleries. I will go back. One idea though. They should take all those lawn chairs, pile'em up in the parking lot at the fairgrounds, add kerosene, and let'em go.