Tuesday, September 28, 2010

A "Disconnect"

The word "disconnect" used as a noun cannot be found in the dictionary. Disconnect is, grammatically speaking, a verb, as in "disconnect the damn television before I smash it", or something like that. Evolving out of business jargon as a noun it is a usage that is annoying and therefore is avoided here - until today.

Here is an example of what is meant when word is incorrectly used as a noun.

Disconnect,(n) High unemployment without any near term relief in sight, stagnant home prices at low levels are once again confirmed, consumer confidence drops to a level last touched eight months ago and what happens to equity markets? They go up.

On the surface this does not seem to make sense if one considers that 70% of the U.S. economy is driven by consumer spending(or so they always say) and all of the negatives listed above should directly impact that capacity. That these negatives do impact the strength of the economy is not at question. They of course do. The fact is, however, that the equity markets work on more than the here and now. IF functioning as intended by the God of markets, they look to the future, as in discounted future cash flows. This foresight is completely imperfect, but it is the goal. Global growth potential, ongoing rationalization and consolidation of corporates, the continuing ascendancy of technology advances, and the lack of alternative investments can drive the market higher on a week's whim and overwhelm current economic statistics. It makes sense in the short term, but it's a "disconnect" that may or may not last.

Sunday, September 26, 2010

Dueling investors - boom and bust scenarios

Friday's post described a perplexing situation, at least here. Both equity markets reflecting optimism and safe haven markets reflecting pessimism have been on the rise. There are many arguments on either side of this debate with money being put on the line. Choosing two on each side is the topic here.

First, on the equity market case, investors see significant upside due to the potential for robust M&A markets. Many corporations have significant cash hoards that are sitting idle as they wait for more certainty in the economic outlook and in the regulatory environment. For corporations in this position, banks and investors would be willing lenders in supplementing any expenditure that can be justified. As targets, many smaller corporations have less certain financial positions and do not have international distribution networks to leverage their product strengths. With the large corporates able and willing and the small corporates in a position where a solid premium could be attractive, the big could get bigger and stronger. Stock prices will benefit.

Second on equities, there is so much to be done when markets turn. Emerging markets are investing in infrastructure and building large consumer classes. U.S. infrastructure rebuilding will soon not be a choice - look at the levee falling apart in Wisconsin as I write. When confidence begins to turn and growth opportunities come into focus, equity markets will turn hard and fast and up. Institutional investors who want to keep their jobs cannot afford to on the sidelines.

As for the safe haven investor case, those investors loading up on gold and U.S. treasuries among other more tangible assets, what possible disaster could be discussed. Here are the two. First there is the almost too obvious potential some type of cataclysm in the Middle East. We live with that always it seems, but in some ways we appear to be back to a more fragile situation. More on that in another post, but anything major there would trash the stock market and send safe haven investments skyrocketing.

Second for the safe haven rationale, '08/'09 reminded us that financial crises are alive and well as possibilities. My favorite, wrong word!, achilles heel is the money market fund industry. Money market funds hold huge amounts of consumer and small business assets and are yielding almost nothing. In fact, they are being partially subsidized by the fund industry as fees are being waived to keep from breaking the buck. There is no margin for error. Any surprise collapse of a major corporate or banking institution, say a significant European bank, could push some funds over the edge and panic would ensue. If it were a number of funds, and not just one like in '08, we would get a test of the back office providers as well that could really get scary. Credit would freeze, financial stocks would collapse, others would follow. That brighten your day?

Friday, September 24, 2010

Enjoying it but wondering

The recent performance of the equity markets has been something to enjoy. What long equity investor doesn't enjoy a day like today. I do.

There's this nagging problem, however, that has kept my fingers from the keyboard this week. Why is gold continuing to rise, commodities in general on a mild tear, and treasury yields almost unimaginably low. These are all, in conventional thinking, safe havens. They are attracting big money.

The equity market is certainly getting more buyers than sellers at the moment, but volumes are not robust. They are, in fact, running at the lowest pace for a September since 1999. So here's my big question - What do I not know? What structural, systemic or geopolitical time bomb is out there that is driving the gold buyers and treasury buyers.

Maybe none, but that question feels important after the '08/'09 debacle. Because the market was private with a complete lack of transparency, most investors, even traditional institutional ones, had no idea what was laying in wait for us in the credit default swap market. The LTCM crisis in 1998 within a matter of weeks froze global credit markets and who knew that one was coming. When bad financial events happen it can be quick.

So I wonder.

Thursday, September 16, 2010

"Freedom", a novel by Jonathan Franzen

It's been a week since the last page of "Freedom" was closed here. It is, on the surface, a wonderful family saga told over a 30 year span, with characters that the reader can detest, love, sympathize with or not care less about. It's all in a recent or current lifetime that we follow the family and their closest friends through successes, failures, angst, and acceptance. For this reader, interest rarely flagged and the well written story unfolded with ease. That's enough for a good book. The overall impact of this novel, stepping back and living with it, can have a salutary impact on readers with certain experiences and interests. This writer is one of those readers.

Throughout "Freedom" there are phrases, sentences, and paragraphs that resonate immediately as humor or insight that is unexpected. Most of the humor is in the form of an instant realization, but there are several riffs of a few pages that reminded me, in their sustained eccentric joke, of the wine jellies and candies ramble in Pynchon's "Gravity's Rainbow". The insights create smiles as well and are mostly people related or family related, as well as some substantial forays into public policy issues and bad government.

Many reviews have been written so the main message here is that this book is worth a shot for any fiction reader.

There is one other thought that lingers with me. There is a sensibility to the book that I did not expect. The characters are all vulnerable to satirical or hysterical realism . They represent familiar poses. One may be able to see or hear their actions or words in other places or other times. They are flawed and they are aging, and participating clumsily in the life that we are stuck with. With all of that, there is still a tender touch of redemption in Franzen's depictions. They are good people, just people, getting by, which is a surprise.

Franzen's good friend David Wallace had two short stories in The New Yorker in the year or so before his death, both part of a larger work that was underway and will in some form be published, apparently, in 2011. Those stories took a careful and unequivocally positive approach to characters in simple, stressful, but undramatic circumstances. The writing could be described as tediously and excruciating well done, far from the big flashy strokes of Infinite Jest. The characters are cared for.

Franzen and Wallace corresponded. They read each other's work. It seems that they were on the same path, vastly different styles but intellects of the same era.

Wisdom from a Greek monk who is also a maestro of finance


"This is the secret of success for anywhere in the world, not just the monastery."

"Yes... and", rather than "No... but"

"The idiot is bound by his pride. It always has to be his way. This is also true of the person who is deceptive or doing things wrong: he always tries to justify himself. A person who is bright in regard to his spiritual life is humble. He accepts what others tell him - criticism, ideas - and works with them."

---From an interview in an article by Michael Lewis in the current Vanity Fair. The monk, Father Arsenios, managed a small penniless monastery, located on a rocky spit in the Aegean, such that the monks now have an estimated $2 billion treasury. This took place over the last decade as the corrupt Greek economy dived toward bankrupcty.

Tuesday, September 14, 2010

Egg on face at JPMorgan Chase

JPMorgan Chase's internet and ATM consumer banking system has been down for the entire day. There is still no explanation and no functionality. This is both amazing and frightening. Amazing since it seems that a strong and capable bank like JPM would have mulitple back up systems and the best talent available. Frightening since last night I read the article on Sean Parker in the new edition of Vanity Fair and became more aware of what someone with his skills(co-founder of Napster at 19 and of Facebook at 25) can do if they go to the dark side.

Almost 17 million JPMChase customers are without access except by branch locations, which must be crazed, and by phone, which should probably have a suicide watch choice(touch 4) for both operators and customers. There is not yet even an attempt at communication about the problem other than CEO Jamie Dimon acknowledging the problem and expressing concern about the inconvenience. One could guess that the job of retail technology head is not one that feels too secure this evening.

Monday, September 13, 2010

Midtown Ninth Avenue food destination

The restaurant scene on Ninth Avenue in midtown Manhattan gives me something to write today about other than politics or financial markets. With the former I sometimes feel that my scribbles are just for my health, not all bad, and as for the latter I don't want to jinx anything for the moment, as if I could.

The street mentioned has become a destination for reasonably priced, by NYC standards, terrific food. Saying it's a destination in the foodie sense is a stretch but where an area has good eateries that don't cost a fortune, there are enough New Yorkers to fill all seats without any tourists or adventurers from distant suburbs.

Ninth Avenue from 42nd to 57th has evolved over three decades from a place that was in the '80's possibly dangerous, the center of the XXX stores, run down, and with plenty of corner activity of several varieties. There were always a few decent restaurants at the 44th to 47th street intersections that abutted the theater district but that was it. That was it other than being the last bastion for the traditional Irish dive bars of which there were many and now just a few. Some did have good hamburgers and fresh popcorn. By 2000 the street was safe, mostly cleaned up, and new restaurants were being established successfully. In the last five years there has been many more new restaurants started that are interesting, innovative, or reliable(or some combination of those three adjectives).

Want a neat "Afgan Grill" with a great sign. What about "Kashkaval", a cured meat and cheese shop that has a fascinatingly wonderful Mediterranean tapas selection as well as fondue, that other Mediterranean staple? The new "b bap fusion rice bar" has hearty healthy Korean fare. "Wondee Siam 2" is always full for dinner and the soft shell crabs that I had there last week were beyond compare, maybe a function of my memory but they were really good. I wondee about numbers 1 and 3 which are also in the area.

There are many more, and more on the way. "Marseille", "Pam's Real Thai", and "Delta Grill" are still humming along, but now they have plenty of company. Who would have thought that 9th Avenue would be in danger of becoming boulevardier territory.

That's really nothing. The well established Chelsea 9th Ave pioneer La Bergamote now has a second location on 52nd street between 10th and 11th. Paris between 10TH AND 11TH in Hell's Kitchen?

New Google search keystroke system freezes

A few days ago the news about a new Google Search feature, that would identify search requests as one typed, sounded like another Google advance even if perhaps a bit too Orwellian. There two observations here. First, the predictive power of the suggested requests is not at all personal. No secrets revealed here. If I type in Ba, the first suggestion is Bank of America which has never been a Google search item here. It's not clear what the logic behind the suggestions is, as they don't necessarily seem to be the generally most popular either. Who knows. Second, and more importantly, entering visible keystrokes for a search is constantly halted by the new system as it seems to want the searcher to have time to examine each new offering of possibilities. This is annoying.

This cannot be what Google planned or, if it is, the reason is completely unclear. One of the major points of search is speed. This new system is a real drag on that.

Interestingly, this new "feature" is not visible on my smart phone browser. No suggested offerings and none but the usual New York wireless area slowdown there.

Oh, and I should note that this cable connection computer is working fine on all other fronts.

Monday, September 06, 2010

Krugman deficit spending campaign goes extreme

In an op-ed column in today's NYT, Paul Krugman once again promotes deficit spending as the way out of the recession and the path to better times. He has been making some good arguments and certainly President Obama's proposal today for new infrastructure spending is the kind of deficit spending that is necessary, no question about it. While worrying about the deficit we are leaving future generations, why not also worry about the outdated infrastructure and stunted economic growth that could also come their way.

Krugman's argument today, however, goes a step too far. He gets into the 1930's examples that he likes to reference and then uses the deficit spending of 1940's wartime as an example of how it works. He writes, "Over the course of the war the federal government borrowed an amount equal to roughly twice the value of GDP in 1940 - the equivalent of roughly $30 trillion today." He later describes the outcome of this kind of spending that even at much smaller levels would be derided by many today - "But guess what? Deficit spending created an economic boom - and the boom laid the foundation for economic prosperity."

What is he talking about. How can he make such a comparison. At the end of WWII, America was the last man standing, the only industrial country still fully functioning, the prince of credit ratings because no war had been fought on its land, a land which remained productive. There was a ten year period after WWII in which economic competition was minimal as the rest of the world picked itself up and put itself back together again. America was on top.

Today there is tough competition from all sides. We don't get a free pass. Deficit spending invested and managed well should be one of the tools to get back on track, but it's not some magic pill that has no side effects, all gain and no pain. That mind-set was tried with Fannie and Freddie. It doesn't work.

First Reich three days ago and now Krugman --- why take good information and directionally helpful ideas and trash them with extreme and useless conclusions. Have these smart commentators reduced themselves to the levels of Dowd, Herbert, Collins, and Rich such that they only appeal to the set in their ways self admiring "elites" who can chortle with satisfaction as they read their dear old New York Times.

Awaiting Obama's Labor Day proposals

The White House has previewed the major message of President Obama's Labor Day message - an infrastructure spending initiative to create jobs and build long term productivity. That preview is probably 95% of what we will learn today apart from the inspirational rhetoric that will accompany it.

This should be a welcome initiative on all fronts but of course it will not be. Our infrastructure is desperately in need of both rebuilding and new development. Job creation from an infrastructure bill would directly impact industries that have been distressed. If both current employment opportunities and long term competitiveness can be addressed in one major initiative, why would it be opposed.

There are the usual answers to that question of opposition as well as some with merit:
---The Republicans will oppose anything that Obama does in general and especially just prior to the November elections.
---The obsession with the negative implications of deficit spending will be focused on, and questionable trade-offs to fund the initiatives will be suggested by both parties.
---The infrastructure spending portion of the 2009 stimulus bill was for the most part a bust. It was a small percentage of the overall stimulus allocation. Projects may have been "shovel ready" but the shovels either were not available or had to approved through the tedious bureaucratic gauntlet of fed, state, and local governments with politicians to feed at every step of the way (the one project followed here, a bridge rebuilding in Danville, Virginia, had its groundbreaking last month, 18 months after funding was approved).
---Infrastructure spending in the 2009 stimulus bill was weighted heavily toward "green initiatives" that were promoted by the Administration. These green initiatives were to some extent in the R&D phase with a long tail to any significant employment growth or societal benefit. They were, generally speaking, not near term stimulus even though their intent is laudable.

We wait and will see. Nothing will happen prior to November, but post-election 2010 could provide a chance. If the pork gets spread evenly enough and the intent is explained well enough, almost everyone in Congress but Ron Paul might secretly want this bill.

Friday, September 03, 2010

Reich's NYT op-ed must have a typo?

"Early childhood education should be more widely available, paid for by a small 0.5% fee on all financial transactions."

This is a sentence from Robert Reich's op-ed column in today's New York Times entitled "How to End the Great Recession". Much of the commentary details the wage inequality in the U.S. as it has progressed over the last 40 years and accelerated in the last 10. He suggests correctly that this insidious development inevitably has led to the dilemma of a consumer tapped out, no longer able to spend our economy into a meaningful recovery. Reich offers a number of solutions, some constructive, some extreme but worth considering in some form, and some that are grandstanding provocation. The quoted sentence is both provocative and close to nonsense, unless it is in fact a typo.

"A small 0.5% fee" - so a retail investor buys 200 shares of a $50 stock for $10,000 and pays Fidelity their commission of $8 and the government their fee of $50 - or the State of Wisconsin Pension Fund buys $10 million worth of a stock from Goldman Sachs and pays a 6 basis point commission of $6000 and pays a government fee of $50,000.

The fee "on all financial transactions" would quickly fund not only all early childhood education programs but also an infrastructure bank, five years of unemployment benefits, and "a chicken in every pot and a car in every garage" as Herbert Hoover said in his 1928 campaign. A half percent fee on every stock and bond trade would be enormous, and if he really means on every financial transaction such as interbank funding, fx trades, derivatives contracts, home loans, car loans, working capital loans etc., we could no doubt just do away with income tax for all but, perhaps, the top 3% of earners, a clear if only implied goal of the suggestion. Reich's tax proposal is the ultimate value added tax, charging fees that far exceed the profitability of most transactions.

This of course could not work. It would cause the U.S. financial industry to move into stall out style slow motion. Massive amounts of financial flows would move into foreign markets. At five basis points rather than 50 basis points this would be a startling proposal. As written it is preposterous.

In other parts of the commentary Reich wishes that the stimulus had not worked, or even been tried, so that the economy would have fully collapsed and allowed brilliant technocrats like himself to come in and make major structural changes that are needed. He's right that major structural changes are needed but what comes across as bitter arrogance is sort of unattractive.

This op-ed piece began as an insightful look at our economic dilemma that, while breaking no new ground, laid a framework for changes that need to be made. Reich's solutions, however, come from a rigid political mind-set that offers little that is new or creative or even possible.

Thursday, September 02, 2010

"The Nearest Exit" and "The Tourist"

These two Olen Steinhauer novels have received major praise within their international spy and espionage genre. The reviews from major newspapers and magazines put these books in the ranks of John le Carre and Graham Greene, and one even mentions the best of the lot by far, Charles McCarry, my opinion.

Steinhauer does write well. Unlike his prior group of books that were set in Eastern European Soviet era times, these stories are right here in the 2000's and the political and country commentary is thoughtful and at times insightful. The places are detailed with precision and the linear plots keep one's attention better than any television show and without the commercials to boot. Character development is not especially nuanced, but the caricatures are fully drawn. Don't look too hard for humor or subtlety or rarified intellect, wrong genre in general but the old masters mentioned above do slip some in from time to time, while Steinhauer is not quite there yet. That's not a totally accurate comment. Somehow Steinhauer's descriptions of observed mannerisms and behaviors in situations that require astute judgement, such as eluding a tail, work well on the subtlety side.

What bugs me most about those comparisons, however, is that when reading le Carre, Greene, or McCarry I feel as if the descriptions of places and events are second nature, developed from personal or shared experiences that in the first instance were not for literary purpose. With Steinhauer it feels as if it is all expertly researched and developed, in the first instance, for writing books. One could ask, why does that matter if the books entertain and to some extent inform the reader.

What's the difference between a hot house tomato and one grown in a Tuscan backyard. One is a step closer to authenticity and it somehow has a depth that the other does not. Choose the one you want, if the difference matters.