Regardless, the only barriers to constructive change are corporate special interests and their wonderful pool of crooked lobbyists.
Tuesday, March 31, 2009
Regardless, the only barriers to constructive change are corporate special interests and their wonderful pool of crooked lobbyists.
Former International Monetary Fund Chief Economist - Financial Elitism Is Destroying America And Corrupting Our Government Through Influence Peddling
The Geithner plan is unconditionally morally bankrupt and fails to address any of the structural problems facing the economy.
Friday, March 27, 2009
Why Geithner's Plan Is Nearly Guaranteed To Fail And Possibly Destabilize The FDIC In The Process
I decided to do a complete breakdown of the Treasury plan after listening to the comments by Secretary Geithner shown in the Congressional testimony below. Geithner is simply pushing another Treasury ramrod job that had not been subjected to any reasoned critical analysis. For Geithner to state unequivocally that this plan will work when no Treasury plan to date has worked is without logic, reason or truth. Sure, throwing money at the banking system has temporarily stabilized it, but the economic environment is not improving even with trillions thrown at mega banks.
That a substantial number of talking heads in the mainstream economics and investment community have lined up behind the plan is irrelevant. I have not seen a single reasoned analysis of the prospective risks or dangers associated with the plan by any supportive voices. So, without any such analysis we, the sovereign, should view these ad hominem arguments for this plan as self-serving. Why should we conclude this? Because even the founder of capitalism identifies the self-serving nature of market participants as the key driver of economics. In other words, there is a general desire by these communities to save the current financial system rather than transform it into something that serves all of society. Concentrated wealth will obviously support policies benefiting concentrated wealth. Let's be frank. If you aren't part of the club there is no one in this process looking out for your best interests. It is up to you to speak through your elected public servants to look out for your best interests. And you must be persistent because your voice is fighting billions of dollars in lobbying money. In other words, your ace is the ability to revoke your elected official's membership in the club. That is the most powerful card in the deck if used properly.
While I am sure Geithner genuinely believes in what he is doing, as the titled post of a few days ago states, the road to hell is often paved with good intentions. Geithner's surety of a plan that involves incredible risk is a sign he is playing the primary role in the Confidence Trick. This is a trademark attempt by power players to ramrod decisions rather than embracing public discourse to find superior solutions. Remember, power always seeks to consolidate its base in times of crisis. At these very moments it is important that the sovereign make their voices heard. This compels me to give a reasoned and logical analysis of this failed plan and its potentially dire implications.
To start, I want to discuss a few surrounding details of the Treasury's plan which I believe have substantial relevance. Not to its success but to other substantial issues facing society.
It was reported a few days ago that Geithner has been ginning up support for his plan on Wall Street in advance of its announcement. This week's Congressional testimony presented Geithner with a question of whether Wall Street's advance knowledge of this plan gave them any advantage. Geithner's response was a categorical no. Here's reality. Want to bet it's easy to figure out what day this plan was shared with Wall Street? How about within days of this rally. Why have I mentioned this over and over? Well, besides that I'm insane? It is representative of the insider information and lack of transparency that makes it so difficult for an average American to effectively invest in our financial markets. On many levels the game is rigged. In this case, Wall Street knows more about what is going on in our government than we do. Not a new development but most likely relevant to a society now realizing this fact for the first time.
So does this mean this rally is contrived by Wall Street? Front running the announcement as we wrote last week? Orwellian manipulation of the public? Our 401Ks are going up so we should be happy with the Treasury plan? It is classical Wall Street whether this is true or not. And, there is ample evidence it is. It's hardly a surprise that we had a rally. The Transports nailed our downside target within a few percentage points and the S&P hit our downside target zone. But it appears to me that something stinks beyond the normal stench. Citi going from 99 cents to close to $4 seems more than a little contrived or pointing to insider information. So are similar moves at other mega banks - the sole benefactors to this bailout scheme. Why else would mega banks rally so disproportionately? There is no logical reason.
Anyway, let's look at the Treasury plan. First, here's a very simple fundamental reason why it won't work - we are just pushing around paper. That's it. Okay, a little more detail is warranted so let's break the plan down into a very simple analysis because it really is simple.
If you own a toxic asset or I own a toxic asset or Elmer Fudd owns a toxic asset, it equally impacts capital in the economy. It simply doesn't matter who owns the asset given a finite amount of money. In other words, if there are ten people in a small closet and someone sets off a stick of dynamite, does it really matter who is actually in possession of it? If banks own a toxic asset, a ridiculous theory put forth by Treasury is that it keeps the bank from lending to the private economy. A private economy that supposedly has capital it wants to use to initiate loans with said banks. Yet banks are unwilling to lend because they are holding toxic assets? This is a cockamamie theory. Remember there are 20,000 banks and credit unions that can supply loans in the economy. Most are reasonably healthy. The Treasury's plan is focused on less than two dozen. Private capital can already initiate loans in the other 19,980 institutions without Geithner's plan if they so desire or if they are credit worthy. Anyway, for argument's sake, let's assume Geithner's notion is true to continue with our analysis.
If a bank transfers a toxic asset to private hands under Geithner's plan, they can do so in one of four possible transactions:
1) They can do so at par value. In that case, there is no incentive for the private investor to buy the asset. There are substantially too many risks for this transaction to be appealing to private investors. Especially in today's environment.
2) They can transfer the asset at a loss which further erodes the banks capital and puts them in a worse position than before the toxic asset sale.
3) They can transfer the asset to their own economic benefit, ie above par, at which point the private investor has no incentive to acquire the toxic asset.
4) A middle man or third party can be inserted into the transaction to take on substantial loss or risk of loss in the transaction so that both banks & private investors or one of the two have sufficient risk/reward ratios to participate. That third party would be the American citizens and the FDIC under Geithner's plan. In this scenario the transaction is effectively rigged and the middle man is left holding the bag. As economics tells us, in a rigged transaction or a asset transfer transacted outside of free markets, there can be no true price discovery. Thus using private investors to acquire toxic assets while utilizing a third party to absorb risk as the Treasury plan attempts to do, creates a fundamental mistruth in any attempt at price discovery. In other words, an attempt to use free markets in this scheme is a gross mischaracterization and dishonest at worst.
So, only two of four scenarios will clear the toxic assets off of bank books. These two scenarios are either ridiculously inept decisions for the banks or for American citizens. If the first is true, banks are exposed to greater losses. If the second is true, well......you get the idea. Care to guess which outcome has a near certain probability of coming to pass?
So, let's continue and assume we live in a world of dunces and banks actually do transfer toxic assets to private investors in one of the scenarios above. Now what? Do you remember our many posts about The Game? (I reposted it below if you weren't a reader at that time. In a nutshell, in The Game there are macro circumstances today which lead to continual deterioration of asset quality which ultimately fuels recursive losses and asset unwindings until The Game is over.) You can read the repost below if you want more details.
Let's apply The Game to the outcome of asset transfers under the Treasury's plan. Let's assume we have now exercised the plan and private investors own the bank's toxic assets. First, if banks have sold assets below par the banks either now need additional capital or they are going to be hampered in lending new money. In other words, paper losses at banks have become realized losses and the banks will need even more capital injections. That's the first problem. Forget about the FDIC and citizen involvement in the transaction for a moment and let's look at the private investors acquiring the assets. Over time, we can expect these assets to erode in value because of current fundamentals as we wrote in The Game. How do I know this? Today, we are making an assumption The Game is not over. Soon, I will share a post that provides data confirming The Game is not over.
Banks have now rid themselves of toxic assets so they could theoretically start lending again. (Geithner's premise for this plan.) But, because of The Game continued erosion of the toxic assets in the hands of private investors actually has the effect of reducing capital in the private economy and, hence a reduced desire for the private economy to borrow. Remember, there is a finite pool of capital in the economy and regardless of who is taking the loss, the consequences have an effect of reducing that pool. This is regardless of whether private investors take future losses or whether taxpayers or the FDIC takes the hit through their burden of risk in the transaction.
So, effectively what Treasury's plan has done is exactly the opposite of its intent. It has made the crisis worse - the law of unintended consequences. It has actually reduced the ability of the private sector to borrow by reducing capital in the economy. It also has the impact of reducing the capital in the private economy needed to conduct existing nonfinancial business. That means the newly refreshed banks will ultimately see an even further erosion of their balance sheets as less private capital is available to pay other existing bank debts assumed to be "good" assets before the execution of Treasury's plan. Or even new bank loans that will be initiated after the execution of the Treasury plan. Geithner's plan ultimately leads to further destruction of bank capital, further destruction of private capital and a larger crisis.
Given the FDIC has been pulled into this plan to backstop risk, failure of this exposes the FDIC to substantial loss. Now, what impact would this have on the FDIC's role of protecting citizen's bank deposits? Remember the FDIC's intent is to protect our deposits. To protect us from mismanaged banks. Not to be exposed to risky schemes that threaten confidence in the FDIC. Or to prop up failed management and insolvent banks.
This plan transfers even more wealth from those least able to bear the burden, the American people, to a chosen few. First Paulson then Geithner and now a future bureaucrat will be tin-cupping for another bailout. When will this end? When The Game ends. That is, when we have bankrupted society or when we have printed a mountain of money thus further destroying private wealth or when toxic assets reach an equilibrium or when these actions have created an environment of social unrest or some combination of the above.
Did anyone in government ever take a math class? Hey Washington, Free Lunch economic theory doesn't work.
How many bailouts have we had now? Remember Paulson confidently told us $700 billion was enough. By the way, that was after he repeatedly told us how great the economy was. Geithner is the new leader in the same Confidence Trick. $10 trillion later the same hacks are still playing games with our future.
One point I find most troublesome is that there are six billion people on this planet and we can't seem to get beyond the ideas of a handful of people with substantial conflicts of interest, bias and little knowledge of how to solve this crisis using sound reason and logic. This very fact is contributing to the negative consequences and raising the long term risks for everyone. This is indicative of an elitist culture that eschews the intellectual capital of society. Of public discourse, of peer review, of the inherent problem solving ability of a free society. In other words, placing the economic decisions for hundreds of millions of people in the hands of a few back room decision makers is exactly the economic model embraced by the Soviet Union. It will result in miserable policy failures and terrible economics.
Are politicians really that foolish or simply that beholden to Wall Street? This crisis is far from over.
Remember, I posted this before this crisis developed. So, it is in future tense. Keep that in mind given we have already seen The Game develop. In fact, The Game is exactly what has collapsed our financial system and the global economy and what will contribute to the Treasury plan's failure.
Repost of The Game.
Question: What if an environment existed where there was significant leverage in many assets and very large bets across all assets. And, let's say some of those assets are more liquid than others. And, that some assets are actually quite illiquid. By that I mean there is not a clearinghouse or large auction market with substantial players to trade that asset. A piece of art may be an example of an illiquid asset. And, let's say any one of those bets turns against one of the players or many players. And, let's say one day players have to recognize that bad bet(s). In doing so, the players have to recover a stable financial position. In other words, they need to raise capital to remain liquid and stay in the game. Or, in a bank's case, remain solvent. And, let's say it has become impossible to raise that capital through the sale of semi-liquid or illiquid assets. And, in a worst case scenario, let's say the illiquid assets are the ones that have turned against those players. What are the players forced to do? And what are the consequences for the players and for the asset markets they've invested in? Both short term and long term?
Answer: There are many outcomes. One is forced selling. Even many deeper angles on the selling. One of them is that players are left with continually deteriorating BAD bets while they sell their good bets to remain in the game. That has a self-reinforcing or recursive effect of selling more and more good bets while more and more bad bets draw down their capital positions over time and thus continually erode their capital positions until either bankruptcy, capital injection or bad bets stabilize. Selling of good bets are not just paper assets or traded assets but could be other parts of the company, people, their trading businesses, etc. And, what might that mean for hedge funds that rely on them to stay in business? And, what does that imply for intrinsic value of these players? That said, there are still so many other angles.. .....But, we'll all watch as it unfolds.
The Federal Reserve's Plan - We Don't Know What We Are Doing But We Are Committed To Doing More Of It
Yellen admitted that it was hard to prove that the new programs were working.
"We simply don't have the experience needed to pin down the magnitude of the impacts," she said, but added that this was just another argument in favor of a broad, aggressive, approach.
When I'm riding in a 747 jumbo jet, I am usually comforted by the fact that the pilot isn't flying blind.
I never thought I would say this but I think Geithner is on on a very hot seat. Not just for this but for his seeming lack of clarity, transparency, doublespeak and even robotic demeanor. Unfortunately for him, appearance is a major component of success in politics and his interactions often appears contrived and very politically guarded. Whether the President is supportive or not, eventually if a politician becomes such a major distraction to policy and getting anything done, they must be replaced to refocus the engine on policy or loose political value to further any agenda. The media and political sharks from the right and left are all over Geithner. If the Geithner bashing doesn't cool down, this is going to create a tremendous political crisis. Frankly, if I were to calculate, I would say it is a crisis we might actually need while we still have some ability to blunt some very risky political involvement in the economy.
Frankly, this was all avoidable. But, even today the political elite of both parties severely underestimate the mood of the country regardless of political affiliation.
Update: More interesting op-ed on Geithner's gaffe than the link above.
Wednesday, March 25, 2009
While the rest of the world was enamored with emerging markets and their cash generating economies, we wrote that they would eventually be put in a position to no longer buy U.S. bonds. That their surpluses would be burned in attempts to save their own economies and bankrupt banking systems. My position surely seemed hilarious as China, Russia and Dubai, amongst others, were apparently ready to inherit the earth. But, we wrote that these economies would collapse. And they are collapsing.
Why would anyone listen to some obscure blogger with no formal economics training when Nobel Prize winning economists were busy pumping Pax Globalia? The same reason why no one would ever listen if I said I know how to solve America's economic crisis. Something we have written of on here. That would be a misplaced belief system. That those with the microphone or positions of authority have all of the answers. Yes, there are solutions contrary to the yammering crew that says we should just let society collapse and the system will take care of itself. A position of sheer madness. Ironically, solutions are based in sound economics, something the mainstream economics community seems to know little about. Why would they? They have been trained by universities that have eschewed common sense.
Time for a short rant. Anyone without a mainstream view is always marginalized by society and the status quo. Be unique. Be yourself. Be progressive in your thoughts. Throughout history the status quo never advanced anything in culture, arts, literature, science or human achievement. And they surely never advanced human equality. For that very reason they won't solve this crisis until we see substantially more pain. Wall Street bankers and politicians are trying to save the status quo yet the economy is giving them a gift. It is telling them exactly how to solve this crisis. Is anyone listening? Sure. Many people. But none of them have the microphone.
Now obviously these bond failures have dire implications. We wrote of that as well while the world was partying - long term sovereign bonds getting plastered. We haven't specifically written of the end state of this crisis but it's not terribly difficult to draw some easy conclusions from my writings. Here's two. One, the world is moving to a self-funded economic model. Sorry but I've said globalization is dead so many times on here I feel like a parrot. At some point G20 leaders will quit holding photo-ops and realize the world has permanently changed. Until then we'll watch Rome burn while the status quo tries to save itself. ( I'll write more outcomes and dynamics of the end state at some point. I just can't promise when.) And, two, even more disconcerting is this environment will impact sovereign entities with consequences outlined in the many posts I have written regarding The Game.
I have a post for tomorrow or Friday outlining the failures of Geithner's plan. I will repost the the dynamics of The Game. So, you can check back then or you may check the January 2008 archives to read what I am talking about. The post I am referring to is "There Was No Reason To Panic..............".
Tuesday, March 24, 2009
Tell me again why I would want to own stocks?
Global Auto Sales For Japan's Big Three Implode
Toyota's Japanese sales -56%
Honda's global production for February -43%
Honda's Japanese sales -48%
Nissan's global production for February -51%
Nissan's Japanese sales -69%
When the yammerers were all pointing to the success of Toyota, Honda, Nissan and others, we wrote that Toyota was likely in trouble and before this crisis passed all major global automakers would likely be bailed out. Toyota, Honda and Nissan have already gone to the Japanese government for bailouts. All three companies are effectively bankrupt. It's just a matter of time. They will surely survive but it will likely be without much of the capacity they developed in emerging markets. We have never wavered in our dislike of emerging markets. And, regardless of the clueless seeking to remount that ride our position will not change.
Remember, we wrote that the yammerers telling us we should let GM, Ford and Chrysler fail were utterly clueless. That this crisis was not a failure of management. No one has been more critical of failed American auto management over the years than I have. I even saw someone using Schumpeter's creative destruction to justify the rationale of allowing these companies to fail. As I wrote, that is ridiculous. Creative destruction involves the replacement of an industry or product with a new product. Schumpeter was clear in stating the new product must exist before the destruction. Minor problem. What's the new product? Donkeys? Camels?
So, I guess the Japanese government should also let Toyota, Honda and Nissan fail for being fiscally irresponsible? These are three of the best managed companies on earth. Where do these blabbering bullshitters come from? Let's just let the whole damn world fail. Then we can all live in caves and forage for grubs with sticks in our new economic model. Then those advocating such ridiculous positions can write their brilliance on stone tablets and stand on boulders to scream that they were right. It's not a wonder our economy is in shambles. We listen to idiots.
A government controlled bankruptcy reorganization was what we thought should happen. That's probably where we are headed anyway.
It really doesn't matter how we get to the end state of this cycle anyway. There is only one possible macro outcome. What the reserve currency is won't matter. We'll talk more about this at some point. But, hey replace the dollar. I'd be just fine with such an action.
On a final note, I'm not an attorney but I do believe the U.S. has right of refusal to any changes in the status of the greenback as the world's reserve currency. Unless the world wakes up and decides it will no longer accept dollars, and that isn't going to happen, it will be interesting to see if this political rhetoric gains traction.
Monday, March 23, 2009
What's Driving The Rally?
Some of the measurements of credit in the economy have finally started to gain traction. Not a surprise given the government is demanding that banks lend. Not exactly a brilliant strategy. We will suffer for this at some point in the future. Forget about all of the bloviating about what is driving the market. The press is not a source of truth when it comes to why markets move. What we are witnessing now is a classic Wall Street scheme. Because Wall Street has monopoly access to credit, it allows them to front run credit in the economy. In other words, if Wall Street can rally the markets, they will. Not because of reality or fundamentals but because they can. That's the insider's scam. It has nothing to do with the wisdom of Wall Street. Wall Street's wisdom is Ben Bernanke. And Bernanke is now finally pushing on the accelerator with both feet.
Even though banks are still in no man's land, they have rallied very substantially in the last few weeks. Obviously, there was either anticipation of the Fed and Treasury's actions or Wall Street was tipped off. Not terribly surprising given half of Washington used to work on Wall Street or vice versa.
50% of global wealth has been destroyed, national incomes around the globe are imploding and the world now has twice as much debt as it did just a few years ago. So, when the burden of this crisis hits home, reality will set back in. In the mean time, we'll see how far they can push. They are pushing awfully hard awfully fast.
By the way, it's worth repeating something we have written on here for years. There is no demand for capital in the American economy. So, all the Fed is doing is re-igniting the same mess we had before. That is why commodities are screaming. Soon, the economic suffering caused by the Fed's actions will likely create another self-fulfilling prophecy - to slam the door on credit once again. I fear those running for bonds right now are in for a very rude awakening at some future point. Does anyone in Washington have a clue? It sure would be nice if they no longer taught Ponzi economics from this point forward.
By the way, how did you like the specifics of the Geithner plan announced today? Taking from average folk to give to bank executives, bond holders, private equity, hedge funds and the sort surely rises to the level of tyranny. Plus, there's one more minor detail with the plan. It won't work.
As we have written, Wall Street could very well never see the glory days of the late 1990s to 2007 ever again. Ever. That would be a very good thing for everyone. That includes those working in financial markets.
Government needs to quit trying to save a system that has failed. The system is failing because of its inability to serve everyone in society. We need a new financial system for the betterment of all. This is one of the fundamental causes of today's economic environment. The answers are so obvious it is blinding. But, our government only responds with transformational change when there is tremendous crisis. Primarily because only a tremendous crisis mobilizes the sovereign into action. Just as Wall Street is not the source of society's wealth, politicians are not the source of positive and lasting change in society.
Do not be deterred by those with the microphone attempting to paint the growing public responses to this crisis as that of a mob, that is simply a ruse by those fearful of change. It is a view held by those trying to save a system that is bankrupt. As Thoreau's timeless Civil Disobedience told us, these minions have served the master well.
The mobilization of the sovereign against corruption, cronyism, inequality and the status quo is the fundamental building block of democracy. The demands for change are seeds of democracy taking root again in America. They are winds of transformational change. A sign that democracy is alive and well. It will not be Wall Street or government that leads us out of this environment. Nor will it be the minions that have served these masters well. It will be the sovereign who re-assert their primacy. It will be you. One must remember the root of this crisis is not the tyranny of the mob. This is a crisis founded in economic liberties and demand for equality of economic opportunity. What we are witnessing is the sovereign responding to the tyranny of the few. Of those who would be king.
This crisis is far from over. The sovereign have much unfinished business. Stretch your legs of democracy. Now is the time for you to lead and the bureaucracy to follow.
Interestingly, Harry Markopolis, the individual who begged the SEC to look into Madoff's Ponzi scheme numerous times over the last nine years also mentions the involvement of organized crime in the global financial system during his Madoff testimony before Congress.
George Orwell would be proud.
Sunday, March 22, 2009
More Egregious Tyranny - First Leaks Of Geither's Plan To Pump Another $1 Trillion Into Less Than Two Dozen Banks
Who is going pay for this? Those least able to afford it. Those making $20, 30 and $50 thousand a year. Who will benefit? Read the last post - the same financial system that created this crisis. The chosen few. Not chosen by the markets or by merit. Those chosen by the government.
The tyranny of the minority remains in play.
Saturday, March 21, 2009
This idea of a public-private partnership is another example of stealing from society. Americans have never been presented an option at the voting booth to sell off public assets. These public-private partnerships are a method for major corporations and large concentrations of capital to acquire publicly owned assets. Almost always in distress. Almost always at prices equating to extortion. Why else would government sell off a toll road or a bridge or any other asset? Because they were one, fiscally unable to manage that asset or two, were lobbied by special interests with a desire to acquire assets beneficial to these special interests. ie, The two scenarios are most likely distress or seamy dealings. Now we see concentrations of private capital in the financial industry are on the verge of the greatest heist in history. And, the American people are about to be the victim.
Warren Buffet recently remarked that the best investment returns on a go forward basis could very well be many of the distressed assets sitting on the banks books. The very fact that Geithner's plan involves government buying these assets and reselling them to private financial corporations and financial firms is a red flag. The recipients of this scheme are the same general group of financial firms complicit in creating this mess be it private equity or hedge funds or other financial entity. And, Geithner's plan uses taxpayer backing to ensure these assets provide a substantial return to these firms. In other words, society is again taking the burden of risk and the same system that destroyed the American economy is going to be positioned with assets that Buffet believes are likely to be substantially lucrative investments. How does this benefit society? Once again Americans are getting the shaft. Not only did we get to bail out this crooked scheme in the first place, but to clean up the mess the taxpayers are again going to get the shaft while we sell these assets back to the same financial system at a significant loss to society? You have got to be kidding me. This can be characterized by no other analysis than stealing from society. This scheme rewards the very few "connected" firms under the same crony schemes that created this mess.
If the government feels compelled to run the world, why should they sell off anything to create profit for a select few? As the expense of society? What ever happened to the original HOLC program we first wrote about when this crisis started? Something Alan Blinder proposed a year ago. This solution isn't palatable to the "connected" firms that are attempting to pull the strings of our government. Why do we need to sell off anything at distressed prices? To a chosen few? If the government feels compelled to buy distressed assets, why aren't the assets held in a public trust? For all of society to benefit from or to be burdened with? If society is told it is a necessity to bail out bankers to save our economic system from collapse, then why aren't policies for the benefit of society? There are surely thousands of better ideas put forth by competent minds.
This is exactly what happened in the last real estate fiasco around 1990. The financial industry created a real estate crisis. Then as the system shuddered and went bust, the distressed assets created by the crisis were sold back to the same financial industry at fire sale prices while the taxpayer was stuck with the bill. The end result? That was so fun the financial industry did it again! And here we are at the same crossroads. Society is being bilked for the benefit of a chosen few. And, how are those "chosen few" chosen? I would surmise there is an interesting trail to the origination of these ideas. Might it be from those who have the loudest voice in government? Might that be lobbyists? The same lobbyists that bilked government of taxpayer money for Wall Street in the original bailout? The same lobbyists that deregulated our financial system to create this crisis? The same lobbyists who convinced government that bonuses should be part of any bailout? The same lobbyists that were paid billions by financial firms. Financial firms that used our money to pay them? Any plan that involves a public-private partnership is not in the best interests of America.
This is more of the same scheming that created this mess - steal from society and give to a very few. Geithner's public-private plan should be dead on arrival. This scheme needs to be exposed to the American people by a press attempting to educate and inform the sovereign. Legitimate public discourse and discovery is the only answer to the problems that face this country. Not more of the back room dealings of politicians and the finance industry.
This has got to end. Our corrupt financial system continues to destroying society.
Gun Manufacturers Are Shooting Higher
I grew up in a small farming community so I tend to think I have somewhat of a reasonable contact list to develop an anecdotal perspective on the gun market from collectors, hunters and farmers. There is ample evidence the gun trade is booming right now.
Above is the stock of gun manufacturer Smith & Wesson. The price has more than doubled in a few weeks on heavy volume. Frankly, gun stocks, although somewhat thinly traded, may provide a reasonable hedge just as their products do. Possibly a safer hedge than gold.
Friday, March 20, 2009
Were the press doing their job by informing and educating the sovereign, Geithner never, ever would have been confirmed. The American people never would have allowed the confirmation of the head regulator of Wall Street. But, instead the press gave the new President a pass. How's that working for you?
Confidence in Geithner is waining fast and that means the new polity in Washington has its first crisis in the making. And, I do mean polity. As the saying goes, if you want a friend in Washington, get a dog.
How much money is involved in doing a reserve split? I suspect the cost is a relatively substantial waste of bureaucratic paper pushing. Something Wall Street is good at. I wonder who might be paying for this? Oh, yeah. The same people paying for the Citi CEO's new $10 milion office. That would be you.
Now, what price will the company trade at with that reverse split? I need to line up my next short trade. I figure it will probably be the only way the American people will get some of their bailout money back.
Thursday, March 19, 2009
Yesterday's Fed Announcement And A Major Cause Of This Crisis - Transparency
The real issue with the Fed's announcement is of transparency. Of individuals having access to the same information as Wall Street or politicians playing games with our money and our economic livelihood. Of repealing standards to ensure our banking system would remain safe, of being influenced by $3 billion in lobbyist money every year. Of playing games with our economy and banking system that has led us to this point. Therein lies what I believe may be the largest problem we are facing as a nation. One that spreads across government, business, Wall Street, boards of directors and on and on and on. Something that has been a major theme on here. The average American doesn't have access to transparency. Of what scheming decisions are being made and why. Of why changes are being made to the rule of law that we only find out about years after it has happened. When it has already negatively impacted society and may even present irreversible crises. Americans have no confidence not because our political and business leaders aren't good speech makers, as the new President surely is, but because we don't know what is going on. Because we have been deceived and continue to be deceived. This cannot be fixed by printing money or giving lip service to a new age. It can only be fixed by airing all of the dirty laundry. Of knowing from this point forward what every politician, lobbyist and board of directors is doing. Of reeling in the self-appointed ruling class and demanding that our economic policies are populist policies. Not secret agreements that line their pockets with our money.
Okay, as an after thought, lets address the Fed's announcement yesterday. First, as we've said before, money moves markets. And, yesterday's next step in quantitative easing is why the banks have rallied so hard. My favorite group of intellectual heavyweights on CNBC actually said yesterday that we don't need to worry about China buying our treasuries because the Federal Reserve will. That's a brilliant analysis. Let me give you my own analysis. If I applied yesterday's Fed logic to my personal situation, this is what it would mean - I could write personal checks then cash them myself with no money in my account. Then buy whatever I want to with the money I had just created. And, you as a business owner would accept that money. That works. I want the banking system and society's deposits to be saved but let's get real. The Fed may have stepped on the accelerator to allow a stock and bond market rally but it has solved none of the underlying issues that caused this crisis.
Quick update: I should have remarked that this still does not change my position on inflation versus deflation. I was probably the only person on the planet to sacrilegiously write last year that the Fed could print a reasonable amount of money and not cause inflation. We have seen $50 trillion taken out of the global economy. Central banks cannot monetize that loss. Nor can they monetize any substantial future losses.
We are seeing tinges of nationalism often disguised by other venues or circumstances but one such blatant example is China's refusal to allow Coke to buy Huiyan Juice. The denial was officially based on the grounds of monopoly status. And, the language was really quite pretty. But, be clear. This is rising nationalism. I am a firm believer in monopoly statutes being enforced but this example is beyond silly. While most people inaccurately consider China to be comparable to the U.S. in its embrace of capitalism, it is estimated that 80% of China's domestic output is controlled by the state or state-owned enterprise. Maybe that number is off by 10-20% but it makes a point. Monopoly is fine in China as long as it's a monopoly by the state.
Obviously, we we see similar behavior in Britain, Germany, France, Canada, Russia and the U.S. as examples but I found this particular example to be of great irony.
Wednesday, March 18, 2009
The Chairman Of The Senate Banking Committee Admits To Inserting Loophole In Stimulus Legislation That Allowed AIG To Pay Ourtrageous Bonuses
It might also be of interest to know that Dodd was also the largest recipient of AIG donations in the 2008 election.
Of course, now he wants to give AIG their money back.
Our country is for sale. And, so is our economic livelihood. To the highest bidder be it banking lobbyist, a lobbyist for corrupt foreign governments or anyone else who has the cash to buy influence in Washington. I'll beat this drum until this situation is fixed but government is responsible for every single economic problem in the economy today. And, if you are unemployed and reading this, your job loss was because of government meddling or worse.
My two favorite remarks in the article are:
The schools suffer from “an overemphasis on the rigor and an underemphasis on relevance,”
“The new logic of shareholder primacy absolved management of any responsibility for anything other than financial results.”
What that really means in unvarnished terms is what business schools were teaching was how to build a sand castle. A sand castle built on the beach at low tide. And, now the tides are rolling in. The long term seeds of renewed economic leadership continue to be planted in the American economy.
Spitzer's article at the title link raises many legal and moral questions most worthy of answer on behalf of society. In fact on that note, I would suppose his knowledge of Wall Street might actually be of value in framing policy and Federal investigations were there ever to be any - another political miscalculation in Washington that is causing substantial resentment and lack of confidence on main street.
Goldman Sachs, for one, has seemingly become the largest financial beneficiary of anyone in this country courtesy of the American taxpayers. I think we can now conclude Goldman is vying for the title of consummate crony firm. Unless, again, there is some other explanation for them receiving such a stack of cash while Americans rot in unemployment and welfare lines. Do tell. We are all ears. Is it any wonder Goldman wants to give the TARP money back? They seem to have more taxpayer money than Fort Knox. How utterly vile and disgusting can these firms be? They have received massive sums of taxpayer money without our consent. This elitism and pompous arrogance sickens me beyond words. Is this Thomas Jefferson's America? Abraham Lincoln's? Martin Luther King's? Susan B. Anthony's? The hundreds of millions of good people of this country are being shafted. And that is the biggest blow to confidence imaginable.
The Producer Price Index Is Showing No Signs Of Inflation
If anyone wonders why this this debate about inflation or deflation (It's not really a debate so much as it is misinformation and a lack of appreciation for fact-base analysis.) issue is so important, all one needs to do is look at the world around us. If one was positioned for deflation, they have made money in this cycle. If by doing nothing else, by hoarding cash. If one was or is anticipating inflation, their investment returns are the worst since the Great Depression. And, they have exposed themselves to great risk of bankruptcy or great financial stress. Be that governments, companies or individuals.
Because policy makers really don't understand deflation, they have no ability to combat it. The monetary characteristics of deflation are symptoms not the root cause. But, when the only tool one has is a hammer, every problem looks like a nail. Because deflation isn't a nail, today's policy will fail to stop it.
Below is the latest Producer Price Index released yesterday. The three right-most columns are what I want to briefly comment on. The columns labeled crude, intermediate and finished prices. Crude prices, not to be confused with crude oil, but instead early-stage processing, have been weakening for some time. As one would expect deflation is spreading like a virus from crude to intermediate and then finished prices as this satan of economics works its way into the economy.
The PPI numbers would be almost certainly be double digit declines were the Fed not to have backstopped the markets. Because they have, we will likely see a dripping deflation with no end in sight unless policy fails completely or unless we see policy changes. The possibility of a slow elongated torture exists. If central bank backstopping fails, we'll see a very swift and murderous deflation. There are simply too many moving parts and yet to be determined events & policy to get a clear visibility on specifics beyond some handful of months. So, we wait and watch as many unknowns reveal themselves.
As an aside, it may be of interest to note that this month's PPI announcement showed hog and cattle pricing falling substantially. We have already started to see early signs of farmers unable to make a profit killing animals to avoid bankruptcy or substantial economic loss. Something that would be anticipated in a deflation - talk to farmers who lived through the Great Depression. The risk is building for a substantial bust in the agricultural business. More on that later. Just a place marker given many including Jim Rogers, who has seemingly been on the wrong side of every trade for quite some time, are very bullish on the agriculture business. Not I.
click on the graphic for a clear view.
Tuesday, March 17, 2009
It's quite amazing to me the rhetoric coming out of Washington over the AIG bonuses. The Federal government basically owns AIG. It was quite easy to write terms into this bailout. Or any of the bankster's other crass behavior with our money. That wasn't done because politicians didn't want to offend the very hand that feeds them - the finance industry. Now they cry foul. A very hollow cry. I've become completely deaf to anything said in Washington until I see real actions.
Washington created this crisis. Every single problem in the American economy originates in Washington. And I do mean every single one. Now the government is going to save us? No. The reality is far different. They see what regulatory changes, law changes, policy changes and political favors have done to the economy and now they are trying to save their own ass by covering up their complicity. No easier way to do this than throw the American people's money at the problem in a last ditch effort to hide the truth from the American people.
Politicians are in the other people's money business just like bankers. Politician's spend other people's money on projects that, in return, give them yet another person's money. In other words, politicians spend our money on pet projects or to affect rules changes or to steer policy in a direction beneficial to a special interest or to deregulate the banking industry so companies can steal from society or whatnot to get lobbyist donations, campaign contributions from those benefiting, crony jobs when they leave government, paid vacations and on and on and on. This is all easily fixed. It's called publicly financed campaigns and transparency. But, the only people policing the process is the American people. We must demand change in Washington. Not rhetoric. Change. Ain't no substantial change in what needs to be changed regardless of the rhetoric and the enthusiasm for a new President.
Today we actually had a politician remark that AIG executives might consider committing suicide to paraphrase the remarks. We need reform but we don't need this type of rhetoric from a politician. The last thing we need is political rhetoric that whips someone into a frenzy because of this crisis. Someone that then goes out and does something terrible to exact revenge.
Interestingly, at the title link above, we see that some of the most vocal politicians speaking out against AIG are the ones who have benefited the most from AIG's donations over the years. This highlights another primary skill of politicians - talking out of both sides of their mouth. Not to be confused with lip service. We'll talk more about lip service later.
St. Patrick's Day
Monday, March 16, 2009
American Taxpayer Bailout Of AIG Goes Directly To Foreign Banks
I believe policy makers are severely underestimating the negative sentiment they are reinforcing - something we have highlighted as far back as the second half of 2007. Their policy actions are destroying any semblance of confidence that remains.
Sunday, March 15, 2009
Why is this any different than a parent giving a child an allowance without any rules on how to spend it, then being surprised when the kids spend their money at the candy store. Looks like Wall Street likes the candy store as well.
What's the moral of the story? Maybe we should replace many of the idiots in Washington with someone more qualified - that would be responsible parents who know how to regulate the behavior of their children.
I actually like Bernanke and think he's a genuine bureaucrat. I don't use that word in a derogatory fashion but in a true sense of the word. He is a bureaucrat. He serves an ideology whether it is right or wrong. And, that is what he is elected to do. I obviously don't like the helter-skelter approach the Federal Reserve is using to deal with this crisis. And, think some of Bernanke's beliefs are inaccurate. That could ultimately cause severe structural damage to the economy beyond what is already evident - a major reason why such a pseudo science should never be put into the hands of a single person or a small group of people.
Madoff - Does The Money Trail Lead To Washington?
I do think it is interesting we wrote that the fund of funds concept was a surety to disappear and that Wall Street was riddled with sociopaths. When the Madoff story broke we learned that fund of funds took the biggest beating and have tremendous liability in the Madoff scheme.
It's also interesting that the linked to article cites a single regulator as one of Madoff's desires and we have written twice over the last year that this concept of a super regulator or single regulator would be an incredible mistake. As we wrote, it is what Wall Street wants. For God's sake, the super regulator was Hank Paulson's scheme. Paulson was a Wall Street leader pushing for law changes that destroyed our banking system when he was at Goldman. As we harped, why does Washington need to replace the regulatory structure that has served us well for eighty years and replace it with a single regulator? It simply needs to re-instate the regulation that was overturned. A super regulator offers no checks and balances for points of control & oversight. This will surely increase the probabilities of corruption and fraud.
Some people still actually believe regulation will kill the golden goose. Or do they? More likely those arguing against regulation have ulterior motives and simply don't want the citizens of this country having insight into what they are doing.
There are really good people working on Wall Street but then they didn't cause this any more than you or me. As we have said for years, Wall Street is using our money to speculate against us in the financial markets. They win, we lose. They lose, we lose. Wall Street has become the market and the economy. And, it's our pensions, corporations, government clients, businesses and other institutional customers they've duped this go around. The riches are much more lucrative when duping institutional clientele. They have much bigger pockets. It also means the Wall Street profit bubble is substantially larger than most anyone still imagines.
Anyway, a more interesting take Madoff is where the paper trail leads us. Apparently to Washington. What a surprise. Don't read this is you aren't ready to believe that white picket fences don't exist and that many politicians actually could care less what you think. At least the politicians that have been in Washington for the last twenty years. It would be a glorious day if they would all resign.
As tragic as the Madoff scam is, it is trivial compared to the size and scope of scams perpetrated on Wall Street. We currently have $10 trillion in government money backstopping financials and it's still not enough. The Madoff scheme is one half of one percent of that amount. While I feel great compassion for those who were criminally terrorized and even financially destroyed by Madoff, comparatively it is a distraction. It's time we quit effing around and get the scalpel out and do some major surgery on how our financial system operates. And, more importantly, how it interacts with our political apparatus in Washington.
Saturday, March 14, 2009
Friday, March 13, 2009
A Befitting Friday The 13th Post - An Interesting Look At The Circus We Call Wall Street7:27 AM links to this post
Thursday, March 12, 2009
The search box at the top left hand corner of the blog works marginally but the Google site search in the right hand column of the blog has been nothing but trouble over the past 18 months. After receiving a fair amount of complaints I just installed PICO Search. Google's site search results often excluded over 90% of the posts. After some initial testing, PICO's results appear to be completely accurate. While I haven't yet removed the Google search box, I'm simply running a few tests before it hits the trash heap.
S&P Cuts GE's AAA Credit Rating - And Then There Were Five
An interesting factoid - the number of AAA rated companies have dropped by 90+% in the last thirty years. How's globalization working for you?
Cramer is going to be on The Daily Show tonight. I guess CNBC never learned that "he who speaks last loses". Doesn't GE have a crisis management team or public relations team to manage these types of issues? It's apparent Cramer believes he can talk his way out of this. Whether GE supports this approach is another story.
The psyche of the country has changed. The public wants its pound of flesh and the press has adopted the mantle of being their mouth piece. It should be quite interesting. If you miss the show, videos of all prior shows are on The Daily Show website link above.
John Stewart Does More "Turd Mining" Of CNBC - The Worm Has Turned
But, then being driven by profits in lieu of truth, CNBC serves its master. There were plenty of voices of concern. Maybe a very small minority but still plenty. Get this CNBC. Bloggers have invested the time to fill the vacuum left in the search for truth. A vacuum left when your ratings and profits became a more important investment than the safety of the investments of hard working Americans. Were you on the search for truth as the press should be, instead of this sycophantic kowtowing to profits over intellectual purity, you too would have been writing about this crisis before it developed. In fact, your reporting may have actually thwarted this environment by "outing" the scams and schemes before they became Ponzi mountains. CNBC doesn't hire award-winning journalists. It hires barkers that can captivate an audience for the greatest entertainment on day time television.
Click here for the lastest comedy in the mud slinging session. Cramer's public belittling of Stewart is pouring gasoline on the fire and giving Stewart more comedic content to bury CNBC. In other words, Cramer is tightening the noose around his own neck. Some people think they can talk their way out of anything.
The backlash to CNBC and Cramer are building as many in the press see their savings evaporate, their companies collapsing and their compatriots, friends & family getting dumped on the street. The sharks are circling and they will have an enormous impact on the collective psyche of society. And our long time prediction that Mad Money will go the way of the dodo bird as this cycle ends will likely become a reality.
It was just a short time ago Cramer seemingly ruled the world and gained near cult status. I doubt there is any turning back. The worm has turned.
Wednesday, March 11, 2009
Yesterday's Stock Market Rally
As I mentioned a handful of days ago, we are more oversold than at any time since dinosaurs roamed the earth as measured by the deepest decline without a rally of at least 50%. We are also more oversold on an intermediate term since the onset of the Great Depression. On a short term basis we are more oversold than at any time this cycle. Plus, we stopped right at technical support of 660 on the downside. (Actually 666 for any Revelations readers anticipating the end of the world.) Plus, we have two upward gaps in the S&P that were begging to be filled. One was filled yesterday and the other is in the process of being filled today. The massive volume in many ETFs shows this is a trader's market as opposed to long term capital...so far. So, yesterday's rally was very much a technical relief rally that had nothing to do with any news. Citigroup is up 60% in two days. Does anyone believe long term holders are plowing into banks after Citi, as an example fell from the mid $50's to 99 cents? The attributes to this rally being Citigroup CEO Pandit's remarks yesterday are ridiculous. Let's get real. Citigroup is for sale at the 99 cent store and some buffoonish comments by the CEO are driving a 7% rally? The joys of a for-profit press are never ending.
I still do not see a tradable bottom. And, I see absolutely nothing that would tell me the bear market is over. Yesterday's rally was the most constructive in a very long time but since when is investing comprised of the movement of a single day?
Tuesday, March 10, 2009
Citigroup Stock Rises Above 99 Cents On CEO's Remarks That Misperception Exists About State Of Company
Just a wild thought. Do continual lies have anything to do with the perpetuation of this environment?
Louise uses a different tools than I do but it's interesting that her discussion points now match what we have discussed on here since starting this blog. In other words, different analysis is ultimately leading to the same conclusions we drew. This brings up an important point. Most analysis, as defined by today's careers, ultimately develops substantial blind spots and limitations. That is a risk-exposure that nearly no one recognizes. Mostly because the entire world resides within silos or career verticals. This risk-exposure is something that I take advantage of by incorporating these limitations into my work. It doesn't make any analysis perfect but it substantially improves the probabilities of being accurate. The number of people who have a firm grasp of the appropriate fundamentals that actually matter, quantitative analysis that matters, technical analysis that matters and trading systems development that actually matters is very, very, very small. Each of these is a vertical seldom crossed by professionals. Not because it isn't possible. And, not because qualified people aren't capable of it. But, primarily because the reward structure doesn't encourage it and, like rats in a maze, we generally respond to reward as opposed to the search for truth. If you live long enough, you will see every one of those methods of analysis fail miserably. Understanding these disciplines at a core competency level allows one to confirm disparities as either valid or invalid and more aptly to understand how the world works. Where am I going with this? Now that every economist, Wall Street pundit, politician and media talking head is aboard the Titanic, it's time to debunk much of the garbage they have been feeding us. And, it's going to confirm why this crisis will get a lot worse and why globalization is dead. Stay tuned over the next month.
Back to Louise. She is now mentioning our bear market downside target as a potential low. That is, she is now mentioning S&P 400. That said, a little over a month ago we actually changed our potential downside target zone from 400-450 to 200-450.
What I find most interesting in this interview is that Louise is the first person I have heard broach the topic we have discussed before on here. Her remarks are more narrowly focused on the stock market but the spirit is the same. That is, that global wealth creation we have seen over the last ten years is nothing more than a mirage - something you didn't read anywhere else while the world was partying. While she hypothesizes this may be so, it is more than a hypothesis. It is proving to be an unavoidable reality.
We wrote on here four calendar years ago that we very well could give back all of the global wealth created since 2000. And, we followed up last year with possible global wealth destruction targets in dollar terms. The mirage is still deluding those preaching the status quo. The party isn't over. In fact, by some measurements, it's just starting. And, those that believe we are talking ourselves into this are utterly clueless.
Monday, March 09, 2009
Harvard Is Becoming A Magnet For Bad News
Students are trying to clean up the stench at Harvard. Cronyism everywhere is getting a substantial amount of disinfectant thrown its way. It's far from over. And, it's all good. Harvard could adopt their experience as a best-practices business case for its MBA program. (That's a joke.) Take this pharma story as a microcosm of the environment in which we live. Washington will not embrace a necessary disinfecting without the sovereign's demands to do so. To date, that hasn't happened at all. I have a sneaking suspicion it will.
With an admission that their MBA program is in crisis, their endowment losing substantial money and the profligate management irresponsibility of redeveloping local real estate and now this, Harvard is developing a rather black eye. I guess Harvard's leaders might want to take a few management courses. But, instead of in the classroom, they might want to learn from the finest institution of learning in the world - the school of hard knocks.
An interesting story at Forbes gives an inside perspective on the foolishness that is Harvard. They are obviously a poster child for a university that drank too much of the Kool-Aid it was peddling on our financial community, politicians and society as a whole. Now they are blowing chunks from the poisoned elixir.
Harvard is learning a lesson. It's an important one. In the long run, I have little doubt that they will get it right. Not because they are Harvard but because in the long run America's culture will force them to get it right.
GE - The Next GM?
Below is a twenty year chart of GE. The company looks as though it could possibly be the next Citigroup or Bank of America. What's GE's problem? The same as many other industrial companies. The same as GM. Something we have talked about often on here - the financialization of America's corporate management structure. People that really have no idea how to build anything or manage a corporation for sustainability are running these companies and society into the dirt. The entire American economy seemingly is focused on little more than finance in one form or another. Not because we were good at it. But because our position in the world encouraged and allowed it. You now see how good at it we really are. We were good at fooling ourselves. That's what we were good at. And, now these same people are going to manage us out of an environment they have created? Economic turnaround dead ahead? Dead maybe. Dead ahead? Hardly.
Jack Welch made a king's ransom running GE. Then he wrote books, consulted and hit the public speaking circuit making millions more. In retirement he was given a massive pension, access to the company jet and, as I recall an office in Manhattan and chauffeur. I'm going from memory so I might be wrong on a few of the details. But, the spirit of the post is more important than specifics.
I'm not picking on Jack Welch. I am using this example to make a broader point as we have in other similar posts. The world's problems were not his doing. And, he may have been a very good CEO in many regards. But, how many people drank his Kool-Aid and the spirits of other "experts"? Was it really Kool-Aid or was it sour milk? The chart below is an accurate representation of Welch's diversification into finance at GE. Maybe the most accurate. Now GE has become an entity that is likely to struggle for its very existence before this cycle is over. Financialization - a case study. It should be a required course for every business school in America.
Are our fearless leaders and politicians learning anything from this escapade? Not from anything I see. They seem to be a little slow on the uptake. But, I am highly confident the American people have learned a lot. They have learned never to trust again. And, that is exactly what they needed to learn to chart the course for our future. And, for the leaders we will choose to guide us into the future. It surely won't be those who believe in philosophies of today's politicians and business leaders.
Sunday, March 08, 2009
Saturday, March 07, 2009
How can this country spend more than $1 trillion a year on defense? That is more than the two hundred plus other countries on earth combined. We could have affordable healthcare, grants or loans available to anyone who wanted to further their education through trade schools or universities, jobs that paid double today's wages for everyone scraping the bottom of the barrel, pay everyone's mortgage and still have money left over to feed the entire world's repressed and underprivileged for what we spend on defense. If nothing else, every American would have had the savings to deal with this crisis. A crisis caused by politicians. Americans are paying for military bases in over 150 countries. It surely isn't for purposes of morality. Morality cannot be legislated.
That world leaders on every continent have continually contributed to the imperialism and colonialism that has left Africa, in particular, in a constant state of death qualifies as the greatest of crimes against humanity. It is often difficult to see beyond one's own hardship but the people of the world must impress upon the politicians who work for us that policies contributing to this constant genocide are no longer tolerable.
Thursday, March 05, 2009
What can one conclude after watching this video? In my estimation, it is obvious CNBC is substantially complicit in the destruction of America by not living up to its Constitutional duties to inform and educate the sovereign. I have been consistently critical of the buffoonery that is CNBC. When the ratings were through the roof, we wrote that Mad Money would be off the air before this cycle ends. I may not have gone far enough. The issue may become whether CNBC is still on the air.
Google - The Implosion Of An Advertising Bubble And The Company's Perceived Invincibility
Over the last year or so The New York Times has reported ad revenue down significantly. That confirms reports of other industry giants McClatchy, Gannett and nearly every other traditional media source reporting ad revenues. Not all but most. There were reports in the second quarter that comScore misinterpreted Google ad clicks. And, that Google's stock was erroneously under pressure. I am quite confident that investors in Google were and are not liquidating the stock because of anecdotal data from comScore.
I think we can now confidently question a claim made by one of the Google founders that the company was designed to be recession proof. A lead Google developer said early this year they will have to see how spending unfolds to confirm if the company is indeed recession proof. That's really quite funny. As we wrote on here before there is no such thing as recession proof. Revenues rising in a normal recession is generally a notion with no validity. In fact, depending on the depth of the recession even sales of staple products can be very negatively impacted. In any event, what does any of this have to do with the price of the stock? As I have said before, the founders of Google were surely capable at creating their very powerful invention but let's keep their aura in perspective. We know they offered to sell the company for somewhere around $1 billion. So, just like Bill Gates, who offered to sell Microsoft three or four times at even lower prices, the founders really had no idea how successful Google would be. And, two graduate students working in a garage with no background in business surely didn't have 'recession proof' as a design point for a concept they were creating. None of this takes away from the brilliance, success or ability of the Google founders. They deserve their just rewards. But hubris simply reminds us that we can all be quite easily convinced of rewriting the past or even the facts.
The anticipated trends for online ad revenue are astronomical. Trend projecting must involve thoughtful consideration of macro factors not seldom understood by industry-specific analysis. Especially when they are related to economics as is the projection for online ad revenue growth. As we discussed before, online ad revenue has been somewhat of an experiment for many companies and there hasn't been strict quantifiable return on investment-ROI-analysis in many cases. It's more of let's throw it out there and see what happens. How do I know this? Because I've actually heard ad executives use this as an argument to increase online ad spending.
So, here's something to think about. We are in a financial bubble that has lead to an earnings bubble. And, the concentration of online ad spending is heavily weighted to financial corporations, globalization and consumers. And, Google became somewhat of a cult phenomenon that the advertising herd jumped on with both feet. Not necessarily because of any reason other than everyone else was doing it. Uh, sort of like Wall Street's repeatable behavior. Given advertising is all about image and prone to significant follow-the-leader dynamics, how could any ad executive resist the Google phenomenon? Seriously?
As corporate earnings drop, and there will be a very sustained drop as we highlighted before, what will CFOs cut? Especially given the macro dynamics of the global economy as it pertains to the focus areas of online ad spending. What becomes expendable? I'll tell you what - unquantifiable ad spending with Google or even ad spending with diminishing or marginal returns. So, might we actually conclude ad spending itself is therefore a bubble fueled in part by the global economic bubble? And, that the online ad growth projections will be completely erroneous? And, that all of the brilliant savants telling us to load up on Google over the last few years were simply caught up in the hubris of a bubble? Could thousands and thousands of ad executives and Wall Street professionals be wrong on this topic? If we look at ad spending and associated GDP, we already see that ad spending has been producing substantially diminishing returns for some years. In other words, it is taking greater and greater ad spending to achieve less and less GDP growth. Looked at another way, the ROI for ad spending has been cratering for some time.
I'm not an ad executive but I do have a fair amount of experience working with companies to personalize marketing and as I wrote back in 2006, this will surely be a future trend in advertising. The type of solutions needed to really drive this effort aren't there yet eithre at the ad level or the corporate level but ultimately whatever the medium, personalized marketing will be a substantial driver of new jobs and technology. Personalized marketing will also very likely put substantial pressures on ad spending instead of the shotgun approach of today. Another factor pointing to an advertising bubble. As an aside, it's also one of many reasons I am bearish on long term trends supporting Wal-mart's business model. This at a time when Wall Street is generally in love with the retailer. Mass marketers and mass manufacturers are in for a major trend shift at some future point. That future may not be so far off either. If Google isn't a leader of personalized marketing, they will be right there with other "mass" missing the new trend. We've already seen the transformation of supply chains and are in the early stages of adopting new manufacturing methods that will help manufacturers and boutique retailers meet the challenges of product and marketing personalization. Future trends could be a death knell to many mass advertisers, mass marketers, mass merchants and mass manufacturers. Not that many of these mass appeal organizations can't transform themselves. They can. But when did you ever receive personalized service at Wal-mart? General Motors? Or others relying on economies of size? The future bodes ill for the business of being a monopoly. There will always be some need for mass appeal but margins and clientele will doom most organizations serving this space to the bottom of the profit barrel. And, that is where I believe Wal-mart is headed at some point. There aren't any aspirational consumers going to shop at Wal-mart unless they have to. Ever. Everyone wants to be an aspirational consumer. The bigger they are, the harder they fall.
By the way, I am confident Google understands this very well. It's simply a matter of whether they will be a leader in this space. Because there are six billion people on earth and a few thousand that work for Google, that isn't likely. It's no different than assuming the next great piece of business software will come from Oracle or SAP. That is just as improbable. Especially if markets are encouraged to embrace competition. The next great anything almost always comes from small or new businesses. Just ask Google. The only hope for established organizations is to be a fast follower or acquire the technology and use their girth to remain competitive. Yet their girth is a hindrance in the long run.
I have been telling readers that Google is a bubble for years. Now that bubble is popping. How often have we said that brilliance in business is often confused with constructive fundamentals of which a company has little control? Google was the right product for the right time in economic history because the fundamentals supported it. Not because its management or founders are bodhisattvas.