Archive for July, 2009

Another busy week here at GCG but still time for a short post.   

We all grew up with the mantra, “America is the Land of Opportunity” drilled into us.  

We historically have been the type of country where many things were possible for so many people.  “If you can’t become a millionaire in America you have no chance of being a millionaire anywhere else”, an uncle once told me.  

That simple wisdom, although a little rough around the edges, always rang true I thought.  

But why is that true?  What makes a country a great place to live?  

I am not sure everyone wants to be a millionaire, but I am sure that everyone wants to realize happiness, whatever that may mean to them.  

I interact with many people from all over the world and whenever the topic of “the ideal place to live” comes up, the same points are invariably raised.  The following is a sampling: 

• Free to pursue individual interests
• Peaceful society
• Entitled to the fruits of one’s labor
• Privacy, everyone minds their business 

Even the most skeptical would agree that here in the US we have progressively (especially over the last ten years) chipped away at these values.  The concepts of private property, low taxes, non intrusive government and George Washington’s non interventionist foreign policy have become almost quaint.  

More familiar these days are tales of waterboarding, wiretapping, spreading the wealth, and high barriers for entry into many occupations.  

I went fishing recently with some friends.  We chartered a head boat out of Bridgeport, CT to fish for blues and sea bass.  The crowd consisted mainly of employees of a local pump distributor. 

Listening to the conversations amongst the group was very telling of popular opinion.  

One man was a well driller who started in the business many years ago.  He commented that given today’s business conditions i.e. liability, insurance, taxes, etc. he could have never started out today and been successful.     

Another man, a delivery driver for the pump company, told of his daughter, a recently minted CPA who was trying to find work.  With a sardonic smile, he compared her earnings potential to the cost of her education.  

The driver further commented he had been doing research on the internet on various countries.  “New Zealand”, he exclaimed.  As I and a few others looked up from our fishing rods, he confirmed emphatically, “That’s the place to be.” 

He then recited several economic, political and social statistics about New Zealand as evidence of its attractiveness as an emigrant destination.   The driver finished by saying “They won’t let you in if you’re over 55 but at least my kids can benefit.”  

I listed quietly without saying much, but I thought, “Wow this guy has done his homework.”  I also thought it was such a sad commentary on our current trajectory that people are actually researching potential options for emigration.  

As the boat’s horn sounded, I reeled in my jig in preparation for the ride back to the harbor.  On the way back, I looked out over Long Island Sound to the horizon and I wondered if someday I would be advising my children to seek their fortune in a land far across the oceans.    

Have a great week, 

Michael Bechara

Managing Director

Granite Consulting Group Inc.

mbechara@consultgranite.com

www.consultgranite.com

In God we trust, all others must pay cash. - American Saying 

One of the benefits of being in our business is that we are exposed to so many viewpoints in so many industries.  We truly have a front row seat to the greatest show on earth:  The US Economy.  

As is our hobby (and maybe our obsession) we are continually trying to figure out which way things are headed.  Serious observers see only two possibilities for the future.  These are deflation or inflation.  

Put simply, deflation is a contraction in the supply of money and credit and inflation is an increase in the supply of money and credit.  

The deflationists believe that due to the housing bubble popping there has been such a contraction in credit that this will certainly cause home prices to fall along with wages, consumer items, etc.  For a detailed explanation of the deflation view click here. 

The Fed is currently doing all it can to fight deflation.  This is stated policy.  

In fact, our Federal Reserve Chairman got his nickname, “Helicopter Ben” for making a comment that he would fight deflation by dropping cash from helicopters if need be (and he’s actually sort of doing that now).  

The deflationists believe that the Feds will not be able to pull it off.  They think that despite the massive amount of money and credit that has been pumped into the system, it’s a drop in the bucket compared to the amount of wealth that has been lost.  In addition, all of this money and credit has been extended to banks, who have done precious little lending, hence the money and credit has not really flowed into people’s pockets.  

The inflationist’s believe that despite the housing crash, the Feds through their fiscal and monetary policies, will succeed in expanding the supply of money and credit to counteract and even reverse the natural decline in prices.  They believe that sooner or later the banks will invest the money and credit given to them by the Feds in something other than deposits with the Federal Reserve.  This will cause the money to flow into company and personal coffers and cause inflation.  For an explanation of the inflation point of click here. 

There are smart people on both sides of this debate. We are constantly examining both arguments, being swayed to and fro, and finally realizing that we just don’t know.  

It is tantalizing to try to figure this out; for if you can untie this Gordian knot, you will be a billionaire, or at a minimum protect yourself and your family from ruin.  

There are people; however, who are terribly uninterested in this debate.  They think all of these very smart people on both the inflation and deflation sides are full of baloney.  

Rather than inflation or deflation, this group sees a storybook land of magical growth and a yellow brick road back to the golden days of consumer spending and debt securitization.  That such a scheme was (and is) unsustainable does not bother these people in the least.  

At any rate, let’s take a look at the complex arguments used to support their thesis that “everything is fine.”  

“This is a mental recession!” claimed a high campaign official. 

“We just need more confidence”, another belched gruffly. 

And perhaps most famously 

“The green shoots of economic revival are already evident”, chimed a high financial official without elaborating further.   

The people making these “arguments” are, of course, our dear leaders and their sycophants in the media.  

So what does this mean really?  Aren’t people entitled to their opinions? 

I have a dear friend who I speak with once every few days.  As I was reciting the above observations to him he cut me off half way though and asked, “Yeah ..and so what?” 

I paused for a moment, unsure of how to respond.  I guess for a moment I had to really ask myself why this was so troubling.  

My friend (he has a razor intellect) probed further, “So politicians make bad arguments…and they make unsupported statements…and the media covers it all.”  “Mike, please tell me you are not surprised by this”, he finished.  

It took about three seconds for my thoughts to congeal before I responded, “It’s unsettling because they are asking us to ignore what we see and to just simply believe.” 

Yes that right folks, televangelism has come to economics and we are all in the front pew.  

Forget all that stuff about economics being the consequences of our collective behavior regarding buying, selling, investing, saving, etc.  We are now told that all of this turmoil is in our heads, the housing crash, the unemployment and the staggering national debt, all of it can be willed away….if only we would believe.  Click here for a sampling of this view:

We have entered the era of faith based economics. 

In many ways we have our values inverted and our vocabulary misplaced.  It was not long ago that in matters of commerce we traditionally used phrases like “Caveat Emptor”, “Put it in Writing” and “Cash is King.”  

The new words being used such as “faith” and “belief”; belong distinctly to another realm of the human experience.  

There is certainly nothing wrong with having faith or believing.  These are very powerful words but they are typically associated with religion.  The notion that we have elevated commerce to the level of spirituality is actually quite unseemly. 

Some tell us you are just not an “optimist” if you don’t believe that everything will magically turn out OK.  These people gravely misunderstand optimism.  

Optimism is wishing for a change in the underlying facts, a change in trajectory or policy.  Repeatedly hoping for an outcome that is unsupported by the facts and circumstances is simply childish.  

So now that we have discussed the major arguments which will it be?  Deflation? Inflation?  Or how about a little of both with Stagflation? 

It may not even matter.  

Yes, we may be in for some very tough times and yes, knowing the direction of the economy may make one rich and prevent misfortune, but one thing is for certain.  

Things do have an intrinsic value beyond dollars and cents.  A house may plummet in value but it’s still a place to live, raise a family and commune with friends.  A gold wedding ring’s market value may fluctuate with price of bullion but its sentimental value remains unchanged.  And finally who can place a value on a friend? 

Come to think of it, the politicians are not altogether wrong.  In the future, we certainly will have a great need for faith and belief but the question is: In what?  In an abstraction such as the economy?  

No. 

We will need to have faith, confidence and belief in each other.  

Have a great week, 

Michael Bechara

Managing Director

Granite Consulting Group Inc.

mbechara@consultgranite.com

www.consultgranite.com

I was affected by the death of Michael Jackson.

No, I didn’t make a pilgrimage to the Apollo Theater or Neverland Ranch to hold a solemn vigil in front of the TV cameras, but I was a little saddened nonetheless.

Growing up I really liked Jackson’s music but as time passed and the plastic surgeries and weird behavior increased I became very disenchanted.  I reached the point where I stopped listening to his music.   Indeed, I became so disgusted by his antics that after a while I just forgot about him altogether.

As the unending media reports of his death dominated TV, Internet and radio, I was reminded of Jackson and his music.  I clicked a few links on the internet and found myself on YouTube, where it seemed the entire stock of his music videos has been posted.

As I watched a few of the videos three observations came into my head.

The first was that Michael Jackson was a musical prodigy.  The guy was talented..period.  Whatever one may think of his bizarre behavior, his singing, dancing and songwriting are a marvel to witness, especially when compared to what passes for talent today.

The second observation, was that I found myself focusing my video selections on the early 1980s;  Beat It, Billie Jean and Thriller.  Jackson was a handsome, normal looking (and acting) young man at the apex of his career.  There was no other artist at that time who could credibly compete with Michael Jackson.  His talents were so vast and his work so original that he stood alone.

The third observation was the simplest of the three and it crept into my consciousness slowly and heavily…..

Michael Jackson destroyed himself.

The inevitable question is, “But why?”

As readers of the WR know, we always look to history for perspective, as a guide to explaining the present.  For the present is simply the child of yesterday’s events.  Historically speaking when companies, countries and individuals have no competition, when there is nothing that can challenge them, they tear themselves apart.  For example:

The Roman Empire at its peak was unmatched militarily, economically and culturally.  Roman authority stretched from the frigid waters of the North Atlantic to the sun scorched borders of Persia.  Roman roads and aqueducts crisscrossed the Mediterranean ferrying troops, merchandise and water swiftly to their intended destinations.

Then the Romans got some bright ideas.  Romans increased significantly their use of German mercenaries to fight their wars.  The Emperors began to spend profligately on pet projects and the currency was debased (inflated) in order to pay for these vast expenses.  Taxes were increased to a point that that they drove small-scale farmers into destitution.  The combined weight of these blunders resulted in the fall of the Western Empire in 476 AD.

Companies are not immune to organizational arrogance either.  As with countries, companies engaging in foolish activities tend to believe they are immune from the damaging consequences.

Siemens AG is Europe’s largest engineering conglomerate and is widely called “the GE of Europe.”  From this commanding position, Siemens began to engage in activities detrimental to themselves.  We quote from Wikipedia:

In January 2007 Siemens was fined €396 million by the European Commission for rigging EU electricity markets through a cartel involving 11 companies.  

Siemens agreed to pay a record $1.34 billion in fines in December 2008 after being investigated for serious bribery, involving Heinz-Joachim Neubürger, former chief financial officer, Karl-Hermann Baumann, another former CFO and ex-chairman, and Johannes Feldmayer, a former management board member.

In addition the US Justice Department and SEC imposed combined penalties of several hundred million dollars for FCPA violations.

Unfortunately, we’ve seen many companies relax their formerly solid stances on accountable management, controls and financial integrity setting themselves up for restatements investigations, fraud and the like.  For information on how you can protect your company from FCPA violations click here.

Our last example is closest to home.  The United States after the fall of Soviet Union in 1989 found itself as the sole economic and military superpower.  At the time, there were a number of ways we could have reallocated our resources i.e. better infrastructure, increased foreign intelligence, etc.  Today we have an economy teetering on the brink of collapse, we are involved in two wars with ever changing objectives and the future seems uncertain.

The common theme amongst these events is best illustrated by the old saying, “We have found the enemy and it is us.”

As for the United States; however, the final chapters are yet to be written.  I retain my optimism (No folks, the prior word is not a misprint) that somehow we will escape the self destructive behavior of the historical precedents mentioned above.

I believe that we will, at the final hour, have a sharp reversal of policy that will avoid the brunt of the consequences.

I leave you this week with Michael Jackson’s 1983 live performance of Bille Jean.

I hope you all had a great Independence Day,

Michael Bechara

Managing Director

Granite Consulting Group Inc.

mbechara@consultgranite.com

www.consultgranite.com