Archive for April, 2010

Economic Surge

A few months ago I attended a corporate governance conference in Dubai.  All said it was a fairly interesting conference as I had the opportunity to see how governance can rapidly develop in an emerging economy. 

Toward the end of the conference there was an award dinner that all of the attendees were invited to.  Held in an outdoor plaza surrounded by the dazzling skyscrapers of Dubai, the setting was quite picturesque.  

Seating was assigned and I found myself sitting next to a guy in his mid twenties.  We got to talking and it turned out that he was a reporter for a local business magazine sent to cover the conference and the award dinner. 

“So where are you from?” I asked him 

“Iraq”, he replied with a sad half smile 

From there we didn’t look back.  Not wasting the opportunity to hear a firsthand report on what things are really like in Iraq, I began asking him questions and listening to his very insightful responses.  We talked for hours about many topics, religious strife, economic conditions, where the violence was (and wasn’t) and the prospects for the future. 

One common thread throughout the conversation was the topic of death.  I quickly caught on that death was a part of everyday life for many in Iraq, and sadly, this young man had witnessed his share. 

 Not to be too morose, but one of the things I learned from him was the phenomenon of people having a surge of energy just before death.  He described people that were unresponsive and bedridden for days that would suddenly sit up, with clear eyes and begin speaking to family members.  Some would even ask for food and start eating.  

“Sahwat il Mawt”, he called it in his native tongue. 

Many of our clients and friends know that we believe the US Economy is in a similar state.  With all of the propping up via tax credits, stimulus and bailouts the economy has recovered from its bedridden state and is now sitting up and talking.  

Unfortunately the disease has not been cured.  

Our financial system and public finances are far too overleveraged.  To repeat the obvious point, the only way to eliminate debt is to either pay it off or default on it.  The current voodoo economic measures simply shift the burden of debt from those responsible to the innocent.  

For some insight into how the recent positive economic numbers betray the fact that there has been no structural improvement in the economy, we will quote The Market Ticker blog.  They have an excellent analysis of the recent Federal Reserve Open Market Committee meeting.  Each excerpt from the FOMC meeting is followed by the analysis in blue: 

“Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve.”

Borrowing and spending 10% of GDP makes it appear the economy is doing reasonably well and has improved.  We continue to accumulate GDP distortions, however, and now are up to about 52%, or twice what we were going into 1931.

“Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.”

That 52% distortion comes out of private demand, of course, and that shows up directly in unemployment, lack of real income growth (it’s negative when one removes transfer payments and handouts) and house prices. 

Once again an excellent analysis by The Market Ticker.  

So what is going to happen when all the stimulus wears off? 

Just to make sure we all understand what is coming down the pike, let’s take a look at the following chart (courtesy of Agora Financial):  

First, recall that housing sparked the economic calamity of 2008.  

Second, this chart shows us that a significant dollar amount of adjustable rate mortgages will reset during the latter part of 2010 and into 2011 and 2012.  In other words mortgage interest rates will change from the low teaser rates offered by banks to current market rates of interest.  This will be untenable for many homeowners and they will default.  

Third, it is also interesting to note that the Alt A mortgages are typically called “liars loans” in the business.  This means that the mortgage was obtained based on false information regarding income and ability to pay the loan back. 

 So what does this mean?  What should we do? 

We have recently been advising our clients to take advantage of this lull in the storm to make structural changes that will prepare them for what is to come.  Now is the time to make sure you assess your risks properly and prepare for what may be a very different future.  

As the awards dinner wound down, my Iraqi friend and I found ourselves amongst the few people left. 

“Well I guess we should call it a night”, I said 

“Why….what else do you call it in America”, he questioned

“Sorry, it’s just a saying in English”, I explained. 

We decided to talk a walk through the streets of Dubai as his car was parked near my hotel.  Along the way he took out a pack of cigarettes; Marlboros I believe they were.   Putting a cigarette in the corner of his mouth he offered one to me and I politely declined. 

With a sarcastic smile my friend mocked me and said “Comon….it will give you a surge of energy.” 

Have a great weekend, 

Michael Bechara, CPA

Managing Director

Granite Consulting Group Inc.


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No Good Deed Goes Unpunished

I always liked my Aunt Maggie.  Married to my Uncle Tony, she was of German decent, blond and blue eyed.  She was one of my favorites in the family.  When I was around five or six years old she would often call me to translate for her when the conversations between the other adults went “international.” 

I can remember one gathering in particular.  The adults were sitting in the living room discussing world events, politics and legal disputes.  As the conversation became increasingly heated, less and less English was used, until finally the discussion continued full bore in the native tongue.  

“Michael come here,” my Aunt Maggie called patting the side of her thigh.  

So hearing her call, I reluctantly left the kids playing in the other room and went into the living room and leaned against the couch next to her.  As the lively conversation continued, I gave her the play by play translation:  

Speaker Mike’s Translation
#$*&&%$@*&^%#*#$% Didn’t you go see the lawyer?
$%#@(*&^%#W@) Of course but it didn’t do any good
$%^# Why not
%^$#@*^*()(*%$@%& Because he’s a son of a b……

 The smack came out of nowhere and before I knew it I was being hauled into the kitchen for a lengthy lecture by one of the other aunts.  

I still maintain my innocence to this day.  

I am very thankful, however, that the aunts were not economists, for if they were, I would still be suffering from the ordeal up until today.  

If we take a closer look at many of the recent economic policies, one common denominator emerges; namely the punishing of the innocent.  This may sound strange to many, as these policies are typically sold to the public as helping “those who need it most” or “averting financial calamity” or some other such rubbish.    

Let’s take a quick rundown of some policies and the people they punish: 

Economic Policy Innocent Party Being Punished
TARP (Bank Bailout) Regional banks that did not participate in securitizing fraudulent mortgages
HAMP (Homeowner Bailout) People who told the truth on mortgage applications and did not take on more debt than they could afford
Artificially Low Interest Rates People that save money
Greek Bail Out Fiscally Responsible Germans
Unemployment benefits lasting 1.5 years Small businesses

 Some questions: 

Where is a country going when it punishes, the prudent, the responsible and the productive?  How long will the productive choose to remain so?  What is the incentive for the non-productive to become productive? 

Personally, I think it’s very dangerous for a country to make smart people into jackasses, for at some point the wise and prudent will make the logical choice and simply join the unproductive.  

This reminds us of an apocryphal story that was sent to us by a dear friend.  The story illustrates this point perfectly.  It goes something like this: 

An economics professor at a local college made a statement that he had never failed a single student before, but had recently failed an entire class. 
That class had insisted that socialism worked and that no one would be poor and no one would be rich, a great equalizer. 

The professor then said, “OK, we will have an experiment in this class on socialism”. All grades would be averaged and everyone would receive the same grade so no one would fail and no one would receive an A.  After the first test, the grades were averaged and everyone got a B.

The students who studied hard were upset and the students who studied little were happy.  As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little. The second test average was a D!

No one was happy.  When the 3rd test rolled around, the average was an F.

The scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else.  All failed, to their great surprise, and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great but when the reward is taken away, no one will try or want to succeed.

At any rate after my scathing reprimand in the kitchen was over, I went back to playing with the kids in the other room.  After the adult conversation was over, Aunt Maggie took me by the hand, smiled and said it wasn’t my fault.  She also promised to make me some of her famous lasagna.  

Boy, I sure wish “Uncle Sam” was more like Aunt Maggie.  

Until next week,

Michael Bechara, CPA

Managing Director

Granite Consulting Group Inc.


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Prince of the City

Some days I think of Chicago.  My mind wanders back to another place and another time…almost seems like another planet really. 

I went to college in Chicago.  DePaul University to be exact.  

There was a period of time during my junior and part of my senior year that I worked for a local CPA.  He was a sole practitioner and a franchisee of a national tax preparation company.  

These tax franchises thrived on processing tax returns for low income individuals who qualified for the federal Earned Income Credit (EIC).  The EIC refunds money to qualifying taxpayers in excess of what they paid in federal taxes, hence the EIC was essentially a subsidy or welfare payment.  

The CPA had his tax preparation offices located at strategic points throughout the city, typically in the “bad” neighborhoods where his customers were located.  The owner and I were the two “professionals” in the firm, the other employees being the dozens of seasonal tax preparers drawn from the local neighborhoods. 

Man, those were the days.  19 years old, a decent paying job and the number two guy in the firm.  I had many responsibilities, overseeing the tax preparers, answering difficult customer questions, preparing some of the firm’s corporate returns and some light client relations.  

One of my favorite jobs was to drop off refund checks at some of the check cashing places throughout the city.  The national office of the franchise had some deal with the check cashing places whereby people could obtain their refund money even faster.  I can’t remember the details, but it was something along the lines of the customer having their check “waiting for them” at the check cashing place.  

The checks were prepared during the day and were delivered at night to the check cashing locations.  The following morning the customers would arrive to claim their checks. 

I drove the owner’s full size Chevy van all over the city delivering checks..Northside, Southside…to the most unsavory neighborhoods.  Although he could see that I enjoyed the work, the owner at times would worry about me going to these places while carrying tens of thousands of dollars in checks…at night. 

Funny how I wasn’t worried at all isn’t it?.  Ah.. to be 19 again….. 

The owner, being the wise and shrewd man that he was, would send two employees from our Southside headquarters to “accompany me.”  

James and Marcus (at a combined weight of about 500 pounds…with no fat) were two of my favorite guys in the place.  James was a former boxer and Marcus would often mumble about how he “was in loan business” during the off season.  

Anyway, the owner would print the checks in the evening and hand them to me with some instructions.  After taking custody of the checks and summoning the Praetorian Guard of James and Marcus, we all climbed into the van and off we went.  

I admit I was having some kind of tough guy fantasy as I would drive up on the sidewalk in front of the check cashing place.  With Marcus standing next to the van and James accompanying me inside we would deliver the checks, obtain the signature of the lady behind the bullet proof glass , pile back in the van and take off.  

Looking back now I can’t believe I put myself at such risk, but at the time I thought it was a great opportunity.  Funny how our risk appetite changes over time isn’t it? 

At any rate, the value of the experience was that I received a good lesson in how a business enterprise was run, from marketing, to operations, administration, etc.  

These days, when performing our consulting work at smaller clients I often hear the phrase, “we wear many hats around here.”  I find it odd that this is usually said with a hint of embarrassment or negativity.  

While I can certainly sympathize with company employees that have many responsibilities, I don’t think many of them realize the stability and efficiency that comes from having so many people cross trained to do so many functions.  Put simply, it lowers the company’s risk profile.  

Job specialization is not necessarily bad, but when taken too far it results in a compartmentalization of the company and the development of silos where a process breakdown in one area of the company can metastasize throughout the entire organization.  

For example, in most large corporations if there is a problem in operations it’s unlikely that someone in marketing will offer any suggestions, let alone know how to fix it.  The focus and incentives of employees are strictly functional and deviation from their assigned responsibilities is looked upon as an intrusion.     

Conversely in a smaller company, the entire focus of everyone is on providing the product or service to the customer.  In a small company everyone is operational, to one extent or another, as there is little opportunity to distance oneself from the customer.  

It’s been a long time since I was delivering checks in the dead of night in Chicago.  Since that time I have gone on to work for some of some the world’s largest companies where job specialization was the norm.  I can’t help but believe; however, that my early training in running an entire business always gave me an advantage over others. 

Today, as Managing Director of Granite Consulting, I am sometimes reminded of the old days in Chicago.  All of us at Granite are intensely focused on our clients and also on helping each other.  In short, we pull together as a team to make things happen for our clients.  

In many ways I have come full circle, from the small firm to the “big time” and back again to the entrepreneurial environment.  

My view of risk also continues to evolve.  

A few weeks ago I had to go out of town for a client meeting.  On my way back to the airport I called my wife.  During our call she let me know the baby was teething again and the other kids were doing their homework.  She further commented that she had not slept since I left because of the baby.  I soothed her by saying I would be home around 6pm and would stay up with the baby that night. 

My flight was delayed…really delayed. 

I finally got home and walked into the dark house.  I didn’t see or hear anyone so I figured everyone was already sleeping.  “All must have went well with the baby”, I thought to myself.  I put my briefcase down and went to the fridge to find something to eat.  As I closed the refrigerator door, my wife stood in front of me…. in the kitchen….in the dark…. holding the baby ……and glaring at me.  

At that very moment I intensely wished that James and Marcus were standing next to me again.   

Have a great week, 

Michael Bechara, CPA

Managing Director

Granite Consulting Group Inc.


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