Archive for October, 2010
“The great enemy of the truth is very often not the lie – deliberate, contrived and dishonest – but the myth – persistent, persuasive and unrealistic.” – John F. Kennedy, 1962 commencement address at Yale University.
Throughout history there have been some enduring lies that are told again and again. Amongst the most famous historical whoppers are:
We are a peace loving people
The check is in the mail
I promise to cut spending
No one really believes these statements when they are used because they are easily identified as outright lies. Ah.. but take a falsehood and create a compelling, sexy story around it…a myth…and it gets them hook, line and sinker.
One of the more persistent myths of modern society has been that debt is a great thing. The storyline goes something like this:
- Debt allows you to fulfill your desires today rather than waiting for tomorrow
- Life is short, enjoy it now
- We’ve got to get credit into the hands of small businesses so they can create jobs
- The banks have got to start lending so we can heal our economic system
- Our government needs to borrow to provide healthcare…feed the needy…etc.
The most bizarre thing about myths is that people continue their belief in them even when empirical evidence abounds proving otherwise.
This week I would like to share with you some earth shattering revelations that barely caused any excitement in the headlines. Then again, I suppose to get top headlines you have to discuss something really important…like these topics:
Anyway, here are some statements about debt from people that are in the debt business. For some, their statements will shatter the debt mystique…and alas for others….. the myth will simply live on.
First let’s start with the CEO of Cantor Fitzgerald, Howard Lutnick. Cantor Fitzgerald is a bond broker, meaning they help to sell company debt to investors. The firm is also a primary dealer for the US Treasury That means they help the government sell its debt as well.
So what might Mr. Lutnick think about debt itself? Let’s go to Business Week and find out (emphasis added):
Cantor is known as the firm that lost 658 of its 960 New York-based employees in the World Trade Center attacks. Lutnick, whose brother, Gary, died on Sept. 11, has steadily rebuilt a lucrative brokerage franchise while branching into businesses from e-commerce sites like Delivery.com to technology that lets Nevada gamblers bet on individual sports plays. He’s had the resources to invest in new ventures, he says, because of conservative management: “We never had any debt. It’s hard for bad things to happen when you have no debt.”
So let’s get this straight. The guy who helps others issue and sell debt, says his business success is attributable to having no debt.
Hmmmmm…are we onto something here?
Now, on to none other than Bill Gross from PIMCO, one of the largest managers of fixed income securities (debt) in the world.
What does Bill think of public sector (government) debt? Let’s read his thoughts from the PIMCO website:
Public debt, actually, has always had a Ponzi-like characteristic. Granted, the U.S. has, at times, paid down its national debt, but there was always the assumption that as long as creditors could be found to roll over existing loans – and buy new ones – the game could keep going forever. Sovereign countries have always implicitly acknowledged that the existing debt would never be paid off because they would “grow” their way out of the apparent predicament, allowing future’s prosperity to continually pay for today’s finance.
So what if there is no “growth” in the cards for the future? Yes…yes, I know a much too uncomfortable question.
Finally on this last Weekly Recon post before Halloween, let’s read something that looks as if it was ripped from the funny pages or a comic book.
One of the biggest purchaser’s of debt (good or bad..who knows), our very own Federal Reserve recently sent out a survey to primary dealers (major banks) asking them how much money they should print as part of the upcoming QE2 (Quantitative Easing Part 2) exercise.
No, I am not kidding. Let’s go to Bloomberg:
The New York Fed survey, obtained by Bloomberg News, asks about expectations for the initial size of any new program of debt purchases and the time over which it would be completed. It also asks firms how often they anticipate the Fed will re- evaluate the program, and to estimate its ultimate size.
Asking banks how much money you should print and give to them?
Trick or Treat?
The only dignified ending I can give this post is to present that old Dire Straits song “Money for Nothing.”
At this juncture, both the name of the artist and song are appropriate to reflect on.
Have a great weekend,
Michael Bechara, CPA
Granite Consulting Group Inc.
Long term sufferers of the Weekly Recon know that we very often discuss economics, money and finance. Underlying all of these topics is the concept of wealth.
This week, I thought it would be a good exercise to try to define this term and do some thinking about life. To aid us in the exploration of this topic, I thought I might describe and categorize some of the typical attitudes toward the subject. To aid in the description and to add a little levity, I have assigned personalities towards the various viewpoints.
The Paper Tiger
This person defines wealth as the accumulation of currency and financial assets. A fairly frugal person they tend to be good negotiators when it comes time to make purchases. They monitor their bank balances and track their stock and bond holdings assiduously.
The problem with this definition of wealth is its disconnection from reality. The Paper Tiger reduces life to a board game where the score is being kept with paper chits and accumulation of the most paper wins the game. The same concept applies to those who accumulate their wealth in precious metals.
At end of the day a lifetime of accumulation results in at worst, numbers on a bank statement, and at best, a pile of metal. Ebenezer Scrooge is a great example of a Paper Tiger.
This species flourished in America during the decade after the turn of the century. Known by their endless accumulation of big homes, big cars and anything made in China, they define wealth as the use of goods and services.
Bank account balances and debt levels matter little to these creatures as they dart from merchant to merchant voraciously consuming goods and services in a vain attempt to slake their appetite.
The weakness in this definition of wealth is its impermanence. If you define wealth as consumption, you cease to be wealthy the moment you stop consuming. If you don’t have the latest car, the highest price handbag or the eat at the current “to die for restaurant”, by your own definition you are no longer wealthy. A great example of Consumerus Conspicuous is the entire population of Hollywood.
For this person the goal seems to be a state of suspended animation. Wealth is defined as empty time…and lots of it. This person sees a life of sipping drinks by the pool followed by hours playing video games, followed by an hour or two of gossiping on the phone as being wealthy. The ability to waste life’s most precious asset (time) is seen as the mark of true wealth.
The trap here is that most of The Comatose succumb to a great feeling of emptiness as they not only contribute nothing useful, but they also eliminate any desire to live. After all if you have reduced your life to doing nothing what is the next step…to do “more” nothing? A prime example of The Comatose are The Housewives of Orange County.
The Boss Man
Control over others is the hallmark of this person. They see wealth as the ability to have others do your bidding. These people see having huge staffs of employees, being elected to public office or having a high rank in the military as being wealthy.
They are perfectly happy to have maids, butlers and schedulers manage their affairs as they are shuttled from place to place. Giving commands and edicts is their prime focus, whether or not anything gets accomplished or seeing the results of their decisions is of very little concern to them. A great example of the Boss Man is the President of the..…..well anyway.
I think it’s clear by now that everyone defines wealth differently. So what is the correct definition? Well, yours truly would like to offer my own personal definition of “true wealth.” I have given the personification of “Natural Man” to this definition.
Natural Man defines wealth first and foremost as physical health, specifically the ability to feel strong and move about without physical discomfort or limitation. He realizes that purposeful work (even hard labor) is immensely satisfying and he accrues a great deal of satisfaction from a job well done. He has time to pursue outside activities/hobbies that are not part of his normal vocation and he shares his free time with family and friends.
Natural Man takes the radical step of living within his means (however large or small that may be) and being accountable to himself rather than others. This has the strange effect of severely curtailing stress and anxiety.
In short, Natural Man experiences what can be called “full spectrum wealth” or wealth that is derived from multiple sources on multiple levels.
If we contrast Natural Man to our own society where everyone seems to on prescription drugs (the most widely prescribed are anti-depressants), no one has any time for outside interests (much less people) and stress levels are at an all time high; you have to ask the question, “Are we really a wealthy society?”
I often contrast our society of today with the village life of the Mediterranean in the “Old Country.” Most were hardworking peasants and fisherman who lived off the land. They ate home cooked and fresh food every day for breakfast, lunch and dinner. They had plenty of exercise from walking and working. It was common for people to live into their eighties or nineties.
They owned their homes completely (no property tax to worry about either) and had no fear of not having a place to live. Their neighbors were either relatives or friends and even if they didn’t get along they at least knew who they were.
Entertainment consisted of sharing time with others either talking or maybe playing a musical instrument and singing. They did not have much paper currency, but they consumed what they caught or raised and bartered for what they didn’t have.
I suppose sometimes those who seemingly have nothing actually have it all.
Have a great weekend,
Michael Bechara, CPA
Granite Consulting Group Inc.
We don’t have as much control over our world as we think we do.
Chief among our false beliefs is that anyone can be anything as long as they “work hard.” On the surface this sounds like it has to be true, for after all don’t musicians and athletes have to practice, don’t lawyers and accountants have to stay current with industry trends and don’t barbers have to stay current with the latest styles?
Sure, sure and sure. But all the practice in the world cannot substitute for raw talent…or raw intelligence for that matter.
Talent is like energy. It cannot be manufactured; only transferred. An intelligent man remains an intelligent man even if assigned to menial tasks. A great athlete does not stop being a great athlete just because he is benched by the coach.
Talent can be honed, it can be improved and it can be groomed; but it cannot be created.
This simple fact seems to be desperately ignored by our present culture. How are we attempting to create talent in our society? Examples abound my friends. Let’s take something as superficial as pop music for example.
As my kids have grown a little older, I am starting to pay attention to the music that is directed at their age group. Most of what I see are boy bands, teen idols and the occasional weirdo. One thing that hits me right away about most of the music today, is that these people don’t play any instruments. Not only that, but their lyrics are simplistic rhymes that talk about ….well nothing.
It is quite obvious to me that these “musicians” are not really musicians, but pretty faces picked out of the crowd by some promoter. Despite all of the lessons, makeup and wardrobe, their lack of talent comes through “loud and clear.”
Now I don’t want to fall into the trap of believing that things were always better in the past and I don’t want to bore my children with, “When I was a boy…..” type stories, but there are a few easy observations to be made here.
The popular music of my youth was derided by my elders as trash and not worth listening to (and some of it probably was) but there are some obvious points to be made about musical quality and talent.
Contrast the boy band of today with Jimmy Page of Led Zeppelin who taught himself the guitar from by listening to records and went on to become one of the greatest guitarists of all time.
Or how about a young Eddie Van Halen who received a call from Michael Jackson, threw his guitar in the back of his Ford Ranger and went to the studio to invent the guitar riff behind “Beat It” in a single afternoon.
Now the argument could be made that these two artists also played simplistic music that did not require much skill but for Pete’s sake at least they played their instruments!
Nonetheless for those that are still not satisfied with our examples of true talent, we only have to point to none other than Ludwig Van Beethoven who continued to compose entire symphonies while he was DEAF.
No my friends, talent cannot be manufactured, created or conjured out of thin air. Greatness does not follow a simple recipe. You cannot take an imbecile and give him:
- some lab equipment and expect an Einstein
- control of tanks, guns and planes and expect an Eisenhower
- a laptop and some business cards and expect a shrewd businessman
To wrap up, we have always found it strange that most people dislike and fight this concept because they find the thought that “anyone cannot be anything they want” to be simply depressing.
We hold the opposite viewpoint.
By insisting that “anyone can be anything”, we are cheating ourselves of the joys of the child prodigy, the superhuman athlete and the musical genius. These individuals were the pride of towns, states and countries. People have traditionally cheered them on and identified them as one of our own.
By insisting that everyone is great we are instead rewarded with the imposter of greatness; consistency. Nowhere is this concept more easily illustrated than in the case of the 1980 Winter Olympics ice hockey competition.
I don’t know about you, but I can’t think of a sweeter and more exciting victory than a bunch of American college kids defeating the feared Soviet National Team.
The Soviet hockey team was considered the world’s best at the time and they prided themselves on their years of practice, professionalism and consistency. According to Wikipedia:
The Soviet players were classed as amateurs, but soft jobs provided by the Brezhnev government (some were active-duty military) allowed them to essentially play professionally in a well-developed league with world class training facilities.
The American team consisted of a gaggle of college boys who had played together for a few months. They only had talent on their side.
Have a great weekend,
Granite Consulting Group Inc
Theologians have often observed and commented on the excitement and strong beliefs of converts to religion. Very often the convert has a stronger faith and maintains stricter adherence to the tenants of the religion than those born into the faith.
I suppose that it is because the mind realizes that what was once incomprehensible is now so obvious, what was once ridiculed as superstition is now revered and what was once taboo is now seen as salvation.
Those who have watched with revulsion the debauchery of Quantitative Easing (money printing) and the desperate attempts to re-inflate the real estate bubble have often been demonized by those taking these false measures as gospel.
Those of us crying in the wilderness for policymakers to repent and adopt austerity, accountability and morality have often only heard the echo of our own voices in response.
Well, this week we witnessed a few stunning conversions. There have been a few who have started to question the wisdom of engaging in moral hazard, coddling failed businesses and borrowing endless amounts of money from people that generally dislike you.
In an amazing conversion, Ambrose Evans-Pritchard, International Business Editor of the Telegraph in London, wrote about his revelation that the current policies may not be sacrosanct. Excerpts from his post follow:
I apologise to readers around the world for having defended the emergency stimulus policies of the US Federal Reserve, and for arguing like an imbecile naif that the Fed would not succumb to drug addiction, political abuse, and mad intoxicated debauchery, once it began taking its first shots of quantitative easing.
My pathetic assumption was that Ben Bernanke would deploy further QE only to stave off DEFLATION, not to create INFLATION. If the Federal Open Market Committee cannot see the difference, God help America.
Bernanke is reviving a doctrine that was already shown to be bunk eighty years ago.
Sooner or later we may learn what the Fed’s hawkish bloc of Fisher, Lacker, Plosser, Hoenig, Warsh, and Kocherlakota really think about this latest lurch into monetary la la land, with all that it implies for moral hazard and debt contracts.
If I have written harsh words about these heroic resisters, I apologise for that too.
“Ha!” screeches the peanut gallery, “Ambrose is an isolated case!….and he is a journalist to boot!”
No my friends, Ambrose is not the only conversion (and not the last) this week. None other than Bill Gross of the famed PIMCO (one of the savviest investors around) made the following comments:
- The New Normal has a new set of rules. What once pumped asset prices and favored the production of paper, as opposed to things, is now in retrograde.
- The hard cold reality from Stan Druckenmiller’s “old normal” is that prosperity and overconsumption was driven by asset inflation that in turn was leverage and interest rate correlated.
- Investors are faced with 2.5% yielding bonds and stocks staring straight into new normal real growth rates of 2% or less. There is no 8% there for pension funds. There are no stocks for the long run at 12% returns.
Finally we close this week with a link to Karl Denniger’s Market Ticker blog. Karl beautifully details the math behind what we have been writing about at the Weekly Recon for some time.
Here are a few gems from this post:
A simple reversion to the 2007 interest rate structure will cause the interest expense to explode to roughly $600 billion, or some 30-40% of tax receipts, and that’s if we stop adding to the deficit today, which we won’t. Read this folks: That’s a level three hundred percent of what is being spent now in terms of tax receipts, and in terms of actual money.
What’s worse is the projections – within the next few years simple mean-reversion will drive interest expense north of $1 trillion, or 50% of tax revenues.
QE is seen by some of you, I’m sure, as a means to allow “recovery” actions by the government. It is not. It is a trap. A trap that, if you don’t stop trying to avail yourself of it, will lead to the government’s collapse.
This is not speculative.
It is a certainty.
We cannot export our manufacturing offshore and replace our jobs with Starbucks coffee-pullers and McDonalds’ burger flippers. Not when we think the way to do this is through slave labor and pollution.
You can’t fix this through any other path than truth. The hard, nasty, ugly truth.
Our favorite quote from Denninger is the last line, for as the theologians tell us, it is the truth that will finally set us free.
Have a great weekend,
Michael Bechara, CPA
Granite Consulting Group Inc.