Tuesday, August 27, 2013

SYRIA: “WE (WILL) GET FOOLED AGAIN!”

8/27/13

Secretary of State John Kerry’s speech yesterday calling Syrian President Bashar al-Assad’s chemical attack on Syrian civilians a “moral obscenity” left little doubt that we are going to take military action, in some form, against Mr. Assad’s regime.   My opposition to such military action, or to any kind of meddling in the affairs of other states in which our interests are non-existent or indefinable, is well known to my readers.  See, for example, 6/17/13’s SYRIA AND THE WAR PARTY:  “AFTER YOU GET WHAT YOU WANT YOU DON’T WANT IT…”, only my latest post on Syria.

The ultimate irony, and idiocy, of intervention in Syria is that after spending billions of American treasure and incalculable quantities of irreplaceable American blood supposedly fighting Al-Qaeda and terrorism in Iraq, Afghanistan, and other venues in the Middle East and in Africa, we are now intervening, with more American treasure and, nearly inevitably, more American blood on behalf of terrorism and Al Qaeda in Syria.

Oh, yes, we comfort ourselves in our pure motives.   After all, Mr. Assad is a thug of major league proportions and we aren’t supporting the more radical, Al-Qaeda linked elements in Syria; we are supporting the “moderate” opposition to Mr. Assad.  By supporting these “moderate” elements, we are, indeed, thwarting Al-Qaeda’s evil designs in Syria.   One of these arguments is true but flawed; the other is a pile of horse excrement.



Mr. Assad is a thug; no one can argue with that.  But the Middle East, and much of the world, is peppered with thugs, and their thuggery never seems to bother us until they oppose our imagined interests and/or provide an excuse for War Party members in this country to enrich the “defense” contractors who sustain the lifelong sinecures those pols call careers.  Mr. Assad is no more of a thug than the likes of Shah Reza Pahlavi in Iran, Saddam Hussein in Iraq, or maybe even Hosni Mubarak in Egypt, with whom we did business quite happily until it became more profitable for some pols in this country to cease such business.  The consequences in all cases have been disastrous.  The consequences will be at least equally horrific in Syria as well because, just as in Iran, Iraq, Egypt, and countless other places, we don’t consider the alternatives before we go off on our neocon adventures of vainly attempting to make the whole world think just like us.

The second argument, that we are supporting the “moderate” elements in the Syrian opposition, reeks like the equine fecal matter that it is.   While there are plenty of people who will proclaim that they are “moderate” if doing so results in getting American cash and sponsorship, there probably are no “moderate” elements in Syria.   And if there are a few such types there, they are overwhelmed, in numbers, influence, and ferocity, by the radical elements we claim to oppose.   A victory by such imagined “moderates,” therefore, will be a victory by Al Qaeda and its wannabes, the very people we supposedly went to Iraq and Afghanistan to oppose.   Those like former President Bush, Senators McCain and Graham, and now President Obama, ought to get their stories straight before embarking on their missions to make the world comfortable for the arms merchants.

The Russians seem to understand what is happening in Syria.  They like Mr. Assad because he is their only friend in the Arab world and because they seem to be predisposed, perhaps because of certain affinities of their leadership, toward sponsorship of thugs.    But even if they had a clearer picture of the genuine evil of Mr. Assad, their sense of realpolitik would lead them to support his regime, and not only because Syria contains their only military base in the Arab world and on the Mediterranean Sea.   The Russians know that if Mr. Assad falls, Syria becomes a terrorist haven.   Russia not only has a huge problem with terrorists in its southern Republics but sits in far close proximity to Syria than we do.   Further, the Russians actually believed us when we said we opposed Al Qaeda and worldwide terrorism.  Silly Russians.



Thursday, August 22, 2013

REBALANCING INTO EMERGING MARKET STOCKS: SOMETIMES IT DOES MAKE SENSE TO RUN, OR AT LEAST STROLL, INTO A BURNING BUILDING

8/22/13

So far this year, the S&P 500 index is up 15%.   The MSCI emerging market index, on the other hand, is down 12%.   So one would think this would be a good time to be putting money into the emerging markets…buy low, sell high…, right?   Apparently, most people don’t think so; individual investors have been pulling money out of emerging market stocks and stock funds for just about the whole year and the pace of selling has picked up this summer.

It’s hard to blame people for getting out of emerging markets in the wake of those markets’ miserable performance this year.   It’s human nature to get out of seemingly dangerous situations.   Even though it’s logical to buy stocks, or at least broad indices of stocks, when they are down, our instincts tell us otherwise.  It takes a lot of courage, or some might say at the time of the trade, foolhardiness, to do what an investor ought to do:   effectively buy low and sell high.

Since most of us don’t have the courage to sell heretofore rising markets and buy heretofore falling markets, it makes sense to substitute discipline for courage.   At the expense of sounding like the proverbial broken record (8/16/13’s post EXOTIC INVESTMENT PRODUCTS FOR THE “AVERAGE GUY”:   WHAT’STHE POINT? is only the latest occasion on which I have made this point.), the best strategy is to rebalance and to do so religiously.   Rebalancing forces us, against our usually poor instincts, to sell a portion of our portfolio high and buy, if you will, a portion of our portfolio low…precisely what the successful investor should do.   Discipline beats courage…and both beat judgment when it comes to markets.

Don’t misunderstand yours truly; I am not saying that you should be putting money into emerging markets because they are down and am certainly not saying that I think emerging markets are going up.  I have no idea where emerging markets are going in the short to intermediate term; hence very little, in either direction, would surprise me.   What I am saying is that if emerging markets are part of your long term asset allocation and you are approaching a rebalance date, or a rebalance bound, disciplined rebalancing in all likelihood dictates moving assets into emerging market stocks since they have been so badly beaten up of late.   Don’t abandon a sound rebalancing strategy out of fear arising from the recent performance of the emerging, or any, for that matter, markets.  The whole point of employing such an approach is to avoid substituting judgment; i.e., idle speculation and emotion, for discipline.

On a related note, it amazes me more and more as I follow the financial media how much time, effort, and brainpower is spent (wasted, really) on idle speculation about where “the markets,” however defined, are going.   As my first boss told me years ago, back when I was much smarter than I am now and therefore didn’t listen as closely as I should have, NO ONE knows where the markets are going.   As with my father, my first boss gets smarter as I get older, and both started out pretty smart in the first place.  Yet some incredibly brilliant people (and, to be fair, some not so brilliant people  (See 8/19/13’s “ADVICE” ON EMERGING MARKETS:  IT MUST HAVE SOUNDED BETTER INA BROADER CONTEXT), spend their careers and lives effectively shooting the breeze over the direction of markets when they must know, or will learn when they get more experience, that they don’t have a clue.   Think of the wasted time.  Think of the wasted talent.  Think of the wasted money that goes toward paying these people to pointlessly pontificate.   And think that it comes largely out of your pocket if you eschew index funds and other low price investment products in favor of tapping Wall Street’s “brains.”


Wednesday, August 21, 2013

“SMART,” ACCEPTABLE PHONE…DUMB, RUDE NEWSPAPER?

8/21/13

As loyal readers know, I, like a lot of people who are interested in the markets, have CNBC on in my office nearly constantly throughout the trading day.   The volume is turned down until something or someone (e.g., Art Cashin, Jack Bogle, Phil LeBeau talking about the car industry, usually Rick Santelli, or some huge news event) appears on the screen, but, nonetheless, the TV is on and tuned to CNBC.

This morning, I noticed that, just before the opening of the New York Stock Exchange (“NYSE”), one of the group of honorees who got to ring the bell was reading from her “smart” phone.   This, of course, was not an unusual occurrence; people are always avoiding conducting the business at hand, such as driving or even simple conversation with a live human being, in favor of staring into their electronic balls and chains pretending to be smart, connected, and/or important.  



But the thought, or the question, came to me, as it has before:   What if that particular person on the podium of the NYSE had been reading a physical newspaper rather than staring into a celphone?   In a prior context in which this thought occurred to me, what if a parent at a school volleyball or basketball game were reading a physical paper during the game?   Why, those people would be castigated and vilified, and, in almost all cases, deservedly so: 

You’re there to ring in the opening of the NYSE or to watch your kid and his or her teammates play a game, not read the paper!   What are you, some kind of a lout?

But if they stare at the “smart” phone, perhaps reading the paper (and my more cynical side suspects the “Entertainment and Celebs,” or some such numbskulled nonsense, section) on that phone, suddenly that’s acceptable.   Oh, yeah, I forgot…they could be doing work on your “smart” phone.  Yeah, they could be.


Monday, August 19, 2013

“ADVICE” ON EMERGING MARKETS: IT MUST HAVE SOUNDED BETTER IN A BROADER CONTEXT

8/19/13

My wife Susan is a nurse by training, education, and experience and a nurse educator by profession; she has about as much interest in investing as I do in nursing, an amount more or less asymptotic to zero.  I depend on her to address our family’s medical needs, among other things, and she depends on me to take care of the family’s finances, among other things.  It’s a partnership that has worked well for the last twenty five years.

Earlier today, Susan and I happened to be in the same room when the Noon Business Hour (“NBH”) on WBBM Newsradio in Chicago was being broadcast.  As you might guess, I am a big fan of WBBM and perhaps especially of its excellent Noon Business Hour.   Sue listens when it’s on, but wouldn’t specifically tune to the show.  Something really caught her ear today, though.

The NBH’s very capable hosts, Kris Kridel and Sherman Kaplan, were interviewing an earnest sounding portfolio manager/financial advisor from someplace in Virginia.  I can remember neither his name nor his employer, which is a good thing for purposes of this post.   The wide ranging interview got around to emerging markets, an area of interest to me both from an intellectual standpoint and because we have a slightly disproportionately large percentage of the family assets in emerging market index funds.  When Mr. Kaplan and Ms. Kridel asked this guest about the advisability of the typical investor’s putting money into emerging markets, the guest replied with…

“Sometimes these markets do well, sometimes they don’t do well.”

That got my wife’s attention.   “Did that guy just say what I thought he said?” she asked me.

“Yes he did.”

“Sometimes these markets do well and sometimes they don’t do well?”

“Yes, that’s what he said.   And he probably gets paid very well for exuding such brilliance.”

“Gee,” Susan replied, “I ought to get into that business!”



Trust and honesty are far more important characteristics for a financial advisor than are purported investment skill and knowledge.

But let’s at least hope that, if you choose to work with a financial advisor, s/he can offer more searing insight than


“Sometimes these markets do well, sometimes they don’t do well.”

THE DEMOCRATIC NOMINATION IN 2016: HILLARY IS NOT INEVITABLE AND JOE IS ALWAYS LOTS OF FUN

8/19/13

This morning’s (i.e., Monday, 8/19/13’s, page A1) Wall Street  Journal reports in a front page story that Vice-President Joe Biden and his team are laying the groundwork for a presidential run in 2016.  Mr. Biden is busy visiting places like New Hampshire and Iowa (to fulfill “longstanding commitments,” of course) while his people are considering strategic moves, including possibly starting up a “leadership PAC” that would spread money around to various Democratic politicians in order to curry their favor for a possible Biden run.



The conventional wisdom (which, by the way, isn’t always wrong despite the derisive connotation it carries, but I digress) holds that Mr. Biden is wasting his time, that he has no chance at wresting the nomination from the nearly already coronated Hillary Clinton.   While I am making no predictions, and if I had to bet at this juncture I would bet on Hillary’s getting the nomination, and probably the White House, the latter especially if the GOP continues to pursue its death wish by refusing to nominate Chris Christie, I would not be so quick to conclude that the Democratic nomination battle is over before it has started.

For those with short memories, we heard the same bullroar back in 2008.  It was Hillary’s nomination for the asking, everyone should just fold up their tents, or not even erect their tents, and go home.   She was the certain nominee.   But no one apparently told Barack Obama and his team.



To put a local and more recent spin on it, remember when, just a few months ago, Lisa Madigan was the sure Democratic nominee for governor of Illinois?   Unfortunately, while Ms. Madigan was primping and preening for her coronation, Bill Daley stepped in and made it a fight.   Either the prospect of such a fight, or the prospect of being governor of Illinois as it slides further down into its fiscal sinkhole, dissuaded the inevitable Lisa from running.   See, inter alia, my 7/16/13 piece, LISA MADIGAN WON’T RUN FOR GOVERNOR:  WOULD YOU WANT THE JOB?  Lisa Madigan is no Hillary Clinton, but Lisa’s dropping out teaches us much about making presumptions when it comes to politics…or anything.

On a more prosaic note, I get a chuckle when I hear one of the strongest objections to Joe Biden’s candidacy or objections to his becoming president…his age.  Mr. Biden will be 73 in November, 2016.  Hillary will be 69.  Yours truly thinks neither is too old to be president, but, even if you think that way, what practical difference is there between 69 and 73?   Either they’re both young enough or they’re both too old.

Again, as a former Republican president was fond of saying, make no mistake.   I am not predicting a Biden nomination.   I am merely arguing that we should not be making wholesale assumptions in 2013 about an election that will take place in 2016.   Hillary is not inevitable.


See my two books, The Chairman, A Novel of Big City Politics and The Chairman’s Challenge, A Continuing Novel of Big City Politics, for further illumination on how things work in Chicago and Illinois politics. 


Saturday, August 17, 2013

TIO HARDIMAN IS IN THE ILLINOIS GOVERNOR’S RACE: HEY, HE’S NOT A CONVICTED FELON

8/17/13

Former Cease Fire director Tio Hardiman has announced he is throwing his hat into the Illinois gubernatorial ring.   Mr. Hardiman is likely to have a hard time gaining traction; his past includes a guilty plea to a misdemeanor domestic batter charge and an arrest for another domestic battery.  His wife dropped the charges on the latter, along with her plans for a divorce, saying she “want(ed) to work on her marriage.”   That was enough to keep Mr. Hardiman out of the hoosegow, but not enough to allow him to keep his job; Cease Fire announced just after his arrest that his contract would not be renewed and his wife’s dropping charges apparently has not persuaded them to reconsider.



When asked about his troubled past, Mr. Hardiman came up with a reply that both clarified things and drew a distinction between Mr. Hardiman and our two most recent former governors:

“The media, they like to bring up things from my past.   But I’m not a convicted felon; let me make that clear.”  (Emphasis mine)

Only in Illinois is not being a convicted felon considered a salient qualification for governor.  And only in Illinois does such a non-status make one a breath of fresh air.



See my two books, The Chairman, A Novel of Big City Politics and The Chairman’s Challenge, A Continuing Novel of Big City Politics, for further illumination on how things work in Chicago and Illinois politics. 

Friday, August 16, 2013

EXOTIC INVESTMENT PRODUCTS FOR THE “AVERAGE GUY”: WHAT’S THE POINT?

8/16/13

Today’s (i.e., Friday, 8/16/13’s, page C1) Wall Street Journal contained an article (“Mom-and-Pop Pitches Draw Flak,” by James Sterngold) discussing the concern of some in and around the investment industry about the increasing number of esoteric investment products being sold to small and medium sized investors.   These products, born largely of search for yield in the wake of what I like to call Ben Bernanke’s War on the Elderly and a desire to avoid the kinds of market downturns we saw in 2008, include long and short funds, private equity funds, funds that buy unregistered bond issues, and a range of investment products limited only by money managers’ imaginations and ability to sell.

Regular readers can probably guess my reaction to this proliferation of esoterica in the financial marketplace:   What’s the point? 


I have long contended that the best strategy for just about everyone to follow is to hold a balanced portfolio of stock index funds and bond index funds, with the proportions of each based on one’s long term risk tolerance rather than one’s perceptions of where the market is going, which are as likely to be wrong as they are to be right.   (See my 5/8/13 post,ANOTHER OF THOSE TRITE BUT TRUE INVESTING MAXIMS for only my latest, until now, expostulation on this point.) The only trades one should do in one’s portfolio are an annual rebalancing, which must be done with nearly religious fervor.  It would also help not to look at one’s investments with any degree of frequency; doing do can lead to panic or euphoria, both dangerous emotions in investing.    By holding index funds and religiously rebalancing, one will capture a portion of the stock market’s upside, avoid a portion of the market’s downside and, in almost all cases, beat the performance of more “sophisticated” products in any meaningful time frame.  (The size of the portion of the market’s upside and downside one will avoid depends, of course, on the proportions of one’s portfolio invested in stocks.)  If one really wants to simplify one’s investment life, one could hold a balanced index fund, which holds both a bond index and a stock index and does the rebalancing automatically, though generally in a slightly different manner than an annual rebalancing.

Why do I make this case for index funds with such fervor and certainty?

First, it is difficult for anyone to beat “the market” over any meaningful investment horizon.  The definition of “the market” varies with the asset class in which one is investing, but virtually every market is represented by an index and there is an index fund for just about every index.   These percentages vary as rolling ten year periods change, but the latest I saw is that only 13% of active large cap stock managers beat the S&P 500 index over the prior ten year period.

Second, while there are managers who outperform their indices, there are few (See the last paragraph.) who do so after the fees that actively managed funds charge.  For example, the aforementioned Journal article talks about a retired physician in Florida who bought the Mainstay Marketfield Fund, which takes long and short positions on stocks depending on who knows what criteria.   This fund charges management fees of 1.50%, or 150 basis points.  The Vanguard S&P 500 Index charges 10 basis points on its Admiral Shares.  The spread between index and active fees is not usually this large, but the spread is always considerable and acts as a kind of ankle weight on the performance of actively managed funds.

Third, while there are managers who outperform their indices even after fees, there are not many of them and the chances of your finding the manager who will do so over the next five, ten, or more years are miniscule.  Remember, past performance is not necessarily a good indicator of future performance, so simply picking the best performers for the last ten years doesn’t work.   Things change.  This is called “manager risk.”  One supposes one could find a broker and/or investment advisor who is skilled at finding really great managed funds, but one would have a hard time finding such an advisor who is clairvoyant.  And brokers who can find such great managers will doubtless charge more fees, further reducing the chances of your outperforming “the market,” as defined by an index fund.

Fifth, these exotic new products will not necessarily perform as advertised.  The same physician cited in the Journal article reports that he is not dismayed by the underperformance year to date of his Mainstay Marketfield Fund of the S&P 500 by about 900 basis points because

“I was happy to sacrifice optimal performance on the upside for the defensive characteristics.”

There may be something to this; the Mainstay Marketfield was down only 13% in 2008 while the S&P was down 37%.  But then again there may not be anything to the doctor’s argument; we simply don’t know how the Fund will do in a similar downturn in the future.  And even if Mainstay does that well on relative basis, not every such exotic fund will. 

We do know how a well run index fund will perform; it will do as its index does, less fees.  And we also know that we can adopt defensive characteristics by not putting all our money into a stock index, by balancing out the risks of stocks by holding a bond index.  We further know that we will force ourselves to buy low and sell high with a portion of our portfolios if we religiously rebalance.   And we can achieve all this while not paying an active manager 14 times more than we pay an index “manager.”


A necessary word…

Some have mistaken my enthusiasm for index funds as a rejection of the work of financial advisors.   This is certainly not my intention.   We who have invested, or do invest, for a living and know what we are doing tend to underestimate the difficulty for the average person of techniques such as rebalancing.  We also tend not to be intimidated by talk of markets and the use of jargon by the investment community.  In short, we think it is as easy for the proverbial “average guy” to invest as it is for us to invest.  While this can be the case with just a little bit of effort and a mastery of some pretty elementary arithmetic, it is usually not the case that the “average guy” finds this stuff as easy as I and my colleagues do.   And sometimes people simply need a trusted hand to hold, figuratively of course.  If you are an “average guy,” at least as far as money and investing go and/or you’d feel better working with an expert, by all means work with a financial advisor.   It would be best, though, to work with a financial advisor who is open to index and index fund like products.   More importantly, be careful; while there are some good advisors out there, there are plenty of charlatans in the money business.   And one can usually detect such a mountebank by his or her promises of to deliver “above market returns,” “more yield with the same or less risk,” or “consistent market beating performance.” 

Trust and honesty are far more important characteristics for a financial advisor than are purported investment skill and knowledge.

Even I work with a financial advisor on a portion of my portfolio and have been doing so for about the last 25 years.  It’s good to have someone with experience both similar to and different from mine with whom to discuss things.   He is smart and honest and does his best to keep the costs down.   I trust him and like him and he more than tolerates my enthusiasm for index and index like products.   


Thursday, August 15, 2013

JESSE AND SANDI JACKSON: JUST HOW CLAIRVOYANT WAS H.L. MENCKEN?

8/15/13

Jesse Jackson, Jr., affectionately, or otherwise, known as “Triple J” in these parts, and his co-schemer and wife Sandi Jackson, were sentenced yesterday for their crimes involving misuse of campaign funds and failure to mention to the IRS their use of such funds for such vital campaign necessities as moose heads, furs, Eddie Van Halen guitars, Michael Jackson memorabilia, and a $43,000 watch.   Yours truly contends that anyone who spends $43 grand on a watch deserves to go to jail on general principle, but I digress.

As regular readers know, I have been deeply intrigued by this story for a long time.  (See, inter alia




and posts in a former blog to which they will direct you.)   So the sentencing of these two felonious finaglers merits some comment from yours truly.



First, the sentences seemed a little light:   a year for Sandi Jackson and two and a half years for Triple J, both far under the maxima under federal guidelines.   If the Chicago Sun-Times Natasha Korecki and Lynn Sweet, neither of whom could be considered hostile to the Jacksons, are to be believed, at least Triple J agrees that he got off easy.  According to Ms. Sweet and Ms. Korecki in today’s (8/15/13, page 4) Sun-Times

Jackson, Jr., 48, who had been blowing his nose and sobbing during his remarks to the judge, appeared to break into a half-grin as the news of the sentence settled in.

And it got better for the Jackson.  Rather than both going immediately to jail (and why has it taken this long?), they will go in sequence, with Jesse going first and Sandi going after him.  And they got to decide the order of their incarcerations.   Who else gets such treatment?

Still, yours truly is kind of surprised that Sandi Jackson got any jail time at all.   It’s not that I don’t think she deserved it.  But so much of the Chicago media and political establishments had bought into the “poor, poor put-upon Sandi Jackson” line of baloney, along with the “these kids need their parents” pile of horse dump that I feared, and suspected, that Judge Amy Berman Jackson (no relation) had drunken the kool-aid.  Fortunately, she didn’t.




Second, Triple J’s still vague emotional/mental malady was taken for the line of cattle detritus that it appeared to be.  Prosecutor Matt Graves, referring to Mr. Jackson’s purported illness, stated

“It’s quite clear there’s no ‘there’ there.”

Some might reply that, of course, Mr. Graves would say that; after all, he was the prosecutor in the case.  But Judge Jackson also gave the mental health angle no credence, pointing out that there was nothing sudden about Mr. and Mrs. Jackson’s, er, lapses of judgment, as would be the case if their thievery sprung from Mr. Jackson’s mental condition.   This was, the Judge pointed out, a continuing pattern of pilferage, and stated that there was

“…only once conclusion, and that is that you (Triple J) knew better.”

Yours truly is no mental health professional, but neither are the vast majority of people commenting on Triple J’s medical maladies.   Further, none of the mental health professionals the Jacksons were able to produce were all that convincing.   Maybe those of us who are, to put it mildly, suspicious of Mr. Jackson’s claims of the psychiatric equivalent of “the devil made me do it” are wrong.  Maybe Mr. Jackson really is sick.   If that really is the case, one suspects that whatever it is that Mr. Jackson has will clear up quickly…very quickly.  In fact, one suspects that his afflictions vanished as soon as his sentence was pronounced.   But they may make a temporary comeback if (when, probably) Mr. and Mrs. Jackson prepare their appeal.


Third, we have been hearing much about “wasted talent” and “a promising career” of “a young man who had the ability to go all the way” being “thrown away,” and other such bullroar from those die-hard liberals in the local and national media who “just wanna believe,” and can’t be convinced otherwise.  

Yours truly never bought into this hype.  Triple J was at best a passable Congressperson, at worst a lazy, entitled son of privilege who was clearly in over his head.   Until recently, he had a very good Congressional attendance record, but one wonders what he did other than attend.  In his 17 years in Congress, he never managed to win a committee chairmanship, despite the sycophancy most of his fellow Congressman showed him due to his last name and the perception that it carries a lot of weight with black voters.  He did manage to win a seat on the Appropriations Committee, but his record of achievement in that all-important Committee, like his overall record in Congress, was slight, at best.   He made a lot of noise about what came to be seen as his pet project, a third Chicago airport in distant Peotone, but there is still no airport growing from the cornfields in that bucolic burg.  He also proposed that each school child in America be given an i-Pad, courtesy of you, the taxpayer.   Hmm…perhaps we should be grateful that JJJ was unable to get anything done.   Even his much lauded oratory was only so much fulmination, much art and little substance, jargon and catch-lines amounting to nothing but pap and pabulum for the already converted.

When Mr. Jackson first came to Congress in 1995, all we heard about was what a terrific, wonderful, super hero of a young man he was, truly outstanding, upstanding, and all around beatific in every conceivable way.  It seemed to yours truly that such talk was just another orgiastic manifestation of the “just gotta believe” phenomenon among starry-eyed liberals with not even a passing familiarity with life on the ground in Mr. Jackson’s 2nd Congressional District.

We had heard nearly the same kinds of hosannas about Mel Reynolds, Mr. Jackson’s predecessor as Congressman in the 2nd District, when Mr. Reynolds defeated Gus Savage in 1992 to assume the seat.   Mr. Reynolds was described in nearly the same beatific tones as Mr. Jackson.   Mr. Reynolds was a Rhodes Scholar and he was….,well, given Mr. Reynolds’ thin resume and an inability to talk in anything but empty platitudes or understand the core of any issue, no one could come up with anything other than his Rhodes Scholarship.   In fact, Mr. Reynolds’ only qualification for Congress, let alone the sainthood his true believers seemed to be recommending him for, was that he was not his race-baiting, anti-Semitic predecessor Gus Savage.  

Mr. Reynolds went on to develop, or maybe just further indulge from a position of power, proclivities toward teenage girls, especially Catholic school girls (“I think I just won the lottery,” Mr. Reynolds response when he was told by what turned out to be an informant that the informant could set him up with a girl who attended a Catholic high school, is perhaps Mr. Reynolds’ most famous utterance, but I digress.) and lie to law enforcement about it.   Consequently, he was provided lodging in a federal facility  and was replaced by the equally underqualified Mr. Jackson.  The same people who just three years before were telling us how terrific Mr. Reynolds was began telling us that we had been visited by an even more celestial personage in Mr. Jackson.  I never believed it because there was never any basis for it other than the “just gotta believe” attitude that affects those whose minds are so open their brains fall out.   But Mr. Jackson’s obsequiants may have had a point; Mr. Jackson had at least one more qualification than Mr. Reynolds:  not only was Mr. Jackson not Gus Savage; he also was not Mel Reynolds.  As H.L. Mencken, one of the truly great figures in American history said,

“An idealist is one who, on noticing that a rose smells better than a cabbage, concludes that it will make a better soup.”



Fourth, there is much talk already about a Triple J comeback.   Don’t discount the possibility.  Young Mr. Jackson is not yet fifty and he’ll be out in about a year and a half.   He managed to win re-election by a landslide in 2012 despite his absence from both Congress and the campaign trail in the wake of suspicions regarding his dalliances with former Governor Rod Blagojevich about Barack Obama’s old senate seat and, of course, the onset of his mysterious maladies.  

Further, as H.L. Mencken also said in a widely misquoted observation…

“No one in this world, so far as I know—and I have researched the records for years, and employed agents to help me—has ever lost money by underestimating the intelligence of the great masses of the plain people. Nor has anyone ever lost public office thereby.”

So we have not yet heard the last from Jesse Jackson, Jr. and his accomplice, Sandi Jackson.   As Mr. Mencken also said, perhaps gazing at the 2nd District from far off Baltimore

“Democracy is the theory that the common people know what they want and deserve to get it good and hard.”

And, perhaps having a vision of the not yet born Jesse and Sandi Jackson, Mr. Mencken also observed

“Government is a broker in pillage, and every election is sort of an advance auction sale of stolen goods.”


Mr. and Mrs. Jackson are living, breathing, walking, talking manifestations of the wisdom of Mr. Mencken.


See my two books, The Chairman, A Novel of Big City Politics and The Chairman’s Challenge, A Continuing Novel of Big City Politics, for further illumination on how things work in Chicago and Illinois politics. 


PAT QUINN PUTS PAT FITZGERALD ON A VESTIGIAL COMMISSION: IS THE GOVERNOR RUNNING THE TABLE?

8/15/13

Governor Pat Quinn (no relation) has appointed a commission to “review oversight at the Regional Transportation Authority” (“RTA”).   Appointing a commission is, from a genuine managerial standpoint, one of the most flaccid moves one can make.   Commissions, whether in the private or public sector, do nothing other than waste time and money producing reports few read, none remember, and all ignore.   From a governance standpoint, commissions are a sign of cowardice; pols and private sector managers don’t like to make decisions for which they might be held accountable and thus pass the buck to a “commission” of, usually but not always, has-beens, never weres, and people who make a living selling their once vaunted reputations.



However, from a purely political perspective, forming this particular commission is the latest of a series of great moves on Pat Quinn’s part.   This is mostly because one of the panel members is none other than Patrick Fitzgerald (pictured), our former U.S. Attorney who had the integrity, work ethic, fearlessness, and courage to go after corrupt pols and their gangster pals in and around Chicago.  Mr. Fitzgerald is a rare exception to the “has-beens and never weres” rule for staffing commissions I referred to in the last paragraph.  Let’s hope he hasn’t joined the legions of “people who make a living selling their once vaunted reputations,” but, given my general sense of realism, which some foolishly choose to label cynicism, I can’t be confident in that hope.   But I digress.

At any rate, putting Pat Fitzgerald on this commission is great politics because Mr. Fitzgerald has such a great reputation for rooting out corruption, of which the RTA is a cesspool.   While this commission, like just about every commission formed since, one supposes, the commission formed to investigate the death of Abel, will accomplish nothing, appearances are all that matter in modern politics.

As I said earlier, this is just the latest of Pat Quinn’s brilliant political moves.   First, there was the withholding of lawmakers’ salaries until they get something done on the public pension problem that is bankrupting, or has bankrupted, our state.  (See my 7/10/13 piece, PAT QUINN SUSPENDS LEGISLATORS’SALARIES:   FOUR MORE YEARS?.)   This move was probably silly, perhaps counterproductive, and yet another example of Mr. Quinn’s insatiable penchant for grandstanding, but it was GREAT politics. 



Then there was the appointment of Frank Zuccarelli, the Democratic kingpin of the south suburbs, to the CTA Board.   (See my 8/9/13 piece BILLDALEY IS SHOCKED, SHOCKED (!) THAT PAT QUINN WOULD MAKE A PURELY POLITICALAPPOINTMENT TO THE CTA BOARD.)   This move was made even more brilliant by Mr. Zuccarelli’s declining the seat in light of the stink Bill Daley made about putting Mr. Zuccarelli on the board.   Why was Mr. Zuccarelli’s declension so salubrious for Mr. Quinn’s efforts to keep his job?   Pat Quinn has already ingratiated himself with Mr. Zuccarelli, which was the point of the whole exercise.   The governor has also created some, er, distance between Mr. Zuccarelli and Mr. Daley.   Finally, Mr. Quinn now has the chance to appoint someone else to the CTA Board, and you can be sure he will appoint someone who, like Mr. Zuccarelli, can help the governor in his primary race against Mr. Daley.

Mr. Daley now has to realize he is in a fight.  (See my 7/16/13 piece, PAT QUINN VS. BILL DALEY:  “THIS GUY DOESN’T THINK THIS IS A SHOW; HE THINKS IT’S A FIGHT!”Lisa Madigan is probably happy she stayed out of this race; it is proving to be far from the coronation to which she felt she was entitled.  (See my 7/16/13 piece, LISA MADIGAN WON’TRUN FOR GOVERNOR:  WOULD YOU WANT THE JOB?)   Pat Quinn (no relation) may have a deserved, or otherwise, reputation as a reformer, but he is showing he didn’t get this far in Chicago and Illinois politics by spending an inordinate amount of time consulting the Marquis of Queensberry.


See my two books, The Chairman, A Novel of Big City Politics and The Chairman’s Challenge, A Continuing Novel of Big City Politics, for further illumination on how things work in Chicago and Illinois politics. 


Friday, August 9, 2013

BILL DALEY IS SHOCKED, SHOCKED (!) THAT PAT QUINN WOULD MAKE A PURELY POLITICAL APPOINTMENT TO THE CTA BOARD

8/9/13

More on the governor’s race, which has been neglected, until today (See today’s other post, THE MADIGANS, THE SPEAKER’S OFFICE, AND THE GOVERNOR’S RACE:  “YOU SEE,THAT’S WHERE MY ARGUMENT FALLS APART…”), since our trip (See 8/2/13’s seminal CLARK GRISWOLD, MR. PEABODY, AND ME), partially because I have been writing about more important matters (See 8/7/13’s THE NATION’S GREATEST PARTY SCHOOLS: THE I’S HAVE IT!)…



Governor Pat Quinn (no relation) has appointed Frank Zuccarelli to a spot on the board of the Chicago Transit Authority (“CTA”).  Mr. Zuccarelli does not live in Chicago; he lives in the south suburbs.  Mr. Zuccarelli is also holds the “job” of Thornton Township Supervisor, one of the many vestigial sinecures we in these parts provide our public servants.  More importantly, for purposes extending beyond the subject of this post, Mr. Zuccarelli is the Democratic Committeeman of Thornton Township, which produces more Democratic primary votes than any other township in the Cook County suburbs.

Bill Daley, Mr. Quinn’s sole, up to this point (See my 7/16/13 piece, PAT QUINN VS. BILL DALEY:  “THIS GUY DOESN’T THINK THIS IS A SHOW; HE THINKS IT’S A FIGHT!” for the reasons I think the words “up to this point” are vital.), opponent in the Democratic gubernatorial primary, is upset with Governor Quinn’s appointment of Mr. Zuccarelli to the CTA Board. 



Mr. Daley points out that Mr. Zuccarelli, while probably qualified, doesn’t live in Chicago and, after all, this is the CHICAGO Transit Authority Board to which Mr. Zuccarelli has been appointed.  This is true, though, while not being certain, I suppose that there have been, from time to time, CTA Board members from outside the confines of the city itself.

Mr. Daley also points out that holding a part time job on the CTA Board would result in Mr. Zuccarelli’s double dipping, since he already holds the job of Thornton Township Supervisor.   This is the sort of double dipping that so recently helped get former Metra Chairman Brad O’Halloran in so much trouble.  (See my 8/4/13 piece, WHO WOULD WANT TO BE ONTHE METRA BOARD?  WELL… for only my latest commentary on that sordid yet par for the course in these parts affair.)  Mr. Daley’s argument also rings true in this instance.

Mr. Daley also argues that Mr. Zuccarelli was appointed by Mr. Quinn for blatantly political reasons; i.e., to secure Mr. Zuccarelli’s very formidable support in the upcoming Democratic primary race for governor pitting, for now, Mr. Daley against Mr. Quinn.  Mr. Daley is also absolutely correct in this contention.

But so what?



Mr. Daley’s criticizing Mr. Quinn for engaging in the type of raw, nearly bare-knuckled politics that results in the likes of Mr. Zuccarelli winding up on the CTA Board is surely a case of (excuse the hackneyed metaphor) the pot calling the kettle black.   Appointing political allies to posts in which they could wield power and double dip is the type of thing the Daleys have been doing since Richard J. Daley started climbing the ladder in the ‘30s.  It is also, by the way, the type of politics that Mr. Quinn, while clearly not identified with, has not eschewed in his long career in, er, “public service.”   He may have a much vaunted reputation as a crusading reformer, but he didn’t survive, and prosper, this long in Chicago and Illinois politics by spending inordinate amounts of time at choir practice.

So, yes, Mr. Daley is right; Mr. Quinn’s appointment of Mr. Zuccarelli to the CTA Board was pretty much raw, naked, largely unabashed politics.   But, to use another hackneyed metaphor, what’s good for the goose is good for the gander…and Mr. Daley had better get used to it.  See, again, my 7/16/13 piece.

This is going to be one heck of a race.

See my two books, The Chairman, A Novel of Big City Politics and The Chairman’s Challenge, A Continuing Novel of Big City Politics, for further illumination on how things work in Chicago and Illinois politics. 


THE MADIGANS, THE SPEAKER’S OFFICE, AND THE GOVERNOR’S RACE: “YOU SEE, THAT’S WHERE MY ARGUMENT FALLS APART…”

8/9/13

I haven’t commented on the Illinois gubernatorial race since going off on our trip.  (See my already seminal 8/2/13 piece, CLARK GRISWOLD, MR. PEABODY, AND ME.)   I, and doubtless my readers, feel deprived; it is time to address this deprivation.

A few days ago House Speaker Mike Madigan indicated that his daughter, Attorney General and former Governor in Waiting Lisa Madigan, knew all along that he would not resign from his post as Speaker if Lisa were to run for governor.  According to the Speaker, they had discussed this topic and he had made it clear to her that he intended to keep his job.  As I pointed out, to leave what is for Mr. Madigan a lifetime job so his daughter could be governor for a few terms while she prepped for bigger things would have been ludicrous (See my 6/19/13 piece, MIKE AND LISA MADIGAN:   WHAT’S A DAD TO DO?), and Mike Madigan isn’t The Man in this state’s politics because of a propensity to do ludicrous things.  



Mr. Madigan’s statement of the obvious, however, destroys Lisa Madigan’s cover story that

“…the state would not be well served by having a governor and speaker of the House from the same family and have never planned to run for governor if that would be the case. With Speaker Madigan planning to continue in office, I will not run for governor."


When the Speaker was asked why his daughter considered a race for governor knowing that he would remain as Speaker when she supposedly had such strong objections to such an arrangement, Mr. Madigan replied in his usual pithy manner “Ask her.”  Wow.

Someone is lying here, and it looks like it’s not the mean old ogre Mike Madigan but the Fair Maiden, the darling of the Chicago Press Lisa Madigan.  The very notion that “our Lisa” may be prevaricating is doubtless offensive to those on all points of political spectrum who seemingly adore Ms. Madigan while abhorring her father.



The exposure of the Attorney General’s cover story for the crock that it was also provides further evidence of an argument I made in my 7/16/13 piece concerning the real reasons Lisa Madigan opted to stay out of the governor’s race, to wit,

The good reason is Bill Daley’s wise and either gutsy or artful political move in entering the race and thus making Lisa’s path to a promotion for more problematical.  Lisa wanted a coronation, not an election.  Bill Daley made it a fight.

The better reason is not quite as political but very simple:   Would you want to be governor of Illinois right now?   This state is in a hell of a mess, with bankruptcy looming over the fast approaching horizon.  In all likelihood, nothing will be solved before the next governor takes office.  One does not blame an ambitious pol like Ms. Madigan for not wanting to tie her dinghy to such a sinking ship.  It would be much easier, and conducive to obtaining that big job that every politician ultimately wants, to become a U.S. Senator, and that job may become available, albeit not necessarily for the asking, in 2016.


See my two books, The Chairman, A Novel of Big City Politics and The Chairman’s Challenge, A Continuing Novel of Big City Politics, for further illumination on how things work in Chicago and Illinois politics. 


Wednesday, August 7, 2013

THE NATION’S GREATEST PARTY SCHOOLS: THE I’S HAVE IT!

8/7/13

The Princeton Review has come out with the results of its 2013 nationwide poll of 126,000 students regarding the quality of, er, recreational activities, in our nation’s institutions of higher learning.   According to these observers, who apparently know of what they speak, the nation’s top five party schools are…

  1. The University of Iowa
  2. The University of California at Santa Barbara
  3. The University of Illinois
  4. West Virginia University
  5. Syracuse University

As loyal readers know, two of these schools are very close to yours truly’s heart.   I got my MBA at Iowa.  My oldest daughter attends the University of Iowa.   And my wife and I aspire, at some point in the future, to live in or around Iowa City, which has to be, in our and many’s opinion, the best place in the world to live, but that is grist for another mill.  I got my undergraduate degree (BS, Accountancy, as they call it, which makes it sound not like a subject but rather a disease, but I digress).  Until I met my wife, those four years in Champaign-Urbana were the best four years of my life.



One supposes that, as an alum of Illinois and Iowa and the father of a student at the latter, I should be perplexed at the notion of these institutions’ being widely regarded as great party schools.  But I’m not.

While no one, and least of all yours truly, condones excessive drinking (or any underage drinking) or some of the other activities that fall under the general heading of “partying,” what is wrong with having a good time?   If my two almae matres were pure party schools, offering little academic challenge or opportunity for intellectual or career enhancement, I would indeed be sullen and down-in-the-mouth about this latest development.  But neither school is a non-stop party; far from it.

Regarding the Big U downstate…

Illinois and its students consistently rank in the top five universities in the country by employers.  Its business, and especially its engineering, math, and science programs, are among the best, if not the best, in the nations.  22 Nobel Prize winners are, or were, associated with the Big U as either alumni or faculty members.  If you are an Illinois resident, Champaign is perhaps the best bargain out there in higher education.  And if you a resident of South Korea or China, you know the U of I; much of the technological infrastructure of both countries, and of others, has been built by U of I alums.



Regarding the University of Iowa

Iowa has long been widely recognized as both the easiest Big 10 University to get into (though with the entry of Nebraska (another great place to go to college), Maryland, and Rutgers (no opinion yet on these interlopers) into the family, Iowa may have lost that distinction) BUT the most difficult Big 10 University to stay in.   (This juxtaposition of the difficulty of gaining entry and maintaining student status makes Iowa something of the opposite of Harvard (i.e., the U of I (either U of I) of the East) and its Ivy League colleagues, where the only difficult endeavor is getting in, but I digress.  At least I do so parenthetically in this case.) Perhaps the attractions of downtown Iowa City have something to do with the latter, but mostly the difficulty of remaining enrolled at Iowa has to do with its very challenging general ed requirements.   Freshmen and sophomores at Iowa are frequently heard to complain that none of their friends at (name just about any other Big 10, or any, for that matter, university) don’t have to work as hard as they do.   I know from personal experience; thank God my daughter is starting her junior year.

The health related fields at Iowa are always among the best in the country.  (Again, personal experience; my daughter is in the 6th rated nationally Nursing program.)  The Tippie School of Business is perhaps the most underrated business school in the country, and I say that fully aware that it is always in the nation’s top 50 business programs.  The Iowa Writer’s Workshop is the best in the country.   And Hawkeye sports?   You have to experience the enthusiasm, near pandemonium, of an Iowa football game to believe it’s real.   And watch Hawkeye basketball this year; Fran McCaffrey and the guys are going to surprise a lot of people this season. 

And then…

there is just being in Iowa City.   What a beautiful campus and town, what great people, what a place…and this from a non-drinker, non-partier buy who has seen something of the world.  (Don’t misunderstand me; I was not a non-drinker, non partier when I attended either of these institutions.  I am speaking of my current status in my advanced age.)


So would I rather not have my two almae matres at the top of the national party school rankings?   Maybe.   But does their achieving such notoriety, in many people’s eyes, make me think any less of either of these two academic giants and all-around great places to spend one’s college and/or grad school years?   Absolutely not.   I love both my schools, would gladly and gratefully go to either again if I had to do it all over again, am delighted that my daughter goes to one of them, and would strongly recommend them to anyone seeking a place to matriculate.   And, yes, they are both a very good time; is that something of which to be ashamed?


PRIVATE EQUITY FIRMS BORROW TO PAY THEMSELVES DIVIDENDS: “BUDDY, CAN YOU SPARE ME A (BILLION OR SO)”?

8/7/13

One of the latest crazes among private equity investors is, as it has been from time to time since the advent of the leveraged buyout (“LBO”) and junk financing, to have the companies they own borrow more money to pay dividends to their owners, i.e., the private equity investors.  This, of course, not only returns cash to the private equity investors but reduces their net investments in the firms they own, reducing their downside and enhancing, at least on a percentage basis, their upside.

As I intimated in the first sentence, this is nothing new.   Even back in the bygone days of the ‘80s and early ‘90s, when I was a professional investor in junk bonds, what we then called LBO firms, but which since have acquired the seemingly more respectable moniker of “private equity firms,” borrowed money against the firms they controlled to pay themselves dividends.  The catalyst for the current bout of such activity was the sudden uptick in interest rates of the last few months, from which junk bonds certainly did not escape.  Private equity firms adopted a “last chance” mentality, rushing to borrow money while it was still relatively cheap but perhaps headed much higher.

A natural reaction to private equity guys saddling the companies they own with more debt in order to make themselves, and their clients, even wealthier is abhorrence.  Yours truly has to admit that was my first reaction.  But upon a few seconds of reflection, a far less sinister motive can be ascribed to borrowing money relatively cheaply to pay one’s self a dividend. 

Such activity is a simple financial restructuring, a decision on the part of a firm’s owners to employ more debt, relative to equity, in the firm’s capital structure in response to a change in the cost of that debt and, perhaps, in the cost of the firm’s equity.   When debt is cheap relative to equity, it makes sense to employ a capital structure more heavily weighted toward debt.   Doing so reduces a firm’s overall cost of capital.  This is straight out of the financial management courses that I teach at NIU, Columbia College, and Elmhurst College and that thousands of my colleagues teach at universities and colleges throughout the world.  Of course, I have to stifle my debtaphobic instincts when teaching this concept, but it remains one of the basic principles of financial management.

That having been said, if I were still running junk bond funds, would I be buying debt issued to pay the owners a dividend, further levering up an already highly leveraged balance sheet, and thus increasing a firm’s financial risk?   While it would depend on the circumstances, the most important of which are the existing level of debt at the issuer, the borrower’s ability to generate cash on an ongoing basis, and a logical exit strategy for the buyout firm, my inclination would be to pass on such deals.  In other words, all things being, my inclination would be to avoid deals in which the use of funds is to pay the owners a dividend, even if such a recapitalization might make sense from a pure cost of capital point of view.


Tuesday, August 6, 2013

PRICE REDUCTIONS ON THE VOLT: THE CARMAKERS DOUBLE DOWN ON PLUG-IN TECHNOLOGY

8/6/13

As long time readers know, I have not always written favorably of the Chevy Volt and its kindred cars.   However, my problem with the Volt had little to do with the car itself, which is both relatively fun to drive and a technological marvel.  My problems with the Volt had just about everything to do with the inability of the numbers to work at anything like the car’s $40,000 sticker price, thus limiting its appeal to ostentatious greenies, a very limited market.

However…

Apparently, no one in the Volt’s short life has ever paid sticker price for the car, as far as I can tell.  A good buddy of mine leased one when they were relatively new at a monthly payment that reflected a sale price nowhere near its sticker price; in fact, if you played with the numbers, the lease had to be based on a price at which one could buy a similarly equipped conventional, mainstream mid-sized car.  At those numbers, the Volt makes a lot of sense, provided one drives more than a modest number of miles per year. 



GM has finally acknowledged reality, but not completely, by reducing the sticker price of the Volt by $5,000 to $35,000.  This is in line with a general trend of automakers’ reducing the prices, through very attractive lease deals and outright reductions of sticker prices, of their plug-in hybrids and pure electrics due to a very slow market for these cars.   GM says that reductions in the cost of manufacturing the Volt contributed to the decision to reduce its price.   This may be true, but Economics 101 tells us that it is weak demand at current prices, not falling costs, that leads to reduced prices.  If GM didn’t have roughly twice the normal inventory of this car sitting on dealer lots, it wouldn’t be reducing prices in response to a reduction in its costs of production; it would be maintaining prices and pocketing the reduction in costs.

So GM, Ford, Honda, and Nissan have reduced the prices of their plug-in offerings, making it easier for people to get into these cars.  However, these reductions in prices have trashed the resale value of these cars.  The Wall Street Journal reports this (Tuesday, 8/6/13, pages B1 and B2) morning that the trade-in value of a one year old Nissan Leaf is down 25% from a year ago; the trade in value of a one year old Volt is down 21%.   This cratering in trade-in values will have two effects.

First, it will, or should, infuriate those who bought plug-in vehicles, increasing their  overall costs of ownership and thus incurring ill-will for the car companies while providing another reason for people to sour on hybrids or electrics.

Second, and perhaps more insidiously, the incentive to lease, rather than buy, these cars will increase.  Even before these price reductions, as my friend who leased the Volt pointed out, it made little sense to buy a car in a period of rapidly advancing technology; better to lease and let the lessor take the risk of obsolescence.  (Yes, my buddy is a very smart guy.)  Now with the carmakers reducing prices in response to slack demand, the near absurdity of owning these cars has been exacerbated.   Unless the terms are heavily skewed away from leasing (They run in the other direction currently.), any thinking person will lease his or her plug-in hybrid or pure electric.   Thus, the ultimate lessors (the car companies, either through captive finance companies or the heavy subsidies they pay to third party lenders) will bear the risk, either of rapidly advancing technology and attendant obsolescence or of simply a cool reception in the market place, of owning these cars.

Not only, then, are the car companies taking a gamble by making and marketing these cars; by making leasing the only logical way for people to get into these automobiles, the companies are doubling down on their bets by making themselves the second owners, the receptacles, if you will, of these vehicles that may very well be obsolete or simply unwanted in the marketplace.

The impact on the stocks of these companies should be miniscule; electrics and plug-in hybrids are a very small part of their business.  But the implications for the technology of such vehicles, which still looks transitional, and perhaps for the company that specializes in such cars, Tesla (TSLA; See my 5/30/13 and 5/23/13 pieces, IF YOU WANT TO GET PEOPLE CHARGED UP, WRITE ABOUT TESLA (TSLA) and TESLA (TSLA):  THEGREENIES ARE CHARGED UP, BUT…), could be profound.


REPLACING FANNIE AND FREDDIE: “I’LL BE HERE WHEN THE MORNIN’ COMES; I’LL BE RIGHT HERE AND I AIN’T GONNA RUN…”

8/6/13

President Obama reportedly will propose today a revamped system of guaranteeing residential mortgage loans in this country.   The previous system, in which Fannie Mae and Freddie Mac, strange hybrids of private profit, public risk, and federal patronage, guaranteed mortgage loans with the implicit guarantee of the taxpayers, has obviously been a failure.  Mr. Obama proposes replacing them with private sector guarantors backstopped by a government guarantee, which sounds strangely like, well, Fannie Mae and Freddie Mac.

The Republicans are not quite clear on what they would replace Fannie and Freddie with but are paying their usual lip service to the private sector.   But a purely private mortgage loan guarantee system is a pipe dream.  Why?  Because there is no substantial market for the types of loans that have supported real estate in this country for just about as long as most people can remember—long term (usually 30 year), fixed rate loans with no call protection for the lender—without federal guarantees.  As long as we insist that borrowers are entitled to loans that feature almost incredibly juicy terms to them and just as incredibly lousy terms to the lenders, the government has to play a big role in the mortgage lending.

The obvious answer, it seems, to avoiding a repeat of the Fannie/Freddie debacle is to move away from the 30 year fixed rate loan model on which the real estate market has been built.   Remove the guarantees and let lenders make loans that make sense from an investment perspective, loans that they would be willing to hold on their books rather than sell to a government backed entity.   Variable rates would clearly be a big part of such a mix, but the cleverness and innovation of the free markets would make all sorts of loans, probably including equity participation loans, available to consumers.  But the 30 year fixed rate loan, ridiculously skewed in favor of the borrower, would probably become a museum piece.

Such a logical transition will probably never take place, even though it works in most other advanced economies.   The real estate industry would scream bloody murder.   Homeowners, largely at the inducement of the real estate industry, would complain that the value of their homes, previously inflated by government guarantees, would be hurt.  Potential home buyers would whine that their entitlement…the 30 year fixed rate loan…had been taken away from them.   And so Fannie and Freddie, or, more likely, something very much like them with a different name, will be around more or less forever.


Long ago, we decided, for whatever reason, that we would heavily subsidize homeownership, and thus investment in residential real estate, in this country.   The largest components of that subsidy are the deductibility of mortgage loan interest and the 30 year fixed rate loan made possible through the intercession of the government.  Neither makes much sense, but neither will be going anywhere soon.  As usual, politics trumps finance, economics, and common sense…and we live with the consequences.

Monday, August 5, 2013

LOW INTEREST RATE POLICIES: WHAT’S BAD FOR CHINA IS BAD FOR AMERICA

8/5/13

This morning’s (i.e., Monday, 8/5/13, page A2) Wall Street Journal features an article by Tom Orlik, “Murky Data Complicate China’s Policy Choices” that addresses the possible undercounting of Chinese consumption in calculating that nation’s GDP.

While Mr. Orlik’s main argument was, as usual, insightful bordering on intriguing, yours truly was especially struck by an observation made late in the article, to wit…

Critics say low interest rates have crimped income for households by reducing returns on savings, denting consumption growth.  The International Monetary Fund estimates that low interest rates transfer about 4% of GDP a year out of the pockets of household savers and into the coffers of state-owned firms that borrow at preferential rates.”

I have been arguing for years that what I call “Ben Bernanke’s War on the Elderly,” or the continuing low interest rate policy that is by no means uniquely American, is in effect a huge tax on those with the prudence to save imposed in order to reward those who spend.   But never have I seen it put so succinctly, outside my blogs, as Mr. Orlik puts it in this morning’s WSJ article.   Unfortunately, Mr. Orlik is writing about China, so the comparison to the United States might escape some readers.  Further, the comparison is not as perfect as one would want; for example, in this country, the low interest rates transfer money out of the pockets of savers to the government and other prodigious spenders rather than to state owned enterprises, as in China

Still, the point is the same; low interest rates are having an insidious effect on our economy.   The immediate effects are to deter consumption and to make the lives of those who depend on their savings more difficult.  The effects will only intensify over the years as savers are pillaged in order to reward spenders with the predictable effect on our already miniscule savings rate.   One hopes that more people would make this point about the United States.