RAHM EMANUEL AND ELECTRONIC TESTING: GOOD GOVERNMENT REALLY IS GOOD POLITICS, EH?

10/24/14

City of Chicago Human Resources Director Soo Choi said Thursday that she wants to convert all tests for city jobs from paper exams to electronic exams.  This is being touted by the Emanuel administration’s toadies in the media as a sharp blow for fairness, against corruption and the evils of patronage.  (See my nearly instantly seminal comments on patronage and its effect on governance, PATRONAGE, THE SHAKMAN DECREE, THE CITY THATONCE WORKED…AND DAVID COPPERFIELD, published 6/16/14 at Rant Lifestyle.) 
In its eagerness to embrace the veneer of reform, the local cheering section for Rahm Emanuel that calls itself the City Hall press corps has it wrong.  Mr. Emanuel’s plan to replace paper tests with electronic tests is not a blow for clean government but, rather, a concession to the modern reality of politics and yet another move to drop the peanuts and grab the golden nuggets.
The precinct captains and the armies of patronage workers of which they were once part are effectively dead as devices for getting out the vote and winning elections.   Federal pressure, largely in the form of Shakman enforcement, has made disciplining the troops nearly impossible.  Maybe more importantly, voters are too busy (Some gullible types say too informed, but that is another issue.) or insouciant to take the time to listen to their neighbors’ pitches for candidates.  The modern voter, even in the remaining supposedly Machine bastions, decides how to vote based on idiotic 30 second ads that interrupt his or her nightly viewing of the schlock we call prime time television.  Over the last 30 or 40 years, the television has steadily replaced the ward organization as the key to winning elections; the television is the new precinct captain and has been for years.   Some of us think this is not an entirely favorable development (See the aforementioned post.), but I digress.
The precinct captain can’t do the pols much good, so why bother fighting Shakman and other federal attacks on patronage?   Why not go the good government route and make moves, such as replacing paper exams with electronic tests, that will further wow the already completely in the tank press and, more importantly, yield an enormous dividend itself?  
What is the dividend this latest goo-goo maneuver will yield?  The electronic tests will involve millions of dollars in contracts for consultants, vendors, lawyers, facilitators and God only knows who else.  Do you suppose that those on the receiving end of this largesse will not show their gratitude by making generous contributions to the various political funds of the mayor and his minions?   If you don’t suppose so, you are hopelessly naïve; make no mistake; something is expected from those who do business with the city, and such expectations, of course, didn’t start with Rahm Emanuel.
Why bother defending patronage when it is impotent in the modern political era?  Why not actually join the fight against it when doing so can generate the money that can be used to buy the inane 30 second ads (and employ relatives, friends, and other hangers-on in the political apparati) that actually win elections in this era of the frighteningly low information voter?

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. 

MORTGAGE LENDING: “LET’S TAKE IT NICE AND EASY, IT’S GONNA BE SO EASY…”

10/22/14

Two developments on the mortgage regulatory front warrant serious consideration and spawn one insightful observation and draw two conclusions.

Federal Housing Finance Agency Director Mel Watt announced yesterday that Fannie Mae and Freddie Mac will guarantee mortgages with down payments as low as 3%.  Previously, though there were exceptions, Fannie and Freddie required 20% down payments on mortgages they guaranteed.

At the same time, the Dodd-Frank requirement that banks retain 5% of the risk in the mortgage loans they originate and sell to investors or require a 20% down payment on such loans was watered down.  Under the new rules, banks can avoid retaining risk in the mortgages they originate and sell by merely “verifying a borrower’s ability to repay” and ensuring that their debt levels remain below certain predetermined thresholds.

Both moves are part of a general thrust toward easing home lending requirements and are seen as a response to a continued sluggish housing market that is characterized by home sales’ being down 2% from last year and still below pre-recession levels of seven years ago.

One can make one observation and draw two conclusions from these regulatory developments.

First, the observation:  At the expense of sounding like a heretic in the church of new age financial innovation, when you have put down only 3% of the value of “your” home, you don’t own the home; your lenders do.  Many have pointed out that only a slight change in housing prices would wipe out one’s equity under such a structure, and that is true.  But even more fundamentally, one doesn’t have to be as atavistic as yours truly to realize that you don’t own anything when you have borrowed just about its entire purchase prices.

Now, the first conclusion.  Wall Street must have gotten to the regulators.  Mortgage backed securities issuance is down 50% year to date from last year.   This of course hurts the trading profits of banks and other Wall Street institutions.   The regulators and their political masters are following their usual “Yes, sir, you’re right sir, what else can I do to make your life easier, sir?” approach to Wall Street and to anybody else capable of writing brobdingnagian “campaign” checks and providing other sources of lucre to our selfless public servants.  That the taxpayers and others not within the vortex of Washington may wind up with the bill for such service is inconsequential to the political class.

Finally, the second conclusion.  Regulators have to have concluded that our Potemkin housing market, and maybe our Potemkin economy, cannot survive without massive debt extension and creation.  That a large chunk of such debt may be unserviceable, and thus will have to be picked up by the taxpayers is, again, inconsequential to the political class or to the special interests it services.

“LOOK AT THAT CADILLAC!”: GM TRIES A GEOGRAPHICAL CURE AT CADDY

9/24/14

General Motors announced yesterday that Cadillac will move its headquarters to New York, part of a larger move to establish Caddy as a separate business unit.   Part of the rationale for abandoning the city whose founder gave Cadillac its name is, as new Caddy boss Johan de Nysschen, put it

“There is no city in the world where the inhabitants are more immersed in a premium lifestyle than New York.”

Mr. de Nysschen thus outlines about as good a reason as any not to live in New York, but I digress.

Will this move to New York work?  Caddy has to do something.  Year to date through the end of August, its sales were down 5% in a strong car market.   Making the story even worse, Caddy’s SUVs, the SRX and especially the behemoth Escalade, are selling quite well.  Sales of Cadillac cars, however, were down 15% as of 8/31/14.  Dealer lots are teeming with CTSs and ATSs that simply won’t sell.

So is moving to New York going to change Caddy’s fortunes?   Employing a little uncommon common sense, one suspects not.  But the move to the Big Apple is at least consonant with Caddy’s pricing strategy; i.e., Caddy vehicles definitely are listed at New York prices.  Therein, one suspects, lies the problem; Cadillacs are simply too expensive.  

The ATS starts in the low $30s, which yours truly thinks is a lot of money but apparently no one else does.  But try finding an ATS at that price point; walk around a dealer lot and you will notice that most of the stickers on this cramped car sport a $40 handle, and many are priced in the high $40s.  The CTS starts in the mid $40s, which gives yours truly apoplexy, and can easily reach the high $50s and low $60s.

C’mon!   These aren’t Mercedes or BMWs; they are Cadillacs, for Pete’s sake.  Yes, the current Caddy products are, in many aspects, as good as the European fare to which they aspire.  The handling of the ATS, which is at least as good, in many knowledgeable people’s opinions, as that of the BMW 3 Series comes immediately to mind.  And it is possible to argue with a straight face that the Cadillac cars are as good as or better in totality than their German competitors.  But that misses the point.

People who spend these brobdingnagian amounts on cars are buying, as much as they will never admit it, an image, not a car.  And while Caddy may be as good as BMW, Mercedes, Audi, Lexus, Infiniti, or what have you, it doesn’t have the image of those “luxury”(whatever that means) marques.  And therefore Caddy can’t charge BMW, Mercedes, Audi, Lexus, and Infiniti prices; those who buy such cars will not stand for it.   And old time Cadillac buyers are not used to paying such prices.  But Caddy doesn’t seem to care much for the traditional Cadillac buyer; in fact, Caddy seems to treat its traditional buyers like something it would like to scrape off the bottom of its shoe.  That also is a big part of the problem.  Older, largely self-made, people have money and are willing to spend it on expensive products that deliver value.  Caddy used to know that, but now seems to be tossing such customers over the side while fixating on capturing the attention of the insecure types who fancy themselves the nouveau riche and seek to prove it, perhaps to themselves, by the accumulation of showy and glittery yet ultimately useless gimcracks and trinkets.

So Caddy can tell its hometown to screw itself.  But as long as it charges prices commensurate with those that prevail in its new HQ town, and tells its traditional buyer base to also do the aforementioned anatomically impossible, it will have problems that far transcend geography.

WHY IS THE MARKET DOWN? WHERE IS THE MARKET GOING? WISE GUY ANSWERS TO UBIQUITOUS, YET POINTLESS, QUESTIONS

9/23/14

A guest on yesterday’s edition of WBBM’S Noon Business Hour (“NBH,” a program I HIGHLY recommend…noon to 1 PM Chicago time on AM 780) was asked to opine on the reasons for the market’s mild doldrums of late.  Since I was cutting the lawn at the time, I didn’t catch the guest’s name and am unable to quote his exact response.  But, paraphrasing, he offered that the market was due for at least a mild downturn or breather after reaching record highs.

This explanation seems reasonable and is certainly as good as any other offered by the “experts” in the field of market prognostication.   Those of us who believe, with more than the usual degree of conviction, in the efficiency of markets, however, believe not only in the inability of anyone to consistently call the direction of markets.   We also believe that it is nearly impossible for anyone to explain why the market has done what it has done; who knows what future events the markets were or is discounting with their usual remarkable efficiency?  People generally stink at prospectively calling the markets; they also generally stink at even retroactively calling the markets.  Such musings as offered by the NBH’s guest, and the guests on every markets oriented show, may be interesting and fun but they are, ultimately, quite useless.  See 8/29/14’s BULLS, BEARS, AND BRAINS:   THE RELENTLESS PURSUIT OF THE FOOL’S ERRAND OF CALLING THE MARKETS for further illumination on this topic.

Given our fervent belief in the efficiency of markets, those who think like yours truly might respond to a question regarding why the market did what it did with a wise guy answer like

“The market was down because there were more sellers than buyers,”

which is about as illuminating as

“The bond market went down because interest rates went up,”

but is nevertheless at least as insightful as anything anybody else might pull out of a conveniently situated orifice.

But even the glib and wisenheimer answer

“The market was down because there were more sellers than buyers”

is wrong because there cannot be more sellers than buyers; clearly, even in this age of such financial sophistication as naked shorts (which, for those of you not as familiar with the markets as other readers, are not as interesting as they sound), for every seller, there must be a buyer.  A better, but no less smart-butted answer, would be

“The market was down because there were more sellers than buyers AT THE PRICES THAT PREVAILED BEFORE THE MARKET FELL.”

Right again, Mr. Quinn.  Thank you.

RAHM VS. THE LILLIPUTIANS

9/23/14

Fran Spielman, the City Hall reporter for the Chicago Sun-Times, write a story published today (“Long shot could force runoff,” page 11) arguing that while Alderman Bob Fioretti cannot possibly win a mayoral race against Rahm Emanuel, the presence of both Mr. Fioretti and Chicago Teachers’ Union President Karen Lewis on the primary ballot could make a runoff more likely.   (See ALDERMAN BOB FIORETTI THROWS HIS HAT IN THE RING:  OH, HEART BE STILL, 9/13/14 for more illumination on Mr. Fioretti and his minuscule chances for winning the big office on the 5^th Floor.)

A brief primer on the mayoral election process in Chicago is in order here.  Chicago mayoral elections are no longer officially partisan; instead, there is a nonpartisan primary in February.  If a candidate gets more than 50% of the vote, s/he becomes mayor.  If no candidate wins 50% of the vote, a runoff is held in April.  Since this officially nonpartisan process was initiated in 1999, there has been no runoff election.

Ms. Spielman, like any political junky reporter, loves a good story.  She even trotted out old school independent strategist Don Rose in support of her thesis, or at least in pursuit of her story.  But Ms. Spielman is, in this case, clearly delusional.  

As I have said before (e.g., TONI PRECKWINKLE RULES OUT A RUNFOR MAYOR OF CHICAGO…MY READERSYAWN, 7/15/14), no one is going to beat Rahm Emanuel in February and there will be no April election.   Mr. Emanuel has the money, the organization, the cowering pols, the obsequious “business community,” the private sector unions, and certainly the fawning press, national and local, behind him.   Politics everywhere, but especially in Chicago, is about money and the people who make money, or can potentially make money, from politics in this city on the make are either behind Mr. Emanuel or will be wooed by promises of money, or by threats, to get behind Mr. Emanuel.  Whether Mr. Emanuel runs against one, two, or a million opponents, that will be the case.

Mr. Emanuel’s inevitability would be, if anything, enhanced by the presence of both Ms. Lewis and Mr. Fioretti on the primary ballot.  Yes, there are differences between them…professional background and race come immediately to mind.  But, fully mindful that ideology is overrated in the governance of cities, it is useful to point out that these two are ideological clones.  Their philosophies are identical…vilify and tax the wealthy in order to pander to the poor.  In a mindless jihad that could only be conceived by those with complete ignorance of economics, both Ms. Lewis and Mr. Fioretti would increase the tax and regulatory burden to make the city sort of dystopia for the productive in a gormless appeal to the baser instincts of the masses.  Hello Detroit.

If we were to join the fantasizing about the possibility of unseating the Wise and Mighty Rahm, we would do well to heed Greg Goldner, Mr. Emanuel’s campaign manager in his 2002 run for Congress, as quoted in the Spielman article, who said

“They’re (Ms. Lewis and Mr. Fioretti) almost splitting the progressive community.  That’s not the right starting point to go to the white ethnic base on the Northwest and Southwest sides that might be dissatisfied with the mayor but don’t share those leftist political views.”

If we had either Mr. Fioretti or Ms. Lewis in the race, but not both, and a candidate who could appeal to the justifiably angry voters on the Southwest and Northwest sides whom Mr. Emanuel regards as an endless parade of Mikes and Mollies, then we might have something of a race…but ultimately, at best, a race to see who gets slaughtered in the April run-off.  That other candidate, however, has not surfaced and will not surface and, as Mr. Goldner points out, those teed off people from my old neighborhood and their kindred spirits from the geographical fringes of the city are not going to back Karen Lewis or, once they’ve read more than a few paragraphs on the man, Bob Fioretti.  They’d rather hold their noses and vote for Mr. Emanuel.  So Mr. Fioretti and Ms. Lewis, if they both wind up in the race, will be battling each other for that fraction of the black and/or progressive vote that hasn’t been bought off or similarly mollified into voting for Mr. Emanuel…like two dogs fighting over a picked over bone.

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 JOURNAL URGES US TO FIGHT ON BOTH SIDES IN SYRIA: BELLUM GRATIA BELLI?

9/17/14

In its lead editorial this (Wednesday, 9/17/14, page A14) morning, the Wall Street Journal urges the Obama Administration to lift the siege on Aleppo by bombing Syrian President Bashar Assad’s airfields.  This would put the United States, explicitly, on both sides of the Syrian conflict and clearly on one side of the larger Sunni/Shiite conflict in the Middle East.  Who but someone who urges us to fight a war for the sake of fighting a war would urge such an insane policy?

Even dedicated non-interventionists like yours truly can see some merit in a bombing campaign against ISIS, ISIL, the Islamic State, or whatever it is being called today, especially after this especially cold-blooded group of terrorists has beheaded two Americans and one Brit.   We don’t like our country putting its considerable proboscis where it doesn’t belong, but we also can’t see our country standing idly by while its citizens are tortured, killed, and otherwise abused.  

But I have also urged caution, reminding members of the War Party, and its most stentorian voice at the Wall Street Journal, that only a few months ago, they were urging the United States to bomb Syria in support of the Syrian rebels, the most salient group of which was, and is, ISIS.  (See, for example, THE WALL STREET JOURNAL ON THE ISLAMIC STATE:  “I WAS FOR IT UNTIL I WAS AGAINST IT”?,  8/21/14, MORE ENLIGHTENED THINKING FROM WASHINGTON: LET’S FIGHT IN BOTH IRAQ AND SYRIA!, 6/25/14)  A military campaign against ISIS, however, would put us on the side of Mr. Assad, a guy that the Journal and its fellow neocons were urging us to oppose only a few months ago.   Fighting ISIS thus would have the implicit effect of our fighting on both sides of the Syrian Civil War.  Only the geniuses at the State Department and other bastions of deep thinking foreign policy formulation in Washington would put us on both sides of a war.

Now the Journal, by urging the Obama Administration to bomb Syrian airfields and take other steps to lift the siege of Aleppo, is advocating explicitly placing us on both sides of the Syrian Civil War, fighting both the Assad regime and its most powerful and visible opponent, ISIS.

The rationale the Journal provides for getting us on both sides of the Syrian conflict is that

Sunnis will not support the campaign against Islamic State if they think our air strikes are intended to help the regime in Damascus and its Shiite allies in Beirut and Tehran.

This might indeed be the case, though we could, by the intensity and targeting of our air campaign, show the world that our objective, and only objective, is to rid the world, to the extent we can, of a group of extremists who have committed what ought to be the worst of sins on the international stage, i.e., the cold-blooded killing of American citizens.  But I digress.

More to the point, though, is that while the Sunnis may misinterpret an effort solely directed against ISIS as our taking the sides of the Shiites in Syria and in the larger Middle East, what will be the reaction of the Shiites if they see us fighting explicitly on the side of the Sunnis in Syria?  Perhaps they will take solace in that we are supporting the Shiite dominated government in Iraq, but I wouldn’t bet on it.  

The larger point is that it’s easy to see how byzantine the politics of the Middle East are and the best policy is to stay as far away from such intrigue as we can, limiting our involvement to making it clear that killing and torturing American citizens will not go unanswered.

One suspects, though, that the neocons, their manifesto writers at the Wall Street Journal, and the rest of the War Party in Washington care little for either the complexities of the Middle East or the rationalizations they provide for military action there.  Their sole, or at least their paramount, goal in urging us to bomb both the Assad regime and the Islamic State that opposes it is to get us involved in a war, any war…doing so is good for the “defense” contractors who keep War Party members comfortably ensconced in their Washington, D.C. sinecures.  And what could be more important than that?

“ILLUMINATING” THE UNIVERSITY OF ILLINOIS?

9/15/14

In a September 5 column, Chicago Sun-Times writer Neil Steinberg, under the cover of a disingenuous offer of “illumination” for my alma mater, the University of Illinois at Urbana-Champaign, delivered a back-handed slap to one of the world’s great universities and nearly an entire state. 

Rarely letting a slight of an institution I hold dear go unanswered, I sent the following letter to the Sun-Times.  As I anticipated, the paper didn’t print my missive and certainly won’t now that all this time has passed.  So I thought I’d post the letter on my blog for your enjoyment and consideration:

Neil Steinberg is a columnist and columnists are not supposed to be objective.  The columnist’s job is to be opinionated.   However, one can be opinionated without being extraneously nasty…and missing one’s facts in the process.

In his offer of “illumination” to my alma mater, the University of Illinois at Urbana-Champaign, Mr. Steinberg fails on both counts.   One understands immediately that Mr. Steinberg doesn’t like the U of I, perhaps because it is too low brow for him.  But he can’t even offer the place a compliment (“bristling with programs and libraries and quirky collegiate peculiarities”) without prefacing those compliments with the back-handed slap that he expected my alma mater to be a “seedy sinkhole of downstate grimness.”   Mr. Steinberg has to go out of his way to insult not only one of the world’s great universities but the entire state of Illinois south of I-80.   But he’s only trying to help, don’t you see?

Mr. Steinberg, in his further denigration of the U of I, offers an absolutely silly criterion for judging the quality of a university:  he challenges us to name one University of Illinois professor.     How many people can name any professor anywhere?   Mr. Steinberg compounds his folly by answering his own question by citing Bill Ayers, who was on the faculty not at the University of Illinois at Champaign, the subject of his column, but at the University of Illinois at Chicago.   Perhaps a better criterion would be Nobel Prize winners; U of I has 11 Nobel laureates among its alumni and another 11 Nobel laureates among its non-alumni faculty.   Two Nobel laureates were both alums and faculty members.  Most people in my profession, investments, can name one of those faculty laureates, Franco Modigliani, the former UIUC professor who won the Nobel in Economics in 1985 primarily for his work on valuation of the firm.  Can Mr. Steinberg name any of the U of I’s Nobel winners?

One of Mr. Steinberg’s prescriptions for improving the U of I’s image is to admit fewer students, to lower its acceptance rate so that “those it did admit might get the sense they had achieved something truly significant by being admitted and actually go.”  Mr. Steinberg goes on, after that slap, to say that he doesn’t want to “minimize” that “a lot of kids work like demons to get in” and that “U of I represent(s) the attainment of their dreams,” but one can clearly smell insincerity there.  And how do you think the taxpayers of this state would react if U of I turned down more stellar students?   Who hasn’t heard the stories of kids with 33+ ACTS and perfect GPAs getting turned down for the engineering or business schools at U of I?   Mr. Steinberg wants more such stories?

We get it; Neil Steinberg, even though he “could see (his) boys going there,” doesn’t think U of I is up to his high standards.  But in explaining this position, does Mr. Steinberg have to go out of his way to insult not only an institution that continues to contribute so much to the worlds of business, technology, and the cause of academic excellence, but also nearly an entire state?

ALDERMAN BOB FIORETTI THROWS HIS HAT IN THE RING: OH, HEART BE STILL

9/13/14

So 2^nd Alderman Bob Fioretti has thrown his hat into the Chicago mayoral ring.  Yawn.

As 1^st Ward Alderman Proco “Joe” Moreno said of Mr. Fioretti’s quixotic quest

“I think he has no shot.  None.  It’s delusions of grandeur on his part.”

Delusions of grandeur are somewhat characteristic of Mr. Fioretti, but probably only to a slightly greater degree than is the case with most politicians.   Like most pols, Mr. Fioretti is convinced that he has all the answers and that he is duty bound to enlighten us with his brilliance.  His feelings in this regard pale beside those of the man he seeks to unseat, but I digress.

There is nothing endemic to Mr. Fioretti that renders his bid for the 5^th Floor laughable.   While being accused of being somewhat loony left, it is hard to label the advocacy of more cops on the street, removing control of the Chicago Public Schools from the mayor’s control, and elimination of red light cameras as being somehow leftist.  A commuter tax is a potentially ruinous idea that does smacks of liberalism run amok.  But, on balance, there isn’t as much room for ideology in running a city as most would have you believe.  The most dyspeptic aspect of Mr. Fioretti is, in any case, not his ideology but his aforementioned ego.  In a field that includes Rahm Emanuel and Karen Lewis, however, Mr. Fioretti’s ego would be, by comparison, a non-issue.

Mr. Fioretti does have some admirable qualities.  What immediately comes to mind is his courage to stand up to Mayors Daley and Emanuel when his colleagues in the City Council were, and are, acting like love struck schoolgirls desperately angling for so much as an approving grin from the object of their sycophancy.   Those who decry the financial ravages Mr. Daley inflicted on our city would do well to have imitated Mr. Fioretti’s voting record in the Council.   Those who decry Mr. Emanuel’s highly unpopular attempts to deal with this mess would have a hard time finding a more genuine champion than Mr. Fioretti.

None of this matters, however.  Mr. Fioretti could be a flawless candidate with impeccable credentials and a solid voting base (He has none of those.) and still get clobbered by Rahm Emanuel.   As I’ve said ad nauseam in the past (KAREN LEWIS, THE HUMAN MONOPOLY GUY: SOME QUESTIONS THAT HAVEN’T BEEN ASKED, 8/14/14, TONI PRECKWINKLE RULESOUT A RUN FOR MAYOR OF CHICAGO…MY READERSYAWN, 7/15/14, et. al.), Rahm Emanuel has all the money and all the organization.  Chicago is an array of constituencies that can readily be bought, one way or another, making it an especially fertile ground for pols with money and organization.   Toni Preckwinkle, who has more name recognition and qualifications, and a more natural voting constituency, than Mr. Fioretti, realized that she had no chance and dropped out.   Karen Lewis, with at least two more natural constituencies than Mr. Fioretti, may be in the process of seeing the light and dropping out.  Who knows what she will do?  But that, too, doesn’t matter; nobody is going to beat Rahm Emanuel in 2015.

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. 

RETAIL SALES INCREASE AND THE AMERICAN WAY: “LIVIN’ ON MONEY I AIN’T MADE YET…”

9/12/14

The Commerce Department reported this morning that August retail sales rose a seasonally adjusted 0.6% from July after rising 0.3% from June. 

Most of the vocal quarters of the economics profession, along with the “strategist” community on Wall Street, seem to be overcome with joy at this number.  This is further proof, we are told, that the consumer is “finally opening up his wallet.”  One wishes that these estimables could come up with something less trite, but I digress.

As is my wont, yours truly is not as enthusiastic about these developments as are his much more highly paid colleagues. 

Earlier this week, we learned that consumer credit other than mortgage debt rose at a seasonally adjusted annual rate (“SAAR”) of 9.7% in July, after growing at more “modest” SAARS of 7.1% in June and 7.3% in May.  Credit card debt, which had been being gradually whittled down since the Great Recession from which we are supposedly emerging, grew at a SAAR of 7.4%, the fastest pace since April, to $881 billion.

We also heard from Dartmouth Professor Jason Houle that more than a 1/3 of Americans in the 24-28 range category owe more than they own; i.e., they have negative net worths, or, to use a highly technical financial term, they are broke.  Much of this problem arises from student debt.

Yes, in the short run, consumer spending is good for an economy that draws nearly 70% of its sustenance from such spending.  But one begins to wonder if the increase in debt that is supporting such spending is about to drop us back into the economic soup from which we are still struggling to emerge.

I’ve said it ad nauseam in the past and I’ll say it again:

More debt is not the solution to a problem that had its genesis in too much debt.

Our politicians don’t understand that.  Perhaps this misunderstanding is in the very nature of a politician.  But perhaps the pols’ failure to grasp this seemingly common sense concept arises because they are elected by a people who themselves don’t understand that more debt is not a solution to too much debt.

RICHARD KIEL, R.I.P.: “THE SPY WHO LOVED ME”? HOW ABOUT THE MAN’S FIRST BIG ROLE?

9/11/14

Richard Kiel died today at the age of 74.  Having a few years, and perhaps a taste for morbidity, on me, I instantly recognized the name and the face, and felt the loss, of this perhaps not great but clearly entertaining actor.   So I combed the internet stories of Mr. Kiel’s death.  I read of “The Spy Who Loved Me” and the Kiel character Jaws.  Not being much of a James Bond fan, they meant little to me.  But I continued reading.  Nothing on Mr. Kiel’s most memorable character.  I went to other stories…still nothing on the role that gave Mr. Kiel his big break.

Perhaps yours truly is irredeemably old and out of touch, but I simply can’t understand why there were no, at least as far as I saw, references to Mr. Kiel’s seminal role as the Kanamit in perhaps the most famous Twilight Zone episode of all… 1962’s “To Serve Man.”  Even those who don’t share my ardent enthusiasm for this greatest TV series of all time know the episode.   If I need to jog your memory…

“It was a cookbook!”

Now you know the episode.

Richard Kiel was the Kanamit, the representative of the big aliens who had come, presumably, to heal all the earth’s ills.   Before he was Jaws or anything else, Mr. Kiel played earth’s alien benefactor. 

If you still don’t remember this episode, or even if you do, the occasion of Richard Kiel’s death should prompt you to watch this episode that many consider the best Twilight Zone had to offer.  Yours truly would not agree with that assessment; while “To Serve Man” was great, there were several (“Walking Distance” comes immediately to mind, but “The Obsolete Man,” “Time Enough at Last,” “Nightmare at 20,000 Feet,” and “One for the Angels” are right up there as well.) that were at least its equal.  But I digress.

If the Kanamits remind you of Chicago politicians, and they should, see my two books

The Chairman, A Novel of Big City Politics and The Chairman’s Challenge, A Continuing Novel of Big City Politics

THE FED: “STAND BY YOUR (MARKET)”

9/5/14

Wall Street’s perennial favorite parlor game has been trying to get into the head of whoever is Fed chairman and deciding when s/he will be adjusting monetary policy one way or the other.   See, for example, TAPER TALK, THE FEDAND THE FINANCIAL MEDIA:   WHAT WOULD JESUS SAY?, 12/19/13.  The last few years, and even the last few months, have seen this game in full swing.  Yours truly may as well join the fun since he is as likely as anybody else to be right…or wrong.

It’s general consensus that the Fed won’t be raising short rates until sometime next year, probably around the middle of next year, after winding down its quantitative easing (“QE”) on the long end of the curve by the end of this year as scheduled.   Yours truly suspects, though, that the consensus might be early on the increase in short rates.  Yes, today’s jobs number indicate that the economy remains shaky and still needs the methadone of the Fed’s easy money policy.  But further contributing to my belief that we might be waiting until 2016 to see the end of what I referred as Ben Bernanke’s (and now Janet Yellen’s) War on the Elderly is the dollar’s amazing strength.  As the financial media are nearly constantly pointing out, the dollar is now trading at its year to date high against the euro.  But the greenback is also at or very near year to date highs against the British pound and the yen as well.   This economy can’t take sustained currency strength against our trading partners/financial rivals, or so the popular wisdom, which this Fed rarely defies, would have it.  Hence rates will stay low a long, long time, especially since the European Central Bank (“ECB”) seems to have jumped on the “toss the paper out of helicopters…go on, it’s good for you!” bandwagon yesterday.  

This enthusiasm for competitive debasement of currencies doesn’t look like it will end well, but old codgers like yours truly have been saying that for years now and, so far, we haven’t been right.  For now, the party continues; the hangovers are tomorrow’s problems.

DAVE TEPPER, THE BOND MARKETS, INFLATION, AND THE FUTILITY OF CALLING MARKETS

9/5/14

Dave Tepper, the former Goldman trader who runs Appaloosa, one of the country’s more successful hedge funds, said yesterday

"It's the beginning of the end of the bond market rally. We are done." 

People in the market, or anywhere, for that matter, don’t get much smarter than Dave Tepper; see AN AMERICAN MANUFACTURING RENAISSANCE; IT’LL TAKE MORE THAN CHEAP ENERGY, 5/15/13  Still, I don’t know if he’s right or wrong here, and I’m not being coy by saying, as is the fashion nowadays, of saying “I don’t know if he’s right here” when one means “He’s wrong here.”   I genuinely don’t know whether Mr. Tepper is right because I fervently believe that very few people, even people as smart as Dave Tepper, can consistently call markets; see the already seminal BULLS,BEARS, AND BRAINS:   THE RELENTLESS PURSUIT OF THE FOOL’S ERRAND OF CALLING THE MARKETS, 8/29/14. But if Mr. Tepper is right about the bond markets, and there is about a 50/50 chance that he is, it won’t be because of the Fed, or at least not because of the Fed in the way that most people say. 

If the bond market rally is over, it will be because the inflation that we all see around us will finally find its way into the government’s questionable statistics and maybe into the markets.  But old guys like yours truly have been saying that inflation is just around the corner for years…and those of us who pay for college tuition, health care and insurance, gasoline, food, cars, restaurant meals, airline tickets…you know, those things that Wall Street tells us are inconsequential, have seen it.  But the government, and the markets, tell us that what is as plain as the noses on our faces doesn’t exist.  When they finally open their eyes and stop playing games, though, there is no doubt that Dave Tepper and like minded souls will be proven correct in their predictions of higher bond rates.

McDONALD’S (MCD): YOURS TRULY MAY NOT BE LOVIN’ IT, BUT…

9/5/14

I bought some McDonald’s (MCD) stock today.

Loyal readers know that I am a fervent believer in the efficiency of markets and therefore in buying index funds, rebalancing with the religiousness of the Pope, and not making the slightest attempt to call the markets or individual stocks; see INDEX INVESTING:  “YOU (DON’T) GOTTA HAVE HEART…”, 8/21/14.  However, old habits die hard.  Consequently, I do trade a little bit of money, mainly to amuse myself and keep myself focused for my writing endeavors, which I also engage in primarily to amuse myself.

With that disclaimer behind us, why did I buy McDonald’s?   The stock has really been beaten up lately; it reached a year to date high of $103.53 on May 13.  It has since traded down 10.2% to the $92.99 at which I bought it.  The S&P in that time period is up 5.7%.  MCD pays a quarterly dividend of 81 cents, which works out to a dividend yield of 3.48%, more than 100 basis points over the ten year treasury. 

Why is MCD down?  Despite what the financial media and most of Wall Street would have you believe, no one knows.  But those who make a living opining on the unknowable tell us that MCD is down because the millennials don’t like McDonald’s  (Who does like McDonald’s…the food, not the stock?  But I digress.), the competition in the fast food business is too much for McDonald’s, and that the pressure for a higher minimum wage that is supposedly sweeping the country will be bad for MCD.  

As a believer in efficient markets, yours truly doesn’t  pretend to know why MCD is down, though I suppose I could guess as well as the people who are paid a lot of money to make such guesses.  What I do know from years of experience, though, is that when the stock of a great American company is down as much as MCD, it is time to consider buying.  When that same stock pays a healthy dividend and has made no indication that that dividend is in danger, it is time to take an even closer look.  When the reasons advanced for the stock’s having arrived at such a seemingly attractive valuation sound like they could only come from people who know little of life beyond the caverns, usually figurative, but often literal as well, of Wall Street, it’s time to put one’s money to work.

That is why I bought McDonald’s.   Was I early?  Will I prove prescient or foolish?  I don’t know.  But, as with football, having a little skin in the game makes watching more interesting.

BRUCE RAUNER CONFIRMS MEMBERSHIP IN A $140,000 WINE CLUB: ELITIST, POMPOUS POPINJAY, OR SHREWD BUSINESSMAN?

9/3/14

Yesterday, GOP candidate for Illinois governor Bruce Rauner confirmed that he belongs to the Napa Valley Reserve (“NVR”) wine club.  NVR is a rather exclusive club; it reportedly costs $140,000 to join.   Mr. Rauner’s membership in NVR was hinted at in an article in last Sunday’s (i.e., 8/31/14’s) Chicago Tribune’s front page headline article entitled “Emanuel and Rauner.”  Yours truly found that article especially interesting, coming in the wake of my 8/18/14 post, PAT QUINN TO BLACK VOTERS:   BRUCE RAUNER = RAHM EMANUEL?, in which I argued that it might be a good idea for Pat Quinn (no relation) to try to convince black voters that a vote for Bruce Rauner is a vote for Rahm Emanuel.   One wonders how many people at the Tribune read my posts and/or are (not so) secretly working for Pat Quinn.  But I digress.

The immediate knee-jerk reaction to Mr. Rauner’s belonging to a “wine club” that cost $140,000 to join is to argue that it confirms Mr. Rauner’s elitism and consequent unfitness to be this state’s governor.   The Pat Quinn (no relation) camp has, to absolutely no one’s surprise, taken up this narrative with near childlike vigor.

The second, more thoughtful reaction would be to question Mr. Rauner’s judgment.  It is, of course, his money and he can do what he wants with it, but what sort of narcissistic, compensating popinjay feels the need to pay $140,000 to join a wine club?

While the second aforementioned reaction is more sound than the first, and might very well be the correct reaction, there is a good possibility there is more to Mr. Rauner’s belonging to NVR than an odd, but not uncommon, combination of ego and insecurity run amok.

Mr. Rauner is reportedly a partner with Bill Harlan, who runs NVR, in a venture called Promontory Vineyards, which owns 480 acres of real estate in the Napa Valley.   At current prices, that property is worth something in the $130mm-$150mm range.   That’s a lot of money even by Bruce Rauner’s standards.   Further, given the current enthusiasm of the bleating sheep who sadly constitute America’s new elite for outrageously priced wine, Promontory may turn out to be a very lucrative investment for Messrs. Rauner, Harlan, and their partners.  Perhaps the $140,000 membership in NVR was a means for Mr. Rauner to curry the favor of Mr. Harlan and thus get in on the Promontory deal.  If this was indeed the motivation behind Mr. Rauner’s joining NVR, that $140,000 could turn out to have been a relatively trivial, and very shrewd, investment.

Or maybe Bruce Rauner’s just an egomaniac who wants to brag to his friends that he belongs to a club that charges $140,000 for access to snooty wine that is often barely distinguishable from the swill yours truly used to buy in the generic aisle at Jewel in the early ‘80s.  One never knows.  But don’t discount the possibility that the seemingly foolish NVR membership was a small cog in a larger plan.  That’s the way business is done.   Pat Quinn (no relation), of course, would know nothing of such matters since he has spent his life suckling on the public mammary gland rather than actually conducting business.  But I digress…again.

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. 

BULLS, BEARS, AND BRAINS: THE RELENTLESS PURSUIT OF THE FOOL’S ERRAND OF CALLING THE MARKETS

8/29/14

The geopolitical situation has rarely been worse, short of all out war: 

• Russia is apparently conducting a not all that surreptitious invasion of Ukraine.
• ISIS is sweeping across Syria and Iraq, seizing territory and oil and conducting acts of brutality that are appalling even by Middle Eastern standards.
• A de facto military coup has taken place in Pakistan.
• Ebola continues to spread through western Africa and threatens to burst out of its present geographic constraints to threaten Congo, other African regions, and perhaps the entire world.
• The UK just put on a terror alert that borders on hysteria.
• The western Pacific continues to be a hotbed of sparring between regional and global powers, with the latest developments being an ongoing game of chicken between Chinese fighter planes and American surveillance planes spying on Chinese nuclear submarines.
• Cyber-attacks, on major financial institutions, power providers, retailers, and agencies of government seem to be a weekly, or daily, occurrence.
• The French government was reshuffled for the second time in months.
• It looks like David Cameron’s center-right coalition in the UK is encountering turbulence as euroskeptics start to jump ship.
• The usual nonsense and gimcrackery prevails in Washington, D.C.

Smart market observers are warning of complacency, not only about geopolitical turbulence but about everything; nothing seems to make the stock markets, or, lately, the bond markets, go down.

Equally smart observers point out that there have been many times when people thought the geopolitical situation has rarely been worse, but the world didn’t end and the markets weren’t fazed, largely because the markets seem to operate independently of geopolitics.  The markets have grown used to, and prospered despite, the obtuseness, or worse, of the politicians.  Further, these observers argue that the very fact that smart people are warning of complacency shows that not everybody is complacent.

These bright bulls point out that it is earnings that drive the markets, and earnings, for the most part, are just fine.  Equally bright bears point out that it is future earnings that drive markets, which are perhaps nature’s most efficient and effective discounting mechanism.  A still debt laden economy, weak consumer spending, tepid consumer confidence, and confusing, but largely bearish, economic news out of China don’t bode well for future earnings  These bears point out that the still lukewarm economy, combined with the aforementioned geopolitics, does not present a scenario in which we should be experiencing near record highs in the major stock averages.  Bulls scoff, arguing that record highs are just numbers.  With the S&P trading in the neighborhood of 16-17 times projected earnings, the markets are at best only mildly expensive.  Bears trot out measures like the CAPE ratio, which adjusts earnings for the business cycle and smooths them over the last ten years, is trading at 25, a level that has been reached only in 1929, 2000, and 2007.

The bears argue that, with the 10 year treasury at 2.33% and the 30 year at a calendar year low of 3.07%, bonds are ridiculously expensive and that it is these low rates that provide the helium that inflates our stock markets.   Bulls argue that with the German and Japanese 10 year government bonds at 0.87% and 0.49% respectively, treasuries don’t look rich at all; in fact, they might be cheap.   On the other side of the equation, some observant bulls are pointing out that with U.S. corporate spreads still very tight, treasuries might be cheap not only relative to foreign government bonds but also relative to credit sensitive U.S. paper.   So not only may treasuries be a better value than is commonly supposed but continuing low, and maybe falling, rates will further sustain the stock market.

So what is the point?  Do I delight in confusing my readers?  The latter is certainly not true.

One side of this argument will turn out to be right; the markets, both bond and stock, will either go up or go down.  (They could trade sidewise, in which case both sides will claim victory, but I digress.)   But given the strength of arguments on both sides, those who emerge correct will do so by nearly sheer luck.   Predicting markets is little more than a game of chance, a fool’s errand.  

The two most salient conclusions one can draw from the serendipitous nature of market prognostication are

·        We waste a lot of time and brainpower, in this country and throughout the world, trying to do the impossible—call the markets.  Very smart people are paid very handsomely to do things they can’t do (i.e., call the markets) because people understandably place a very high value on their hard-earned money and still believe that they can get a jump on the markets by listening to the smart guys.  What if those wonderful brains on Wall Street and in the City of London spent their time curing diseases, finding new forms of energy, or working out the logistical and infrastructure problems that look to be a profound source of economic difficulty in the future?  Not only would it be a better world, but everyone would make more money.  The two, by the way, are not at all mutually exclusive; quite the contrary.  But I digress…again.

·        The best course of action for the investor is not to chase the pied piper of market beating returns.  Instead, the investor should, as best as s/he can, determine how much risk s/he is willing to take and set up, alone or with the help of a genuine financial advisor, a balanced portfolio of index or index like products that conforms to that risk profile.  And then rebalance religiously.  See INDEX INVESTING:  COULD ITS SUCCESS BE ITS UNDOING?, 8/23/14 and INDEX INVESTING:  “YOU (DON’T)GOTTA HAVE HEART…”, 8/21/14

CHICAGO’S DAY FOR THE JACKIE ROBINSON WEST LITTLE LEAGUE: HAVE THE POLS ANY SHAME?

8/27/14

Today was a glorious day in Chicago, the day when my home town honored the U.S. Little League champion Jackie Robinson West kids with a parade and other festivities.  The parade kicked off at Jackie Robinson Park on 105^th and Morgan and proceeded north on Halsted Street, passed Comiskey Park (er, sorry, U.S. Cellular Field), turned east on 35^th to Indiana and eventually made its way over to Michigan Avenue and Millennium Park.   It was supposed to be a glorious day and, for the most part it has been, except…

At the kickoff of the parade, at 105^th and Morgan, an observer, casual or otherwise, could not be faulted for wondering who was being honored by the event.   The kids made a cameo appearance, as did their parents.  But who was there, front and center, seizing the limelight?    This is Chicago, Illinois, so you know the answer…the politicians.

There they were, a cast of blowhards that is drawn to such events like hungry dogs to prime steak…Governor Pat Quinn, Mayor Rahm Emanuel, Attorney General Lisa Madigan, County Board President Toni Preckwinkle, Congressperson Robin Kelly, Alderman Carrie Austin, et. al…the usual suspects, turning what should have been a great day honoring some great kids into yet another occasion for self-aggrandizement.

Have these people no shame?  

They have spent our state and our city into bankruptcy.  They have made careers of shaking down the (admittedly, in many instances, not all that uncooperative or put upon) private sector for their nefarious ends.  They have been largely responsible for our city and state having become less and less livable.  They have ruined what was perhaps one of our nation’s greatest states, which combined the bustling, vital, and exciting city of Chicago with a downstate that serves as a vital component of the nation’s breadbasket and an exemplar of the type of small town values that made this country what it once was.  They have stolen and pillaged everything that wasn’t, and much of what was, nailed down. And now they have stolen the well earned limelight the citizens of our great city would like to have cast on a much deserving crew of magnificent kids.

How can one describe these poltroonish politicasters?   They are popinjays, professional narcissists, barnacles on the ship of state.   They are empty suits, carnival barkers, entitled, whimpering no-accounts.   Shameless leaches.   Self centered snakes and scalawags.  Benighted bindlestiffs on an endless, undying quest for the next microphone and/or camera.  Bleating, bumptious boors.  Contemptuous caitiffs.  Jejune jackasses.

Seizing the glimmer of glory granted to a group of great kids, not being able to envision anybody but themselves and their fellow professional narcissists getting any glory…is there any depth to which these despicable human beings will not sink?

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. 

SENATOR CHUCK GRASSLEY: FAREWELL TO “…A FARMER (?) FROM IOWA WHO NEVER WENT TO LAW SCHOOL”

8/27/14

I’ve never been a big fan of retiring Iowa Senator Chuck Grassley (R. Iowa).  It’s not that I have many problems with the man philosophically, other than his incessant pork barreling, largely in the form for his ardent support for wind power and ethanol.  But one can hardly blame a politician for supporting industries so vital to the state he represents; it’s the way the game is played.   What really bothers me about Chuck Grassley, though, is that he has been in the Senate since 1981, when I was getting my MBA at the great University of Iowa, which was a long, long time ago.   Yours truly would support no politician, even one with whom I was in perfect philosophical sync (Scary thought, but I digress.), who stayed in one office for what will have been 24 years when Mr. Grassley retires and who has been in public office for 55 (!) years.  I have no use for career politicians and am an ardent fan of term limits.  In fact, as most readers have picked up, I am nearly at the point of thinking that the very desire for public office should disqualify one from public office.

So while there are plenty of worse senators than Chuck Grassley, I remain no fan of this man who has made his living feasting at the public mammary gland for nearly 3/4 of his biological life.

However…

My feelings regarding Mr. Grassley would have warmed considerably months ago when U.S. Representative Bruce Braley, the Democrat who is running against State Senator Joni Ernst for Mr. Grassley’s senate seat, castigated the Senator several months ago as

“…a farmer from Iowa who never went to law school.”

 Way to campaign for a U.S. senate seat from Iowa, Mr. Braley.  But I digress.

An Iowa farmer who never went to law school?   If that were true, I would have wanted Mr. Grassley to be not a senator, but president of the United States, or emperor of the universe, if the last were possible.  In any case, we surely could use more Iowa farmers who never went to law school in public office.

Alas, though, Mr. Braley’s characterization of Mr. Grassley as “a farmer from Iowa who never went to law school” is largely untrue.  Mr. Grassley was born in 1933.  He entered the Iowa legislature in 1959, when he was 26.  How much farming could he have done before the age of 26?  It is, of course, possible that Mr. Grassley farmed in the 16 years he was in the legislature before entering the U.S. House in 1975; state legislating is supposed to be a part time gig.  So maybe Mr. Braley is correct in his characterization of Mr. Grassley as “a farmer from Iowa,” at least in the sense that he was at one time a farmer.   Further, Mr. Grassley didn’t go to law school, and he attended the University of Northern Iowa.  So he has those things going for him.  From what I hear, he’s also great on constituent service, even above and beyond the aforementioned pork barreling.

So, all in all, the people of what is perhaps the Union’s greatest state could have done a lot worse than Chuck Grassley.   That does not make me any less enthusiastic in wishing him Godspeed.   But I certainly hope Senator Grassley is will not be replaced by Bruce Braley; even a four term senator would be preferable to a man of such poor judgment and utter disdain for his constituency.

INDEX INVESTING: COULD ITS SUCCESS BE ITS UNDOING?

8/23/14

The index fund bandwagon is getting more crowded.   Yours truly has been an ardent advocate of such passive investing (a term I don’t like much, even in connection with index funds, but that is grist for another mill) for 20+ years.  Warren Buffett, one of the few active managers who has managed to beat the indices over long periods of time, appears to have gotten on the bandwagon more recently.  (See the already seminal INDEX INVESTING:  “YOU (DON’T) GOTTA HAVE HEART…”, 8/21/14)  Now the Wall Street Journal’s Jason Zweig (“The Decline and Fall of Fund Managers,” WSJ, page B1, 8/23-8/24/14) reports that Charles Ellis, the founder of Greenwich Associates and an icon in the fund management industry, says that the day of the stock picker has passed and that

“With rare exceptions, active management is no longer able to hold its keep.”

There is something though, that we have to keep in mind when predicting or anticipating the demise of active management.  While this consideration is probably more valuable as an intellectual exercise than as a practical investment tool, it is worth pondering. 

If Mr. Ellis is right and, as a consequence, active managers (and, probably more importantly, active analysts) lose their jobs in large numbers,  fewer people will be doing the research they think will enable them to beat the markets and thus the mechanisms for information getting “into” the markets (i.e., to be reflected in securities prices) will get rusty.  The market will thus become less informationally efficient and thus the markets will get easier to beat, weakening one of the major arguments for index investing.  That will induce more people to invest their money with active managers and start the circle turning again, making the market more efficient and harder to beat and thus increasing the allure of index funds.  This is one of those self-correcting mechanisms that is endemic to finance and economics.

As I tell my finance and investments students, the great irony of the efficient market theory is that it only has validity because not everyone believes it.   If everyone believed the efficient market theory in its strongest form, no one would bother to do the research necessary to make the market efficient.

We certainly don’t have to worry about the world going entirely to indexing and thus destroying the efficiency of the markets, which is the very underpinning of index investing.  There will always be a lot of (primarily young and inexperienced) people who are certain that they can beat the markets; yours truly used to be one of them.  And we probably don’t even have to worry about a precipitous deterioration in the markets’ efficiency because of a sharp falloff in active managers and active management; there will always be legions of people chasing the dream of consistently beating the market.  But it is worth considering, from an intellectual standpoint if nothing else, the consequences for index investing of its own success.

THE REDFLEX SAGA: WHAT DO MARTY O’MALLEY AND A CANARY HAVE IN COMMON?

8/21/14

The man whom I referred to as “mysterious “consultant” Marty O’Malley” has decided to cooperate with the feds in their ongoing investigation of Redflex’s nine figure red light camera contract with the city of Chicago.  (See my posts on this issue going back to October, 2012; the first, on the now defunct Rant Political, is reproduced below, following this piece.)   Mr. O’Malley was indicted in connection with l’affaire Redflex earlier this month, along with former Redflex USA CEO Karen Finley.  John Bills, the former city official most intimately connected with the Redflex affair, was also indicted with Ms. Finley and Mr. O’Malley; in Mr. Bills’ case, that was his second indictment in connection with the case.   Mr. O’Malley, who faces five years in the hoosegow, is expected to plead guilty as part of his deal with the feds.

As I’ve said ad nauseam, going back to the dawn of the Redflex caper, if anything has the potential to bring down some very big people in Chicago, it is this scandal.  Clearly, the feds aren’t going through all this scandal to put John Bills, a deputy managing commissioner of the Chicago Transportation Department and a precinct captain (albeit a very good and important precinct captain) for Mike Madigan’s 13^th Ward Regular Democratic Organization, away.   And it would seem that a deputy managing commissioner is not in a position to have much influence over a contract the size of Redflex’s red light camera contract, at least not in Chicago.  But do read my 5/18/14 post (REDFLEX:  COULD JOHN BILLS HAVEPULLED THIS OFF (NEARLY) ALONE?, Rant Lifestyle); in it, I outline a plausible scenario under which Mr. Bills could have acted alone:  perhaps Mr. Bills, a man of powerful persuasion skills and, reportedly, figurative cajones the size of church bells could have convinced the naïve suits at Redflex that yes, indeed, he did have the power to make things happen.  The smart money, though, has to be on Mr. Bills being something of a pissant in this whole caper.  The feds seem to think so and would like to get to the real decision makers.

So Mr. Bills seems to be the ball game here.  Does he risk going away for a long, long time with both Mr. O’Malley and former Redflex Executive VP of sales, Aaron Rosenberg, cooperating against him?   Theoretically, both Mr. Bills and Ms. Finley could go away for life.   What, or who, would a man give in exchange for his life?

A further note, which might not mean anything but is still interesting:

When the first reports of the Redflex tale emerged, the Tribune reported Marty O’Malley was a member at St. Bede Parish, on 82^nd and Kostner (just a few blocks from one of my favorite pizza places, Vito and Nick’s, or Nick & Vito’s, which is easier to say but not quite official.  I have to say that, based on our last few visits to this south side institution, Vito & Nick’s is a little off its game; perhaps it has something to do with the place’s having been on Diners, Drive-Ins, and Dives, but I digress.), as was and, supposedly is, John Bills.   These two guys living in the same parish, as I explained in a lesson the social mores of my species (i.e., south side Irish Catholic), made Mr. O’Malley’s claim that he didn’t know John Bills until they started working on the Redflex deal highly suspect.  Now it is reported that Mr. O’Malley lives in Worth, a suburb several miles southwest of the 13^th Ward, outside the borders both of  St. Bede and, obviously, of Mike Madigan’s 13^th Ward.   Does this give Mr. O’Malley’s “I didn’t know the guy until we started working on Redflex” argument any more credibility?   Maybe.

But maybe not.   Worth is clearly not in Mike Madigan’s ward and is not in his 22^nd state House district.  But that doesn’t mean that Mr. O’Malley, though living in Worth, is not a parishioner at St. Bede.  We, for instance, belong to a parish in my old neighborhood even though we don’t live anywhere near the church.  Perhaps Mr. O’Malley once lived in St. Bede, has moved to Worth, but prefers to go to church, and maybe remain otherwise active, in his old parish.  This is very common behavior among us south side Irish types. 

More saliently for this case, Mr. O’Malley doesn’t live in the 13^th Ward but is active, at least financially, in its politics; he, according to the Tribune’s story back in October, 2012, admits to contributing $1,000 in 2007, $1,500 in 2009. and another $1,500 in 2010 to Mr. Madigan’s political operations.  Remember, too, that Mr. Madigan’s influence emanates throughout the whole state, but its intensity increases as one nears his 13^th Ward base of operations.  He is especially entrenched in the southwest suburbs, like Worth and Oak Lawn, where many of his former 13^th Ward and 22^nd District constituents and their adult children have moved as part of the white flight that has characterized the southwest side of the city over the last few decades.

Given their possible, though admittedly stretched, parish connection and their much more likely 13^th Ward connection, it remains highly doubtful that Mr. O’Malley’s contention that he didn’t know John Bills until they started working together on Redflex is true.  Now, the Tribune is describing Mr. O’Malley as Mr. Bills’ “longtime friend,” so who knows where this perhaps trivial aspect of the story is going?   It has been a long time, one supposes, since the Redflex contract was won in 2005 and even longer since the maneuvering began for this contract.  But from the perspective of guys the vintages of Messrs. Bills and O’Malley (53 and 74, respectively) and yours truly (somewhere between those two), nine or so years seems like the blink of an eye.

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. 

MY FIRST POST ON THE REDFLEX DEAL, as promised above:

REDFLEX TRAFFIC SYSTEMS AND CHICAGO POLITICS:   TRUTH NEARLY AS INTRIGUING AS FICTION

10/18/12

The City of Chicago has just scratched the surface in the malodorous dealings of Redflex Traffic Systems, Inc., which supplies the city with red light cameras.   Redflex has been barred from bidding on the city’s upcoming speed camera system after having paid a hotel bill for a city purchasing agent and covered up this indiscretion for two years. Redflex continues to be the vendor for red light cameras for at least the time being.  The background story of Redflex and its dealings with the powers that be in Chicago politics is, typically, murky but, er, interesting.

Redflex Traffic Systems was among several companies bidding for the red light camera contract in Chicago back in the early part of last decade; it won the contract in 2005.   The city official in charge of overseeing the contract was (Get this title; talk about bureaucracy!)  Managing Deputy Commissioner of the Department of Transportation John Bills.  John Bills was, and is, a substantial figure Illinois House Speaker, Chairman of the Illinois Democratic Party, and Ward Committeeman Mike Madigan’s 13^th Ward Regular Democratic Organization, serving as a registrar, or the guy who supervises collection of signatures on candidate petitions, for Mr. Madigan.   One supposes that Mr. Bills is also a precinct captain for Mr. Madigan, but I can’t verify that.   Mr. Bills also lives in St. Bede Parish on the southwest side, which is also Mike Madigan’s parish.  

Redflex just happened to hire as its “consultant” on the red light camera project one Marty O’Malley, who also lives in St. Bede.   Mr. O’Malley claims no affiliation with Mike Madigan’s organization, but admits to contributing $1,000 in 2007, $1,500 in 2009. and another $1,500 in 2010 to Madigan’s political operations.   These contributions were made possible largely by the commissions Mr. O’Malley earned on the red light camera sales, but more on that later.   Mr. O’Malley denies having known Mr. Bills, or Mr. Madigan, before he and Mr. Bills started working together on the camera project.   Mr. O’Malley’s not having known Mr. Bills is plausible, given their ages; Mr. O’Malley is 72, Mr. Bills is 51.   But, for those of you unfamiliar with the mores of the southwest side, one’s parish is a big thing; it often is the center of many of one’s activities, spiritual and otherwise.

As it turns out, Redflex won the contract and Mr. O’Malley, who denies that he used political clout or geographical proximity to either Mr. Bills or Mr. Madigan when interviewing for the consultant job, got a commission of $1,500 per camera, more, according to Mr. O’Malley, than he was expecting.  His total payday came to $570,000.   Some of that, as we learned above, made its way into Mike Madigan’s political coffers.  Mr. Bills denies playing any role in getting Redflex the contract; Mr. Madigan, as far as I know, has not been asked if he had any role in this deal.

There was a small fly in the ointment.  It seems that, according to Mr. Bills, he was in Arizona for a Cubs pre-season game (That a guy from St. Bede would have any interest in a Cub game makes this story suspicious on its face; perhaps Mr. Bills was going to root for the opposition, thus adhering to a proud south side tradition, but I digress.) and didn’t have a hotel reservation.  He called a Redflex executive (Redflex has offices in Phoenix.) to see if he could help out.  Redflex booked him a room in a luxury hotel and the bill somehow never found its way onto Mr. Bills’ credit card, which he didn’t notice for quite some time.   For this minor transgression, and for two yeas of covering it up, Redflex is banned from bidding on the speed camera contract.   Mr. Bills also retired from his Managing Deputy Commissioner of the Department of Transportation job last summer after 32 years of working for the city.  No one has said Mr. Bills' retirement and the Redflex problems are related, but who’s kidding whom?

And it gets better…

Since these shenanigans have taken place, Mr. Bills has been appointed by “reform” Cook County Board President Toni Preckwinkle to a position on the Cook County Employee Appeals Board.  This position is part time and pays part time ($35 grand a year), but includes health benefits.  The Appeals Board has long been known as a receptacle for hacks who have somehow run afoul of either the law or the vicissitudes of the voting booth.  Ms. Preckwinkle will not say whether Mike Madigan recommended Mr. Bills for the job.

So…

A minor figure in this drama loses his job for accepting $500 in accommodations from a city vendor.   The vendor keeps its current contract but can’t bid on a new one, though the city Inspector General is investigating the case. 

It looks like there is more to this story and that there are more important people involved than Messrs. Bills and O’Malley.   How likely is it that larger heads will role?   For a hint, take a look at my two novels of Chicago politics, The Chairman, A Novel of Big City Politics and The Chairman’sChallenge, A Continuing Novel of Big City Politics.

INDEX INVESTING: “YOU (DON’T) GOTTA HAVE HEART…”

8/21/14

The Wall Street Journal reports this morning (“Investors Pile Into Vanguard, Eschewing Stock Pickers”, page A1, 8/21/14) that investors are buying into index funds big time, driving Vanguard’s assets under management (“AUM”) to almost $3 trillion and making Vanguard’s Total Stock Market Index Fund the largest mutual fund in the world.  (A note is in order here; Vanguard, a firm that I advocate and highly respect is widely known as THE passive manager.  While it is the premier passive manager, and the virtual inventor of the index fund in practice, Vanguard has a big actively managed fund business, just about all of which is done through sub-advisors.  Further, you don’t have to invest with Vanguard to invest in passively managed index funds; most fund managers, even those, like Fidelity, who pride themselves in being great active managers, have substantial businesses running passive index funds.  Most of you knew that, but my readers span a wide range of financial sophistication, so I wanted to clarify that.)  Further, money flowing into index funds exceeded money flowing into actively managed funds by a factor of 6 last year and by a factor of over 2 this year.

Some of this influx has been attributed to something Warren Buffett, one of the few active (in his case, VERY active) managers who has beaten the indices over long periods of time, wrote in Berkshire Hathaway’s letter to investors in March.  He stated that he gave the following advice to the trustee of his estate:

“…put 10% of the cash in short term government bonds and 90% in a very low cost S&P 500 index fund.  (I suggest Vanguard.)”

Great minds apparently think alike (See below.); some just get to the party later than others, but getting there, not when they get there, is the key.  But I digress.

The world seems to have caught onto the argument, long advocated by yours truly (See, inter alia, EXOTIC INVESTMENT PRODUCTS FOR THE “AVERAGE GUY”:   WHAT’S THE POINT?, 8/16/13 and the posts to which it will refer you.), that index funds are the way to go.  Combine the inherent efficiency of the financial markets with the low cost and lack of manager risk of index funds and you are nearly sure to beat active managers over meaningful periods of time by investing in index funds.   Just about all my money is in index funds. 

(A point of digression here:  So why do I have any actively managed money?  That’s a long and not all that interesting story that I will save for another time.  For now, suffice to say that almost all of my non-index money is invested in funds that use screening techniques and thus eliminate, or at least minimize, manager risk, much like index funds, and keep costs reasonably low, though not as low as index funds.  I like to refer to them as “index-like” products and they play a limited role in my portfolio.  Much of my remaining non-index money is there to entertain myself, to indulge my market prognostication propensities while keeping my acting on those propensities away from amounts of money that would really matter.   So, while I don’t have ALL my money in index funds, I eat my own cooking; just about all of it is in index funds.  Of course, lately, all my money doesn’t amount to very much, but that is another issue.)

Many years ago, when I was managing portfolios at a big Chicago bank, I appeared at a forum sponsored by a major mutual fund company with whom we did business.  This particular family of funds, which will remain nameless, was and is primarily an active manager and an advocate for active management.  At this forum, I was there to represent the passive investing argument and the deck was stacked against me, but the sponsoring fund family was, and is, good people and I was confident enough in my argument that the set-up didn’t bother me.

After I made my pitch for index funds, the firm’s representative said something like (paraphrasing, not quoting; it was a long time ago):

What Mark is advocating is putting your money with a manager who has no brain.   Does that make any sense?

It looked as though he had me, until I retorted

Yes, I agree that an index fund has no brain.  But it also has no heart; it invests without emotions.  In your life, when you’ve made mistakes, was it because you weren’t smart enough to avoid those mistakes or because you let your emotions get the better of you?  

The answer, to most people was obvious.  I went on.

It’s the same with investing.   For the most part, money managers are very smart people.  (Perhaps I exaggerated a bit here, but I digress.)   It’s not a lack of intellect that gets them into trouble.  It’s their emotions.   They won’t sell a losing position that is getting worse.  They won’t add to a losing position that is only becoming an even more compelling value.  They continue to add to a winning position that has gotten way too rich.  It’s human nature that leads to investment mistakes.  Index funds eliminate the emotion from the process.  So, yes, I would rather invest with a manager with no brain…as long as it also lacked a heart.

I don’t know whether I won the day there, but I was quite happy with my defense of index funds and passive investing.  I have more or less stuck to that philosophy until this very day and probably will for the rest of my life, with at least one caveat:

Index investing does not entirely remove the emotion from investing.  Effective index investing (or even active investing) still requires nearly religious rebalancing (See, inter alia, Bill Gross Has A “Bad” Year:   Lessons For Your Portfolio, Rant Lifestyle, 1/4/14) and emotion can certainly get in the way of effective rebalancing; who wants to sell “winners” to buy “losers,” which is one of the things rebalancing forces us to do.  So to nearly eliminate all emotion from investing, even the dangerous emotions that come into play at rebalancing time, one would have to invest in a balanced index fund, or set up an arrangement in which your index funds are automatically rebalanced for you by the fund company.  Such arrangements are growing increasingly common.  Or you can do what my clients (at the time, mostly institutions) did:  hire a manager to do the emotionally wrenching things for you.

If you want to entertain yourself, do what I do:  watch “The Godfather” again, read a compendium of the musings of H.L. Mencken, watch “Shark Tank,” drive long distances in a car with a manual transmission and satellite radio, watch Big 10 football and basketball, read and write about politics…and maybe trade a few dollars like a scalded dog and hope to keep your underperformance, or outright losses, reasonable.  If you want to invest sensibly, buy index funds and religiously rebalance.