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| AIG and other PIG’s and an update on the economy |
As I write this article, this March 17th, St Patrick’s Day, it occurred to me the large number of non-saints who are celebrating today, especially those who, as the saying goes “took the money and run”. You can’t blame them for running if you set up the formula to allow them to do so. Many of us who have never had, do not have now, or ever will have the coveted golden parachute, are and seem quite disturbed when companies like AIG are allowed to operate in a manner where the government is into them for around 160 billion dollars and their best and brightest who evidently aren’t the best and brightest, given the financial circumstances of the companies in question, are allowed the opportunity to raid the fridge and leave the door open as they leave with their pockets and their mouths full. The question I have, and I’m sure you have also, is: How do you get rewarded with a bonus while at the same time your company is getting bailed out for the fear of it going under and taking others with it? Now that I got that off my chest, let me share a couple of opinions I have concerning our economy. Let me sum it up by saying, “It ain’t over ‘till it’s over”. The stock market, in my opinion, has not made its final and major bottom. My estimate is that we will see around 3,000 on the DOW before it’s over. Call it simple farm math, but the numbers are the numbers. If you look at where the DOW was in 1980, about 800-900, and you give that a little over a 3% growth rate until current, compound it and sprinkle in a few dividends, that comes out to about 3,000. Now, I don’t know about the growth of the economy where you live, but I believe it’s pretty safe to say that the average annual growth rate is pretty close to 3/3.5%, which on a compounded basis with a few dividends, puts us pretty close to 3,000. It is pretty much common knowledge that the current state of the economy is gloomy at best. According to government statistics, real sales fell at a 5% rate last quarter, and even though this quarter is not over, I think it’s pretty safe to say they will fall an equal amount. This stimulus package is starting to remind me of a UFO. You know, the kind of thing you hear a lot about, but can’t see any concrete evidence to prove that it really exists. Oh, I know, we’ll spend a TRILLION dollars somewhere, and there will be lot’s of accolades to go around to the congressmen who can take credit for spending money in their constituencies and a lot of financial companies who will get some of their sins cleared up or acme blemishes covered over, but when will we see any real stimuli from the stimulus package? It’s a little bit like the 4th of July fireworks that you light: the fuse buns to the end, and nothing happens and all of the sudden 10 minutes later (which is years later in fireworks time), you hear a little pop because there was still an ember burning and the powder attempted to explode. I assume by now, the question you ask yourself is: Why am I so upset? Well, let me sum it up like this: The ability to get cheap credit with little proof that you could pay it back started about 25 years ago and went into warp speed mode in 1999 when they repealed the Glass-Steagall Act, which allowed commercial banks to participate in riskier activities than they were allowed to in the past. This type of de-regulation allowed investment banks and commercial banks to develop ways to securitize their loans and sell them stamped by the rating services in a manner which drove an increased demand for them and lower interest rates. In short, it was self-perpetuation. The lower the interest, the greater the loan demand. The greater the loan demand, the higher the asset rose in value behind the loan. The rising asset value allowed for another refinancing, which created another security, which packaged and sold, and so on and so on. So Americans decided that the way to riches was through purchasing homes they couldn’t afford and refinancing them when they went up in value using leverage along the way unprecedented in any previous time horizon. They say what goes up, must come down, and boy did we learn it the hard way. Not since the great depression have we seen paper wealth destroyed in such a manner between 401K plans, stock portfolios, and housing, the US has seen an unprecedented destruction of wealth. Or did we? Did it ever really exist? I keep asking this question as I wish all of you to think long and hard about that subject which is real versus that which is not real. What I mean by this is the following: just as California redwood trees do not grow to the sky, the stock market could not continue to grow at double-digit rates, as it did for a decade unchecked when our economy was growing on an average of 3-3.5% and home prices appeared to be the next great fool’s paradise. The definition of greed, according to the dictionary, greed: excessive or rapacious desire of wealth or possessions. Although there is plenty of greed-like actions to go around, those actions that boarder on criminal are those of the Wall Street kingpins who created the Monopoly Game that everyone wished to play on over the last 10 years. Although it is natural to wish to increase profits of your company and reward shareholders and employees, at what point does a company cross the line led by its management to express its immorality and possible criminality? I believe that line is crossed when the innocent and the uneducated are sucked under by the current created, while a trail of devastation is left in its wake. Competition is the heart of capitalism, but when competition is corrupted by a company that engages in activities that put the entire system in which they operate at risk, those who risked it all for the sake of greed, need to be held accountable. Our country’s largest banks and investment firms systematically schemed and leveraged themselves to create more profits with total disregard for the integrity of the system created by their irresponsible actions. I believe that until we as Americans insist on the following, we will not see noticeable improvement in our economy: 1. We need to throw the bastards out that screwed up the system in the first place and quit pretending that by giving more money to the incompetent and the greedy, that we can expect to get different results the second time around. 2. We need to convince the American public that our 3. Once the American public is convinced that the crooks are out and that the righteous are at the helm, confidence will once again be returned to the system and the rebuilding process can begin. 4. Savings: Who said that we need to save in the manner that Wall Street wishes us to do so? Whether it’s a bank savings account, equity in commercial real estate, or a qualified plan funded with companies or stocks of local interest (knowledge and control). It’s still savings. The biggest farce ever perpetrated on the American public is that some mutual fund manager could do a better job at investing your money out East or overseas using diversification like buying donuts at Krispy Kreme by determining you were diversified by having one of each. At the end of the day, they were still all donuts. You just had 12 different ones. 5. Show some real reasons why we should saddle our children and grandchildren with a trillion dollar stimulus with more to come down the pike before it’s over while people continue to lose their jobs, homes, and retirement plans. It’s a little bit like expecting a family to start rebuilding a new home when the ashes are still burning from the one they had. Real confidence will only come when leadership, vision, and confidence are out front and upfront. In closing, there was a recent television program in which Glen Beck illustrated the devaluation of the US currency. Before I tell you what we said, he quoted Thomas Jefferson saying, “That to devalue our currency and pass on debt to our children would be considered immoral”. Glen Beck used a chart to show that from 1925 to 1970, the US was on the gold standard and that our currency remained relatively stable and unremarkably immovable in regard to its comparison to world currencies. In 1971 until 2000, there was a slight change as we were no longer on the gold standard and we showed some devaluation according to his chart, a little in excess of 500 billion as opposed to zero being the point of reference for comparison purposes. From 2000 until the stimulus package, for various reasons, including 9/11, we saw a spike of about 100 billion, but the real story is what has just happened. We have now spike passed 1.5 trillion. What took 75 years to devalue our currency by a mere 500-600 billion has been devalued literally overnight by an additional trillion dollars. How can we justify or pay for an expense that will affect our future, our children’s future and our grandchildren’s future by a sudden change in the value of our dollar so drastic that what took 75 years to evolve has now morphed to double that size in the last 10 years with the majority taking place in less than a year? I would like to leave you with this question: How will the rest of the world view our financial system, our currency, and our future economic status in light of our actions in regard to fiscal policy and currency valuations? If you are a business owner, you need to grasp how these sudden changes will affect your ability to operate both here and abroad.
Until next month… Bruce Hager Mr. Hager can be contacted at: |
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