bostonbubble.com

[balor123]

What do you all think about this article?

Credit Policies Still Threaten Recovery

[john p]

I have three basic thoughts on this:

First:

I remember sitting in my MBA and seeing this big fund guy looking at this PE ratio of EMC (right at the peak), and saying, "You know that looks a little bit too high, it just makes me a little nervous". I think it was something like 200 or some crazy number. We all know it later plummeted.

http://people.smu.edu/undergrad_practicum/reports/04/sell/emc.pdf

We were basically doing analysis like on the link above. At this date (March 04) this analyst is saying to sell because the PE ratio for EMC is 79 and the average is around what 25 or so.... The reason for the spread is that investors believed that EMC had better FUTURE EARNINGS POTENTIAL.

M thought is that what is the PE ratio of median income to house price in certain areas versus others. I think Boston is somewhere around 4 and areas of California are like 7 (where people were banking on their future earnings to be much, much higher). Now the people that were leveraging on a Gold Rush mentality will get hurt more than those that overextended about 5 years; these people will have a few or so more extra years where they will have to conserve before their incomes come to a comfortable reach height over their expenses.

Lastly on this point, certain regions of the country had different conceptions as to how to obtain wealth. In the midwest, people don't use much credit. Germany is the same way. Other areas like NYC or Southern California saw their credit limit as an asset that they needed to take advantage of. For example, if the stock market was bringing in 15% and you had a credit line of say $200k, you were a fool not to take that and put it into play in the market. What the hell else were you going to do, break your ass and hope to get a 4% pay raise. Remember shareholders were yanking out money at high rates and weren't increasing employees pay nearly as fast (which is why this new socialistic policy of rewarding the irresponsible is so much more unjust). Bottom line, the areas that believed that you earned a living based on credit are really in trouble.

Second:

Think about the difference of investment banks and commercial banks. After the Great Depression they said these two types couldn't merge (Glass Stegall Act). They repealed this in the Graham Leachy Bill. When the investment portion of these co-mingled failed and started to bring down the commercial portions, the Federal Government (or taxpayers) stepped in to bail them out.

Now think about the regulations for each type. Commercial banks have reserve rates which limit the amount of lending. Investment banks have leverage caps which have ratios as to the number of shares and investors so you don't get one of the scams like in the movie the "Producers". (Ponzi Schemes).

What I'm looking at now is this whole new G20 (global 20 nations) trying to come to terms with central banking and investment banking rules. I wonder if their banks are also co mingled or are they separated?

The reason why we had the credit meltdown was that many mortgage backed securities guaranteed by the Federal Government got AAA ratings and weren't considered as risky. Our government guaranteed them and Moody's gave them an AAA rating and the SEC just yawned. Investment Bankers used to say that people never even modeled out the possibility of house prices going in reverse as they did. The point is that nobody wanted to buy them when they went in reverse. Credit Markets were locked out because nobody wanted to buy these investments.

The Global 20 deal is big because they are talking about leverage caps and actually europe carries more of this AAA stuff and if they have a cap and all these banks need to unload this stuff who's going to buy it?

Third

I'm thinking about the correction. Do you make a drug addict go cold turkey or do you lower the dosage little by little? How does California with the house price P/E ratio of 7 ratchet down in light of things now? How just is it for people who live in very modest homes in Indiana and Tennessee and shop at WalMart to have to bail out some guy from NYC who who wears 1,000 dollar suits with french cufflings? The same urban yuppie who makes fun of them for being country music loving hicks. It was these country bumkins who thankfully lived within their means who are the real foundation and backbone of our nation and all those who have made fun of them for being simple and honest are bearing down on them for support.

What's this global correction going to be? Who wins, who loses? Obama gave away a missile defense system to make Russia trust us and he's apologizing for the US like we are this evil empire, yet on the other hand, he's pumping up the Unions and telling him that he can maintain their prevailing wages even though they are completely not competitive in a global market. How much life can the parasite suck from the host? I don't think there has EVER been a time in history when a nation like ours has had such a Military Superiority (we spend 670 Billion and the next size military is 70 or something) AND NOT EXPAND THEIR EMPIRE?

The paranoid conspiracy theory I have is that Capitalism is now a global living entity and the leaders in capitalism want the United States to be the security guard for all of them, and our nation is paying for GLOBAL security for Global Corporations. Now it sort of is in our interest to have an expansion of free markets, but we priced ourselves out of many of them. So US citizens have to pay for this global military and the rich can move their money to Switzerland, and their polluting factories in China? This is like what the fuck? Coming to terms with this Global set of regulations will do what??? You'll need a global regulatory infrastructure; a New World Order. After WWI, Americans initialy rejected the League of Nations and became protectionist isolationists, until Hitlar came along and then we decided to have an enormous military to avoid having another crazy try to take over.

Whether capitalism succeeds or we go to war depends on how leaders behave right now and what they ask of us. Obama is feeding a delusion with Unions which pits unions against foreign manufacturers. To avoid this confrontation he is taxing other US citizens but is killing the host. Wall Street also gave Obama 3 times more money than McCain. They knew they could mold and shape him. The Pharma companies ARE FINANCING THIS HEALTH CARE BILL. Think about that, think about the cost of prescription drugs and the fact that Obama, who is supposedly fighting for us, is letting the Pharma companies off the hook! He's letting the trial lawyers off the hook for profiting on others misfortune and driving up health care costs. He let Pelosi control the process. This guy like to just parade around and deliver his thunderous oratory written by someone else delivered on a teleprompter. He's like the Democratic Party's wind up toy. They think that because John Kerry had a wooden personality that they needed a celebrity. I mean Obama talks about responsibility, but if responsibility was even in the picture during the election he wouldn't be president because he has no experience. It was irresponsible to have even picked him. The people that pushed for him are getting what they want just like Bush took care of the oil industry.

I think people need to elevate their professionalism with respect to citizenry because they will wear down with fatigue by the parasites and predators that are feeding on them. Obama is poisoned with vanity and just likes applause. We need the right people feeding him the content. He is no different than someone on the Mickey Mouseketeer Club who grew up to be a pop star like Justin Timberlake. Hey, maybe he can be our next President. Years ago, people that sang the Blues, felt the blues. Now, we've got a President who's like a fashion model who puts on any outfit that the client asks and parades around and poses. He's not a brain. The basis of his policy itself is flawed. He thinks that the top 1% stole the money from everyone else. If he could just open his eyes and look at every product that says "Made In China" he'd understand why it doesn't make sense to promise a prevailing wage to a union worker in Detroit when everyone is buying Toyota and Honda.

[JCK]

[john p]

Regarding Pharma "financing" this Health Care Proposal:

Yes, I have read reports that the Pharma Industry is pumping more money into promotion for this Health Care Bill than John McCain spent in his entire campaign. I meant "financing" as providing financial support... The quid pro quo is that they although the legislation is based on trying to expand health care by lowering costs, the pharmaceuticals products are marked up so much more in the United States and our President of the People isn't standing up to them....

Regarding weighing "justness" versus "solving today's problem":

The turbulence just grows if you don't expect people to behave responsibly. The Big Dig was great for Boston for a decade, but it manufactured the most corrupt, slothfully lazy construction industry that is delusional enough to expect that the taxpayers will just subsidize them forever. I mean think about the Union Autoworker, they just flat out can't compete on a price point with China and Obama's answer is to hold up their prevailing wage. I mean how long do we have to subsidize this? And it isn't coming out of Obama's heart, it's coming out of all taxpayers wallets. Times are hard for a lot of people, why does everyone else have to pay for a union autoworker in a failing company? I don't mind temporary support, but subsizing an industry for decades??? Mike Dukakis was a bleeding heart, he thought it would solve the problems of the 1980's if he hired people to the government instead of paying them welfare. Union workers, government workers are the majority of those that hold up signs for Democrats. Well, those WPA do-nothing jobs of the 1980's have people ready to retire now and now we have to pay for their pensions. We're paying pensions for jobs that should have never been. What is worse, is that those individuals end up being delusional and actually don't even get that they're useless. They complain that they're overworked, and ask for support and helpers for their do nothing jobs. You hire one hack and they'll try to hire their hack friend and that hack friend wants to hire all their friends, and so on, and so on. This is my point, the Big Dig created a culture of corruption. People who act like this don't even think it is corrupt to lie about how much something is going to cost or how long something is going to take. They see it as a "game". People who are honest are looked upon as naive. You can't build a society with weak members like this. Think about the guys who put their names on the Declaration of Independence, they could have been hung for that, you needed to trust your fellow citizen because your life is on the line. It is kind of shamefull that we've gone from that type of moral character and integrity to what we've got now. The new House leader wants casinos....

[JCK]

john,

I agree with you 100% on the issues of corruption. I think, however, that when crisis strikes, (e.g., banking meltdown) you need to ask what gets the best results, not just what is fair. Moving away from the crisis, I think we should then implement a fair system.

Frankly, I think both parties take too much from Wall Street, Pharma Cos, etc., and it's Congress (not Obama) is writing the bills. I'm really not sure what can be done about this problem.

[john p]

I think the answer is professionalism.

Think about how they used to have witch doctors and people used to drink "Moxie" because they thought it was good for you.... The practice of medicine was regulated and they tested the tar out of those that went into it.

What has happened now is that as we have become more modern and global and we have greater abilities, we haven't kept up with the regulatory infrastructure. I was in China once and was floored at all the Building Code violations. I remember seeing the smog in the cities in the 70's. Basically we had automobiles but we ran into problems, problems that professionals needed to get out in front of and create regulations with technologies that worked to reduce problems.

Think about how fast things have moved with the internet and banking. It is not a big surprise to me that we had problems, it is just that we want to now look at certain roles and say, hey we need to make sure that the person in that role knows the law because it is a pivotal role. I don't care if the licensed professional works for an insurance company, so long as the community that person is doing business in has someone there that has taken the time to learn their rules and is aware and beholding to them.

I think by having a professional class for key roles embedded within a privae company accountable to a society, we can avoid having a publicly run health care system.



I don't know if you've heard of the term "Gerrymandering"

http://www.businesscontrols.com/newsletter/images/gerrymander2.jpg

This is a great picture for me, because it has my hometown in it... Anyway this Governor drew up the voting district lines to favor his party by creating a weird meandering district that concentrated his opponents into one district giving his party the majority in the others.

Anyway, my concern is now that we're going at such a fast pace and we're having this convergence with other cultures and people are playing the regulatory arbitrage game of moving money around to avoid taxation and regulation of certain nations, that when the G20 does sit and meet that it isn't prison rules where people will just gerrymander what is good for them right now, but rather look at the overall health and future.

We have this Kyoto Protocol. Kyoto is in Japan and they had a really bad pollution problem and many people died. They decided to come up with global pollution regulations. Anyway, they wrote the rules to make it harder for the production nations so the United States had to pay a ton to meet the requirements while others who benefited from our products didn't. Anyway China never signed up so why would the United States bother to have to pay penalties when their production competitor and biggest polluter never signed up? They would have just created a polluter's haven. The thing is how do we get from A to B. How do we create goals and objectives that people will work towards and give them enough time to adjust and how do you keep other nations from being rewarded by being irresponsible. I know people that don't want to become registered professionals because they don't want the responsiblity and liablity. While everyone is gobbling up Chinese products, it is going to be hard to uphold environmental or banking regulations. Further, for those in our society that don't produce and just take, they don't get it. They think there is a money tree. The top 1% invested in these emerging markets and got wealthier while the workers here lost ground period. What do they want us to do, bomb China, put up protectionist regulations, or use international diplomacy to get the G20 on the same set of performance standards?

The reason why I think the need is pressing is because we're moving too fast.

[balor123]

[JCK]

[balor123]

[john p]

I see it more as a respect thing. I think that in business certain responsible people plan for Murphy's Law in their dealings and game plan more and insure themselves more than others. For capitalism to work we need to make people pay for being irresponsible and not reward them.

For example, what if companies were putting a bid in to build a new school like say Newton H.S. One company prices it honestly and another company low-balls. Well if the company that low-balls gets awarded frivilous changes, the responsible bidder gets harmed, as well as the taxpayers who have to pay for the wild cost overruns. If the unions control the politicans, the costs just go up and up and up and the taxpayers pay and pay.

I totally get JCK's point about the temporary loans for going concerns, that point is valid totally, however there are a lot of people that got laid off and lost a lot of money that had to take a bite out of the shit sandwich so government has to be careful about who they nurse back to health and who they let starve. The way Paulson worked out the deal was that US taxpayers were going to get handsomly rewarded for this temporary relief. As long as the taxpayers have something to really gain in this extension of credit, I don't mind as much provided that they aren't capricious in who they help and who they don't. That in and of itself is a thesis.... Bush would have helped the oil companies, Enron, Blackwater, Haliburton, and Obama will help out the Unions, Pharma's, Trial Lawyers, Acorn, etc.

Case in point, in this edition of the "Economist" there is a great article about how the US is playing the tarrif game with China with the tire industry (the writers of the Economist call them "tyres"....) Anyway, as we talk out of one side of our mouth with the international community we say "No Protectionist Policy in our Bailout", and then Obama tells the Unions "See I got your prevailing wages and I got the "buy American clauses"". So basically, the Obama Administration can pick and choose what industry they can protect via tarrifs.

What this means is that we're moving into an era where you have to kiss the ring of politicians to get protection. This is no different than the guy who has to give cases of scotch to the operators of canals to have their vessel cut the line. Kick-back city will be the name of the game. This is the Chicago Way. I honestly think that this is how business is done in Chicago, you have to get blessing from politicians and the ones that pay up get protected and that is how it works. It is total Mafia. I honestly think that this how Obama's life experience has created his perspective and it is the prism that he sees the world. Obama promised something different, I didn't believe him and I was dying to be proven wrong. Unfortunately, I think I'm right.

[JCK]

Paulson did let Bear Sterns fail, so it wasn't as though he was unwilling to let the banks fail.

My understanding is that the problem was that the Lehman failure was going to bring down AIG (due to all of the CDSs that they had where they bet the house against a Lehman failure).

So keeping Lehman alive was necessary at the time to prevent a total melt down.

I agree that we need to lessen the influence of these banks going forward; we should never again have companies that are "too big to fail." And Wall Street needs to have less influence on both sides of the aisle in Congress.

I don't claim to have the answers, but I'm still awaiting the case against the bailout that goes beyond "they deserve it."