Sunday, September 21, 2008

National Finance

The federales have stepped in to save the lifestyles of their buds that run the large investment houses. In the process, they have nationalized the financial services entity. That's the first obvious one, with the rest of the country to follow.

There has been more than a close working relationship between the military and the industries that provide the parts and equipment to them for decades. While there needs to be some knowledge of the military system by the suppliers to that system, there is no doubt every opportunity to abuse the system for personal benefit. This raises the bar very high, if in fact the goal is to watch out for the government's interest first.

The same could most likely be said about the financial services industry. Many who serve in the highest ranks of government oversight of the financial services industry are floaters. They float between government service, the executive suite of the largest investment and financial firms, and the top spots in academia. This rotation develops friendships and business relationships that last decades.

One of the challenges is simply that its tough to hold your friends and professional acquaintances to account. This type of arrangement isn't new, nor is it unique to the financial industry.

There is more than enough blame to go around in terms of who is responsible for the meltdown. Loose money from the Greenspan era, mortgage and real estate brokers who are incented to maximize the size of the deal, federal encouragement to make bad loans, the aforementioned financial entities making billions by packaging junk, and selling it in the market, potential homeowners desparate to own a home, and the list goes on.

Yes, there are all sorts of parties and reasons to blame in this. However, nationalization of the industry is not the solution, nor is it the answer. Yes, it will allow those at the top of the food chain to retain their lifestyle, and their home in the Hamptons. And, with a federal bailout, it will defer the costs of fixing the problem for a decade or two. It may well allow quite a few people to keep their jobs, and provide for some stability in their 401k's.

But is that the goal? It appears we have made an incredibly costly trade. We have chosen to sacrifice the connection between decision and consequence on the altar of perceived safety and security. Those who made the decisions that led to the meltdown, as well as those watching, have learned one thing. That is, they can make poor decisions, and if those decisions have a negative affect on enough people, the taxpayers will bail them out.

Now we are faced with two challenges. One is the overt nationalization of our country, and the other is a long term reduction in the value of our enterprises. If companies are not allowed to fail, then poor to average decisionmakers will never have the opportunity to learn to make good decisions, and will move up through the ranks. These average decisions, allowed to happen because the government will step in and save the day, reduce the earning potential of the company, and ultimately reduce the value of the stock.

The challenge with nationalization is simply that a profit motive doesn't exist in a government environment. Governments are not producers, they are consumers. To this day, I have met no career government employees who have made a successful transition to a leadership position in the private sector.

Well, I could go on, but have probably said enough on this topic.

Until next time...


Saturday, September 13, 2008

Domestic Tranquility

In many parts of our great country, domestic tranquility is hard to come by. I'm not speaking of conversations between the adults in the house, but the uneasiness many feel concerning the economy.

It appears that we could be facing a form of perfect storm. The price of gasoline has risen dramatically in the last two years, settling in at just under $4 a gallon. Housing inventory exceeds demand, interesting lending practices over the last few years have dried up liquidity for borrowers, and the adjustable rates used so frequently just two or three years ago are adjusting. In addition, the affected industries, construction and autos, and their supporting industries, continue to shed jobs.

Those so-called homeowners with adjustable rates have been putting discretionary dollars in the gas tank, hitting two sectors fairly hard - department stores and non-profits. Consumers are flocking to Wal-Mart and Costco instead of Penneys and Sears. Some of the adjustable rates have begun adjusting, with the majority of them set to adjust beginning in January of 09. We expect the foreclosures to continue to rise.

Given all this, we don't expect 2009 to be much prettier than 2008, and the economic conditions could worsen before they improve. Is there any good news in this?

Well, some of the larger companies on the planet are setting up shop in America. In spite of our current challenges, America is still the world's largest consumer economy, with the best trained workers, and the best legal and physical infrastructure of any country in the world. Every day, it seems, we are reading of a new company that has selected a town or city in America as the place for its next manufacturing facility. I expect this trend to continue, and not just because of the relative weakness of the dollar.

For those who depend on jobs for their livelihood, which is most of America, this would be an ideal time to learn people, leadership, and management skills, so they are prepared for promotions. For those who depend on technical skills, retraining is the word for the day.

For those who have other forms of income, such as business ownership, cash, as always, is precious, and is king. Those who have depended on debt to support their lifestyle are already in trouble.

What are the opportunities? For those with cash, the challenge will be separating the good opportunities from the great opportunities. Also, many of us will have the opportunity to give of our time, money, and energy to those who have been hit hard by this perfect storm.

Until next time...


Thursday, September 11, 2008

Palin & Company

Well, McCain certainly hit a hot button with Sarah Palin. She has moved, in the space of a few weeks, from a relative unknown to political center stage. We will know within 60 days whether McCain's decision paid off.

The Democrats still have no real idea what to do in response to Palin's presence. Just about anything they say that's negative or derogatory has a backlash that just harms them. The traditional print and broadcast media are lost when it comes to explaining Palin and her family. They are certainly trying, but her American experience and their American experience might as well be from two different planets.

Palin has appeal to some part of the female vote that McCain didn't have. She and Todd are working together to parent five children, and soon a grandchild, and at the same time have an impact beyond their family. Palin is certainly no wallflower, as evidenced by her pasttimes and her comments at the convention.

She also appeals to the evangelical portion of the Republican party in a way that no one since Reagan has done. While it's mostly unspoken, there is an absolute determination among this base that Obama not be elected, and Palin has become the galvinizing force.

Finally, the Palin's appeal to the Reagan democrats, which in large part were the union members across the rust belt. Don't most guys relish winning some event like Todd Palin has done? They may not say it, but yes, they do.

So, let me make one prediction. The McCain/Palin ticket will win the popular vote by five to ten points, and will take about 350 electoral college votes. You may want to earmark this blog so you can come back and see if I am correct in my predictions.

Until next time...