Tuesday, November 20, 2012

Illusions Shattered: Rolling Off the Presses or Down the Hill

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)

            At the children's mass on Sunday, the priest told the little angels:

            "I grew up in a country that's far, far away. Canada. Almost as far away as the suburbs. In Toronto.

            "When I went to school, every fall, chestnuts fell from the trees. Everybody at school collected as many chestnuts as they could. The kid who had the most chestnuts was the wealthiest. Don't ask me why. What can you do with a chestnut? Nothing. All you can do is collect them. I could never understand it.

            "Do you know how many chestnuts I had? Zero. None. I couldn't understand collecting these useless chestnuts, so I was the poorest boy at school. And the stupidest. I felt really stupid with no chestnuts. Everybody else was showing off their chestnuts, saying how rich they were, and I had nothing. I couldn't understand why chestnuts made them rich and I felt stupid. And poor.

            "I went to a Catholic School for 12 years. Right next to our school was the public school. In those 12 years, I never once set foot on the public school ground. Nobody else did either. Not one of the children at the public school set foot on the Catholic school grounds.

            "But, I had some friends in the public school. One lived across the street. One day he asked me: "Do you want to see my chestnuts?"

            "I'd love to."

            So he brought me to his bedroom. He had four shopping bags full of chestnuts in his closet. He and his father had gone to the airport and grabbed them all. He was really, really wealthy.

            "He asked me if I'd like some of his chestnuts. "Well, sure, I thought, why not?" And he handed me two, shopping bags, full of chestnuts. I started feeling rich as I crossed the street to go back home.

"Remember now: before, when I had no chestnuts, I felt stupid. Because chestnuts are useless. They were still useless but now I had them. I hadn't collected chestnuts because this didn't make you wealthy. Yet, everyone in school - except me - thought the more chestnuts you had, the richer you were.

"Now, I had two shopping bags full of chestnuts. They were still worthless, but because they were mine, all of sudden, I felt smart and wealthy."

"Then I had to decide how many chestnuts to bring to school to show how wealthy I was. The next morning, I carried both bags to school. Everybody gathered around me. They were all asking if they could have a chestnut: "Can I have one? Can I have one?"

"And, do you know what I said?"


"No! No! No! No! No!"

"Wow, did I feel rich. I strutted into my classroom with both bags and put them in the back of the room. At recess time, I went back, picked up my two bags, and walked to the playground, feeling richer than everyone else. I was waiting for all the kids to gather around me. Nobody did. They were saying: "Let's not play with him. He won't share his chestnuts." They all walked away.

"Our playground was different than most. It had two levels. The upper level was paved. The lower level was all grass. The slope from the upper to lower level was also paved.

"I was standing on top with my two bags of chestnuts. I was the richest kid in the school. Everyone else had gone to the lower playground. They were playing, having a good time, chasing each other, laughing, while I stood on the upper level, rich, and all alone. I felt so lonely standing there. I was the loneliest boy in the world.

            "So, do you know what I did? I rolled both bags of chestnuts down the slope and onto the grass. The kids turned as they heard the chestnuts rolling down the pavement. Everybody came running towards me.

            "I don't want you to misunderstand me: I was not being generous. I was lonely. I wanted friends. I wanted everyone to like me.

            "As they ran towards me, with all my chestnuts rolling down the hill and onto the grass, do you know what they did? They threw away their chestnuts. All at once, they recognized: The chestnuts were worthless! They couldn't do anything with their chestnuts except pretend to be rich. I had flooded the market. There were so many chestnuts now, all the kids got rid of them. We were all poor together. 

Saturday, November 17, 2012

They Won't Be Forgotten

Ed Harrison at Credit Writedowns, adding fuel to the outrage upon the announcement that "Doctor" Alan Greenspan will address the Annual Market Dinner of the Boston Securities Analyst Society, reminded the sans-culottes of an earlier pathetic effort:


"I'd like the record to show that I think you're pretty terrific, too. And thinking in terms of probabilities, I think the risk that we decide in the future that you're even better than we think is higher than the alternative."

            Ed's reminder inspired a search of "terrific" through a bag of quotes. Coming up empty, a search for "great" was fruitful. Following are the first few "great" quotes that showed up. They have not been vetted for accuracy. More to the purpose: for lack of accuracy. That the majority have proved to be so wrong (since they were saved at the time in anticipation) shows what a bunch of dopes is in charge. This may lift spirits of some who have been dismayed by the efforts of has-been institutions and the media to cleanse history. They won't be forgotten:


SEC'Y GEITHNER:  "The American economy was falling off the cliff in the fall of '08 and the first months of [Obama's] administration.  And he put in place the most creative, the most forceful set of economic measures we have ever done as a country.  And because of that, we've prevented a second Great Depression and the economy has now been growing for more than a year and a half, more than two million jobs in the private sector since job creation started again. Faster job creation than the last two recoveries." 


AARON TASK: "What are your thoughts about the fact that Alan Greenspan is considered one of Ayn Rand's greatest protégés?

Dr, YARON TASK, Ayn Rand Institute: "I think Alan Greenspan is responsible for this crisis by holding interest rates after 9/11, for 2-12 years, below the rate of inflation: He encouraged the debt boom, the credit boom, that occurred that we're really suffering from today."   


"It's the American economic boom. The greatest story never told."


 "Most [banks] would say, 'Our analysts are here just to do great research and follow companies,' but that's not reality. They have a lot more responsibilities - and investment banking is becoming more essential."


"To an important degree, banks can be more active in their management of credit risks and other portfolio risks because of the increased availability of financial instruments and activities such as loan syndications, loan trading, credit derivatives, and securitization. From the perspective of bank management and stockholders, the availability of advanced methods for managing interest rate risk leads to a more favorable risk-return tradeoff. For supervisors, the benefit is a greater resilience of the banking system in the face of a risk that figured prominently in some past episodes of banking problems."


"I think we are [sic] thankful that we have Ben Bernanke who is a great expert on the Great Depression at the helm. Uh, and I think he won't make the mistakes that the Fed made the last time around and so we're not going to have, I'm optimistic, anything as severe as the last episode."

The last episode, being, the Great Depression.


SCHIFF: "The basic problem with the U.S. economy is we have too much consumption and borrowing and not enough production and savings and what's going to happen is the American consumer is basically going to stop consuming and start rebuilding his savings especially when he sees his home equity evaporate and when you have the economy 70% consumption [sic], you can't address those imbalances without a recession...."

LAFFER: "What [Schiff's] saying is that savings is way down in this country but wealth has increased dramatically. The United States economy has never been in better shape. Monetary policy is spectacular.... I think Peter is just totally off base. I just don't know where he's getting his stuff."

SCHIFF: "It's not wealth that's increased in the past few years. We haven't increased our productive capacity. All that's increased is the paper values of our stocks and real estate, but that's not real wealth."

LAFFER: "Of course it is."


SCHIFF: "Art, why do a husband and a wife both have to work to provide enough income to support a family?" 

LAFFER: "Because they love their jobs at low tax rates....

SCHIFF: "No, they don't love their jobs; most women with children aren't working because they love their jobs. They're working because they need the income..."

LAFFER: "With lower tax rates, it makes it much more valuable to work. At lower interest rates, you can buy more [stuff] - it's great!"


"I, just briefly will say, Mr. Chairman, obviously, like most of us here, this is one of the great success stories of all time. And we don't want to lose sight of that and [what] has been pointed out by all of our witnesses here, obviously, the 70% of Americans who own their own homes today, in no small measure, due because of the work that's been done here. And that shouldn't be lost in this debate and discussion. . . ."


"I think we do have a great deal of froth in housing markets. There's no doubt about it. I don't think we're likely to see a large nominal price collapse, that is largely falling house prices, but I think we'll see much slower rates of growth in house prices after 2005."


"The mortgage market is going to be a great market in this country for a long time. We've got population growth. We've got people who are always going to want to live in homes that they own. It's going to be a great market."


"America is close to turning the page on this economic crisis.... [w]e have now reported three quarters of positive growth and the beginnings of job creation. As the economy improves, we are winding down the Troubled Assets Relief Program, and Congress is moving toward enacting the strongest financial reforms since those that followed the Great Depression. In fact, we are repairing our financial system at much lower cost than anyone anticipated and expect to return hundreds of billions of dollars in available but unused TARP resources to the American people. That is a rare achievement in Washington."


"The Federal Reserve and other government agencies have learned a great deal about managing economic affairs since the Great Depression.... Financial instability, which was not addressed by government...was a major contributor both to the depression in the U.S. and abroad. I believe the difference today is that we will address financial issues and try to maintain the integrity of our financial system.... We will not let prices fall at 10% a year."

FORTUNE'S July 23, 2007 COVER:

"The Greatest Economic Boom Ever" 

Friday, November 9, 2012

The Long View

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)

            "Communications" ended with the long view advocated by a nine-year old. An adult may slot the family of Henry VIII as a model for modern dysfunctionality; while a child, unburdened by classification and definition, may see to the heart of the matter. Human tendencies echo across time under somewhat similar circumstances. "Somewhat" is where art and concentration must divine the applicable (or not).

The court of Henry VIII was followed, in due time, by that of Elizabeth I. The Virgin Queen had, like many leaders then and now, no convictions when she inherited the throne. Unlike many leaders (then and now) she understood the importance of staking her claim and betraying no qualms. The great 19th century Swiss historian Jacob Burckhardt wrote: "[H]er main characteristic was a queenly one: her strength of soul. When she trembled, at least no one was aware of it." (Quoting Burckhardt, as is true in all the below, unless stated otherwise.)

            In "Communications," Wall Street's best and brightest trembled at the mention of monetary policy. They are afraid of their own shadows.

            Elizabeth's "own religiosity was dubious, to say nothing of her creed." The pope's intervention established her solidity with the Church of England, after which, "complete supremacy was enforced" in the Anglican creed. "Elizabeth was the sole fount of truth and every authorization. This made Catholics who remained Roman guilty of treason ipso facto, even if they were perfectly quiet.... Elizabeth brooked no deviation. The persecutions did not stop short of the scaffold."

            We know there were martyrs, but they are always in a minority. As to the population at large, Burckhardt contends the "[p]eople were willing to put up with anything but a fight between heads of factions. They gave up parliamentary rights and safeguards against judicial arbitrariness, even the salvation of their souls, if only there was a firm government that steered the ship of state with a firm hand."

            (Gibbon preceded Burckhardt, writing of ancient Greece: "More than they wanted their freedom, they wanted security. They wanted a comfortable life, and they lost it all - security, comfort, and freedom, when the Athenians wanted not to give to society but for society to give to them, when the freedom they wished for most was the freedom from responsibility, then Athens ceased to be free." Too-Big-to-Fail bankers, stock-option-motivated CEOs, and politicians in cahoots with Fannie and Freddie come to mind.)

            The-then current attraction of Protestantism, the Reformation, "must have had an enormous attraction for all those who enjoy not having to do something any longer." [Burckhardt's italics.] A case could be made that today the something is "work." (Not to make light of those who have struggled years to find a job, at least in the United States, home of The Silent Depression.)

            There are seasons for impulse and inertia, for restlessness and repose. Christianity found favor and developed when "paganism, classical and otherwise" was still oriented to a "no longer existent middle class, its exhausted poetry and literature...and so on" The October 26, 2012, New York Times published an opinion: "How Food Has Replaced Art as High Culture." True or not, this is an acknowledgement that Western Civilization has exhausted most lines of achievement, of advance. It is, at the least, following the pattern of Will Durant's observation that civilizations are born stoic and die epicurean.

            The Reformation found sympathy in several countries of Europe at approximately the same time, at the end of another age; one that had exhausted its resources, leaving the people at loose ends. A few hundred years before that, Mohammed "hits upon a moment when a large strata of his nation were evidently highly receptive to an extreme simplification of the religious; his genius lies in his divining this." Elizabeth I not only achieved obedience by the stick but also by the carrot: "Her ministers, above all Cecil and Burleigh, were in the fortunate position of knowing their interests to be generally identical with the queen's." And to, Mohammed: "[F]rom the hegira on...in addition to Mecca, which he promised [his followers]... [there was] the conquest of Arabia and the resulting booty."

            Circumstances differ. Today, the path to riches for the mislabeled "elite" combines the enjoyment of not having to do something any longer with extreme simplification. For example, and as addendum to "Communications," a Wall Street veteran with over 45 years of experience estimates that not 2% of the so-called professionals on Wall Street know how the Federal Reserve functions. That is, of the strategists, analysts, portfolio managers, and technicians quoted and interviewed, one in fifty understand the process by which the New York Fed buys (or sells) dollars for securities (or vice versa), the machinery by which interest rates are cut and bank balance sheets ebb and flow.

            Posing this proposition to a veteran with two decades of prying answers from Federal Reserve officials, he responded: "I'll go further than that. Not two percent of the people working at the Federal Reserve understand how the Fed operates. The same is true for those interviewed on TV. Most of them have no idea what the interviewer is asking. They say something they heard before they were interviewed, so the same opinions are repeated over and over."

The know-nothing club predicts the direction of the stock and bond market, both of which are .99999 correlated to the Federal Reserve's open-mouth policy, an institution of which a Norwegian telemarketer knows as much.

            The Latin poet Juvenal wrote:

"Nunc patimur longae pacis mala, saevior armis
Luxuria incubuit victumque ulciscitur orbem."

"Now we suffer from the ills of a long period of peace. Luxury, more destructive than war, has engulfed us and imposes retribution for our conquest of the World."

Thursday, November 1, 2012


Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)
            Jacques Barzun, who died last week at the age of 104, is known to most Americans, where he is still known at all, for one statement: "Whoever wants to know the heart and mind of America had better learn baseball..." Rarely is his explanation discussed. He saw a combination that was uniquely American: teamwork and technique. Boosters and critics of GDP growth as an end in itself should immediately recognize this truth. Barzun's observation helps explain why Americans were uniquely drawn to stock market technology bubbles. ("Were" - such a distinction between Americans and the rest of the world may have passed.)

Today's bubble-builders root for Apple's ascension to a $1 trillion market capitalization. Comparisons have been drawn to Cisco and Microsoft. But who remembers the post-Sputnik technology boom and bust in 1958? Or the bowling binge in 1962? That was whipped up by the introduction of the automatic-ball-return machine. Americans would be more efficient bowlers, spend, accelerate, and multiply, or some such New Economics interpretation. Bowl-Mor Corporation fell from $51 to $3-7/8; Fairlanes Inc., from $12-3/8 to $4-3/4; Major League Bowling, from $14-1/4 to 5/8; Sports Arenas Inc., from $14-1/2 to $1-1/8.

As to the application of technology, the October 31, 2012, King Report gathered bulletins from the embers: "Power could be restored in Manhattan and Brooklyn within four days, but other boroughs and Westchester County could be without electricity for a week." "[C]ell phone coverage is down as users in Manhattan battle signal failures. Many people are virtually cut off [sic - they are either cut off are they aren't - FJS] and have no way of contacting friends or family or calling for help if there are further emergencies." "A call to FEMA's news desk" found "even they didn't have any non-Internet information readily available beyond suggestions that people call 911 in an emergency."

Investors should watch this development closely: Consumers have dropped non-cell phones, declaring there is no need for Ma Bell's relic. However, this decision is often a means to cut costs. Lifting the veil on falling corporate revenues, many are reductions of spending on, if not formerly "necessities," objects and services that were not consciously considered an "expense." Cell phone or TIVO charges were not matters to ponder.

FEMA's response to those in need: "Well, those people who have a laptop with a little battery life in it can try that way. Otherwise, you're right."

Most markets, including the New York Stock Exchange, were closed Monday and Tuesday, October 29 and 30. The New York Stock Exchange's "main data center for U.S. markets is in Mahwah, New Jersey." It has no remote back up center. After 9/11, we heard: "just-in-case will replace just-in-time." This was specifically directed at the exchanges in New York. October 31 is the last day of the month and the last day of the year for most mutual funds. (Bonuses and retention are swayed by November 1 through October 31 performance). A breakdown at Rahway could have produced untold gains to the swift and the clever, but the exchanges are public now, and precautionary expenses are not accretive to NYSE shareholders.

The presidential election is less than a week away. The clear winners are political opinion makers. Now, no matter what they predicted and no matter who wins, consultants can blame poor forecasts on Americans subjected to a cone of silence rather than the incessant roar of electronic communications.

                                                                                                                                    Nevertheless, technology gadgets are dominant. Yet, in finance, knowledge is regressing. Is it also possible "just-in-time instead of just-in-case" has left us vulnerable, trusting our lives to an i-thing? Electronic communications betray shaky foundations and gee-whiz faith in spreadsheets and models is built on ether.

            Recent conversations reveal the loss of financial acumen.

            Balance sheets are not taught at business school. There will be exceptions, but it is normal to graduate from a celebrity business school without understanding the relationship between the income statement and balance sheet. This makes for frustrating discussions about corporate valuations within investment firms.

            Related is the ignorance of CEOs and CFOs who go about acquiring and spinning off businesses. It has been brought to these elders' attention that they are making such decisions without an appreciation of (for instance) the value of retained earnings vs. those from acquisitions. It makes no impression on top management that earnings that are neither retained nor paid out in dividends are a house of cards.

            Top business schools still drown students in efficient market theory and the capital asset pricing model. The theory is bogus; to those who still believed, it was shot full of holes in 2008; yet, finance professors who rose and landed astoundingly high-paying corporate directorships are not going to think differently.

From someone who attended a reception at his business school, after cornering two finance professors:

"Are you still teaching CAPM?"

"Of course."

"With a negative risk-free interest rate? How does that work?"

"You move it down....."

"How can you teach it when there's obviously no such thing as a risk-free rate?"

"Because that's what we teach."
"Yes, yes. That's what we teach."

It is also evident there is a new taboo when meeting with top-tier investment firm strategists and analysts. That is the touchy topic of monetary policy. Just try and ask a simple question to often-quoted Wall Street oracles: "Do you think Bernanke's policy is working?"

Silence. A cough or two. Then, one of the top-tier analysts dares speak: "Yes." This is the classic Emperor-who-wears-no-clothes. The financial celebrities cannot bear to either think or talk about it.

            My daughter (age 9) was reading a fictional biography of Anne Boleyn to me. Henry VIII was anxious to produce a male heir. Anne Boleyn was eight-and-a-half months pregnant when she had a miscarriage. Life went on at court as if nothing had changed.

            This called for an explanation: "Wait a second. Henry's court - the whole kingdom - was anticipating Anne was about to produce a male heir. Now, she's obviously no longer pregnant. And nobody says a thing? Nobody mentions it? That doesn't make sense."
            Daughter: "Of course it does. It's the same as when Bernanke and Obama say things that everyone knows aren't true but nobody says it. People don't change that much, Daddy. It will be about the same 500 years from now."

            "Keep reading."