Still On Vacation

I am still on vacation. Unless something dramatic has happened, I will only write occasionally. I apologize to you who follow this blog. I should be back in full swing in 3 weeks. Thank you for your patience and understanding.

Obama's 100 days+

Obama has done one thing that will go down in history as "game changing". I don't just mean getting himself elected. That certainly was a game changer. How quickly has the country (apart from a small minority of racist largely Republican) accepted a black president as "normal".

The really significant thing in my view is the number of "people of color" he has brought into his cabinet whose credentials are awesome. Steve Chu is a Nobel physicist. His new Supreme Court nominee is a Hispanic who graduated Summa from Princeton and onto Yale Law Review. And so on. Never again one should hear the argument that there are no qualified "minority" citizens. There are plenty and Obama has once put away that not so subtle racist argument.

However, as long time supporter of Obama, Frank Rich of the NY Times wrote in today's Sunday paper that some serious stuff is going down badly. The full column is here. It shoudl be read in full.

Here are a few excerpts:

...The administration’s two financial gurus, Lawrence Summers and Timothy Geithner, wrote to preview their plan [in the Washington Post]: “Some people will say that this is not the time to debate the future of financial regulation, that this debate should wait until the crisis is fully behind us,” they wrote by way of congratulating themselves on taking charge.

Who exactly are these “some people” who want to delay debate on the future of regulation? Not anyone you or I know. Most Americans were desperate for action and wondered why it was taking so long. The only people who Summers and Geithner could possibly be talking about are the bankers in their cohort who helped usher us into this disaster in the first place. Both men are protégés of one of them, Robert Rubin, the former wise man of Citigroup.

There are some worthwhile protections in the Summers-Geithner legislation, especially for consumers, but there’s little that will disturb these unnamed “people” too much.

Remember I raged over the lose-lose proposition of Geithner's Public/Private Investment Plan? To see how the issue of "conflict of interest" has been set aside for Obama's economic team working with some of the powerful people in the financial sector, just read in the same issue of NY Times a long article on Bill Gross's role in shaping government policy. I don't know to laugh or to cry. Read the full article as well here.

NY Times has been a huge supporter of Obama's Campaign for President.

Another longstanding "liberal" magazine close to the Center is also unhappy about Obama's increasingly "traditional" politics as usual presidency. The whole article by Kevin Baker needs subscription at Harper's Magazine, July Issue. But here is one excerpt.

Wall Street Won - 2

I am still on the road in the United States living off a suitcase with just time and energy to do emails. I try to keep up with the news but cannot blog as often as I would like. Very sorry.

However, one thing caught my eyes. Michael Lewis, one of best writers about Wall Street, is angry at the same thing I was sometime ago regarding how Obama, as advised by his two chief economic lieutenants, had cratered to Wall Street tycoons. The biggest of them all on Wall Street are those who run Goldman Sachs. Read here.

There are two fundamental issues in the financial rescue operation: systemic stability and economic justice. They are not mutually exclusive especially in this particular financial meltdown when the victims, the majority of taxpayers, are also footing the bill to rescue Wall Street.

It is simply wrong to save Wall Street in the name of restoring systemic stability at further disadvantage against the working stiffs who in California are experiecing a growing unemployment rate now at over 12% and rising.

Paul Krugman just came out with a short but punchy analysis of what was so lacking in Obama's new policy on regulating Wall Street.

The package is yet again an example of saving the backsides of the tycoons while plugging some holes related to systemic risks. Read here.

A Decaying Empire

It gives me no pleasure to lament over the sad state of many aspects of the United States who has given so many shelter, protection and a second chance in life from their unhappy past. Me included. My parents were refugees from China before 1949.

Yet, as the American Society of Civil Engineers, (ASCE) the nation's largest such association, has been warning over the past many years, the conditions of the American infrastructure, once the world's Gold Standard, are in dire conditions. Anyone who has visited mainland China (even!), or Korea which US once saved from the North or Taiwan, can spot the lamentable state of much of American roads, telecomunication, bridges. Internet speed is mostly slow even in the high income neighborhood. I compare it to what I have in Thailand. Read the latest from ASCE here.

It isn't just "hardware" that's a big issue in this country where I have been traveling the past weeks.

American airline companies these days, like Detroit automakers, must be prime materials in management courses as to how not to run any organizations.

Not only flight delays are routine, not only service is uncaring, even baggage handling is laughably "Third World". My short flight from San Francisco to Los Angeles was delayed for 3 hours. I checked in 2 hours before scheduled departure. Yet, the carrier managed to have left behind my luggage. If only my random experience were exceptional. But my story met with a knowing shrug among all my friends for it was apparently a common phenomenon. Sad

An Apology

I have been traveling constantly last 2 weeks in California on personal business living off a suitcase.  Two more weeks to go before I could sit down and do some serious writing.  Please accept my apologies.

Nothing fundamentally has changed.  Wall Street is still practically dictating what the economic team of the Obama Administration should or should not do.  

Financial markets like what they see, for now.  Despite reassurances from Washington that its policies are only anti-deflationary, inflation fears are increasingly affecting the bond market as the long end moves up.  Gold, Oil, other commodities have stayed very strong.  

Dr Doom, Marc Faber, an old friend, is going around the world saying US is going the way of Zimbabwe because the Feds have been printing and committing trillions to avoid Great Depression 2.  So inflation was to become hyperinflation.

Marc as usually overstates his case, but his directional prediction is not to be dismissed so quickly.  

For the time being, I can only contribute occasionally to my blog.  July should be when I get back to the swing of things.  

General Motors and Team Obama

GM is dead. Long Live GM. Uncle Sam is there to give you back life. Will the new GM work? Can a broken vase be put back together?

No one provides a better answer to the GM question by the normally conservative NY Times columnist David Brooks. His analysis is here.

The following rejoinder by a reader makes a good companion piece to Brooks' analysis:

David, your thinking is sound, but missing an historical context that would actually reinforce it.

There are two books that completely explain what GM was, is, and will become:

1. "My Years With General Motors" by Alfred Sloan

2. "Concept of the Corporation" by Peter Drucker

The first is by the quintessential GM insider. Sloan was chairman of GM during its formative years - and pioneered the ostensible virtue that proved to be GM (and other American) companies' demise. That is, of course, centralized finance and decentralized operations.

GM has always been run by its finance people. Recently, run into the ground. This is perhaps why Barack's team is so deceptively comfortable at its helm.

Everything by the numbers. The Corvair. The Vega. The Aztek. More harmfully, a succession of mediocre models.

The second is by the quintessential GM outsider - and about GM from an outsider's perspective. The poignancy here goes to the other fatal aspect of GM's culture - its insularity.

As Drucker wrote his book, GM's senior executive management grew so comfortable with him, they wanted to offer him a senior executive job. Upon reading the book, however, that thought dissipated. They had grown to see Peter as an insider - and so his outsider's view was seen as disloyal and even seditious. So Drucker brought his lessens elsewhere. To Japan.

Santayana's comment (incidentally, Barack, a Harvard man through and through) about those not remembering the past being doomed to repeat is eerily poignant here.

Lutz, from Chrysler - the engineering-oriented company of the big three - couldn't make a significant dent (pun intended) in GM's culture.

But our new young president might just get it right - and I certainly wish him and his team well to that end - and learn a valuable lesson in wealth creation.

GM's challenge is not creating a supply of cars. It is about creating demand.

For that - he needs to turn to the marketing-oriented company of the big three.

I see a Ford in GM's future. You heard it here first.

— W in the Middle, New York State

Beijing Ridiculed Tim Geithner

US Treasury Secretary, Tim Geithner, is in Beijing to reassure America's single largest creditor that it's bonds are "safe". Chinese Prime Minister, Wen Jia Bao, recently asked for reassurance as China is saddled with US government papers.

The Peking University audience to which Geithner addressed humiliated Geithner by laughing out loud when he said "Your assets are safe".

A former Central Bank governor of China told the press Geithner's math was dubious when Geithner claimed US could reduce its fiscal deficits substantially in the foreseeable future. It is rare that Chinese hosts so openly disparage a guest.

The coup de grace came when the ex Chinese central banker said "The Federal Reserve Bank is the world's largest investor in junk assets."

Three signs of any empire falling: a decaying economy, declining morality and a world losing respect of the emperor seen to be increasingly naked. The US unfortunately is well on its way to meeting those three pre-conditions. The Bloomberg report on Geithner's visit in Beijing is here.

Crony Capitalism V2

Wall Street has been shaping Geithner/Summers's financial rescue policies. This much is well-known. But the brazenness with which they do so and the docileness with which Geithner et al allow the Wall Street chieftains to walk all over Washington is getting a little obscene.

Here is the latest chapter on how Wall Street is effectively playing with public money in full view, buying up each other's toxic assets after getting bailout $$ to bid up prices of such assets which they couldn't sell to unconnected parties at unrigged market prices. Read this from NYU Professor Nouriel Roubini's famous website:

"In order to persuade the private sector to participate in the PPIP, the government is engineering solutions that sidestep the strings attached to direct government aid, in particular executive pay restrictions. Moreover, reports show that banks are planning to bid on each other's assets to drive up the price and take advantage of the subsidies, while the FDIC is mulling to let banks share in any upside if they participate in the program as Treasury wants to keep participation voluntary. Increasingly, questions arise about the legality of this approach starting with AIG's full bailout of counterparties with taxpayer money. Given the limited TARP buffer left ($150 billion after PPIP) and likely Congressional opposition to new TARP money, the administration is under pressure to restore the banking system with the help of private capital if it wants to avoid anything resembling nationalization. This puts Wall Street in a position to dictate the terms..."

Racial barriers in USA

President Obama is doing one thing really well. He is systematically tearing down the barriers in USA against "people of color". What an euphemism.

Obama has nominated Sonia Sotomayor to be a Supreme Court Judge who calls herself a NewYorkrican.

The cognoscenti will recognize that word to mean a New Yorker whose origin was Puerto Rico, a Spanish speaking Latin society and an almost US state.

Ms Sotomayor, a graduate of Princeton and Yale Law School, will be the first American of Hispanic heritage to sit on the Court if confirmed by the Senate.

One by one, Obama is showing his country "color" is no longer a relevant issue in USA. Well done.

Now, could you please fire Geithner and Summers for having taking too good a care of their buddies on Wall Street in their rescue package you have approved?

That's Crony Capitalism, don't you know?

Whither the Republican Party in USA?

Every thriving democracy needs at least one strong, intelligent opposition party.

USA, though a young country, has the longest democracy in history. The 2 party model (Democrat and Republican) in the US, Conservative and Labor in the UK, has been a shining example of how a democracy can work without splintered by multi-party chaos. Witness Italy.

That's why the decline of the Republican Party into becoming a fringe group representing a narrow electorate consisting mainly of white, Christian and ultra-nationalists, and often racist, is an alarming development.

The following two articles are worthy of your time. Paul Krugman in the NY Times is here and the Bloomberg article on former Secretary of State and retired General Colin General Powell is here.

It is sad to see the Party of Lincoln, Eisenhower and the Rockefellers, symbols of fiscal conservatism, cultural tolerance, political moderation abroad has descended into a totally unrecognizable party of intolerance.

Many traced that change to Richard Nixon. While a brilliant international tactician, he brought a dark side to US politics with his many brooding Freudian insecurities and "hatred" against his domestic "enemies".

Ronald Reagon was not a "hater" the way Nixon was. But he too had a black and white view of Democrats and Republicans; the tax cutters (GOP) vs the tax and spenders (the Democrats).

In fact under Nixon and Reagon, US began its march towards becoming a larger and larger debtor country.

Fiscal conservatism, long associated with Republican principles, was replaced by reckless tax cutting and spending at the same time. The worst is George W Bush, the last president, in economic policies and in his reliance on fundamentalists in USA to assume a key role in domestic politics.

US becoming a Third World Country?

I have been arguing that "crony capitalism" USA is damaging the country in public/private sector governance and credibility around the world.

Now, the other shoe is about to drop. USA is poised to lose its AAA bond rating as its national debt shoots up from a small single digit as a percentage of its GDP to a double digit in 2009-2011.

The Obama Administration is saying budget deficit will soon come down a couple of years out. No economists outside of the Administration buy that scenario. A very sad situation for US debt for as long as one can remember is the Platinum Standard for sovereign debt. Read the latest from Bloomberg News here.

Crony Capitalism USA

My view on "Stress Tests" distributed by Project Syndicate and published in the Japan Times, May 19, 2009 is Here.

Don't Fight The Fed

That old adage about "not fighting the Fed" is based on a simple but solid fact: ample liquidity translates into a strong stock market. And a strong market is what we have. The talk of a "bear market rally" is correct ONLY if liquidity was not a factor.

Yes, the general economy is still a mess. But the amount and the speed with which the Fed and other Central Banks are injecting liquidity into the global economy all but ensures a strong stock market. Even the length of the global recession is likely to be shorter than expected. Instead of a long flat bottom U shape recovery, we are likely to see one resembling a moderate V.

The Rise of RMB and the Fall of US$?

The latest hot topic in the press is the potential assumption of China's RMB as a reserve currency, perhaps even replacing the US$ as the world's global currency. Roubini wrote an op ed piece in the New York Times. Successful speculator Jim Rogers is "sure" the dollar is finished to be replaced by RMB.

The logic goes like this. The US$ assumed its central role after WWII as the monetary equivalent of the Sterling when Britannia Ruled the Waves. One empire fell, a new one took its place. Money went with the power. They went hand in hand, in fact. But Pax America is also over as it had squandered its resources.

Empires always fell when their economies declined. America's economy has seen its best days. The reasons are well-known. Insufficient savings by both the public and the private sectors. Insufficient investments. While hi tech is still alive and well in Silicon Valley -- but America is no longer the only place where hi-tech thrives -- not much else is.

Basic infrastructure in America is a sham. Education is a scandal, apart from the tiny elite circle of high schools and universities sought after by the world's elite families. The national average of a number of measurable indicators has been falling over decades compared to a large number of foreign countries.

China on the other hand is a big saver, a big investor in infrastructure and is aiming to catch up and overtake America. The drive and the energy of a nation starved for global recognition only makes America look tired.

The latest Wall Street bubble from years of incompetent national governance and less than honest private sector governance is just another sign of a nation lost in its own self-absorbed admiration of a past gone.

Question: is RMB ready to replace the US$?

There are signs that the Beijing government is keen to do so. But they are not in a hurry because they know more than outsiders that China continues to have a number of serious structural issues to deal with.

China's domestic legal structure exists more in name than in execution. Judicial independence is years, decades away from reality. The ranks of world class corporate management is still thin. Corporate governance is still subordinate to national policies as many senior managers are proxies of the ruling Communist Party.

The currency, increasingly credible, is years away from being a convertible currency. Its convertibility itself depends on the strength of its legal structure.

Can the currency of an authoritarian country assume the role of a global currency? It would indeed be a first if it did.

More on the RMB in future postings.

Stress Tests Meet Saturday Night Live (SNL) on NBC

SNL in a venerable American institution that has bred numerous successful comedians. Among them are Eddie Murphy, Chevy Chase, Tina Fey, Bill Murray, Dan Ackroyd, Adam Sandler and the late John Belushi and the late Gilder Radner.

The show also features VIP guests that have included not just Hollywood celebrities but many high government officials and public figures. Senator Obama, Clinton, Al Gore among others have done so. Late President Gerald Ford opened the show once. Others fight to be on it because the show is one of the most watched in the country.

Its satire of Obamamania during the last presidential campaign was cited by his then opponent, Senator Hilary Clinton, as "evidence" of media bias against her. Its satire of officials often had the effect of a "kiss of death". You don't want to be the target of its satire.

In this context, Tim Geithner, whose "stress tests" have been panned by many analysts, including this one, would be having sleepless nights because SNL has just done a skit on that very subject. Watch it here.

Stress Tests and Buying Bonds

The stock market behavior of late smells of "insider trading".  It seemed obvious many already knew what the Stress Tests "results" would be.

A number of highly respected financial professionals have commented on how non-rigorous the tests were and how incomplete the released information was.

Geithner managed to create the virtual reality that the banks under tests of "stress" needed only x amount of money.  Senior bankers rushed to say a) they would be able to raise it to satisfy government criteria; b) the tests were overly "pessimistic" while clearly happy that the government had given them a pass, and c) they couldn't wait to get the government out of their hair so that they could continue their way of paying themselves.  

Isn't it curious none of the Wall Street bankers nor the boards of directors to whom senior management was held accountable had been told to take a walk the way Detroit executives had?  

Crony Capitalism is not just an Asian thing in some third rate developing country, is it? 

I have long argued Geithner/Summers' approach to avoiding a total meltdown was not to solve the fundamental problem of getting rid of toxic assets, changing Wall Street's out-of-control management and looking after taxpayer's interest.  

They bought Wall Street's argument that nothing was fundamentally wrong except confidence using in effect FDR's well-known homely:  There is nothing to fear except fear itself.  

More specifically, the toxic assets on the banks' books were, as claimed by bankers, worth a lot more than what they were because the "market" then was wrong in marking those assets down as reflected in the tanking of banks' shares on stock exchanges.  To this day we have no idea how much of that toxic stuff the banks continue to hold.

Geithner/Summers devised the Stress Test program to allow the banks not to have to mark to market their toxic assets.  Meanwhile Bernanke on the side was pumping trillions of money and credit commitments to flood the market with liquidity driving interest rate to near zero.

With money coming out of one's ears, so to speak, a number of things happened:  stock markets took off as money became "cheap".  Bond prices declined as inflation fears have taken hold.  Oil and Gold are on the rise.

The way forward is to put money in inflation hedges: gold, oil, other commodities and short bonds.  Stock markets will rise but watch out. This Geithner/Summers plan can be a trap.

Stress Tests and Cheating

Imagine for a second you were back in university and had taken a final. The professor who was grading your paper called you up to discuss your grade before the grade was released.

You got a chance to argue with him or her about the fairness, indeed, even the accuracy, of that grade. In that process you got a chance to "explain" what you really meant in this or that paragraph the grading professor had misinterpreted.

This in a net shell is the meaning of the delayed release of the Stress Tests designed by Geithner/Summers to find out how healthy the banks have been. No one has analyzed and criticized it better than Arianna Huffington. Read here.

Wall Street and Stress Tests

Warren Buffett said the other day what was pretty much an open secret among financial professionals.  Geithner's stress tests of banks' capital adequacy were irrelevant to intelligent investment decisions even though Buffett's comment was specifically related to Wells Fargo Bank, his second largest holding in Berkshire Hathaway.  Read Here.

Geithner's "stress tests" served Wall Street on these grounds: first, these tests were a delay tactic  signaling to the nervous market the government was to "uncover" the true financial conditions of the banks.  The subtext was until the truth was revealed there was not reason to panic.  Second, the tests had enough ambiguity due to a lack of transparency to allow the banks themselves not to panic for it appeared those tests were not the same as "mark to market" discipline a free market demands.  Lastly, during this holding pattern while the tests were being conducted, Geithner's PPIP program was put in place to boost the value of toxic assets to further help the banks to pass those stress tests -- whatever they were. 

We still do not know how those tests were carried out, what assets did they apply do and indeed we read there is much internal government squabble as to when or how much the results should be released to the public.

A royal mess. 

Joseph Yam, Head of Hong Kong's Monetary Authority

Yam is the highest paid Central Banker in the world. His salary is about 7 times that of Bernanke and 3-4 times that of head of Bank of England,  European Central Bank and more than 4 times that of Japan's Central Banker. That much is well known.

What is less known is how he got to be paid so much. Elementary: he put on his compensation committee people whose businesses are regulated by the Hong Kong Monetary Authority he heads.    Second, he paid those below him huge salaries which automatically meant his own compensation had to be higher. It became a matter of how much higher, not whether it should be.

Instead of keeping the regulated at arms length, Joseph Yam embraced them for his self interest. And that was his worst and unforgivable sin.

Geithner's Wall Street Connection

There is no evidence Geithner or Summers is corrupt by any legal definition even though Summers had been paid handsomely by Wall Street for very little consulting work and speech making while he was president of Harvard, a curious side job for arguably the most prestigious academic job in the United States. Did he have insufficient work to do at Harvard?

However, as James Kwak, co-author of Baseline Scenario, a respectable economics blog, has so eloquently pointed out, Geither, Summers cannot but share many of values of Wall Street especially given their close connections to Goldman Sachs, the ultimate symbol of Wall Street culture. Read Here.

Those shared values played the central role in Geithner/Summers's bailout plan that is so biased in favored of the very bankers that had themselves helped manufacturer the biggest financial disaster since the Great Depression.

It is also instructive to note that Geither wants to kick out Vikram Pandit at Citibank as a belated acknowledgement that senior Wall Street bankers had behaved badly.

Yet, a cursory look at Vikram Pandit's cv shows he had been at his job for about a year, long after Citibank under previous tutelage of Bob Rubin, former Goldman Sachs co-chair and mentor of Larry Summers had done their damage at Citigroup.

How come no one at Goldman Sachs or Morgan Stanley have been singled out for a little public humiliatio, but Pandit who was never a Goldman Sachs alumnus?