This recession was inevitable and overdue!

In a Utopian world, we would never have recessions, depressions, or restraints. We could grow and spend and over-extend ourselves without consequence. We do not live in this fairy tale world. We are fortunate enough to live in a free market society that provides the opportunity to prosper but also the painful recourse when an opportunity is mismanaged. And rightfully so, we are now entering a time of punishment for over-extension of credit, surplus goods, and false demand-boosting incentives in the 1990's and 2000's.

Like many things in life, prosperous times come and go. Riding the flows upward are fun and the ebbs down are not. But its not with a messianic clairvoyance that one could foresee this coming. With a simple understanding of Economic principles (supply & demand, market pendulum, velocity of money, etc.) it is more of a question of "why did it take this long for the proverbial "bubble" to pop?"

Pick your bubble (housing, energy, tech, .com, etc.) and it has contributed to this downturn in our economy. When you over supply a market with a product (houses) without reducing prices, you create a surplus gap between the supply and the demand. Mortgage companies sought to remedy this gap by reducing the immediate impact of purchasing a home at the same price by deferring payments. This helped raise demand which fueled additional building. However, as the deferred payments and interest caught up with over-extended buyers, demand plummeted.

Here are some interactive S&D curves to play along:
Supply: http://www.bized.co.uk/learn/economics/markets/mechanism/interactive/contain.swf?path=demand_and_supply4.swf

Demand:
http://www.bized.co.uk/learn/economics/markets/mechanism/interactive/contain.swf?path=demand_and_supply2.swf

This is an over-simplified micro-economic view of why growth has slowed. But, apply this misalignment in the supply & demand of products to a handful of industries and you have momentum. Free markets contain tightly interwoven dependencies throughout the various supply chains. The benefit is cost efficiencies and competitiveness. If there is true competitiveness, when one entity falls or fails another can rise in its place. This does not happen instantaneously and in the time it takes for the successor to rise or enter that market there can be further decline among other associated entities. So as one grows/declines so does its dependencies, which creates an inertia. If the inertia is not controlled we get the large boom and busts. The problem is that the larger/longer the boom the larger/longer the bust and vice versa.

Looking at a macro-economic view let's go back to the Utopian idea of no recessions. Well in theory it is possible. Based on the idea that markets act like a pendulum, if you don't have a flow you won't ebb. Economists vary in there belief of the ideal growth % to avoid the rollercoaster. I've come to adopt 5% based on Ibbotson's analysis of Risk Premium in the Cost of Capital equation of the Capital Asset Pricing Model (CAPM). CAPM helps determine the rate of return for an asset and is a quantifiable measure of the value of an investment. The Risk Premium takes into account the opportunity cost of not investing the potential investment capital. Ibbotson determined that in developed countries the risk premium averaged 5% throughout history. In other words, if you invest in the market expect 5%. If your investment opportunity presents a higher percentage, seek the opportunity.

Lets look at a 5% annual growth versus the Adjusted Closings for Dow Jones Industrial Average, NASDAQ, and S&P 500 throughout each indices history.

DJIA:
The Dow, Jones & Company has existed since 1882 and has been tracking an annually chosen group of 50 predominant companies from leading industries. The companies have changed over time with General Electric being the only original company still included (except from 1902-1908). As the graph shows, the post WWII era of growth was inline with the 5% annual growth up until 1964. From 1964 the DJIA stagnated with some large swings until 1980. From 1980 to 1994 you can see a steady growth back towards the 5% line, with a few down years (1989-1990). From 1994 to 1999 the DJIA almost tripled from going 3800 to 11500!!! This unprecedented growth was the ride of rides. However, reality came back as the market started to correct itself from the overheating with the declines through 2002. President Bush and others realizing the potential magnitude of the decline following the boom used steps to change the decline (pre-9/11). Unfortunately for us today, those steps were too aggressive in my opinion and created another boom rather than a soft landing back at consistent growth. Instead the false confidence grew the DJIA to an all-time high of 14,164.53 in Oct. of 2007 and we have been sliding ever since as the market continues to correct itself.














NASDAQ:
The NASDAQ (National Association of Securities Dealers Automated Quotations) was founded in 1971 and is currently comprised of approximately 3,200 companies. It has the highest trading volume per day of any stock exchange in the world and gained its place along side the DJIA in the 1990s by focusing on technology and growth companies. The graph shows a similar trend as the DJIA against a 5% annual growth. The 1970s were a stagnant period with steady growth through the 1980s and early 1990s. Like the DJIA, the NASDAQ composite boomed in the 1990s as it gained 6 times it value from 1994 through 1999 going from 750 to +4000!!! Hurt by the .com and technology bubbles of the late 1990s, there was a resurgence from 2002 to 2007 and decline ever since.













S&P 500:
Published since 1950, the Standard & Poors (S&P) 500 index is comprised of 500 stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. The 500 companies are typically the 500 largest American stocks according to market capitalization. Similar to the DJIA and NASDAQ the S&P500 saw growth inline with 5% through the 1950s until 1964. It then stagnated until 1980 and then steadily grew until 1994. From 1994 to 1999 the S&P500 tripled its value from 450 to +1500!!! It too declined into 2002 and re-boomed until 2007 and has been down ever since.

What the 3 charts illustrate is that we are now paying the price for the boom of the 1990s. The market appeared as though it would correct itself in 1999-2002 but then falsely manipulated growth sustained until 2007. It was appropriate to attempt to control the downturn in 2002, but the errant attempts to cling to the 1990s may have caused us even more pain now. This economy was due to slow down after the 1994-1997 joy ride. 2002-2007 only deferred the slow down and may cause a deeper and longer recession because of it.

So, let's apply this lesson towards a more cautious attitude and sense or reality as we combat this recession. President-elect Obama and his team have floated the idea of large stimulus and quick return to the double-digit growth slopes of recent yore. Largely based on public demand for a return to those haydays, I argue that it is not what we need. We need to return to steady consistent growth in the single-digit percentage range. Its fun to go fast but not on the way down. Let's slow the economy for a sustainable long-term growth rather than a short-lived burst. The problem is that political figures have a shelf-life and long-term steady growth is not beneficial to them during their career. However, their legacy will be judged by the history of tomorrow's tomorrow. A strategic vision of economic growth is why we can look back and say that Presidents like Truman-Eisenhower-Kennedy and Reagan-Bush did more to advance the prosperity in American than the short-term benefits of economic times under Presidents Ford-Clinton-Bush.

Signing off...JCB

Sphere: Related Content

You say that's capitalism, I say that's compromise

Make no doubt, there are renewed and fervent efforts by those emboldened by our current predicament who seek to destroy capitalist ideals.

I find it hysterical to read articles like this one, published by A. Huffington in which they attribute this downturn to economic ideologies of the Bush administration these past few years and call them "laissez-faire". She calls this laissez-faire! I call it compromising of free market Capitalism.

Now I assume Ms. Huffington is intelligent enough to know the difference between true laissez-faire and our current interventionist model. These are the subversive tactics being employed to associate the economic recession with Bush, with market-oriented principles, with deregulation, and with Capitalism (with a capital C). The goal is to associate these things with the plight and pessimism in order to vanquish the favor towards free enterprise from the American psyche.

This isn't new, this isn't unique. Rather, this is seen as a great opportunity to shift towards socialist ideals. You see, Ms. Huffington and her colleagues are the Balph Eubank and Bertram Scudders of this world. They enjoy the lavish lifestyles and quality of life that Capitalism and the defense of freedom through the ages has made available to them while bashing these principles in hopes that future generations will not have to bear the burden of choice.

They are misreading the heart of the American spirit.

Signing off...JCB Sphere: Related Content

TARP: A Gigantic Bridge to Nowhere?

The "Bridge to Nowhere" approved federal project to spend an estimate $398 million on a bridge to connect Alaska's Gravina Island residents (approx. 50) to Ketchikan International Aiport was once upon a time the scandal of scandals in mis-appropriated federal funds.

My, how the times have changed...

The U.S. Treasury has shown an ineptitude only capable by a government organization in its issuance, administration, and reporting of the $700 BILLION bailout. Otherwise known as TARP (Troubled Asset Relief Program), the bailout was approved with roaring voices of oversight and accountability by Democrats and Republicans in Congress.

The sad, almost predictable, fact is that with almost half of the money issued ($350B) there is little known impact. The AP surveyed those who received large chunks of the issued $350B, and they basically got non-disclosure regurgitation and vague accounts.

I may be old fashioned but how did these firms justify the dollar amounts they received? To justify were there ROI discussions or deliverable terms and conditions or did they throw out a round number and Paulson's cronies wrote the check? It is amazing the unwillingness and probable inability to produce some semblance of order to how the money is being issued and spent.

On issuance:

• What justification is used by firms to gain access to the funds?
• Are there strategy investments the Treasury is targeting?
• What are the terms for repayment?
• Are there goals of any kind related to spending?

On spending:

• Are the recipients accountable in any way to the Treasury to show spending?
• Are the rewarded for extending credit?
• Do they have any incentives to invest in specific sectors (i.e. foreclosure avoidance)?

OK, I'm getting dizzy staring into the great abyss. Maybe, just maybe, someday we will know how and if the money has been spent. Don't hold your breath!!

Signing off...JCB

Sphere: Related Content

What is Bush thinking?

President Bush is considering using a portion of the $700B approved Bailout money to help the Big 3. Unbelievable!!

As Republican (and a few Democrats) Senators prepared to reject the bill passed by the House, after the UAW rejected the terms proposed by the GOP Senate Leadership. To my understanding, the approved bailout passed by the House included language that would require the UAW wages to be renegotiated to be more in-line with the other (profitable) U.S. auto-manufacturers. GOP Senators wanted a timetable to ensure that the agreement would take place within a reasonable time, the UAW response... No Way! Heisman! Bye-bye.

Well, if that isn't an indicator of their commitment to fundamental change required in the terms of the bailout agreement, what else? They obviously wanted to appear willing to consider change but would fight any concessions, that's the Union mentality. Commitment without accountability is an open door to subversion.

Of course, we get the usual attempt to vilify the GOP as Union killers. The GOP Senators need to sell the reason why they are opposing this, lack of accountability and commitment to correcting the problems.

Meanwhile, the President is hinting at working to pacify the inept? Huh? Why? If he thinks that helping the auto-makers & unions will be remembered positively, wrong! If he thinks that taking this action will help the economy and the perception that he helped bring us out of this downturn, wrong! Barack will get all of that credit.

Don't do it Mr. President. GM and Chrysler need Chapter 11.

Signing off...JCB Sphere: Related Content

Czar you kidding me?

The United States is now entertaining an idea of government oversight over the Big 3 Automakers as part of a deal for emergency bailouts. The position has been quickly termed by the mainstream press as the "Car Czar." We've had "Drug Czars," "War Czars," and "Money Czars" as well as a few others in our American history, but they bear little resemblance to the Russian rulers dating back to 14th century. That's not for lack of wanting, though. Our mainstream press is simply gushing over Obama's "New New Deal" as they seek to solidify Democratic control over even more aspects of our daily lives.

What is it about people that makes them believe the government is somehow better equipped to handle their lives? In the Great Depression, we saw exorbitant spending by FDR, but little evidence of his policies exists that points to any economic recovery beyond entering World War II. That generation of Americans would take any job offered, and they would scrape what little they had to take care of necessities for their children. Today we have people singing that Obama's going to pay their mortgages, and put gas in their car in one city, while Congress is giddy to insert itself even more heavily into the free market to the extent that Detroit may be called the "Federal District of Detroit" before too much longer.

We've produced a nation of wimps, with over-obsessive government, to the point that I've actually witnessed people wait for permission to evacuate from a fire. Grown men stand idly by while an 80 year old WWII veteran is assaulted in one city, while other men trample over women and children to get an extra 15% off the red-sticker price at Wal-Mart. Now we have a nation that can't take responsibility for its own actions, like some spoiled rich kid, and begs mommy and daddy for a bailout loan with no solace, and no remorse for financial misdeeds, because they know it is coming anyway.

You and I are mommy and daddy, by the way.

It's time to tell your Senators and your Representative that you do not support bailing out failing companies with your own hard-earned tax dollars. Tell them to either bail all of us out, pay off our mortgages, and any debts that we may have incurred over time, as well. Heck, let's just create 1,000 new jobs at the Treasury Department and print off a quadrillion dollars and send checks to everyone while we're at it!

It's only our money...(that we don't have)...going to other people...(who don't deserve it) to solve (political) problems!


Find your 'leaders' here: www.senate.gov and www.house.gov and ask them where YOUR check is. Of course they can't do that, b/c you're not a union-run failing corporation. The government should no sooner cut checks to these companies than they should pay off anyone else's credit card balance. We need to take responsibility, but the government is unfortunately more concerned with using this economic situation as an opportunity to grab more power than any Czar from Russia's past could dream of.

It all comes down to freedom. Sphere: Related Content

Let the Detroit 3 go Chapter 11, ASAP!!

The final test for this "lame duck" congress comes this week with the push to bailout the Big 3 U.S. auto-makers (GM, Ford, and Chrysler). I urge those in congress to vote NO.

The Democratic leadership is pushing to appropriate $25B of the approved $700B bailout for these auto-makers. It is not a bailout for the auto-makers but rather a Christmas present for the United Auto Workers (UAW) union. $25B will cover roughly 4-5 months of operating expenses and will not change their unprofitable ways. In Spring they will be back with their hands out or worse, fail regardless of the bailout and/or layoff many of its workers.

The GOP congress and President Bush have offered a compromise position, re-purpose the already approved $25B from moneys allocated to re-tool and development of hybrid vehicles into a no strings attached loan. Democrats have turned this down, and I say don't offer that up either. At most offer an extension of unemployment benefits and re-training credits to the workers if they are laid off as part of any Chapter 11 filing or actions.

The U.S. auto-makers have a defunct business model which has been propped up by their lobbying efforts. They are paying almost double in overhead operating cost per worker than the "foreign" owned auto-makers operating in the South. Their concessions to the UAW in the 1950s forward have sealed their fate.

They need to fail and go into Chapter 11 bankruptcy. That will allow them to re-negotiate union contracts, restructure, sell off failing brands, and change Management. This is what they need. For some reason people think that this will be the end of U.S. made vehicles. WRONG!

Just as the failing airlines had to go through Chapter 11 restructuring, the auto-makers need to do the same. Cars will still be built and warrantied, just as flights continued to fly. Union contracts need to be re-negotiated or eliminated. Using Northwest as a comparison, it went into Chapter 11 and was able to replace its mechanics union, restructure pilot and flight attendant union contracts, create a new fleet strategy, and revamp its routes for cost efficiency. The Big 3 need this same help.

They have tried to vertically and horizontally integrate to invoke "economies of scale" as a business model. But it is a method not a model. They have become to big to handle and change. They cannot innovate rapidly enough because changes are so grand that the only investments that generate positive ROI are the proven existing technologies. To change to a electric hybrid vehicle, they can't simply retool manufacturing. They have to retool the mfg. lines, develop the product, re-engineer the vehicles, source within their own supplier, develop distribution models for the supply chain, not to mention marketing and sales overhead. Oh, and not just for one brand or style of vehicle, but since manufacturing lines have been so inter-woven, the change will need to happen across multiple brands and or vehicles.

They have over supplied the market with cars and therefore people can't afford the prices they need to be profitable given their operating costs. Their perceptions of the demand curve are not in-line with the reality. Demand is lower than the supply they need to be profitable. Demand will drop in this economy. You can't incentivize your way to profitability. Part of the bailout is a $7,500 incentive for buyers of electric hybrids like the brainchild Chevy Volt. Congress is essentially interpreting that demand will not meet the supply curve. Think of it this way, the taxes you pay will help your neighbor buy a new car! Hope you get a ride!

Demand will not go away! There will be a demand for new cars, domestic and foreign made. Sure the foreign owned auto-makers will probably see a market share bump because of this, but there won't not be a U.S. owned auto-maker. They will breakup the conglomerates and form new partnership and establish new profitable business models.

For the companies who supply the Big 3, they will still need your products. Orders may be down and you will have to look at new companies to supply, but if you have the right product at the right price, you will recover.

Regarding the calls that we bailed out the Financial Institutions and Banks; new automobiles are a luxury, credit is essential to market operations. Like the Steel Industries in the 80s, let them roll and re-emerge as a more efficient and profitable industry.

I wonder if G. Richard Wagoner, Jr., Alan Mulally, William Clay Ford Jr., and Robert L. Nardelli are secretly wishing for Chapter 11 so they can finally loosen the iron grip of the UAW.

Signing off...JCB

Update: Romney echoes the needs for the Big 3 to restructure and how the bailout prevents that: http://www.nytimes.com/2008/11/19/opinion/19romney.html?_r=1&hp Sphere: Related Content

The Sharks are swirling

I warned in earlier posts that Obama's broad and mountainous promises were going to come home to roost early and with fury. All campaign rhetoric becomes interpreted as a promise. All campaigns represent the promise of a lot of things to a lot of people. For all of its glory and adoration in the press these days, the failure of the Obama candidacy will likely be focus. They failed to focus their constituents at the close of the campaign on key initiatives they will undertake in their first days.

They seem to be playing catch-up. But, I think given the circumstances, the expectations have never been higher or broader of a President-elect. People expect him bring stability to their lives like instant oatmeal. He has a growing crowd of expectations outside his door. We see if he can overcome this challenge. As I analyzed before, his biggest fear better be the liberal left. They are coming fast and hard and don't want excuses or patience. They've had 8 years of patience unleashed and they are ready to rip.

A few examples of the growing mob:
Unions: http://www.washingtontimes.com/news/2008/nov/10/unions-aim-to-collect-on-white-house-clout/
Auto-makers: http://online.wsj.com/article/SB122616278065311225.html
Evirons: http://online.wsj.com/article/SB122624781089211609.html

Expect more!

Signing off...JCB Sphere: Related Content

$700B of postive reinforcement, for what?

What did the bailout get us? Time will tell, I guess. I understand the lack of liquidity in the market and its impact on B2B transactions. But didn't we just postively reinforce the bad behavior of the lending children? To use psychological theory, we essentially just rewarded those issuing high-risk loans and those seeking them by saying, "you shouldn't have taken out/issued a loan you couldn't afford to pay, but we've got you covered. Continue over-extending yourself".

Now state governments and more industries are at the steps of the Capital with their hands out. I'm amazed at the lack of coverage of the $25B given to the auto industry last week, apparently to help them develop hybrid cars. Where have market principles gone? Capitalism on the way up because it rewards, Socialism on the way down because it doesn't punish (the culprits anyways). This continued coalescing of power in the Government, while blaming capitalism and free market principles, is a trouble sign of things to come.

I imagine I'm not the only one looking for a 'Galt's Gulch' right now.

Signing off...JCB Sphere: Related Content