Dear Workers of America

Actually, it IS your fault.

Barack Obama was raked over the coals this week (at least on Fox news) for suggesting that the US is not as competitive as it used to be, and that Americans are becoming complacent about their #1 position in the world.

What is interesting about Obama’s comment is that so many people agree that the US is not as competitive as it used to be, yet refuse to believe that they personally have anything to do with the situation.

I know many Chinese parents whose children are enrolled in soccer camp, take swimming lessons and piano lessons, have math tutoring, and yet still have time to meet their friends for several “playdates” per week – after finishing their homework, of course.  They have this much free time because they are only allowed to watch 2-3 hours of television per week, with another 1-2 hours per week to surf the Internet or play video games.  In contrast, I also know many American families whose children do almost nothing except watch television and play computer games.

The above is merely anecdotal evidence, of course, and doesn’t prove a thing.  But can we really call the average American family “motivated and driven to succeed?”

To find out if you are part of the problem or exempt from scorn, ask yourself the following questions:

1)      Do you watch 3 hours or more of television per day?  How about your children?

2)      How many books have you read in the last month?

3)      Do you currently have 3-6 months of emergency savings in cash, in case of injury, unemployment, or other unforeseen disasters?  If not, why not?

4)      Do you have trouble saving money?  If so, what have you recently done to drastically reduce your spending or increase your income (or both).  Or, do you just complain that bills are hard to pay but do nothing about it?

5)      During the last few years, have you purchased items like recreation vehicles, sports equipment, home decorations, electronics etc. on credit that you did not pay back at the end of the month?  Why?

6)      Have you been with your company for five years or longer?  If so, have you recently upgraded your skills/taken training courses etc on your own time?  Have you expanded your skill set to improve your employability outside your currently industry?

7)      Do you hate your job?    If so, what have you done to change careers or companies?  Have you updated your resume and practiced your interview skills?  How many jobs have you applied for?

In street interviews, website comments, and in social media, it is apparent that many Americans believe things will never get better: that they will always be unemployed, never get out of debt etc.   The more healthy reaction, of course, would be to say, “Wow, I was really stupid to rack up all that debt on my credit cards and house.  Now I’m going to have to study and train and work three times as hard.”

Of course, self-analysis is a difficult process and most people avoid it.  So, just continue to believe you are unemployed because of the President of the United States.


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People who are unable to motivate themselves must be content with mediocrity, no matter how impressive their other talents."

Andrew Carnegie

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see also:

Let’s just say what we really think about Barack Obama

An Open Letter from Donnie Drumpf to the American People


Dear Citizens of America,

In recent days, the media have played into my doubts about Barack Obama’s citizenship, his academic abilities, and more. But now I am thinking, “Why all this pussy-footing around? Why not just come out and say what we are all thinking?”

Barack Obama is a negro! Am I the only one who has noticed this? I referenced an anthropology textbook (just to be sure) and it is undeniable: he has big lips, a wide nose, and dark skin. He looks like a heterosexual version of Michael Jackson before he became white. Weren’t these people slaves just a while ago? How did we allow this to happen?

Obama has relatives in Africa, spent part of his life in Malaysia, and yet still speaks English more eloquently than I do. Do you know how annoying that is? Black people aren’t supposed to be good at English. They are supposed to say, “yassah, nossah,” and “You’s disrespectin’ me, Holmes.” Of course, there are other members of the blacks who sound like white people. I forgave Denzel Washington and Laurence Fishburne because they make good movies. But now a President? This is too much.

And that name: Barack Obama. What kind of name is that? “George Washington” is a good American name. “Abraham Lincoln” sounds a bit Jewish, but is still pretty good. “Barack Obama” sounds like the kind of person we look for in caves in Afghanistan.

We’ve tried labeling Obama as the anti-Christ, linking him to communists and racists, challenging his citizenship, and of course the general and sweeping comment that he doesn’t seem American. The whole time, he keeps smiling and saying, “We need to focus on the issues.” He talks about the economy, energy planning and health care - completely ignoring our requests for college transcripts. What is it going to take to get rid of this guy!?

Barack Obama is better educated than I am, obviously smarter, holds the highest position in the world, and even has a better beach body. What’s not to hate?

By the way, did I mention that I have the highest rated show on the Gonzo network? It’s a great show, with a great fan base. We have a great name. People would be impressed if they knew how much money I have. I’m important. Right?

Sincerely,

Donnie J. Drumpf®

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"Don't hate me because I'm beautiful."

Kelly LeBrock, 1980s shampoo commercial

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The US Federal Budget (and my 10th Grade teacher)

No, John Maynard Keynes was not my 10th Grade teacher. But it was in Grade 10, from my history teacher, that I learned about famous economist John Maynard Keynes.

It was Keynes who first proposed that markets move in cycles - in repeating booms and busts - and that the best way to lessen the impact of these booms and busts is to implement countermeasures.

Prior to Keynes, governments taxed less and spent more during good times (when they could afford to do so), and taxed more and spent less during bad times (when they couldn't). It all seemed very straightforward. After the Great Crash of 1929, for example, the US government cut back on myriads of projects and social services in order to save money.

Keynes argued that such seemingly sensible measures only worsen recessions. Instead, he argued that in bad economic times we need to cut taxes, cut interest rates, and increase government spending in order to “stimulate” the economy back to life. Then, in boom times, we need to increase taxes and curtail spending (since the economy is sustaining itself), and pay back that debt.

My 10th grade teacher pointed out that Keynes was foolish and that his ideas would never, ever work. The problem was not with Keynes' theory, but rather that his plan ignored human psychology and the reality of politics.

In bad economic times, people enjoy having their taxes reduced and interest rates cut, even though this leads to the large government deficits that these same people become angry about (rather like being pleased to receive expensive presents from your wife, then complaining that she spends too much).

As the economy improves, it gets even harder for the government to implement Keynes’ ideas. Despite being angry about large government deficits (“debt for our children!”) people are nonetheless unwilling to pay more in taxes to reduce it.

In the United States, any proposed tax changes are complicated by the remarkable fact that low-income earners have been led to believe that rich people need lower taxes, but that they personally don’t need them! Yes, only in America, prefabricated home owners and squirrel hunters can actually be seen protesting against higher taxes for the rich, even if that results in higher taxes for themselves.

The US budget promises to be a Frankenstein-like creation. The US Democratic Party hits walls of opposition because they propose ideas that only economists can appreciate. The US Republican Party is politically successful because they propose simple and intuitive economic ideas, no matter how unworkable those ideas may be.

Like John Maynard Keynes, Barack Obama expects people to be as logical and practical as he is – except that they aren’t. Even my tenth grade teacher knew that.

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"The avoidance of taxes is the only intellectual pursuit that still carries any reward."

John Maynard Keynes

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For an example of the class divide in America see:


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Mad About Taxes

The media and the public are divided and angry.

Some people, such as billionaire Warren Buffett, say that tax increases for the rich are “fair,” since the rich currently pay less tax than the poor. For others, any increase in taxes for the wealthy is an example of socialist government, and a disincentive for hard work.

The expiration of the Bush tax cuts has been called “the wrong move at the wrong time.” This expiration, combined with Obama’s proposed tax increases for those earning more than $200,000 per year has been dubbed the “small business killer.” Should we be worried?

When I worked as a lender, a consistent thing I noticed about small business owners is that they claim to have almost no income. A man could own a successful business, drive a Mercedes and take annual vacations to France, yet according to his company's financial statements be making $20,000 a year. This was normal.

For lenders, the financial statements of small business owners can be frustrating. Owners typically often write off so much (to avoid taxes) that it becomes difficult to approve their loans.

“Just show a little more income next year,” lenders often tell business owners.
“But then I will have to pay income tax," the owners counter. "You know I make lots of money. Can’t you just approve it?”

The proposed tax changes would raise taxes for individuals earning $200,000 per year, or families earning $250,000 per year, with lower taxes for those earning less: this is hardly a small business killer. A small business owner that shows an income of $200,000 per year would, in all likelihood, be earning at least 3 times that much - and there are simply not many small businesses pulling in that level of income.

Then there is the debate about lowering taxes for the middle class. Many members of the middle class themselves are opposed. Personally, I find this hilarious. One of my favorite things about the GOP is that they have actually convinced people earning less than $200K a year that tax cuts for the rich are good for the economy, but tax cuts for themselves are unnecessary. I love it! Gullibility knows no limits.

From an economic standpoint, lowering taxes for the nation’s middle class makes sense. The middle class tends to live “paycheck to paycheck,” spending almost everything they earn. Any decrease in taxes (increase in money to spend) would go directly into the local economy. High-income earners, on the other hand, tend to save more, or spend their money overseas. In terms of boosting the economy, a tax decrease for low- and medium-income earners gives far more bang for the buck.

Being that the US has a record deficit, somebody’s taxes need to increase. Increasing taxes for corporations is a bad idea, since unemployment is still far too high and corporations are the nations largest employers. Tax increases for the middle class is also a bad idea, since their spending levels (which constitute most of the US economy) are already low. The wealthy are the best choice for tax increases, because their personal spending levels will be least affected.

Tax cuts for the rich after the economy is rolling smoothly again – sure, why not? Everyone believes in the American dream. Everyone believes that someday, they too will earn more than $200,000 per year. And, they want to make sure tax levels are low when they get there.
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“In 1790, the nation which had fought a revolution against taxation without representation discovered that some of its citizens weren't much happier about taxation with representation.”

President Lyndon B Johnson

US Banks: What a Difference a Year Makes

Although recent financial news has a decidedly cataclysmic tone, evidence continues to mount that things are improving frustratingly slowly and steadily, exactly as expected.



Today, the FDIC announced that US banks earned, in aggregate, 21.6 billion dollars in the second quarter of this year (FDIC). Though this is still well below historical standards, what is striking is that most banks (80% of them) have returned to profitability.

Back in May, when I first publicly recommended bank stocks (US Banks), headlines warned that the government might force banks to be broken up and sold, that financial regulation could destroy them, and that a new debt crisis (ex. Greece) might soon cripple them. None of these things has materialized.

Since May the US financials index (XLF) has nonetheless dropped from $15.36 to $13.44, despite quantitative improvements in all areas of banking: decreased leverage, reduced loan loss provisions, increased profitability, improved credit market stability, and more.

The new worries for banks include a flattened yield curve (making credit spreads less profitable), a potential double-dip in housing, and that Barack Obama is secretly a communist Muslim and/or Biblical Anti-Christ whose intention is to destroy the US financial system.

If you truly believe that the US economy will never improve, and that US families will never again buy cars or houses, use credit cards or keep bank accounts, you should definitely stay away from bank stocks.

If you believe that banking has a future in America (and that America has a future at all), this year’s prices may well mark the single greatest buying opportunity we will see in our lifetimes.
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"After 1929, so many people had been traumatized by the stock market crash that there was a lost generation."

Ron Chernow
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Disclosure and Disclaimer

Do not buy stocks, or take this or any other financial advice without doing your own analysis; including, but not limited to: reviewing business models, financial statements, management style and philosophy, recent developments, market macroeconomic analysis, and chart analysis. If you do not know how to do these things, you shouldn't be buying stocks in the first place. Seek the advice of professionals, as appropriate.
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Related amusement:

The US Economy - Headed in the Right Direction?

Today, Barack Obama announced that the US economy is "still headed in the right direction," a comment that induced a great deal of ridicule, especially after this week's dismal employment figures. Yet, Barack Obama is right - the economy is headed in the right direction, though it has little to do with his great leadership, or his lack of it.

Interest rates are low & housing prices are low, together creating the best affordability rates since the 1950s. At the same time, many stocks are trading at below book value (net asset value). These are prime conditions for economic recovery. No matter what other government programs or policies are in place (or not), the economy will be in far better condition two years from now than it is today.

The economic cycle is playing itself out, textbook style. If Bill Clinton, George Bush, Ronald Reagan (also a chronic spender) or anyone else were still in office, we would be at exactly the same point.

The tendency for people to overemphasize the significance of an individual's actions is known as "fundamental attribution bias." As an example, the Vice-President of a bank recently told me that he became Vice-President at the "worst possible time" – just before the recession hit - thereby making his sales and leadership abilities look terrible. The economy is still bad and people are frustrated, so they are blaming Obama for everything except breathing.

Now that the major requirements for recovery are in place, the actual pace of the recovery is not within Obama’s – or anyone else’s – locus of control. Just as Bush was unable to prevent the crash, Obama is unable to speed up the recovery.

This time of maximum pessimism is, as I have stated on previous occasions, a buyer’s dream. Take advantage of it by purchasing the stocks of great companies at low prices. That is, buy low and sell high – unless you really believe that the world is ending.
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"Until people feel better about their own lives, they're not going to feel better about the president."

Bill Clinton, regarding Barack Obama, 2010
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Barack Obama - Enemy of Business?

The same people who were clamouring for financial reform during the height of the crisis now appear to be taking a "if it's not broken don’t fix it" approach. Having seen their stocks go up since the lows of 2008, fear of change has taken hold. How can we be considering financial reform when talk of it makes markets drop? Don't the markets "know everything?"

Many conservatives have branded financial reform or regulation as "socialist" or "communist," making the ridiculous conclusion that since the highly-regulated communist structure didn't work, a complete lack of regulation must be best. Such short-term and narrow minded thinking is bad for the nation. Financial reform is necessary - and has been a long time coming:
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"If we bail out this one (Penn Square Bank)...then the markets will know that, no matter what risks they take, the government will bail them out. Eventually, its going to lead down the road to nationalization of the banking system."

William Isaac, FDIC chairman, 1982
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"If this sounds like a warning, it is."

Gerald Corrigan, President of the Federal Reserve Bank of New York, telling bankers that the over-the-counter (OTC) market seemed to be expanding without adequate controls, 1992
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"Improved 'transparency' - a favorite remedy of politicians, commentators and financial regulators for averting future train wrecks – won't cure the problems that derivatives pose. I know of no reporting mechanism that would come close to describing and measuring the risks in a huge and complex portfolio of derivatives."

Warren Buffet, Berkshire Hathaway 2008 Annual Report
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"A key question: Should we opt for even more pain now to gain a better future? For instance, should we create new controls to stamp out much sin and folly and thus dampen future booms? The answer is yes. Sensible reform cannot avoid causing significant pain, which is worth enduring to gain extra safety and more exemplary conduct."

Charles T. Munger, 2009, in the Washington Post
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"A clear lesson of this crisis is that any strategy that relies on market discipline to compensate for weak regulation and then leaves it to the government to clean up the mess is a strategy for disaster."

Timothy Geithner, Secretary of the Treasury, 2010 in the Washington Post
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"It is simply unacceptable to walk away from this recession without fixing the system's basic flaws that helped to create it."

Timothy Geithner, Secretary of the Treasury, 2010, in the Washington Post
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"A clear lesson from the events of the past few years--and a recommendation in the report with which we strongly agree--is that the government must not be forced to choose between the unattractive alternatives of bailing out a systemically important firm or having it fail in a disorderly and disruptive manner. The government instead must have the tools to resolve a failing firm in a manner that preserves market discipline--by ensuring that shareholders and creditors incur losses and that culpable managers are replaced--while at the same time cushioning the broader financial system from the possibly destabilizing effects of the firm's collapse… The financial reform legislation in both the House and the Senate would provide for such a resolution regime."

Ben Bernanke, Chairman of the Federal Reserve, 2010, Fed Speech
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In my estimation, one of the reasons people hate Obama is because he is forward thinking and logical, and therefore does things that voters hate (a rare combination in politics). In doing what's necessary, he successfully manages to piss off every possible segment of his support base. He makes poor people get health insurance coverage, even if they don't want it. He institutes financial reform at a time when the market is recovering and when each word from his mouth causes the market to drop. His logic, rather than his strict adherence to political philosophy, makes him "difficult" and "impossible to predict." Personally, I like the fact that Obama ignores popular opinion and just gets things done. No doubt he will be a one-term president.

Enemy of Business: no.
Enemy of dangerous, unregulated, pre-1929 style business: yes.
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"Issues are never simple. One thing I'm proud of is that very rarely will you hear me simplify the issues."
Barack Obama

U.S. Robin Hood Real Estate, Part II

In last month’s U.S. mortgage refinance program, the Democrats announced a comprehensive plan to help struggling homeowners. The plan allowed homeowners to refinance to a longer amortization (ex. 35 years) or reduce their interest rate in order to make monthly payments more affordable. This Friday’s announcement went one step further, allowing homeowners to actually reduce the amount of principle they owe (ie. write off the debt). In essence, the plan is a mass Chapter 11, funded by the taxpayer.

With this new plan, the home equity gamblers of 2005-2007 have really hit the jackpot. Although they lost equity in the real estate casino (which they chose to enter), the owner of the casino is now handing them their money back. Meanwhile, prudent people who didn’t gamble remain in apartments or living with their parents, driving compact cars instead of SUVs. It’s a deplorable affront to dignity and consequence.

In my view, if the big banks want to modify their mortgages to prevent further losses, they should be encouraged to do so; taxpayers, however, should have no part in it. Painful as it may be, let supply and demand work itself out, and let personal consequences matter.

See also Part I
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“The house doesn't beat the player. It just gives him the opportunity to beat himself.” Nick Dandalos, professional poker player

America Wasn't Ready

This Sunday, the U.S. health care bill was passed after a furious battle.

The center and left were virtually silent this week, giving the limelight to those who believe that Barack Hussein Obama is not working in their best interests, to say the least. In fact, the opposition united in what both looked and sounded like a religious crusade to save America.

“We have to deny the power of the devil and his disciples in our midst,” wrote one blogger. “Pray to the father God to wake up Congress,” pleaded another. References to “rebuke,” “wickedness,” and “righteousness” were everywhere.

Then there was the coming revolution. There were calls for “bloodshed” if the bill was passed, for “revolution in the streets,” and to “impeach the foreign born dictator.” Conservative talk-show host Rush Limbaugh said that Obama’s secret goal is to divide America before destroying it, while house Minority Leader John Boehner likened the bill to "Armageddon." An ad on the Washington Post's website offered free handguns and knives to those who enrol in a self-defense training course, to prepare you "for what's coming."

The conservative right says that their hatred of Obama is politically – not racially – motivated. Casual observation suggests otherwise. One commenter on a national news website called President Obama a “lying sack of Kenyan dog crap.” Another said that he “lies through purple lips.” Yet another said that the “monkey man will get beaten.”

Of course, the health care bill passed and will now become part of American life. Citizens will have health coverage, whether they like it or not.

For investors, the big question is “what to do now?” When propaganda is rampant & emotions high, what can investors expect? At the opening bell this Monday morning, the 22nd of May 2010, two possible scenarios could occur: A) The right will demonstrate its genuine belief that Obama has destroyed their economic future by selling off U.S. stocks like mad, creating one of the largest stock market crashes in history. Or B) nothing dramatic will happen, showing that it was all just crazy talk.

Personally, I’m hoping for “A.” If so, you will find me at my computer, happily buying underpriced stocks of great American companies, while everyone else loses their minds.
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“Reactance – the urge to do the opposite of what someone wants you to do out of a need to resist a perceived attempt to constrain your freedom of choice.” Wikipedia, “List of Cognitive Biases”

U.S. Robin Hood Real Estate

This week, President Obama announced revisions to the mortgage bailout program, giving the hardest hit states additional support. But when clients can’t pay – or simply don’t want to pay – will modifications help? For many of these borrowers, it was all-or-nothing from the beginning.

Back in June of 2007, customers would walk into my office saying, "I'm going to buy this house, redo the roof, sell it, and make a hundred grand!!” (During a bubble, people never say “thousand.” they always say "grand.") “But,” they would add, “we have to do it right away, because this market won't last forever!" Other clients would admit, "I don't have the money to buy supplies for renos, so I'm going to buy them on my credit card. It’s no problem. I’m going to flip the place in a month anyway."

In other words, people were intentionally making financially dangerous decisions, knowing full well that they were buying into a bubble. I saw little of the innocent “I didn’t understand the paperwork” crowd that made appearances on TV later on. And when I declined their mortgages, they got angry: "If you won't give me the money, I'll just go to someone else who will!" (I was, after all, denying them their once-in-a-lifetime opportunity to get rich.) If you're 40 years old and your only assets are a Harley-Davidson and some tools, why not risk everything? After walking out of my office, they probably went to a high-risk lender, got approved, and then our bank stupidly bought back their mortgage through a CDO.

Now we are giving them more money. I would like to see the U.S. housing market recover more quickly, just like everyone else. But instead of setting a dangerous precedent, the Government should continue to increase productivity through infrastructure renewal, keep interest rates low, and wait until the market drops low enough for the savers (of which there are many) to buy the homes. That is, stop bailing out gamblers and let the market work itself out.

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Barack’s Reforms make Big Banks Cry

Being that I own hordes of bank stocks in my personal portfolio -- and that I work for one -- you might expect me to decry President Obama’s recent pronouncement that big banks will no longer be allowed to engage in certain high-risk trading. On the contrary, I think it’s a perfectly acceptable idea, one that Wall St. professionals have known the practicality of for years.

In 1987, when markets crashed and big banks were “saved,” many thought that this set a dangerous precedent. It was believed that banks, confident that they would be bailed out no matter what their level of gambling, would start acting like hedge funds and go for broke. And they did.

So, while I am dismayed that my annual investment returns may decline a few points due to the proposed changes, I am also grateful that I won’t come back from the bathroom to find my stocks down 80%. In short, I expect my U.S. bank stocks to become more like the banks themselves: large, boring, and immensely profitable.
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“If we bail out this one (Penn Square Bank)…then the markets will know that, no matter what risks they take, the government will bail them out. Eventually, it’s going to lead down the road to nationalization of the banking system.” William Isaac, FDIC chairman, July 1982.
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“CMO equity is a particularly slippery mortgage investment. The CMO stands for Collateralized Mortgage Obligation, but bond salesmen call it ‘toxic waste.’” Michael Lewis, The Money Culture
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“I would confidently predict that most of the derivative books of major banks cannot be liquidated for anything like what they’re carried on the books at. When the denouement will happen and how severe it will be, I don’t know. But I fear the consequences could be fearsome.” Charlie Munger, Poor Charlie’s Almanac, 2005
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