Archive for July 7th, 2009
Nearly 13 years after making ‘irrational exuberance’ one of the most familiar phrases of all time, stock market investors are anything but exuberant. On 12/5/96, when Greenspan suggested that stock market investors may be out of touch with reality, the S&P 500 was at 744.38. As of the end of the second quarter, the S&P 500 has gained 53.4% on a total return basis. At face value, this seems like a respectable return on one’s investment. However, compared to alternatives the gain loses its luster quickly.
Consider the three month US T-Bill, which is one of the safest, most conservative, and lowest yielding investments out there. Back when Alan Greenspan was talking about ‘irrational exuberance,’ putting your money in three-month T-Bills was akin to stuffing it in the mattress. Currently, three month T-Bills are yielding 0.1575%, which means you will receive 15.75 cents of interest for every $100 you invest. Even with their low relative yields, however, T-Bills have had a total return of 56.4% since Greenspan’s memorable quote, outperforming stocks by 300 basis points. Equity market investors can only hope now that the years ahead look similar to what happened the last time stocks were underperforming T-Bills back in late 2002.
Who Needs Stocks When You Have a Mattress? – Bespoke Investment Group
July 7th, 2009
President Obama’s visit to Moscow this week may turn out to be a very good thing. Forget all this jibber-jabber about nuclear disarmament.
There is no better reminder than the former Soviet Union for how the fantasies of a few collectivist zealots can turn into unending nightmares for its people — and for how a state-run economy ends up with no economy at all.
If we’re lucky, a little Russian history on this trip will turn into a welcome wake-up call for Mr. Obama.
It’s not that Mr. Obama is some radical who carries a warm nostalgia for the Soviet Union from his university days. He’s way too young and too smart for that.
But the president believes in the state, certainly more than any other recent American president. He believes the state must actively intervene in the economy and that the state can bring about a better future. And it seems he believes it is his destiny to lead the state to that future.
In that way — and others — Obama reminds me of Vladimir Lenin, the founder of the Soviet state.
CNBC’s Jim Cramer made the Obama-Lenin comparison back in February. And the more I’ve thought about it, the more it holds.
Associated Press
A painting made during the Russian Revolution, showing Vladimir Lenin surrounded by revolutionaries, date unknown.
Of course, Obama is a reformer, not a revolutionary. And he’s certainly no communist.
But just like Lenin, Obama is a supremely self-confident leader — an intellectual heavyweight and a clever political tactician — an elitist moralizer and a populist champion. And just like Lenin, Obama carries the true-believers’ righteous fervor for “change.”
I was thinking of Lenin as I watched the president’s Rose Garden remarks on energy and innovation last Thursday.
After his eight minutes in front of the teleprompter, the president turned to walk away, and a reporter blurted out a question, “Mr. President, do you have a message for the small businesses on health and economy?”
The president should have just walked away. But it was as if he couldn’t stop himself as he launched into a rambling, haughty answer that I found…well, a bit scary.
It was scary because it demonstrated that Mr. Obama — almost half a year in office — still has no grasp of the everyday realities faced by America’s small businessmen. They can’t make payroll, but the president is directing them to buy LED lightbulbs and urging them to contact “clean energy” CEOs.
And it was scary because it showed that the president is still possessed by an unshakable conviction in the power of the state over the individual and of the future over the past.
As he put it in the Rose Garden, we have to change the health-care system. We have to change how we use energy. We have to change how we “train our young people.” “We are not folks who are scared of the future or look backwards. We always meet the challenges by moving forward.”
Political clichés? Of course.
But the president seems to actually believe his clichés. And some of his Rose Garden remarks could have been lifted from Lenin’s speeches circa 1918 – the same hectoring tone and the same mockery of opponents who long for the “status quo”.
Even Mr. Obama’s call to move “forward.” “Forward!” in fact was one of the Soviets’ favorite slogans.
The good news for those of us who are a little freaked out by Mr. Obama is that even Lenin did an about-face after the utter failure of his initial hard-left economic policies.
By early 1921, faced with the ruin and famine wrought by nationalization of the economy, the Bolsheviks re-instituted a quasi-capitalist economy with its New Economic Policy. Ironically, the NEP was aimed to help small businessmen — the very same people that the Obama economy so desperately needs nowadays.
Lenin called the NEP taking “one step backward to take two steps forward.” While he’s in Moscow, President Obama may want to ask someone at the Kremlin, just what Lenin meant by that.
Editor’s Note: Mr. Newmark was a student in Moscow in 1984, worked with George Soros on Russian economic reform in 1988-89 and ran the Goldman Sachs Moscow office from 1992-1994.
Why Barack Obama Is Like Vladimir Lenin – Evan Newmark, Deal Journal
July 7th, 2009
Last week saw the publication of some of the scariest numbers so far in this recession. Britain suffered its worst quarterly fall in GDP since 1958: a year when Harold Macmillan was prime minister and the Soviet Union was launching Sputnik satellites into space. The 2.4% fall in the first quarter of 2009 was equivalent to about 10% at an annual rate.
In America the unemployment rate hit its highest level since 1983: when the American embassy in Beirut was bombed and Michael Jackson first performed the “Moonwalk”. Paul Krugman, a Nobel prize-winning economist, has estimated America has lost 6.5m jobs since the start of this recession.
To make matters worse Arnold Schwarzenegger, the governor of the state of California, declared a state of fiscal emergency in his state. The fiscal plight of the American states adds to the ballooning of federal debt discussed in this week’s cover story.
Under such circumstances it is not surprising that Stuart Thomson, the economist at Ignis, talks of a “WWW recovery”. He is not referring to the internet but to the pattern of apparent recovery followed by a decline back into the mire.
After nine months of severe pain it should be apparent to all that the recovery, when it comes, will not be easy. The economies of the developed world are in a dire state.
With the benefit of hindsight it would have been better to take some pain in the short term, rather than the sustained torture by a thousand cuts. For example, letting some large banks and auto makers go under would no doubt have been unpleasant. But if the destruction of old business helped pave the way for the generation of new ones, the longer-term effect could be beneficial.
Of course, it makes sense to minimise the extent of human suffering. Those who lose their jobs should, as far as possible, get help in finding work in new or expanding economic sectors.
In any case, the current recession is hardly painless. As Greg Mankiw, a professor of economics at Harvard, points out in his blog the level of American unemployment now is much higher than the Obama administration forecasted in January. This is despite its huge stimulus plan.
Better to take misery in the short run than face a protracted period of unpleasantness.
Better to Face Our Economic Pain Now – Daniel Ben-Ami, Fund Strategy
July 7th, 2009
America’s unemployment rate–the worst in 26 years–has stopped the stock market cold. It has moved the recovery goalposts down the field, maybe into next year.
Hope resides with America’s growth companies. But they sit at the epicenter of the credit meltdown and face funding hardships. Forbes.com has a plan to help promising growth companies get the funding they need. More on that in a minute.
The awful, jobless summer was forecast in April, when two conflicting sets of data emerged. One was positive–consumer confidence was soaring–and hinted at growth by summer. But other data was deeply discouraging: America’s large-company CEOs were paralyzed. I wrote about the disturbing anomaly here:
The Fed has done its job. (Maybe too well, but that’s another story for another day.) Consumer sentiment and spending have bounced back. The headwinds that remain have less to do with bank stress tests and more to do with CEO mood. The Business Roundtable, which represents big business, reported “record low” CEO confidence in April:
–71% of CEOs plan more layoffs in the next six months.
–Most see declines in capital spending.
–The CEO Economic Outlook Index was negative for the first time.
Let me say this again: The yield curve predicts growth. Check. Consumer sentiment and spending are up. Check. But CEO confidence is lousy, and CEOs are not investing for growth. Whoops. This raises the question: Why are CEOs in such a low mood?
Answer: If you are a CEO in financial services, manufacturing, energy production or health care, you will see more regulation. Period. End of story. Your response to forthcoming regulation of yet-to-be-determined complexity will be to hunker down. Keep your name out of the news. Improve the balance sheet. Hold tight.
That’s what has happened. Understand that America’s soaring rate of joblessness is not due to mass layoffs. It is due to the fact that CEOs are simply not hiring. They are paralyzed by the fog of uncertainty coming out of Washington.
In past recessions, recovery and new jobs have emerged from start-ups and small growth companies. But during this recession, funding has been very difficult for the small fry.
Forbes.com has a plan. We have teamed with The Venture Alliance (TVA), a boutique investment adviser to early-stage companies, to identify America’s most promising companies. Click here to learn more.
How do venture capitalists evaluate the potential of any growing company? The Venture Alliance has developed a scoring algorithm based on a vast range of variables that determine a company’s potential–and, ultimately, its worth to investors–including: financial projections, current capitalization, market position, market opportunity, intellectual property, management team and others. TVA crunches that data (which it collects by surveying young companies) and reduces it to one “fundability score.”
Companies that score well, theoretically, have a better shot at raising money than those that don’t.
If you are a growth company seeking funding, click here to get your fundability score.
Small Companies Aren’t Filling Job Slack – Rich Karlgaard, Digital Rules
July 7th, 2009
