Friday, October 28, 2005

Al Hunt Does Me Proud Again

I have tried to chronicle (here and here and here) the heavy liberal bias that financial professionals are subject to when they use that must-have tool of the finance industry, a "Bloomberg." So it came as no surprise to me when Bloomberg News got a good jump out of the starting gates to declare Bush's second term over and his agenda dead now that we know that I. Lewis Libby did a Martha Stewart impression.

#21 on Bloomberg TOP as of 1:30 pm today - "Libby Indictment Weakens Bush's Chance of Accomplishing Second Term Goals"

Bordering On Libel

I have posted twice (here and here) on this crazy, but quite popular, notion that working for the Bush administration qualifies you as a complete doofus or somehow (they never quite know specifically how, but they just KNOW) sinister.

Don Luskin points out the latest version of this, from some Princeton economics professor who works at a private website, and makes it look as silly as it truly is.

Hey Bill Frist, What Does 3.8 Tell You?

I see from Drudge this morning that Sausage Factory Shop Foreman Bill Frist has called for an investigation into high oil prices. Aside from the facts that 1) this has already been done, 2) would be expensive, and 3) would tell us what we already know, it would be entirely unnecessary. The third quarter GDP numbers are out and, despite numerous predictions of oil-price induced weakness, the economy sped ahead at a 3.8% growth rate. So all the Q3 pessimists were wrong when they predicted over and over and over that high energy prices would derail the economy as high gas prices crimped consumer spending. How many headlines did you read that went something like "Pain at the Pump Hurts Outlook" or "Oil Threat to Fragile Economy". Right, tons. Yeah well, the economy didn't get the memo. So what are the Q4 pessimists honing in on as the cause of the inevitable economic crackup? High oil prices. Naturally. Although this time, it will be home heating oil. High gas prices didn't derail consumer spending but high heating oil prices SURELY will. Joe Sixpack may have cancelled a road trip or two to pay for that iPod but no way will he wear a friggin' sweater around the house to get that flat panel TV for Christmas. No bloody way can he react with such sensitivity to price signals. Fat chance. He's toast. He'll have to pay for the damn heating oil, suck it up, and go without. The headlines that we will be barraged with over the coming weeks will read "Cold Weather Brings Sticker Shock to Homeheaters" or "Economy May Struggle to Stay Warm this Winter".

And the economy won't get the memo. 3.5-4.0% GDP growth in Q4.

Thursday, October 27, 2005

New SEC Chairman Confirms, "We Know Squat!"

As I mentioned in a previous post, the SEC knows diddely about the hedge fund industry, even though they are convinced that it needs regulating. Now, the incoming Chairman, Christopher Cox, has confirmed this, stating that the upcoming registration requirement will provide "census information about what's going on in the world of hedge funds." So it's true, they know nothing. Nonetheless this data gathering exercise will require tens of millions of dollars of additonal taxpayer money to implement and cost hedge funds tens of millions of dollars. After all this money is spent, the SEC may or may not prevent any fraud. After all, the most recent high profile hedge fund frauds, Bayou and Wood River, were completely missed by people who are in the business of vetting hedge funds (sub. req.) for clients with real money.

I'm not trying to drum up sympathy for the hedge fund business here, just pointing out the mentality behind our regulatory blob. This unknowing intrusiveness goes on throughout our economy and throughout our lives. Have a nice day.

Tuesday, October 25, 2005

Now, Who to Head the Council of Economic Advisors?

So, Ben Bernanke will take over for Alan Greenspan at the helm of the Fed. That leaves a vacancy at the top of the CEA. Now the CEA Chairmanship has never been the plumest of jobs - it's less important than Fed Chairman or Treasury Secretary and, at least recently, it is a good spot from which to take whippings by the press corps, especially if you say something a little too honest, albeit intelligent (or obvious even), for the political sphere to take. Nonetheless, it is a place from which one's work and ideas have access to a powerful audience, and for the right person, the job can take on more influence than it has traditionally demonstrated. And it is not the worst thing to have on your resume.

So who should it be? In my view, someone from outside academia, a market economist. Also, someone who has a strong record of being correct. Policy affects real people, so we need someone who sees the effects of policy in the real world and has made smart calls that have practical applications. Based on that criteria, a good choice would be...Brian Wesbury.

UPDATE: I am on a roll...see here.

Latest "Fiddling While Rome Burns" Scenario...From Rome!

The Italian economy is stuck in the mud, Italy is sinking in the world competitiveness rankings, and organized crime is reasserting its hold on the business climate. So what is needed? Clearly, a law banning fishbowls as "cruel".

I Don't Know Who I Like More Right Now...

...Sen. Tom Coburn or Eli Manning.

UPDATE: Alright then, let's have some pictures!

Friday, October 21, 2005

Golden Opportunity Missed

In addition draping themselves in bipartisan embarrassment by defeating the Coburn "Bridge to Nowhere" amendment, which would have diverted government spending on egregious pork to Valuable Katrina reconstruction, our Great Sausage Factory's upper chamber missed another golden opportunity. Ted Stevens offered to resign his Senate seat if the amendment passed! All I can say is, "MY GOD, HOW DID WE PASS THIS ONE UP!"

Ted Stevens is the Republican Robert Byrd, an embarrassment. And they should have sent him packing. Oh well.

Thursday, October 20, 2005

$500 to Run Against Don Young in 2006

If there is a small government, pro-growth, anti-pork type Alaskan who wants to run against Don Young in the 2006 primary, I will help you crank up your campaign kitty with a $500 donation. No social issue litmus test, just sign an anti-pork pledge, post it on your official website, file your papers and I'll write the check.

Business Leaders: Locate Your Business in Italy...

We have high taxes, stifling regulation and political assasinations by organized criminal elements!!

Julian Simon is Everywhere & the Faces of Children

Don Boudreaux blogs about the passing of his friend over at Cafe Hayek. Don mentions that his friend retired after suffering from macular degeneration. Here is a message I shot off to Don:

My condolences for your loss in the passing of your friend, Hugh Macaulay. Your post instantly reminded me of an example that fits within one of your constant themes, our ever-expanding pool of prosperity . My father-in-law suffered from macular degeneration and went completely blind this past June, just in time for a visit from his grandkids whose faces he could no longer see. People can deal relatively easily with the prosaic implications of sight loss by relearning to get around and do everyday things, but the emotional pain that comes with the loss of seeing those young bright faces is immensely debilitating to even the hardiest spirit. In August this year however, my father-in-law underwent a new surgical procedure known as a vitrectomy, and his sight has been restored to a substantial degree. You read that right, complete blindness to adequate sight after a 1 hour surgical procedure. He will be able to see his grandkids' faces again! The story of the vitrectomy procedure is truly a Simonesque tale of human ingenuity. The instruments used in the procedure were designed by a doctor in his garage ( The procedure is now widely performed with a high success rate. Every time I hear of attempts to diminish the motivation, either through regulation or litigation, to conduct medical research I wonder how many procedures like the vitrectomy we are denying to posterity (and to ourselves given the rapidity with which these innovations can go from experimental to commonplace).

Photo essay of the vitrectomy here:

There are some key lessons in the story of the vitrectomy. First, no central authority or government agency planned it; it was brought to us solely by the application of one man's ingenuity and motivation. Think of this everytime someone says we should have nationalized healthcare. Second, many of our current constraints that we regard as given are not inescapable. Think of this everytime someone says we are running out of oil. Third, read, and encourage others to read, your Julian Simon!!!

Wednesday, October 19, 2005

Lemonade Recipe Part 2

Senator Tom Coburn (R-OK) has a recipe for LEMONADE, that cool refreshing drink...

I offered my own recipe a few weeks ago.

Message to all Republican Sausage Factory Workers:

Tom Coburn = Lemonade, Don Young = Lemons

Tip: If you hate pork (and love lemonade), you can find out about the Tom Coburn's of tomorrow here.

Tuesday, October 18, 2005

The Mother of All Policy Cycles

Larry Kudlow is all over the emerging details from Bush's Tax Reform Commission. He hedges but his key impression is that the cost of capital should be coming down, which is good. I am less a believer in the business cycle (under-capacity yielding to overcapacity and back again) as I am in the policy cycle (good policy yielding to bad policy and back again). The policy cycle is much more dangerous as policy is less responsive to reality, often refer to as market forces, as the business cycle is and bad policy will persist alot longer than overcapacity ever will. And tax policy is the mother of all policy. If this commission gets it right and the Great Sausage Factory doesn't butcher its recommendations too badly, we could see the mother of all policy cycles unleashed to the upside. Low tax burdens and more transparent rules would be an undeniable plus for the economy and the stock market, but more importantly the effect would have a more lasting effect as it would take tremendous political energy to reverse the policy cycle. The cycle could be measured in decades rather than years.

Monday, October 17, 2005

Sarbanes-Oxley and "Going Dark"

I have blogged about Sarbanes-Oxley, and what a disaster it is, before. The Wall Street Journal had a spot-on editorial yesterday pointing out that the existence of SARBOX did nothing to prevent the debacle at Refco. Beyond this obvious, and convincing enough, point the Refco fraud is even more damning of SARBOX given its particulars. The Refco fraud was not a fraud that simmered and built up undetected over many years, advancing by small degrees. This company was the subject of major investor interest and scrutiny, and presumably the high level of due diligence that such interest brings with it, many times in recent history. Thomas Lee Partners, the famous private equity investor, bought in as recently as 1999 and ole' Tom Lee himself and two of his representatives sat on the Board of Directors all along. Refco had a revolving credit facility, so there was a bank, or a syndicate of banks, presumably who got to take a look at the inner workings at Refco. Then Refco went public in August of this year. That means that several large investment banks got to crawl all over its books as well as the auditors. So in a few short years several institutions, sophisticated institutions mind you, got involved at various stages and each and every one flubbed the job. That is not my lament. If the private sector falls flat on its behind, too bad so sad, they'll have to learn to get it right, which they invariably do. But what of the regulations like SARBOX that impose huge costs and are now demonstrably worthless in preventing frauds?

There are numerous examples of smaller companies that are facing high six figure to low seven figure bills to comply with SARBOX. For a small company, this is not just serious money (at one company that I have invested in, these costs are 50% of its total annual net income), it is just simply unaffordable. Many of these companies are considering, and I believe they will opt, to "go dark." This means they will reverse split their stock to bring the number of shareholders below 300, so they will not be required to meet any public reporting requirements. Their shares can still trade on the bulletin boards but liquiidity will suffer and thus market capitalization. Many will eventually sell out to private equity firms at depressed values because their shares cannot achieve full value in an active, liquid market. Is this what SARBOX was supposed to do - cutoff participation in the capital markets and hurt small companies? Clearly not, but our esteemed Suasage Factory Workers have no clue what they are doing, so this is what we get. SARBOX needs repeal at best, heavy modification at worst.

Bloomberg TOP Bias of the Day

For today's gross bias on your Bloomberg TOP function, look no further than: "Bernanke, Possible Greenspan Successor, Toes White House Line."

This story's all but stated theme is that Ben Bernanke has all but abandoned his integrity by not criticising the Bush administration's economic policies (which he has had a hand in devising) all the while being the leading candidate to replace Alan Greenspan as Fed Chairman. The article opens up with Bernanke's attractive attributes: he "was fascinated by libertarianism" and "spoke his mind." Apparently, by going to work for the Bush administration, no such behavior is possible for poor Ben. He must be "buttoned down and buttoned up" (yeah, I said "huh?" too.), "cautious" and he might have some "difficulty recognizing" his former self.

To be fair, the authors line up heavy hitters Milton Friedman and Robert Solow to say that Bernanke is qualified to succeed Greenspan, although there is no discussion of actual policy and results that might merit such an endorsement. (Friedman is a strong advocate of low taxes and reduced government regulation of the economy and has supported this administrations key economic policies.) Saving their one reference to actual policy, the authors quote Alan Blinder (notable in comparison to Friedman and Solow by his lack of distinguishment in the field of economics) thusly:

"Keeping himself out of trouble is a crucial thing because part of his current job description is to defend the economic policies of this administration, which to my mind, in many ways, are indefensible."

So Bernanke is defending the indefensible to get a plum job. It couldn't possibly be that he is defending sound economic policies that he himself has advised the President on (and that economists of the stature of Milton Friedman agree with). Nope. Perfidy, disingenuousness and professional/ethical compromise simply MUST be at work here. Thank you Al Hunt, I was duped into believing that a qualified economist was giving sound advice to the President that was helping our economy.

N.B. Check out just how indefensible this administration's policies have been here.

Wednesday, October 12, 2005

Hedge Funds and Caviar - The Mind of a Regulator

Hedge funds and caviar. I doubt that these industries elict any sympathy from mainstream society given that they are associated with the wealthy, but recent or impending regulation of these industries provides us yet another, as if we needed it, glimpse into the dangerous workings of the regulatory mind.First, the US Fish and Wildlife Service is banning the importation of beluga caviar that comes from Caspian Sea beluga sturgeon. Yes, that would be the Caspian Sea that is halfway around the world from the United States. Now, the Caspian beluga sturgeon may be falling on some hard times (mostly because of corrupt business climates in post-Soviet nations and Iran) but is it really the place of the US Fish and Wildlife Service to do something about it? Even though this US government agency has no jurisdiction outside of the US and no scientific resources to evaluate or apply to the situation in the relevant geography (there is no USFWS office in Baku), the answer apparently is still yes. Putting aside the question of jurisdiction for a moment, without any scientists on the scene, how does the USFWS understand what is happening to the beluga sturgeon and how can they assess in a rigorous way that regulation is needed? Easy, they take other people's word for it. They rely on the word of 'conservationists' who tell them that it is a problem. So basically you have an arm of the US government applying none of its own evaluative resources but nonetheless proceeding to influence an industry in another part of the world.

Such is the mind of the regulator that the belief in their mission is so great that they can't possibly perceive of any rational limits on their reach and power. The same was evident in the words of Harvey Goldschmid, Columbia Law Professor and former SEC Commisioner, at a small gathering in New York to discuss the SEC's impending regulatory regime for the hedge funds. Goldschmid admitted that the SEC hadn't a clue about the size and scope of the industry or how it worked. Even so they were sure they knew that the industry had a fraud problem that was sufficiently bad enough to regulate. How did they know? They read the papers and got complaints. How many complaints and how serious were they? How pervasive was the apparent fraud relative to the size of the industry and compared to other areas of the asset management business like brokerages? Well, they didn't know. But they chose to regulate anyway. When discussing the cost of complying with the regulations, Prof. Goldschmid poo-pooed the notion that the $100,000+ cost was a burden to industry players, saying "for most hedge funds, $100K is a drop in the bucket." So he confirmed that the SEC knows next to nothing about hedge funds, because clearly he doesn't know that over 70% of hedge funds are small ('mom and pop' you could even say) operations for whom $100,000 in regulatory compliance costs would put them out of business. He went on to say that, contrary to all previous experience, the new SEC inspections of hedge funds would not be a "game of gotcha" and that the SEC would take on work that the CFTC already does because the CFTC stinks and the SEC is, well, just a really top-notch agency. Thank you Prof. Goldschmid for a profile in the regulatory mind, which believes it should regulate despite a lack of data to suggest it should, which imposes costs the burden of which it cannot gauge and is indifferent to, and which feels uniquely qualified to do something even though it is currently being done by others.

Friday, October 07, 2005

How to Destroy Your Brand 101

If you are an Italian clothing maker, launch an ad campaign that depicts:
  • Death row inmates
  • Animal cruelty
  • HIV-infected people

If you are the Nobel Peace Prize, give the award to:

  • The United Nations, 4 times since 1981 no less
  • Yasser Arafat
  • Jimmy Carter
  • Wangari Maathai

The palpable lack of buzz surrounding this year's prize probably reflects the declining prestige of the award.

Trichet Didn't Get the Memo

European Central Bank President Jean-Claude Trichet apparently didn't get the memo that Jacques Chirac wants his monetary autonomy back so he can get back to the business of competitive devaluation, otherwise France won't be getting back to business. The ECB honcho made some hawkish statements about inflation on Thursday, indicating that the central bank would be prepared to raise interest rates. This gave the Euro a double shot in the arm and you could just hear the "Merde!" emanating from Elysee Palace.

I wonder if this is shaping up to be a classic head to head battle between economics, embodied in an inflation-fighting Central Bank, and politics, embodied in a despreate mercantilist head of state clinging to power. Usually, when the central bank and the politician are from the same government, it tends to work out bad for economics, but given that this is a fight between a supra-national body and powerful member state, it should be interesting.

Good Thing We are Suing (and Regulating) Merck...

into the f***ing ground. I mean, why would we let these rapacious bastards off the hook, when without us seeking justice they would be sitting around saving thousands of our wives, moms, and daughters from cervical cancer.

Wednesday, October 05, 2005

We Must Show Solidarity.

Tuesday, October 04, 2005

La Michigan qui tombe

The November '05 issue of Bloomberg Markets has an article on the approaching end-game for troubled auto-parts manufacturer Delphi, which was spun off from GM in 1999. It is a typical review of the options that face a company clearly headed for bankruptcy, yet this tidbit was interesting:

"Job cuts at GM, Delphi and other automakers and suppliers could saddle Michigan with unemployment as high as 9 percent for the foreseeable future, says Sean McAlinden, a labor economist at the Center for Automotive Research in Ann Arbor, Michigan. The August unemployment rate in Michigan was 6.7%, the highest among U.S. states."

Clearly this is a speculation, but the problems in the domestic auto industry are indeed real and deep and getting worse. Major jobcuts in Michigan are a distinct possibility. If McAlinden's prediction comes true, we won't have to look across the Atlantic to see what has happened to France. We will have a little piece of France right here in the USA - a crumbling economy, depopulation, reduced political influence and a burgeoning Arab minority (this is in no way to suggest that this ethnic group is a cause of MI's malaise), and a clueless head of state.

At least Michigan produces some excellent wines, although I hear that the Aussie's are putting out some excellent reds that are giving Michigan's top names a run for their money.

UPDATE: OK, that last bit is a wine geek joke and the title is a reference to this best-seller.

There's Hope for Kate Moss

After being fired by Burberrys, Chanel and H&M, there is indeed hope that Kate Moss can find gainful employment. She can run for office in Quebec.

The Titanic Deck Furniture Repositioning Tax

As Donald Luskin points out, we've been lulled to sleep and sucker-punched.

Did We Inflect and Not Even Realize It?

OK, I am NOT saying that the bubble has burst and I am NOT jumping up and down saying that I was right and that I am so damn smart.........BUT, I did posit in a Sept. 14 post that the Sept. 20th Fed meeting had the potential to change the sentiment that is driving the housing market to dizzying heights. I argued that it is more than just rates, we have to look at what's motivating the animal spirits behind the housing boom. Based on this, I thought an inflection point is close at hand. Well, today there is a Bloomberg TOP story about Manhattan apartment prices falling in the 3rd quarter, and falling significantly. I can't link to the Bloomberg item, but here is other coverage. Compare this to where we were just three months ago.

Let me state the caveats and counterpoints first. This could be meaningless. The third quarter is not generally the most active period of the calendar for home sales (although recent 3rd quarters have been good). Also, Wall Street bonuses are set to be quite good this year, so the key punters could be holding off until their '05 bankrolls are revealed in December and the checks are cashed in February. Also, the FOMC meeting came at the end of the 3rd quarter and its outcome could hardly have influenced the whole quarter's data........BUT, despite the precise timing, what I outlined could be unfolding. Alan Greenspan has said you are going to get increasingly better rates on your cash and lendable capital going forward and the putatively fragile US economy is looking alot less fragile based on some recent numbers. Perhaps, just perhaps, people are starting to feel that they can do better with their money in the typical alternatives to housing - cash, bonds and stocks which have been non-starters in recent years, wot with corporate scandals and sub 1% MM yields and all.

P.S. I have a stated in a few of the linked posts above what I think of the Euro's prospects. Guess who have been big buyers of US property Yup, Europeans. Will a $1.10 Euro curb this source of demand? Hmmm.

French and Italian Whine Still World Class

Jacques Chirac misanalyzes the roots of France's woeful economic performance and blasts the European Central bank for letting the Euro appreciate too much against the dollar. "We can't run our national monetary policies, and we've moved from a system of competitive devaluation to support our exports to a system of overvaluation of the currency," said Chirac, as reported by Bloomberg. So, the French President, who has been the most fervent cheerleader of the EU and of integrating the European economy as a competitive weight to the US, is now bitching about the loss of monetary autonomy. And if the irony isn't thick enough for you, he goes on to blast the European Commission for NOT prohibiting Hewlett-Packard from firing 5,900 workers in Europe (mostly in France I have to assume). Doubtless it does not occur to him that it is this very thing - such interventionary micro-management of business by the state (and the propensity of people like himself to call for such interventions) - that leads a Hewlett-Packard to not want to locate too many of its employees in Europe.

And he is joined by Silvio Berlusconi, who also believes that Italy's economic woes would magically disappear if only the Euro were competitively devalued. As I touched on in a previous post, Italy is sinking in the competitiveness rankings due to the same statist, hyper-regulatory, over-taxed economic model that afflicts France and Germany, but it is also losing the reins on basic law and order.

It is hardly earth-shattering that Old Europe continues to misdiagnose its economic ailments, but now we know what their leaders' view of economic health looks like - mercantilism. Even with what looks like some political de-bottlenecking in Germany, these statements can't give confidence to Euro holders. Only US weakness can support the Euro now. Any more reports that show the US economy's post-Katrina/Rita resilience, like yesterday's ISM Manufacturing Index, and Chirac and Berlusconi will get what they wished for. Analysts will be taking about a $1.15 Euro very soon and a $1.10 Euro will be the story of 2006. That means cheaper Burgundies and Tuscan reds for you and me folks.