Financial Brands That Should Disappear

The folks at 24/7 Wall St do a great job stirring up controversy with their annual list of familiar brands that are in danger of disappearing.  It takes guts to go out on a limb and claim that some venerable companies are on their way down the tubes.  In the spirit of the moment, let's think about why some financial brands that should have disappeared are still around. 

Merrill Lynch.  These guys were spiraling down pretty hard in late 2008 until Bank of America agreed to buy them out.  The deal made little sense for BofA; they already had a presence in wealth management and investment banking and would have been stronger had they just stayed away from Merrill Lynch.  This is where ego trumps business sense.  CEOs who want to be known for closing the biggest possible deals retain the prerogative of throwing due diligence out the window.  Way to go, BofA.  Grabbing Mother Merrill did nothing but make your TARP bailout needs grow. 

Goldman Sachs.  Do a web search on this firm and you'll see its tentacles in every business sector on the planet.  The firm is insanely profitable but the way they do business raises questions about whether the firm has a conscience.  "Vampire squid" pretty much nails it.  Warren Buffett considers GS to be a good investment precisely because its amorality enables it to be so dominant in the financial markets.  Amorality is not necessarily a recipe for immortality.  Someday their enemies list will reach a critical mass and their moles at Treasury and the SEC won't be able to save them. 

AIG.  The continued existence of this firm is a strong argument that U.S. financial markets are rigged by the government.  The firm's credit default swaps in 2008 were so radioactive that they almost single-handedly took down the economy.  Hundreds of billions in TARP assistance later and taxpayers still hasn't received a decent return on their "investment." 

Compiling this list is depressing.  These firms will probably be around for a while.  That doesn't mean I have to do business with them. 

The Haiku of Finance for 06/24/11

Release oil? How dumb
Don't play games with the market
You can't control price

Fed Confirms Structural Problems But Ignores Bank Exposure

Leave it to the Fed to be last to the party.  Recall the past pronouncements of Helicopter Ben wherein he claimed things were getting better.  Well, they're not.  The Fed says the economy is slowing down and the near future will not offer improvements.  I knew this months ago.  Read my past blog posts and you'll see how far ahead I was of the Fed's own analysts. 

Given the Fed's track record of inaccurate prognostications, one must wonder whether any predictions it makes are accurate.  Right now the Fed Chairman claims a Greek default won't harm U.S. banks.  He said pretty much the same thing about the subprime mortgage crisis in 2007 and how its effects were contained from the rest of the economy.  The European Central Bank has a much more sober view of how dangerous the Greek crisis can get for banks.  U.S. money market funds heed the warning signs and scale back their exposure to European debt.  They must not be paying much attention to the Fed. 

The credit crisis is back.  It's not pretty or exciting. 

State Pension Plans And Hedge Funds Make Us All Miserable

Well, my evening is hereby ruined.  I was planning to have some fun watching videos of dancing cats or some such aimless baloney, but I had to go scanning financial headlines first.  It's a habit I just can't break.  Today I scanned some headlines that indicated I would be just miserable if I kept on reading.  Now I can share my misery with my readers.   

Let's read about desperate state pension fund managers drastically increasing their bets on hedge funds.  They feel compelled to roll the dice, swing for the fences, and do whatever it takes to increase their chances of meeting impossibly high discount rates that will fund future payout liabilities.  I stopped rolling my eyes long ago whenever I heard hedge fund managers spout their sales mantras of "equity returns with bond risk."  That kind of nonsense unwound many a hedge fund in the liquidity crunch of 2007-2009 and only the Fed's easy money policies saved the remainder. 

If reading about stupidity in finance doesn't make you miserable, paying higher taxes to fund it certainly will.  State and local government pension funds are so underfunded that the tax increases needed to save them will destroy taxpayers.  Let this sink in.  The extra taxes needed to maintain upper middle class lifestyles for municipal employees will eliminate the rest of the middle class within one generation. 

The easy fix is to eliminate defined benefit plans for government workers and pay out pensions that funds can support today, at sustainable levels, until they can be phased out in favor of defined contribution plans.  Nothing in government is that easy.  That means we'll do things the hard way with municipal bankruptcies, shutdowns of vital public services, and/or confiscatory levels of taxation. 

There you have it.  Now I hope you're all as miserable as I am for seeing once again just how much pain America is about to take thanks to its legions of useless professional money managers.  Misery loves company.  I also love keeping company with attractive women but there aren't any within arm's length right now.  That makes me even more miserable. 

The Haiku of Finance for 06/21/11

Hard choice for Europe
Let Greece and euro go bust
Or make more bad loans

Natural Gas Lights The Way To North America's Future Export Dominance

Hold your horses there, Peak Oilers.  There's plenty of hydrocarbons to go around this here North American landmass.  Record volumes of natural gas are heading to market.  Hedge funds playing this trade will get killed as long as technology makes fields easy to crack open.  Oh yeah, BTW, the abundance of cheap gas makes it a compelling opportunity for export to energy-hungry emerging markets.  The high price of oil makes this stuff look good.  Americans need to quickly get over their NIMBY bias against LNG terminals if we want to make seruous money. 

Remember when the U.S. led the world in petroleum exploration before Saudi Arabia learned how to pump?  We can have that era of dominance again with natural gas, which means we can keep the dollar as the world's reserve currency if we don't have to recycle petrodollars into U.S. Treasuries. 

Find a good pipeline play that covers Eagle Ford and other gas-rich areas.  Then watch the cash roll in while the gas flows out.  It all sounds so easy until you try it. 

Greece, Oil, And Stuff In The Headlines for 06/20/11

This week is off to a really great start.  European ministers can't agree on how to structure the next iteration of wasted money for a bankrupt Greece.  At least they provided enough breathing room for a very important no-confidence vote to take place in the Greek parliament.  That will give Germany the pretext to say "told ya so" and refuse to back a bailout.  The Group of Seven wants to get in on the action if only to go on record with bold assertions that yes, we all really must do something about this whole dreadful Greek crisis thing.  The growing danger to the world economy of daisy-chained bank implosions from a Greek default hasn't gone unnoticed by the IMF.  Nothing gets by those wily IMF wizards, except of course a massive cyberattack on its databases from an adversary with deep resources. 

The IMF isn't the only acronymic organ of nascent global governance that's suddenly gone impotent.  The IEA is asking the world's oil producers to pretty-please raise their oil output so prices can come down and the developed world can start spending its way to prosperity again.  Nice try.  Better luck next millennium.  Russia isn't about to fall in line just to save the West from insolvency.  It's too busy consolidating its stock exchanges and preventing capital flight prior to elections to take requests right now. 

The IEA can start to relax with oil futures headed down anyway thanks to decelerating GDP growth in the developed world.  The free market takes care of these things without jawboning. 

The world is in for a new golden age provided it avoids financial implosion in Europe, stagflation in the U.S., and North vs. South resource wars.  Fun times ahead!  Life just keeps getting better for everyone. 

The Limerick of Finance for 06/19/11

Spanish workers are out on the street
Anger boils while they can't make ends meet
But the debt binge must end
Creditors aren't your friend
Europe's leaders are feeling the heat

Ancient GPS And Imperial Power Projection

Last week I attended a thought-provoking lecture at the War Memorial Veterans Building in San Francisco.  Jarom Vahai is a local military veteran who has done pioneering academic work on ancient civilizations and their technologies for terrestrial navigation.  Check out his presentation yourself (here's another version); readers can comment on his work at this blog.  The thumbnail summary of his argument is that ancient civilizations built giant structures to serve as navigational aids aligned with the Earth's curvature and astronomical markers.  These are not just showy tombs for royals.  Travelers setting off on global journeys could use pyramids and monoliths as waypoints in the same way we use global positioning system technology today.

This got me thinking about how and why the ancients would build such things.  It takes a lot of capital to build something like Stonehenge or the Pyramids at Giza.  Such public works projects are only available to societies that are already commercially successful.  Building infrastructure that is useful in launching global expeditions implies that a powerful civilization wants to go somewhere far away, on military expeditions or trade missions.  Interestingly enough, Mr. Vahai's research indicates that the alignment of an ancient civilization's pyramids correlates with whether it was primarily a commercial power or a military power.  His research also implies that some pyramids may have doubled as public works projects that could pump water (pending confirmation with more research).  That is potentially a breakthrough observation, and it actually makes sense that a civilization good at building things to enable global expansion would find multiple uses for these structures. 

A civilization that can project power beyond its borders is a global power and a force for changing human civilization.  The U.S. military uses GPS to coordinate air strikes and photo reconnaissance missions far from its shores.  Knowing where you are and where you're going is indispensable for success.  The ancients figured that out long before we came along.  It took the rest of us thousands of years to catch up. 

The Haiku of Finance for 06/18/11

Microsoft buys Skype
Video chat with Windows?
Just launch a new tab

Europe Chooses To Ignore Greek Reality

Central bankers and financial regulators must think they're living in an alternate universe where arithmetic doesn't apply.  The EU and IMF have agreed to release loans to Greece after all, with no discernible progress towards even minimal controls on that country's profligacy.  Continental regulators are doing their part to aid and abet this insanity by ignoring the gaping holes a Greek bond default will blow in European banks.  Stress tests are nothing but meaningless finger drills. 

Europe is really pushing its luck.  These moves give the trans-Atlantic ruling elite more time to sell off their remaining insider holdings under the guise of routine diversification.  Just listen to those golden parachutes unfurling in the breeze with plenty of room to spare.  China undoubtedly watches this action with dismay, regretting its decision to go long European sovereign debt in pursuit of a political lever.  The recent cyberattacks on the IMF appear in a new light now.  Was the IMF warned to prop up European debt or else face the wrath of Asian traders and cyberwarriors?  Stay tuned for the next chapter in a centuries-old drama. 

Something's Gotta Give In Container Sizes

One shipping company can start an industrywide trend with a push for something different, or it can doom itself with a strategic misstep.  APL Logistics is pushing ahead with plans to field more 53-foot shipping containers simply because they match well with U.S. truck configurations.  The problem is that U.S. trucks are the only leg of the global transportation system that is out of step with global container standards. 

The intermodal industry is built around the twenty-foot equivalent unit (TEU), a decades-old measure of container traffic that relates directly to the size of a standard oceangoing container.  One retailer complains that the 53-foot box makes transloading easier.  They may be a lonely voice in the sector.  Their distribution model is built around cheap Asian imports flowing from West Coast ports to East Coast markets.  There is no guarantee that model is sustainable if rising energy costs make Asian imports more expensive. 

Do longer containers pose problems for infrastructure in some places?  State highway planners will have to think of new routes for extra-long trucks.  Longer routes will add to shipping time and costs.  LTL truckers and railroads are used to the TEU standard.  Forcing them to change will force them to think about dropping some shippers as customers. 

Even APL admits that only a small part of its fleet can handle 53-foot containers.  Committing to newbuilds that can stack configurations other than the TEU will drive up per-ship costs as the shipbuilding industry adjusts to boutique requirements.  Even analysts won't be happy with this move, because they'll have to adjust their traffic calculations to equate cargo volumes carried by two different configuration standards. 

Betting against the TEU configuration is probably a bad idea.  It reminds me of the U.S.'s refusal to adopt the metric system for weights and measures, which adds to the administrative costs of foreign manufacturers who want to ship goods here.  Retailers who think their buying power will force carriers to adopt a new container standard assume the rest of the world will adjust.  The world is pricing in the end of American dominance in more ways than we know. 

Growing Logistics Costs Point To Margin Compression

Thank the oil speculators identified in my earlier post today for the growth in logistics costs that is outgrowing the overall economy.  If the cost of moving stuff - a big expense for any company that makes things - is rising while overall revenue growth is stagnant or falling, net income compresses.  Ceteris paribus applies but energy costs are an input to other expenses besides transportation.  The GDP growth figure is that topline revenue number for the economy. 

This is great news only for the transportation sector (one of my favorites, thank you very much).  It is very bad news for the manufacturing sector.  We are in the double-dip recession right now, and declining GDP growth will eventually hit the transportation sector too as customers curtail shipping for lack of sales.  Poor retail sales figures in May show us what's coming. 

Oil Price Speculation Confirmed By Sleepy Regulators

Our Arab "friends" were on to something when they claimed hedge funds were making life difficult for them by gambling on oil prices.  The CFTC confirms that the vast majority of investors in long futures contracts are not the end users of commodity products.  Futures contracts are great for producers who want to hedge against price swings in the stuff they produce.  Anyone else who wants in is playing games with things they don't understand.

Hedgies' attraction to commodity gambling is obvious.  Greed for yield drives their pursuit of new asset classes to churn.  One remaining question is whether or not the Fed's quantitative easing really is driving hedge funds to go long commodities, the results of which turn up in food price inflation around the world.  We'd have to somehow link incentives for banks to keep their excess capital on deposit with the Fed to increased lending to hedgies.  With those excess deposits unavailable for things like mortgage loans, are banks then forced to turn to their reliable money maker - margin to hedge funds? 

This also begs a question of what regulators plan to do with their newfound knowledge of this high-stakes gambling.  My bet is that they'll do nothing but talk.  CFTC auditors all want to work on Wall Street too, just like their SEC cousins, so excessive zeal in cracking down on speculators won't help their careers.  Nothing will change. 

Greece Rating Cut, And The First Domino Is Tipping

S&P just cut Greece's sovereign debt rating to triple-c, and that is not at all the kind of Triple Crown race you'd want to win.  At least the Greeks beat the other PIIGS to the bottom, so they should get a prize of some sort (maybe a Grecian urn with the ashes of their country's economy stored inside). 

This shouldn't be funny.  There's nothing funny about the coming Greek default and the chaos it will cause when it pulls down European banks that hold Greek debt.  There may be something funny about Greek chaos reducing oil prices just as certain OPEC members are preparing to raise production.  Any prop traders who recently bought CDS swaps on Greek debt or went long oil futures are going to get burned badly in short order.

The first domino in the chained collapse of European equity markets and the euro itself is about to tip over.