Dec 21

My Wishes for the New Year


At this time of year, it seems that everyone has their own special wishes as we approach the end of one year and the beginning of another.  I thought I would share a few of mine with you.  I wish…

the US pols would wake up and serve their country honorably instead of themselves dishonorably.  They could start by leveling with the populace and saying that this is not a normal economic condition, but one of deleveraging.  And that it will take time and determination to reduce debt levels by repayment or forgiveness.  As forgiveness appears ‘off the table’ for many Americans, it will take time to get debt levels down to a reasonable level, upon which a true economic expansion can begin.

the US pols would realize that the our representative democracy is not very representative. In my opinion, that is the message underlying all the histrionics behind both Tea Party and Occupy movements.  “Job one” for the US pols should not be to come up with laws that will create jobs (that is what private industry does a lot better and more efficiently).  “Job one” for the pols should be to work on making our representative democracy a lot more representative.  Moving in that direction would improve discussion and decision-making. It might even make the pols sound intelligent.

the Federal Reserve would stop using smokescreens and legal defenses to keep the public from knowing how much they have subsidized and are subsidizing the operations of US and foreign banks. Bloomberg, LP had to go to court to get one Fed program’s bank borrowers’ names and amounts ($trillions) exposed to sunlight. Chairman Bernanke seems like an intelligent, kind man, trying his best to keep the economy moving, without much help from fiscal policy, during a balance sheet recession.  But, I also think that he does essentially report to the large money center banks…and that keeps transparency from rising to the occasion.  Thus, we see another example of a not very representative democracy.

the Federal Reserve and US Treasury would once again act independently (the Fed is supposed to be a central bank, independent of the Administration’s urgings).  And, that includes letting the public know of the basic strategy being used to deal with the ever growing pile of US government and agency debt: Financial Repression – low, negative real interest rates (see earlier blog post).

the Eurocrats would not attempt to follow in the footsteps of the US and Japan. Let’s face it, whether it is Japan in the 1990s, or the US at 2008/9, the goal was to save the large money center (zombie) banks, despite the fact that their poor management was a large reason for the excesses that caused a balance sheet recession.  Both the Japanese and Americans kept those zombies going primarily because they are the oligarchs and, perish the thought, bank shrinkage and/or reorganization and/or recapitalization would cause deep economic scars, from which there would be no recovery.  Right.  What this does cause is a slowing of economic growth, as the zombies suck on the blood of government subsidies (direct and indirect). Today, when you hear that (fill in the blank country) must be saved, you might want to consider that what is being saved are the banks mismanaged enough to overleverage with high yielding Euro sovereign debt that required no risk capital.   The overall expected result…a lot slower growth in 2012 than the so-called experts are crossing their fingers about.

the Eurocrats would stop calling it a ‘bailout’ of a country, when it really is just a change or increase in credit availability for that country.  The ‘bailout’ is an implicit one for the banks holding the sovereign paper. As an ex-commercial lender, I know that you can do one of two things with a bad loan: send it to the collection department or restructure.  As the first option essentially means default, the second option remains.  And restructuring can mean changing terms, loaning additional funds so that the borrower can effectively rebalance the timing of its cash flows, and/or obtain collateral.  What the Eurocrats are missing is a comprehensive formula for restructuring on a country-by-country basis (not the current band aid approach), including obtaining collateral in the form of state owned enterprises.  As the Chairman of my former bank employer used to say, “collateral makes a good loan better.”  A more honest and complete restructuring will also keep sovereign debt values from falling more than they would have and make the shrinkage/reorganization/recapitalization of the banking sector cheaper.  But the Eurocrats want to keep the oligarchs in place (see above), including themselves, and the result may not be very pretty.

economic and financial forecasters would stop making forecasts so heavily biased towards what just happened. At the end of every year, we hear one forecast after another basically saying the same thing, “what is happening now will probably just keep happening…with minor variations.”  Making decisions based upon an assumption that tomorrow will be like today, is one of the major problems in making good decisions.  How many forecasters predicted equities would be flat in 2011?  Or, that we would see a US 10 Year Treasury around 1.9%?  With most forecasters telling us that US GDP will be about 2.5% next year and that the stock market will muddle along, I think we can be fairly certain that those forecasts will be either very low or very high.  I wish I could tell you with certainty which of those last two alternatives would occur.  Thus, we highly recommend that insurers focus on the impacts of the ‘tails’ of the distribution when reviewing investment strategies.

you would please consider joining our discussion group on LinkedIn.  Insurer Investment Forum Online can be found there and, with a free LinkedIn account, you can participate…even adding your own wishes…or letting me know how much you might disagree with my ‘wishes.’

Those are just a few of my wishes as we approach the end of 2011.

But, most importantly, I wish you and your family the happiest of Holiday Seasons and the healthiest of New Years.