Dear Mr. President: We Can’t Afford a Bear Market

Posted on October 31, 2008 by John Stodder

It’s not just your 401-K. It’s the solvency of large firms with defined benefit plans and several states with huge public pension liabilities that will be affected by the continued decline of the stock market. The market has had a few good days, but not good enough to save October 2008 from being the worst month in 10 years, and the fourth-worst month since 1950.

An emerging political issue for 2009 and beyond will be whether pension promises will be kept, and what keeping those promises will cost everyone else. The problems shrinks the more the stock market goes up. And, according to Brian Sullivan of Fox Business, a down market means a lot of us will have to put off retirement:

(M)any Americans and politicians have an erroneous view that stocks are for “rich people” and not them. Wall Street remains a mysterious world, operated largely behind closed doors by mad scientist math wizards. The pension problem proves nothing could be farther from the truth. The teachers, cops and other government workers who trust their retirement to companies such as CalPERs (California’s pension fund) may suddenly take a keen interest in equities.

The other reality is that many Americans will have to work longer than planned. Companies and governments may not have the ability to cover costs for people retiring at 62 and living another twenty years. The math of early retirement + living longer / awful stock markets simply will not add up.

Actually, I think Sullivan might be selling Americans short. Compared with the last prolonged bear market in the 1970s, I suspect the political tolerance for a slacker Dow Jones will prove to be very low. The expectant retiree facing having to work an additional 8-10 longer than planned are about to become the nation’s most potent force.

Filed under: Wall Street | Tagged: , , | 1 Comment »

Steelworkers Say Paulson Overpaid — By A Lot

Posted on October 28, 2008 by John Stodder

Leo W. Gerard, president of the United Steelworkers (USW), told Treasury Secretary Henry Paulson he paid twice as much for the U.S. Treasury’s investment in Goldman Sachs and other financial institutions as the shares were really worth.

In an invective-filled letter, Gerard claims investor Warren Buffet — who some say might succeed Paulson, especially if Sen. Barack Obama is elected — made an investment in Goldman Sachs stock that, on a per-dollar basis, was half as pricey and at much better terms. Buffet made his buy just three weeks before Treasury did.  The USW international chief attaches an analysis comparing the Buffet and Treasury purchases — click the link to the letter to see it.

Gerard accuses Paulson of overpaying “as a gift to the firms’ shareholders,” according to the Steelworkers’ news release.

“This behavior is simply outrageous,” said Gerard. “Half the money is invested and the other half of the public’s money is gifted to institutions after they paid out hundreds of billions in undeserved bonuses and shareholder dividends and engaged in reckless speculation.”
“This is no different than if you paid me $10,000 for a car for which no one else would pay more than $5,000,” writes Gerard. “You bought it for $5,000 and gifted me the other $5,000.”
“In my world such gifts are rarely offered to working people.”

Martin Manley, a former assistant secretary of labor under President Clinton and founder of Alibris and Reputation Networks, Inc., says “good for the Steelworkers for doing the math.” On his blog, “Jam Side Down,” Manley writes:

Paulson should renegotiate the terms if the deals turn out to be as either as self-serving or as financially lame as their analysis suggests.

Manley said the union’s math was done by Ron Bloom, a former investment banker with Lazard Freres. So far, no response from Treasury, but that’s just a matter of time.

Filed under: Bush Administration, Mortgage/Housing Crisis, Organized Labor, Wall Street | Tagged: , , , , , | 3 Comments »

Why Upper-Middle-Class Voters are Deserting McCain

Posted on October 28, 2008 by John Stodder

Michael Barone thinks Sen. John McCain’s campaign is in denial about Pennsylvania — that they don’t believe what a consensus of polls are telling them about the GOP’s slide in the suburbs around Philadelphia.  Things have changed so quickly since 2004, and Barone thinks he knows why:

My hypothesis is that that is because places like the Philly suburbs are places where the recent decline in household wealth has been most conspicuous. Housing prices mean a lot more to you when your house started off at $400,000 and declined to $290,000 than they did when you started off (as may be typical of Scranton or a blue-collar town in metro Pittsburgh) at $140,000 and declined to $110,000. Newspaper coverage of our current economic distress focuses on the very poor (like a recent Washington Post story on North Carolina, which focused on an ex-convict in a cheap motel in Charlotte), but the people who are getting hurt most visibly in their lifelong project of accumulating wealth are the more affluent. They’re the ones whose house values have most visibly and spectacularly declined, and whose 401(k) accounts and stock portfolios have tanked in the last few months as well. Folks in Scranton or in the cheap motel in Charlotte didn’t expect to live comfortably ever after off their increased house values, 401(k)’s, and Merrill Lynch accounts; a $700 monthly check from Social Security is about what they have long expected and that’s not in danger (yet). Folks in the Philly suburbs did expect to live comfortably off such assets.

Barone’s description reminded me of the “swing voters squared,” swing voters in swing states, who I discussed in this post a few weeks ago:  Upper-middle-class homeowners in their 50s and 60s who expected to retire comfortably but now fear the future.  They know the economy will turn around eventually, housing prices will get off the floor and the bear market will turn bullish again.  But they’re afraid the turnaround will come too late to do them any good and now are facing the fact that they’ll have to keep working. These people are as angry as they are scared.  Weren’t Republicans supposed to be looking out for them?

To Barone, Sen. Barack Obama’s ability to take advantage of this situation is richly ironic. Obama

is interested in advancing policies that could have serious wealth-destroying effects: higher taxes on high earners, protectionism, government-controlled health insurance, the card check bill abolishing secret ballots in union elections, which could have the effects on much of the private sector that United Auto Worker contracts have had on what used to be called, quaintly, the Big Three U.S. automakers. Will voters in the Philly suburbs, and their equivalents in target and nontarget states, like the consequences?

These crucial voters who are putting Obama over the top?  All they want is for him to reverse the stock market’s trajectory and revive housing prices so they can reacquire the wealth the Wall Street fiasco vaporized. If elected, will Obama alter his plans in order to keep these voters on board?

ADDED:  Today’s David Brooks column fills in more of the picture.  He explains the widespread cultural failure to perceive how much risk all of us implicitly accepted when we pinned our retirement hopes on the stock market and ever-rising housing pricess. Brooks cites the work of Nassim Nicholas Taleb, author of The Black Swan.

Taleb believes that our brains evolved to suit a world much simpler than the one we now face. His writing is idiosyncratic, but he does touch on many of the perceptual biases that distort our thinking: our tendency to see data that confirm our prejudices more vividly than data that contradict them; our tendency to overvalue recent events when anticipating future possibilities; our tendency to spin concurring facts into a single causal narrative; our tendency to applaud our own supposed skill in circumstances when we’ve actually benefited from dumb luck.

Millions of people lost a big chunk of their life savings.  They believed such an outcome was inconceivable.  They thought they were being conservative, prudent and were playing by the rules, working hard, saving, and getting richer due to the magic of the marketplace.  It will take a long time to persuade them of their personal responsibility for their own misfortune.  For the next eight days, they’ll be looking for someone to blame.

Filed under: Barack Obama, John McCain, Mortgage/Housing Crisis, Wall Street | Tagged: , , , | No Comments »

Food for Political Thought

Posted on October 25, 2008 by John Stodder
Thanks, taxpayers. Were enjoying the corn syrup.

"Thanks, taxpayers. We're enjoying the corn syrup."

The next president can’t deal with energy, climate change or health care unless he’s willing to talk about food, according to author and activist Michael Pollan, quoted in Tara Parker-Pope’s Well blog.

It’s a political issue because of the U.S.’s massive agricultural subsidies.

Mr. Pollan notes that food is a bipartisan issue, and that both parties have dismal track records on agricultural policy. Food, he argues, is the ultimate “solar” product, but the current food system, with its focus on the monocultures of soy, wheat and corn, is heavily dependent on natural gas and oil to make fertilizers and pesticides as well as to import and transport food.

One of Mr. Pollan’s concerns is that national policies subsidize the least healthful calories that we eat. He notes that the “building blocks” of fast food are soy and corn, used to make hydrogenated soy oil, the protein and starch in cattle and chicken feed, and high-fructose corn syrup used in sodas and sweets.

“That’s what we’ve been heavily subsidizing, encouraging farmers to grow more of, and that’s what makes fast food so cheap,” he said. “Meanwhile over in the produce section, the head of broccoli costs more than a fast-food hamburger. Why is that? We do very little to encourage farmers to grow what are called specialty crops, which is actual food you can eat. We need to level the playing field between the unhealthy and healthy calories.”

Among the many great questions neither candidate is ever asked:  Why should taxpayers pay to make their fellow Americans overweight?

Filed under: Agriculture, Environment, Health Care, Lobbying | Tagged: , , , , , , | No Comments »

Quotable: John Tamny on the Enduring Trickle-Down Theory

Posted on October 24, 2008 by John Stodder

John Tamny, editor of RealClearMarkets and senior economist at H.C. Wainwright Economics, claims “trickle-down economics” is not a program, not an idea, merely a description of how the economy works. He illustrates the principle by showing what happens when the trickling stops:

As it turns out, when those with money (meaning the rich) are hurting, their pain is often transferred to those who need money even more.

In a New York Post story dated September 25, the proprietor of Soho-based Five Point Fitness spoke of his inability to attain financing for his popular workout facility. According to owner Kevin McGrath, “The guys [from the bank] said if this was a year ago, it would have been a slam dunk.” But as the Post story noted, as “the economy continues to tailspin, scores of small-business owners are struggling to get tightfisted banks to dole out loans for much needed expansion plans.”

It turns out McGrath is not alone. Four days later a Wall Street Journal account of major food franchisees found that they too are facing troubles with regard to finance. As the Journal put it, the tough financing environment for Panera Bread, Yum Brands and Sonic (employers of those who’d like to be rich one day) is “a sign of how the turmoil on Wall Street is spreading to large companies and small business owners.”

Seeking out other lower-income individuals impacted by problems on Wall Street, USA Today reporter Charisse Jones traveled to Greenwich Avenue in Greenwich (CT), a street famous for its fancy shops and restaurants. While it’s safe to say its shop owners and employees have traditionally earned microscopic fractions of what their customers have traditionally brought home, they’ve not been immune to the financial downturn that has plagued the elite of Greenwich.

Jose Candray, manager of Village Bagels in Greenwich told Jones that “tips are smaller” these days, while Greenwich resident (and investment banker) Bob Jermain referenced the fact that his kids no longer “need 20 sweaters”, which means sales at Greenwich Avenue clothing stores are set to fall. Are layoffs of the lower-wage workers these businesses employ not too far off?

(snip)

What these various accounts tell us is that whether due to pure profit motive through which the rich supply capital to businesses, or through perhaps simple vanity that causes them to give to all manner of charities, it is thanks to the wealthy that job-creating businesses are funded, and it is also thanks to the rich that societal ills are addressed with ample funds.

So to deny the reality of trickle-down economics is the equivalent of denying that the sun sets in the west. It does, and trickle-down economics is. In short, politicians can dream up all sorts of tax plans and programs to harm the rich, but in doing so, they should make no mistake about who in fact will pay in the end.

Filed under: Mortgage/Housing Crisis, Recession, Wall Street | Tagged: , | No Comments »

The Chamber’s Campaign is For the Senate

Posted on October 24, 2008 by John Stodder

The U.S. Chamber of Commerce is defying the Democratic tide, perhaps at the business community’s peril, according to The Wall Street Journal’s Kimberly Strassel.  Starting from the assumption that Obama will win the presidency, the chamber

has, for months, been defending the 60-vote wall, fully engaged in nearly every competitive Senate race. It may well spend $40 million this cycle, or double its 2006 effort. In many Senate races, the Chamber is proving the only outside help to underfunded Republicans.

The “60-vote wall” refers to the number of senate votes required to stop a filibuster; in this case, a filibuster against anti-business policies a Democratic supermajority would presumably sponsor.

In Kentucky, the group has blasted Democratic candidate Bruce Lunsford for his antienergy stance. In Minnesota, it is beating on Al Franken for failing to carry workers’ comp coverage for his employees. It has tagged New Hampshire Democrat Jeanne Shaheen as a “taxing machine.” It has praised Oregon Republican Gordon Smith for his work on health care.

It also unveiled the season’s most humorous ad, entitled “Meet Bill.” It features real-life union boss, Bill, caught assaulting a cameraman (”I’m gonna’ take this camera and stick it somewhere you don’t want it!”). It points out that it would be Bill who, under card check, would get to monitor votes in a union drive.

Sen. Charles Schumer (D.-NY) has blasted the chamber’s involvement in these campaigns, claiming the officially non-partisan organization is acting like “a wing of the GOP.” He promises unfriendly legislation in revenge.  But the chamber’s Bill Miller, head of political efforts, isn’t fazed.  He tells Strassel:

“What if we became lambs instead of lions? Would the legislative agenda be less beholden to trial lawyers and labor unions? Maybe this is a shot at K Street, but the lobbying mentality of too many is to go up and be solicitous, and hope to get some crumbs from the table. That is not our deal. Our deal is to be the last line of defense for the business community. And while we always work collaboratively, that’s what we’ll continue to be.”

Whether or not there will be 60 Democrats in the next Senate, you have to figure not all 60 would be liberals.  The party’s growth has mostly been at the expense of moderate Republicans dragged down by their association with the Bush Administration and the social and religious right. There are likely to be many “blue dog” Democrats in the Senate next year whose votes will be available to the business community at some price.

Filed under: Congress, Democratic Party, Lobbying, Organized Labor, Republican Party, regulation | No Comments »

The Risks for News Organizations that Publish Polls

Posted on October 14, 2008 by John Stodder

Why do newspapers and broadcast organizations publish polls?  Well, it’s information, it’s news, sort of manufactured news, but still of interest to consumers.  But I suspect the bigger reason is marketing.

Whenever your poll is quoted, your news organization’s name gets mentioned.  It enhances your reputation and puts you on the shopping list for web- and channel-surfers and maybe even potential subscribers.

Is this marketing plan upset if your poll is wrong?

This question came to mind as I read this column by political science professor Todd Eberly on National Review’s website, which raises some intriguing questions about two recent polls by the Washington Post/ABC and Newsweek. Their most recent polls made news because they showed Sen. Barack Obama opening up a big lead.

With these two polls, the political junkies’ much-watched Real Clear Politics average of polls jumped up to 8.1 percent at this writing.  For a couple of weeks, Obama’s lead had been hovering at around 4-5 percent on RCP. (In fact, since the National Review column, the LA Times/Bloomberg and CBS/New York Times polls were released showing Obama with leads of 9 and 14 percent respectively, boosting his margin even higher.)

Looking at the WaPo/ABC poll and the Newsweek poll, Eberly discovers that both polls assume that far more Democrats will turn out to vote on Election Day than Republicans.  Newsweek’s weighting assumes the following turnout scenario:

  • Democrats, 40 percent
  • Republicans, 27 percent
  • Independents, 30 percent

Which means the Democratic turnout edge will be 13 percent.  WaPo/ABC assumes a Democratic turnout advantage of 9 percent.

Such ratios would represent a profound shift in party identification.  According to Eberly’s research, Democrats had only a slight turnout advantage in most of the past few elections:

  • 2006: 2 points
  • 2004: Tied
  • 2000: 4 points
  • 1996: 4 points

Using the historical data and assuming a high-end turnout differential of four points, Eberly claims the two polls under examination would actually show Obama with a four-point lead — a lead consistent with the recent results published by a couple of independent pollsters including John Zogby. If one assumes 2006 is the most relevant point of comparison because of its recency, Obama’s lead would only be two points.

What this means to the presidential campaigns is not my concern here.  You’ll get arguments on one side saying Obama has excited a massive wave of new voters that will leave historical models in the dust.  You’ll get arguments on the other side saying these news organizations are biased and the bias extends to how they weight their data.  Dunno.

What interests me is the business impact.  Doesn’t it hurt the Washington Post, ABC or Newsweek if their polls turn out to be wrong?

For whatever reason, these three news organizations have attached their names to polls that have adopted assumptions starkly different from the actual data of the recent past.  It’s a roll of the dice.  If they’re wrong, and if their error derives from making unusual, unprecedented assumptions that don’t prove out, the effect on their reputations will outlast the polls’ effects on the news cycle.  Won’t they?

The news business is in trouble.  Circulation over the past few years has dropped like a rock for most daily newspapers, as have TV news ratings, in part because the mainstream media aren’t trusted implicity the way they used to be. If these polls turn out to be way wrong, and if the turnout assumptions turn out to be the underlying reason, political insiders, bloggers and commentators will zing them publicly, as will their competitors in the political research business.  Is it prudent for these news organizations to gamble with their reputations this way?

Filed under: Barack Obama, John McCain | Tagged: , , , | No Comments »

McCain: Some Economists Endorse Not-Obama, Some Endorse My Plan

Posted on October 13, 2008 by John Stodder

Senator McCain has compiled a list of hundreds of university economists that have signed a statement of opposition to Senator Obama’s economic plans and another list of several hundred economists who support his plan.

Not all the signatories are on both lists, which is a little confusing.  For example, five Harvard University economists are on the “not-Obama’s-plan” list.  Six Harvard economists are on the “support-McCain’s-plan” list. Only four overlap.  If the lists are accurate, Robert Barro dislikes Obama’s plan but isn’t supporting McCain’s; while Joshua Coval and Markus Mobius support McCain’s but don’t join in the condemnation of Obama’s.  That’s just Harvard. Seven University of Chicago economists support McCain’s plan, but only four signed on to blast Obama. And so on.

It could just mean the McCain campaign assigned two different interns to collect these signatures, and one of them was more charming or had a better contact list.

Some reports had McCain outlining a new economic plan today. But now reporters are being told it will be Tuesday.  Again, maybe two interns?

The two statements are after the jump.  The signatories can be found at the links. Read more »

Filed under: Barack Obama, John McCain | Tagged: , , , | No Comments »

The Chicago Model for Buying Off Radicals

Posted on October 13, 2008 by John Stodder

This story made me laugh.

Its writer, John Kass of the Chicago Tribune, helps us understand how the lure of public money can tame even the most revolutionary impulses.  Anymore, William Ayers is no radical.  Today, he’s what they used to call a sellout.  But it’s a soft kind of selling out, the kind that allows you to keep calling yourself a progressive while living comfortably under the protection of a big-city political machine.

(T)he reason Ayers is not a big deal in Chicago has to do with the Chicago Way, and the left fork of that road that has been bought and paid for by the (Mayor Richard) Daley machine, subsidized by taxpayers who foot the bill for public relations contracts from City Hall.

The new Daley machine is much more sophisticated than his father’s. And the stereotype of knuckle-draggers and wiseguys—they’re still around, and there are jobs on the city payroll for those who work the precincts.

Yet what’s often ignored is that their university-educated cousins get city contracts to spin the news and shape the symbolism and tell out-of-town reporters that Ayers is no big deal. They won’t bite the hand that feeds them….

Marilyn Katz, Chicago PR Consultant and Ex-Radical

Marilyn Katz, Chicago PR Consultant and Ex-Radical

One friend of Obama and Ayers is former ’60s radical Marilyn Katz, now an Obama fundraiser, strategist and public relations maven. She’s often a go-to quote for reporters to knock down the Ayers-Obama story….

(D)uring the violent protests of the 1968 Democratic National Convention here, Katz was the security chief for the radical Students for a Democratic Society. She once advocated throwing studded nails in front of police cars, back in the SDS days when the group was alleged to have thrown cellophane bags full of human excrement at cops and cans of urine and golf balls impaled with nails.

How things change.

Under this Daley, her firm, MK Communications, has many city deals, and one involves public relations for the Chicago Police Department’s community policing program. From nails to contracts, the Chicago Way. Apparently, irony was not a ’60s thing.

Now, as Daley prepares to lay off more than 1,000 city workers, he’s given Katz and other public relations firms five-year contracts that could pay them as much as $5 million each for consulting, advertising and promotion.

And, folks, that’s why Barack Obama did not recoil from the “unrepentant terrorist” William Ayers.  We’re talking about two Daley Machine regulars, trusted members of the brother- and sisterhood.  Why would Ayers even stand out?  He was just another insider angling for a contract.  Yes, “another guy from the neighborhood,” but the neighborhood Obama was referring to was not a physical place, but a political citadel.

Given the impotence of the Republicans’ attacks on Obama for his ties to Ayers, maybe voters subconsciously understand this. You can’t hold it against a guy for wanting to make a buck.  Selling out obviously civilized him long before Obama crossed his path.

Filed under: Barack Obama, Democratic Party, History, Marketing Advertising PR | Tagged: , , , , | No Comments »

Quotable: Robert Samuelson on Deleveraging

Posted on October 13, 2008 by John Stodder

The veteran economics columnist Robert Samuelson clarifies the nature of the risk for the world’s financial system in Monday’s column.  Samuelson claims the subprime mortgage industry’s collapse wasn’t, by itself, enough to topple the economy and put it in such peril.

What we’ve discovered is that the real problem is bigger. Large parts of the financial system are too thinly capitalized and too dependent on unreliable short-term debt. Leverage ratios often reached 30-1 for investment banks and hedge funds ($30 of debt for every $1 of capital). The presumption was that the MBA types had learned how to “manage risk.” That false conceit backfired. Low capital didn’t adequately protect against losses. Confidence and trust evaporated, because no one knew which institutions held suspect securities, how much the losses were and who was ultimately safe.

“Deleveraging” — a shift from excessive debt toward more capital — is inevitable and desirable in the long run. The trouble is that, in the short run, it may destabilize the economy if it proceeds too rapidly.

Consider stocks. Their plunge has been driven in part by hedge fund selling. Hedge funds often buy stocks by borrowing from their “prime dealers” — firms like Goldman Sachs and Morgan Stanley, which in turn borrow from commercial banks. If banks “deleverage” by reducing loans to prime dealers, then prime dealers tighten up on hedge funds, which react by selling stocks.

Because of the high degree of debt, the global financial system has been “inherently fragile” for a long time.  What we’re seeing is a correction, but it needs to be managed carefully.

I’m wondering: Are we lucky that we’ve got a lame-duck administration in charge?  From now until mid-January, we’ve got a Treasury secretary who can do what needs to be done without political calculations entering into it.  Will he?  And is he wise enough to exploit his opportunity on our behalf?

Filed under: Bush Administration, Mortgage/Housing Crisis, Wall Street | Tagged: , , | No Comments »

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