Sunday, March 30, 2008

Get Ready to Tweet

The Internet continues to evolve and generate new words and expressions. Remember when you first heard about Google? Now it has become a verb. Just Google it!!!

Now it's time to get ready to Twitter. (To "tweet", a verb makes you a "Twitter", a noun) My tech savvy son brought this to my attention several weeks ago and I must say I am fascinated. Not that I will be spending a lot of time tweeting, but I keep thinking of how this will move into the mainstream for commercial applications. Ooops, perhaps I should explain what a Twitter is. In brief, it is part blog, part e-mail, and part instant messenger. You can broadcast messages but you are limited 140 characters. I say broadcast because someone must decide to "follow" you through your Twitter name. Most new users start with simple things like "Hi, I'm at the airport on my way to Palm Springs". Presently, it is a cutting edge social networking medium but like blogging, MySpace, & YouTube will likely find commercial applications very soon. I like it for its versility and cost (zero). You can send and receive on any device that connects to the internet. It's ability to communicate to large groups of people almost instantly seems to be its commercial value. You could easily communicate with employees regardless of their location. I could forsee even communicating with customers. In any event, if you are in business and are interested in what lies ahead, I would suggest learning about Twitter. To read more you can click here which will take you to an article on the subject including a link to a very well done YouTube video explaining it all. A clever way to use two new technical mediums.

Saturday, March 22, 2008

Homeowner Bailouts?

It had to happen sooner or later. Legislation has been introduced in the US House and Senate that would provide a method of relief for financially troubled homeowners. What seems to have pushed this forward now is the recent "bailout" of Bear Sterns. Comments being made by politicians are along the line of 'if we can provide $30bb to bailout Wall Street, we can surely provide something for homeowners'. But, like many political analogies it does not stand up to scrutiny.

First, if you owned Bear stock I doubt you feel the government bailed you out. You will get $2 for you stock that was trading at $160 last year and $60 just days before the "bailout". Even the $30bb may not ultimately be a cost to the tax payers as it is in the form of a loan. Second, and most importantly, the real bailout was our financial system. Bear was facing a run and would certainly have had to tell clients they could not get to their funds and would have had to declare bankruptcy. We just could not take the risk that this could have led to runs on other investment banks and even commercial banks. Remember, it was not the stock market crash of October 1929 that caused the Great Depression, it was a series of runs on banks in 1930 and 1931 that was the culprit.

Now let's look at the legislation being proposed for homeowners. The federal government would create a fund to purchase mortgages from lenders at an amount equal to 85% of the homes's current value. The lender would then make a new loan to the borrower on terms reflecting the homes reduced value. That seems reasonable on the surface but lets look at how it may look in reality in your heighborhood. (Kind of like the econonist who retorted, sure that's the way it works in reality, but will it work in theory?) Let's assume two neighbors each purchased homes in an overheated market it the peak value for $400k each. One took out a loan for the full $400k purchase and the other put $200k down. Today, each house is worth $300k and the neighbor with the $400k loan cannot make the payments after the initial teaser rate expired. Under the proposed terms of the legislation, the over extended neighbor gets his loan re-writen at $300k. Having nothing invested in the house he has not suffered a loss. The more conservative neighbor, on the other hand, has suffered a $100k loss. How long to you think it would take for someone in this circumstance to demand that their loss be covered as well. This becomes a clear example what is called a moral hazard, or rewarding the wrong behavior. I just don't see how this sort of bailout can fly.

Friday, March 21, 2008

Controling, Managing, & Leading

I recently saw a quote by the late management guru Peter Drucker. “So much of what we call management consists in making it difficult for people to work”. I have it printed on my desk and ponder its meaning from time to time. More recently I found myself responding to a colleague that “controlling is not managing”, and then added, “and managing is not leading”. It seems to me that is what Drucker was referring to. I re-read my post from a year ago in which I discussed leadership versus management. I would now add the notion of control as a component of management. I once found myself working for a huge bank as a result of a merger. Several years earlier the bank was in severe financial distress due to some very risky mistakes. In addressing these missteps the bank had created a culture of extreme control, to the extent that it was stifling. Risk was controlled at the expense of innovation or even simple initiative. While the bank’s name continues today, the organization was soon taken over by a bank with a more open and aggressive culture. Surprise! Surprise!If you think back to jobs you enjoyed most, I suspect it is because you worked for a very good manager, maybe even the rare leader. Think of a job you hated, and most likely it was working under a “controller”, or micro-manager. While “controllers” think they are managing, as Drucker says they are just making it difficult for people to do their job.

Thursday, March 13, 2008

Is The Fed Re-flating The Economy?

Commodity markets, particularly gold, seem to be answering yes to that question. For centuries governments have fell to the temptation to use asset inflation to solve economic problems. They did so often knowing they were only trading today's problem for an equal or larger problem in future years.

In recent weeks the Fed's response to the credit market's problem has been to lower interest rates and expand the money supply, even though neither step will have much impact beyond psychological. The fact is lending institutions and investment bankers combined to act with incredible stupidity and all the money in the world at near zero rates will not repair the damage. It will simply take time, and yes institutions and homeowners will have to accept their medicine. When my children were teenagers I called it the law of collective stupidity. Meaning the more teenagers you add to a group the lower becomes their combined IQ's. Based on this my son was never allowed to invite more than 2 friends to join him on our boat, allowing him in turn to enjoy those summers accident / incident free. It looks like Wall Street got together with mortgage bankers while ignoring my law of collective stupidity.

But, as to inflation, the US dollar is at an all time low and commodity prices are almost all at record highs. Almost every business is feeling the effects as food, fuel and everything imported goes higher. Consider steel, much of it is imported. Almost everything, it seems anyway, at Walmart is imported. So, if we are in line for more inflation it will eventually work its way into the price of real estate creating a sort of backdoor bailout. While I hope this is not the case I fear it may be the real Fed agenda.

Thursday, March 6, 2008

Introducing alt-A

Move over subprime it is time to make room for alt-A. You can be excused if you don't know what an alt-A loan is. But, all they seem to be are subprime loans to borrowers with more respectable credit scores. (See my earlier post on credit scoring titled The Mortgage Mess) Like their subprime siblings, the loans lack income or asset verification and with an advance rate of 100% of value. In other words they ARE subprime loans with a prettier face. Lipstick on a pig would be a good description. It turns out this was not an inconsequential part of mortgage lending in recent years. The Mortgage News trade publication reports that a total of $1 trillion (that right, trillion) of such loans were made in the past two years. For more on the subject click here to read the CBS Marketwatch article.

Sunday, March 2, 2008

Warren Buffett is doing what????

There was a recent bit on late night TV that went like this; "You know the world is upside down when 1) the best golfer in the world is black, 2) the tallest player in the NBA is Chinese and 3) the German's finally found a war they don't like". Well, perhaps we can add another line, "when Warren Buffett shuns the US dollar and invests in (gasp) the Brazilian real. But, according to his letter to shareholders issued last Friday that is exactly what he is doing. In fact, the real was his only currency position last year. In fairness, this does speak well for the economic progress made in Brazil. Progress, by the way that was made by going against the very vocal advice coming from both Wall Street and Washington, D.C. In recent years Buffett has made money betting against the dollar by investing in other currencies including the Canadian dollar. That is the real story here, the world's strongest economy in terms of output, at least, can't manage its own finances. Click here for a link to his letter.
I avoid making political comments here but the fact is our fiscal / monetary policies have us requiring upwards of a trillion dollars from overseas each year. Given that, the dollar can do nothing but decline. While a cheap dollar helps exports, it adds to the cost of just about everything we consume.