Toxic Waste

Dow is at 6627 today.A drop of 1600 points since the historic inauguration day of January 20th. At that time around everyone thought the financial crisis was factored in to stock prices but i think the market is not clear about the direction the Obama administration is taking to stabilize the financial crisis situation.

As per the TARP, the initial plan was to buy back the troubled assets ( alias toxic waste) and there by inject money to banking system to boost lending activity. Now they are not sure that's the best way. It seems they are thinking over two possibilities :

1. Buy all the toxic waste at a fair price and sell to private investors

2. Lend low interest money to private investors to help buy the toxic waste.

both these cases don't guarantees an increased lending by financial institutions. The only way to do that is to nationalize the banks temporarily to unlock the liquidity and stagnation .

Bernake's confessed before the congress that bailing out companies like AIG (so far 180 billion spent and counting ) was most painful as they behaved more like hedge funds. This pain is no spreading to major banks like Citi ( 50 billion spent and guaranteed 306 billion worth of assets) and Bank of America (45 billion spent and 118 billion guaranteed). These are soon would be zombie organizations Obama's administration should temporarily nationalise so that markets will get stabilized and then its easier to direct funds to priority sectors.

Temporary Nationalization says Greenspan

Allan Greenspan's admission that temporary Nationalization might be a way to fix the current crisis is in a way conceding that laissez faire was not the right approach to keep a healthy banking system. Greenspan was a strong advocate of the hand-off approach as he believed the corporations always acted in best interest of the shareholders and in a perfect market there is no place of wrongdoing without being monitored by interested parties.

It's quite frustrating that Obama government refuse to admit this, even after many respected economists like Krugman was a strongly advocating the same. Relating temporary nationalization to Socialism is silly and makes no economic sense. It seems Obama is trying to stay away from a 'socialist' brand by avoiding such tough decisions. His economics council probably knows what's required but protecting his political image takes the priority so far.

Stimulus Plan Miracle

Obama's stimulus plan is being debated in a rare Saturday Senate session, ahead of the crucial Monday vote. Optimism around the recovery plan was reflected in the Market on Friday itself where Dow was up more than 200 points despite the dismal January job loss report and unemployment rate rising to 7.6%. One question remains : Is the economic stimulus package is big enough to stop the recession ? None seems to know.

800 billion spending in the form of tax cuts, infrastructure building and health care subsidies appears like a big amount and a required one. However, we probably cannot place all our bets on it for the economy to recover. The government is running out of tools to give a boost to the economy and deficit financing is probably the only one left. However, the US is in war for last 6 years and some estimates show that the government spends 16 billion a month to meet war expenses in Iraq and Afganistan. Obviously a good percentage of that is earned by the US corporations and citizens so there was a stimulus package close to 1 trillion already deployed in this economy . Some economists estimate that the real cost of the war is going to be 3 trillion and that means more money in the stimulus package.

So what's the miracle we are expecting out of this stimulus ? Looking at the economic models, its about flooding the economy with money hoping that the aggregate demand will increase, driven by the Goverment and people consumption. So the war expenses and the new stimulus package are doing the same thing. Stimulus package is probably more targetted with a hope that sectoral growth help spreading the activity to other sectors as all are realated in a grand scheme of things.

I really hope the stimulus plan works . However I see the economy slipping into very low activity in 2-3 years . There are couple of signs for that. 1. Increased savings by Americans(means less consumption and hence low production) 2. Unemployment rate : Indicates that businessess see no demand int he future also people get less money for consumption.

Low Gas Price ! Good for the US?

I feel low gas price is detrimental for the US, considering the way tax dollars are being used by the government and the paradigm shift in the way economy operates.

No doubt I feel a lot better at the pump these days and regret less driving a performance car. But high gas prices make me happier knowing that in this demand supply equation, high prices indicate that the economy is reviving and people have the funds available to purchase more. Since the Fed is trying all the monetary tools (like cutting Fed rates & funds to failing businesses) to increase money supply and thereby push the overall demand, a deflationary trend in major commodities like gasoline tells me the policy ineffectiveness. But that’s just gas price as an indicator.

Necessity is not always the mother of Invention but innovations and discoveries are normally aimed at incentives when a business pursues it. So low gasoline prices could put to rest many of the R&D efforts in improved technology, new sources or alternatives. For Instance, Toyota sold less hybrids at $2/Galon gas (Check sales number of Toyota Prius when the Gas was $4 and now); It would be less viable to drill newly found oil fields in Brazil or continue exploration in Arctic for fossil fuel at $2/Gallon. Same story is true for the electric line-ups now being demonstrated in Detroit Auto Show. Projects like creating mass transit facilities like electric trains in all cities will have few takers due to low potential demand as people have no incentive for taking a train as compared to riding their own car.

Government makes huge infrastructure investment (with Tax payer dollars) every year to maintain or build roads and bridges. This is where the Washington lobbyists protects the interest of Auto Manufacturers or resist any alternate form of transit.

So going back to the economic principles, we will have to create a new incentive system to motivate businesses and individuals to achieve the bigger goal of reducing fossil fuel consumption. I think it’s fair for the owners of the vehicle to pay for the maintenance of the road infrastructure(Not the whole country). When the auto makers sell cars, people just pay sales tax not a road tax. Many countries charge a road tax on the top of the sales tax and that could be 10% of the cost of the car, paid an yearly basis. Further, the Government should put an additional tax of $1-2/ gallon and that will automatically work as an incentive to consume less. When driving is part of their work, gasoline should be treated like a cost of production and should get the tax credit.

These two additional taxes in place, the incentive system looks lot better for an ordinary Joe. The tax he pays depends on what he buys- let it be car or gasoline. He pays a lot less when he takes a public transport so whatever discomfort he has is paid for. When he buys a gas guzzler he is prepared to pay a lot more, everyday, than his neighbor who rides a fuel efficient car.

India's Enron & Short-term achievers

Ramalinga Raju of Satyam was searching his saul over a decade and finally decided to speak out his conscious yesterday. The news dragged down India's Sensex 7% and wiped out the Satyam shareholders assets 77%. Satyam was in spotlight for a month ago for their decision to buy Maytas constructions, a company with Raju’s sons have significant stakes, as a case of poor corporate governance. The company did show a tainted image to the market then and that news was followed by World Bank banning Satyam from doing IT outsourcing because of their unacceptable business practices. The biggest looser is India as a country – the institutional investors now will require additional premium for compensating for this kind of risk.

Its quite evident that Raju was totally informed in the fraud game. Most of the reported adjustment was in cash balance and its hardest of all to hide. This also raises concerns about what auditors, Price Waterhouse Coopers, was doing in the process. The independent auditing is supposed to bring the credibility to the financial statements but appears like those practices are compromised. The market instantly named it as ‘Indian Enron’ so are we going to see Price Waterhouse going down soon? Satyam is going to get hurt badly as many of their Furtune 500 clients re-evaluate and decide to walk-off from the deal and most probably sign-up with one of the competitions like Infosys or Tata. The question left is how pervasive this kind of frauds are in India ? If Satyam could do this many others also could. Raju admitted that he was riding a tiger without knowing how to get off not being eaten. Something started as a small discrepancy, a decade ago, now grew into a billion dollar problem. This confession allude to a bigger global business issue- chasing short-term profits.



We see all market punishes the companies with lower quarterly earnings. If the earning doesn’t meet the analyst expectation, the share prices tumble and it seems the stock price is the only yardstick of CEO’s performance. Should the quarterly earning be that important? I think its important that the technology and product based companies are evaluated differently because lot of their future earning depends on the brand establishment and innovation, which takes several quarters of waiting. Analysts in Wall Street hardly know anything in engineering or innovations but so good at making judgments by crunching numbers from the financial statements. So none wants to give out a bad news to the market fearing its going to eat them up. Things would eventually culminate into a point of no return, hurting investors and employees and unrelated everybody else in the market.




Now this is not to justify Satyam's action. There is no justification for billions of shareholders lost wealth . Ever since Satyam was in focus for the bad deal to buy Maytas, Raju's back was on the wall and he knew a confession was better than exposing

Ponzi 2008

We all heard the word 'Ponzi' repeateadly by end of 2008. $50 billion Madoff scheme was hard to comprehend. More disturbing was the names of people got hurt in the process - seasoned investors, economists, banks and charities to name a few.

Paul Krugman was wondering how Madoff story was different from the investment industry as a whole ? His article convincingly concludes that the story was not very different . Instead of creating value, the whole investment industry was destroying the value of assets .

Financial companies have written off billions of their bad assets, a product of their lax lending practices , and pushed the economy into a financial crisis. Credit markets froze and left many businesses with no operating cash and layoffs. The shareholders lost 7 Trillion - a gain of last 6 years - in just one year. Home prices fell forcing a lot of home investors bankrupt. In short, everyone is some way or other had a negative financial impact in 2008.

There are some good signs in people's behavior - though not necessarily good for the economy to recover.Spending: There is a drastic cut in spending as people manages their finances better. People travel less, eat out less or buy less gifts.

Savings: Other than equities and funds, people are increasingly attracted to gold and low risk instruments as an alternative.

Ponzi schemes will always hunt us in some form - As someone pointed out, Social Security funds may be the biggest legal ponzi scheme -:)

Ways to Use Bailout Billions

The workers of Republic Windows and Doors in Chicago came out victorious from their week long sit-ins after the factory was closed due to credit crunch. Republic Windows workers had media attention and Bank of America and JP Morgan were forced to react.. The workers had a question to them: Weren't the billions these banks drawn from the Government, supposed to help the companies like Republic Windows ?

Last month when I posted about Detroit big 3, i thought they were so close to getting the money from Government. However, yesterday Republicans shot it down saying that unions needs to make more.When the republicans backed off ,Whitehouse stepped in to offer them help under TARP. As Friedman says , the investment in GM will be remembered as pouring billions of dollars into CD music business on the eve of the birth of iPods and iTunes.