Obama hasn't learned lessons of Bhopal | Randeep Ramesh | Comment is free | guardian.co.uk

The horrific oil spill in the Gulf continues to get a lot of attention in the press, as well it should.

Cries of outrage, and demands for compensation, are raining down from the President and virtually every U.S. politician. BP's stock price also continues to get hammered, and has already lost far more in market cap (+$100 billion) than its actual costs or possible liabilities projected by the most pessimistic analyst.

There are now demands that BP suspend its dividend until the mess is cleared despite the fact that it easily has the financial means to pay it.

And yet, when viewed from the British side, our reaction smacks of being hypocritical, to say the least.

Chevron, for example, is embroiled in a huge environment disaster in South America, where locals say that hundreds have been sickened or died from toxic waste.

This U.K. columnist notes another example: the Union Carbide disaster in India. Here's an excerpt:

While Barack Obama is lambasting BP for spreading muck in the Gulf of Mexico, he should perhaps pencil in a date with the people of Bhopal when he visits India later this year. While 11 men lost their lives on BP's watch and the shrimps get coated with black stuff, the chemicals that killed thousands of people in Bhopal in 1984 are still leaching into the ground water a quarter of a century after a poisonous, milky-white cloud settled over the city.

The compensation – some $470m – paid out by Union Carbide, the US owner of the plant and now part of Dow Chemical, was just the cash it received from its insurers to compensate the victims, a process that took 17 years. But it's one rule for them and another for anybody else.

This is not to defend BP (how can you?) but to note that the U.S. is getting close to overplaying its moral righteous hand.

Obama hasn't learned lessons of Bhopal | Randeep Ramesh | Comment is free | guardian.co.uk

Calls for Stimulus Yield to Deficit Concerns - NYTimes.com

Yesterday I wrote that most of Europe is now talking about reducing deficits rather than adding stimulus. Now it appears that the U.S. is going in the same direction.

It's not that I'm not concerned about deficits - we obviously have to make some serious changes in government spending - but at this point I'm not convinced that the economic recovery is strong enough to deal with a large dose of higher taxes and lower spending.

If you think about the arithmetic from Econ 101, our GDP is calculated as follows:

GDP = C + I + G + X

where C is consumption spending; I is investment; G is government spending; and X is net exports.

The consumer is spending again, but only cautiously. Continued continued growth in by consumers will in large part be determined by jobs and the housing market. Unemployment remains stubbornly high, and even the most optimistic forecasts don't look for the jobless rate to decline significantly by year-end, at least.

Housing, as Paul Volcker said recently, remains totally a ward of the state. In other words, the mortgage market is being totally driven by government policies, and the Fed, at least, is pulling back on its activities in this area.

In short, I think the outlook for the consumer is probably muted for a while. And consumer spending represents 2/3 of our GDP.

Turning to investment, there still seems to be too much excess capacity to see much of a significant boost in cap ex. Moreover, it seems that more spending on new projects is occurring in lower wage cost markets, e.g. China or India. So not much help there.

Our export market will definitely be hit by the strength of the dollar, particularly against the euro. Moreover, most government policies around the world seem to be focused on "beggar thy neighbor" ideas, where internal growth is spurring by more exporting.

Which leads to government policies. If government spending is cut, or at least its growth reduced, I would argue this would remove a major source of growth. Again, I understand the argument that we need to do something about deficits, but I worry that this is not the time to do so.

There is a precedent, which is often referred to in the financial press. In 1937, government spending created a spur to the US economy, and things seemed to be getting better. By 1938, attention turned to reducing government spending and tightening credit. When this happened, the fledgling economic recovery was snuffed out, and the economy and employment plunged again. Only with the onset of World War II did the US begin to grow again.

Also, as I have said repeatedly, all of this talk of reducing government spending will eventually lead to more deflationary pressures.

Here's an excerpt:

The box that Europe, the Obama administration and Congress find themselves in today — desperate to stimulate the economy and fearful of the political reaction — gives new meaning to Milton Friedman’s famous line from the mid-1960s. “In one sense, we are all Keynesians now,” he wrote to Time magazine, referring to the theories of John Maynard Keynes, who called for government spending to counter downward cycles in the economy. In a less-remembered continuation of that sentence, he added, “in another, nobody is any longer a Keynesian.”

Today they are periodic Keynesians. The Senate has taken up a jobs bill that could cost $100 billion over the next decade, a fraction of last year’s historic stimulus package, but significant by the standards of other such jobs packages over the last two decades. “Here in the Senate, jobs will remain priority No. 1,” Senator Charles E. Schumer, a Democrat of New York, said Tuesday. “It’ll be almost an obsession to us.”

Not surprisingly, the parties cannot agree on the best path to satisfy their obsessions.

Calls for Stimulus Yield to Deficit Concerns - NYTimes.com

Estate Tax Dormant, Billionaire’s Bequest Is Tax-Free - NYTimes.com

I don't know if you saw this story in this morning's New York Times, but it illustrates the cost (to the Treasury) of the delay on the part of Congress to do anything about the estate tax.

As I mentioned in a post about a month ago, many estate lawyers had been thinking that there would be some clarity on the federal estate tax by Memorial Day. Well, the end of May has come and gone, and no action from Washington.

The problem is what steps, if any, investors should be taking in anticipation of estate tax law changes. At this point, it is simply not clear.

Here's a short excerpt from the piece:

Dan L. Duncan, a soft-spoken farm boy who started with $10,000 and two propane trucks, and built a network of natural gas processing plants and pipelines that made him the richest person in Houston, died in late March of a brain hemorrhage at 77.

Had his life ended three months earlier, Mr. Duncan’s riches — Forbes magazine estimated his worth at $9 billion, ranking him as the 74th wealthiest in the world — would have been subject to a federal tax of at least 45 percent. If he had lived past Jan. 1, 2011, the rate would be even higher — 55 percent.

Instead, because Congress allowed the tax to lapse for one year and gave all estates a free pass in 2010, Mr. Duncan’s four children and four grandchildren stand to collect billions that in any other year would have gone to the Treasury.

Estate Tax Dormant, Billionaire’s Bequest Is Tax-Free - NYTimes.com

Europe Tightens Its Belt

The recent moves to cut fiscal spending by some of the major European governments hasn't received as much attention in the U.S. financial press as I believe it should.

Governments around the world are facing the same problem: do they cut spending/raise taxes in an effort to reduce their budget deficits? Or do they propose more government stimulus - new spending/cut taxes - with the idea of growing their way out of their fiscal problems?

Most governments seem to be moving to the first alternative.

Yesterday, for example, the German government proposed large cuts in its federal budget:

The German government put together the largest austerity package since World War II on Monday, with spending cuts and new business levies aimed at saving 80 billion euros by 2014. Chancellor Angela Merkel says Germany, as Europe's largest economy, must set an example.

Radical Cutbacks: German Government Agrees on Historic Austerity Program - SPIEGEL ONLINE - News - International

And then there was new British Prime Minister David Cameron solemnly warning his country that severe cutbacks were coming:

Prime Minister David Cameron said Monday that Britain’s financial situation was “even worse than we thought” and that the country would have to make savage spending cuts to bring its swelling deficit under control.....

...Mr. Cameron said that at more than 11 percent, Britain’s budget deficit was the largest ever faced by the country in peacetime. But he warned that the structural deficit was more worrisome. Britain owes more than $1.12 trillion, he said, and in five years will owe nearly double that if nothing is done now.

The country already spends more on interest payments on its debt than it does running its schools, he said, adding that determining how to reduce the deficit and cut down on borrowing is “the most urgent issue facing Britain today.”

http://www.nytimes.com/2010/06/08/world/europe/08britain.html?scp=4&sq=david%20cameron&st=cse

There doesn't seem to be any consensus among economists about which course is best, but it seems to me that the near-term effects simply can't be all that good for the European economic prospects. Cutting spending and raising taxes at a time when economic recovery is only beginning seems premature, yet there is also no doubt that debt levels are spiraling to untenable levels.

Then there is the social consideration. Imagine the reaction in the US if the President proposed cutting spending not only on social programs but military outlays as well (if the US military were cut in the same proportions as the German government is proposing our military would move from 1.4 million troops to 265,000).

Finally, there is the news from Japan, where 20 years of loose monetary policy and aggressive fiscal spending has been essentially unsuccessful. Here's a recent headline:

TOKYO (MNI) – Outstanding loans by Japanese banks fell 2.1% year-on-year to Y396.12 trillion in May, marking the sixth straight y/y
drop after a revised -1.9% (initially -1.8%) in April, Bank of Japan data released on Tuesday showed.

Lending continued to drop due to weak corporate fund demand, though the annual rate was held down by sharp gains in lending a year earlier.

http://www.forexlive.com/111468/all/japan-may-bank-lending-2-1-6th-yy-drop-in-row-apr-1-9

Strategies - A Flight to Treasury Bonds That Wasn’t Supposed to Happen - NYTimes.com

I started my investment career at Scudder, Stevens & Clark in the early 1980's. I was hired to be an analyst in their bond research department. As part of a team of probably 20 bond professionals, I learned an enormous amount about investing from some of the brightest and most experienced investment professionals around.

Scudder's investment philosophy was thoroughly grounded in research in both the equity and bond markets. At a time when most managers picked stocks largely through "tips" or advice from friends, Scudder believed that extensive research in fundamentals would yield handsome returns for their clients.

Scudder at that time was one of the few places in the investment management world that had a bond research effort. I think it is fair to say that the whole concept of bond research started at Scudder, with investing giants like Herman Liss, Bob Pruyne and Sidney Homer (author of "Inside the Yield Book") studying the fixed income market in ways that very few had ever done. Their research set the stage for much of the kind of work that goes on in fixed income today.

One of the key concepts I learned as a fledgling investment professional at Scudder was to realize the futility of investing based on a single forecast.

Outlooks are always too uncertain, and no one has a perfect "crystal ball". Instead, attractive investment opportunities were to be founded by asking "what if", even if some of the scenarios seemed just too far-fetched to be true.

We had a name for this analysis: "Opportunity/Risk". Every week we spent hours developing scenarios and doing research on the risk/return profiles on a wide variety of different securities and sectors in the bond market. It wasn't good enough to say, for example, that you wanted to buy a particular bond based on a view that interest rates were going to move lower.

The question would come back: what happens if rates move in a different direction? Or what happens if credit spreads widen? Or what happens if the shape of the yield curve changes? And so on.

As simple of a concept as this seems, it is still too often forgotten by many in the investment management community.

For example, as this recent article from the New York Times points out, almost no one in the investment world at the beginning of this year forecast that interest rates could move lower, and so Treasury bonds were thought to be poor investments. Now it turns out that this widely-held view was wrong:

For people holding Treasury bonds, it’s been one of the best of times. In May, long-term Treasury mutual funds outperformed every traditional category of stock fund, according to Morningstar data, returning 5 percent. Ominously, only bear market funds — those dedicated to bets on a stock market decline — fared better. They returned 8 percent. These trends continued last week, with the Dow and the S.& P. 500 each falling more than 3 percent further....

...It is also sobering that a vast majority of economists and market strategists were forecasting a different chain of events. Treasury yields were universally expected to be rising, not falling, as the United States recovered from a deep recession. The domestic economy is, in fact, growing, and corporate profits have been rising, but the European crisis has overturned many expectations.

As old-fashioned as it might seem, I think that opportunity/risk analysis still makes sense.


Strategies - A Flight to Treasury Bonds That Wasn’t Supposed to Happen - NYTimes.com

Lost Decade, Here We Come - Paul Krugman Blog - NYTimes.com

Sobering words this AM from Paul Krugman's blog.

I'm not sure who's right - those who have become fairly hysterical about the looming deficits, while others (including Larry Summers of the President's economics team) are calling for a second dose of stimulus - but I would agree that imposing draconian spending cuts at a time when the economy is only beginning to improve doesn't seem to make too much sense.

Here's an excerpt from Professor Krugman:

The right thing, overwhelmingly, is to do things that will reduce spending and/or raise revenue after the economy has recovered — specifically, wait until after the economy is strong enough that monetary policy can offset the contractionary effects of fiscal austerity. But no: the deficit hawks want their cuts while unemployment rates are still at near-record highs and monetary policy is still hard up against the zero bound.

But what about Greece and all that? Look, right now sovereign debt problems are taking place in countries with a very specific problem: they’re part of the euro zone, AND they’re badly overvalued thanks to huge capital inflows in the good years; as a result they’re facing years of grinding deflation. Counties not in that situation are not facing any pressure from the markets for immediate cuts; as of this morning, 10-year bonds were yielding 3.51 in Britain, 3.21 in the US, 1.27 in Japan.

Lost Decade, Here We Come - Paul Krugman Blog - NYTimes.com

John Wooden, 99, Legendary U.C.L.A. Coach, Dies - Obituary (Obit) - NYTimes.com

"Failure to prepare is to prepare to fail."
-John Wooden

John Wooden died yesterday at 99 years old. Wooden was a basketball legend; he is still (I believe) the only man to be elected to the Basketball Hall of Fame as both a player and a coach.

Wooden's UCLA teams in the 1960's and 1970's dominated college basketball as no other team before or since has done. Winning 10 national championships - the final one came in 1975 - was an amazing feat.

John Wooden was widely admired, not just for the championships but also the way that he conducted his life. I have read a few books by Wooden, and always learned something from them.

Wooden was a huge fan of the value of preparation. He often said that his most enjoyable times as a coach were not the games but the practices. He and his coaching staff would meticulously plan each two hour practice session - no minute was allowed to be wasted.

He was a strong believer in the value of physical fitness, gained through intense practices.

He emphasized fundamentals. For example, he hated behind-the-back passes, which he thought were needlessly risky. He also liked players to use the backboard for their shots, believing that a bank shot had a better chance of success.

Wooden rarely scouted the opposing teams. He would point out that it made little difference whether he knew the tendencies of a particular player. Instead, he felt that if his teams focused on the fundamentals, and played the type of aggressive zone defense for which UCLA was famous, they would win most games. And of course he was right.

John Wooden was intensely competitive, as this morning's New York Times obituary pointed out. He might have looked like this mild-mannered school teacher from Indiana, but once the game started he was as ferocious as any coach around.

Wooden was devoted to his wife Nell. They were married 53 years. Nell would sit behind the bench at nearly every game. Right before the opening tip-off, John would look up in the stands to Nell and give her an "OK" hand signal. When she died, he visited her grave site nearly every day. He also wrote notes to her telling her how much he loved her, and missed her company.

It is a testimony to his widespread influence that his death merited a front page story in the Times this morning, even though he had coached his last game almost 35 years ago.

If you have the chance, read "They Call Me Coach" this summer. Even though it was written a number of years ago, it's a fun read, perfect for the summer. You'll learn valuable lessons about both basketball and life from one of the best ever.


John Wooden, 99, Legendary U.C.L.A. Coach, Dies - Obituary (Obit) - NYTimes.com