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August 29, 2009

Our Banks are in Deep Shift

Bank stocks have been climbing higher recently, fueled by optimism that the recession is over.  However, the continued accessibility to credit card debt in combination with accounting rules that allow banks to hide the real potential default rate associated with these loans is a recipe for disaster that has taken down 84 banks so far this year* and has added another 300+ to the FDIC “watch list”.   Sure the FDIC has $20 billion in reserves, but it is facing potential losses of $300 billion or more.  (See FDIC Chairman Sheila Bair’s August 27, 2009 letter.)   
The cold, hard truth is that people are becoming reconciled to the fact that they will never get out of debt.  They have gone from using debt to facilitate big purchases for homes, cars and major appliances to using credit cards for virtually everything.  There is a disconnect in people’s minds that causes them to treat credit availability as if it’s cash in the bank.  If a person has $2,000 in the bank and a $17,000 credit limit he thinks, “I have $20,000.”
This irrationality is playing out in disastrous ways.  According to MSN Money, in the United States, 43% of families are spending more than they earn each year. At the end of 2008, the average American household that had a credit card was holding nearly $11,000 worth of credit card debt – the highest this figure has ever been.  Approximately one in six families with credit cards pays only the minimum due each month, according to an Experian national score index study.    
Yes, high unemployment rates are exacerbating this situation, but so are fees and interest rates.  In fact, fees and interest rates are now so high that many Americans are living a virtual sharecropper existence where they will never get out of debt (short of bankruptcy). 
1)       According to the National Consumer Law Center, the average bank overdraft fee is now $34.65.  The Financial Times recently reported that U.S. banks are set to earn $38.5 billion this year from overdraft fees alone, more than double the number from 1994.
2)       According to a survey done by the Pew Safe Credit Cards Project in March 2009, 92% of credit cards had a fee for exceeding the credit limit, including 100% of student cards. The over-the-limit fee and the late payment fee were both $39 for most accounts. Also, these infringements can result in your interest rate skyrocketing up to 30% or higher. In fact, that same survey found that 93% of cards allow the issuer to raise any interest rate at any time.
3)       The average interest rate on a credit card in the U.S. is 11.2% according to bankrate.com. However, one-third of credit card holders pay between 20-41%. 
4)       According to CardWeb.com, cash advance fees ten years ago were on average 2% of the amount advanced with a $2 minimum and a $10 maximum fee. Today that number has gone up to 3% with a minimum ranging from $5-$15 with no maximum fees. 
5)       Payday lenders charge annualized interest between 200 and 500%.


As long as this disturbing trend toward higher balances and higher interest/fees continues we cannot say we are out of this recession.  Instead, we are merely staving off the final reckoning.  Bigger banks that generate revenue from their brokerage businesses may be able to successfully outrun the triple tsunami of mortgage, credit card, and commercial loan defaults that have, are, and will soon occur, but many small and medium banks will not be so lucky. 

A look at insider selling may be an early warning sign that all isn’t rosy in the land of “green shoots”.  For example, thusfar in 2009 Jamie Dimon, the CEO of JP Morgan Chase, has sold 1/3 of his company stock for $33 million.  Yes, Chase is clearly the best of the breed, but Jamie Dimon knows from personal experience that the market doesn't always differentiate the good from the bad and the ugly and he has shown great wisdom in trying to securing the family farm.  My only question for Jamie Dimon is "What currency did you convert that $33 million to?"


 *120 as of November 11, 2009


August 26, 2009

Sometimes Common Sense Isn't

When employers fail to compensate employees sufficiently to allow them to meet their basic life needs, such as food, shelter, clothing, heath care and retirement benefits, it forces those same employees to look for alternative sources of income such as public assistance and charity.  But when people have to turn to public assistance and charity to meet their basic needs, it does something to the psyche.  People begin to lose their sense of responsibility towards themselves.  Over time, they not only come to expect to be taken care of, but they also stop caring about doing the things necessary to make that caretaking job any easier or less expensive*.  For example, social security was meant to supplement other retirement income, not replace it.  Yet both business, looking to cut costs, and employees, strapped financially as it was, failed to set aside those other funds, leaving the lion’s share of the burden for many older Americans squarely on Social Security and accumulated home equity.
When people abdicate direct responsibility for bearing their own lifelong expenses, they also lose their sense of pride and ambition.  Pride and ambition is necessary for people to do a quality job, to be inspired to pursue lifelong education, and to otherwise care whether they Wealth Shift or not.  This, in turn, places a different kind of expense burden on business – higher employment and income taxes, greater consumer debt default, and more lackadaisical employees. 
In terms of the bottom line, either scenario results in effectively higher labor costs.  I would submit, however, that the first option – paying employees sufficiently in the first place – is far preferable, as it is far more likely to result in a healthy, ethical environment consisting primarily of responsible, effective, and self-sustaining people. 

 *On November 10, 2009, jobless benefits were again extended for people currently collecting unemployment benefits.  While seemingly helpful, the Catch-22 is that there is also a temptation for people on extended unemployment to not even look for work. 


August 11, 2009

Recession Worker Productivity

Today it was announced that non-farm worker productivity rose 6.4% in the second quarter of 2009, the biggest jump in productivity in more than 6 years*. 

This statistic clearly shows what happens in the workplace when job loss fears drive employees to mend their wealth shifting ways and work longer and harder to keep their jobs.  It's a statistic that goes a long way toward proving the high cost of wealth shift that occurred during leaner times.  

During a recession, companies find they can get the work done with fewer workers and are slow to hire additional workers to replace the less dedicated workers that were laid off.  But eventually they do, and the whole process starts again. 

The challenge for management is to find a way to inspire this kind of productivity in the absence of fear, as fear-driven productivity is not only unsustainable, it is also often hostile.


 *Q3 update - worker productivity up over 9%!   


August 05, 2009

The Prosperity Debate

The political conflict in this country can be boiled down to a disagreement between people who believe that America is prosperous enough to afford to guarantee a minimum standard of living – wages, health care, retirement benefits – to everyone, and those who believe that America can’t possibly generate enough prosperity to accomplish that objective.  Those in need look at the lifestyles of high-living corporate executives and chalk our country’s troubles up to a wealth allocation problem, while those self-same corporate executives look at the accumulated debt burden of the country, run the numbers, and realize that there isn’t enough wealth in the entire country to settle even our current debts and obligations so why should they give up their money to fix somebody else's problem? 

The stock market is on a stimulus tear right now – one that can't possibly last.  Those who believe that opening the spigot on money supply can prevent a depression fail to understand that there is a huge difference between avoiding a depression entirely and merely delaying one.  While we have historically been able to use monetary policy to push off the day of reckoning, we have done so by increasing our debt burden (both public and private) to levels that are clearly unsustainable. 

Late 2010 and beyond will not be pretty for people who are expecting a V-shaped recovery.  Unlike the climate of the last century, high commodity prices, rising labor costs, and increased regulation are going to make it much more costly to do business in America.  Labor and materials, interest rates, and taxes are all going nowhere but up.  Innovative companies will continue to see rampant Wealth Shifting of their ideas.  Meanwhile, top-line revenue will be constrained due to consumers who cannot afford to pay full price.  This scenario is supportive of companies with P/E multiples of 5-10, not the huge P/E multiples currently being commanded by the likes of Amazon.com.  We are so used to seeing quarter-over-quarter earnings gains of 20+% that we can’t imagine a world of flat to marginal incremental earnings.  We can’t imagine a world where leverage is so costly that it doesn’t produce greater earnings but, instead, merely compromises viability.

In this new world it may end up being true that we can’t afford to have decent health care and retirement benefits for all.  We may eventually be forced to make hard choices about who eats and who starves, who lives and who dies.  But Steve Forbes and billionaires like him are the worst possible spokespeople to tell impoverished Americans that their futures lie in that ditch over there.  (I think French aristocrats tried that strategy once before, and we all know how well it worked out for them.) 

I have no doubt that in the world of the "new normal", many executives will turn out to be zeros.  Many will take the cash they've stashed and run away.  Many will throw up their hands and abdicate their responsibilities to the government.  Many will make appearances on CNBC as whining brats in Saville Row suits and Hermes ties complaining about how difficult it is to run a profitable company anymore.

But executives will also have opportunities to be heros.  Ones who take off their fancy suits, roll up their sleeves, and get back in the trenches with their people.  Ones who will be willing to teach, and train, and lead their people to real prosperity.  Those people we will listen to.  Those people we will believe.  

I think in their quest for fifteen minutes of fame, politicians, business leaders, and the media alike have missed the point about what it is we should be striving for.  They see universal prosperity as fantasy destination - nice to think about but impossible to reach.  They fail to realize that universal prosperity is not a destination but a metamorphosis - one that will take time and be accompanied by both successes and failures along the way - but one that is possible if we are willing to change the way we think about each other and what we can give rather than what we can take.



When Movie Plots Seem Like Good Ideas

You know you’re in trouble when movie plots begin to seem like viable real-world solutions to financial problems.  I was in Las Vegas this past weekend when I overheard a conversation between two thirty-something out-of-work investment bankers who had just stepped off a red-eye flight from New York with the bright-eyed intention of parlaying their last 50K of savings into at least twice that by strategically "investing" in an all-night game of no-limit Texas Hold 'em.  No wonder casino stocks have been doing so well.


Mark Schorr, the chief operating officer of Wynn Resorts,  just sold $7.35 million in company stock.

Care to guess who made the better bet? 

P.S. On August 14, 2009, Steve Wynn sold 2 million shares for a total of $116,240,000.  Sound like a lot?  No worries - Wynn still has 22 million shares...lol.