Dancing with Superman and Nose Kisses at Bedtime.
Today my daughter was wearing these silly slippers I bought for her last year in Italy. I asked her why; her answer “Because you brought them for me, daddy.” Always nice when you get thanked. It’s the only pay we parents get for our work.
This week I’ve had my hands full; Karen was in Berlin for 4 nights on business, and I am the one on house duty.
Jeremy at 19 months is doing quite well; he likes to play musical instruments and he even gives the xylophone mallets to Elizabeth to play along with him; he even knows which one she likes. He is a crazy man on the slides — goes down headfirst and wants to play with the big boys on the big slides.
Last week we had a dinner celebrating the Jewish holiday Purim festival with the kids in costume; Jeremy was Superman and Elizabeth was a princess. They danced together for the first time while Karen and I sang songs. It was a long way from my days as a single person; once I recall sitting in a local synagogue with all the others in the community who had no place else to go for their Purim feast, and I must say that this made for a better evening. Elizabeth tells her 19 month old brother when he stands on the table that it is “not acceptable behavior.” It is quite cute and precocious. She oughtta be; she just got into the nursery school of our choice.
Last week I was in Houston; it is America’s 4th largest city and fairly pleasant at this time of year. Downtown has a whole network of tunnels so that people never have to go outside in the summer. The neighborhood of River Oaks has tons of beautiful mansions without big walls or gates; lots of old oil money, I’m told. George Bush Sr. lives in Houston as well. The Rodeo and Livestock show happened to be going on while I was in town. I dropped in on the livestock show which was going on at the time I showed up during the afternoon; imagine a convention center with lots of cows and horses in it. The Texans take their hats very seriously and I saw lots of people wearing seriously big hats at the show and eating lots of very macho sounding foods they don’t sell on the streets of Manhattan. The city is very large and traffic can be terrible; it is not a bad idea to stay at the airport Marriott if you have a morning flight out. There is a tunnel at the airport with a little train that whisks you around to the terminals in no time. In Houston right now, people are not complaining about the economy. People are employed and pretty happy.
I figure that a religious person ought to find religious meaning in everyday life, such as recognizing miracles around you. It is no coincidence therefore that the first day the stock market went up wildly for the last several months was Purim day (luckiest day of the year for Jews), partly on the strength of comments by the Jewish chief of the federal reserve. It is a sign that gives me some hope for the future.
I appeared on a radio show last night as publisher of globalthoughts.com discussing Obama’s foreign policy initiatives in several areas around the world. You’ll get to read most of what I said below, but I guess it’s nice to know that somebody thought enough of this site to invite me to chat on a national radio talk show.
Today, I am going to talk mainly about economic issues.
The buzz I am getting out of Washington is that Obama has basically subcontracted a lot of his policy implementation out to Congress who will basically decide how much of his program gets passed and how it will be implemented. Aside from his skeleton staff in the federal agencies, a lot of the bread and butter people have not even been appointed or approved yet, the quality of people that are on the job is inconsistent, and some of the people are either just plain arrogant, incompetent or not yet have the handle on their jobs. Congressional staffs are so busy with legislation on main economic issues that they have no time for anything else. Foreign ministers who would normally see chiefs in Congress are being told that there is no time for them and at the State Department their appointments get moved around in very undiplomatic ways. Yet I believe that if the economy improves, it will be likely despite the US Government rather than because of whatever he is doing. Consider this: At the Treasury department, after the secretary of the treasury, all the top 18 or so appointments have not been filled. What can you possibly expect to be coming out of that department? Advantage goes to those with staffs and right now Congress has staff. Obama has been appointing all sorts of people to temporary jobs that might well become permanent in order to get around the fact that Congress could take nearly a year before it finishes approving the nominees put before it.
We may be at a turning point in this economic saga. I’ve been sitting on my hands trying to decide when to push the SEND button on this month’s posting. The atmosphere today is better than it was at the beginning of the month before the Purim rally began. The question is whether or not we have turned a corner or whether it is another false rally before another large fall.
You get the sense that most of the federal government wants to change some of the accounting rules that made the banks look perhaps worse than they were and to re-regulate short selling. I’m not convinced that these changes will make a real difference but atmospherics count. I am not at all convinced that Citibank and other banks are 40% better than they were a month ago, but again, they may not have been as bad as they seemed. Or maybe they are. People at Citibank are not happy and the government essentially owns it and is proving to be a horrible stakeholder that people are dying to get away from. I personally think that Citibank is probably bankrupt and being kept afloat by the government at this point.
Earlier this month, my sense was that the fear factor was reaching its height. Warren Buffett says that when fear is great, one should get greedy (and buy). Are we reaching the low of the low? Stocks seem cheap, but they are not necessarily cheap when you consider their earnings and the suspension of dividends. Citibank still doesn’t look healthy and there is much less money in the FDIC insurance program than what it would take to make depositors whole. But if they didn’t cover depositors in a timely manner, people would flee all banks and we really would be in a Great Depression. I had thought GE’s stock would dive 50% if it was downgraded to the extent people anticipated; it rallied only because it was downgraded a bit rather than a lot.
No doubt that Obama made a good speech before Congress last month; looked like he was very much in command, and talked to the nation in a very convincing manner. His budget is a real budget and his program is pretty much what he promised and what the country voted for. If people are shocked, it’s because he actually meant what he said during his campaign. It is based on too rosy expectations and some of it is junk — the reductions in Iraqi spending are false because everybody knew that money wasn’t going to be spent in the first place. The markets are still generally spooked despite its Purim day rally — whatever anyone bought on election day or inauguration day has lost another quarter to a third of its value.
Normally, economists would be heartened by the shrinking inventory figures that were reported last month. That usually portends built-up demand, something that brings about recovery. Problem is that the demand just isn’t there even if the supply is dwindling. On one hand this recession tracks those of the 70’s and early 80’s and seems magnified due to the presence of CNBC, CNN, Fox, Bloomberg and all these 24 hour business news channels that scream all day long that make you feel the world is coming to an end. On the other, the world has changed quite a bit since then and no real historical guide exists with which to analyze or predict. But in comparing to the recessions of the 1970’s and 1980’s consider that housing prices have still not fallen as much as in those times; the price earning ratio of stocks is still higher and the extent of unemployment is still lower. So I think we still have a way to go and I still see problems. One should also consider that during the 1930’s there were large stock market rallies only to dissolve into even deeper falls before it took World War II to finally pull things out.
Here is an example of the problem I have making sense out of things: Two weeks ago Wednesday an oped piece in the NY Times called “Matters of Principal” said that because the new foreclosure program was focused on getting people’s interest payments down, it was a waste of money and wouldn’t work, because it would make more sense to lower the principal on the mortgage thus leaving people with equity in their homes. The authors wrote that history shows that people without equity abandon their homes. Bondholders would make three times as much from interest on people with lower loan principals than through foreclosures of those with higher interest payments who would still be essentially paying rent even after 5 years of Obama’s handouts. Seems logical? Then a few days later I am reading the current issue of Newsweek and an essay by Warren Buffett who writes exactly the opposite. He says that Americans do not walk away from their homes even if there is no equity in them and that the key is to lower interest payments. Are you confused? We do know that foreclosures are definitely taking place at an accelerated rate — should we stop them?
I talk to executives who are very pissed off that 80% of the country made business mistakes, bought things they couldn’t afford, and that the 5% who did well and followed the rules have to now go and subsidize all the rest. Takes away the motivation to work and be rewarded for it. They feel that loser banks and companies ought to go bankrupt and that to keep bailing them out is just raising the bill and the misery for the rest of us. They also feel that Obama is buying loyalty of 80% of the population by simply giving them handouts and that it doesn’t matter if the other 5% hate him as long as the rest of the population keeps voting for him and the Democrats. They also feel that although the richest among us are the most mobile, that it is not a simple thing to pick up and move away. They also feel that it is all a lie — even if you taxed 100% of the income of the wealthiest, to really fix anything you’d still have to raise taxes on the middle class and this is the truth that Obama is still not willing to share with the masses. He keeps telling them that 95% of them will not have to pay anything.
What I am left with is the feeling that so far the government is not prepared to let zombie banks die, their budget is not realistic based on too rosy forecasts of economic growth, the foreclosure plan will not solve the problem, that leading programs such as clean coal have almost zero basis in the current reality of the technology, and that money is still being directed more toward votes and patronage than need and that the money being spent is most likely to be wasted. Obama talks out of both sides — he says to Congress that we cannot abandon the automobile but that companies in Detroit that made bad decisions need to pay the price. What does that mean? I couldn’t tell you but it sounded good when he said it on TV. I’ve seen the new plan to get rid of toxic bank assets; it looks like a favored few will get a lot of government aid to buy up these assets but that the bad banks get to keep going. It could wind up being another windfall for a privileged few and the problem might yet not be solved. There are alot of IFs about it. There is a lot of similarity between this program and what Bush’s Paulson put forth last year. If it doesn’t work, it’s going to be hard to get anybody to agree to have the government put forth the additional money it may have to put up and by then it might be too late. So maybe we will be lucky and it will get better; bad luck and we could be in an even worse situation a year from now.
The advice I’ve been given is to not sell that which is in the dumps, to consider some corporate bonds, to consider buying large companies that tend to do well over time such as Proctor & Gamble, Johnson and Johnson, Exxon Mobil and IBM. Even Berkshire Hathaway. I still believe that 2010 will be a year of recovery, but that things will look worse in 2009 before they look better. The main problem is that people think the prices of everything will only go down, money needs a place to be invested and it is too cumbersome to get credit, and people with technology have no place to market it because there is no venture capital worth getting at a fair price. I just paid tuition today for Elizabeth who did indeed get into the school we hoped for; I could pay the tuition in one or 10 payments but there was no incentive to pay it right away since there is evidently no time value to money. I paid it right away but had hoped I would have been rewarded for doing so.
Somebody mentioned to me that the Republican Louisiana governor whose speech bombed as a response to Obama presides over one of the few states with economic growth. I was told that it is ridiculous that the best talent are being shunted aside for stupid reasons. Everybody is still writing that Tom Daschle has been irreplaceable as Obama’s man to spearhead health care reform. If they couldn’t make him the cabinet secretary, they should still bring him in as something else with the understanding that he is helping call the shots without the lead title. So far, the indications are that the health care reform is not going to amount to much except for a lot of government spending.
Something I totally don’t understand — tax reform is zilch. It’s basically just raise taxes on the top tier. This would have been a good area for fundamental change. Some of the ideas are so bad that it takes only a few days for him to back away from them when even the Democrats balk. So if this guy had a few years to get ready to be president, and had hundreds of advisors during the campaign and transition coming up with all kinds of ideas, how does he come out with stupid ideas such as limiting charitable deductions for rich people and then having them repudiated almost immediately by his own party? Even the banks such as Goldman Sachs and Chase are looking to give the US Government back its money — they are bucking the social engineering that is being forced on them by government regulators and the fact that the moves they are being asked to do are sometimes increasing the very risk to the banks that are being asked to reduce their exposure. Same deal with Fannie Mae and Freddie Mac — people forget that part of the reason they failed was that they were under government pressure to make loans to people who shouldn’t have received them in the first place!
I can just imagine how far the proposal to tax health insurance benefits will go. And this past week, Obama is telling his treasury secretary to use every legal avenue to stop AIG from paying out bonuses which it already paid last week to people who had bonuses according to contracts; that means they weren’t really discretionary bonuses. I think it’s silly for a president to waste his political capital trying to undo something he won’t be able to undo. It is also silly because his administration knew for months the bonuses were going to be paid and did nothing to stop it. But it plays well in Peoria for now until he looks impotent for trying to do something and then failing. The law that Congress passed to tax 90% of the bonuses from any company that took $5 billion in TARP money is even more stupid — a successful banker at Chase is going to also be taxed at 90%? Yes, Chase took money, but you have to remember that Paulson forced all the banks to take money last year so that the ones that actually needed it wouldn’t be stigmatized by having taken the money. So of course now that’s all out the window because either the best bankers move to non-US banks, or they give back the money they didn’t need just to get the government off its back leaving the other banks in the nude and in the town square. It’s also unfair; a secretary making $50,000 who got a bonus would have to give it back if her household income exceeded $250,000. I had expected that the Democrats would figure out that this kind of regulation would blow up and that they wouldn’t pursue it; evidently they can’t control themselves. Anyway, it will come to very little except that the government is making enemies of the private sectors that it needs in order to engineer a recovery; government isn’t going to spend another trillion dollars to buy up toxic bank assets, they need the private sector to help bail this out and nobody is going to want to play ball with a government that keeps changing its mind and reacts to populist politics and does things such as pass laws in a week taxing all sorts of people at 90% that don’t necessarily have anything to do with the problem.
In short, I see very little fundamental change and mostly tinkering with existing ways of doing things. The economy will eventually pick up basically because the cycle will come around and the stimulus of the US and countries all over the world will have some effect, but the rate of recovery will be slower than it could have been had the government really acted boldly and delivered fundamental change. Finally, if Congress is basically being placed in charge of the reform legislation, one must ask where they were for the past two or three decades?
H1B immigration reform is not happening — the labor unions are in charge now and they are totally hostile to it. If anything, more restrictions will be put on. This is a terrible mistake; the US will lose out on innovation to other countries for a generation. Further proof of this is early trade wars beginning with Mexico over US reneging on NAFTA provisions and failure to deal with Brazil over ethanol. These are important areas for Latin America policy, and Obama is more interested in pleasing the domestic unions and corn-growers rather than dealing with sugar cane ethanol which is more efficient or with the concerns of Latin America. It is becoming clear that there will be no real changes in policy toward this region. He already knows he has messed up with Mexico, but I can see that the damage has already been done.
I am patiently expecting recovery, but not bullish on America for the long haul. A great opportunity for fundamental change is in my opinion being squandered. Probable reason: Because the new president couldn’t get a staff in place and didn’t really have the ideas, so essentially Congress took the initiative and got what they wanted. For the future, we need to give presidents their staffs faster and administrations shouldn’t be so choosy about looking only for Mother Teresa’s for government jobs.
Gold — When the Economist says it is a good hedge either way, it is a good sign that one should stay away from it. But if everything else loses its value, gold is still a standard. Consider silver or platinum which may be proportionally better investments these days.
Middle East — It’s amazing how Israel managed to squander what looked like a decent military operation into what now looks like a complete waste. I did mention that probable outcome in my predictions made in January, while the campaign was still in progress. The testimony coming out this week about what things were like on the ground in Gaza on the Israeli military side is not really shocking; I’ve always said that I didn’t expect the Israelis were angels but that they were relatively humane. Meanwhile, the good is that at least the truth comes out in that country. You can’t pull off rape as the country’s president or corruption as prime minister without being called on the carpet for it. Olmert might some day be viewed as successful but right now he doesn’t look it; the rockets still come and nobody thinks the army won’t be back in Gaza before long under Netanyahu and it will be interesting to see if Barak as defense minister acts more boldly in Gaza than he did under Olmert. I suppose though that at the end of the story, in Lebanon and in Gaza, the people that live there are sitting around billions of dollars of destruction and under complete siege in Gaza and it will take years to rebuild, and nobody is going to invest in infrastructure until there is peace. So they can declare victory all they want; the Israelis clearly have the better life and the Palestinians remain what they were — a nuisance but not an existential threat. In the long run, Hamas and Hizbullah can rant and rave, but peace is the only thing that will give life to those who live on the Arab side of the border. I do think that while the Israelis might not be able to strike at Iran, Netanyahu is going to be a ball-buster for Obama to deal with and that the Israelis will not hesitate to do whatever they have to do to deal with Iran which they view as an existential threat, America be damned, so to speak. The Israeli policy is not complicated — throw rockets at us and sit among the rubble. Stay away from us, and we’ll stay away from you. It will be interesting to see how it works out with Barak, the Labor Party and this government. Barak brought down Olmert and it was thought all along that Barak and Bibi had a secret deal; after the election it looked like Barak was going home but evidently he just lay low until popping out just at the end. Bibi wants Barak in his corner; Iran has to be dealt with and he wants Barak at his post…Syria has been making the rounds in Jordan and Saudi Arabia; they want back “in” with the Arab world but there is a price; they are asking the Saudis to commit $2 billion a year for 5 years to help them recover their economy. No telling if part of the deal is for the Syrians to let go of their chokehold over Lebanon’s economy. The Syrians know that the Iranians don’t have the money to keep subsidizing them; I’m being told that the Israelis and Syrians might early on announce a deal that has essentially already been negotiated. I don’t know if I believe that, but I do know that the Israeli military is in favor of a deal with Syria and that the military vote counts for a lot.
Af-Pak Region and Beyond — I read an interesting article about Islam in Newsweek a few weeks ago. It was written by a senior editor Fareed Zakaria and basically said that if you look at Islamic revolutions for the past few decades, what happens is there is a revolution, people get tired of all the fanaticism, and then force the people in charge to become more moderate because people don’t want to be living in a very stern society in which sharia law is oppressive to them. They want sharia and islam, but not too much of it. He recommends to stop trying to stop Islamism for its own sake, let them do their thing and that eventually their regimes will be more moderate. This sounds like a plan, particularly in places such as Pakistan; maybe we ought to hear this guy out more because he makes sense. I think Obama is likely to be receptive. I see a lot of quiet activity going on viz. Pakistan and Afghanistan. Afghanistan is complicated because the Saudis can help because they have influence with the Taliban; Iran hates them and would rather bolster the Northern Alliance. I don’t see fixing Afghanistan without separating the Taliban from the Al-Qaida elements and then working with them, pretty much like the US did with the Sunnis and Shiites in Iraq. There is also a lot of quiet diplomacy going on with the Russians; I don’t know if it extends beyond arms control treaties. We also know that quiet activity is going on with the Syrians and Turkey. Obama visits Turkey in 2 weeks and the Turks are leaning on Syria and dealing with Iran; Syria’s Assad has been recently welcomed in Jordan and Saudi Arabia and this rapproachment with the Arab world is very important to Syria. It remains to see what comes of all this. It could all be nothing or it could be something; it is too early to tell whether all this diplomatic manuevering yields favorable consequences for world peace and the US position, but for now it is enough to say that Obama’s team, backed up by various consultants such as Kissenger, is giving things a real whirl in all the right places in a rather quiet way and it is all rather complicated — far away from the economic storm capturing the headlines. Obama had a news conference last night; hardly any questions about foreign policy. But meanwhile, in the past week, 3 past secretaries of state, 3 former senators and 2 former defense secretaries have all been to Moscow talking to high officials; clearly there is a lot of balls in play.
Here are some comments by John Loftus, an analyst with good ties to the intelligence community. He made a speech in Miami recently which I heard:
Bin Laden is in Iran; US doesn’t admit it so that it doesn’t have to go to war against Iran. The powers that be want to put a blockade on Iran; Iran will block straits of Hormuz. The Arabs are building pipelines in Saudi, Iraq and China is willing to build a giant refinery in Syria. By the way, Venezuela’s hard crude means the only market they can sell to is USA. Turkey is not against the Syrian refinery. Assad has to decide if he wants to do the deal and go with the West; he needs money and the Iranians no longer have the money. He gave Israel the goods; they had a senior intelligence official announce the willingness to have ties with the Syrians; the Syrians tipped off the Israelis to a Hizbullah plot to kidnap and attack Israelis abroad; the Iranians found out and had the Hizbullah murder the Syrian intelligence official 3 days later on a Syrian beach.
If the Chinese build the refinery, there could be shipments via Syria, Lebanon and Iraq to get around Iran. The Russians would be fine with this too. They have a deal with Israel where they unload oil at Ashdod, pipe it to Eilat and send it to China without having to go all around Africa. Iran would be bankrupted and forced to change its government by overthrow. They have no real refinery. Netanyahu willing to deal with Syria and to do so very soon. They will keep the Golan quiet and a listening post on Hermon to listen to Iran, in both their interests.
Price of oil could drop drastically if new research in production of energy at 2-4 cents per kilowatt hour is effective. Sees a $22 a barrel price next year.
Israel not capable of striking Iran; won’t get overflight rights; not enough planes, too many unknown targets. (I disagree on the overflights but only if they are guaranteed to succeed, in which case the Saudis will acquiesce). For US, military op vs. iran is out of the question. AIPAC case to close soon with egg on the face of prosecutors — what seems to be true is that the information leaked was not in fact Confidential US intelligence but rather originated with the Israelis in the first place.
Proof that the Syrians murdered Lebanon’s Hariri: 3 minutes after the assassination, phone call intercept between assad’s brother and brother in law: we got him. By the way, the nickname for Bashar Assad in the intelligence community is “Game Boy” — he plays with that toy often and they don’t see him as terribly intelligent. I myself have given an alternate opinion on this and believe he is underrated and anyway, people ought to pay more attention to his wife.