Thoughts — 31 October 2011

I told the kids that this Friday night I would be giving them the biggest surprise they ever got in the whole wide world. Elizabeth asked if it was schnitzel. Jeremy asked if it was cake. I said it was even bigger than that. The surprise is that they are going to Disney World at year end for the first time. (They actually went 2 years ago but don’t remember it.) So then we told them and Elizabeth said “Can I have some more juice?” Not exactly like that kid in the You Tube video watched by over 5 million so far who went delirious when she found out she was going there.

Jeremy gives me the feeling that he might have been reincarnated. He keeps talking about “the olden days” and he doesn’t have any elderly people around to talk to. Elizabeth went out with her mum to Times Square for the first time at night for a girls night out. She was all rehearsed to ask for a “table for two”  and was surprised at the noise in the restaurants which she thought were supposed to be quiet. The waitress agreed and said “the girl is definitely right.”..Sitting in synagogue this past Yom Kippur I was thinking about how when I was a kid I would sit with my father and talk about my hopes for family vacations. Nowadays, I sit around thinking about family vacations with my kids.

This month we vacationed in Florida and spent a few days at the Acqualina Resort in Sunny Isles, which is just north of Miami Beach along the coast. The hotel was excellent; it is what the Fontainbleau would be if it were a classy boutique hotel instead of the mammoth hip-hop sprawling mass that it is. The hotel brings a new standard of excellence to the area. We enjoyed it even though during the 4 days and 3 nights that we were there the sun never came out and it mostly rained. As the younger population of Dade County has moved further north over the years, it is interesting to use this area as a base to explore areas of Broward County that have good children’s museum such as in Davie, Florida and the Museum of Science and Discovery in Fort Lauderdale.

This past month has been really interesting for the Global Thoughts observer and so let’s get to it. In Israel, I have been asked why over 1,000 prisoners including some notorious terrorists in exchange for one solitary soldier of no real rank? The Shalit release is part of a more complex picture than I am in a position to understand but there are certain elements that are common sense. Hamas is going to have to deal with Egypt if and when Syria falls (which is only a matter of time) and they might move their HQ to Cairo. Both Israel and Egypt would like this to happen and for Hamas to be co-opted and controlled by a Western-oriented country rather than Syria which is linked to Iran. Egypt wants to show they can get things done and gain some respect and right now the Arab World is not stable and the Saudis and Qataris (who also fund Hamas) don’t want too much trouble and would prefer to lower the temperature. Hamas wants to embarrass the PA and show that it can deliver the goods, and the Israelis didn’t like that the PA went to the UN and they feel like embarrassing them too. The PA has not wanted this exchange to happen because it makes them look impotent with the Israelis (and in the eyes of the Palestinians) at the expense of the more militant Hamas that got concessions while being in a state of war with them.

I support the deal and if you noticed the past 2 months I have been advocating an end to this saga and mentioning that I felt that a deal was in the latter stages of negotiation – when earlier this month I saw the body of a notorious terrorist being returned to the Palestinians after 15 years it gave me a very good indication that something was about to happen. The Israelis obviously figured they couldn’t get him out alive by rescue and if he were going to be killed as a prisoner, it would have been much better had it happened at the start of the whole 5 year episode. They needed to show their soldiers that they wouldn’t close any doors to rescuing the likes of Shalit, and it is part of the morale that drives their army to know that no price is too high to bring one of their own home. The Arabs know and respect it even though it leads to lop-sided results. An Arab soldier knows that his country won’t trade him for 1,000 others and just doesn’t get motivated the same way. That said, I suppose that the Israelis probably made clear to Hamas that future kidnappings would have different reactions. Personally, if I were running Israel, I would say that you either release my guy within a week or we will take your top profile prisoners and start executing them. Kill just one or two of them such as Barghouti and you’d either see the likes of Shalit released real fast or put on executed real fast – it would happen once but probably not again after that after Hamas determined the exercise was not profitable and that Israel was prepared to exercise its own leverage. Not pretty but practical – and then again the Hamas didn’t play by the rules either. No Red Cross visits for 5 years and clearly they didn’t treat him nearly as well as the Israelis treated their Palestinian prisoners. The problem here is that if Hamas goes back to kidnapping or a good number of these released people go back to terrorism, many more Israelis will die. So the calculus is absolutely that it would have been better for Shalit to die and to die quickly than to become this magnet for the release of 1,000 other people and for the sense that Israel was held hostage for 5 years holding out for his release. So they need to have a tough posture or else risk the idea that you grab an Israeli soldier and win the lottery.

I am told by someone who was part of this negotiation that Shalit could have been released in the beginning for a busload of Palestinians but that Olmert, then the prime minister, didn’t properly perceive the value of dealing with it at that time and passed up the opportunity. It’s really important with these things to deal with these issues promptly at the beginning and not to have them fester into things that mutate out of control and out of proportion.

The Persian Gulf is putting a lot of money into the Magreb country elections (ie: Tunisia, Egypt, Libya) and hoping to buy influence or at least make sure that moderate parties come to power there. So far Tunisia in my opinion went rather well.

I expect that Iraq will become more of an Iranian satellite. I suppose the Iranians sent the cleric Sadr to Maliki and told him that they would kill his entire family if he didn’t play ball with them. The Americans don’t exercise that kind of leverage and it’s clear that Maliki wasn’t going to be interested in having a small number of troops around that couldn’t protect anything especially when Sadr and the Iranians want all the US troops out. I think Obama is right to pull out completely – having a few troops around is just a big target and an excuse for everyone to blame America for all Iraq’s ills and to say that the country is still under occupation. There is more strength for America at this point in not being an occupier there just as it is in Libya and as it will be in Syria.

The big question for the next decade is what should happen in Saudi Arabia when that government basically implodes. Its government is utterly corrupt, there is no real leadership or succession and the country is completely dysfunctional but for money being thrown around to pay everyone off. Does the US repeat what it did in Egypt and basically let it happen or does it decide that Egypt was expendable while Saudi Arabia is not? I personally favor what Obama did with Mubarak and I think that the top level of this Administration understands that the world is moving away from the Arabian Gulf as its economic leverage point and that Asia is where the game is to be played. Energy is being developed all over the world and OPEC is not going to be what it used to be. America cannot compete with Asia if it is constantly devoting military resources to protect the flow of oil in that region which is increasingly going to Europe and Asia and not really to America. Why pay to be the world’s policeman at the expense of our own ability to compete economically? And why create this liability of blow-back terrorism in this part of the world by appearing to be propping up dictators and holding a noose around the necks of 1 billion Arabs who see they are being held back? So I think that the more things go along the route that they are going, the more likely the US will be to let the Saudis fall and for some other government to rise. As long as the Americans appear to be helping progress in the Arab World and not propping up its dictators, it will not be hated in that region and the likes of Al Quaida will not be very popular. So far that is what we are seeing in the Arab Spring. I keep being told it will be more sinister but so far I am not in a bad mood about it. I like seeing this kind of progress; it will take time to stabilize but I think it is for the good. You can’t stand around telling the Arabs that because they are not Democrats you can’t deal with them and at the same time keep pulling strings to keep their dictators in place. It’s not honest and in the long term it won’t work.

One year from now the US will elect its next president. I predict it will be Romney (the only Republican really in a position to run at this point; Cain has no real money) due to the economy being in bad shape for the next few years and the housing market still being in the dumps a year from now. So far nothing is being down to reduce the number of homes being worth less than their mortgage value and these foreclosures are putting homes on the market for sale and reducing everyone’s values. This in turn makes everyone feel poorer and spend less money which will hurt the Democrats in the next election. The evidence is that despite the evangelicals who don’t go for a Mormon, the bulk of the Republican states will vote for him and in a general election he is likely to do well. The fact that he flip-flops and nobody really knows what he stands for is a plus because hardly anyone believes anything anyway and people want results, not promises. Romney actually has a record of getting some things done and of flip-flopping in office and I don’t think that the 10% in the middle that decides a general election cares right now about the flip-flopping part. I think that Romney will cut deals and, anyway, a Mormon runs JetBlue airlines and they are the first airline that actually got it right and they are my favorite, so if someone can actually run a good and profitable airline, you could definitely run the country. Romney will get Jewish support; Obama is not going to get the same level of support this time around. This pizza guy Cain might be an interesting VP candidate for glitz and packaging, but he is disorganized and nutty and I suppose Romney would be better off finding someone like Mike Bloomberg or a known technocrat like a Joe Biden to run along with him for VP. The Republicans just have to show that they can field a technocratic responsible ticket that is likely to get things done, stop talking about all the ideology and pandering to the party’s base, and instead worry about the reasonable man in the middle. The ideology stuff won’t work anyway – Obama’s foreign policy has basically been a continuation of George Bush Jr. except that he actually had more success than Bush did. The economics ideology doesn’t wash – the Democrats will remind everyone that the Republicans’ ideology and irresponsibility caused the 2008 crash. Obama running against the rich is also stupid and won’t work – and I can’t wait to see how much money he doesn’t raise or how much Romney does raise this cycle. The rich will hate Obama, the poor don’t believe him and the small contributions over the internet are not materializing this year for him as they did in 2008. Just stick to showing people that you are reasonable and open to cutting deals and getting things done and people will respect that. And let the better candidate win. If anything, maybe this election cycle will result in real changes to the tax code. I like the flat tax idea. Americans don’t mind if someone gets rich – they just want to know that anyone can get rich. That said, only the rich like the flat tax – the poor want to tax all the millionaires and have no idea that this is a ridiculous way to raise money – taxing all the rich people into oblivion will only get you so much money. The money is where the middle class is.

I agree with economist Martin Feldstein’s expectation that in the coming year Congress will agree to reduce payroll taxes and extend unemployment benefits. It won’t make any material difference but it will buy votes and keep the band-aid on the problem during an election year. To really solve problems, they need to stabilize the housing market and get people to spend more money. Businesses won’t hire workers because you cut employment taxes; they hire because people are buying their products and services. I think that Martin Feldstein is correct in saying that the banks need to make a Grand Bargain in return for all the money they got from the government and taxpayer – banks write down mortgages to no more than 110% of equity value and in return the mortgages become personally guaranteed by the borrower for the difference even if the house is sold in foreclosure. The banks also need more freedom to lend and not be required to hold as much as capital in reserve. Small businesses are still finding it very hard to borrow money.

Jack Welch, formerly of GE, said that we need to realize that our recovery will be jobless and that it ought to be. Manufacturing output in America is larger than it was 40 years ago in real terms but this has been more than matched in productivity gains. Meaning that it takes a bunch of robots with a supervisor to do what 50 humans used to do. We also do ourselves many jobs that people used to do using automated things such as kiosks for airport check-ins and scanners in supermarkets. We can fire all the robots but then the factories will just be built abroad because someone else can make a factory with robots. The challenge is to create new types of jobs that make sense in 2012 and beyond. He also feels that many of the jobless in this recession are the mediocre people who shouldn’t have had jobs in the first place and that it is still hard to find good people. I can tell you at my company that it is still hard to find good people.

I have to tell you – I am not hopeful about the elections bringing real change, at least if Obama is elected. Everyone said things would be fixed after 2008, then 2010 mid-term elections and nothing was fixed. All we have to show for it is higher medical insurance premiums. The problem is that even though people don’t trust government, Congress or the president, 90% of people think their own congressman is fine. And money flows toward incumbents to buy them off. So that’s why 90% of them get re-elected. Obama knows that he can look forward to another 20 years of speeches at $250,000 and up an hour if he doesn’t make a lot of enemies. So he will make speeches but not really do anything. But don’t just blame Washington – politicians see that if they tell the truth they get punished by voters. See what happens when Romney got booed telling the crowd that corporations are really organizations consisting of human investors and employees and not just these bogeyman targets that have no shape. It is a system that is totally broken and the American People just want everything for nothing and don’t want to take responsibility. The President has to be able to tell people to take the medicine they don’t want and to like it, to paraphrase Harry Truman.

So let’s get to Asia, which is where the US is gearing up to fight. In order to have a good fight with China, we need to bring down our deficits and start paying down debt. You just can’t have economic leverage when you are in unsustainable debt to your biggest competitor. I think that China has its own problems; they are getting a bit richer and having neighbors like Vietnam breathing down their neck with cheap imports and lower labor costs as their own country moves up the chain. Now China has to start creating brands in order to validate the higher prices they have to charge for their goods. So far they have very few brands. In a decade, they could pull a South Korea and create a few but it will take time. And so far the evidence I am seeing is that for all the talk, they just are not particularly creative over there and lot of the things they are doing are not working. They are spending a ton on this solar energy stuff and they may be dominating that industry but the issue is how much of an industry it really is and I’m being told that the stuff doesn’t work. Maybe in the future it will be interesting but so far it is hyped and subsidized without real demand and a realistic price point.

Now to Europe. This latest Greece deal is mostly the same old blah blah with no real fix – it is only kicking the can down the road a bit and it won’t be long before the markets tank again. Martin Feldstein and Jack Welch both said this month that Greece is finished and ought to default and either get out of the Euro or the Germans ought to come in with trucks and dump tons of Euros all over the town square in Athens. The Euro is hurting the weaker countries because they can’t devalue their currencies in order to compete with the bigger European exporters such as Germany who control the Euro. Basically, the Germans bought off the other Europeans hoping to control the continent when they introduced the Euro; what they didn’t gamble on was how weak the other countries truly were and how much of a drain it would become on the rest of Europe. The only stocks in my portfolio that are really hurting are the banks and European indexes such as Austria (and Austria is probably the best of Europe).

This past month I attended the World Business Forum in New York, 2 days of lectures by the cream of the crop across the spectrum talking to business leaders. I enjoyed it a year ago and totally enjoyed it again this year. What I got out of this: Business is changing profoundly – marketing is becoming more social and connected as opposed to vertical thru reaching down via media. Companies are more democratic and people are bringing technology from home with them to work (ie: airplane pilots using ipads instead of log books) (ie: people using their own communication devices to connect to the company’s servers).  There are generational shifts and these and the new technologies are real and many. People in their 40’s and 50’s make appointments for lunch. People in their 20’s sorta zero in on each other (ie: Where are you right now and where are you heading?”) for lunch.

Bill Clinton spoke as well and he had Jack Welch both said that government and business have to work together. The current state of affairs with government and business being adversaries in America is not profitable especially when the two sides are much more joined at the hip abroad. On the other hand, there are opportunities here. Our banks are less likely to be corrupted than a bank in France where the government official is likely to be an owner of the bank and can tell the bank that it has to lend to a high-risk constituent in return for a favor that doesn’t benefit the bank.

A particularly spell-binding speaker was Ben Zander, conductor of the Boston Philharmonic Orchestra who spoke about Possibilities. I can’t remember a lot of his 90 minute presentation but it was one of the best speeches I’ve ever heard. The idea is simple – look at possibilities. But it was a lot more than that. There is a TED presentation by him – look it up. Another speaker Tal Ben Shahar, spoke about Positive Psychology and the two presentations I thought were rather interesting. The basic idea was instead of looking to fix faults, look for strengths and build on them. This approach has a better probability of success. In Zander’s case, instead of talking about how only 3% of the population likes classical music and trying to get it up to 4%, figure out how to get the other 96% of the population to like classical music. The World Business Forum’s site is I think you can download the presentations on webcast for paying a fee. It would be worth it if you have the time to sit and watch a good deal of this. Basically, the forum is an excellent resource for wisdom when it comes to running a company and understanding what kinds of changes are going on in the world that affect business in a more profound sense than simply day to day. Howard Schultz, founder of Starbucks, Robert Rubin (former Treasury Secretary) and Angela Ahrendts, CEO of Burberry (a very well resuscitated brand) were among the many speakers.


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