Unemployment to 13%?

Meredith Whitney spoke in June and forecast a worst-case possibility for unemployment to reach 13%.  In a prior post, ‘Meeting of the Minds’, Larry Fink forecast near 11%.  It is safe to say we will approach 12%.  However, remember this is not U6 unemmployment.  Also, notice the generation-long trend of long-term Unemployment climbing.

A Poor Education in a Rich World

An Economist article last week discussed the perils of America’s education system.  It is old new that the Nation’s coveted universities, hospitals, law firms and investment banks are filled with a diverse population.  However, the increase in diversity of the nation’s most talented begins at the University level because our elementary schools are poor.   Highlights are below.

• America spends 3.8% of GDP, above average in the rich world
• Its pupils do poorly in tests of reading, writing and mathematics, and many drop out.
• Teaching attracts few ambitious and able graduates.
• School leaders have little autonomy.

The solution, to free-marketeers, seems obvious. Give taxpayers’ money not to a state-run monopoly, but to independent schools. “More than four-fifths of our pupils are reading below grade level when they arrive aged ten,” a charter-school director says.  “Three years later, fewer than a quarter of them still are.”

The obstacle in turning the system around is not small.  Try going up against state/municipal governments, teachers’ unions and teachers’ pension funds.  Unfortunately, until states recognize the success of programs like Teach for America, City Year and Charter Schools, the majority of students will languish in a system that lacks the creative people and competitive environment required for success.

A Global Enemy Requires Global Allies

Dan Rather sad down to interview Alberto Mora, the former U.S. Navy General Counsel.  He has some very pronounced things to say regarding the war on terror:

• Human dignity as an American value is emphasized in the 5th, 8th an 14th Amendment.
• Fighting a global war on terror requires a global coalition of US allies to collect intelligence, lobby governments, assist in battle and monitor the outcomes.
• These allies have been reluctant to participate in this coalition because our position on terror conflicts with their domestic and international laws/ideology.

The interview presents only one side of the argument; but in the long-run it makes the most sense.

The “Slippery Slope” to Big Brother

One thing – perhaps the only thing – the Bush and Obama administration’s have in common is their belief that access and control of information is the right of the government.  As Millennials enters the work-force, they are exceedingly comfortable sharing their every move via facebook, twitter linkedin, etc and have become fairly ‘privacy-complacent’.  However,  the willingness to share personal information with select friends is far different than mandating that businesses and individuals report it to the breadth of government.

Our current Administration is looking to monitor alternative investments like hedge funds, venture capital firms and private equity shops.  However, VC firms have no impact on financial markets, no control of taxpayer dollars, and rarely even use debt in transactions.  You can’t help but wonder, What is the point of regulating a VC firm?

When you realize there’s no good answer yet no substantial policy objection, it becomes apparent that the era of Big brother is already here…

http://dealbook.blogs.nytimes.com/2009/06/18/obama-regulatory-plan-rattles-venture-capitalists/

CDS: “A licence to kill”

George Soros, renowned currency trader, hedge fund investor and author of ‘The Crash of 2008′ responded to regulators’ initiatives in the Financial Times on Tuesday.  He doesn’t present many new ideas, but does point out that the Administration’s proposed regulatory framework would look very similar to what it is now – only renamed.  The highlights are:

• Issuers of securitizations must maintain 5% of securitized assets.  Note: I guarantee this will have legal ramifications because the buyer and seller are intertwined, rather than on unique sides of the deal.
• Hedge funds will be regulated (and taxed) in a way that may resemble investment banks, largely eliminating the benefit of hedge funds.  Watch for heavy M&A activity between hedgies and IBs.
• Glass-Steagall should be re-considered.  But after Merrill, Bear and Lehman were swallowed up by commercial banks, the stand-alone I-Bank model is shaky.

With renowned tact, Soros goes on to deccribe how CDS should be regulated.  “Consider the recent bankruptcy of AbitibiBowater and that of General Motors. In both cases, some bondholders owned CDS and stood to gain more by bankruptcy than by reorganisation. It is like buying life insurance on someone else’s life and owning a licence to kill him. CDS are instruments of destruction that ought to be outlawed.”

He’s right.  CDS is not an insurance policy.  In fact, the net discount/premium vs. expected cash flow (albeit a interest rate or PE multiple) should accurately reflect risk.  The yield/multiple is repriced in liquid markets to reflect any  afluctuation in risk.  To mitigate risks of undesired price fluctuation and/or default, buyers can a) purchase insurance policies or b) use a reliable hedging source (stocks, options, futures, commodities, etc).  Swaps are neither an insurance policy nor a reliable hedge.  It is time they be reigned in.

TMP Makes ‘The Big Picture’

Barry Ritholtz, author of  ‘Bailout Nation’ and the blog, ‘The Big Picture’ posted a entry in response to our post on Tuesday.  The original post discussed the Frotnline piece on TARP.  Visit Barry’s post and blog here.  Thanks for the link Barry!

What North Korea Wants: An Equal Seat at the Table

After 16 years of negotiations, once in 1994 under Clinton and again in 2005 under Bush, North Korea has demonstrated that security and diplomacy are not what its looking for.  In fact, the US provided Kim Jong Il with substantial energy and economic independence and a potential promise of a peace treaty to end Korean War.  Even China got involved in 2005 to pushing back on North Korean weapons.  While still engaged in talks with China, Korea fired the first nuclear test prompting China and the US to realize that North Korea will ignore us until they get two things:

1. To be a Nuclear Arms state.
2. To have a seat at the table on disarmament (not aggression) as a way to gain hegemony.

After 16 years, North Korea clearly has the weapons and our attention.  But what is it they have to say?

The Day Everything Changed

Frontline gained access to interview every substantial player in TARP and divulges the truth behind the BofA / Merrill Merger.  “The Day Everything Changed” is by far the most compelling.  Watch the video.

• As if teaching a second grade, Hank Paulson lined up banks in alphabetical order at The Treasury to accept TARP.
• He filled in the amount of money they would accept ($10 Billion+) with a pen – not exactly prototypical legal procedures.
• Only weeks before, the government watched Barclays pass on Lehman and the Firm went bankrupt, even as George Herbert Walker, the President’s cousin, was CEO of the LEH arm Neuberger Berman.

You can’t help but ask, “Why Citi?  Where was W. when Lehman went down?  And did the end justify the means?”

Iran in Photos: Failed-State or New Democracy?

It appears the youth of Iran were hoping for the charismatic voice of change that swept the U.S.  Is the mass protest a response to the electoral process of failed-state or evidence of the first meaningful step towards demanding a real democracy?   At one death, these photos indicate more of the latter.

A Case Against M2M Accounting

As markets become increasingly global, the tendency for the world to arrive at universal conclusions and philosophies grows.  The problem of such ‘generally accepted principles’, is that the whole world can fall victim to “group think”.   The gravity of this problem has yet to be realized, but has managed to manifest itself in popular culture where  Shaq’s mis-spelled tweets are heralded while much more substantial record-albums die.

The world is unreasonably obsessed with transparency and succinct on-demand information.  As a consequence, ’short-term accuracy’ is making people ‘long-term ignorant’.  Perhaps the most important professional manifestation of this trend is FAS 157. The consequence of such foolishness was recently discussed by Blackstone President Tony James at the KBW Financial Conference and can be viewed here.

• FYI- FAS 157 marks-to-market assets.  In private equity and hedge funds, carry value is the accounting realiziations of gains.  Carry cannot be negative.  Carry is only distributed as cash when assets are sold.
• This means that during the last recession, a large BX portfolio would have been marked down 71 using FAS 157 during the last recession.  It ultimately more than doubled its value.  This is fairly common.  See Slide 16 for an alarming chart.
• For public investment banks, this has caused the realization of  losses that would never normally be realized.  However, the banks look so terrible that sell-offs occur, thereby destroying equity, halting lending and resulting in employment.
• In my judgment, mark-to-market accounting is artificially increasing the realization of losses as well as the impact of beta across previously uncorrelated assets.
• For successful investments to be identified, assets must be held in confidence and gains realized when investments are cashed-out, thereby allowing for alpha to return to the markets.

The increase of vol. correaltion across assets is exaggerating losses worldwide and unnecessarily destroying unbelievable amounts of wealth and progress.