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THE BLUE MONEY REPORT.
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The Blue Money Report
"Everyone for himself," cried the elephant, as he danced among the chickens.
~ Robert Bork
Welcome to the Blue Money Report
Today's Commentary: 04.17.03 It doesn't matter whether you view the world through rose colored glasses, believe the glass is half full, or the day is all sunshine and green lights, the economy is feeble. Your outlook, or your level of confidence is immaterial in the overall state of finances in this country. But should you tend to be someone who is optimistic, and I often think of myself as a member of that camp, you may be sadly disappointed with the outcome of the next twelve to eighteen months. Things are not going to get better.
For a moment though, let's pretend you are President Bush. You have just proved to the world that the United States is a military might beyond comparison and above competition. You could probably surmise that our troops, more specifically, our air power could take on the next five biggest nations in the world in a street fight. And as President, fresh from over-running the hapless and relatively defenseless Iraqi regime, you are used to getting your way. Worse, you are used to hearing what you want.
Your handlers, the folks you have delegated the everyday trench work to, have shown you that they are right by welcoming advice only from those who agree with their point of view. That point of view suggests that growth can only be achieved by creating deficits that will last for generations. When you want an outlandish and irresponsible budget passed, when you want record deficits, when you want to get credit for kick starting the economy, you bring in advisors who will tell you what you want to hear. What those advisors have said is quite remarkable.
The basis for this tax cut is simple: cutting taxes on dividends would add value to the stock market. That value would offset any interest rate problems created by the removal of a good deal of money from the economy by the nation's biggest borrower, Uncle Sam. Your advisors tell you that the connection between interest rates and deficits is not even worth arguing about. But the folks who will benefit from these cuts continue to remain the biggest roadblock to getting this budget passed.
The 2001 tax cut provided a quarter of increased growth much like watering a near dead plant. You get some thanks as the plant recovers. But like so many projects launched by this administration, it is too little help to work over the long term. The Fed has done all that they can do in the face of this feebleness and it has recognized one thing: growth of any kind is better than growth of no kind. But as President, that isn't good enough. You want what your advisors said you could have.
Your advisors told you that tax cuts aimed at the wealthy would be all of the stimulus this economy needed. Like so many current issues at play in the economy, you either agree with Mr. Bush or you are unpatriotic. The unpatriots are looking at a very different picture than those who blindly support the President and his economic policies.
The unpatriots are beginning to look around that world for proof of the economy's current state of injury. Early last week, the latest proof that the economy was in deeper trouble than we thought was the sudden appearance of the underemployment number, a figure that was calculated to be twice what the current rate is estimated to be for March (6.0%). These new numbers, not really new at all, add in the folks who are no longer looking for work and the folks who have found work at a far lesser amount of pay than they were used to getting paid.
Underemployment, your advisors would suggest, is a number that may, in it's purest form, simply be a precursor to an improved economy. An economy that, I might add, existed only a decade ago. So your advisors would suggest that you ignore unemployment or the underemployment number as a thorny patch on the road to recovery.
But the unpatriots are pointing to the nature of those jobs. Those jobs still exist, they will tell you, in places where companies can operate without all of those pesky regulations; where costs have kept inline at almost zero. Those jobs belong to folks who produce goods in far away lands at a fraction of what companies in the United States can produce with our workforce. This not only cripples the buying power of the (un)workforce, but lowers the ability of companies to make profits and without that sort of income, expansion is simply a dream of a time gone by.
The unpatriots look at countries like Japan, who have attempted the same "government debt is good for the economy approach" and noted that it has failed spectacularly. The President's advisors are quick to point out that this is hogwash. We are not Japan.
No. But we are expecting the world to continue to buy our goods, our currency, and our debt. At what point do they say enough is enough. If that happens in tandem with an increased deficit, which looks to be a lock at some $350 billion, the dollar will fall under the pressure, interest rates will rise dramatically and the ensuing recession will be even more toxic than even the wealthy can handle.
Your advisors have suggest a way. To get what you want without making your party look like they currently appear, you need to wipe out all of the special interest packages attached to the $350 billion Senate imposed cap. Then, soon as the Democrats come on board, immediately propose the second half of your plan for stimulus.
You have clever advisors who will tell you what you want to hear. Every leader needs that.
Today's Commentary: 04.14.03
The regulation free environment of hedge funds is not without risk even with all of the built in methods of harnessing returns. Chasing the popularity of managers would create a mutual fund "cult of personality", much like the one that currently exists in the hedge fund world. Not only would this be bad for the mutual fund industry, but the average investor would need to rationalize their picks with more than numbers. They would find themselves flipping through the pages of People magazine for managers that suit their taste, a thought I can't bear to entertain. I believe that most investors understand the criteria currently in place is there for the protection of both parties.
So I believe in "style purity". Granted, there are far too many funds to choose from, broken down into far too many categories within each group. But these splinter styles tend to burn themselves out after a period of time. Perhaps a loosening of the rules in each of these "general" groups would open the field to broader investment opportunities. Growth should be able to chase growth wherever they see fit. Value could pursue value in companies of any size. This would only solve part of the problem within the industry. The investor can fix the other part. What the investor and the manager may need instead is a new understanding of their mutual obligation in the agreement when they purchase a fund.
Mutual fund investors are attracted by performance numbers. But these are past results footnoted by no guarantees of future returns, compared to indexes that may not apply. Those numbers are shy of what a manager could do if they were presented with the gift of investor conviction.
I have read many letters to mutual fund shareholders written by well meaning managers. I have, over the course of the last three years, penned a few hypothetical one myself. All of these notes to the investors are apologetic at best, critical of the environment they have to work with, at worst. These managers all come just shy of suggesting that the investor should stand pat, sit tight, and let them find a way to beat this market. I think I have an idea that might work, but will never come to pass.
My suggestion would stem the flow of redemptions by investors, one of the prime causes for poor performance in a down market. Many of those redemptions are done by foolish (bought at the top) and skittish (former believers in dollar cost averaging) investors who are selling at the bottom.
In my opinion, when an investor signs a manager to work for him, the two should enter into a two year long contract. This lock-in period would free those contributions from a reserve pool of money that these managers seem to need to keep for redemptions. Cash on the sidelines is doing nothing for the fund but slowing down the possibility of better returns.
After the first year expired, the investor would renew his contract with the manager with the knowledge that his originally invested principle, secured by his shares, could be borrowed against if needed. This would give the manager the option of selling those shares or holding them in equities.
Once the second year expired, the investor would pay back the principle with interest, renew the account or simply part ways. This gives the manager two years of investor commitment. The ownership would lower turnover within the fund, allow the fund to be fully invested, cut back on trade commissions and lower the cost of taxes, all of which hurt the overall performance.
When the manager and the investor part ways, the manager should be allowed to do one of two things. They should be allowed to borrow against the shares held to pay the investor or simply sell those shares to refund their money. If the manager feels confident in his abilities, seeking returns without worrying about who is looking over their shoulder, or worse, about to bail on his next best idea, they would be free to chase opportunities that would take longer to unfold.
The incentive for the manager will be determined by performance and by the exodus of investors. With the pesky problem of redemptions removed, and the opportunity to earn interest from borrowed funds, style purity would narrow the field of available funds to include those that are the best now, not the best then.
The Week Ahead in Mutual Funds
Or perhaps we are still looking at a lackluster economy whose ability to pull itself up by its financial bootstraps might be more difficult than previously thought. The business outlook, as reported by the National Federation of Independent Business, was less than optimistic. With the war more or less ended and the costs of it and the aftermath still undetermined, the President's tax package looking to push the deficit to new and previously unexplored heights, it is hard for business leaders to get fired up about much. That is despite what most of the talking heads have turned their attention to now that the war has diminished in newsworthy value.
Sidelined cash is missing an opportunity though. Even if we head hat first into another recession (the odds of which are increasing daily), the stock market won't bear the brunt of the pain this time. Much of that is already present and is unlikely to get much worse. And is probably already built in.
The Week Ahead in Bonds
The tobacco companies, of which Philip Morris is the largest, have already agreed to previous damages to be paid to states over the course of the next decade. These payments have, in turn, been sold by these local governments in the form of municipal bonds. The possibility of the feeding hand of big tobacco stopping those payments have left many states in jeopardy of defaulting on the currently issued bonds and has put a halt to new issues. Prices soared on the news last week and have stabilized a bit as the company hunts for a compromise in the court of Judge Nicholas Bryon.
Otherwise, the good news out of Iraq kept the whole of the Treasuries market less than even on the previous week. Bond markets close early on Thursday this week and are closed on Friday for the observance of Good Friday. Perhaps this would be a good chance to reassess, relax, and reflect on what and where we are going.
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