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Today's Commentary: 06.07.05
Right vs. Wrong:
When Even Winning Hurts

Four things have gone wrong over the last week, all of which will impact every financial report for the coming year. I failed to see two of them coming, the other two were much easier.

To begin, I was wrong about the dollar and its relation to the rest of the currencies available on the open market. It was widely believed until last week, that no matter how much the United States borrows, the world would always buy that debt. At least we all thought so. I was surprised to find that there was even more to it.

The attempt at some sort of European constitution by the members of the Union fell short of fruition and the Euro took a hit as the result. That was understandable. What wasn't so clear to me and apparently there are others as well, was the dollar, even when weak is perceived to be solid, was not so tightly tethered to our consumption. When the dollar began to rise at the same time as the 27 nation Euro fell proved that the fickleness of this market is moved not by huge trade deficits, not by our strength nor even ability to repay our creditors in a timely manner. In fact, that seesaw movement between the Euro and the dollar points towards a policy concern rather than a credit one.

If that is the case, China would be off the hook as the big bad trade partner with its own Yuan unnaturally chained to the dollar at the hip. Instead, the markets seem to be speaking to those who make the deep deficit policies as the likely reason for the steady three year decline in the dollar. Seems we were watching the wrong indicators of sentiment on that one. Soon as the Euro regains favor, the thinking would go, the dollar will begin to slide again.

I was right about the Fed though. Sending Dallas Fed president Richard Fisher into the forefront with his baseball analogy about the pace of rate hikes as compared to the nation's pastime seemed ridiculous. But it distracted us by what was supposed to appear the rookie mistake. We are not in a baseball cycle. Instead, we are more aptly compared to the final two minutes of a close basketball game. The outcome hangs on every second rather than the seemingly small amount of time until the final buzzer. Fisher let Greenspan move either way without seeming panicked.

Even if the Friday's job numbers seemed to point at a retreat from that really large number in April and it did seem to catch more than few by surprise, it turns out that the number was actually significant but only as an average. And that is exactly what the administration was quick to point to as they rendered averages to suggest we still have a healthy 4% growth rate.

What Mr. Fisher, The Treasury Secretary John Snow and the Labor Secretary Elaine Chao missed was the fact that those numbers, if they are to be believed at all, point towards is a meaningful growth rate of 6%.

The Fed needs to keep raising rates just to break even; the Treasury needs to attract other foreign buyers - their current customers are now looking less interested with each new auction; and the Labor Department needs to face facts about the kinds of jobs that are being created, many of which still fall below the minimum standard for a living wage. Loosing 7,000 more in manufacturing is hardly reflective of the optimism that frothed to the surface last week in the wake of the light report.

I was also wrong about William H. Donaldson, I believed after several years on the job, a tenure that increased morale at the Security and Exchange Commission in the wake of Harvey Pitt, wrangled more money from a reluctant Congress, and succeeded in restoring the credibility of the agency he would have stayed, and despite the turf wars with other politicized agencies, he would have actually been strengthened by the conflicts he had yet to face. Within his group, disputes arose frequently, mostly from the two Republicans.

Donaldson allowed us the simple pleasure of cheering on a champion of the little investor. He'll be missed by this column even if he did his work quietly and diligently, forcing industries like the mutual fund business to refocus on their obligations. Many fund families will celebrate his departure. Hedge funds were also a target that he should have avoided but the audacity of aiming at the bastion of true wealth, because he realized what would happen if they tripped, was worth encouraging. He will be proved right on that suspicion eventually and even though the S.E.C. did not have the resources available to try and regulate the hedge fund industry, the suggestion seemed enough to create concern.

The work Donaldson did fly in the face of the business first White House. His attempts to head off exactly the types of scares the hedge funds provided several weeks back were the source of a good deal of peer criticism. He wanted increased regulation in the mutual fund industry and better corporate responsibility and accountability to shareholders. He held close the belief that oversight kept companies and investments honest. That was what finally did him in.

He was one of the good ones and should have never been pushed out of the office. I thought you had what it took, Mr. Donaldson.

At the behest, which is a nice word for whining, of the Republicans on the Commission, the President nominated Charles Cox, a nice conservative boy from California who has been noticed for his "straight on the party line" efforts and doing the exact opposite as the current chairman. I'm fairly confident that Representative Cox will provide substantial fodder to this forum in the months to come as he under regulates, under represents the interest of the investors, and under scores the same type of policy problems that have kept the dollar in decline, the economy off kilter, and every one talking about housing.

It is important to say, right up front, that the housing market is way beyond anything the Federal Reserve can do. But that doesn't let those bankers off the hook. By ignoring it, they did their best to enable it by creating a short term belief that long term rates are one in the same. Much like the lack of follow through on margin rates just before the equity bubble burst, allowing the average homeowner believe that cheap money is controlled by Greenspan and co. By them collectively turning their heads the other way, they allowed lenders to create a natural cause and effect. We can expect that sort of behavior from private sector chiefs but these are a much more academic, study the data types who should have known better. But this is also a more political bunch than previous Boards.

Housing prices are their problem. Aside from a togue-in-cheek remark made by Greenspan before Congress about his concern over adjustable rate mortgages, he has done more by his silence to keep the money flowing from equity in homes into sales to stimulate the economy than he could have with words. That, he knew, hence the tongue tucked in the cheek, that the continued borrowing on top of borrowing let him keep those ridiculously low rates too low for too long and give the eventual impression that he is in control as he tightens.

ARMs now make up 35% of the mortgages. That number doesn't included the amount of adjustable rate terms that are tied to home equity lines. This type of loan has been the favorite among mortgage lenders looking to close a deal on a house for folks who otherwise wouldn't be able to qualify. It keeps the payments affordable even if many of these loans are structured as interest only. A sort of financial double whammy for the uninitiated. Those rates are inching up now with each Fed hike and are calculated using the prime rate plus an additional percentage or two or three. Many have caps of 18%, which will come as a rude awakening for a lot of mortgage holders who started the loan at 5.5% or less.

Even with a three right, one wrong score after last week's events, the perspective is what we need to appreciate most. Winners in this day and age, lose as well. Mr. Donaldson will be missed and so will the housing market. Both were done in by browbeating accusations of doing what they we supposed to do. Donaldson for being watchful; the housing market for being appreciative.

I was right about the growth rate in this country being far below that of the talking heads. It will remain anemic and a lot of that is the result of the other right for the week: the weak dollar is the result of poor economic policies, nothing else.

BlueMoney Report

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