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THE BLUE MONEY REPORT.
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The Blue Money Report
"...contributors will only give money to challengers when they have a realistic chance of winning, and incumbents only spend a lot when they have a chance of losing"
~ Steven Levitt
Welcome to the Blue Money Report
Today's Commentary: 09.19.03 There are folks out there doing some very serious research about strings. In the hopes of uniting the whole world under one theory, strings being the only way this is possible, these very hip scientists are attempting to build a framework where everything can be explained. Including money.
Just to bring you up to speed on what this string theory is all about, it is important to know, that before I applied it to finance, it was completely useless as a means of altering your everyday life. You couldn't apply it to a trip to the store. It wouldn't help your kid on his English exam. In other words, it means almost nothing. Until now, of course.
The theory is based on the simple notion that strings unite all of the forces in nature including gravity. There hasn't been much in the way of opportunities to prove this thinking, the cost of a particle accelerator has made testing of the whole idea cost prohibitive. So they scribbled on paper or perhaps with grease pen on those see through Plexiglas easels. They did math in the hopes of being able to prove something that may not even exist. Evidently, waves, the previous uniting principle are out; strings are in.
Scribbling furiously myself, I have determined that the events of the past week or two might be applicable for the string theory of money.
Dick Grasso is gone. The string that has held his world in tact for so long, over eight years as the chair of the NYSE, has come unraveled. It was bound to happen. He left enough strings tied to other people's fingers to give away his intention. If I could hire someone who could influence my pay, I would. It appeared on the surface that there were no strings attached. But there were. He was on the board of companies who were on the board of the NYSE and by the time most of the media untangled the string that tied everything together, we noticed that the string was now a noose around the poor guy's neck.
The board should share much of the guilt for letting this happen. But they probably won't. They understood what many a physicist has grappled with in the context of this one theory search: sometimes you get lucky. This universe can be considered a simple case of good fortune for the human race. The NYSE was a good stroke of luck for Mr. Grasso. When the exchange was making money no one noticed what Mr. Grasso was making money also.
There are strings around the Fed which surprisingly leaves Alan Greenspan is neutral. He has become much more of a weaver in recent years, telling financial markets what amounts to a string of tall tales whose meanings, while given in soft and subdued tones, mean almost nothing. He is as cryptic as always and this past week was no different. He believes that the interest rates at 45 year lows are where they should be. Money is flowing into the market at the right pace. The string this time is being formed round our collective necks.
Its important to note that whatever the current short term rate is has absolutely no determination of availability of money. The second thing that is important to note is that rate will not likely be there for long. News that Mr. Greenspan had decided to hold the funds rate at 1% was met with a huge sell-off in bonds. If you take a snapshot right now, you would find us in the perfect set-up for a return to interest rates in the 5% range. He will feel as though he has to do it. GDP will be up. And yes, unemployment will ease some from the bottom up. Noted economist Michael K. Evans even went as far as suggesting that the rate needs to be at 5% just to be near equilibrium.
But the effect of that 1% interest rate held for too long will find capital being spent on all of the wrong things. Cheap money can create capital projects that take too long to complete. If that happens on borrowed money and the return on the project is slightly higher that the rate at which the loan was made, it can look like a profit without ever having been utilized. That happened not too long ago in the nineties as investors raised billions for products that never happened. At the end of that period we realized that we had all invested and didn't save. Greenspan is pulling that string again, encouraging investments on cheap money, encouraging equities when valuations are still outsized, and leaving us think that this will all last indefinitely. The problem with tying all of those things neatly together finds us coming dangerously close to what happened in the Twenties.
One of the problems with the theory of everything is the fact that, as the scientist will tell you, things are accelerating. This applies to the world of money as well and specifically to those countries who want to play on the big field with the big players. The failed Cancun meeting of the WTO, tripped over the very strings it used to try to weave the world in a collective basket of cooperation.
When money is used for subsidies, farmers in all parts of the world pay the high cost of what some of the most outspoken critics of the program call "corporate welfare". On the American front, the farmer is strapped by the cost of doing business as companies on both ends of their problem continue to tighten the noose. Suppliers, once plentiful and competitive have consolidated creating market power which create pricing power. The squeeze from that end has put pressure on profits.
At the other end of the world, dirt farmers in third world nations are unable to sell their produce because of American aid. The string that ties American crops to Ethiopian children as an example runs through, around and between a vast array of companies whose real interest is not trade but the free flow of cash from the US Treasury.
This is an accelerating problem of a universe that is expanding too fast for some creating a dangerous lag for those not pulling the strings.
So how does the biggest string puller of all fit into this theory? Mr. Bush has a way with money. Able to create his theory of everything all on his own, he has tried to do what no one else has been able to do, solve every problem. He has unfortunately failed miserably in this attempt to prove that all things are attached by strings.
The President whose tax cuts, aggression in Iraq, inability to veto any spending bill that crosses his desk, and to create a budget deficit of generational proportions seems more lost these days. I believe he beginning to realize what many folks before him have understood: theories fail.
The sooner this realization sets in on the President, the quicker this country can rearrange itself and get back on some sort of financial track that leads to fiscal responsibility. But the only way that would happen is a reversal of thinking.
In string theory thinking, the universe will always find itself in a position to take the mix of cosmic elements at hand and create life. Once that manipulation begins, is difficult to control. There are three things that the President can do to allow his cosmic mix to create life as it may.
Let Greenspan go. By letting Mr. Greenspan's tenure continue which some have rumored was a nod and wink towards re-election, he has become an enabler to a failed monetary policy. This makes us, as Paul Krugman of the New York Times points out repeatedly, a possible candidate for banana republic status.
Increasing our permanent subsidies to $40 billion a year after the hollow promise to third world nations about reductions served only to create ill-will. It doesn't matter that Europe and Japan have higher subsidies in place. they never said they would reduce their programs. We did. When we, the global power, do this it becomes doubly wrong. We used to look at developing countries as customers. And they looked back at us a potential partners in trade. When the President doesn't acknowledge this relationship, how can he expect his most favored corporations to do otherwise.
The belief that the economy will grow sufficiently enough to create revenue to repay the debt, while using the best intentions at the wrong time, he has basically hog tied this country with the very string that attaches us to the rest of the world. Even reagan realized the folly of his maneuver. The president's father realized the dilemma he faced and did what amounted to political suicide. Doing nothing or worse, allowing some of those tax breaks to become permanent will be the same as if he had raised them.
We will continue to work on the theory. Suffice to say, this is only part one.
Today's Commentary: 09.16.03 Okay, perhaps that is a bit oversimplified but many of us were taken back when his pay package was announced. Calling it a package merely softens the blow. In reality he only makes $2.4 million in actual pay, the rest the exorbitant amount of cash is counted as the cost of doing business with such a great leader. Honestly, were any of us surprised by the chairman's pay or were we upset by his ability to influence the very people he has made very wealthy, gently coaxing them through cronyism to help him reach the lofty level of the truly rich?
These seat holders on the exchange pay handsomely for those chairs. In case you were wondering, a seat at the exchange is worth something in the neighborhood of $2 million. This is a sum many are more than willing to pay to become members. Mr. Grasso has become the poster boy for Wall Street diligence and cooperation with the authorities as the investigate practices of its members. When Merrill Lynch slipped and allowed themselves to be cornered and caught by Eliot Spitzer, the New York Attorney General, Mr. Grasso was right there brokering the settlement. He looked every bit the regulator in that instance. But because he is willing to take the pay for those skills and adept footing when those other regulators want to drag the exchange through the muck in the name of political gain, he quickly departs their ranks and becomes the CEO again. Then those wealthy members decide that his ability is worth a great deal to their peace of mind paying him bonuses and deferred pay to make his retirement very comfortable indeed.
It is easy, you might say, for someone who has never been in a room with that much money, deferred or not, to throw stones at his clean shaven pate. He deserves credit for the following accomplishments: He has increased the amount of shares that can change hands on any single day by upgrading the systems used on the floor, an act that would have come at the insistence of the numerous companies whose value depends on expeditious movement of shares in and out of the exchange. This move had a secondary effect masking a third effect quite nicely.
The second effect of upgrading the technology was an increase in trade efficiency. As a result of his efforts to accommodate the movement of billions of shares, a hundred fold increase from the time Mr. Grasso first become an employee of the big board, the the price of those transactions fell as a natural occurrence. But the third often overlooked result of increased trades and lower costs is higher total commissions.
The folks who designed the infrastructure of the NYSE's board created a multi-tiered system of independent and member directors who feel as though Mr. Grasso has done a fine job at generating good fortune for all involved. The only thing better than being king is personally picking those who determine your pay. The internal relationship between Grasso and member companies, many of whom were added during his tenure often seems incestuous.
My issue lies with the cryptic title of regulator, the other one-third of his self explained job. Regulators are typically work in a branch of government that pays a regulator's salary. Many of the regulators at the SEC have come from lucrative private sector jobs that made them millionaires many times over. If Mr. Grasso were indeed a regulator as he claims he sometimes is, his paycheck needs to reflect the pay of a public servant. By way of comparison is the paltry almost symbolic pay received by the S.E.C. chairman of $142,000.
But the simple fact that board members will probably crumble beneath the heated light of further scrutiny will probably see the 57 year old Grasso stepping down in the near future. When the board meets again on October 2nd, Mr. Grasso will be the subject of much discussion. Former holders of this job are calling for a complete change at the helm, an event that is not likely to happen. Mr. Grasso, as the front runner of the NYSE will be offered to save the integrity of the exchange and to keep the credibility in tact as well.
If Mr. Grasso did what we all thought he should do, the committee who determines his pay did what they were supposed to do, and the constitution that governs the big board was upheld, no former employees should have issue with what he has done. His credibility may be in question. His time at the top job at the NYSE may be in jeopardy. But everyone can rest assured, the NYSE will survive intact with or without him. He certainly won't be the last Wall Street cowboy who tries to run herd over big compensation packages, but he will be run out of town. Question is, who will replace him at the skillful job of bell ringer?
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