wallydownundy

Companies are shedding jobs quicker than kilos on “The Biggest Loser“. Former fatties are now “right sized” and “down sized” and better able to handle the economy. Meanwhile the “right sized” are filling unemployment lines and leading to record high unemployment in most OECD nations. (Australia, for some odd reason, is defying the trend and last month announced a decline in unemployment - Aussie! Aussie! Aussie! Oy! Oy! Oy!)

In the USA alone, each month a half million jobs are lost, according to The Guardian:

“The unemployment rate in the United States has hit a 26-year high after another half a million jobs were lost last month.

“The labor department said the jobless rate jumped to 8.9% in April from 8.5% the previous month, marking the highest level since September 1983. US employers cut 539,000 jobs in April, the smallest number since October.”

Source: guardian.co.uk, Friday 8 May 2009

To date the Global Financial Crisis emanated from falling residential housing prices leading to a drop in consumer confidence, leading to less spending, leading to banks writing off loans…leading to today’s catastrophic mess.

But the bad news it’s only going to get worse.

The employers that are now thinner, leaner and meaner are locked into long term rental agreements for commercial property. This means the major cities will soon have a glut on their hands. And when owners find it impossible to fil buildings - at the right price - they’ll start defaulting on commercial mortgages. Prices for commercial property are bound to fall due to a steep fall in demand. Yet due to the long-term nature of most commercial rental agreements, we’re unlikely to see the full effect for another year.

Until then demand for new commercial premises has fallen - so building has stopped.

And did we mention the banks now holding mortgages that may not be repaid? In the USA attention has been focused on the larger banks - Citibank and BankofAmerica come to mind. According to “The Wall Street Journal“ more than US$100 billion is likely to be lost across all banks in commercial property next year:

“Commercial real-estate loans could generate losses of $100 billion by the end of next year at more than 900 small and midsize U.S. banks if the economy’s woes deepen, according to an analysis by The Wall Street Journal.” (see full story on-line)

We’ll need new terms in a post-crisis world. Safe as banks? Nope. Good as bricks and mortar? No longer. Maybe mattress sales are on the upswing - especially as we can’t get coffee in tins any more to bury in the back yard.

The financial markets caught the swine flu yesterday.

The outbreak in Mexico has spread to America, Canada and New Zealand. Australian authorities are trying to contact 300 people who shared an Air New Zealand flight to Australia (via New Zealand) with infected passengers.

Financial markets - already unstable - sold down heavily in transport and aviation stocks. China has placed a ban on all pork products from the USA and Mexico (despite the fact cooked pork products contain no traces of flu). American authorities have placed an alert recommending against travel to Mexico.

To date the “global pandemic” hasn’t taken an enormous toll (in actual numbers, versus the gargantuan toll one death takes on a family). Yet the biggest casualty may prove economic. They say those most at risk in flu season are the frail. Global financial markets couldn’t be weaker. Add to that calls to slap in place some protectionist measures and you may find swine flu taking a disproportionate bite out of the economy.

It is my fervent hope the flu is contained before taking a high toll in lives. It is my great hope, also, that swine flu doesn’t further infect the already sick financial markets. The patient may not survive a relapse.

The US auto industry has yet to recover - and this week manufacturer Chrysler is expected to announce Chapter 11 bankruptcy. General Motors isn’t far behind. Both companies benefited from substantial government loans. Only Ford Motor Company continued its drive without assistance.

Ford is not out of the woods. Last week the company announced a quarterly loss of US$1.4 billion. Despite the loss it is a better result than anticipated - and exceeds the previous quarter loss of US$24.8 billion.

GM and Chrysler have taken government money to supplement their own losses. The taxpayer loans have kept the factories open and paid for daily expenses. While Ford has been losing money, it’s earlier actions and savings mean it’s in the best shape to continue - without assistance.

At first I thought Ford’s refusal to accept government money would put it at a disadvantage. Why stand stoic when the handouts are thick and fast? Yet today Matthew Dolan of “The Wall Street Journal” tells that acceptance would have diluted the Ford family shareownings and jeapordised CEO Alan Mulally’s turnaround efforts. Ford remains the only US manufacturer not reliant on government handouts.

And in case US consumers didn’t realise this, Ford’s now using it to their competitive advantage by targeting Chrysler and GM customers. Who wants to buy a car from a bankrupt company? What if the dealer goes under? What does that mean for service - or resale value? Ford has ads saying its dealers are looking “forward to serving you for many years to come.”

Ford’s decision to turn away subsidies may prove to be its wisest decision in years. Just ask all the former GM and Chrysler customers now driving Fords.

Governments around the world are grappling with the banking system. The entire inter-connected ball of string has been close to unravelling several times. It’s only been perserverance, luck and wads of money that have kept it together. In five years time we’ll be reading books entitled, “Financial Armageddon: How the World Economy Almost Collapsed”. That’s assuming worse things don’t happen. Then we’ll be reading survivalist newsletters bought by barter at the communal water well.

Yesterday Bank of America announced a US$4.2 billion profit - and sent the global stock markets crashing. It wasn’t the size of the result - a few billion dollars is still substantial, even though dwarfed by the trillions in bail-out funds. What panicked global financial markets was the composition of the profit. The vast majority was made in global markets through trading in interest and currency products, equities and commodities. This one-time gain even compensated for a new class of concern - bad credit card debts. Bank of America lost nearly US$2 billion in its credit card business. But that makes perfect sense - if your home has been foreclosed and your car repossessed, what’s to keep you making payments on the Visa? (Read the results in The Australian.)

Kevin Rudd, Prime Minister of Australia, published his vision of the clean-up of the global economy prior to last month’s G20 meeting. (That’s the one in London where the protester was killed died.) In it he refers repeatedly to “toxic assets” and the urgent need to flush these from the banking system. Toxic assets. That sounds awfully nasty. Years ago US Republicans were calling for a ban on “partial birth abortions” (also known as late term abortions).

Politicians have a nasty habit of coining terms that become immediately indefensible for the opposition. Who wouldn’t want to get rid of toxic assets? Who could support partial birth abortions?

Yet pick apart the vitriol and look at the root cause. Toxic assets are nothing more than loans made by bankers using bad lending criteria. Sometimes the bankers were prodded on by legislation demanding equal access to credit. Most times the bankers were driven by the fees and surcharges made when lending - and their insatiable drive for profits.

So toxic assets are mistakes by banks. And now politicians want carte-blanche to get in and buy them out. Without punishing the lenders. By having taxpayers pay for the mistakes of salaried bank managers.

At a recent rally in Washington DC one man waved a placard - “Honk if you’re paying my mortgage”. He didn’t look infected by his toxic asset. Instead every horn-blowing taxpayer was covered in toxic spill-out from the banks of America.  

The French are…different. When there’s a dispute at work it’s quite acceptable to kidnap the boss. This month the head of Sony France was held captive - as was a colleague - as staff were upset over benefits. There’s a pleasant photo in “The Economist” of him sitting in his a meeting room in shirt and tie dining on take-away. Apparently he was treated humanely. They gave him Internet connection so he could update his Facebook status (”Je demande liberte!”).

Apres La Revolution: Sony employees locked Sony France execs Serge Foucher and Roland Bentz in a meeting room for a night because they were upset about getting fired and not getting the same relocation package as other workers. After the CEO agreed to continue negotiations, the workers set him free. (Source: CrunchGear)

It appears “le kidnapping” is a popular technique “en France”. It’s seen as a useful way to demonstrate disappointment in management’s actions. It’s hard to imagine, though, what the first “All Staff Meeting” is like after the boss is let free…?

Like everyone else, we’ve started economising at home. We swapped to a lower-cost grocery store and sold the second car. We’ve always used left-overs - now there are fewer of them because we’re trying to cook only what we need. I’ve given up the cup of coffee bought downstairs every morning. And I swapped bus routes because the new one is $8.00 cheaper a week.

These are minor changes compared to the sacrifices made during The Great Depression. “The New York Times” includes a series of interviews with people who survived those tought times. I thought we were doing it tough until I read this great article:

“In the winter the chickens would come up under the house and sit in the basement, so if we wanted a chicken we’d raise a plank up and reach down and get the chicken.”  Thomas Moon, 87

Read the article - I heartily recommend it.

Politicians and business leaders are learning the importance of confidence. Obama describes the latest increases in housing starts and durable goods orders as “first shoots of green”. The New CEO of National Australia Bank says the global financial crisis could be bottoming out. Given the speed this crisis hit are we going to see a rapid return to consumerism-fueled prosperity? Or is it a dead cat bounce

Time for Wikipedia…

A dead cat bounce is a figurative term used by traders in the finance industry to describe a pattern wherein a spectacular decline in the price of a stock is immediately followed by a moderate and temporary rise before resuming its downward movement, with the connotation that the rise was not an indication of improving circumstances in the fundamentals of the stock. It is derived from the notion that “even a dead cat will bounce if it falls from a great height”.

I trust the positive figures and am relieved to see stirrings of life. But I am also a realist and believe the crisis is far from over. The analogy I prefer is rather gruesome. I believe the python has swallowed the sheep, but it’s going to take a long, long time to work through the system.

Royal Bank of Scotland (RBS) has already received a significant injection of taxpayer-funds in the first tranche of emergency government lending late last year. This past weekend The Sunday Herald in Scotland writes that RBS is likely to receive much, much more (”RBS will get ‘billions’ in US bail-out of economy” by Ian Fraser). In Sydney RBS now has a prominent facade as the old ABN-AMRO Tower has been renamed the RBS Building-Tower-Shining Edifice.

So with a big building - and a bigger bail-out - I was keen to learn more when I saw RBS sponsoring a large display in Sydney’s Martin Place.

It was odd to see such a large - bubble - with the RBS logo so prominently displayed. I figured inside would be the legendary “toxic assets” that were the root cause of this global strife. I imagined bio-hazard engineers mopping up collateralised debt obligations and other nasties.

Instead RBS had a sports car that simulated a real “on track” experience. Brochures invite participants to:

Take the Challenge

Using a full size formula 1 show car with a driving simulator, you can test your instincts, nerve and reactions to set the fastest lap (source: The Sydney Challenge hand-out from RBS Martin Place display)

Now people have accused me of being cynical - and I agree. I have been a little biased in past posts. And at first I was horrified. Last year RBS accepted US$30 billion in government funding to continue operations (according to CNN). Today it is in line to receive tens of billions of dollars more. And in Australia, RBS has no retail banking operations. So the RBS Bubble is to keep the brand front of mind with corporations and other banks.

Then the penny dropped. Of course it makes perfect sense. RBS needs its customers to have all the reflexes of a professional race car driver if they are to survive the harrowing twists and turns in the coming months.

Who says the RBS display in the centre of Martin Place is a waste of tens of thousands of dollars?

Australian Prime Minister Kevin Rudd just landed in Washington, DC according to his Twitter posting 17 minutes ago. He’s on his way to meet Timothy Geithner, USA Treasury Secretary. It’s nice being able to Tweet a head of state to offer suggestions and advice. It almost makes you feel like your voice is being heard.

Just this morning Geithner has a bylined article on page 20 of the Business Section of “The Australian”. Seems the public relations offensive is in high gear.

Thankfully Wall Street and global markets liked Geithner’s presentation yesterday. The indices are up across the board and this looks like a convincing bear market rally. Maybe traders can claw back profits before the markets swoon again.

The Tweets and the bylined article showcase the importance placed on the effective presentation of the US Treasury Secretary. In his first public outing last month, Geithner failed to impress audiences with the details of his plans. Seemed the vaguaries and poorly considered plans left traders with cold feet. That set off a wave of panic selling and demands for Geithner to attend presentation skills training.

The combination of a stronger presentation and global media relations helps ensure global markets that the USA plan will work. There is a constant need for ongoing information. Pleased to see Geithner has lifted his game.

Great communications achieves cut-through. You hear a phrase that you immediately understand and remember - and it epitomises the issue at hand.

Warren Buffett - the Oracle of Omaha - has a wonderful way with words. He’s been tested in his most recent shareholder letter when trying to explain the devastation wrought by the global financial collapse. Buffett says of 2008:

By year end investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game.

No confusing that imagery. And yes, I feel much like a battered sparrow. Who doesn’t? 

But what chills the blood is Buffett’s description of the government’s response:

In poker terms, the Treasury and the Fed have gone ‘all in’.

That doesn’t leave any room for maneourvre, does it?

In Australia the government has kept a few spare chips in reserve. The Reserve Bank of Australia chose not to lower interest rates at today’s meeting. That means there’s a little more flexibility for future changes. And Prime Minister Kevin Rudd has rushed AU$42 billion in aid out. But that’s billion with a “b” and not like the $1 trillion now being laid out in America. (Cut to Dr Evil in Austin Powers who exits a time machine and decides, in the 1990’s, to blackmail the world for $1 million. What comes after trillion? Gazillion?)

But back to bloodied birds. If you’re trying to make sense of the global financial collapse then look no further than Warren Buffett’s letter to shareholders. It’s plain, understandable and damn sobering.