Merchants of dreams

This is it people: believe it or not, the crisis is over.

It was time, wasn't it ?
I had enough of all these bad news. I was starting to be a bit concerned that we could never go back to the good old boomy days of cheap credit, overconsumptuion and uncontrolled debt spiral. The good old days when the only that mattered was global warming.

Thankfully we have had the G20. It gave 1.1 trillion USD to the IMF and that was it: the miraculous cure. This is in fact the only significant conclusion of this summit that I can remember of. Oh no...there was Mrs Obama hugging the Queen (like she would have done with her Grandma) and the final photo souvenir of 21 actors desperatly trying to boost their people's moral.

Anyway, what matters is that it is all over now. This was just a bad dream.

Our governments did not create thousands of billions of dollars of extra debt, Lehman, Bear, RBS and others did not go bust, our pensions and our savings are being well looked after, there has been no housing bubble bust, The avearge US household has plenty of money set aside that it will now use to buy all sort of useless stuffs (like GM SUVs), the US economy has not lost 5 millions jobs in the last two years, the US car industry is thriving, the bankers bonuses have not been cut and Madoff is still called Bernie by his friends at the SEC.

I feel better already. Don't you ?

Well not really actually because the only "green shoots" I can see are those of the nasty hangover we will all be left with for the next 10 years or so. And the wake up call is approaching, fast.

When interest rates have to go higher, when governments have to raise taxes, when corporates do not have anyone to lay off anymore to keep their profits artificially high because of slumpy revenues, when protectioninsm appears as the only decent option to save the few jobs that can still be saved, when the millions of people who lost everything start making their voices heard.

This world is only going one way. And it is not the way of the merchants of dreams.

First Class !

I flew back from New York in First Class the other day.

I must admit that in these conditions, travelling becomes a pleasure again. Flight attendants are smiling (more than in coach !), the champagne is of much better quality, so is the cognac, the wine, the food, the seat...I mean the bed.

I wish everybody could fly first, always.

Sadly it is impossible: not enough seats per plane to make it financially viable for airlines. Besides, would First Class still be First Class if there was not any coach ?

I just can't stop thinking though: over the last 30 years or so, I have the feeling that First became better and better (you even have your own individual suite on some airlines now) while coach really became worse and worse.

It got to have something to do with capitalism: get forever more to an ever smaller number of people, while increasing the number of those who get nothing...but fly coach.

One caveat: statistics apparently show that you have far less chances to survive a crash in First than if you are sitting next to the toilets in the rear of the airplane. I am not sure I consider this a sufficient incentive to fly coach...but you may.

The truth is in the data...

It took 191 years for the US government to run up its first trillion dollars of debt: from 1791 to 1982. When G.W.Bush became President in January 2001, the national debt was at 5.7 trillion dollars. Last Friday, official statistics published by the Treasury Department reported a staggering 11 trillion. In other words the US debt has doubled in exactly 8 years.

And it is not over: it is now estimated that by the end of the US fiscal year (September 30^th), the US debt will stand at 12.7 trillion dollars, and could peak in 2012 at 16.2 trillion dollars where it should represent 100% of the forecast GDP.

Actually the current dollar GDP fell in the fourth quarter of 2008 by 212 billion dollars to 14,200 billion. And this trend shall continue for the rest of the year. I am in fact thinking that the psychological barrier of 100% of GDP could be broken this year. Back in 2007, the US debt to GDP ratio was around 45%.

Countries like Germany or France were criticized for years by the anglo-saxon world for their lack of discipline when it came to tackle public debt. The truth is, they all had forgotten that households debt can be even more lethal. In fact we have just been proven that households debt can be easily converted into public debt, by the banking bailout mechanism. To prevent banks from collapsing under the burden of mortgage defaults and debt-backed assets depreciation, the US government had no other choice but using taxpayers money to save its financial system.

I hope someone one day will ask: what is that system they are really saving ?

In the meantime, debt to GDP ratios in France and Germany will only be affected by a few percentage points, moving from respectively 63% to 70%.

Thank you Mr Thain

This week, focus on Mr Thain, the 4 billion dollars in bonuses he paid to Merrill Lynch staff just before the completion of the take over by BofA, the 1.2 million dollars he spent refurbishing his office, including a now famous and slightly offending $ 1,400 waste-paper bin. That is it. For months people tried to put a face on the financial crisis, so that they would have someone to blame. It had to be a banker. It had to be an American one. It had to be one obviously so arrogant that he would become detestable by every body. Mr Thain, congratulations. You have just been voted by the public opinion, the financial crisis scapegoat.

Enough.

• Enough of the people blaming the bankers for this crisis but who are also first in line to put pressure on the same bankers to get the highest possible returns on their capital. Usually without paying too much attention to the risks.
• Enough of all those blaming the big bonuses because they would like to have their share of the cake and don't. Hey, the more we are to eat on it, the smaller will the shares be. Back off !
  
• Enough of all those imbeciles who do not understand that when you make millions a year, the base price for a waste-paper bin is $1,400. End of story. Below that it would probably be made in China and would therefore not earn a living for a good American worker (by opposition to the Chinese worker who has to be bad). By the way, how much is Obama's bin worth, in the oval office ?
  
• Enough of all those criticizing these wealthy people, when the only thing they are aspiring too is to become on of them. And then, spend a million dollars or so in the refurbishment of their office, to show it off to their competitors. Just to show them who they are. The riches must have their own little pleasures too...in particular if they are funded out of other's money. Does anybody think that Ford's or GM's CEOs have offices decorated with Ikea kind of furnitures ?
  
• Enough of our western societies, stinking jealousy and greed where people are ready to do absolutely everything to satisfy their highest need: make money to buy stuffs, then show these stuffs off to those who cannot afford them and by doing so, claiming a higher step on the ladder of consumerist stupidity. All societies have their own hierarchy. This is ours.
  

In this society Mr Thain, you were right at the top. You could only go down. You just did. But you know Mr Thain, that silently, a lot of Merill Lynch employees, who are in the process of loosing their jobs in this merger, will thank you for this last bonus that may keep them afloat during the tough months ahead.

And unlike the dreamers who believe that a better and fair world will emerge out of this, you know that there will always be someone to take your seat, in your newly decorated office. Someone who will look the waste-paper basket everyday and secretly say: "Thank you Mr Thain...I quite like it".

We are all guilty

Bankers are responsible for the current crisis. Their greed and their remuneration schemes have pushed them to take ever more risks. Their culture of short term profits rewarded by immediate big bonuses is what has triggered the current crisis.

These are highly popular (and populist) theories. We hear a lot about them these days, being repeated all day long as they are by journalists who have long ago forgot about discovering and telling the truth. They just content themselves with what the public opinion wants to hear (so they think) as the only possible truth.

No matter how convenient and popular are these theories. They are wrong.

None of this would have happened if we had learned how to live within our means and not beyond them. None of this would have happened if we had not seen the housing market for the last ten years as some in their time had seen the stock market: a quick and easy way of making a fortune, on assets that could not go down. None of this would have happened if our politics had not encouraged this kind of behavior: Mr Clinton wanted to turn his country into an America of landlords. Mr Blair had no other ambition for Britain. None of this would have happened if the bankers had rung the alarm bell of a booming credit market. And none of this would have happened if the regulators had been competent enough to understand what was going on and take preemptive actions.

Risk taking is the very nature of the banking industry: if banks were not taking risks, credit would simply not exist. Most bankers have had for the last few years their bonuses paid in deferred shares. This practice was put in place to make sure that talented people would stay in the company and that long term profits rather than short term ones would be rewarded. A lot of them have lost years of remuneration in the last year or so. The public opinion usually does not know that.

Yes some of them managed to make enough money just before "the end", and yes it can be shocking. But just like a lot of property managers or estate agents who got out of the market right on time. It does not mean that they are all crooks. They have been just like us all: greedy and irresponsible with just an extra bit of luck.

Rate the ratings

S&P has decided this week to downgrade Spain from its AAA rating to AA+. This means that suddenly, S&P considers that Spain is not a sovereign state anymore, because they are in the Euro zone and cannot take with their money the sort of liberty that other sovereign states are (like the US or the UK).

In clear this means: underwrite an awful lot of debt, print money, buy back your own bonds, nationalize your banks, bail out your entire industry (or what is left of it), then print some more money and you will keep your AAA rating. Do none of these, try to keep your government's expenditures under control and you will loose it.

For those who may wonder, the Spanish public debt is currently representing 36% of Spain's GDP. It was 44% in the UK last year, 60 % in the US (that was before the 3 trillions USD waste), 63.9% in France, 64.9 % in Germany and a massive 170% in Japan. They are all AAA except Japan, being AA- or A2 depending on the rating agency.

How comes we have the worst ratings at both end of the curve ?
According to Moody's, what happened to Spain cannot happen to the UK, because the UK is not a member of the Euro and therefore remains a sovereign state...or let's say just a little bit more sovereign than Spain. So how sovereign is Japan then ? Does all this make sense ?

Obviously not. Just like it did not make sense to rate AAA a number of securitised sub-prime mortgages. These ratings are not only complex, meaningless, and often useless, they have been turned into ridicule in the last twenty months.

Let's shut down the rating agencies...now.

Fancy a Chrysler ?

An hour after having received its 1.5 Billion dollars 0% loan from the US Treasury, Chrysler has pushed out an offer: 0% credit on all models. Will they ever learn ?

So let's try to get this right.

• Creditworthiness

The very problem that triggered the present crisis was the abundance of cheap credit, to everybody, including people with poor credit records. It seems that the lesson has not bean learned yet. Giving your clients a 0% interest on a loan so that they can buy your product, does not change anything at all: a loan is a loan, no matter the interest, you still have to repay the principal. And somethig tells me that Chrysler's clients might be broke.

• Blindness

Selling - sorry I meant dumping - all their cars on the market (what they are effectively doing) is not going to help the US auto makers. The problem they faced in the last five years are still there: poor quality vehicles, fuel inefficient, strong competition, high production costs... They seem not to have realized the fundamental reasons of their difficulties. A weak dollar for the last two years should have protected them against European and Japanese imports. It did not. Simply because the price was not the problem. The product itself was the problem.

• The credit mechanism
  

People seem to be excited at the prospect of null interest rates in the US. And probably soon in the UK. They do not seem to understand that it does not make much of a difference at all. Buying a car with a 0% loan today means that they are still going to pay it more than its face value tomorrow. Simply because we are entering a deflation era and every dollar they will have to pay back tomorrow, will be worth less than today. So every dollar Chrysler will get from its clients tomorrow for the cars sold today. will be worth less than today. The basic credit mechanisms imply that today's deals are tomorrow's profits or losses. In this case, it will inevitably be losses.

• They are all taxpayers

So the US treasury is giving money it gets from the taxpayer with 0% interest to Chrysler, so that Chrysler can allow the same taxpayer to buy a car with a 0% interest rate from its catalog. A car that he will have to pay with his own money since he is the taxpayer and therefore cannot be bailed out.
Does it make sense ?
From Chrysler's point of view, it seems everything makes sense these days. For the US treasury, maybe. For the Taxpayer certainly not: he is ultimately paying his car twice. And still has to pay his taxes, otherwise the whole thing will stop making sense for the US Treasury too !

So where is all this going to ? My guess is: straight to the wall. Will see in six months the disastrous results. I am glad I am not an American taxpayer though.

Porn bailout...

This is not even a joke !
So after the financial sector, the automotive industry, others are now asking for their own bailout: the footwear manufacturing industry just did, airlines will certainly follow but for now it is the porn industry.
Too big to fall ?
I was wondering: given the current trend, we may soon be forced to bail out the bailout !

Read the full story here.

The first one....

This is it: my first message and hopefully a lot more will follow.
I will try to update this blog as regularly as possible with anything that I will want to share ranging from technology, sports, headline news...everything basically.

Hope to see you soon...