Market Update 3 30 09

On the road again

Through the modern science of logistics, US Airways was able to get me from Orlando Florida to Memphis Tennessee in a mere 13 hours. For those not familiar with the trip it would have taken Ford about 12 hours to accomplish the same task. I checked in at Orlando International at noon on Friday and I walked through my front door around 1 AM Saturday. Apparently the dog was as tired as I was because he couldn’t muster the energy to get up and meet me at the door…after a quick glance to ensure it was someone he knew he went right back to sleep. I’m not certain that his reaction would have been different if it had been a complete stranger coming through the door at that hour but it’s a difficult thing to prove.

My travels and meetings taught me a few things, the first of which is that nobody is happy with the FDIC special assessment. I’m frequently surprised at the range this newsletter has after everyone gets done forwarding it. I know that several of these updates have ended up in high places and I want to let Sheila Bair know (if she is reading this) that you can save yourself the airfare…I’ve spoken with the banks and they don’t like the special assessment.

I also discovered that roughly 15 months into the worst recession since the 80’s, the average American understands very little about what’s going on in the economy. During my travels over the last week I spoke with cab drivers, college kids, housewives, hourly workers, and small business owners. What I found was that the average American (outside of the banking/finance/investment sector) doesn’t have a good grasp on what is taking place in this economy. The fact that the average American watches 3 hours of TV per day combined with the fact that they don’t understand the largest financial crisis to hit their country since the Great Depression confirms for me that the media is doing a terrible job. If you got all of your news from the TV you would likely be convinced that all bankers get $165 million in bonuses and that all investments are a ponzi scheme. One needs only to watch CSPAN for 20 minutes to realize that congress is no better. Most of the people that are trying to “fix” the problems have no background in economics or finance. They appear to be less interested in the facts and more interested in sound-bytes, votes, and their share of the “free” money. Here we have a real problem; politicians trying to balance their own short term interests (re-election) with the long term interests of the average American (not becoming a debtor nation whose citizens work simply to service the interest owed to foreign investors). It’s become clear that these interests aren’t necessarily aligned with each other.

We face an array of complex problems that can’t be adequately summed up in a 4 second sound-byte so when I watch congress on CSPAN I’m reminded of the old adage that it’s easier to stir a man’s emotions than to stir his intellect. I watched a Senator grilling Bernanke last week in what came across as an amateur hour version of Law and Order where the Senator was trying to steer Bernanke into answering “yes” on a politically loaded question. Getting Bernanke to say “yes” to this particular line of questioning would garner that coveted 4 second “gotcha” sound-byte. The Senator asked this question no fewer than five times, using techniques from shouting to sarcasm in an attempt to get a “yes” out of Bernanke. To his credit it appears that Bernanke learned a few things from Paulson on the art of dodging questions before he left Treasury.

Is congress helping or hurting?

Short-termism is a phrase used to describe behavior that values near term performance at the expense of all else. This is what I see in congress right now…the attitude seems to be “do ANYTHING to have some impact now” with very little regard for the long term implications. The problem is that unlike congress, the market is full of people that DO have a solid understanding of economics and finance. The market understands the long term implications of all of this spending, of short-circuiting the incentive system, and of altering the risk/reward relationship that keeps our markets efficient. At a minimum the implications are higher future taxes with which to pay back the debt we’ve issued, and lower GDP as a result of less after-tax money that individuals can invest in economically viable projects. It’s like the old saying goes “a poor man never gave anyone a job.” By the time they get done taxing the money makers in this country there won’t be a lot of money left over with which to spur economic growth. That is a very serious problem and it is one that I hear very few in our government attempting to address currently.

If the solutions offered by the government continue to involve using taxpayer money to subsidize losses that should be absorbed by the risk-takers that generated them, then we are in for a long and painful process.

On a lighter note I have to say that I am actually a bit surprised to have made it back from this last trip. I had a meeting scheduled with a friend in northeast Florida. In our last correspondence before I left he said that all of the meeting rooms in the bank were full and that we’d be meeting in the “back-room” at the deli across the street from the bank. The imagery gave me some pause…my first thought was that this would end up like a scene out of the movie Goodfellas. I’ve got pictures running through my head of Mike taking me into the back room to introduce me to Joe Pesce and Robert Di Nero where one of them caps me for selling them a bond that yields 1.00%. “You don’t sell a 1.00% bond to a “made” man! Capice?!”…that type of thing. I figured I’m an easy target because nobody would miss a transient like a fixed-income salesman…it might be a year before anyone reported me missing. In actuality it was a far more pleasant experience as I got to have breakfast with a great bunch of folks, and nobody produced a gun. In fact the closest I came to death was the side of bacon that came with my eggs, but it’ll be years before that catches up with me.

The market

On to the market news this Monday morning. Treasuries are rallying and the Dow is down about 200 at the open. News over the weekend of the Treasury announcing that more banks may need substantial help along with the Obama administration telling GM’s Chairman to go home are the source of some nervousness.

Below I’ve highlighted the activity in Treasuries this morning.

To provide a bit of perspective as the 1^st quarter comes to a close I’ve attached two graphs that highlight the general trends in Treasuries. The graph below shows the steepening of the yield curve that we’ve experienced over the first quarter of 2009.

The trend in the 10 year Treasury over the 1^st quarter has been volatile. It is apparent that toward the end of January the 10 year moved into a new trading range. It’s yield has been bouncing around between 2.60% and 3.00% with a quick dip down to 2.50% after the Fed announced a massive new round of asset purchases.

If you have any questions on this material or if there is anything I can be doing for you please let me know.