PeterGlenshaw.com

A Cruel, Cruel April?

T.S. Eliot famously wrote in 1922 that "April is the cruellest month, breeding Lilacs out of the dead land, mixing Memory and desire, stirring Dull roots with spring rain."

Eight-seven years later, I find myself wondering if Eliot's remarks will seem like prophecy. 

Sure, we're experiencing a delightful bull run in a bear market, and signs of an economic spring appear here and there.  Best Buy sales, up 10%.  Consumer spending, up.  Housing starts, up. 

Local merchants and business owners in the Upper Valley tell me similar tales after a frozen Winter that all wish to forget.  A job here and there appears.  A slight increase in customers occurs.  People start to dine and purchase again.

I'm cheered by these observations, but also remain wary. 

First, it's hard to imagine anything other than terrible first-quarter earnings numbers from most companies in the Dow, S&P 500, and Nasdaq.  These reports will be made public between now and mid-April, and if most are as bad as I expect, this news will depress the market further.

Second, broader economic data suggests we're not thru this recession.  Despite a decline in housing construction, housing inventories remain high and prices for homes continue to drop.  The latest figures suggest 10-12 months of housing inventory still exist. 

Third, for now at least, lending standards remain very, very high.  In that light, I support Treasury Secretary Geithner's plan to bail out toxic assets, but also agree (with his own assessment) that it is risky and success not certain.  Short of nationalization, it's the best alternative.  What's clear is that something must get lending and credit flowing again in the economy.  Without it, we're drifting for months, years, and maybe longer in an economic morass.

Fourth, oil prices remain low, but at the first sustained signs of an economic spring, expect gas prices at the pump in the US to quickly reach $3.00 per gallon and maybe higher.  Such a move will pyschologically (and negatively) affect consumer confidence, and thus flatten any return to normalcy. 

A host of thoughtful experts and practictioners in the economy -- everyone from Jeff Immelt to Ben Bernake -- suggest that true and sustainable signs of recovery will occur by late 2009 and clearly exists in 2010. 

I hope so.  My own sense is that the rest of Spring of 2009 could be very difficult indeed.  It will try our patience significantly.

Economic Mud Season

Imagine This:

Come home at the end of the day, pet the dog, kiss the kids, un-shoulder bags and coats, and head straight for the deck outside. 

Why?

To answer the question.

The Question?

How much snow has melted?

The Next Question:

Has Mud Season arrived, and when will I get the chance to throw the ball against the pitch-back for my dog, Bear, again?

A triumphant, affirmative answer came three nights ago, when enough snow disappeared to create a small landing strip for the baseball wobbling against the pitch-back.  By tonight, a semi-field existed of yellow, frozen-crusted grass and dirt, enough for me to rear-back like Randy Johnson and thrown a hard fastball from 30 yards away.  My black Labrador dog, Bear -- now soft and out-of-shape after three-plus months of gentle walks from our house around the Lyme Common, all due to the frozen and deep snow which lay in our backyard this Winter -- panted again and again as I threw the ball. 

This is hope.  This is the real thing.  A dark sky, a million stars, and the thrill of pitching a scuffed baseball again and again and again into the night at an aging pitch-back device. 

A look-ahead at the weather forecast suggests Winter might be done for good.  Like last year, the snow is receding very quickly.  The Dartmouth Green is almost completely worn of snow.  The Dartmouth Skiway has precious few trails remaining in operation, barely enough to meet this weekend's festivities.  Cross-country skiing is finished, even though the woods surrender their snow last.

On days like this, the mornings arrive brisk and solid as ice, but by 11am, it's nearly 50 degrees Fahrenheit.  Jackets fall away, hats are doffed, and almost everyone seems to have an extra bounce in their step and gait. 

Mud season is everywhere.  Regardless of where people live -- be it China or India, London or New York, Washington or Moscow -- they seek signs which suggest some thaw in the economic deep freeze which has gripped the nation and the world since at least the Fall of 2007. 

This afternoon at the Tuck School of Business at Dartmouth College, Jeff Immelt of General Electric described the situation in candid terms that were as worrying as optimistic.  We're living in historic times, he said, the likes of which he never could have predicted seeing in his lifetime.  Immelt recalled that in mid-September 2008, he received a phone call from then-Treasury Secretary Hank Paulson (a fellow Dartmouth alumnus) who suggested that it was entirely possible that the Federal Reserve window for borrowing might not open the next day, and that GE ought to do everything it can to prepare for that possibility.  Immelt described how he and a team at General Electric stayed up the entire night that evening preparing for that possibility. 

Mud Season resets the calendar for those of us who live in northern New England.  Suddenly our skin is not so dry and itchy.  Suddenly our driveways are clear of snow and ice.  Suddenly the snow drifts don't hover near the tree branches. 

Immelt said this economic crisis is as deep and fundemental a reset as any in the last 100 or more years.  It's the mud season to end all mud seasons.  Immelt, a staunch Republican who said he has never voted for a Democrat, declared this afternoon that "we're all Democrats now."  Government spending is the only answer, and a resetting of expectations around compensation, regulation, and social values is critical for businesses who hope to succeed in this new environment. 

The market rally -- is it that? -- of the last few weeks appears to be a kissin-cousin of the optimism I bring every night to my back porch.  I seek an end to the snow and ice in my backyard.  Everyone else is asking, has housing hit bottom?  Will durable good orders increase?  Is there a bottom there, please?  When does this horrible movie end?

Politicians assure us the end, if not in clear sight, will appear soon.  Even Jeff Immelt said today that an end to this economic calamity will come.  No one is entirely sure when, but if there's any parallel with mud season, it surely lies in the fact that time, place, and season to all things in this world.

Mud season does arrive.  Spring follows, and Summer not long afterwards.  Will the economy behave similarly?

I hope so.  Everyone hopes so.

On Bonuses

For all of the sturm and drang over the AIG bonuses, it's important to peel back a layer of indignation and ask the following question:

How many of us are reacting (and maybe over-reacting) to the bonus scandal at AIG because we don't really understand (and maybe don't want to understand) the magnitude of the credit-default swap and derivative scandal at AIG?

Everyone understand a bonus.  You work.  You earn a wage or a salary.  And then someone pays you more, supposedly based on outstanding performance of either yourself or the firm.

But derivatives?  Credit-default swaps?  Huh? 

No matter that the so-called sin of bonuses at AIG ($160+M) compared to AIG's other sins in credit-default swaps and derivatives (as judged by the US government bailout of $80B) is on the order of at least 1:2,000. 

Put more simply, for $1 in bonus money sent to AIG which we now protest, another $2,000 has gone to the firm for its risk business practices in credit-default swaps and derivatives. 

The bottom line is, we understand bonuses, even if they represent some 0.20% of the federal monies committed to AIG.  All of this anger about bonuses at AIG involves less than 1% of the total money committed by the federal government to AIG.  Weird, right?

Wrong.  Most Americans don't receive a bonus in their paycheck.  They earn an hourly wage or a yearly salary, and they're glad to get it. 

And for years, we've heard about CEOs and other corporate leaders earning performance-related pay packages in the tens of millions of dollars, while more than half of us have earned barely stayed afloat or earned less than we did ten years ago. 

Now comes the recession, and while we're not expecting corporate leaders to earn a lot less, the notion of bonuses seems particularly unfathomable. 

So, there is both logic and ill-logic in our reaction to the AIG bonuses.  If we are really concerned about malfeasance, we ought to focus on the illegitimate business practices of the AIG hedge fund that committed to insure the un-insurable.  The bonuses paid by AIG are wrong, but they frankly pale in comparison to the real crime committed by this financial giant.

So, where do we go from here?

First, I think we need to commit ourselves to real and significant wage and salary growth for the "bottom" 60-80% of American households in the next ten years in terms of income.  This is the group which has lost or barely kept afloat during the Bush years.  Obama's focus on health care is critical to achieving this goal.  Far too many corporate and other organizational dollars have gone towards meeting health care of employees needs than wage needs in the last 20 years because of incredible inefficiencies in our health care system.  Once we have a more effective system, employers will be able to (and should) direct compensation dollars away from benefits like health care and more towards wages and salaries.  

Second, we need to maintain the middle-class tax cut introduced by the Obama administration.  The mal-distribution of societal responsibility introduced by the Bush administration must end.  A return to Clinton-era tax rates, which is what Obama proposes, for the most wealthy and privileged in American society is the first step towards ensuring opportunity for all. 

Finally, we must re-regulate our financial houses.  Faithful readers of this blog know I endorsed Senator Chris Dodd in the New Hampshire primary, and did not endorse then-Senator Obama until Senator Dodd withdrew after the Iowa caucuses.  Months later, when Senator Dodd had a chance to return to the Granite State in the summer of 2008, I asked him about the pending financial crisis, and whether he thought modification of the Financial Services Modernization Act or the Commodities Modernization Act was necessary. 

To my great disappoint, Senator Dodd demurred.  He did not think it was necessary to separate the Wall Street functions of banking from its Main Street functions.  By blending the two operations, we could compete in a global economy, he said.

I like and appreciate and think highly of Senator Dodd, but I'm afraid he and far too many Republicans and Democrats simply missed the disastrous implications of these bills (for the record, the Financial Services Modernization Act was passed under the Clinton administration, and the Commodities Modernization Act passed under President George W. Bush). 

The bottom line is that conservative, prudent, and proven financial strategies for asset management, banking, and insurance were tossed aside once senior executives were compensated by the quarterly growth of their company's stock. 

Bonus-stalking and inflated quarterly earnings became the lifeblood of firms and their leaders. Instead of serving as cherry atop a well-earned dessert, bonuses swelled to such proportions that leadership in financial institutions swayed to whatever short-term methods would allow them to earn these lucrative "rewards."  The cherry became the dessert, and what followed was a complete upheaval of our financial system.  For all of our outrage over the recent round of bonuses paid by AIG, we ignore the years and years in which Wall Street leaders (and many corporate leader far from Wall Street) paid themselves handsomely for profits that we now understand were fiction.

What saddens me most in these turbulent times lies with the failure to learn from organizations that do understand how to lend to the most risky set of customers.  Consider the New Hampshire Community Loan Fund, which has made over $100M worth of loans since 1984 to the riskiest of borrowers. It's been in the subprime finance and housing market for its entire career.  Its default rate?  In over 25 years, the historical average has been less than 1%.  If nothing else, their track record shows its very realistic to lend money to these markets without bringing undue risk to investors. 

It's easy to get frothy about the AIG bonus situation, but doing so avoids the hard work ahead that will reset our economic and financial priorities.  If a small non-profit in New Hampshire can safely invest in sub-prime borrowers for 25 years and do better than Wall Street, surely its possible for that lesson to be shared with other financial firms.  If there is a bonus to be found in this economic melt-down, it's that prudent financial practices can in fact enable a 21st century middle-class to re-emerge in the United States.

Economic Frost Heaves Ahead

It's been a while since I posted to my blog, owing more to the insane schedule that defines Winter for my family than anything else. 

In the 15 weeks since Thanksgiving, we've balanced 12 public meetings on the Lyme School budget, almost weekly Lyme budget committee meetings, four-days-a-week of ski-race instruction (including travel to mountains several hours away from our home), twice-a-week basketball practice or games which I coached for 10 weeks, and twice-a-week work or volunteer commitments in the evening for both myself and Elizabeth.

Plus visitors on weekends.  Oh, and plus work for both of us.

Mud season approaches, and a gentle cheer erupts from everyone in the Glenshaw household.  It means on weekends we can get up after 5:30am.  It means we eat dinner together for four or more nights of the week.  It means a return to a normal schedule as a family.

Alas, since November (more like September), there has been no normal in terms of the economy.  And in fact, since January, what had been a good-to-bad situation has grown far, far worse.  Indeed last week, as I listened to two podcasts from Business Week and The New Yorker about the economic crisis, I heard the word "depression" mentioned several times as term most appropriate for describing the economic conditions we face.

We can quibble about whether the term is appropriate, but there is no mistaking the dire situation ahead.  For instance, when my employer made the decision to reduce 150 positions through a combination of attrition, layoffs, and early retirement, the Dow stood at approximately 9,000.  A week ago the Dow was at 6,500 and today nothing much more than a sheer desire for optimism has the index nudging just north of 7,200. 

I was one of those affected.  Although I was not laid-off, my hours and pay have been reduced by 20%.  Add the extra cost for health benefits in this situation, and the impact is more like 25%.

The economic road ahead is not just rocky and hard to navigate.  It's frankly dangerous. 

Consider the fundamental industries in near or complete collapse today: finance, housing, and automobile.  Previous recessions saw high-tech or energy alone as the primary drivers of economic recession.  You don't need a doctorate in economics to understand that multiple pillars of the economy in economic distress -- coupled with global interdependency and the volatility which accompanies Internet-age communication -- makes for a destabilizing financial system that will require a significant amount of time for complete recovery. 

Maybe this is what a 21st century Depression looks like.

I also find myself deeply concerned with the lack of national unity on this issue.  Sure, everyone knows there is an economic crisis at hand, but there seems to be a distinctive lack of national commitment to solving the problem together.  Warren Buffett compared this moment to Pearl Harbor, yet I sense no response that compares with that historical moment.  Instead it feels like a pack of ducks or geese dominates the headlines.  We seem more committed to pecking on the shortfalls in prescriptions made by others than on navigating the road ahead together.

So, in the spirit of national unity, here is my prescription for the next few months. 

1. Patience plus.  These days, it takes much longer than I would like to travel from my home to the Dartmouth Skiway because of the many frost heaves between here and there.  Go too fast, and the transmission on your car will get ripped out.  Go too slow, and you risk angering everyone behind your too-slow-car.  Let's assume the same pace with the development of economic policy.  Not too fast, not too slow -- middlin' is just fine.
2. Breathe deeply.  When things seem tough, remain calm.  When good news appears (two months of profit at Citi!!!!!!!!), remain calm.  In other words, be cool.  Yes, three fundamental pillars of the US and perhaps global economy are in trouble, but there are a lot of sectors with promise ahead.   No less than IBM shows tremendous strength ahead.  GE is sure to be winner, too.  A week ago, when I began this post, GE was at about $6 per share.  Today it is nearly $10 per share.  Hang in there.
3. Re-balance, and move ahead.  The next winners will be those companies, organizations, and individuals who adjust their operating plans to the new economic reality without losing sight of their fundamental mission or goal or customer.  The losers will be those who become near-sighted, and wonder how will I/We/Us survive.  Wrong question.  The right question is, how do we grow?  Make no mistake -- even in times like this, some organizations, companies, and individuals soar.  Are you going to belong to this elite club, or are you going to be a wannabe?

While I still have enormous faith in our national and international economy to recover, I also believe that we are entering a period of enormous economic distress that will require a solid year or more, not months, before recovery will occur. 

This time of year, as the snow and ice recede in New Hampshire, the detritus of Winter becomes apparent.  Fallen tree limbs, sleds, clothing, and all manner of leave-behinds from family pets appear.  In a few months, the tired grass will appear bright green in my backyard, but tonight the few patches of earth which emerge appear sick, yellow, and mangled -- crushed by the weight of four months of heavy snow and ice. 

Will I have the patience to wait for the ice to recede and the green grass to return before heading into the backyard to practice pitching? 

Will I have the patience to ride-out these economic frost heaves before returning to my mission as a husband, dad, and professional?

A lyric from the title title of Bruce Springsteen's newest album captures my sentiments completely in these contradictory times:  "I'm workin' on a dream, though sometimes it feels so far away."