Tulips, part II

So, we’ve established that, with a little creativity, almost anything can be considered an investment. Tulip bulbs mesmerized the Dutch.

A recent example in the extreme was a young man who listed his “soul” on eBay.
The buyer was a priest who was touched by the young man’s plight. The young man thought he had a buyer (the Devil), but was considering other offers.

There is a serious point that I want to make about all this. It’s the most important point that we can make about money.

The entire issue is contained in the difference between value and purpose. Value is subjective ex. the price of real estate, gold, diamonds, currencies, clothing. Analysis of companies - price-earnings ratios, product pipeline, competitive advantages, market share – those are value issues.

When you consider purpose, you evaluate companies based on their broad footprint. Those companies that consider their environmental impact, promote human rights, animal welfare, corporate transparency, fair workplace practices; that fight discrimination, and are in partnership with their employees, shareholders and stakeholders, are purpose-driven. Purpose is never subjective. It is the essence of social investment - profit and principle.

The one-dimensional view of money, the “how much”, considers only profits. It is what allows companies to do end-runs around product safety, tolerates deceptive lending practices, allows lead-based paint in toys. The three-dimensional view brings in the interests of the consumer, the borrower, protects the children. If this seems simplistic to you, please explain to me why these issues are not dealt with - why campaigns are run on these platforms, and have been for years, and yet the problems persist.

The measure of how little progress we have made, is easily illustrated. Over 90% of every investment dollar is in an unscreened portfolio. Over 82% of the entire S&P 500 violates one or more principles of social conscience.

Warren Buffett, a legendary investor in the long history of Wall Street, knows value. So much so, that he is presently the richest man in the America, with a net worth of $62 billion. He sure can create value for his investors.

But Berkshire Hathaway is the largest stockholder in PetroChina, the engine behind the genocide in the Sudan. When asked about this, Mr. Buffett says that it is not his business to tell the government of China what to do. Mr. Buffett is not purpose-driven.

In my role as an advisor, I’ve seen the disconnect between value and purpose. Value dictates that in times of War, we invest in weapons manufacturers, oil companies. Value taught me that “War is good for the Economy”, and old Wall Street adage. Purpose precludes this. The lack of transparency in mutual funds, allows protesters to march on Washington, while owning Halliburton.

There are many angles from which to view the same disconnect. Every morning, I maneuver around 100 foot cranes, as New York City is bulldozed to make way for hotels and high rises. But affordable housing disappears, our leaders veto funds to shore up our crumbling bridges and tunnels, we have a third world education system, and we stand by as the Administration spends $12 billion a month on the War effort, mortgaging America’s future. The disconnect.

I’m not sure that the Dutch obsession with Tulips allowed the deterioration of their infrastructure, or put that little Dutch boy in the position of plugging that dyke –

-but it makes sense to me.

Tulips (Just In Time for Spring)

It is April 3rd , the 66th trading day of the year, and we’ve already had 30 days where the markets have been up or down at least 1%. That’s volatility with a Capital “V” my friends. However, it might be comforting to know that we’ve gone through this sort of thing before.

Our current crisis of confidence is all about the perception of value. This manifests itself in a number of ways.

We agree (assume) that the rarer something is, the more valuable it is. Diamonds, postage stamps printed upside down, limited edition cars. It’s not that these things function any better, or at all, for that matter – it’s that there are so damn few of them. Perception. Scarcity = value. For some reason endangered species don’t work this way.

In business, however, this works well…believe me. In my former life (sales), I learned that there was nothing better than a closeout offer. People would line up for used cat litter if it were a limited time offer. The same perceptions move people to sleep overnight, in freezing temperatures, for the latest version of the Xbox. It’s the exclusivity factor. And it’s all perception.

Which brings me to the subject of tulips and Holland. There are similarities to our current value enigma that are worth examining.

At the beginning of the 17th Century, a rare new exotic flower was introduced and soon became popular with the elite of Holland. Why tulips became a fad, I’ll leave that for the tipping point experts. But soon the prices seen for even ordinary tulip bulbs were skyrocketing. It was not unusual for bulbs to range in price from $2,000- $3,000 (today’s dollars). The perception of value had begun working its magic – and before you knew it, you’ve got tulip inflation.

Eventually, the extreme was reached. Bulbs were considered too valuable to plant, but were just displayed – unflowered, certainly unattractive…but still perceived very valuable.

Not surprisingly, bulb trading became the rage. Bulb traders were making (Are you seated?) over 60K per month in today’s dollars.

But these were simpler times. There were no bulb mutual funds. Tulip derivative strategies never came into play. There were no tulip options, or tulip futures ( I could be wrong about this ). No tulip default swaps, and no one developed a tulip volatility index. Things were simpler.

Finally, the bulb bubble burst. All it took was one buyer who didn’t show, and who reneged on the deal. Panic spread, and prices plunged. (There were no bailouts in those days.)

So let’s look at this more closely. Was it really the one buyer? Probably not. We know that the perception of tulip value did change very quickly, though.

Perhaps it was that the Dutch woke up one day and realized a sobering bit of information (a tulip is a flower) and because of that critical change in perceived value, the Dutch financial system very quickly disintegrated, which brought on economic chaos that lasted 100 years. No kidding.

Fortunately, there has never been another instance of flower mania in the 400 plus years since the great Dutch debacle. I’m almost certain that hedge funds have no origin in gardening.

So, there are many kinds of flowers…also diamonds, real estate, and investment banks. Each has a perceived value. We lose sight of the perceived value lesson until Bear Stearns reminds us. If there is no market for its assets, even a leading investment bank can be almost worthless overnight.

As we speak, the White Knights ride to the rescue, in the persons of Chairman Bernanke, and his merry band of Federal Reserve Board Governors. Don’t get me wrong – the Fed response to Bear Stearns’ imminent bankruptcy was completely necessary. The domino effect brought on by a disappearance of investor confidence would have been devastating.

But what is happening now warrants scrutiny. We are seeing a proposal that includes a complete overhaul to the system of checks and balances, a total revision of supervision. The Fed discount window, a source of ready capital to commercial banks, becomes a fallback position to the investment bankers. It is a profound change.

Chairman Bernanke’s testimony on Capital Hill was more like a pitch, missing only a PowerPoint presentation and a laser pointer. The questions from the committee were contentious, from Senator Kennedy, from others. True the Fed Chairman clearly identified his function as independent of any accountability to the American people. Still, I have a hard time envisioning former Chairman Greenspan being cross-examined in this way. Things have clearly changed.

With a sales team that includes Treasury Secretary Paulson, the Fed’s presentation is likely to be well received. The markets may recover, buoyed by additional resources.

This may very well turn out to be our White Knights, digging our economy out of the hole we’re in, or it may ultimately be The Four Horseman of the Apocalypse, preparing a hole suitable for our eventual demise.

Tulips might be nice.



Tulips, Part II to follow

The Ingenuity of Man

I have great news for you.

I know for certain that government can work, that government can be efficient, responsive and effective. I’ll say that again for those of you who may think you didn’t quite hear that quite right. Government can work. I’ve seen it happen.

Sure, we have memories of FEMA’s lightning-quick response to the disaster in the Gulf Coast, but that was the Bush administration. I’m talking about government.

Now, I live in the great State of New Jersey, the Garden State. We have much to be proud of and much work yet to be done, of course. We can point to a history marred by political corruption. We have the well traveled jokes about the scenic drive down the New Jersey Turnpike. Recently, we had a Governor who came out of the closet. But throughout, we knew that this great state could withstand any scandal, could take on any challenge.

…but then of course, there was the New Jersey Department of Motor Vehicles.

Everyone who lives in New Jersey knows that you could find your way out of a black hole faster than dealing with the New Jersey DMV. It was a life changing experience. To get a jump on this marathon, people would sleep in their cars outside the agency, like it’s the pending release of the latest version of Xbox, or the final episode of Star Wars.

First, you’d enter - that is if the line was not out the door and down the block (it usually was). You didn’t know it yet, but you were on something called the information line. Here, you’d find out what endless line you really needed to be on.

There was some initial indication as to how long this process would take. The coffee truck outside was a clue. There were some folks who’d had breakfast and were back for lunch. And if you’re aware of the level of cuisine usually available here, you’ll understand what I mean when I tell you that this was the highlight, the best thing about this experience.

Renewing your license or registration, took anywhere from 3-4 hours. Picture licenses, even longer, and felt like a booking. Sometimes I envisioned myself channeling Tom Hanks in Castaway. This could bring you to your knees in prayer.

So you can understand my awestruck reaction, and how I know that anything is possible. Anything. Any horribly inefficient business, any misguided, mismanaged mangled bureaucracy can be made streamlined, customer friendly. I’m sure of this, because they fixed the New Jersey DMV.

Though in shock, here is my best recollection of how it went.

First of all, there was no line outside the same familiar building. I asked someone if this location had been closed. They said no. I walked inside, then outside to check the address. Yes, it was the Lodi, New Jersey Department of Motor Vehicles. I looked for the information line. There was none. There was, however an information desk. It took fully five minutes for me to make sure I was in the right place.

I never sat down, never experienced how uncomfortable plastic can be. I went straight to the counter, where the apathetic service agents had somehow been replaced by helpful, almost kind people. Understand this - previously you could risk your life asking for a pen in this place.

The whole process, including my initial disorientation, and effusive expression of gratitude, took 20 minutes. For someone who’d felt like a prisoner of War, it was a surreal experience.

So, If I move away, I’m still coming back to visit. When I can no longer drive, I’ll still come back. It’ll be like a pilgrimage.

Its given me a renewed sense of optimism, of confidence. Sure, we have a third-world education system, crumbling bridges and tunnels. Healthcare is a shambles, financial institutions are imploding. Yes, these are big problems. But we now know that we can do anything.

Forget cold fusion, forget perpetual motion. Forget the miracle of Hannukah.


We fixed the NJ Department of Motor Vehicles.

FED UP?

Quote: “We can’t solve problems with the same kind of thinking that created
them.”

Albert Einstein

Maybe it’s time to shake the cobwebs out, order another espresso (make it a double), and get to work. Historic changes are occurring right before our eyes.

Last week, the Federal Reserve Bank in an unprecedented move, offered JP Morgan a $30 billion credit line, to allow the investment banking firm to take over Bear Stearns, which had become insolvent almost overnight. The precedent established is something few of us can fully appreciate.

But in connection with this situation is a development with even more serious implications. The Fed “discount window” which previously provided liquidity only under extraordinary circumstances, and only to commercial banks, would now be made available to investment banks.

The Fed action in the JP Morgan/Bear Stearns deal, and others that will undoubtedly follow was probably necessary to head off a meltdown in the financial community. But a permanent policy change allowing the Federal Reserve to provide liquidity to these largely unregulated firms, well, that’s another story. It appears that this action is being considered an opportunity. These and other changes require our immediate attention.

Yes, immediate. As we speak, a battle for control and direction is developing. The Senate, as well as the Treasury Department, scrambles to propose legislation to reform a system no longer capable of dealing with financial services firms that cannot be restrained. This is what makes the recent Fed actions/bailouts alarming. It tells us what the next dropped shoe is likely to look like.

Recent related developments point in a similar direction:

• The infusion of capital by anonymous Sovereign Wealth Funds to Merrill Lynch, Citigroup, Morgan Stanley, and others. Potentially, the United Arab Emirates port security issue pales by comparison. It is fortunate that the general public doesn’t understand the implications of this.
• The AAA rating enjoyed by AMBAC and MBIA, insurers of municipal credit, are in jeopardy, compromised by liquidity issues. In essence, buyers of AAA rated tax-free bonds pay for coverage that is not really there.
• The Port Authority of New York and New Jersey struggle to find liquidity, unable to sell financial instruments they assumed would always have a market. Bridge and tunnel fares increase almost immediately.
• Treasury Secretary Paulson questions whether investors can rely on rating agencies. Lip service is given to corporate responsibility.
• On Thursday, Standard & Poors, a leading ratings agency, signals the “end in sight” to bad loan write-downs by firms.

Friday morning, the Fed steps in with a $30 billion line of credit to JP Morgan Chase, and the news of a virtually bankrupt Bear Stearns, a $2 a share buyout, rocks the markets.

So,

…..the decision will be made to create a completely new governance system, or put increased power in the hands of The Fed. The latter could prove to be disastrous.

And,

Using Al’s definition (Einstein, not Greenspan) we cannot ensure the responsible governance of our financial institutions, with what is already in place. That would be The Federal Reserve.

A lot can be learned by browsing the Fed website http://www.federalreserve.gov/

“Seven-member board that supervises the banking system by issuing regulations controlling bank holding companies and federal laws over the banking industry. It also controls and oversees the US monetary system and credit supply.”

...Its members are appointed by the President subject to Senate confirmation, and serve 14-year terms…

“The federal agency with rule-writing authority for the Truth in Lending Act, of which the Consumer Lending Act is part…

On the Federal Reserve site I also found the transcript of a recent speech made by Federal Reserve Governor Randall S. Kroszner at the American Bankers Association Spring Summit Meeting, Washington, D.C. March 11, 2008.

I’ve taken excerpts that I felt were important. There’s a lot more. Let me make this disclosure. I recognize that an address to the banking community might reflect a different, less confrontational tone. Nonetheless there are some telling comments.

“….in other words, it is good to have a few people within the institution (bank) who--to paraphrase a former Federal Reserve Chairman--know when to take away the punch bowl. Being the party pooper, however, can be very difficult in any organization…

“….Naturally, in very large organizations it is difficult for senior management to monitor each individual, so incentives need to be consistent, permeate even the lowest levels of the organization, and remind each individual that his or her risk-taking affects the whole enterprise.”

In other words:

Banks only need a few employees who are responsible fiduciaries. Whistleblowers, I imagine. All others, of course,“drink from the punchbowl”, getting drunk on profits, until something happens, or until they’re disciplined.

And:

This was not the fault of management, but of a system too large, too difficult to manage.

We would expect the support of business, the protection of corporate interests at all costs, in many places. We always assumed that the Federal Reserve would not appear on this list.

But this is not your Grandpa’s Federal Reserve…

A Little Knowledge is a Dangerous Thing

It becomes apparent as the green revolution evolves, that we have to be careful who we listen to.

The Motley Fool, the stockpicker / online blogger, is running a green investing series in advance of Earth Day on April 22. The MF perspective re: green investing focuses on long-term shareholder value, but so be it. Pretty one-dimensional, but we get a habitable planet in the process.

The companies that Motley Fool highlights boggle the noodle, though. Some of these companies, held up as progressive, have a checkered eco-past, some have troubling human rights records.

The Motley Fool articles applaud Coca-Cola (NYSE: KO) and its recycling campaigns, General Electric's (NYSE: GE) Ecomagination cornerstones, and Disney's (NYSE: DIS) environmental policies.

But Coke has a history of international anti-union activities including murders of union officials in Colombia; see http://www.killercoke.com/ or this Businessweek article

Applauding GE for its Ecomagination campaign shows how little MF knows about GE’s eco-history. From 1947 to 1977 General Electric dumped 1.3 million pounds PCB’s from our river into the Hudson. These PCB’s are found in the river, in fish and in us. Riverkeeper article

If you’ve seen the commercials GE runs about their portable ultrasound equipment and the difference that this is making in developing nations you’d applaud. But if you realized that one of the ways these units are used is to abort female fetuses, you’d be horrified. Washington Post article

Disney’s checkered labor history includes violations of Chinese labor laws. Workers making Disney toys work 15 hours a day. 28 days a month. To read more about Disney’s labor history, here and abroad: Disney’s labor history and Disney in China

For whatever reason, our eco-awareness is on red alert- but all the issues we deal with in reforming, transforming and supporting corporate conscience demand our attention……

Onward and upward!