5/27 Is it Summer Already?

Written on May 27, 2010

Greetings- Have a great Memorial Day weekend in the States. Remember that after the Civil War folks set aside a day to remember the fallen among their countrymen many they had fought with, many against. My buddy owned a manufacturing facility in Taiwan for a long time maybe 20 years. A while back, when he unfortunately had to close down the facility due to slowing demand in his business, he told me a heartfelt story about the devoted workers he had that were thanking him for the jobs he had provided for them over the years. That is a little different than the story I read last night. Seems a bit different on the Mainland of China… At a plant that employs and houses 400,000 people in Xinhua China, the twelfth employee of Foxconn (this year!) has committed suicide. The firm manufactures mobile phones and electronic equipment for top brands including Dell computers and Apple. Takes a little bit of the fun away from cranking up the old IPod… for me. A couple of guys that both work in the oldest profession in the world were in Doha this week. They are professionals “servicing” clients. Both work for an American bank. Both traveled first class to be here. Both stayed in a five star hotel and trust me they always buy dinner because I never (and I mean never) reach for the check. One plies his trade from Dubai and the other from Geneva, Switzerland. They service some of the highest paying Johns in the world. If they were from a Singaporean bank or a Qatari bank or a Swiss bank I guess it would not bother me. So I get this straight… the US Government borrows money to expand a deficit to bail out the bank. The government then loans $1trln to the Fed so that the Fed can buy the same bank’s toxic mortgage backed securities. Next, the bank has unbelievable earnings because they don’t have to mark any of their bad loans or investments to the market and the Fed leaves rates at near zero so that they can loan it to my children at 6-30%.…so they could eat French food with me in Doha...perfect…I get it…and the caramelized pear and gorgonzola salad was memorable… but for some reason I am getting a touch of heartburn thinking about it. As progressive politics were doing away with those nasty robber barrons, giving women rights and beginning to protect the rights of labor and children. From 1896 to 1916 the British Empire was starting to crumble under its own breadth and debt. Following the Spanish American War and the building of the Panama Canal…by 1916, the US had emerged as a new world power. After WWI, the US demanded payment on its loans from the Brits and the great empire began to unravel. JP Morgan’s Michael Cembalest wrote yesterday “China’s holdings of $800 bn in Treasuries impact the way the US handles the situation in North Korea?...Major Generals at China's National Defense University and Academy of Military Sciences have recommended that China use this lever in the furtherance of its broader policy objectives. This is the face of geopolitics in the 21st century. As my wise and dear friend Bud says, “debt is like very cold water, it is okay down around your ankles, but when it gets up around your”….you get the point. I’d say $800 bln is up around the eyeballs! The similarities to the rise of China and greater Asia are clear. The similarities to the UK in protecting their holdings vs. policing the world and the corresponding debt are clear. I have been wondering if the market’s behavior over the last 10-12 years may reflect this. Real rates of return (removing inflation) went down from 1906-1920 and from 1965 to 1984. Although the market has moved violently sideways, we really have not seen that kind of destruction in wealth…so far. (Thanks to the gang at d.short.com for the chart below) Taxation without representation in government is just like imposing rules without relationship in parenting teenagers… both lead to rebellion. The US Government’s ability to spend so much borrowed money without any say from the public is un-American. As my friend Hal said to me, “look at every negotiation as if the guy across from you is trying to take money from your children.” The smart guys took it without saying a word! Good to know the Almighty has it well in hand, because these guys are killin’ us. Study hard, negotiate harder, walk away a few times, buy only if you can’t sleep thinking about how great the deal is. Leon