Return to Magic Mountain
London, England
Monday, January 26, 2009
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*** Politicians take the spotlight...the auto parts sector needs a bailout too...
*** Leverage is a two-way street...will Obama’s plan get the economy going again?
*** No magic will make this mountain of debt disappear...gold got a boost on Friday...a memo to Microsoft employees...and more!
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The mountain is still there...but where’s the magic?
“This year the politicians are the real stars,” says a commentary in the International Herald Tribune this morning. Which gives you a hint about how bad the show is...
“It’s worse, quite frankly...then everyone thought it was...and it’s getting worse every day,” says America’s new Vice President, Joe Biden.
Mr. Biden is talking about something he knows nothing about – the worldwide financial crisis. And this week, a large group of people who know nothing about it are going to travel to Davos, Switzerland, to talk about the financial crisis.
Davos was once made famous by Thomas Mann’s book, The Magic Mountain . Now it is made famous by the movers and shakers who gather at the place each year to move and shake. Recent years have seen an explosion of glitz and glamour at Davos – led by Hollywood celebrities and big-spending financial firms. Goldman Sachs, for example, provided the money, hosting a party that was always the talk of the town. Brad Pitt and Angelina Jolie brought the intellectual gravitas. And politicians provided a comic element.
But no one is laughing at the politicos now. The whole world is making a shift...from the “innocent fraud” of the free market to the armed robbery of politics. People are taking politicians seriously again.
“The pendulum has swung and power has moved back to governments,” says Davos organizer Klaus Schwab.
All over the world, capitalism is out...politics is in. Obama is a hero...Fuld is a schmuck. Politicians are taking control of banks. They – not investors – are deciding which firms survive and which perish.
For example, this morning brings news that the auto parts sector needs a bailout too. If it doesn’t get $10 billion of somebody else’s money, it will be in big trouble, it says. And there’s Larry Flynt, over in the porno business. He says the bump and grind industry has fallen on soft times too. Will the feds rise to the occasion and pump in a little cash, he wants to know? We will see.
The problem is, practically every industry needs cash.
Leverage is a two-way street. When the going was good, a small addition to the financial sector’s capital would be multiplied many times. The limit for Wall Street’s investment firms was 12 to 1...until it was increased to 33 to 1 in 2004. Thereafter, if you put $100 into an investment bank...counterparties would soon have about $3,300 worth of credits.
Easy come...easy go! When the financial system rolled over last year, the banks lost money. Suddenly, $100 less in bank capital forced the banks to reduce outstanding credit by as much as $3,300. Cash disappears and everyone is forced to cut back.
The guy who was going to buy a new car decides he should wait a year or two...and then Detroit is hurting. And then, the assembly-line worker is laid off...so he cuts back on his porno purchases... Pretty soon, no one has any money.
Even the best companies – such as Microsoft – say that the days of easy-spending customers are over. (See below...)
So Obama is trying to come up with a global solution – tax cuts, infrastructure spending, rebates, handouts, bailouts, stimulus spending...a little of this...a little of that...anything that will get cash back into peoples’ hands again.
The logic of it is so simple we can’t understand it. People spent too much. Now the feds want them to spend some more. The crowd at Davos ought to put down their champagne classes and think about that. Instead, they will learn the latest claptrap theories and return home inspired by the latest self-serving hokum.
“Governments need to take a more aggressive stance,” they will say. “We need to regulate more...we need to control more...we need to spend more! We need a worldwide, coordinated program of economic stimulus.”
But when Republicans saw the details of Obama’s big spending project – $825 billion worth – they weren’t stimulated at all. Instead, they lost interest. Not that they mind throwing cash around wantonly...nor does it seem to bother them that the U.S. government doesn’t have any cash to throw around...instead, they just thought they could do a better job of chucking it out.
“At the end of the day, we want him to succeed,” said the Republican minority leader. “Because America needs him to succeed.”
Will Obama’s plan get the economy going again? Even one of his aides says it “may not be enough.”
Here at The Daily Reckoning , however, we take a different view: to us, it is not too little; it is too much. It is bad money after good. Mistakes need to be corrected, not hidden behind the new furniture. Bad investments need to be reckoned with...not propped up with someone else’s money. The mountain of debt is still there; there’s no magic that will make it disappear.
*** Gold got a big boost on Friday – up to nearly $900. What does the gold market see? Inflation? Bankruptcies? Monetary chaos?
We don’t know. But gold is what you buy when you fear that the financial authorities are making a mistake. And right now, central bankers worldwide are trying an experiment program called “quantitative easing.” As we have explained, you can’t slide a knife between “quantitative easing” and printing money. They’re so close, you can’t tell where one stops and the other begins. And when the other begins, inflation begins too.
At some point, inflation is likely to appear suddenly. In the space of a few days, prices could rise so sharply it will take our breath away. That is not likely to happen as long as the financial sector and the real economy are both imploding. But perhaps gold is looking a year into the future. Maybe less.
No matter when gold skyrockets, we will be prepared...and so can you. Find out the easiest way to pad your portfolio with gold by clicking here .
*** Our Pittsburgh correspondent, Byron King, former classmate of Steve Ballmer, passes along a letter sent to Microsoft employees.
“ I wonder if Pres. Obama will send a memo like this out to the federal workforce?” he writes.
“Or will Gov. Schwarzenegger send a similar memo to the California workforce? Or Gov. Patterson to the New York workforce? Or Gov. Rendell to the Pennsylvania workforce?”
From: Steve Ballmer
To: All Microsoft FTE
Subject: Realigning Resources and Reducing Costs In response to the realities of a deteriorating economy, we’re taking important steps to realign Microsoft’s business. I want to tell you about what we’re doing and why.
Today we announced second quarter revenue of $16.6 billion. This number is an increase of just 2 percent compared with the second quarter of last year and it is approximately $900 million below our earlier expectations.
The fact that we are growing at all during the worst recession in two generations reflects our strong business fundamentals and is a testament to your hard work. Our products provide great value to our customers. Our financial position is solid. We have made long-term investments that continue to pay off.
But it is also clear that we are not immune to the effects of the economy. Consumers and businesses have reined in spending, which is affecting PC shipments and IT expenditures.
Our response to this environment must combine a commitment to long-term investments in innovation with prompt action to reduce our costs.
During the second quarter we started down the right path. As the economy deteriorated, we acted quickly. As a result, we reduced operating expenses during the quarter by $600 million. I appreciate the agility you have shown in enabling us to achieve this result.
Now we need to do more. We must make adjustments to ensure that our investments are tightly aligned with current and future revenue opportunities. The current environment requires that we continue to increase our efficiency.
As part of the process of adjustments, we will eliminate up to 5,000 positions in R&D, marketing, sales, finance, LCA, HR, and IT over the next 18 months, of which 1,400 will occur today. We’ll also open new positions to support key investment areas during this same period of time. Our net headcount in these functions will decline by 2,000 to 3,000 over the next 18 months. In addition, our workforce in support, consulting, operations, billing, manufacturing, and data center operations will continue to change in direct response to customer needs.
Our leaders all have specific goals to manage costs prudently and thoughtfully. They have the flexibility to adjust the size of their teams so they are appropriately matched to revenue potential, to add headcount where they need to increase investments in order to ensure future success, and to drive efficiency.
To increase efficiency, we’re taking a series of aggressive steps. We’ll cut travel expenditures 20 percent and make significant reductions in spending on vendors and contingent staff. We’ve scaled back Puget Sound campus expansion and reduced marketing budgets. We’ll also reduce costs by eliminating merit increases for FY10 that would have taken effect in September of this calendar year.
Each of these steps will be difficult. Our priority remains doing right by our customers and our employees. For employees who are directly affected, I know this will be a difficult time for you and I want to assure you that we will provide help and support during this transition. We have established an outplacement center in the Puget Sound region and we’ll provide outplacement services in many other locations to help you find new jobs. Some of you may find jobs internally. For those who don’t, we will also offer severance pay and other benefits.
The decision to eliminate jobs is a very difficult one. Our people are the foundation of everything we have achieved and we place the highest value on the commitment and hard work that you have dedicated to building this company. But we believe these job eliminations are crucial to our ability to adjust the company’s cost structure so that we have the resources to drive future profitable growth.
I encourage you to attend tomorrow’s Town Hall at 9am PST in Café 34 or watch the webcast.
While this is the most challenging economic climate we have ever faced, I want to reiterate my confidence in the strength of our competitive position and soundness of our approach.
With these changes in place, I feel confident that we will have the resources we need to continue to invest in long-term computing trends that offer the greatest opportunity to deliver value to our customers and shareholders, benefit to society, and growth for Microsoft.
With our approach to investing for the long term and managing our expenses, I know Microsoft will emerge an even stronger industry leader than it is today.
Thank you for your continued commitment and hard work.
Steve
And on that note...we will sign off for the day,
Bill Bonner
The Daily Reckoning
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The Daily Reckoning PRESENTS: As the financial markets continue to fall apart, the Mogambo’s favorite yellow metal seems to be the preferred adhesive of smart investors around the globe. Yes, gold is on the rise once more. And once more, the angriest guy in economics gets to yell four of his favorite words: I told you so. Read on...
PATCHING UP THE WORLD WITH GOLDEN GLUE
by The Mogambo Guru
It was in the Wall Street Journal , in their “Best of WSJ.Com’s Money Blogs” where I got the news that “As any private banker will tell you, the wealthy have become gold bugs. They are buying futures, gold bars, just about anything made from the shiny stuff.”
Personally, this was surprising, since I didn’t know how or why bankers would know what the wealthy are doing, especially as concerns gold, but maybe this is because my relationships with my bankers are always frosty for one reason or another, usually centered around my failure to maintain a minimum balance in my checking account and then getting loud and angry when they hit me with a service fee as a result.
Naturally, I go down there and make a big fuss until they agree to wipe the fee away, and every month it’s the same thing, over and over, and so I am asking, “Why in the hell don’t you just stop assessing me the fee and save us both a lot of trouble, you moron?” and they are saying, “Because you agreed to pay them when you signed the account application, you Cheap Mogambo Bastard (CMB)!” but now I am supposed to tell these greedy halfwits that I am buying gold? Hahahaha!
Naturally, one would start to look for an explanation for this “gold seeking” behavior, and soon they provide one, in that gold “is the ultimate crisis bet, that when the world is falling apart, gold will retain its value.”
And the world will certainly fall apart, just as my world always falls apart after long spells of excesses and heedless hedonism, although the world’s problems will probably not be caused by somebody getting pregnant or demanding that I pay a huge bar tab, but by the horror of inflation.
And sure enough, inflation is coming, as it was not that long ago that the loathsome chairman of the Federal Reserve, Ben Bernanke, was saying that insane excesses of monetary stimulus were not going to be enough!
And he was proven right, as even though he has driven interest rates to literally zero in proving it, and now, he says, Congress has to fire up some of that insane fiscal crap of deficit-spending and tax policy changes to make it all work out, because now the news is even worse and he realizes that not even more insane Federal Reserve monetary policy of creating more money and credit can cure the bankrupting maladies caused by previous decades of insane monetary policy, especially since 1997 when that bastard Alan Greenspan, then the chairman of the Fed, really lost his freaking mind.
Specifically, Bloomberg.com reports that “Federal Reserve Chairman Ben S. Bernanke warned that a fiscal stimulus won’t be enough to spur an economic recovery and that the government may need to buy or guarantee banks’ tainted assets to revive growth”, which Bill Bonner here at The Daily Reckoning cleverly sums up as “buying trash and paying cash.”
In other words, take your worthless assets to the government, who will bail you out by paying you more than the assets are worth! Hahaha!
Of course, there was the usual crapola like the incomprehensible “Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system,” which is what Bernanke is reported to have said in a speech at the London School of Economics.
One would have expected somebody in the audience to say, “What? The Mogambo is right when he called it incomprehensible! What in the hell is that supposed to mean, you stupid Yank blighter?”
He did not explain it, but instead went on to utter the equally incomprehensible “More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets.” Hahahaha!
The end result is that it looks like there is going to be a lot of borrowing and printing of money, as Bloomberg.com reported that “The U.S. budget deficit soared to a record in the first quarter of the 2009 fiscal year,” as the deficit jumped to $485.2 billion”, which was so much that it is “surpassing the shortfall for all of last year”, when “ the shortfall was $454.8 billion.”
As scary as this is, the numbers are a Big Stinking Load Of Hooey (BSLOH) because it is much worse than that, as I can easily prove by showing that the national debt right now, in January 2009, is $10,635 billion, whereas last year at this exact time it was only $9,210 billion, a difference of a sizzling $1,435 billion! A trillion and a half dollars more debt in twelve months, yet these guys say that it is only $454.8 billion!
The word “Gaaaahhh!” escapes my throat, as all of this was BEFORE all the new promises of massive new deficit spending! Trillions of dollars of federal deficit spending per year, for years and years and years into the future! Again, “Gaaaahhh!” We’re freaking doomed!
An admonition for you to frantically buy gold would usually ensue right about here, but I am too freaked out to even think about it, as proved by the sheer number of times I said “Gaaaahhh!”
Until next time,
The Mogambo Guru
for The Daily Reckoning
Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.
The Mogambo Guru is quoted frequently in Barron’s , The Daily Reckoning and other fine publications. Click here to visit the Mogambo archive page .
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