European Downgrades:
Will There Really Be a Fallout?
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The Daily Reckoning | Monday, January 16, 2012
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Deferring to the wisdom of his fellow reckoners for today’s issue...
Joel Bowman
Markets in the US are closed today, as is the (admittedly diffuse) Daily Reckoning H.Q. As such, we’re letting our readers do the talking/writing for today’s installment. Here’s what a few of them had to say about some of our recent reckonings...A Few Notes from Your Fellow Reckoners... First up, this one from Reckoner John. Z....
Dear DR,
I would like to offer my own personal observations on System D which you so clearly opined about recently.
[Ed. Note: We introduced the concept of “System D” in columns here and here, last week.]
To preface my comments, I would like to offer some background.
I have met a payroll in Washington state for more than 25 years and with diminishing patience several years ago I began to look elsewhere (read another country) in which to ply my God given skills.
The industry I come from is one of the most vilified in the United States, second only to oil. I am a timber beast. To elucidate, I have owned and operated a timber company here for many years. Our best era was in the ’80s when demand was high and availability of the resource was plentiful. We grew and prospered those years. Since that time however, we have been slowly bled to death to the point where our company is but a shadow of its former existence. This is primarily due to increasing nonsensical regulation from the bureaucratic zombies and taxes.
Our margins have been squeezed to the point that our only option was to downsize to meet profit objectives.
Further, following the recent years’ advancements in government control and exercise of power over citizens, I have become increasingly alarmed about the basic freedoms Americans have enjoyed for centuries — namely life, liberty and the pursuit of happiness. So much so that my beloved wife and I attended an International Livingconference in Las Vegas to explore living outside the country of our birth.
I am beginning to see a light at the end of the tunnel. Our business interests in Russia and Hong Kong are expanding and I intend to close my business in America completely by the conclusion of the first quarter. My wife and I have selected a property to move ourselves and our four-legged children to in Central America. We have chosen a country, after a great deal of research, that has no central bank and is relatively secure. The main reason we chose this particular country in which to establish citizenship is the tax structure for income earned outside the country.
It is hard to believe that America is driving away the entrepreneur to the point that I know I am not alone as a self-made man amongst many who have given up on trying to change the system in America. It must be cleansed of the evil of the state via collapse under its own weight. I am truly astonished sometimes at the extent of my network of friends who are also looking to ‘get out’, and soon.
It is a big step to move permanently out of the country, but a necessary one, as the gifts that God has given me to do what I do and do it well can be better applied in countries where these skills are appreciated; and where we can manage to keep more, if not all, of the money we earn. These talents to manage nature’s bounty for profit, to our clients and ourselves, are talents that are mine and mine alone. Not the property of the state or that of the parasitic cleptocrats, which seem to think the fruits of my hard work are better applied in centrally controlled bureaucratic programs of their choosing, to perpetuate their own power.
Country be dammed, it appears their aim at this point is only the retention of power.
Well I for one don’t want to play their foolish game any longer, and I wish to be free. Nothing more complex than that.
Keep up the outstanding work and keep the faith, Sir. There are more and more people of talent and ability that are seeing the light each day.
Kind Regards,
John Z.
And here’s Reckoner Steve C., running an idea up the DR flagpole (wait, we have a flagpole?)...
On the topic of executive compensation, most Americans who earn a wage or salary are subject to the vicissitudes of the market. We can be hired or fired, promoted or demoted, given options or not, and given a bonus or not. Market forces and our performance hold great sway over our compensation.
I can appreciate that management plays a key role in a company, that shareholders would like to attract a good CEO, and that in order to get a good CEO to leave his current position you might have to offer him a bit of security. Notwithstanding, CEOs of publicly traded companies still work for someone else (the shareholders), and most CEOs still put on their pants one leg at a time. Given the tight nature of a CEO and his board, and the fact that a board doesn’t personally pay any of the CEO’s salary...the market forces have been substantially corrupted. The shareholders pay for management’s compensation, and they are too far removed from the negotiations. That is the crux of the problem.
If we want to keep the government from dictating the free market, we need to find a way to empower the shareholders. One possible way to achieve this would be to establish an algorithm to calculate a base management compensation package for public companies, based on such factors as profitability vs. leverage risk, number of employees, and average per capita income. If a compensation committee chooses to offer management additional compensation they must make the case to the shareholders. Then 50% of voting shareholders (excluding management and brokerage houses) must approve it. If the compensation committee’s package is rejected by the shareholders, the entire amount is paid to the shareholders as a dividend or via stock repurchase. [Or alternatively, we could additionally compensate management proportional to the affirmative vote, the remainder of the compensation pool going to the shareholders.]
Then only compensate the board minimally, with the exception of a number of shares (calculated by formula )becoming available to trade anywhere from 5-10 years out. If the management isn’t performing...the problem will be fixed soon enough.
And finally, this one from Reckoner P.S....
[You wrote:] “schoolteachers are increasingly not allowed to fail anyone.” I was just informed by my granddaughter today that she was not allowed to take her English test over because she got an 80%. Now, I don’t think anyone should be allowed to take tests over, but then again tests are pretty stupid in and of themselves. (I’m a trauma surgeon, I have taken my share!)
But the hooker is that if you get 60% or less, you can take the entire test over and get whatever grade you get on the re-take. It’s a graduated income tax for kids!
As always, we welcome your thoughts, ideas and occasional abuse. (Well, not so much with the abuse part.) If you’d like to write to us, drop us a line here:joel@dailyreckoning.com 10 Million Blind Could Regain Sight
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Reckoning from Melbourne, Australia...
Bill Bonner
On Friday, after the close of business in the stock market, S&P downgraded 9 European countries. Spain and Italy were both taken down another notch, leaving Italy with a BBB+ rating and Spain with an A.
But the headline damage was done to France, whose triple-A rating got downgraded to AA+. France had been rated AAA for 36 years.
The French bid adieu to their triple-A status...said they didn’t care about it, expected it, and didn’t believe it anyway. But it was a blow, not just to the French but to the whole European experiment. France, with Germany, was one of the strong, big economies at the center of Europe. It was one of the economies the others were depending on to bail them out. Now, it looks like France may need its own bailout.
The Wall Street Journal warned that markets needed to “brace for European fallout,” this morning.
But maybe there won’t be much fallout. The US lost its AAA status last year. And it wasn’t at all inconvenienced as a result. Instead, yields on US debt went down...meaning, its bonds were more desirable than before. Investors knew they would get their money back, they didn’t seem to care about what the money would be worth.
Mr. Market often plays tricks on investors. He makes the thing that is the most risky seem the safest. The safest asset, on the other hand, he makes seem like the riskiest thing they can buy.
That was what investors thought about US Treasury bonds 30 years ago. Inflation had reached over 13%. The US 10-year note yielded 15% (from memory). Investors had taken to calling them “certificates of guaranteed confiscation.”
But instead of confiscating investors’ money, bonds proved to multiply it. Yields soon began to tumble. They’ve been coming down, more or less, ever since. Which means...people who bought bonds in the early ’80s have made a lot of money. Bonds turned out to be a very safe investment.
Meanwhile, gold was seen as the safest thing you could buy in the early ’80s. It had been going up for the last decade. Investors saw no reason the trend should stop.
But barely had the ’80s begun when gold put on the brakes. Then, it began to back up. The price fell from over $800 to under $300 — over the next 18 years. Investors would have been safer on an Italian cruise ship!
And how about now? Money rushes to the safety of US bonds. Yields are as low as they’ve been in 100 years. But are they safe?
Nope. They’re probably the riskiest investment you can make.
France has about the same financial profile as the US. In this respect, both are at the center of the developed world — with government debt of about 100% of GDP. Neither can expect to work its way out of debt unless it can keep its deficit below its rate of growth. And that’s going to be almost impossible. Europe appears to be heading into a recession (negative GDP growth)...and the US is not far behind. Despite the renewed talk of a ‘recovery’ in the US, the country limps along with a budget deficit of nearly 10% of GDP...and will probably tip back into recession later this year. In any case, there is no end in sight to America’s huge deficits. And no chance that growth will rise high enough to offset them.
This is going to end badly, dear reader...
And more thoughts...
It is amazing what you find in the newspapers. In Johannesburg was the story — if you can believe it — of a man who threatened three men with a pistol and forced them to rape and mutilate his wife. Then, he shot and killed his son.
He then fled into the bush...only to reappear when he ran out of food and water a few days later.
In Sydney, Australia, the “Elvis Express” left the station last week, without a single unsold seat. The train takes Elvis fans to the 5-day Parkes Elvis Festival, held once a year for the last 6 years.
And all over the world, the press is howling for the heads of the marines seen urinating on the bodies of dead Taliban soldiers on YouTube. Everyone is appalled. Defense industry chief Leon Panetta says he disapproves. And Al Qaida is said to be using the video already and getting a terrific response to its recruiting efforts.
Here at The Daily Reckoning we rise to defend the downtrodden, the diehards...and those too dumb to speak for themselves. Of course, the marines did something disgusting. They should be court- martialed. And put before a firing squad...along with their commanders...right up the chain of command to the commander-in- chief. They all sabotaged America’s war effort.
But we have mixed feelings about the marines. They were sent to fight a savage war. Is it any surprise they act like savages?
A friend of a friend...a doctor in the Army Reserves, just returned from Afghanistan, offers this perspective:
“It was such a waste. It was so expensive, keeping us all there. Most of the time, we did nothing. Then, we would go on patrol. The Afghanis would try to kill us; we’d try to kill them. And they were just drug dealers and goatherds; what was the point?
“I’d get two kinds of patients...those who had just stepped on a landmine and lost a leg...and those who had injured themselves playing football in our camp. Both were a waste...”
Part of the reason the press is so disgusted by the marines is that they show America’s war in Afghanistan is a fraud. Far from cuddly nation-building, the marines act like soldiers always act when they are put to such nasty tasks. They are not fighting a heroes’ war. They are not defending the country. Instead, they are fighting a mean, dirty war — like the French in Algeria...or like the Russians in Afghanistan before them.
It is not an honorable war, in our opinion. It is not a decent war; not a war good men should not be sent to fight. It is a zombie war. It is the sort of war America’s two most celebrated generals — Washington and Eisenhower — warned against. Its only purpose is to enhance the power, wealth, and status of the military industry. In his farewell address, General Washington warned against getting entangled in foreign military adventures. General Eisenhower made the same point: beware the “military industrial complex,” he said.
And yet, here we are. Entangled...for the benefit of the military industrial complex.
The marines were pissing on the wrong people.
Regards,
Bill Bonner
for The Daily Reckoning
Monday, 16 January 2012
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