High Altitude Thinking

Hosted by Bob Akright

Jan 28

The American Way

Colorado, Nation Comments Off

Last night we heard our president’s first state of the union address. Overall, I think he did a reasonable job of touching on the issues that are currently at hand. Whether he can action his own rhetoric is a different story.

There is one point I think requires clarification. The president referenced the common theme that for most Americans their largest asset is there home. I don’t think that is the case. I think the largest asset held out for by most Americans is the implied asset that they have in social security benefits or their state sponsored pension plans upon retirement. This is a huge issue facing most Americans – if not now certainly in the near future.

We see that most states are struggling with how to meet their obligation to state employees and we know that social security is on the brink of bankruptcy. While I don’t believe that we can solve these problems to the original commitments, we need to proactively address these issues in the context of solving our national financial predicament.

It is imperative that both federal and state governments take logical, practical and pragmatic solutions to these issues. They are some of our most daunting financial burdens and responsibilities. You will see from my previous blogs that I do not believe the California solution is either logical or pragmatic. I will soon write about the 2/2/2 Plus Plan being put forward in Colorado under Senate Bill 1. These are not solutions. They are political posturing that puts the burden somewhere down the road and around the corner. Out of sight for the next generation to deal.

This is not leadership. Nor is this responsible behavior by the adults at the table – today. Our politicians boast the intellect and capabilities of our citizens. We need to start making “us” responsible. Yes, we run the risk that putting responsibility for retirement in the hands of our citizens may find them back at the well in the future when their investments have performed poorly. But we cannot “guarantee” them a just reward at the expensive of every citizen. With citizenship comes responsibility. That is the American way.

BA

Jan 21

S&P 500 Performance “Bending the Economic Map”

Nation Comments Off

“Bank of America Announces 2009 Net Income of $6.3 Billion”

“Wells Fargo Reports Record Full Year Net Income”

“JP Morgan Chase Reports Full Year Net Income of $11.7 Billion”

“Goldman Sachs Reports Net Earnings of $13.3 Billion”

Just a few of the headlines from the past week.

In his 2003 book, Deep Survival: Who Lives, Who Dies and Why, Laurence Gonzales dedicates a chapter to an orienteering term called “bending the map”. He describes it as “trying to make reality conform to your expectations rather than seeing what’s there.” Used in the context of someone who is lost, he articulates how one can persist to follow their mental map even though their surroundings are telling them it’s wrong.

Since its 52-week low (666.79) on March 6, 2009, we have seen the S&P 500 increase by an amazing 72% when it hit its 52-week high (1,150.45) on January 19, 2010. Although it has given back 3% in the last two days, it has still had an impressive ride since last March. Is economic recovery at hand?

I think there are a number of factors that should compel us to stop and consider if the performance of financial markets is “bending the economic map”.

First, while we have seen improved performance in corporate earnings, including the larger financial institutions, we should be cautious as to what this really means.

In yesterday’s 4th quarter earnings release, Bank of America CEO Brian Moynihan reported, “As we look at 2010, we are encouraged by signs the economy is improving, as we have seen in the stabilization of our credit costs, particularly in the consumer businesses. That said, economic conditions remain fragile and we expect high unemployment levels to continue, creating an ongoing drag on consumer spending and growth.”

As unemployment continues at high levels this will have a trickle down effect on the fiscal health of federal and state budgets.

Second, despite last week’s comment by JP Morgan CEO Jamie Dimon that “Commercial real estate is a train wreck, but it’s already happened”, I find it still uncertain as to the ultimate fallout of lower valuations and the appetite for banks and investors to re-capitalize these assets. If the current banks are being too optimistic we may see another wave of writeoffs coming in the first half of 2010. More pain to come from commercial lending will certainly impact an already tightened credit market further de-stabilising growth and stability of small and medium businesses. Keep in mind that it is with certainty that we have not seen a major chunk of the problems that will still come from community and regional banks.

Finally, the past few quarters have undoubtedly reflected some benefit from federal stimulus monies that have been used to defer layoffs and shore up a portion of state budgets. It is less clear that these efforts can be extended beyond the first half of 2010 which will result in further pressure on consumer spending in the second half of the year.

Layoffs and cost cutting may drive capital markets, but they don’t pave main street. Unemployment will continue as a significant issue in 2010 – both economically and socially. Hopefully Congress and the current administration can keep their eye on the ball during this mid-term election year dealing substantively with reality and not wasting time (ours) “bending the map.”

BA

Jan 15

Tragedy and Responsibility (Guest Contribution)

Colorado Comments Off

by Rich Devlin

On the morning of November 25, 2009, a popular bartender was found lying unconscious in the snow in a trailer park in Winter Park, Colorado. The 42 year old, Kevin Gilbert, was pronounced dead shortly thereafter in a local hospital. The preliminary autopsy report listed the cause of death as hypothermia. The report also noted facial injuries.

The police properly and thoroughly investigated Gilbert’s death. The investigation showed that Gilbert, and his 24 year old friend, Beau Grega, had done a lot of drinking that night and both were quite intoxicated. After leaving a local bar, they walked to Graga’s home (which was an old bus) but were unable to start a fire to keep warm so they headed to another friend’s trailer. Witnesses in nearby trailers report hearing loud and incoherent voices around 2AM. A trailer resident told police he believed Grega physically tried to help Gilbert into a trailer and then heard a loud noise like someone falling into the deck railing.

When the sun rose, Gilbert was dead and Grega was “slow to remember details.”

After the investigation, Grega was arrested and charged with criminally negligent homicide—an unintentional killing caused by the defendant’s gross deviation from the standard of reasonable care.

Criminally negligent homicide is when someone kills their children by leaving them seat-belted and locked in a car in the blazing sun. It’s also when someone shoots and leaves the victim without medical care. In such cases, the defendants may not have intended the victims to die, but they did die because the defendants’ acts so deviated from an acceptable standard of care.

In this case, Grega didn’t cause Gilbert’s death, Gilbert’s own acts did. Gilbert voluntarily drank beyond his ability to come in out of the snow. That Grega somehow managed to find shelter doesn’t mean that he is responsible for his friend’s failure to survive.

Grega will live forever with the horror that he might have been able to prevent his friend’s death. Putting him in jail for years would compound the tragedy. More broadly, are we all now subject to arrest for failing to save our friends and neighbors from their own poor choices?

Rich Devlin is a practicing attorney and Winter Park resident.

Jan 14

Who will need a bailout after California?

Colorado, Nation Comments Off

Last Friday California governor Arnold Schwarzenegger requested $6.9 billion of federal funds in his state-budget proposal. Jeez, I wonder where he thinks the fed will get the money? I don’t hear any spare change jingling around when Secretary Geithner shakes the U.S. piggy bank.

The governor’s 2010-11 proposal includes an $82.9 billion general-fund budget. However, this assumes (a) receiving $6.9 billion mentioned above, (b) $8.5 billion in spending cuts and (c) $4.5 billion in alternative funding. So if my math is correct, roughly 25% of their budget still needs to come from some heavy lifting and government bailouts – not to mention some stabilization to declining tax revenues. California also needs to be mindful that while it is darn tough to give up your U.S. citizenship and its worldwide tax, it is not so hard to walk away from your foreclosed home and move to another state. Maybe California hopes its obligations will exit faster than its tax base.

Last week the governor also delivered his 2010 State of the State address to the California legislature where he focused on the need for teamwork. I’m afraid they will need lots of it even from players who aren’t actually on their team.

Mr. Schwarzenegger is calling for broad tax reforms. Based on his speech, he claims that 144,000 of California’s 38 million residents pay almost 50% of all personal income taxes! The Tax Foundation, a nonpartisan tax research group based in Washington, D.C., already identifies California with one of the most highly progressive individual income tax structures with a top rate of 10.55% for those earning over $1 million. Surely there is little room for help from further taxing the wealthy.

The governor notes a perceived inequality in federal taxes paid by Californians vs. federal spending received. He notes that California got back 78 cents on the dollar as opposed to 94 cents on the dollar during the Clinton administration. To clarify, the most recent information compiled for this information is from 2005, so the governor’s reference is from 4 years ago. The Tax Foundation, who also provides this information, notes that the most important factor determining whether a state is a net beneficiary is per capita income and the impacts of our progressive federal income tax structure. As most states that are beneficiaries from this system are smaller (i.e. smaller federal taxes paid and federal benefits received), I don’t see any significant upside for California in the foreseeable future.

As with other states, California also has deep issues with meeting its state employees’ pension obligations. He states that current contributions of $3 billion per annum will need to escalate to $10 billion! Schwarzenegger further notes, “Now for the current employees these pensions cannot be changed, either legally or morally. We cannot break the promise that we already made. This is a done deal.”

While California may have legal considerations, as with a corporation that faces bankruptcy and cannot meet its pension obligations, it needs to face its employees and ask them to participate in a solution. Without their participation, it is de facto taxation without benefits for those who do not participate in the plan. This doesn’t sound like an emphasis on teamwork.

California no doubt faces serious fiscal issues. As a border state, they may indeed need to have special relations with the federal government. But a bailout of California is a slippery slope that will have 49 other states and D.C. lined up right behind. In fact, Nebraska’s Senator Nelson may have already beat them to the start line in manipulating the healthcare discussions for privileges for Nebraska.

California is too big to fail. I suspect we will see increased federal support. But who’s going to bailout the U.S. when it’s too big to fail?

BA