Category: In the News

Simple references to other existing news items. May include quotes/excerpts from third-party sources, but without additional commentary or perspective.

Can paradise be found in prudence?

by Economoralist in ChiefIn the NewsLeave a Comment on Can paradise be found in prudence?

Bloomberg: A Polynesian Paradise Sacrificed Its Economy to Stay Virus-Free

https://www.bloomberg.com/news/articles/2020-05-26/polynesian-cook-islands-sacrificed-its-economy-to-end-coronavirus

We know the knee-jerk reactions…

  • The Right – That horrible government, treading on their people’s liberties, shutting down their economy like that…

  • The Left – That wonderful government, making the decision for their people because their people wouldn’t have known any better, regardless of economic impact…

We’ll take no particular position on the role of government in this particular case. We simply read this article to mean – the less debt you have, and the more savings you prudently accumulated while times were good, the more flexibility you’ll have to make a choice, either way. And isn’t choice what it’s really all about?

Choice, coconut drinks, and no central bank. Sounds like paradise to me.

“With no central bank of its own, the policy options are limited. A relatively low debt-to-GDP ratio of 21% gives the country room to borrow, Brown says. The government is in talks with the Asian Development Bank and the New Zealand government to provide loans until border restrictions are relaxed and visitors can return.“

“During the recent run of good economic times, Puna’s government had the foresight to bank NZ$56.7 million in an emergency reserve fund to be used during downturns or to recover from cyclones. The funds helped pay for the stimulus measures.“

Or to just cut right to the important parts…

“no central bank of its own”

“relatively low debt-to-GDP ratio”

“foresight to bank NZ$56.7 million in an emergency reserve fund”

To be fair, we do, of course, hope all the individual business owners (including ones like the Napa family and their Kiikii Inn & Suites) in the Cook islands had also been just as prudent with their savings.

“I thought the same thing as everybody else: What are we going to do?” says Napa, 59, recalling the moment he found out there would be no more guests arriving at the motel. “I was just gearing up for busy season.”

Thanks to Emmanuel Samoglou writing for Bloomberg BusinessWeek for chronicling this inadvertent case of prudence being the ticket to paradise – at least in relative terms?

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When even the Fed is warning on asset prices (or when the rules just keep on changin’)

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Bloomberg Law: Fed Warns of Significant Hit to Asset Prices If Crisis Grows

https://news.bloomberglaw.com/banking-law/fed-warns-of-significant-hit-to-asset-prices-if-pandemic-grows

When even the Fed is warning of a “significant hit to asset prices”, is that a sign we should be worried? Or are they just warming us up for even more #QE? (in which case, you might want to re-think who should be doing the worrying…)

An excerpt from Bloomberg Law’s coverage of the Fed’s recent statement which, at face value, sounds awfully logical:

“Asset prices remain vulnerable to significant price declines should the pandemic take an unexpected course, the economic fallout prove more adverse, or financial system strains reemerge,” the Fed said in the report. It cited commercial real estate as being particularly susceptible to falling valuations because “prices were high relative to fundamentals before the pandemic,” and there have been severe disruptions in the hospitality and retail industries.

In the old days, “asset prices remain vulnerable to significant price declines” would mean #savers get rewarded (by waiting, prudently, to buy low and re-establish equilibrium in markets at more appropriate valuations) while #debtors take the hit – and perhaps deservedly so, because “prices were high relative to fundamentals before the pandemic”.

In the new (or at least recent) normal, “asset prices remain vulnerable to significant price declines” would simply be cover-speak for ::printing more money to ensure asset prices don’t decline:: which would mean #savers get duped (by waiting, apparently foolishly, for their savings to be devalued) while #debtors get rescued and rewarded for their irresponsible behavior of having driven up prices to be “high relative to fundamentals” in the first place.

What will the very latest version of “normal” turn out to be?

Can someone just tell us what the rules will be once and for all?

Or is it time to walk away and find another game to play altogether?

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Is it worth it to be careful when carelessness pays just as well?

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It’s refreshing to know there are at least some companies that still see prudent financial & risk management practices (i.e. saving for rainy day) as relevant to their ability to operate as a going concern. Sounds almost quaint in this era of #Fed bailouts, #QE, and rampant #moralhazard.

We’ve added a few [COMMENTS] from an “Economoralist” perspective to the excerpts below from Nina Trentmann’s recent piece for the Wall Street Journal. Take them or leave them.

WSJ: Some Companies Began Preparing for a Downturn Before the Pandemic

https://www.wsj.com/articles/some-companies-began-preparing-for-a-downturn-before-the-pandemic-11588637143

“Finance chiefs were preparing for a downturn [GOOD IDEA!] long before the coronavirus roiled the global economy; however, few expected it to be as swift or severe. [OK, FAIR ENOUGH] “

“After 11 years, we were expecting a slowdown or a recession,” [PROBABLY SMART?] said Max Brodén, chief financial officer of Aflac Inc., an insurance company.“

More executives were being proactive in planning for a recession; [ALWAYS A GOOD IDEA] however, they weren’t as aggressive in tackling “the extreme downside that we are seeing now,” [OK, FAIR ENOUGH]

“We had seen an expansion that had gone on for more than 10 years,” said Linda Huber, the company’s chief financial officer. “Market conditions don’t go on forever.” [NOPE, THEY USUALLY DON’T]

“When the sun is shining, you plan and take advantage of that,” Ms. Huber said. [GOOD ADVICE!]

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The hazards of discussing moral hazard?

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NY Times: How Bailout Backlash and Moral Hazard Outrage Could Endanger the Economy

https://www.nytimes.com/2020/05/04/upshot/bailout-backlash-moral-hazard.html

The excerpt below from a recent piece by Neil Irwin writing for the New York Times about sums up the “economics vs. values” equation we like to talk about on this blog (and perhaps also the popular political-partisan sentiments of the times we live in…)

“My conservative friends don’t think states and cities deserve help,” said Tony Fratto, who worked in the George W. Bush White House and is now a partner at Hamilton Place Strategies. “My progressive friends think certain businesses don’t deserve help. And my libertarian friends don’t want anyone to get help.”

The only viewpoint that’s missing here – is there anyone out there who just thinks everyone should get help? At least then we’d avoid that whole nasty #moralhazard problem… well, sorta (and then we can just let the “economists” figure out the rest?)

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When debt is always the solution, what is the final solution?

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The quotes below speak for themselves – and will make you want to read the full story for one man’s relevant perspective; an engaging piece by Rana Foroohar for Financial Times, after “lunching” with investment strategist & research firm founder Kiril Sokoloff…

Financial Times: Kiril Sokoloff: ‘There will have to be massive debt relief’

https://www.ft.com/content/b8639ab6-8936-11ea-9dcb-fe6871f4145a

“Recently, he has been trying to make the financial elite see the dangers of seeking to solve the problems of debt with more debt.”

“Then as now, he says, “central bankers were pushing on a string”, trying in vain to whip up a real economic recovery with monetary policy.“

“…a debt-phobic Midwestern child of immigrants who never understood why more people (not to mention companies) didn’t save for a rainy day.”

“…we collected money from a lot of poor devils and gave it over to the four winds.”

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Survival of the unfit?

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There are enough jokes to go around on what businesses are considered “essential” in this age of coronavirus. In this case, sure, we can only think of one thing people are scrambling to get their hands on more than sanitizer or chicken – and that’s a boarding pass for their next Carinival cruise…

At least we know the Fed has our back.

WSJ: How Fed Intervention Saved Carnival

https://www.wsj.com/articles/how-fed-intervention-saved-carnival-11587920400

“The previously unreported tale of Carnival’s rescue shows how effective the Fed has been in turning the debt spigot back on for large corporations. Carnival may still founder if tourists shun cruises over the long term, and its new debt carries a far heftier price tag than previous offerings. But the immediate survival of the company, which employs about 150,000 people, is no longer in question.”

“Elliott’s owner, Paul Singer, and others have warned that this success story comes at a cost. The Fed could be setting the U.S. economy up for a harder fall down the road, they contend, by flooding markets with cash and spurring investors to prop up firms that may not be fit to survive.”

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Would you bother to play if you knew the game was rigged?

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To be fair, we don’t know what the balance sheet of mom & pop Quality Electric Co. in Birmingham, Alabama might have looked like in this particular case either – but we’re guessing it couldn’t have been any worse than, say, what was about to happen to Millennium Management and ExodusPoint Capital Management. Unfortunately, in this “race to the bottom, er, bailout” we’ll probably never know for sure how the “little guys” might have fared against the “big guys” head to head, because according to BNN Bloomberg someone stepped in to pick the winners and losers before anyone even had a chance to get to the finish line…

BNN Bloomberg: Resentment grows on Main Street over bailout winners and losers

https://www.bnnbloomberg.ca/resentment-grows-on-main-street-over-bailout-winners-and-losers-1.1426347

“…waiting for approval of her US$40,000 small-business loan last week when the government’s first-come-first-served lending program ran out of cash.“

“Smaller companies like us are probably just going to be washed under the rug”

Meanwhile….

“Some billion-dollar hedge funds, too, have benefited from quick Fed action. A number of them, including Millennium Management and ExodusPoint Capital Management…”

“The basis trade was in a position to tank… The Fed responded, limiting losses. Both Millennium and ExodusPoint declined to comment.”

So…

“…if one of the lessons of 2008 is to help Main Street as well as Wall Street, the lesson seems to be only partly learned. Americans live in two separate and unequal worlds, and the bailouts reflect this.”

“I really have no faith,” Shultz said. “I have no faith in the system. In this government. In this leadership.”

Well…

Not much new here, really. We wrote about a similar game two years ago… in case this one sounds familiar.

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Is everything feeling “just peachy” to you?

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MarketWatch: Opinion: Wall Street wants you to believe everything is peachy

https://www.marketwatch.com/story/wall-street-wants-you-to-believe-everything-is-peachy-2020-04-14

“What happened to prudence for investors in the stock market?”

“The most important point is that the stock market is now back to about the same level where it was in October 2019. Since then, the coronavirus has caused many deaths, many jobs lost, a lot of trauma and massive economic dislocation. A conclusion that can be drawn is that the stock market believes that none of that matters, otherwise it would not have reached back to the pre-liquidity injection level.”

“It is career suicide for a Wall Street analyst to stay bearish if the market continues to go up. On the other hand, if the market goes down and the stock market analysts are bullish, it is not their fault — they just couldn’t foresee the coronavirus’ effects.”

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A gut-check on values with Chris Cuomo.

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A silver lining of being stricken with COVID-19, it seems, is an opportunity to take a step back and re-evaluate those “bigger questions” – you know, the ones whose answers we tend to take for granted. Whatever your politics (or whatever your opinion of Chris Cuomo’s) the man brings up some of our favorite points below – whether he intended to or not.

While the recent actions of the Fed might force him to re-think that last part about his “saved money”, all other things being equal (if only), we couldn’t agree with him more.

Of course, it all comes down to values.

Cuomo for next Fed chair? Or Treasury secretary, maybe?

NY Post: Coronavirus-stricken Chris Cuomo trashes CNN gig during radio show meltdown

https://nypost.com/2020/04/13/chris-cuomo-trashes-cnn-gig-during-covid-19-meltdown/

“I don’t want to spend my time doing things that I don’t think are valuable enough to me personally,” Cuomo said. “I don’t value indulging irrationality, hyper-partisanship.”

“I’m basically being perceived as successful in a system that I don’t value,” he continued. “I’m seen as being good at being on TV and advocating for different positions … but I don’t know if I value those things, certainly not as much as I value being able to live my life on my own terms.”

“That matters to me more than making millions of dollars a year … because I’ve saved my money and I don’t need it anymore,” he said.

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When even your hedge fund peers think you’re “morally corrupt”

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All we can say is, the system allows it. So, what does that say about the people participating in the system? How about the ones who created the system in the first place? (or better yet, the ones who allow it to continue?)

Bloomberg: Hedge Fund Managers Claiming Bailouts as Small Businesses

https://www.bloomberg.com/news/articles/2020-04-14/hedge-fund-managers-are-claiming-bailouts-as-small-businesses

“A manager with a healthy business who takes advantage of a program that isn’t “precisely defined, is not only showing poor moral judgment and potentially hurting the reputation of the alternatives industry, but it’s also probably crowding out struggling workers and businesses severely impacted by Covid-19”

“One manager, who asked not to be named, said he was outraged when he received a note from his accountant analyzing his potential eligibility. Why, he asked, would a hedge fund that collects management fees, and can make money if it’s skilled, avail itself of a government handout?”

“It’s a complete abomination,” agreed Nate Koppikar, a partner at San Francisco-based money manager Orso Partners. He noted that firms that avail themselves of the money may later be publicly identified under the Freedom of Information Act. “

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