FINANCIAL WIZARDS DIG FOR PROFITS

WATER SHORTAGES MAY BE GREAT BUSINESS FOR BANKS?
I found an interesting article today in Bloomberg about why the world should care about China's water problems.  Unlike what I first thought when glancing at the title, the author doesn't suggest that China will attack neighbors for their water rights or anything close to this.  The article's author suggests that some financial alchemy would be the prescription for solving the world's water problems.

http://www.bloomberg.com/news/2011-07-06/why-we-care-about-the-price-of-water-in-china-peter-orszag.html

I won't go into depth into what Peter Orszag highlights as reasons for the water issues, but they are the same ones we hear about China all the time.  They have polluted everything, including their water supply.  They are using all energy sources and burning them takes a bunch of water.  Oh yes, there is also a terrible drought as well.  All of these things are reasons that the world should assist China in fixing their situation.

WHAT TYPE OF HELP SHOULD THE WORLD PROVIDE?
1)  You knew it would be long to find that if the "global village" was going to get involved that the first answer had to be that we need to fix CLIMATE CHANGE!  I mean it is simply stunning that in one sentence Orszag links that we need to reduce water pollution and then somehow jumps to the notion that we must address climate change.  Can it be that simple?  What specifically does global warming have to do with polluting streams, rivers, and aquifers?  Are we heading somewhere?  Does this sound familiar?

2)  The second recommendation is one that seems reasonable.  We should provide more potable water.  I get this and I'm for it.  Let's get more desalinization plants and cook up some drinkable water.  No argument here.

3)  Finally, we get to the meat of the posting.  We need to let the "market" begin pricing water to effectively manage usage of supplies.  Here is the quote;

"Water is Earth’s most valuable commodity, and yet in most countries it is given away free -- as if it had no value at all.

If China moved more aggressively to price water in a manner that reflected demand and supply, it could teach the U.S. a lesson in using market economics to address environmental issues. As a colleague of mine at Citigroup Inc., the analyst Deane Dray, has written, “water has never been priced efficiently.” In the U.S., water is generally heavily subsidized, and prices aren’t adequately linked to usage levels.
Just as we need to price carbon in order to avoid a climate crisis, we need to price water to avoid a water crisis. Market forces can work wonders for the environment, but only if we have the political courage to create them. "

THE REAL AGENDA
Here is the takeaway from all of this nonsense.  Peter Orszag is a Vice Chairman of Global Banking at Citibank and also a former official in the Obama Administration.  Mr. Orszag probably has several main goals here, so I'll assume his motivations fall into just a few camps.

First, market based pricing for a necessary commodity like water would be a great place for a bank like Citi and JPM to completely dominate.  That is all we need is another situation where banks hold and trade valuable commodities (like oil) rather than provide lending services.  (What business are they in again?)  As a Vice Chairman, I can guess that he's in the business of business development.  Is there any doubt this is the angle he's playing here?

Second, this all comes back to Orszag as an excuse to wage war on Global Warming, errr, I mean Climate Change.  Actually a better word for this would be a market mechanism for pricing carbon emmissions throught the creation of related credits based on the fiction of climate changes due to man.

Last, as a former senior administration official, I suspect that Mr. Orszag would identify himself as a senior believer in the Global Village concept where we collectively should jump in and solve all of the problems in the world without concern for national sovereignty.  I'm not so sure China is quite so open to the UN's type of help and doubt seriously that they would comply with any rules related to water pricing or carbon trading at all.  So if China doesn't participate could we really be looking to get into pricing of water here in the USA as well?

WHEN FINANCIAL WIZARDS GET COOKING THEY MAKE A MESS
As a Financial Analyst at a large firm many years ago I was a financial wizard.  My firm had many offices throughout the world and as each location became connected over the years, communication and connectivity costs grew significantly.  In my younger days managing corporate spending I led a team that intended to allocate and charge out these costs because the parent company was subsidizing all of the expenses and we needed to look more profitable at the core business. 

With an enthusiasm that is unmatched in the finance world I created an amazing soup of allocations and charges to all of the global offices for everything from executive leadership to T-1 lines and GWANs (Global Wide Area Networks ---- big, big, Internet pipes!).  The executive team and board bought my allocation strategy and I looked great and on paper, our corporate offices gained $15 to $22 million a year simply by waving a wand in front of an excel spreadsheet. 

Clearly the home office saw me as a hero and the global offices saw me as a.....goat.  What really happened was that the entire scheme was a bunch of garbage.  The company didn't make any more money than it did previously, and you had about 10 global local CFOs that were angry every single month when we reviewed these communication and technology related charge outs.

My wizardry added absolutely no value to the bottom line, but some executives in the home office looked much better.  Perhaps I made them more bonus money at the expense of some to those in other locations?  When an excel guru starts trying to price your IT costs or your carbon credits or your water, you must recognize that you are not going to benefit one bit.  Things will get very complicated and someone might earn a bonus, but it isn't going to make much difference in the long run.

GOATMUG 

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

THE BEST CUP OF COFFEE EVER

I have to admit, the older I get, the more spoiled I am. When I was younger (college) I lived on a diet of Taco Bell, Top Ramen, and Keystone Light. You might be able to discern with that line up that I paid for college myself and you'd be right on. Fortunately, those items contain just enough of the four food groups to sustain me. I didn't eat or drink any of these things because they were awesome, they were simply life sustaining and served their purpose.

As I earned my undergrad degree, I became a coffee fiend as well. I often tried drinking coffee black, but found that coffee with a bit of that white powdered gluten laden non dairy creamer improved the taste. As I've aged, I developed a taste for better quality beverages and I often won't even drink coffe when half and half is not available. I've learned that I don't care for the manufactured taste of the powdery drink additive.

Why do I take this trip down memory lane? Yesterday I took a new leap. In the quest to create the perfect brew of coffee I purchased hand roasted whole bean coffee from a local roaster. I purchased organic turbino sugar, and also organic half and half. Why such a special concoction? I was celebrating the completion of several major work projects I've been tackling for months. (By the way, I would have never dreamed of making a cup of coffee like this in college). After grinding the beans, brewing the coffee, adding the sugar, and adding the half and half, I realized something was horribly wrong. Something was not as it should be. Flakes of creamy white rotten half and half floated to the top of my "perfection in a coffee cup". A few explicatives and a drive down to the corner grocery quickly rectified the situation, but as you can see I was clearly scarred by the experience.

What is the purpose of relating this story? Easy, things are not always what they seem. I bought the best of the best in all of the ingredients in my coffee. Unfortunately, organic, rotten half and half is still just as nasty as non-organic rotten half and half. While the packaging was prettier, the marketing better, the price tag greater, the end results were disappointing. In fact, after the entire ordeal, the results were probably more tragic!

I think that is a great starting point for our story of the marketing job our Fed, Treasury, world central banks, and two Presidential Administrations have served up. Recall that the problems over the last 18 months started in the following manner;

1) The Federal Reserve attempted to restart our economy after the tech wreck by lowering interest rates to stimulate spending. As usual, low cost money for a prolonged period spurred irrational exuberance, and a mis-pricing of risk. American investors felt that real estate was the new "money tree" and either gobbled up investment properties or used their home equity as an ATM for rampant consumption of stuff they didn't need or access to additional debt to buy other investments.

2) As more Americans borrowed and spent, more and more less qualified borrowers were wooed by President Bush's goal that 70% of Americans could own homes despite that the long term average percentage of home ownership in the US is 63%.

3) Realtors, mortgage brokers, mortgage lenders, and Wall street were more than happy to oblige these lower tiered borrowers and like a drug pusher helping an addict they continued to offer their wares.

4) As home prices continue to go higher the merry go round had all of the kids on board and so therefore there was no one left to keep pushing. Sub-prime borrowers began defaulting as mortgage resets hit them with higher interest rates and caused them to lose their undeserved homes.

5) As the tidal wave of defaults hit, Wall Street became a victim of its own success. Bear Stearns and Lehman Brothers exploded bringing down Wachovia and Washington Mutual. All of these firms were involved in lending to marginal borrowers or the securitization of pools of these loans. Merrill Lynch, AIG, and more also were involved in this mess.

6) The Federal Reserve and Treasury along with other world central banks stepped in and offered their fiscal support and immediately lowered rates again to near zero. Remember, these are front month rates and are the interest rates the government charges banks for overnight money. The Fed also bought toxic securities outright from troubled financial institutions and traded those assets for treasuries. Our government offered the TARP funds to help institutions and even made outright purchases of banks and insurance companies. (AIG, Citbank, etc.) We even used these to buy and lend stakes to great car companies like GM!

7) In concert with these actions our government also looked to perform direct support (cynics would call it manipulation) in the mortgage market and the treasury market. By guaranteeing and supporting the FHA the US taxpayer became the lender/insurer to 80% of the post-collapse mortgage market. With the announcement of quantitative easing by the Fed we began buying our own treasuries to try to keep prices low and contain rising interest rates.

8) The Obama administration got in the act and began programs like the Housing Tax rebate for first time home buyers, Cash for Clunkers, and now Cash for Caulkers. In addition, the federal government has continued its payment of extended unemployment benefits. In addition, as a country we are now running a huge fiscal deficit (nothing new, just the magnitude of it is) and our government's expansion has required us to raise the debt ceiling (allowable debt of the country) to $1.8 Trillion Dollars! This doesn't even account for the addition of any new health care program or new stimulus.

9) The accounting standards board (FASB) bowed to pressure from financial institutions and our government by suddenly recommending that accounting standards be thrown out the window. Clearly they were pressured and threatened that if they did not create new "rules" for accounting for troubled assets and balance sheet holdings economic collapse would surely follow. A better translation for this should be, "If you don't allow banks and financial institutions to continue reporting false values and lie the whole ponzi scheme will collapse". You know what, that is exactly what would have happened. Am I amazed that FASB suspended its own rules and took a break from truth telling? NO, NOT A BIT! Am I amazed that for a while I was duped to believe that there was ever any truth in the markets, truthfully, yes. What these accounting standards amount to now is that they are standards as long as they are convenient. When accounting standards are not, they are no longer required.

THIS SHOULD BE A WARNING TO ALL OF US! WHEN OUR FREE MARKETS AND FREEDOM ARE CONVENIENT, THEY WILL BE FREE. WHEN THEY ARE NOT CONVENIENT, YOU WILL HAVE YOUR FREEDOM AND FREE MARKETS SUSPENDED.

10) Finally, as we saw in the previous October post that was published in http://www.slopeofhope.com/ we see that the Fed unleashed its last desperate weapon, Dollar Devalution. I've posted that blog article here if you missed it PUBLIC ENEMY NUMBER ONE . This speech given in 2002 highlights all of Bernanke's contingency plans for a bust cycle. Guess what - he's done it all and now the bullets are expended.

Now don't get me wrong if you are reading this and saying that "Goatmug sure does hate prosperity and the government!", the truth is that would be absolutely wrong! What I do hate is waste, entitlement, theft, and intentional distraction and lying. I admire honesty, consequences, discipline, entrepreneurialism, and nationalistic pride.

My aggravation with the government's scheme is that it avoids almost all of the things which I've highlighted as worthy of admiration. As I've mentioned before, I believe that the government has done unprecedented acts and while it appears to have done amazing things, in reality has accomplished little but to raise asset prices of stocks, bonds, and commodities. We have not addressed the underlying asset destruction on the balance sheet of banks and in fact it has not forced them to write bad loans down at all. The FASB's actions simply reinforced that our approach would be to "extend and pretend" rather than taking a disciplined approach and closing these Too Big to Fail Institutions. We've allowed Goldman Sachs and others to literally use the US balance sheet and make billions while it would have been more economically reasonable to cut a check to each American family for $200,000 or more.

As usual, this post is way longer than I thought it would be, and I haven't even gotten to the main point. Therefore, I will highlight in the next post what has changed for the US economy due to the actions of our government and how they are simply surface level improvements. I'll outline how the global economy and its linkage will ultimately lead to a double dip recession or worse despite our best efforts.

I found this quote in a piece done last week by Chris Pulplava, who is also one of my favorites. If you are not reading him weekly on Wednesdays you are missing out. (By the way, he is quite bullish now, so please know that I read all perspectives and don't dismiss them when they don't agree with my point of view). http://www.financialsense.com/Market/daily/wednesday.htm

FDR’s Secretary of the Treasury, Henry Morgenthau came to in 1939 after initially being a proponent in massive fiscal stimulus to cure the depression and employment. His comments are provided below:


"We have tried spending money…We are spending more than we have ever spent before and it does not work. I say after eight years of this administration, we have just as much unemployment as when we started… And an enormous debt to boot!”

I wonder if that sounds familiar? We'll discuss what improvements have been seen in the economy and how they have been manipulated and engineered to create them. We'll also discuss how these improvements will abate in the next several months as counter-vailing forces moving to limit and undo the positive moves of the last 9 months. In other words, we'll put the economy to the "Best Cup of Coffe Ever" test and see if it really pans out to be as good as we envison it.

By the way, I no longer drink, I haven't eaten Taco Bell in 5 years, but MSG addictions and bad habits are hard to break. I must admit that I have a stack of Top Ramen Roasted Chicken Soup in my cabinets. God, family, great coffee, Tabasco, and Top Ramen are essentials for a fulfilled life. You might pick up a packet, heck even with inflation a packet is still 20 cents! (Remember when it was 12 cents?)