Thursday, October 2nd, 2008...1:06 am
Thinking Finance Thoughts
I’ve been tuned in to the Wall Street financial collapse for the past few weeks since I wrote my last blog post on the market. I wake up and go to sleep to CNBC and devour as much intelligent analysis as I can find in regard to the credit crisis, bailout plan and status of our ever fragile economy.
For once, I don’t think there is a huge conspiracy behind this credit meltdown. Blame can equally be shared by all, as our nation became one dependent on unsustainable credit and greed. The federal bailout seems like an appropriate measure put forth by brilliant minds (Paulson, Bernake) and it looks like it will finally be approved by congress this week. Unfortunately, I’m not sure the bailout will do much more than prevent total systematic failure of the global banking system. Companies are about to report quarterly earnings and I suspect they will be dismal leading to the official start of a global recession that will effect everyone in every industry
I haven’t written about the market more because I’m not sure how much I have to add to the conversation. It seems like everyone has analyzed it from every possible angle and people much smarter and more well-versed than I have been sharing insightful and unique opinions.
But here are a few random thoughts I’ve been bouncing around that I will share upon request from LittyHoops 9th biggest fan, Mr. Daniel Klien….
As I mentioned, I’ve been watching a healthy dose of CNBC and I dig it. The reporting and analysis is fast-paced, intelligent, level-headed and most importantly seems fair and unbiased. CNBC anchors like Mark Haines, Dylan Ratigan and Jim Cramer have been sharp, honest, report the news and help the viewer analyz what it all means. I like how Haines and Bob Pisani risked their own reputations by voicing their own personal opinions that they believe the bailout is foolish and unnecessary. But what I really like is Erin Burnett as I’m pretty sure I have a newfound crush.
My favorite CNBC moments have been when anchors interview politicians about the bailout plan. The CNBC anchors are direct and to the point and try to understand and analyze the plan. The politicians, constantly posturing, and avoiding the questions seem to drive the reporters mad. It’s happened more than a few times. Ratigan’s fuse was about to blow as Chucky Schumer listened to himself talk in generalities about the evil Republicans and how his democrats are here to save the day (and vice versa with your favorite Republican imbecile). After watching months of the dog and pony show that they call the 2008 presidential election, it’s refreshing to see a newsroom you can trust and enjoy.
The Spilky Schplkes
In the summer of 2004, when I was living in San Diego, I needed to find a roommate for a few months and ended up subletting the other bedroom in my beach cottage to a thin little man named Spilky. Spilky had schplkes to get rich quick.
Spilky had some story about how he won 40K playing black jack in the San Diego casinos. He used that money for a down payment on a new three bedroom house that was being built in a new development in Carlsbad. He took out an interest only adjustable rate mortgage. That means Spilky was paying the least amount possible for monthly payments by only paying interest on the loan. He was not trying to repay any principle so he would never really own any equity in the house. Spilky’s plan was that his house would quickly and inevitably rise in value so that he can have it reappraised at a higher value. This would allow him to take out another mortgage or home equity loan on the increased value of the house and use that as the down payment for another house. The only time spilky ever seemed excited, interested, confident or altogether alive is when he would explain to me how you need to “leverage like a m—– f—–.”
I have no idea what ever became of Spilky or the weird black lightbulb picture frame that he thought was so pimp but I imagine he could have probably bought a few houses on his initial blackjack winnings. Yup, all 127 lbs of whiteness could have easily put his name against multiple houses in the hottest housing market in the US. The San Diego market was also one of the first housing markets to plummet and I wonder what happened once the value of Spilky’s houses began to decline. Spilky never thought about what would happen if the housing market tanked or if his houses lost value. Perhaps he escaped the country on one of those j-date cruises that he would frequent with his mother down to Rosarito to begin anew in Baja where he could fan out all his pesos!
I had another friend in San Diego who worked for a company that provided credit to small businesses that needed to make investments at higher interest rates to account for additional risk. For instance, let’s say a local bar wanted to make renovations and needed a loan. My friend explained that the beauty of his job was that his company didn’t even have to provide the loan, they would just pass it along to the bank. So basically he could give just about any company a loan and make a huge commission off of each sale/deal that make him over six figures a year.
We hear lots (mostly from scummy politicians) about the family who bought his dream house for his wife and kids and now can’t pay the mortgage. While, I’m sure this is sadly occuring around the country, I’m also sure that there are lots of stories like the two I mention above.
Sniffing Out Opportunity
Whenever I hear about a business collapse or a seismic industry shift, the first thing I think is that somebody out there is or will be getting filthy rich. It’s an entrepreneurial mindset. The prime example of opportunity in this credit crunch is Warren Buffet. He’s simply going to the biggest blue chip companies (Goldman Sachs, GE) in the history of American Business and naming his terms to receive outlandish returns in exchange for much needed liquidity. Basically, Buffet is betting that these pillars of American capitalism don’t go under and if all they do is stay afloat he enjoys a ridiculous return on his capital.
Take that down to the everyday, everyman level and if you’ve saved your cash during the bull market you’ll have some nice bargains to choose from in 2009. You can pick up an NYC apartment or summer Hampton’s house on the cheap. Not only will many finance people be leaving NYC, but more stringent mortgage requirements will cut down demand even further. If you’re a first time buyer with cash, this housing market is for you.
I also imagine that tons of distressed debt/equity funds will pop up that buy assets on the cheap. This could be everything from a billion dollar hedge fund, to people buying a piece of the new federal bailout debt to a used car salesman who buys up all the cars from people who won’t be able to make their payments.
Produce, Create, Innovate
One of the most peculiar moments of my college education occurred when I first began the Michigan Business school in my junior year of college. The b-school has pretty stringent requirements and application process and really weeds out most students so that you are left with the most intelligent, motivated and successful students (Yes, I realize that is not me. I probably got in because I came to Michigan with 42 AP credits from high school. Let me tell ya, it feels great to intellectually peak in high school).
Anyways, I quickly realized that the vast majority of these students were all on the same exact march into the world of corporate finance. It baffled me that people who had their sh*t together to accomplish just about anything that they wanted, all were content to be finance drones. But that’s what our capitalistic society promotes and rewards and often I end up feeling like the sucker for not going along with it. If you are the smartest, best and brightest and want to be the most successful you become an Investment Banker. There is a clear path to success, the financial benefits are lucrative and the associated status is coveted. But once you’re a banker, all you do is spend your days and nights figuring out how to financially engineer dollars to create more dollars through vehicles like credit default swaps and other archaic derivatives.
I would like to see our country push the brightest business minds to innovate in the businesses of energy, environment, global initiatives and technology. Let’s see a Harvard graduate (not dropout) create the next Facebook, Microsoft or Dell. Create tax breaks for entrepreneurs and highly paid entry level jobs for college graduates. Innovation in these industries is what the US truly needs to turn around the fundamentals that plague our economy: trade deficits, reliance on oil, speculative finance, and a faulty dollar.
It’s doable so let’s do it. Barack? McCain? You guys out there?
As I mentioned in a previous blog post that I wrote in March as Bear Sterns folded, Wall Street always figures out new and creative ways to create tremendous value.
….There are just too many geniuses working too hard at it. If the US worked as hard at philanthropy and science as we do at creating new derivatives and financial vehicles we would have solved the answer to life by now. I’ve read about the junk bonds and leveraged buyouts of the 80′s, watched the dot com boom and IPO’s of the 90′s and have tried to understand the hedge fund and private equity markets during this most recent boom.
The Masters of the Universe on Wall Street have an advantage over every other industry. Their only focus and goal is to make money. They don’t have to figure out how to make the environment cleaner, create a new automobile, make a solid product, or help people connect through sports. They can skip all that and advance to go to collect their money.
I’m sure the best and brightest on Wall Street are already figuring out how to make their next hundred million. Perhaps they leave the big banks and go to boutique investment banks that won’t be as regulated or structured. Maybe they create distressed debt funds with astronomical yields. Perhaps they figure out how to pick apart the bailout package. The brains on finance will always work faster, harder and smarter than those who are creating new regulation or putting up their dumb money. It’s similar to the tax code. As quickly as the IRS can create new code to account for loopholes, an army of CPA are in a basement somewhere creating new loopholes.
I’m almost positive that this is just a bust in a cycle of larger booms and precarious falls. Perhaps it takes a year or five to recover but the US will recover and forget the lessons we are supposedly learning right now. Regulation will be followed by deregulation once the economy gets all lubed up. But there are a few things that do worry me this time around. First, I’ve heard a lot about Japan and how they basically entered a ten year recession. That’s scary as it seems to foreshadow a tremendous down shift in standard of living for America. The second is that the US is no longer in a one country race as the dominant capitalistic economy for the world. We aren’t the Dream Team of 1990 anymore. We might be the Dream Team of 2008 but there are now some other countries that have grown up in the last few decades who are gunning for us. The economies and societies of Russia, China, Japan and the Middle East don’t have much sympathy for our self inflicted credit crunch. If they could take their money out of our economy without shooting themselves in the foot they would have done so already. What happens if the next time it’s time to stuff ourselves with greed there isn’t as much food on the table because our global neighbors have already helped themselves to a heaping? We shall see…
Would love to hear your thoughts? Hit me up or better yet leave a comment.