Fed Food

Was the grilling of the Fed chair a summer sizzler?

When Bernanke testified before Congress last week, a lot of people were surprised by the rancor. But this is a sensible approach to a newly political institution.
In the fabled days of yore, the Fed used “System RPs” and “Bill Passes” to manage the money supply and regulate the use of the discount window. On a good day, they could oversee a bank holding company exam.

But once the Fed gets involved in saving banks and creating investment vehicles, the central banker has become political in a major-league way. Arranging marriages and re-writing rules has major implications. Someone’s ox will be gored. Those are political decisions, and they requires political accountability.

Now seeing Barney Frank grill Ben Bernanke was distasteful, but I know no other approach. The Fed isn’t all-knowing. If Bernanke can’t handle that heat, he needs to get out of Washington’s kitchen.

Douglas R. Tengdin, CFA
Chief Investment Officer
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Emerging Shoots

June is bustin’ out all over. Especially in emerging markets.

Recent attitudes have been positively giddy. Commodity prices have helped stock indices from Singapore to Turkey to Brazil. An composite of these markets has risen over 70% since March.

Clearly, the shock resulting from last year’s credit crunch is fading. In May, Singapore’s exports rebounded 5%; Hong Kong’s unemployment rate was unchanged; and IMF support has reduced the risk of a cash crisis in Eastern Europe But some clouds are on the horizon. All the stimulus has given governments little room to maneuver should the economy turn down further. Moreover, rising energy prices could stress large importers like China and India. Money spent on oil can’t fund other stuff.

No tree grows straight to heaven. While we’re constructive on how emerging markets will perform, investors need to hang on. The ride could get bumpy from here.

Douglas R. Tengdin, CFA
Chief Investment Officer
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Bootleggers and Baptist

Sometimes moralists align with monopolists to protect their markets.

A few years ago, Mississippi was a “dry” state. Every so often someone would propose that they go “wet” and allow people to buy liquor at the store. At that time, preachers would rail against the evils of alcoholism, aided and abetted by moonshiners and bootleggers. Those folks had a vested interest in keeping whiskey out of the stores and in their `stills. Monopolists always want higher barriers to entry.

We can see the same principles at work today. Cigarette companies align with health groups to oppose e-cigarettes. Large banks team up with Treasury officials to support proposals to regulate systemic risk. Energy companies support a carbon tax or cap-and-trade regulation.

In many cases, people with a moral cause ally themselves with vested interests to support anti-competitive measures. But we should be wary in these cases. Because competition keeps us strong. And moral arguments should be judged on their own merits. And eventually, Mississippi went “wet.”

Douglas R. Tengdin, CFA
Chief Investment Officer
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Endangered Species

Pity the poor Fed Watcher. There’s hardly anything left to do.

In days gone by, Fed watching was a contact sport. There were cryptic actions by the New York Fed that went by names like “System RP” and “Bill Pass.” These seemed more like football plays than policy actions. Back then, a Fed watcher had to translate the arcane actions into meaningful intentions. It took training in economics, finance, and communications.

In 1994 the Fed initiated a new policy of announcing Fed decisions. But Greenspan enhanced this with his policy of “constructive ambiguity.” Now you needed a degree in Russian Literature to decode his pronouncements.

With Bernanke, there really doesn’t seem to be anything to do. Not only is he clear in what he says, he’s put Fed policy on perma-hold. The Fed watchers are endangered again.

So don’t worry if they squawk about rising rates. Most likely, they’re just getting bored.

Douglas R. Tengdin, CFA
Chief Investment Officer
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Compensating Interests

Everyone’s looking at controlling compensation.

One of the stories that people like to tell about the credit crunch has to do with compensation. Because a bunch of kids were paid too much too fast, the story goes, they were effectively incented to gamble with house money. When they lost big-time, the Treasury had to pick up the tab. Never mind if this is true-but it makes a nice story.
So now the government is looking to limit pay, not just for TARP recipients, but for everybody in finance. Now, over the years a lot of uber-smart people have tried to align the interests of executives and shareholders Maybe the bright minds at Treasury will discover the perfect formula that has eluded everyone else. But I suspect that they’ll have an easier time spinning straw into gold than holding down a deal-maker’s compensation.

Because we live in a global financial market, if U.S. banks can’t pay enough, someone else will. On the margin, talent will migrate to the activity and locale where it is best rewarded. If the Feds penalize performance, then the performers just won’t show up. Is that really what we want?

Douglas R. Tengdin, CFA
Chief Investment Officer
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Moderate Medicine

“Moderation in all things” seems a sensible rule of thumb. But for some economists, when it comes to government spending, you can’t get too much.

For months, Nobel-laureate Paul Krugman has been berating the Obama administration for its stinginess in only approving a $700 billion stimulus package. After all, global real estate probably declined by about $5 trillion. If half of that occurred in the U.S., then the government is making up only a fraction of the loss.

It’s understandable that many people want a pain-free recession. So they’re pushing for a bigger bailout. But there are limits to everything. When your body’s sore, a little Tylenol helps. But if the pain persists, most people know enough not to swallow the whole bottle. The federal deficit is now scheduled to run at 8% of GDP-6% above its normal recession peak. Any more medicine may just make this patient more sick.

Moderation means walking down the middle of the road. But it seems that any moderates here are likely to be run over by a government steamroller.

Douglas R. Tengdin, CFA
Chief Investment Officer
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Dodgeball

This is Doug Tengdin from Charter Trust with the Global Market Update for Monday, June 8th, 2009. Everybody’s worried about GM and Chrysler. But what about the other guy?
Yes, we’re talking about Ford. For years, Ford was the also-ran in the auto market. Their rental agency, Avis, was perpetually second to GM’s brand, Hertz. The number-two moniker seemed permanently tattooed on the company’s chest.

Well ever since Alan Mulally mortgaged the company to the banks, Ford has been dodging what’s been thrown at it. Sub-prime mortgages? Missed that one. GMAC didn’t-and they needed TARP money. Foreign culture clashes that nailed Chrysler? Ford dodged that one, too. And they managed to sell Jaguar and Land Rover to India’s Tata Motors while there was still some value there.

Now the latest attack in this game of corporate dodgeball is being thrown by the government. By bailing out GM and Chrysler, the US is effectively penalizing the intelligent corporate moves that Ford has taken. In a just world, Ford could have bid on the new Malibu’s plants. Now, they have to convince people to buy the Fusion instead.
Playing dodgeball is exhilarating. But as fewer and fewer players are in the circle, it gets harder and harder to dodge the next shot. Let’s hope that Ford can stay in the game.

Douglas R. Tengdin, CFA
Chief Investment Officer
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Physics Envy

Is everybody trying to be a physicist?

Physics seems to be the science of uniform laws of motion and force. Hit a billiard ball with X force and see Y result. One can see the appeal. In health care, evidence-based medicine could lead to alternate treatments and healthier people. In economics, laws of money supply and output can help us tame inflation and stimulate the economy.

Only life is rarely so neat and clean. You can’t do controlled experiments on municipal finance like you can on ant colonies. And much of the “evidence” in medicine is the result of self-reporting, where someone with back pain feels oh-so-much better after a sympathetic listener rubs some weird cream on his feet.

But policy demands certainty, even though people aren’t predictable like simple harmonic motion. The thing is, when you really understand physics, quantum behavior is full of all kinds of random, unpredictable events, with strange forces and weird twinning behavior. The physical world actually is a very bizarre place.

Maybe physics is a pretty good analogy after all.

Douglas R. Tengdin, CFA
Chief Investment Officer
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What Went Wrong?

What brought a company low that at one time embodied the cool of Apple, the financial heft of Microsoft, and the marketing savvy of Toyota? At one point, every other car sold in America was made by GM. In a word, protection.

When Alfred Sloan organized Billy Durant’s hodgepodge of brands, he created a car for every purpose. The entry-car was a Chevy. As customers went upscale, they could ascend through Olds and Buick to eventually land a Caddy, and never leave the GM family. Any business student will tell you this is classic niche marketing, combined with price optimization. Why didn’t the model last?

Well, times change. A trade war in chickens led the US to impose tariffs on imported trucks. Capital was diverted to this more lucrative market, and GM’s “auto ladder” languished. In the end, so many resources were focused on the profitable light truck market that when fuel prices spiked again in 2008, the company couldn’t adjust..
So government protection diverted assets that should have gone to strengthening a diverse product lineup. Sure, management made bad decisions. But they were encouraged to do so by bad policies.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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They All Laughed

The old commercial stated that when E.F. Hutton talks, people listen, But apparently when the U.S. Treasury Secretary speaks in China, it’s okay to laugh.
When Secretary Geithner asserted that Chinese investments in US Treasury and Agency bonds were very safe, his answer drew loud laughter from his student audience, reflecting skepticism in China about the wisdom of a developing country accumulating a vast war-chest of foreign reserves.

Vice Premier Wang Qishang later “clarified” that economic dialogue was wise, but the message was clear: the Chinese-the globe’s largest creditor-don’t respect the world’s largest debtor. To some extent, this attitude simply reflects the wisdom of Proverbs: “the borrower is servant to the lender.” But in financial and global affairs, disrespect and hubris are never wise.

Because what goes around comes around. After World War I when we held most of the world’s reserves, policy errors by our Fed and Congress helped initiate the Great Depression. In the end, it doesn’t matter who starts to laugh. What matters is who’s smiling at the end of the story.

Douglas R. Tengdin, CFA
Chief Investment Officer
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