Syzygeist

Unofficial Poll

Okay, you decide whether the following story is an indicator of the outcome of the 2008 Presidential race:

In Providence Rhode Island on Monday I asked a room of 60 CEOs - many of them in the media and telecom business - whether they believed the outcome of this presidential election would matter. We had been talking about the nature of global and macro uncertainty. These days provoke a lot of worry about how bad things might get. So how should good corporate leaders react? After all, the Dow had been down almost 580 points before recovering a couple of hundred points higher. And this on top of an 877-point decline last week.

Show of hands? Yes. The outcome of this election matters. Unanimous.

Then I asked for another show of hands - without suggesting support for one candidate or another. 

How many in the room thought McCain/Palin would win? 

Not a single hand raised. This caused a ripple of bemused or perhaps nervous laughter.

Then someone called out, "How many are going to vote for McCain?" and the questioner himself raised his hand, looking around for support.  About a fifth of those in the room raised their hands, several of them tentatively.

Is this an official poll? No. A focus group? Well, perhaps, if you wanted to focus on CEO opinion in the media. (Do we think such a distinguished crowd would tip toward Democrats? I would think - hmm, not necessarily at that level of the enterprise.)

I realized that I was not prepared for the outcome of my impromptu poll. This unanimous result fell into the category of "the unthinkable," which had been one of the discussion topics. With so many unthinkable things happening in the world (Freddie and Fannie taken over, Bear Stearns gone, Lehman gone, WaMu gone, Merrill absorbed, AIG saved), what others might business leaders need to take into account in their planning?

Their answers included terrorism on US soil, capital shortages, and internal strife in the US economy akin to that of the 1930s, when people pulled up stakes en masse and left California, to cite one example.

But closer at hand?

A landslide victory for Obama. That's what the "poll" said.

Rome is Burning

With conflagration in markets, global credit frozen, open dysfunction in Congress, unemployment rising and fear driving most asset prices lower, I am moved to speak up (after a long silence) by the fact that Congress now wants – as part of the bill they haven’t passed - to increase FDIC insurance coverage from $100,000 to $250,000 for retail depositors, an apparent attempt to allay panic and curry favor. (My 28-year-old daughter, a WaMu customer who doubts her deposits are really safe despite the takeover by JP Morgan, said last night she intends to withdraw her funds today and open a new account at JP Chase. This may be a bullish sign for Chase in the long run, but it’s also a small piece of a larger bank run. Expect more to come.)
Congress’ move to increase insurance is understandable, reflecting their desire to “Do something now!” to make the general public feel better about the credit crisis and its potential (impending?) impact on their bank accounts.  If people wonder, “Hey, what have they done for me lately?” this might give some comfort.
But does it reflect an appropriate grip on reality and a sense of priorities? The FDIC at the end of the second quarter increased the number of problem banks on its watch list from 90 to 117. Others have predicted that over the next few years as many as 400 banks with assets of over $300 billion will fail. Against these potential losses the FDIC has only $45.2 billion in its insurance fund now against total insured deposits of $4.5 trillion.*
Making an adjustment in FDIC insurance to reflect inflation since 1980 seems to ignore the underfunding problem by multiplying it by 2.5. Is this comforting?
Everyone seems to be grappling with different pieces of the problem. Yesterday we drove to West Virginia for a meeting hosted by the Arlington Institute in which Dr. David Martin, chairman of M-CAM and a fellow at the University of Virginia, held forth in a 2-hour disquisition on the state of the markets and the near term future.  Life ain’t gonna be like it used to be, according to Dr. Martin, who foresees:

-A 30 percent decline in the value of the dollar by December.

-Moves by China to stop purchasing US debt and shift its support toward the Euro. Martin also sees China as the only economy in history that can – and he believes will -  turn inward to build its economy because it has attracted the capital and technology to do it.

In Dr. Martin’s view of the world, the US brand of consumer and finance capitalism is finished. We went too far believing in currency and consumerism and now have sold ourselves out into insurmountable debt, and transferred key technology to China that has effectively hollowed out our competitive capacities. Increasing the insurance the government says it will pay for lost deposits does not alter the underlying reality – a deficit-driven government struggling to pump liquidity into failing markets and boost confidence when the US economy itself has lost its competitive edge, and its official paper is under threat.
Are bank deposits safe – and is an insurance increase the answer? I listened this week to a former Wall Street insider rejoice in having sold his entire Morgan Stanley stock portfolio before the share price dropped below $42 (it’s was trading at $23 on September 30th), and explain why a mix of 80 percent Treasuries and the balance in JP Morgan and Bank of America stock makes sense to him as a defensive portfolio with real upside. This reflects an underlying belief  - common in the US - that our currency will continue to dominate, the world will always be willing to buy our debt, and we will always have a few banks that really are too big to fail.
This former Wall Street executive would not have been encouraged by Dr. Martin’s arguments. Martin says US Treasuries are in deep trouble – not a safe haven as widely believed – in part because China faces a stark choice – either to build its internal economy as fast as possible now to meet the needs of 170 to 230 million perpetually single males coming of age, or to continue to buy more US Treasuries to help the US economy recover (and keep our consumer society liquefied).
Martin believes the Chinese will take care of their own and leave the US economy in the lurch, which would mean, among other things, many more bank failures.
Is the answer to increase deposit insurance? Or is there a bigger picture to consider? Martin believes that Chinese moving “off the dollar” will mean trouble for Singapore, Malaysia and heighten tensions in a region rife with Muslims who have no affection for the US. To hear him telling it, increasing deposit insurance for the FDIC at a time like this amounts to fiddling while Rome burns. 

-Eric Best

_{*See Roger Cass’s most current report No More BRICS in the Wall- When the Gods of the Market Tumbled at http://bestpartners.cc/pdfs/partners/roger_cass/3Q2008.pdf}