Tis Only My Opinion

February 2001 - Volume 21, Number 2

The Party is Over -- It is now time to Perform!

Did the inauguration festivities in the cold dreary weather dampen your enthusiasm for the first day of the new George Walker Bush administration. I seriously doubt it but I am amazed at the endurance of some of the parade marchers in that weather. The question of endurance and willingness to fight for legislation to get GWB's agenda passed will be of major importance in the next few weeks.

The Inaugural Address

GWB in his address continued to state the themes upon he built his campaign with education, tax reform and a buildup of our military capability high on the list. How successful he is in getting this through Congress will be a major factor in how his first, and perhaps, only four years in office is judged.

Clinton's Farewell Addresses

As I watched the replays and live shots of the events of January 20th, the audacity of William Jefferson Clinton to attempt to overshadow the incoming President throughout the day was just plain obnoxious to me. And the taxpayers had to foot the bill for his ride home to JFK in one of the Presidential planes so that WJC, the Senator from New York, and their child could spend one night in New York. Sunday, they returned to Washington. What a waste of taxpayer money but what a small price to pay to have his Presidency end. But don't think that we have seen or heard the last of WJC. Too bad, that Independent Counsel Robert Ray did not force WJC to also agree not to speak in public on any subject for the next eight years.

Unlike Al Gore who said, "it is time for me to go," and went graciously into the night, WJC's ego will cause him to attempt to continuing setting the agenda, and he will continually be interviewed aud nauseam by his press lackey's on any subject that he wants to discuss. What a contrast to the roles every other ex-President adopted upon leaving office. He will likely even attempt to continue to control the Democratic party though his henchmen, denying Albert Gore the time to build upon his defeat and create a base from which to launch a campaign for President in 2004. Ah yes, the Clinton game plan is for Hillary to run for President in 2004. And perhaps, we will even see Chelsea in 2016.

If you think that WJC will go quietly into the night, think again. The taxpayers will continue to be soaked for his pension, living expenses, office rent for 8,300 sq ft of floor space in NYC with a view of Central Park for a staff of 2 of $600,000 annually plus other office expenses in NYC, secret service protection, etc., etc., etc. As one Senate staffer said recently, "the only way to put WJC on the sidelines is to bury him in a casket." I don't know if he was serious or joking but there is an element of truth there.

Trashing the People's House

Some people have expressed surprise at the $200,000 of damage done the final day the White House was inhabited by the Clinton Administration. Based upon the events of the past eight years, I wonder why they were surprised!

There is absolutely no excuse to defecate and urinate on the carpets and walls, paint pornographic slogans on the walls and render computers inoperable. But then, the past administration despite its promise to "have the most ethical administration in history" was never one that could be trusted.

I can never forget an HBS classmate who lived in Arkansas for many years, calling in November 1991 to say, "Thank God, we are rid of those thieves! We can not believe that the US electorate is so stupid that they would elect Clinton." To the very last, the Clinton administration ran true to form . . . lies, stonewall, and above all live like they are above the law.

Blame it on Perot

The results of the 1992 election should really be laid at the steps of Ross Perot. If he had not entered the race and siphoned off a significant amount of conservative votes, Clinton would never have been elected. But George Herbert Bush had made Ross Perot angry on more than one occasion and he was going to have his pound of flesh even if it meant electing Clinton. Besides Hillary and Bill had agreed to give EDS the lucrative government health care business. And just think of all those Reform party volunteers duped into believing that Ross Perot really was an honest candidate when from the very beginning, it was just about destroying George Herbert Bush and getting the inside track on a lucrative government health care contract.

A Different Tone

Perhaps, the most striking thing to me was the telecast of the swearing in of the new White House officials on Monday. First, Vice President Cheney and then President Bush stated that things would be different. From clothes, decorum, and accountability, the Bush Administration is vastly different from those whom it replaced. While Bush waits for all of his nominees to be confirmed by the Senate, only John Ashcroft looks to be delayed. Linda Chavez withdrew her nomination when she failed to tell all to the transition team people. If there is one thing George W Bush will not abide, it is people who don't provide all the facts or distort the facts. Chavez is the first victim of the new Bush policy.

Tom Daschle, the Senate minority leader, assured Bush that all of his nominations would be confirmed after Linda Chavez withdrew her nomination. A few hours later, he appeared on camera and stated that was not what he said. Daschle is a politician who does not understand that he probably just made Bush an enemy. Bush is a straight arrow, believes in one's word, and does not abide people who aren't truthful and upstanding. If you don't understand the Bush mantra, take a close look at the vetting of Governor Keating for clues.

Even Alan Greenspan gets Bush even if he does not know the real problem.

Probably one of the more interesting double takes was the testimony of Alan Greenspan on Tuesday. Amazing, he is now for tax cuts and perhaps, a continued lowering of the interest rate. Whether that will be enough to stop the oncoming recession is problematical. The real problem is a credit cycle bubble which can not be addressed by the Fed. During the past decade, Consumer Debt + Mortgage Interest has ballooned from about 35% of GNP to 85% of GNP, clearly an unsustainable number. What this really means is that we have been borrowing to fund the good times of the past eight years, and the piper is due!

During late December and January, the number of layoffs is amazing. When one realizes that most of those being laid off are in relatively high-paying jobs, it must hurt. Late payments on credit card debts increased in December 2000 for the first time in 3 years according to Moody's this week.

My old HBS Professor of Business History Ralph Hidy once remarked that you could tell which direction the economy was going by looking at the length of women's skirts. If they were short, the economy was moving upwards. If long, it was going into recession and if the skirts were near the ankles, a major depression was ahead. Well, today, the fashion is just above the ankles. Maybe, we are going to have a depression and not just a recession.

The Fed has been pumping money into the economy or allowing credit to be pumped into the economy at a rate we have hardly ever seen before. M3 has grown at $115 billion in the three weeks ending January 19, and $150 billion in the past six weeks. There is no way that the economy can absorb that amount of money and therefore it is free and available for other uses. Those other uses might be to remove money from the U.S.$, but the U.S.$ is extremely strong.

The Credit Cycle

Some of my colleagues have been arguing that rather than a normal Business cycle problem, we are nearing the final phases of a credit induced expansion that will as it winds down cause a global depression. Their evidence is based somewhat on the Kondratieff wave theory, the abnormally high levels of consumer credit debt, and the destruction of real money for "paper or fiat" money.

The US government debt obligations are greatly understated since the Social Security, Medicare, Government Pensions including Military pension obligations are not included in the $5.7 trillion debt as well as the Fannie Mae and Freddie Mac guarantees and others are not included in the governmental debt figures. Some critics have estimated that if the federal government had to prepare its books like corporations, the debt would be in excess of $25 - $30 trillion.

Folks, the U.S. is bankrupt and most state and local governments are in the same boat. Only the belief that we can inflate our way out of the mess keeps even the true believers sleeping at nights.

Well, I am beginning to be a "seriously doubting Thomas." The huge buildup in M3 has not seen a significant decrease in consumer credit nor an increase in the equity market. Distribution continues to rule in the old economy stocks and the Tech market has seen a slight "dead cat" bounce in January. But with all the layoffs and the decline in consumer confidence, is the end of prosperity in sight? Some pundits might argue that we are already in a recession and just don't realize it yet.

In the week to 19 January mortgage applications were 21.7% down on the previous week, but that 50% of these were mortgage refinancing. . The week before that mortgage refinancing was at a record figure. This refinancing technique is used by the house owner to raise money on the ever-rising value of the house. Frequently the additional cash raised may well have been used to pay off credit cards at a much higher rate of interest. If it had ended there the house owner would be saving substantial interest. Unfortunately that interest saved is used to continue the previous level of spending. Temptation being the devil that it is, it became irresistible not to use the credit card limits which remained outstanding. Now when people are laid off, or are asked to take a pay cut, or heaven forbid, the value of housing drops, the whole house of cards falls.

So what is the problem?

All this suggests strongly that there is something wrong with the U.S. economy which the Fed is trying to hide, cover up or alleviate. The obvious suggestion is that there is Derivative trouble. If the Gold problem is not solved, and the Bush Administration decides to change the strategy of the Exchange Stabilization Fund relating to the Gold market, the chances of the Derivative problem causing major turmoil in the banking arena increases daily.

The U.S. Long Bond has fallen and that virtually guarantees a sharp fall in U.S. Equities and equally sharp fall in the U.S.$. What is more the more money that Greenspan throws into the market to halt either of these moves would on all available evidence only make the situation worse.

This afternoon, the Federal Reserve reduced the federal funds rate by another 1/2% which won't help the economy much. Neither will the Bush proposed tax cut not the possible change in withholding tax schedules. As layoffs hit not only the dot com companies but also the old economy ones like Chrysler, Caterpillar, GE and ExxonMobil, one wonders when it will end.

California often leads the country so the saying goes.

If that is true, we have a real problem. The Democratic controlled California legislature opted to change the laws of supply/demand when they partially deregulated the electric utility industry. They capped the retail cost of electricity to the consumer but left the wholesale cost free to market forces, and then failed to understand that natural gas prices might increase. By bowing to the environmental lobby and refusing to build any new power plants for 10 years while the demand for electricity was growing each year, the stage was set for the bankruptcy of two major utility companies. It never ceases to amaze me that most lawyers have no understanding of the laws of economics.

The California consumer was up in arms about a 15% increase in electricity costs whereas consumers in the states around them were facing 50-100% increases as the FERC forced power generator utilities in those states to send power to California. By diverting electrical supplies to California, electrical rates in the Pacific Northwest were increased to the point where many businesses that had relied on cheap power such as Alcoa and Kaiser Aluminum were shutting down plants and putting people out of work in Washington and Oregon. The ripple effect was building. At Alcoa, the average salary was $59,000 per year. Do you wonder what unemployment in Washington is per week?

But Californians could only gripe about the rolling blackouts that occasionally affected their lives. Another great example of the Californian syndrome causing anguish to others.

In January, several major power generators were reluctant to send power to California fearing that they would not get paid and also be dragged into bankruptcy. The mindset of Californians never ceases to astound me. They want growth, they want electrical cars, but they don't want power plants. Hello! (Moreover, we want some other states to take and bury our trash as we are running out of landfills but that is another story.)

Water levels in many hydroelectric lakes were already at dangerously low levels in the Pacific Northwest because of the lack of snows in recent years. And if we don't get a lot of snow in February and March in the Pacific Northwest, water levels will be critical for the generation of power next summer and fall. Oops, guess you can't blame Mother Nature. Bad Form, you know.

Yet, the environmentalists were insisting that Bonneville Dam continue to waste water flushing the salmon fingerlings down the Columbia River. And the Sierra Club continues to fight for the destruction of the Idaho Power dams in Hell's Canyon. While other groups are yakking about the need for electric cars and politicians pass tax subsidies to people who purchase them. I wonder where they are going to get the power to keep those cars charged. Sometimes, I wonder about the agendas of various interest groups. I guess that they would rather have a fish go down a river and then use a candle for light this spring and ride a foot powered scooter to work in Los Angeles and San Francisco.

California businesses were also affected as many had contracts that cut off their electricity upon a Stage 3 power emergency being declared. Retail sales are off as are sales tax collections. Once again, the law of unintended consequences has raised its head! As the effects spread to other nearby states, the only people smiling were those selling stand-alone generators.

California could easily solve the problem if they believed in the free market system which of course they don't. A program to decontrol retail prices, restart several nuclear power plants that were shut-down by the environmental community, and allow older coal fired power plants to generate electricity would quickly solve the problem as well as a conservation program that would eliminate every 2nd street light and fluorescent bulb in every retail mall. But hey, that is just common sense, and who ever heard of a politician with any.

Of course, Clinton, in his wisdom and throwing a bone to the environmentalist groups, made the low-sulfur Escalante coal in Utah, out of bounds for those California coal power plants, by creating a monument in Utah. He would rather have the U.S. purchase the low-sulfur coal from Mr. Riady's Indonesian sources thus increasing our balance of payments problem. And did I not hear that he was going to become a director of Riady's company. Might that not be considered a conflict of interest . . . oh, I forgot, we are talking WJC . . . and he can do no wrong!

The Clinton Administration had no comprehensive energy policy.

On Monday, Dick Cheney was appointed by President Bush to head a commission to work on the energy problem that faces this nation. It must be a comprehensive solution involving oil, natural gas, coke, coal, nuclear power, and alternative sources. Yet I am reminded of a study many years ago when the final paragraph stated unequivocally, "that the only real long-term solution to the world's energy needs lay in nuclear energy." Nothing I have learned since 1983 has changed my mind. There is no need for an electricity crisis in this country. There is only a requirement that politicians and the regulators including the NIMBY crowd get out of the way. There is no need for this crisis . . . it is a crisis caused simply by stupidity and kowtowing to the environmental lobby.

Yet the fact that it exists is symptomatic of the things that are wrong with this country and if not corrected, will destroy the public's confidence in the ability of its elected officials to solve problems and ultimately, in the value of our paper money.

Confidence is the Key!

This week many investors are getting their 1099's and statements showing the results from last year. Quite a few find that they owe a lot of income taxes despite the fact that overall their portfolio is down 25-40% from a year ago. One acquaintance complained to me that he had lost all the money he had put into his 401(k) plan including his employer's matching funds for the last 10 years last year. Plainly, he was very worried about his upcoming retirement next month after working for a Fortune 100 company for over 40 years.

If these are any indications of the world around us, we are in for trouble. Let's see, declining hemlines, lost consumer confidence, realizing that the government is not endowed with omnipotence . . . yep, we just might be in big trouble in the next few years.

GWB will be surely tested in the coming months. Not only is the economy headed south but who knows what lurks in the minds of politicians and dictators in other countries. The easy part . . . the campaign is now behind our new President . . . the real test is before him.

After the first 10 days in office, his cabinet seems almost intact despite the Ashcroft bashing . . . education reform and the tax cuts have been placed on the table and GWB is even going to a Democratic Party retreat in Pennsylvania in a continued attempt to reach out to a party which has shown very little willingness to compromise as the Ashcroft hearing showed.

Well, GWB, the party is over . . . you asked for our vote . . . the Supreme Court said that you were the winner . . . and now you have almost four years left to perform. Good luck!

But then - 'Tis Only My Opinion!

Fred Richards
February 2001

Corruptisima republica plurimae leges. [The more corrupt a republic, the more laws.] -- Tacitus, Annals III 27

This issue of 'Tis Only My Opinion was copyrighted by Adrich Corporation in December 2000.
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