USA Election 2000 – Iranian Edition (And Your $$)
The Iranian election becomes another election mess. The American (the first edition) version requires a Supreme Court to give a final answer. Iranian one? A Supreme Leader gives a final say.
And the Supreme Leader says the incumbent wins.
In a situation like, just like the American original version, a decision made by that few individuals, the decision is ultimately political, whatever the cloak it is actually. In the American original version, it is under the cloak of law. In the Iranian version, it is under the religious leader’s cloak. Note that the Supreme Court Justices are life time appointments just as well.
What ticked? Not bribe. As usual, what is the alternative of the decision? Supreme Leader weighted between incumbent and challenger. Who is a bigger threat to the Islamic Republic? Or for that matter, to the power of clergy?
Challenger is always about “change”. Incumbent is always about “you know what you get. Don’t rock the boat.” This applies to any institution (note, not necessarily a country), any selection process (note, not election), any candidate.
The next question is: what about the protests? Supreme Leader is confident he can manage the internal crisis. If the protests get any worse, it will be between a Tiananmen Square (Iranian Edition) and End of Soviet Union (Iranian Edition). Certainly, Supreme Leader thinks the worst scenario is Tiananmen Square.
Alright, so what does one care about this latest news episode? Political instability drives up the prices of commodities, in particular, the commodities the geography produces. So, in this case, oil.
Oil will become more expensive, if this goes on. The only way oil does not increase further is traders believe the recession is so bad there is no demand for oil anyway, i.e. demand will decrease even if the quantity of supply is not being affected by the political instability of Iran.
Oil exploration companies’ stocks go down (not up). The core material of their product gets more expensive, so their profit margins get squeezed. Consider the following company, BP:
The companies that get affected less so are the American oil exploration companies who have less exposure to Middle East (or think about the Canadian oil companies). And if you happen to own renewable energy companies’ stock, you should see prices going up for your stocks. Given today is Friday, one may be tempted to clear their stock inventory just in case the next episode of this Iranian Election comes up and affect the portfolio.
The things that really distort the prices of stocks affected by Iranian election are: Obama’s announcement on health care and Obama’s announcement on the merger of OTS and OCC.
How To Use Swine Flu
This swine flu became a real political event: California declared a state of emergency; Homeland Security is making moves; Obama is making another TV appearance again. It so far looks like the market is reacting to the Fed statement rather than this health event. Banks are up for 3%, S&P are 2% and medical supplies are only up 1.7%. It is almost a drag in the market today.
With this swine flu, manufacturers and distributors of over the counter medical supplies are of interests for products like hand sanitizers, wipes, over the counter drugs, surgery gloves, masks, etc.
Certainly, vaccine makers should go up. However a lot few of those.
Also related industries would be hotel and tourism interests. Retailers and mall operators which have a heavier geographic exposure in the southern states would get affected (Tex/Mex cuisine chains who have more sites in California and Texas, say). This issue will fuel more talks around border control.
Having a tighter border control can be used to divert the attention from gun control once people move their attention back to border violence (if there will still be), drug territory dispute. We are more connected than before. However, this forces lobbyist to be more creative to exploit the issue of the day.
Anyone Understands Geithner?
Little reaction (criticism, actually) is out there considering the scale of Geithner’s proposal unless everyone is used to the lack of details from Obama Administration and is waiting for the real deal or no one understood what just happened. The financial weapons of mass destructions, along with aggressive and unethical lending practices, lack of regulation in some areas (say appraisal), + many more are to blame. Geithner’s solutions reacted to them. However, no one really asked if Geithner’s way makes sense. I am writing to argue that systemic risk regulation only requires stronger enforcement from or even enhancement of other existing regulation.
The best synopsis of Geithner’s proposal, so far, that I can find is this one from Reuters. However, the best one to articulate the central ideas of the proposal is Times. Four tools are actually these: prevention (safety and soundness regulation), reaction (market insurance, FDIC like), bailout (Federal Reserve) and exit (IndyMac). Please don’t think an article that lists more central themes is a better article to read, like this one.
Two of the four tools a government can have already been deployed: protect and bailout. In fact, the administration already made up the rules as they went along. Prevention and exit require more legislation to make them work (and budget too).
Combating a commercial entity that is too big is the central idea of anti-trust legislation. Anti-trust is tricky for Justice to pursue and tricky to defend. However, it is no more difficult to enforce if one is “too big to fail” or differentiate between “too big to fail” versus “too big”.
This “Too Big” can be applied and extended to every industry. In fact it is being extend to the auto industry. Geithner is creating a framework for the United States to become Venezuela in the north.
Geithner is not purposefully exploiting a political opportunity (Democrats are if they are tucking a truck loads of other reforms in this crisis). He simply believes governments work. Otherwise, he would not be a civil servant for this long. However, politicians love to along on this one since the decisions to bail out and take over are ultimately political. The success of this proposal will extend their powers (and more political contributions). What will really save the risk of extending the power of the government is to re-examine anti-trust.
Geithner: What Did You ACTUALLY Say?
http://www.reuters.com/article/newsOne/idUSTRE52O6JP20090325?sp=true
Geithner had a hearing, not quite an announcement on future regulation framework. And you cannot get much out of a hearing. So, if you were looking for a pdf of details that can help you get a feeling if Citi (NYSE:C) will get more oversight versus Northern Trust (NASDAQ:NTRS) or Union Bank of California, then sorry.
This is the best article I can come up with so far:
http://www.reuters.com/article/newsOne/idUSTRE52O6JP20090325?sp=true
This article says merger of regulators is now a lower priority than before. The consequence for that is the work force continues to be in limbo. This is not the time to make these regulator employees second guessing where their jobs will be. The administration would want them to strengthen enforcement. The impact of this is on banks, not banks regulated by Federal Reserve (largest banks), but OCC and OTS.
Another interesting point is about Mark-To-Market. Is Geithner really thinking about modifying Mark-To-Market? This will be a plus for the banks that operate in metropolitans since theirs assets more volatile.
Securitization: Congressmen maybe simplifying the problem. However, that can be one of the fixes. Just don’t believe that is THE fix.
Most of the consumer protections make sense. However, it looks like one thing is forgotten, unless will be included in the details: education loans got loads of undesirable business practices behind the scene. This is a good time to take care of that too.
Provision standard: be careful with this one. Geithner may end up hurting the small banks as well. The original intent was to decrease systematic risk, i.e. reduce largest banks’ influence and increase the market share of the small ones.
Credit rating agency: Geithner may as well talk about appraisal firms.
The international settlement part will play well with countries who want more multi-polar settings.
It is now becoming a pattern that Geithner / Obama always gives expectation of a “plan” and then end up with a power point presentation.
Detox Plan: Taxpayers Fund 93%
Geithner announced the Detox plan. Stocks went up for a great deal. Investors probably are hungry for any positive headlines and don’t really want to read the content. AP writes that the taxpayers will actually fund 93% of the purchase. Krugman of course slams it like the first time he read it when it actually is the same plan half a year ago. In a way, why does Krugman write as if it were a surprise to him?
Gergen writes much more succinctly than what I did yesterday (and Eurasia Group): “there is a second question lurking that really only the President and Congress can answer: that is, whether private investors can have confidence that if they do invest, the lynch mob mentality we saw last week in Washington won’t come and plague them in the future. As the managing director of a major hedge fund told me recently, if this plan is good enough, our firm stands to make money. But then why should we invest if Washington is then going to get mad, take 90% of our profits from us retroactively and if I may be hauled up before Congress and vilified?”
AIG The Sacrifice: The Reflection Of America’s Political Risk
I agree quite a few points of this article in regard to the AIG episode.
Of course, nothing is perfect. I would change a word here:
“It will certainly make Mr. Obama’s task much more difficult when he tries to sell the public [my version would be: investors] on his administration’s ability to manage the rest of the bailout, and when he tries to sell private firms on the public-private partnership that will be needed to make the recovery work.”
Obama will have more difficulty to convince investors his future plans work (already stated in the article). Also, Obama will have more difficulty to get troubled entities to take the bailout. Look at AIG. This bailout actually bites!
AIG was politically insensitive. This story alone will make firms in the future to invest more to mitigate political risk or at least reputation risk (branding), which is not a good news.
In addition, a good portion of the reason for these companies to require a bailout is that their valuation (capitalization) fluctuated so greatly they were literally worthless. So, some companies may realize taking themselves off the exchange is not a bad idea, at least they can insulate themselves from the volatility. Is that what we want: fewer choices for mutual fund managers and pension fund managers? If they have fewer options and social security is running out, then what are to do?
Fewer choices on the exchange also means quicker wealth concentration. Gini coefficient will spike up very quickly. Is that what Obama wants?
Navy Or Education?
Naval conflicts are obviously more exciting and therefore more headline deserving. However, Obama’s education announcement may have a greater impact over the US competitiveness. US’ timing of airing out these incidents at this time is interesting. So is the timing of China’s testy behavior.
US has been relying on foreign labor supply for a long time, both the high and low paying jobs, just lower than Canada’s (and thus lower college grad/capita than other western European countries). However, tightening this foreign labor supply since 911 and later due to border control will make the quality of domestic labor supply more critical to the US competitiveness. US can certainly produce high quality labor supply. Given the size of the US economy, does US have sufficient quantity of high quality labor supply to sustain the complexity and sophistication of US economy? Does US suffer from too much variation of more basic labor supply? The answers to these questions may not matter much to the restaurant down the street. However, they matter from call center and assembly line operators to pharmaceutical companies.
Obama’s quest of the week, apparently education this time, is important not for this recession (or depression), but for the sustainability or viability of our Social Security. America needs to find more domestic supply for higher end jobs, if America decides to continue tightening foreign supply. America also will need to have a more consistent quality for lower paying jobs as well. All these mean education system of the US has to pump out products that are more fitting to the buyers of the labor market. That is why Obama is stressing on quality of education, merit pay, etc.
Quality labor supply does not come easy. They require a long investment cycle. And they are difficult to measure. AFT says the devil is in the details. Obama is getting into the habit of not giving details. Will we see something of substance to improve the education? How long will we have to wait for this one?
About the naval conflict, this is similar to what happened to Bush 2 as well. Is China testing Obama’s style or determination? Or, is US military trying to seize the agenda of Obama’s diplomacy? After all, DoD secretary Robert Gates is supposed to just “help out”. In a situation like that, Department of State should be able to assert more influence than Defense. What is the story here? Watch how this evolve and we will get a better clue.
Obama, How Much Per Job?
Obama’s message in the first presidential TV press conference was straight forward. Who was he talking to? Sure we all want get going with the recovery. Where is the problem? If there were not problem, Obama would not have been talking. Can the TV appearance be credited for the Senate passage? Hardly.
Stimulus (by now, it should be stimuli) bill got going because 3 Republicans voted with the Democrats. Nancy Pelosi is having the no-compromise stand. However, the margin in the Senate is 2 Republican votes. Nancy Pelosi may actually get hurt at the end. Republicans have no problem with sinking since they are sinking a Democrat president. The remaining Republicans got fairly safe seats. Even if there is a backlash against Republicans, they felt they got their seats firmly. House Republicans’ attitude is the proof. Senate Democrats understood this fully. That’s why Senate Majority Leader Reid says “the differences are minor”. They are minor only when you want to compromise. Reid is basically telling Pelosi to get it over with.
Was Obama talking to Nancy Pelosi? Or Senate Republicans? Does public opinion carry weights on the Senate Republicans? Hardly. May be to someone like Palin who has national inspiration. For the Senate Republicans, it cannot be appealing, at least not for another one and a half year when the midterm election is up or Republican primary is up. So, could Obama be trying to build public support against Pelosi? That would be an entertaining idea.
$838B to create how many jobs? The up side says 3.8M jobs. Let’s say 4M. So, we will spend $209,500 per job creation. And let’s round it down, say 209K or even 200k per job and take the general rule of thumb that another $20 is needed for payroll tax and benefits. We are looking at $174k per job (round down again). What kind of job are these, actually? And I guess $174k / job is okay because they are not $500k executive pay?
Gary Becker (1992 Nobel and right wing) gives the lowest multiplier so far I have read, below 1. Let’s take that multiplier as half of 1.5 (the consensus he claims). We are looking at 0.7. In that case, the actual $ per job creation is $130k per job creation. Does it make you wonder if you want to drop you current job and take one of these 4M jobs that are to be created by the government?
Yes, this is very cynical. That is very inefficient. That is exactly the point of the Senate Republicans. Here is the however.
However, what is the cost of inaction? How little is “just enough” for recovery? This is not a typical recession. A lot of this recovery is related to confidence: consumer confidence and investor confidence. Any kind of stimulus of this magnitude cannot really afford a staged approach. The stimulus has to be big enough to create a reverse shock effect to ignite activities. The problem with staged approach is each new stimulus actually reinforces the perception that “We are doomed. We have tried so many times and we failed. Give it up. We should not try it again.”
So you may agree to Senate Republican’s message. However, can you afford to err on the “right” side? Or would you rather err on the left side?
