Being a Lady

This note was originally published at 8am this morning, October 22, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Being powerful is like being a lady. If you have to tell people you are, you aren't.”

-Margaret Thatcher

 

America (she) is a great country and I’m proud to be an American!  When are we going to behave like the powerful nation we are?  

 

Sadly, of late, we need to keep reminding people how powerful we are.  We do have tremendous power and this is a great nation, but right now we lack the backbone and the political leadership to make the tough decisions to get us on the right track.  (And, no, I do not believe the Tea Party is the answer).   

 

Case in point #1 - Treasury Secretary Tim Geithner 

 

Mr. Geithner is in the hot seat today because he is representing the USA on the world stage in Seoul, South Korea at the G20 summit this weekend.  His quotes in the WSJ yesterday are a sign of weakness, not strength.  Just one example: “We would like countries to move toward a set of norms on exchange-rate policy."  Seriously, the Chinese are having a field day with that comment.  As issuers of the world reserve currency, it’s embarrassing that successive administrations have led us down this path.

 

Another embarrassing quote: "Right now, there is no established sense of what's fair".  What? C’mon, Mr. Geithner, what is not fair?  Given his record of paying taxes, some might find it amusing that Geithner is our guy in Seoul, making the moral case.  Some might say he lacks legitimacy in such a claim.  The same might be said by the international community: why is America pointing fingers when it is plainly obvious that failed economic policies and Washington DC dogma has rendered the U.S. economy and currency in their present states?  The Chinese march to the beat of their own drum and look out for their interests.  What part of that is not fair?

 

The countries with strong economic and fiscal policies are being forced to embrace capital controls to slow the inflows of speculative cash that is coming from the USA.  It’s not unfair, it’s embarrassing!  Nobody cares about the losing team complaining about the officiating or the lack of sportsmanship from the other team; at the end of the day, all that is remembered is who lifts the trophy.

 

Case in point #2 - Failed Washington policies - Stress Tests 2 is on the way

 

I could go in multiple directions with this one (TARP, Healthcare reform, etc….), but despite the Dodd-Frank financial regulatory act, the US financial banking system is still facing a high level of systemic risk.  The foreclosure fiasco is posing systemic risks to a number of financial intuitions, and I don’t believe the first round of bank stress tests contemplated a breach of contract in securitized mortgages.  This is a problem.  Who knows what other omissions the stress tests made from their “analysis”?

 

While today is the 103rd anniversary of the Panic of 1907, which led to a run on the Knickerbocker Trust Company, we are seeing another crisis emerge at a number of large financial institutions.  The 13% month-to-date decline in Bank of America is not a run on the bank, but it’s frightening nonetheless.  There is no immediate threat of Bank of America being insolvent, but the damage to the bank’s reputation is immeasurable and the financial liability is uncertain. 

 

If we have learned anything over the past two years, the downside scenario is that the losses are likely greater than the $47 billion that a few institutions want back.  Importantly, the latest round of uncertainty in our financial system is not helping consumer confidence and will make most financial institutions more cautious about extending new credit, further slowing the recovery.

 

It would seem that it’s just a matter of time before the Stability Oversight Council created by the Financial Regulatory Act orders Stress Tests 2.  

 

Case in point #3 - No credible plan

 

While Mr. Geithner can cry this weekend that things are not fair, nobody in Washington (Democrat nor Republican) has put forth a credible plan to fix the nation’s problems except for more QE.    

 

As my colleague Daryl Jones noted in a post yesterday on Canada, for the second time in the last 30 years, the Canadian Dollar is now worth more than the US Dollar.  In short, Canada cut spending and improved the corporate tax environment, which narrowed the deficit and reduced government borrowings. 

 

Austerity, not quantitative easing, will provide Mr. Geithner the respect he needs to be powerful on the world stage.  Leaders make brave decisions at difficult times; there is no evidence of strong leadership on either side of the aisle in Washington today.

 

The S&P 500 is up 3.4% so far this month, on the back of the FED printing more and more money.  The potential headwinds for the market are seemingly being ignored (for now) but won’t go away.  The headline risks from the mortgage mess, slowing GDP momentum, margin pressure from higher commodity costs and lingering worries about the backlash that could emanate from the divergent fundamentals at work in the foreign exchange market can’t be solved by the FED and QE.

 

Margaret Thatcher was a leader that was unafraid to take a stand.  She was a divisive figure in Britain, and around the world, and remains so today.  I believe that America’s leadership could learn much from her example.  She allowed the gales of creative destruction to blow through the nation’s economy and many fault her for the demise of the mining industry in Britain in the 1980s. 

 

On that same point, many applaud her confrontation of the unions and credit her with reestablishing Britain as a world power.  My point here is that she made difficult decisions, perhaps made mistakes at times, but showed the leadership that was needed to boost her country. 

 

Much like President Obama, Thatcher had a record-low approval rating during her tenure as Prime Minister.  On average, it was 40%.  History has been much kinder; a survey conducted by Yougov/Daily Telegraph in the United Kingdom in March 2008 rated Baroness Thatcher as the leader Britons regard as the greatest post-World War II prime minister, receiving 34% of the vote.  Sir Winston Churchill came in second, with less than half of Thatcher’s support, at 15% of the vote.  Politicians that make tough decisions are not always appreciated immediately. 

 

Doing the right thing is not always easy.  The administration needs to realize that instant gratification and pandering for votes is not going to set this country straight.

 

Function in distaster; finish in style,

Howard Penney

 

Being a Lady    - mt


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