It has been a long time since the last post. The reasons are lots of work and too many changes in the economy and in politics that made our heads spin here at CENAK Consulting.
We are in the lucky position to do well in this environment. Valuation of assets seems to be at the center of the current problems in the US and elsewhere. As asset values decline, banks are less and less willing to lend because they risk that the collateral goes down in value. The bottom line is that the US economy needs to de-leverage. That is a long process and will not be done over night.
The government, in the meantime, stepped in to randomly save some firms (AIG) while letting others go under (Lehman). The TARP was born, While we do not think that the TARP itself can save the economy, it prevented a total collaps. We think it had more to do with psychology than anything else as people saw that the government was willing to step in for banks and firms that it considered too big to let them go under.
Along came the stimulus plan to get people jobs and to get the economy going again. In our view, the stimulus plan is flawed in a big way and driven by politics rather than what needs to be done to provide stimulus. The US infrastructure is the worst infrastructure of any developed country. We have on average 3-4 power outages a year at our house. That is ridiculous. Driving becomes an exercise of avoiding potholes and Internet connections are slow. Yet only a fraction of the money goes into infrastructure, where jobs would be immediately created and future competitiveness of the country improved.
Washington has proven once more that it is not capable of doing the right things at the right time. That's concerning as it now also is trying to control what banks in the TARP can and cannot do. That can only end up in disaster. If you put a cap on compensation for executives, be aware of unintended consequences. Talented people will leave the affected firms and they may simply outsource the functions that require them to (still) pay competitive bonuses.
The economy will get better but it will take time. De-leveraging of companies, banks and individuals needs to continue. A new culture of saving will have to replace the old "buy today and pay in five years" attitude. All that will be a painful transition but one that is necessary and will lead to a healthier, and eventually less volatile economy. That is little comfort for people that are unemployed and looking for work. Don't rely on our politicians to do the right thing.
