What’s Wrong With Cheap Money?

Posted on February 22, 2012 by Douglas Smooke

In 2009 I refinanced my mortgage, with interest rates the lowest they had been in recent history.

I did it again in 2010. And again in 2011.

The European Central Bank (ECB) loaned $644 billion to 523 banks in December at 1%, with an additional $1 trillion or more coming this month.*

Who didn’t take the ECB up on their offer? Deutsche Bank, Barclays, and Lloyds, amongst others. A unnamed CEO of one of these banks didn’t take the loan because he “didn’t want to take any risk” of harming the bank’s reputation.

Under the U.S. Troubled Asset Relief Program (TARP), the Federal Reserve issued approximately $160 billion to American banks, including the six largest: JPMorgan, Bank of American, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley.**

Meanwhile, a Gallup poll in January reported that only 15% of Americans had a “great deal” or “quite a lot” of confidence in the U.S. banking system.

That’s a new low, but is more likely reflective of banks charging customers for services they never charged for before (reference the Bank of America attempt to charge customers extra for online banking) and poor customer service.

Banks’ low reputation will improve if they treat their customers with respect and honesty– not because of their lending behavior.

I’m glad I re-financed my mortgage.

I also value my clients.

My reputation remains intact.

*”Some Europe Banks Shun ECB Loans,” Wall Street Journal, February 7, 2012

**”Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress,” Bloomberg Markets, November 27, 2011

The Price We Pay for Economic Freedom

Posted on January 20, 2012 by Douglas Smooke

The Heritage Foundation recently released their annual Index of Economic Freedom, in which countries are ranked in categories such as:

property rights
corruption
government spending and regulation
corporate and employment regulation
free markets

The United States amazingly ranks 10^th (I predicted lower, with much of the drag coming from– you guessed it– government spending).

Interesting notes on countries that rank higher:

#9 Ireland– Currently boasting a 14.3% unemployment rate

#3 Australia and #4 New Zealand– Where 15% of population between 15 and 65 are marijuana users (U.S. is 7%)

#8 Mauritius– Population 1.3 million with no standing army

How do we move up in 2013?

Allow rampant real estate development like Ireland (oops)
Legalize marijuana (making progress)
Divide the U.S. into thousands of city-states with no military

Oh, the price of freedom.

Your State Has More Money to Spend (Thank You American Consumer!)

Posted on January 4, 2012 by Douglas Smooke

A funny thing happened while politicians wrestle over spending cuts and tax increases, and Meredith Whitney’s prediction of municipal defaults.

State tax revenues continue to go up.

The U.S. Census Bureau issued its quarterly summary of State and Local Government Tax Revenue on December 20^th, and here’s what we learned about state tax revenue in the 3^rd quarter of 2011:

Total state tax revenue was the 2^nd highest of any 3^rd quarter in history.
Individual income tax revenue was the highest of any 3^rd quarter– ever.
Sales tax revenue was the 3^rd highest of any 3^rd quarter in history.
Total state tax revenue has increased each quarter since the start of 2010.

The Right will likely use the data to claim that higher taxes are unnecessary, while the Left will use it as ammunition against additional spending cuts.

Governors will assert that additional funds should replenish the most vulnerable sectors. Education and health care should rise to the top as the most hard hit and the most likely to receive popular support.

Reports of the demise of the American consumer have been greatly exaggerated.

Bernanke vs. Draghi: The Inflation Battle of the Century

Posted on December 16, 2011 by Douglas Smooke

On April 7^th the European Central Bank raised the key interest rate from 1% to 1.25%. According to then-ECB President Jean-Claude Trichet, this was necessary to “firmly anchor” rising prices.

In July the ECB increased the rate to 1.5%. Trichet felt is was of “paramount importance” to be “properly vigilant” on inflation and energy costs.

Fast forward to November, and the ECB unanimously cut the rate to 1.25%, with new chief Mario Draghi saying, “Environment, price, cost and wage pressures in Europe should…be moderate.”

Last Thursday the ECB lowered rates to….you guessed it– 1%.

Were the ECB’s rate increases premature? Will they accelerate a possible European recession?

This summer Ben Bernanke pledged to keep U.S. interest rates where they are until mid-2013.

Economists couldn’t have asked for a better case study.

Watching Governments Fail is Easier Said Than Done

Posted on December 1, 2011 by Douglas Smooke

The last few years have seen the U.S. government intervene in our economy in a variety of ways. The banking, automobile and housing sectors were the most prominent recipients of aid, with several others, like infrastructure and solar energy joining in as well.

Some cheered these injections of capital, claiming the end of capitalism as we knew it was close at hand.

Others decried the moves, saying that a Darwinian natural selection should occur, with only the fittest surviving.

The last few months the media has turned our attention to the reckless behavior of Ireland, Greece, Italy and other European countries.

While our own affairs invited a more divided response as to if or how our government should respond, there has been a nearly united cry for the European Central Bank to rescue its reckless constituents.

To stand by and watch failure with the tools at hand to help is easier said than done.

Giving Thanks to a Healthy Life

Posted on November 22, 2011 by Douglas Smooke

“L’Chaim” is a toast often proclaimed at Jewish celebrations. “To life” is the English translation.

In my profession I spend vast amounts of time contemplating investing strategies and economic and political events. While intellectual curiosity drives some of these thoughts, my overarching motivation to learn and grow stems from my deep concern for my clients’ financial health and well-being.

My attention turned from financial health to the physical health of my 14-year old son for 4 long months this summer, as we wrestled with the implications of a potentially fatal heart condition.

Our ordeal ended thankfully in late September, with physicians in Boston and Denver collaborating to provide us with the diagnosis that he was indeed a healthy kid, and could pursue his hopes and dreams without any reservations. (If only our elected officials could work together like they did!)

This Thanksgiving I am reminded how vital physical and mental health are to each and every one of us. Unfortunately it often takes events like the one our family endured for us to understand fully the importance of a healthy life.

L’Chaim!

Undergrads Opt for Public Service Over Capitalism

Posted on October 25, 2011 by Douglas Smooke

In a Stanford Daily editorial last week, two undergrads assail their esteemed university as “reckless” for allowing Wall Street recruiters to “take advantage of students’ job insecurity.” According to these students, Stanford is to blame for allowing “the largest banks to dominate student recruitment.”

Management consulting and financial firms dominated the recruitment scene in 1990 too, when I was set to graduate.

Because of my curricular and extracurricular pursuits, I hungered to pursue what the authors deem to be “socially productive” careers. I am proud of my five years teaching in the high school classroom.

Some rising seniors pursue financial careers due to a passionate interest, while others do so out of necessity, with Stanford expenses ringing in at approximately $60K per year.

Rather than promoting a boycott, encourage universities to offer more robust course offerings, volunteer opportunities and career counseling focused on public service, entrepreneurship and science.

Wall Street recruiters won’t come to campus if no one signs up to interview.

Encouraging Banks to Make Small Business Loans

Posted on October 18, 2011 by Douglas Smooke

Regulators recently released new financial regulations aimed at preventing a new financial crisis.

The document, nicknamed “The Volcker Rule” (after the former Federal Reserve Chairman), weighs in at nearly 300 pages, with the thrust being to restrict how big financial firms can trade their own securities for their own benefit– better known as proprietary trading.

Where does a significant portion of these funds come from? Your deposits, of course.

The rule will force banks to focus most of their attention on making loans to businesses and individuals.

Precisely what the small business community has been clamoring for.

Three years after the 2008 financial crisis, and we finally have regulations ready to be implemented. One of the biggest reasons for the delay has been the vocal resistance of a key player in the economic meltdown.

The banks.

Employment Opportunities Return to the U.S.

Posted on October 13, 2011 by Douglas Smooke

Wall Street has “consistently outsourced labor and used that outsourcing as leverage to cut workers’ healthcare and pay.”

This debatable grievance of the “Occupy Wall Street” protesters may find a solution without any intervention.

Ford, General Electric, Otis Elevator and a variety of other companies have begun to shift overseas jobs to the U.S., according to a recent Wall Street Journal article.

Declining wages and high commodity costs may be depressing growth and prosperity domestically. But in places like China, wages and inflation are increasing.

These changes make it more expensive to manufacture products, to pay for the fuel to ship goods back here, and to hire foreign workers.

Most of us are working harder and earning less, but more opportunities may be on the horizon.

Wanted: Wall Street Protesters with a Purpose

Posted on October 6, 2011 by Douglas Smooke

While I live and work as an investment professional in the Rocky Mountains, my livelihood is inextricably connected to Wall Street.

On the streets of lower Manhattan, the “Occupy Wall Street” protesters wail their grievances:

“They have taken our houses through an illegal foreclosure process….”

“They have held students hostage with tens of thousands of dollars of debt on education….”

“They purposefully keep people misinformed and fearful through their control of the media….”

In truth:

Some homeowners who owe more than their houses are worth are victims, while others made poor choices.
Students have a choice regarding whether or not to pursue higher education, and if they can afford to do so.
With the pervasive and instantaneous access to information, we have more choices regarding the type of news we receive than we ever have before.

While there are plenty of unscrupulous and unethical people in my profession, these traits can be found in any occupation.

In the end, what exactly do these protesters hope to accomplish?

Airing complaints without a clear resolution in sight is the most vacuous form of activism.