DonnyBragg

 It's Game ON in the battle between Alvin Bragg and Donald Trump.  One might call it a "donnybrook," but maybe the word will be replaced by "DonnnyBragg."  

It appears early on arraignment day that Bragg has taken an early lead.  First, he had Trump thinking the indictment was coming weeks ago.  This allowed Bragg to see Trump's arraignment playbook.  After the big day passed, Bragg lulled the Trump legal team into complacency, thinking there would be no indictment until the Grand Jury met in a month.  When the indictment came immediately instead, it was leaked to the New York Times, it seemed, before Trump's team was notified.  The WSJ was quite a bit behind the NYT on running the story.

The indictment was sealed, which means the Trump team has to prepare for more contingencies at the arraignment. This didn't have to happen.  Bragg is pulling out all the stops.  This is war.

There have been leaks about there being over thirty counts.  There is some talk about there being some non-felony counts.  Despite a defendant's right to a fait trial, prosecutors routinely try to constructively eliminate it. They do this by charging every act in a possible crime sequence as a separate crime, with each count carrying a potential multi-year sentence.  Faced with the risk of a 20-50 year sentence, what defendant really wants to go to trial when offered a much more moderate plea deal?  This technique makes it much easier for prosecutors to pad their conviction rate.  If some of the counts are misdemeanors, that's another prosecutorial trick.  If the jury doesn't like the defendant, but doesn't believe a felony conviction is warranted, they have a way out--convict on a misdemeanor, thereby justifying the entire prosecution.

Bragg gets a break from another plea deal.  A few years ago, key witness Michael Cohen pleaded guilty to 8 charges in federal court.  Among them was a count alleging a campaign finance violation in the Stormy Daniels incident.  From a defendant's standpoint, once the sentence has been established, there is little reason to object to the number of charges included in the plea.  So prosecutors get defendants to make admissions they seek to make in other questions.  Since the Trump campaign was never prosecuted for this, the Cohen "admission" will now be used by Bragg.  Surely Trump will try to suppress it, as there was never any "proof" other than Cohen's plea.  At the time, I saw the potential for this plea to be used against Trump.

There will certainly be issues over whether Trump can get a fair trial in a jurisdiction when a key plank  of Bragg's campaign was prosecuting Trump.  So Bragg may go for a gag order to protect Trump's right to a free trial.  There is a presumption that prior restraints on speech violate the first amendment, so the Supreme Court has established criteria that must be met in order for them to be enforceable.  A broad gag order might be harmful to Trump's campaign, as a key element of his candidacy is the weaponization of the justice system by his opposition.  There are good arguments on the Trump side that there will be so much media coverage regardless that a gag order would be ineffective at preserving a fair trial.  The very question of fairness could be used as an argument for Trump to argue that the only way to get an unbiased jury wold be a change of venue.  There is a good discussion of the legality of gag orders here.

Commentators have noted that key witnesses may have low credibility, but that's for a jury to decide, and a biased jury can make a biased decision.  So Trump has real risk here.  

 The Western governments have apparently decided they will not engage even in conventional attacks on nuclear powers--they don't want to risk even the slightest chance of nuclear war. They refuse to call Putin's bluff--or, he has succeeded in making them think he is crazy enough and powerful enough to launch mutually assured destruction--or at least take out major Western cities with WMD. This This doesn't bode well for Ukraine, and it doesn't bode well for Taiwan. It means there is essentially no defense, at least in the short-term, against the territorial excursions of these powers. The West is experimenting with a long-term solution, exclusion of bad actors form the financial system. The problem is, that may be only a short-term solution. The Russians have already developed alternative financial transaction structures, and could use them with their ally China. Russian oil is excluded from the sanctions. The world may also need to exclude Ukrainian wheat in a few months. The US has a monopolistic position in the global financial system, the reserve currency status. China would like to replace the dollar, and this is a step toward, if not that, at least turning that monopoly into an oligopoly. Right now the free world is building semiconductor plants outside Taiwan, to replace the Taiwan technology with production in more politically stable countries. Are we willing to replace Russian oil production--we likely can't do it with solar and wind in the next 30 years--and Chinese production of all sorts of essential daily products? What would the planet-savers and race-baiters say? Think of the Chinese-Russian partnership, self-sufficient in oil and food--and that ever-present threat of nuclear destruction. The West needs to move from single-issue politics to a more holistic approach. Will the single-issue gang give up their power?

Goodbye to the Vaccine Mandate?

 I think it's highly likely we won't have a national vaccine mandate as we enter the New Year of 2022.  The government has read the mood of a vocal minority in the country, and delayed the implementation date of much of the mandate until January 4th.  The government knew it's mandate would create a disaster scenario for the holiday season.  It will never admit the mandate was a mistake.  But by January, the government will be able to claim that along with the development of new medications the mandate created additional vaccinations that reduced or eliminated the need for a mandate.  So it will claim that it is "following the science" which would actually be a first in the pandemic. The President will be able to claim victory over the pandemic.  That will likely work out as well as a previous President proclamation from an aircraft carrier that we had won the Iraq war.

The lesson, in case we need reminding, is that the federal government has become a bloated bureaucracy that will never admit its mistakes. And we can tell a governmental directive is a mistake when ordinary citizens are conscripted to enforce it, because the government's own law enforcement personnel know it's too dangerous.

John Lewis Disses American Voters

John Lewis, I'm sorry you feel Trump is not a legitimate President due to Russian hacking.  However, voters knew of the Russian hacking, and do have the ability to discern fact from fiction, fake from real news.  We also knew that European leaders "meddled" in our election by expressing their feelings about Trump.  The Europeans and Russians are all expected to act in their own best interests, not ours.  Even the candidates seem often to lie or misrepresent facts.  But Congressman Lewis, you insult me and other voters by asserting we are not smart enough to figure all this out and make our own voting decision.  Our responsibility as citizen voters is fundamental to our Republic.  Today the internet gives us a fire hose of information.  Yet we elected officials early in the 19th century when news traveled slowly, and citizens voted with outdated information.  We never have perfect information.  We always have to use our independent judgment to decide.  It's no different today, and this election is no less legitimate because of it's unique set of issues.  I'm sorry that one of our elected officials does not believe in the ability of our citizens to make voting decisions.  If I lived in your district, I certainly would not vote for you because of your disrespect for the abilities of your constituents.

Obama and the Keystone Pipeline

It was pretty cowardly for Obama to hide behind the State Department's decision that the Keystone Pipeline was not in our national interests. I mean, those guys work for him. No question John Kerry does what he's told. The rest of his speech was even more bizarre. He admonished Congress to pass an infrastructure bill that would create more jobs and long-term benefits for America. Gee, I thought a pipeline was an infrastructure project, that like most infrastructure projects, creates lots of short-term economic activity followed by years of service revenue and added value to infrastructure users, both direct and indirect. Obama also pooh-poohed the effect on energy prices and energy security. Security is enhanced because we have reduced dependence on imports from unstable ares. Without this pipeline we'll need to replace the Canadian oil with foreign oil. And the recent Russian plane crash raises all sorts of questions about the growing risks from ISIS. That Canadian oil may be headed for China now. The oil will still be moved, but it will be moved across territory we don't have real control over. There's really not much effect on the environment either way, and that's the really disturbing thing here. Is Obama such a poor trader he couldn't convince the green lobby to let this one go and save their chits for something that really matters? What does that say for his Iranian nuclear deal?

Public Debt Levels and the Presidential Campaign

Leading up to the 2012 election I wrote about concerns over the structure of federal spending and its effects on total public debt in the US. I was concerned that the administration had built structural spending to 24-25% of GDP, while we had never been able to generate more than 18% of GDP in federal revenues. The good news is that the economic recovery has brought tax receipts up to that 18% level, as well as lowered expenses to the 21% level. So deficits are running 3% of gdp or less. This may be as good as it gets, however. Our public debt is now at 100% of GDP. We can get away with this at zero interest rates, but if rates rise 2% structural spending will increase. Another recession or slower growth could also affect the deficit by increasing social services costs and reducing revenue as a percent of gdp. The good news is that the administration has taken advantage of lower rates to push treasury debt maturities to near record long levels. This will insulate us to some degree from rising interest rates at some point. It would seem to me that the presidential candidates should debate the desired ratio of public debt to gdp. If we want it less than 100%, we are going to have run deficits that are smaller than gdp growth. And how will we go about that? By spending cuts, tax increase, tax cuts. Donald Trump, could you please raise this issue while you're still relevant?

The US Government Puts Citizens at Risk For Identity Theft

Is it really any wonder the US Government is the victim of huge hacks? When you get your Medicare card, your identification number is your social security card, printed right on the card, and part of every doctor's records. Who really knows the security standards they hold themselves to. This is a disgrace, as private insurers haven't used social security numbers on their statements in decades, for the most part, and they don't require you to provide them to doctors. Our own government is putting every senior at risk of identity theft. A bill was recently passed that orders HHS to provide cards to new beneficiaries within 4 years, and an additional four years for existing beneficiaries. This is a disgrace. If the government is so far behind on this issue, what does that mean for the future cybersecurity of anything government touches or regulates? Elizabeth Warren should forget the banks and go after HHS.

Hubbub in a Holster

It is always dangerous to make policy changes in the wake of disaster. The President seeks to use the Newtown tragedy not so much to prevent the next one, but to advance his agenda. So his Rose Garden anger/blame speech over the Senate gun control failure conveniently failed to mention another vote related to the bill that only garnered 40 votes. There are problems with the bill which the President actually misrepresented in his fervor to call the NRA liars. When discussing the amendment's prohibition against a national gun registry, he failed to mention it only applied to the attorney general, and not other governmental agencies. As we move on to deal with the important mental health aspects of gun control, it is not hard to imagine HHS deciding it needs to consolidate information to cross-check with mental health records coming from a healthcare system falling under steadily increasing federal control. The Senate should move forward to resolve the issues with this bill. Speaking of post-disaster policy initiatives, it is ironic that a decade ago the liberal establishment railed against Bush anti-terrorist legislation, a lot of which President Obama promised to eliminate, then eventually decided to extend. He's a smart guy, and knows when to switch from principles to public relations. Obama is working very hard to fool the American public again. He's busy taking moderate stances on entitlements and painting the opposition as radicals out of touch with the mainstream. This is all about the 2014 Congressional elections. The divided legislature keeps him from an unencumbered implementation of his "equal outcomes" agenda. I suppose he was growing up in Indonesia and didn't get "equal opportunity" translated correctly--or didn't realize that it didn't exist there. If this occurs, one can only hope that the Congress will realize they need to get re-elected, and that need may trump the President's agenda.

Buffet's Move on Heinz Validates Einhorn

David Einhorn of Greenlight Capital is battling with Apple over methods of maximizing shareholder value. Einhorn argues that "Cash Distributors Can BE Great Growth Businesses For Decades." Examples of this are Coca Cola and IBM. Tim Cook of Apple calls the issue a "silly sideshow." Well, I'm an Apple shareholder, and I don't think so. I think the strongest support of Einhorn's idea to issue preferred stock is the Heinz acquisition recently structured by Warren Buffett at Berkshire Hathaway. In order to purchase Heinz, Buffett knew he'd have to pay a premium to market, but he didn't want to overpay. So a key element of his deal was a large preferred issue, which Berkshire will own. The $8 billion preferred yields 9%. There's a tax arbitrage here as corporations only pay a 5% tax rate on preferred dividends rather than a 35% tax rate on interest. In the case of Apple, a preferred issue would be very valuable to corporate investors. In the case of Heinz, Buffett is buying a company with great brands that don't require a lot of financial capital to grow. So the preferred is a way of taking returns out of the company so the owner (Berkshire) can redeploy those assets productively. Einhorn points out that Apple is allowing a third of its market cap to sit on the balance sheet earning sub-par returns, giving no opportunity for shareholders to redeploy those assets. Apple is similar to Heinz in that its branding has created a business that generates excess capital. In order to maximize the value of Apple, the company must allow shareholders to redeploy the profits of the business. Let's hope the management looks at the Heinz deal and realizes they can create a similar structure for Apple shareholders.

Perverse Incentives

According to Republican Representative Jim Gerlach of Pennsylvania, Ernst & Young has a report out that says raising tax rates on the rich could cut 700,000 jobs over the next ten years. The Republicans want to use this as an argument against raising rates. But President Obama was re-elected despite an abysmal jobs performance, and his administration is poised to issue new regulations, held up until the elections were over, that will undoubtedly cause more job losses. Clearly his agenda of a better quality of life regardless of economics is based on his practical experience with "voter-nomics" that shows him the unemployed will vote for the party of entitlements, not the party of jobs. The worry is the Republicans are using arguments that are meaningless to the President, and overestimating their leverage. The White House is now insisting on a more permanent resolution of the debt ceiling, one of the few leverage points the Republicans have. This implies the cliff negotiations may drag into the new year, creating more volatility in the market in the meantime, and more layoffs, which will be used by the White House to blame Republicans.

Why I’m Voting for Romney

It’s a tough choice between two candidates who sincerely want a better America, and whose campaign rhetoric has been tainted by the need for each of them to appeal to their own party bases--representing very polarized groups. I’ve come down to a few simple ideas to make this decision. My biggest concern is the structural budget deficit the US is facing. The US President answers to the people, of course, but he tends to decide what the people are saying to him--usually leaning to the view of a mandate. We haven’t seen it in our day, but the President may soon come to answer to the bond market. Ask the governments of Greece and Spain how this works. Obama’s agenda--or maybe it’s his party base’s agenda, has driven up baseline federal spending to 24-25% of GDP, from about 20-21%. We’ve never been able to raise more than 18% or so of GDP in taxes, except during WW II. Currently taxes are only raising 15% or so of GDP. Taxes are based on activity and incomes, and the incomes portion is really falling short. If we become a higher cost economy, that part may not improve. I don’t mind a 3% budget deficit. If the economy grows that fast, we won’t increase our debt-to-GDP ratio, and the bond vigilantes won’t be dictating terms to us. If we continue on our current path, however, we are likely to keep running deficits in the 6-10% area, increasing our debt-to-GDP ratio and bringing the bond market into play. Remember that even now the Federal Reserve is buying a big portion of the new debt we’re issuing. We can avoid a debt default in this manner, but only at the cost of a dollar that will buy alarmingly fewer goods and services. The government in this scenario would have little choice but to keep printing money because if it paid high bond rates, government spending could be driven up to 27-28% of GDP, leading to catastrophic deficits. I don’t believe much of either candidate’s published plans, but I think Romney will be more serious about fiscal discipline than Obama. The polarization of America is a big concern to me. It bothers me that so many reasonable Americans can’t engage in civil discourse on politics. On a pure track record basis, Romney was able to reach across the aisle as a Republican governor in a a state where the legislature was 85% Democrats. I don’t think this was solely due to his sparkling personality, but I do believe his experience has taught him that you need to solve problems, not hope they’ll go away. I also think it’s important that Massachusetts has a flat tax. I believe that the progressivity of the tax code is the most corruptive influence on politics today. In Massachusetts, the people have had chances to vote on a progressive tax code, and always turned it down. And this is a very liberal state! If politicians have an expensive dream, they have to get a broad spectrum of people to pay the bill. They can’t sell it to some folks on the basis that others will pay for it. It keeps them honest, well, at least for politicians. But most of all, it creates space for political dialog on real issues. Because once you have a progressive tax code, the central issue is always one of what is the fair share of taxes to be paid by different groups. And it is a question that can never be answered. So instead of talking about how we build wealth as a society and opportunity for all, we argue about who pays. If we didn’t have that argument, we’d have more opportunity to reach across the aisle as Romney did. All of us. Of the two candidates, Romney stands for less progressivity in the tax code. The third decision point for me is track record. Romney has been very successful at most things he’s done. People love to attack him for moving jobs to China, but as a businessman I know that making those decisions has taught him what the reasons are that lead to those decisions. And he knows how government can fix the environment that leads businesspeople to make those decisions so more Americans can keep their jobs. I don’t see any background that would let President Obama understand this at a gut level. He didn’t have much of a track record in the Senate, not introducing any bills, and as President, he let the most divisive elements of his party write key legislation instead of taking on a leadership role in the design of it. I’ve hired lots of people in my career. I attribute most of the success I’ve had to identifying talent and motivation in others--since I didn’t have much talent myself! When I think of myself as interviewing Romney and Obama for the job of President, and think about which one is more likely to solve the complex problems he’ll face, I just think Romney has the track record that tells me he’ll be able to accomplish that.

The Windows 8 Ecosystem

My biggest theme this year has been Windows 8. Things looked good earlyin the year, but as the launch approached, the lack of hype, coupled with the slow sales of PCs, and the thought that the PC was dead, drove the stocks in the ecosystem down: Dell, Hewlett, Microsoft, Nokia. Nokia bottomed on July 18, and is up 70% since then. Microsoft made it’s low on October 23 and has been up over 5% in a market which has been essentially flat. The timing of Microsoft’s move is interesting, as it is essentially coincident with the Window 8 launch, and with a great deal of weakness in Apple’s stock. Microsoft isn’t “cool” and its stock has suffered from the perception that it’s products don’t measure up to those of Apple. Over time, though, Microsoft has been adept at becoming a mass market leader in businesses invented by others. It overcame a lead by CPM to become the PC OS leader. Lotus was once the leader in spreadsheets, and Word Perfect in word processors, while Excel and Word are now the staples of Microsoft Office, one of the three big revenue producers at Microsoft. Let’s not forget how Microsoft has performed in the gamebox business. It doesn’t always work, but Microsoft has a lot of patience. On the “cool” front, word is that Oprah sees the Surface tablet as one of her “Favorite Things” of the year. There are a at least two important innovations in Window 8. First is the use of essentially the same operating system and user interface among PCs, tablets, and cell phones.Second is the idea of a touch interface on PCs. The latter may not be perfected yet, but it’s a big change to see Microsoft leading the way, instead of following. As a user, I like the idea of using the same apps on my PC as I do on my tablet and cellphone, with a similar user interface. On my investment axis, I see Microsoft as offering a solid economic value proposition, but it’s brand image is not “cool.” This may slow consumer acceptance of the new system. However, I believe businesses will look at this and see reduced training time, increased help desk efficienncy, and easier integration with corporate systems and security regimes. Many corporations are still running XP. haven’t skipped the Vista and Windows 7 upgrade cycles. XP support runs out in 2014. I think this will be a very attractive upgrade. This upgrade plays right into moving Office to the Cloud and Microsoft’s dominance of the corporate infrastructure software market. It looks to me that market expectations are low, and the company is entering a powerful upgrade cycle. That’s why Microsoft is my largest position. There are some hardware opportunities in the space, but they seem less certain to me. Given the OS integration, we will see convertible devices such as laptops that have detachable tablets. But right now, the speed and simplicity of Windows 8 has given my old laptop new life. I may actually delay purchase of a new laptop. Hewlett and Dell make printers, and the printer business is endangered. Network printers mean we don’t have to have a printer for every PC, tablets are easy to read on, and cell phones allow me to carry electronic travel intineraries instead of printing them, as well as eliminate the need for printing out those Google maps directions. Printing seems to be in secular decline. New products are aimed at enticing users to remotely print stuff from mobile devices for later viewing. We’ll see. Because of all this and it’s other issues, I don’t own any Hewlett, and I wish I didn’t own any Dell. The opportunity for these two is that the market seemed to reprice them since their latest earnings report for a secular PC decline. If that quarter reflected the typical decline in demand before a new OS launch there is plenty of upside. And if the last quarter’s decline was exacerbated because corporate customers wanted to wait for a new generation of machines to run the new OS, there’s even more upside. Dell has $11 billion in cash on a $16 billion market cap, and now has a 3.5% yield. The company has a reputation for finding ways to get cash to shareholders, although there’s a risk that DELL makes more acquisitions to bolster the IT services business and reduces the flow back to shareholders. I’ll probably swallow hard and average down in this one. It’s likely I’ll buy some mbefore the earnings cll and some after. It may be too soon yet for positive guidance to emerge from the call. Even if Windows 8 phones capture market share, the question for Nokia is whether they will make them or somebody else will. If Windows 8 is successful, then Intel also looks cheap. The new iPad mini is selling well, and over the next few years I see a lot of creativity in devices. I see a convergence of tablets and phones, especially among women, who seem to be willing to use devices with larger screens--possibly because they carry purses to put them in! There are signs that some PC makers are thinking about building phones, maybe with Intel chips. It’s clear that the PC hardware makers want to follow the customers into their new devices. If innovation slows down at Apple, their lower cost structures could begin to gain share in the non-PC device market. It would appear even now that Samsung may be making phones that can go toe-to-toe with the iPhone, and how much change will we see from iPhone 5 to iPhone 7? It may be more about forms than function. In a rapidly changing world, the Steve Jobs vision may not last forever. I still think there are lots of things to happen in the future that can keep the PC alive. The touchscreen is here, and it is likely that effective voice recognition is getting closer. Siri is wonderful, but faster chips, which are usually found on PCs rather than mobile devices, are more suited to really practical voice recognition. I believe the market grows as functionality improves.

Romney delivered a strong performance tonight, against an Obama who looked more like John McCain than himself. Romney won a debate he was expected to lose. He also looked Presidential, perhaps for the first time to a lot of people. This can change things, but there are more debates to go. Meanwhile, the streets of Teheran could provide a major foreign policy victory for Obama that could have a bigger impact on the election than tonight's debate. The Obama administration came under fierce pressure for standing by the last time there was rioting in in Teheran. But the US government has long believed the Iranian regime could one day fall on its own. This year's follow-up to the Arab Spring is more economic than political, and that's usually a better basis for upheaval. Hungry people will fight to the death, having nothing to lose. Political freedom can wait on a full belly. Oil prices dropped. A change in regime would be certain to put Iran's domestic needs first, pumping all the oil it could sell, and probably dropping the Syrian escapade as well as the nuclear project. The Ayatollah can still salvage the situation by throwing Amadinejad under the bus, but one wonders how many times the clerics can pull this ruse off on a sophisticated population. Regime change here could validate the administration's foreign policy, make a more peaceful Middle East, and improve the US economy by lowering the oil price "tax" on consumers. $3 gasoline would swing a lot of votes to the President.

The Lessons of Chicago

Just thinking--Chicago teachers said they shouldn't be responsible for student improvement since 85% of the kids were poor and there were too many outside variables. Guess they've been doing a real great job in those schools the last 40 years getting those folks educated and out of poverty--huh? And wasn't Obama a community organizer in those neighborhoods--maybe his program for reducing poverty in those neighborhoods didn't work either?

BP Settlement?

Both British Petroleum and the Obama administration have a problem. They need to extricate themselves from the relationship they have been forced into due to the Gulf oil spill. And they need to do it quickly.

The issue is simple. The administration views the cleanup and payment of economic damages as instruments of social and political policy. BP approaches the process from a point of view of balancing legal, financial, and public perception aspects.

Obama needs a solution that will stop some of the bleeding before the mid-term elections. BP needs a solution that will restore confidence among lenders and business partners. Who wants to do business with a company facing an open-ended liability? Lenders will balk, and governments and other oil companies will be reticent to enter into long-term deals with a company facing such an uncertain future.

For its part, the Obama administration relies on the technique of ruling by fiat, taking money from hapless taxpayers (and Chinese bond buyers) to fund largess for which it takes credit. It seems to be taking the same tack with BP, continually making bolder demands.
While the claims settlement process is basically an insurance operation, however, the administration is unhappy with the speed and frugality of BP’s process. In addition, the administration is demanding an escrow fund administered by an “independent” panel. Would the government demand such a thing from an insurance company? The government has also put a moratorium on deep drilling in the Gulf, and wants BP to pay for the costs resulting from it. BP is balking. The Obama administration is already running into Margaret Thacher’s admonition that the problem with using other people’s money is that you soon run out of it.

The issue of the responsibility for the moratorium is a dangerous one for the administration. If regulations were adequate and BP made a mistake, there is no reason for a moratorium, and BP should not be liable for the costs of it. If the regulation was inadequate and BP followed the rules, there is an argument that the government bears not only the responsibility for the moratorium but also the cost of part of the cleanup or broader damages. Remember that offshore leasing is a $13 billion annual revenue source for the government. Given that revenue stream, it would make sense for the government to have disaster recovery procedures in place, including dispersant and boom inventories. It is more efficient for the government to do this than the individual drillers. If individual drillers provided this backup, the redundant costs would lower their bids and reduce government revenues to a greater degree. Similarly, bills in Congress calling for unlimited liability would have the effect of lowering revenues dramatically as fewer companies would bid smaller amounts for leases.

For the administration and BP, the current claims settlement system is a no-win situation. If BP pays a satisfied claimant, the government gets no credit. Unhappy claimants, most likely the vast majority, will wonder why the government isn’t “doing something.” And the more the government tries to expand the definition of relief, the more BP will pull back.

There may be international issues too. The British might not be happy to see the US legal system destroy an iconic British company that pays over 10% of the dividends of a major British stock index.

What’s the solution? Why not have BP pay the US government a large sum of money, say $30-50 billion, in exchange for the government taking on the cleanup liability? The administration can quickly claim a win before the elections. It can then set up a claims process and get credit for the largess that flows from it. It can freely use the military to assist in the cleanup. Over the years this process will take, the political process will allow the government to move expenses around so that it can be seen to have made a very shrewd deal, while once again using the hapless taxpayer’s money to pay for the broad social policy embedded in the settlement process.

If there is no settlement, there is a real chance that BP would be forced to file for bankruptcy, throwing sand into the gears and ensuring plenty of voter, as well as shareholder disenchantment. A settlement would also allow BP shareholders to survive with a reasonable valuation and dividend.

Both sides win—the right basis for any deal.

Obama in Copenhagen

It will be interesting to see how Obama does in Copenhagen. A big part of his campaign was about regaining respect for America abroad. Internationally, he doesn't have official authority, nor any legislative majorities. He must operate on the strength of his ideas, and the concept of American leadership. He wants to succeed at Copenhagen. Secretary of State Clinton threatened that no deal meant no money. Americans should be concerned that Obama, hungry for a win, gives away the store.

The worrisome thing is that an agreement in Copenhagen may both spur further migration of industrial jobs from the US and Europe to the emerging markets, and that we will subsidize this process, and find no net greenhouse gas emission reduction.

Electronic Trading Debate

The Wall Street Journal published our rebuttal to Senator Schumer's response to our editorial: http://online.wsj.com/article/SB10001424052970203440104574404581166261194.html

Investment management is a business that is easy to leverage, except in the area of trading, where size creates a disadvantage as lack of liquidity can penalize performance. For this reason, I believe managers and their clients all have an interest in defending innovation in trading markets. Innovation provides investors more opportunities to handle their orders according to their preferences, rather than in some monolithic, one-size-fits-all product that we wouldn't even accept for laundry soap. Customers, not Senators, should be the ones to choose which innovations to reward with market share.

WSJ Op-Ed

This morning's Wall Street Journal carried an op-ed co authored by my former colleague Don Luskin and me. The subject is "Flash Trading" which is under regulatory attack in electronic markets, despite its existence in traditional markets for as long as I can remember. The op-ed can be found at:

http://online.wsj.com/article/SB10001424052970203706604574374431720968204.html#articleTabs%3Darticle

If you don't subscribe to the Journal, let me know and I'll email you a copy.

National Health Care

We've got quite a dilemma as a country. We worry over the cost of universal health care, but it's probably something we should have as part of a process of rationalizing the system. Yet the addition of 40 million new customers will pur a big strain on primary care doctors. I reckon there are about 300,000 of those, and if each new client took 2 hours a year of their time, we'd need another 40,000 or so. Massachusetts has gone to universal health care and has this problem. If we pass universal care, this could create problems for baby boomers looking to retire and move to a new location--they might not be able to find a primary care provider--especially since the growing resorts are often heavily populated by uninsured workers and the undocumented. Ironically, it may be easier to get into the emergency room.

So rationing of some sort has to come, because the price of care will likely be too low for many new customers. Many people want ot cut down those expenses that occure in the last 6 months of life. Problem is, we don't always know when the last six months of life begins. Also, we don't want it to be our grandma, our ourselves!

And finally, there's a genuine concern about a "national option" run by the same people who run the post office, with potential for coercive legislation to ensure it's competitive position, bloat its cost, and further redistribute income.

I'm praying the Bue Dogs can resist their own party's attack dogs and move the plan in a semi-rational direction. Semi-rational--that's all I can expect from the goverment these days...

Decoupling: Has the Time Come?

Decoupling may have finally arrived, a little too late for the believers of two years ago. The "this time its different" crowd argued that the emerging markets could stand alone without the US and Europe. It didn't work that way, and emerging market equities were hit even worse than those in the developed markets. Lately the Asian emerging markets have been moving up faster than the US market, but it also seem the economies are as well. And, funny thing, the Eurozone is growing faster than the US--at least for now. There should be concern for the Chinese market after the big rally--lots of IPOs, bank loans up at high rates, and maybe some of that money flooding into stocks. Global banks are considering listing in Shanghai and floating stock there. Of course, hot foreign markets are always the last place Wall Street goes to sell junk, when they've run out of locals who haven't heard the news. While playing the Chinese market in the short term given the current liquidity bubble is not for the faint of heart, especially with the government warning against speculation and bank loans finally slowing, continued economic decoupling may lead to returns exceeding those in the developed markets over a longer horizon.