Reading the Tea Leaves
Take Thursdays edition. I cut out headlines from stories in just that one edition. Here they are.
The stories themselves told a tale that we've discussed here for months. America and Americans have switched from being net creditors (money lenders) to net debtors (credit junkies.) And not just American Yuppies hooked on credit cards and home equity loans. No siree. Corporate America, the folks who got Americans hooked on living beyond their means fell for their own line and started doing so themselves.
When consumers do that it's called "consumer spending," - and no one ever seems to link it to "consumer earning." Because if they did it would expose the fact that, as an economic model fueling an economy on borrowed money isn't sustainable -- it wasn't, isn't and won't be.
There are two kinds of corporate debt, the good kind and the bad kind. The good kind of debt is used to expand operations to meet growing demand. That's called "capital investment." The bad kind is when companies borrow enormous sums of money simply to buy up other existing companies in what called "leveraged buyouts," or LBOs. The leveraged part means they used very little, if any, of their own money borrowing the money instead from always eager commercial bankers.
By now you might be wondering why commercial bankers have been so eager to shell out money to a bmuch of debt-burdened corporate bororwers. Simple, they don't care if the deal makes or breaks the borrowing company, because they -- the bankers -- won't be anywhere around when any possible shit hits the fan. First, they collect fat loan fees for financing the deal. Then they carve the loans up into increasingly exotic pieces -- (tranches). They package these bits and pieces up and sell on Wall Street to investors seeking higher yields than they can get from much safer US treasuries.
For example, an investor might want to buy just the interest portion of those loans in what is now a CBO (collateralized bond obligation). Or an investor's needs might cause them to be attracted to the discounted principle tranche .
But I digress.
The bottom line here is that, just as over-extened consumers are cutting back on spending (with borrowed money) those CBO-buying investors are now worried that the leverage buyout boom is running out of steam... or suckers. Even those take-the-money-and-run commercial bankers are getting nervous. After all, many of those tranche-buying investors have gotten stinking rich off the LBO bubble, meaning they have enough money to hire the best lawyers in the world to sue the green eye shades off their bankers for sticking them with bits and pieces of defaulted loans. (I can't wait to see how they're going to put all those Humpty Dumpty loan pieces back together. "Hey, you're standing on my reverse floater." "Am not." "Oh yeah, then what's that on your shoe?" "Ewwwww.")
Meanwhile to gap between the majority of us and the super-rich has grown so wide we can barely see the outlines of the MacMansions on the other side. Believe me, it's not jealousy that fuels my concern over that fact. Since the kids grew up and moved away my wife and I rattle around in our modest ranch-style home like two beans in an otherwise empty rattle. We lust not for anything larger.
No, my concern comes from a visceral feeling that money serves the same purpose in keeping an economy healthy as blood does our body. If too much blood goes to, say the head, leaving too little to bring oxygen to, say the legs, someone going to end up in a wheel chair, or worse.
Oh sure, I'm having a bit of fun with all this because I'm a pretty boring investor. Hell, one look at my asset mix and you'd think my middle name was Lenin. Risk-wise I'm downright unAmerican. I have no credit card debt, no auto or home loan debt and my investments are comprised entirely of things with names than any 19th century accountant would recognize at first glance.
Which, after reading my Wall Street Journal these days, allows me to sleep like a log at night. I don't like giving investment advice because I am wrong at least half the time. (I told all my friends to sell Apple stock back in 1998 because -- I prognosticated -- the company had no future.)
Still, if my assets were heavily weighted in stocks right now, I would begin slowly backing towards the exit with the goal of being out by no later than this October. Who knows, I might be right this time. (Hey, even a broken clock is right twice a day.)
Safety Sadie Says:
Shopping at Wal*Mart May be Harmful to Your Health (or Life)
Wal-Mart made it's trillion-dollar bones by buying cheap stuff from China and selling it cheap in their stores.
Most (70%) of Wal-Mart's Products Are Produced in China
WAL-MART'S INVENTORY OF STOCK PRODUCED IN CHINA TO REACH $18 BILLION
JIANG JINGLING, CHINA BUSINESS WEEKLY
The world's largest retailer, Wal-Mart Stores Inc, says its inventory of stock produced in China is expected to hit US$18 billion this year, keeping the annual growth rate of over 20% consistent over two years.
Fully 60% of product and food recalls this year were products from China.
The first clue something might be amiss came when tabby cats started dropping like flies. Then dogs followed. The problem turned out to be industrial plastic-making chemicals put in Chinese produced pet food as filler. The result was kidney failure, and death. (Please, no puns about Woking the dog -- and shame on you for thinking about it.)
Next it was wood children's choo choo trains painted with bright, delicoius-looking red paint containing high levels of lead. If someone had not caught it ten years from now we might see headlines blaring;
"Why Doesn't Johnnie Know His Own Name? Why Does Jane Just Rock a Corner All Day?"
Then came toothpaste with a special ingredient only Eskimos could love... anti-freeze. Then it was tires that tend to fly apart at speeds just above those posted around school zones.
Now it's Chinese farm-raised fish, bulked up with a witch's brew of drugs. (Just how this one was caught by US inspectors isn't yet clear, but apparently a junior inspector asked if it was normal for dead fish to have shit-eating grins on their faces.)
So, if you insist on continuing to shop at Wal-Mart you might want to call your insurer and bump your life insurance up a a few notches. Your kids will thank you -- if they remember who you were.
June 26, 2007
Here's your morning quiz question:
What do Paris Hilton and the new Apple iPhone have in common?
Answer: One is already trash and the other will be the moment the next shinny gadget catches the public imagination. And, no one actually needs either of them.
First some disclosure. I am the last person on earth who should be suggesting that the latest wiz-bang gadget is an unnecessary waste. Since 1978 I was the guy scratching at the glass doors of Radio Shack to snatch up the first PC, then every new peripherals or software release.
But somehow the iPhone seems different. Maybe the time has come for Americans – and especially innovative companies like Apple – to take a break to consider what they are expending their money, talents and the earth's rapidly dwindling natural resources on.
Like, do you – or anyone you know – really need a $500 iPhone? No. We can all get cell phones for next to nothing at any mall in America. Want it to have a camera? No problem, it comes free with the phone. Want you cell phone to play music and connect to the Internet? No problemo, dozens can do that already.
So what's the selling point for the iPhone? Well of course it will be able to do all that, but with style and panache.
So millions of Americans will chuck their perfectly good cell phones, sending them off to either a local landfill or shipped across the sea to some third world nation where peasants will retrieve the precious metals and chuck the unwanted toxic materials into their landfills or the sea.
Apple Computer Inc. -- which makes superb products, also specializes in panache and image. The core of Apple's consumers view themselves as free-thinkers, socially responsible, sensitive, creative and, of course, ecologically responsible.
But just look what the good folks at Apple are about to unleash with it's latest don't-need-but-must-have product:. The iPhone's parts and pieces will be produced all over the globe. Those parts and pieces then must be shipped to Asia for assembly. The final product will be packaged and shipped to US and European warehouses. From there they will be loaded on trains, planes and trucks and shipped to stores. (I'm sure some egghead out there can figure out how much energy that series of steps will end up consuming and how many tons of greenhouse gases will be produced as a result. But for the purposes of this article you can assume it's somewhere around plenty to the 10th power. )
If a product consuming and polluting that much filled an unfilled need and made life objectively better for mankind, I'd say, fine. But the iPhone – and products like it, are simply fashion enhancements on already existing technologies. Begging the question, is this sensible behavior considering the challenges that now and will face the human race? Challenges that could mean the difference between survival and mass extinction.
Products that actually enhance life and personal productivity don't need a lot marketing. I knew months before the first personal computer was going to be available at my local Radio Shack, and I was there the day it arrived, willing to pay way too much for a computer with just 16K of memory and a 9 megahertz processor.
But products like the iPhone, and it's predecessor, the iPod, require lots of buzz-creation, since they are not really needed by anyone. At best they are nothing but show-off enhancements on existing gadgets.
But of course, marketing buzz works. Just look at the cascade of spin-off iPod products that fill store shelves now. The iPod created entire industries around itself. Imagine the resources, the fuel, the human capital that goes into all that, then get ready for the tsunami of products that will feed off the iPhone.
Bitch, bitch, bitch. Right? “What's wrong with all that Pizzo? Are you a commie or something? Are you jealous because you're not getting a piece of all that action?”
No, and no. I'm just worried. I feel like a parent watching his grown children, once filled with talent, energy and promise, acting like that superficial little airhead, Paris Hilton. Oblivious to the real world around them. Self-indulgent, trivial twits, chasing trends and fads even as civilization and the earth itself, shift beneath their their feet.
It wasn't always so. Americans proved many times over the past couple of hundred years that we can do remarkable things when we want to – world-changing things. But not today. These days what we do best is consume things. We are herds of consumers and marketers are our modern-day cow punchers who herd us from green pasture to green pasture, to consume.
Our national mission today is to keep the thing-makers in business. Even after the worst attack on US soil since Pearl Harbor all our leaders asked of us was to “go shopping.” Otherwise the terrorists woud win. How? By crippling our thing-makers.
But I digress.
So what would I have thing-makers like Apple do instead of producing very nice, but very un-needed products like the iPhone? All that technical talent might instead be turned to develop things mankind really needs right now, and will need more of in the near future. Things that are more efficient, that put less of a stress on the physical environment, things that can scale to serve an exploding world population, without killing us all off in the process.
For example, imagine Apple iSolar devices. Apple is famous for leveraging existing technologies and making them more efficient and easier to operate. The Apple's marketing geniuses package them in ways that make them downright irresistible. Imagine what Steve Jobs could do if he turned his engineers loose on personal and residential solar power devices.
Another thing Americans have more than enough of are gasoline and diesel-consuming vehicles. What if General Motors – already in a world of hurt because it was late to the hybrid game -- decided that, beginning next year, it would produce only hybrid and electric plug-in vehicles? They have the right name, “GM.” All they'd have to do is change what it stands for -- from General Motors, to Green Machines. Imagine the impact of that! The scramble by other automakers to “out green” GM.
George W. Bush had the germ of an idea when he told us to “just go shopping.” He seemed to understand that there may be no more powerful force on earth than American consumerism. Of course, like most of George W. Bush's thoughts, that one was sorely mis-focused. What George meant was we should get out there and buy things. What things? Whatever. Just buy stuff.
But imagine if America could harness the innovation, the marketing and design talent and the competitive passion to win that once made American companies genuine world-changing, life changin, powerhouses. If we harnessed that to produce and market things that really matter, things we don't already have, but so desperately need, like clean, renewable energy sources and the products that use them, imagine how fast we could change the world, and it's future.
But we're not there yet. I've seen Apple's ads for the iPhone, and even I found myself nodding in obedient agreement that it's way cool. But I'm not buying one. I have a cell phone, it rings, I listen and hear the person calling me. I talk and he hears me. I have a Sony digital camera should I want to take a picture. If I want to listen to music I have a stereo at home and a radio in my car. So you cold say that, iPhone-wise, I'm covered. Most of you are too.
Nevertheless, millions of American will soon chuck their perfectly good cell phones – even their iPods -- in favor of Apples latests Paris Hiltonish cell phone upgrade. They don't need an iPhone, but they'll want one. And they'll want one bad enough to shell out $500 to $600 to get one.
Imagine if someone could make the same number of Americans want an high-speed trains, electric cars and solar roof panels (with a stylish Apple logo engraved on them) that much.