Some items of note this week

  • General Electric (GE), the largest U.S. conglomerate, as measured by revenues, reported solid earnings today. This is a very positive sign, especially since GE is a multi-national corporation with customers and sales occurring all around the globe. 

Along this line, Union Pacific (UP) said yesterday that its second-quarter net income surged 28 percent, as the nation’s largest railroad collected higher prices and fuel surcharges and handled slightly more cargo. Major freight railroads, such as Union Pacific, are watched closely because the cars, chemicals, crops, containers of imported goods and lumber they carry offer insight into the health of the economy. “When we look at the economy we don’t really see anything that tells us it’s tanking. It continues on kind of a slow-growth trajectory,” UP CEO Koraleski said.

The above earnings announcements from a multi-national corporation that does business around the globe and a transportation company that hauls goods and materials are quite reassuring, especially in light of all the negative economic news and uncertainty out there. It definitely is a breath of fresh air and buoys one's confidence. 

  • The LIBOR scandal involving big-bank efforts to manipulate global interest rates is truly disgusting and an example of a lack of integrity and of the trust that has been placed with these large financial institutions. However, now we find out that the Federal Reserve Bank of New York in 2008, headed then by current Treasury Secretary Timothy Geithner, knew what was occurring and took no action. As a matter of fact, former FDIC Chair Sheila Bair told CNBC recently that Mr. Geithner should have done more to investigate big-bank efforts to manipulate global interest rates, "looking at those emails, it looks like they had pretty explicit notification of some very bad behavior...but I don't understand they didn't investigate given what they were being told. I don't understand it, and they did have the authority to do that."

            It is alarming that several large, and in many cases, global financial institutions were so arrogant and downright deceitful, but it is just as alarming that the head of            the U.S. Treasury, it appears, turned a blind eye to it.  Who’s regulating the regulator? 

  • The New York Times reported that the U.S. Department of Education and the Consumer Financial Protection Bureau released a 131-page report today on student loans. Unfortunately, as was the case in the housing market, securitization /  packaging and reselling of student loans led to more aggressive, or should I say, lax underwriting for borrowers. Whom in many cases could not possibly afford the debt they took on, according to a government report.

Student loan debt has ballooned to over $1 trillion dollars, with 85% of the loans coming from the federal government and 15% from private institutions. Some of       these private institutions are now being accused of taking a sub-prime lending style directly to college students, which is resulting in higher defaults.                             

In my opinion, it appears that whether they be private or government originated student loans, underwriting standards were eased and students took out larger loan       balances than should have been justified with prudent underwriting processes. Now these same students are graduating and not able to obtain employment, and as a     result, they are not able to cover all their obligations. I am not advocating such a move, but I would not be surprised to see a program offered that allows student loan balances to be reduced or forgiven due to financial hardship. This may sound like a compassionate and necessary stance, but out there somewhere there is an investor (e.g., individuals, institutional investors, mutual funds, insurance companies, pension funds, tax-payers on the hook for government-backed loans) whom has an investment that is backed by these same loans, and as a result, they will incur losses if and when these loans go into default or become uncollectible.

I am very empathetic to the plight of many graduates struggling to meet their student loan obligations. That being said, higher education must include some common sense / street smarts knowledge that allows students to understand the implications surrounding the money they are borrowing in practical and easy to understand examples. This is so these students know what is expected once they sign on for these loans. In addition, I do believe that lending institutions should be ethical in the practices and not underwrite loans like a payday loan store. 

What are the implications? 

Look, we are all aware of the concerns regarding the problems in Europe, global economic slowdown and our own political gamesmanship taking place in D.C. and the potentially damaging economic effects of each. However, my interaction last night at a local bank advisory board says it all. 

This is a board of business owners and professionals who work directly in or with businesses of all sizes including start ups. As such, it is very interesting to get their perspective, especially since many of them are on the front lines every day making sure they're paying their bills, making payroll, and strategizing on how to improve and grow their businesses, while empowering their staff along the way. As such, there was one constant theme in that meeting and it was uncertainty. Currently, business owners are in a holding pattern, and in some cases, outright scared to spend additional funds or hire individuals. 

Are they doing this out of greed or ignorance? No! The owners of companies that range from one to thousands of employees know that ultimately they are responsible to make sure the bills are paid, payroll is met, and they are personally on the hook for any debt or lines of the credit their company takes out. If the business fails, then they're bankrupt.

Supporting this view point is Donald Trump. Look, I am not a big fan of his. He comes across as arrogant to say the least, but at least he's got some business savvy and not afraid to say address issues head on. He was on CNBC yesterday and noted that there’s been no leadership (from either party) to fix the looming “fiscal cliff” and end the uncertainty in the economy.

“I think businesses are very unsure,” Trump said. “There’s great uncertainty and we just don’t have leadership. I’ve never seen a mess like it.” The fiscal cliff refers to the expiration of tax cuts that expire at the end of the year and the automatic spending cuts that go into effect at the same time.

As a result, business owners and executives are frustrated out of the desire to grow and expand, but are extremely afraid to do so, not knowing what may be around corner "economically" for their business and their employees. 

Their trust has been broken by continued reports of large financial institutions acting unethically or illegally, municipalities claiming bankruptcy and in one case it being disclosed that the city had falsified their financial statements for over a decade. Well how do you think the investors who bought that city's municipal bonds feel now? Also, as we try to get over the scandals by Bernie Madoff and MF Global, we now find out Peregrine Financial Group, a commodities firm in Cedar Falls Iowa, has perpetrated a massive fraud for over 20 years. And as it pertains to broken trust, the icing on the cake are the reports of various government entities and their out of control spending on wasteful and in many cases lavish events. 

Look, whether it be your banker, mechanic, plumber, tax-preparer, state representative or senator, child's teacher, priest or pastor, or even financial advisor, all relationships; business or personal, are based upon trust. As such, if that other party we are interacting with is untrustworthy, then our confidence is shaken and a cloud of uncertainty and skepticism begins to jade our perspective of the world. 

Well, I can tell you that the business owners and professionals, in the meeting I previously referred to, are becoming economically paralyzed due the uncertainty they face; from not knowing what tax or regulatory environment they may face in the upcoming months, let alone years. In addition, when you've put in countless hours for many years whether as a business owner or as a hardworking teacher, doctor, or employee, the current environment in the United States is incredibly stressful. This is due to the fact that your trust may have been broken as the result of you finding out your pension or social security benefits may be in jeopardy, your position may be eliminated due to budget cuts, or you are struggling to come up with strategic plans for your business without the benefit of knowing what rules, regulations or tax rates you may be facing in the near future. 

Look, I am not trying to come across as a fear monger or from one political vantage point or another, but the fact is, currently, we as Americans and especially small business owners, who are the backbone of job creation, need our political leaders at all levels of government to come to the plate. By this I am referring to reasonable tax and regulatory policies that are long-term oriented and working within fiscally responsible and transparent budgets. By doing so, business owners of all sizes will know the lay of the land and plan accordingly. Otherwise, uncertainty, skepticism and lack of trust will prevail and turn what could be an expanding economy into a zombie economy. 

To do this we need to do away with a lot of the accounting shenanigans taking place in some corporations, local, state and federal entities. Just as executives at large publicly traded companies are stewards of their shareholder's money, government leaders and employees are stewards of the citizens' / taxpayers' money. As such, we need to create an environment where everyone at all levels are accountable for their budgets and their spending. If someone abuses their responsibility, they are not only reprimanded or even fired, but there is a claw back against whatever benefits they may have accrued, whether it be pension, 403(b), 401(k) or thrift savings plan. I believe this policy should apply to all governmental entities, as well as all companies whose stock or bonds are publicly traded. 

Last, and this one probably will never occur, is for political ads to be subject to fact checker for truthfulness. This fact checker could be a third-party, independent organization, such as a large CPA firm, whose only job is to check the facts of the ad and report if they are truthful or misleading. This analysis would be noted at the end of the ad or a link to a website providing such analysis. Also, the candidate or party making the statement would be responsible and required to pay for the fact checker analysis or unable to place the ad. I believe this is important because there is so much disinformation and outright lies being bantered about, that no one has the time nor energy to actually investigate and distill the truth. As a result, many of us, including myself are voting on issues or for candidates based upon misleading and sometimes false information. If IBM, McDonalds, Berkshire Hathaway or even Starbucks put misleading or false information in the proxy notices to their shareholders, these corporations and their respective directors and executives would be subject to civil and possibly criminal actions. Well, why not place the same standard of care on our elected leaders, whom are fiduciaries of the taxes collected from us. 

Bottom line, Americans need their trust restored and it may take some dramatic actions by business and political leaders for this to occur. However, I would rather face the firestorm of criticism to get our country's economic and political ship righted, versus continuing to accept more of the same and expecting a better outcome. I am sorry if any of you believe I am trying to point the finger at one political party or another. This is not the case! We are currently dealing with an economic crisis of confidence, and we need strong, honest and well thought out leadership from our business and political leaders going forward. Otherwise, business owners and consumers will resort to their natural instincts when faced with uncertainty and distrust, and that is hunker down and don't spend money. They go into survival mode, versus taking chances and look for opportunities to grow and thrive, which creates jobs. Along this line of thought, I don't care for nor watch zombie movies, and I care even less for a zombie economy! Just as a movie can be rewritten to have a happy ending, so can the plans of our business and political leaders for the benefit of our citizens and country. 

Quotes

 "Remember, reaching goals is not so much about doing big things when the feeling hits you; it's more about doing little things every day that move you toward your dream. It's about staying steady and on course."

                        Francine Ward, author, attorney and motivational speaker 

"About the only thing that comes to us without effort is old age."

                        Gloria Pitzer, author 

"One-half the troubles of this life can be traced to saying yes to quickly and not saying no soon enough."   

                        Josh Billings, American humorist 

"One of the best ways to measure people is to watch the way they behave when something free is offered."

                        Ann Landers, advice columnist 

 

Tony Moeller, CPA

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only.  It is not a recommendation or solicitation of any particular investment or strategy.  A risk of loss is involved with investments in the stock and bond markets.  

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