Someone ought to gently nudge David Einhorn and tell the hedge-fund manager and wannabe baseball tycoon that Steve Ballmer doesn't play for the New York Mets. So firing Mr. Ballmer as Microsoft's boss will not enhance the fortunes of the hapless Mets that Mr. Einhorn is dickering to buy a piece of for a tidy $200 million. It's easy to forget who's on first while trying to tend to your day job managing a $7.8 billion portfolio.
Actually, the apparently well-intentioned Mr. Einhorn may simply be infected by a plague of forgetfulness that has afflicted our fair land. On this score, it strikes us as particularly strange, bordering on the paradoxical, that even as it pays proper deference to Memorial Day, the populace seems more inclined to amnesia than remembrance.
An odd lapse, indeed, since this proud country is actively engaged in not one but two wars. Admittedly, except for those doing the actual fighting and their families, the conflicts, unyielding as they are and taking as they continue to an enormous toll in blood and treasure, hardly impinge on the nation's consciousness. But on reflection, it's perhaps not all that surprising, since there are no overt, constant reminders as there were in earlier wars, such as the draft or a sharply greater tax bite.
This tendency toward forgetfulness is evident, too, amid the fuss and furor about deficits and spending that has the political parties at each other's throats. Folks appear to have plumb forgotten it wasn't all that long ago that the tally of federal income and outgo produced—we kid you not—a surplus. Americans by and large are optimists, and for good cause (we're blessed with natural bounty and, as Winston Churchill pointed out, ours is the worst form of government except for all the others), so it's not inconceivable that from time to time remaining upbeat requires a fuzzy memory of reasons for discontent.
Of course, politicians as a group are not renowned for their mental acuity. The Republicans seemed shocked by the rude discovery, courtesy of the recent election of a Democrat to a House seat in one of the most conservative districts in New York, that Jane and John Q. are enamored of Medicare, an inconvenient truth confirmed by every opinion poll taken by enquiring man.
The GOP's lament that the results were unforeseeable, skewed by a third party in the contest for the seat that had been comfortably occupied by a Republican for four decades, is pretty lame. After all, to find a precedent that might have helped avoid an embarrassing loss, they had only to hark back to the 1992 presidential election, when Ross Perot's presence on the ballot enabled Bill Clinton to edge out Bush the elder; the spoiler this time was the Tea Party.
As to the Democrats, against all odds, they managed to forget that the humble pocketbook commands more political clout than the grandest of promises. And when millions are out of work, their paramount, often their only, interest is jobs. Yet, more than two years into recovery, we're still laboring with a 9% unemployment rate, and more than 20 million people are underemployed or jobless.
It's not so much congenital optimism or chronic forgetfulness that's prevalent these days in Wall Street, the proximate cause of the horrors that so recently threatened to bury the economy and did such a fearsome number on the markets. It's quite the opposite, really—a highly selective memory that blanks out everything but the remarkable rebound of the markets from the depths of early 2009.
Restored to the living by a rich Uncle's unstinting generosity with your money and ours, the brokerages and banks tend to shrug off disturbing and even alarming signs of a faltering recovery and counsel courting risk with blithe assurances that the recent past will prove prologue. To us that seems like the perfect recipe for trouble.
WE HATE TO SOUND SO GLOOMY with a presumably three-day sunny weekend staring us in the face. And at the risk of being accused of reveling in someone else's misery to make our discomfort seem less imposing by comparison, we'd like to point out that things could be worse, a lot worse, and are in the weak sisters of the European Union. We're talking about Greece (the subject of our cover story this week), Portugal, Ireland, Spain and Italy. More than once, we've pointed out that to deliberately saddle these financially floundering countries with punitive austerity measures and higher interest rates in exchange for liquidity injections was similar to denying a drowning man a life preserver and insisting he learn to swim.
The insightful Michael Darda, who wears two hats at MKM Partners (chief economist and chief market strategist, but relax, he has only one head so far as we know) and whose views we've shared with you from time to time, happens to agree with us. His latest dispatch is ominously entitled "Why Bailouts and Austerity Are Failing in the Euro Zone."
In it, he points out that it's now over a year since the first bailout of Greece, followed last November by a bailout for Ireland and one for Portugal earlier this month. Yet, "debt-market spreads in peripheral Europe, which were supposed to ease as aggressive austerity took hold," are well above their year-ago levels, he notes. He contends that the bailout/austerity policy mix has failed.
The basic problem, Michael believes, is that those weak sisters are simply not competitive with the core nations: Their unit labor costs average some 22% more than France and Germany, while their prices run 8% higher than the European average. He traces this disparity back to the boom and bubble period during the mid-2000s, a stretch during which the periphery drew in capital and drove prices and wages higher than the slower-growing core euro-zone nations.
Absent a more accommodative stance by the European Central Bank (ECB, for short), the quintet named above, he fears, will have to suffer the pain of deflating nominal wages and prices. That translates into high unemployment, weak or declining gross domestic product and collapsing tax revenues, an ugly combo destined to "exacerbate debt burdens and render austerity fruitless."
Unless the ECB does a U-turn, Michael warns, "the entire periphery could be headed toward some form of default or restructuring." He expects the bank to eventually reverse course, but voices concern that the measures it has already imposed "create the potential for an increasingly disruptive series of events." To us, the moral of this little treatise is never underestimate the mischief the central bankers can wreak.
ALTHOUGH THE BULK OF THE LATEST communiqués from the economic front, including durable-goods orders, nondefense capital investment, consumer spending, pending home sales and new claims for unemployment insurance were disappointing or downright weak, not all the news, we're happy to report, was dispiriting. Consumer sentiment ticked up a bit in the latest survey, although it remains rather subdued.
One of the few things we've been consistently bullish on, thanks to the vagaries of the weather and, more specifically, a profusion of droughts globally, has been farmland. And we're indebted to the Federal Reserve Bank of Kansas City for affirming our preference. More specifically, it issued a recent report noting that farmland values are up a handsome 20% and credited strong demand from farmers and investors alike.
The rise in cropland values is all the more striking because, as we don't have to tell you, real estate in general is far from booming. And that goes in spades for residential real estate. As real-estate guru Mark Hanson, who has been pretty much on the money in assessing his chosen field, points out in a recent commentary, the prospects for an imminent housing recovery are anything but stellar.
He notes that Washington in its various incarnations appears to have thrown in the towel on reviving the industry after shelling out trillions via quantitative easing, tax credits and the like. And that doesn't exactly bode well for what he calls the "largest landlords in the world," namely the banks and servicers.
He lists the many woes that afflict the industry. High up among them is "effective negative equity," which he defines as the inability to pay off a mortgage, plus paying a real-estate broker 6% and coughing up 10% to 20% of the purchase price as down payment on a new purchase. Mark reckons that a majority of mortgages fall into that unenviable category rather than the 28% commonly estimated.
He also cites a humongous default, foreclosure and short-sale backlog overhanging the market. Since 2007, he relates, there have been only four million foreclosure completions and short-sale liquidations out of a probable 14 million to 18 million. That alone is enough to give you the willies.
Toss in unfavorable demographics, mounting energy costs, a miserable excuse for a mortgage market and inexorably declining home prices…well, you get the point. Housing is one of those festering sores on the economy that will be with us for quite a spell. And so long as it is, or until jobs grow more abundant and consumer income muscles up, the likelihood of a decent and sustained rebound for the industry seems a good piece off. And, we're afraid, the economy's recovery is apt to maintain its desultory pace.
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