What is going on with the world today? Many of the institutions and systems we grew up with and believed in have crumbled faster than a crumb cake in front of Santa Claus. This morning sports fans were shockingly (or not) met with news that one of the few remaining baseball superstars to not be tainted by the steroids scandal, Alex Rodriguez, failed an MLB steroids test in 2003. Considering that this news was corroborated by four independent sources, and based on past evidence of such news, this story likely has meat behind it. As the Barry Bonds’, baseball’s all-time home run king, steroids perjury trial heads to court, we wonder if there is anything sacred anymore in sportsmanship and fair play. The list now includes Bonds, Arod, Marc McGwire, Sammy Sosa, Roger Clemens and Raphael Palmeiro. All were heroes and idols to millions and millions of kids and sports fans.
Sports is nothing, however, compared to the deepening economic crisis affecting the country. But, then again we need to ask ourselves how did this country fall into such a dire situation in the first place? With news of unemployment reaching 7.6%, worst since 1982, most Americans are sensing a pessimism in the country and its leadership they have never felt before. Corporations that have long been stalwarts have wilted after years of trustworthy service. Fannie Mae, Freddie Mac, Bear Stearns, Lehman Brothers and AIG, just to name a few. Even General Electric has fallen on tough times due to untrustworthy leadership expectations and financial exposure. Then there are the frauds of individuals, such Bernie Madoff, and corporations, such as Enron and Global Crossing.
Polar bear cub
Then there is the global warming and energy crises. Due to the irresponsible and rampant use of oil and other natural resources, and the irresponsible output of chemicals into the air, river and ground, the natural balance of Earth has come under question. Dire predictions of sea levels, global temperatures, forestation, glacial coverage, droughts and diseases have left us wondering is there any hope left? Will there exist a viable Earth in 100 to 200 years?
It is truly amazing that all three of these problems have one major thing in common. Greed. Greed. Greed. What is most disturbing is that the situations did not become problems until the ultimate greed kicked in. Arod was already a once in a generation baseball player back in high school. It is fair to say that he did not do steroids as a teenager as his body structure was simply too small. Bonds was a skinny player with the Pirates but was already a five tool player on the path to the Hall of Fame. McGwire was an amazingly talented rookie with the Oakland Athletics. Why did they feel the need to use steroids and become even better than they already were? Why risk already amazing career trajectories with such greed?
Similarly, the financial companies that have gone bankrupt or bought up were very viable and successful companies (some for over a hundred years) before the ARMs and hedge funds became en vogue. Why the greed to do such risky investments in order to raise the bottom line and stock price? Was it all due to increasing stock compensation packages of executives? Was it all worth it? To dupe millions of unknowing citizens just for more personal money? What about Madoff? An already well-respected and wealthy investor; what caused him to risk everyone’s money (including hundreds of other wealthy individuals and companies), just to make more money for his firm?
Finally, the earth has remained relatively stable ever since the existence of man. However, since the Industrial Revolution and especially since the widespread use of combustible engines, there has been this disregard for the side effects of using such resources. Coupled with research in biochemistry and synthetic compounds, the effects of pesticides, mercury, lead and carbons have led to a precarious global balance. Millions of animal species extinct or on the brink of survival.
Are humans, the supposedly most “intelligent” species with opposable thumbs, in fact, the dumbest species ever? Just imagine outsiders writing about the history of man and what they would write about, especially the past 150 years. Just imagine what they would write about western civilization. Just imagine what they would say about the population numbers. Or about technology and medical research? Is this the final goal of evolution? We have reached the ultimate in special survival… our only enemy is ourselves? The whole purpose of natural selection is the survival of the strong. However, part of natural selection is natural balance. A species never wants to become too powerful because then their food sources and natural enemies would disappear. Humans have, in essence, overcome both these natural laws. Through natural selection (our brains and opposable thumbs) we are far and beyond the most powerful species. In a relatively short time, our population and power increased beyond control. Humans have no more natural enemies. The machines we have created are unmatched and only destructible amongst ourselves. So what does this all mean?
The human world does not have a checks and balance system. Nature and other species have always acted as the equalizers. The closest thing that comes to that is the United Nations, and everyone knows how ineffective it is. Additionally, idealistic political systems such as communism and socialism have proven futile. Even checks and balance systems, such as the one in the United States, has a limited efficacy, as witnessed by the politics, lobbyism and other issues. Nature is having a difficult time balancing the effects of human greed and power. Diseases and natural disasters are becoming minimal in damage due to medical research and better disaster predictions. Without any natural enemies, we are left to govern ourselves and our future. As exciting of a possibility that is, the track record of that has been phenomenally pathetic.
10. Yahoo rejects Microsoft’s $45 billion takeover offer – February 11, 2008. This one has to rank as one of the most stupid business decisions ever. Since Yahoo practically started the internet search business back in the 1990s, they have quickly given up their dominant position to Google in the past ten years without a major fight. By the middle of 2007, Google had a 53.6% market share of the search engine business, versus Yahoo’s rapidly shrinking 19.9%. Microsoft’s $44.6 billion in cash and stock offer was literally a lifeboat and gave Yahoo the best chance for long-term survival. Yahoo rejected the offer and a later offer in May valued each Yahoo share price at $33. Yahoo’s share price had been languishing around $19 in recent years. Yahoo’s CEO and founder Jerry Yang demanded $37/shr! Eventually Microsoft got tired of Yahoo’s demands and pulled all negotiations off the table. What is Yahoo today, end of 2008? The share price is $13.03 and Yang was ousted in November. Although Microsoft still has lukewarm interest in Yahoo’s search business, the main opportunity for Yahoo has passed.
9. Housing prices continue to go down town – It’s amazing how so many analysts and normal people knew that the meteoric rise of housing prices was due to risky ARMs and other loans that were impractical and ticking time bombs. It’s amazing the federal government did not see this coming or chose to not do anything about it. Because of the dot com bust from a few years ago and the recession soon after, the Feds turned a blind eye and let free credit run rampant. The bomb went off in 2006, and median housing prices have gone on a free-fall from an inflation-adjusted high of $275,000 in 2005 to near $200,000 at the end of 2008. It will take a good while to sort this thing out. Housing prices are still historically high and with high unemployment rates, increasing foreclosures will continue to flood an already over-supplied realty market.
8. Unemployment rate – The United States has been pretty lucky in terms of unemployment rates for the past two decades or so. Ever since the recovery from the high inflation, 9.0+% unemployment rates of the early 1980s, the rate has stayed well below 8.0%. Since 1995, the rate has performed even better, only touching above 6.0% once during the short recession recovery in 2003. In January 2008, the rate was around 5.0% but had already been steadily rising throughout 2007. Since this January, the rate has put on the rocket boosters and is now at 6.7% nationally, with no signs of slowing down. Several states, such as Michigan (9.6%) and Rhode Island (9.3%) already have unemployments rates above 9.0%! Another five states have rates above 8.0%! Stats were from Nov 2008 and look to be higher when December stats come out.
7. What happened to the commodities bull market? – Oil, gold, silver, platinum and copper. All were at multi-decade highs in 2007 and even in 2008. Since then? Crude oil prices have dropped from $150+/bl to $37/bl! Most commodities lost more than half their values. Exchange-traded funds such as SLV, GSG, and XLE all dropped more than 50%. The one exception so far has been gold. Although gold prices have dropped from a high over $1000/oz, they have not dropped below $700/oz, and have recovered into the $800s since then. Gold is an unique commodity and it appears that it mostly trades as a safe-haven currency than a physical commodity. In looking at the chart of GLD (below), gold prices have solidly bottomed out at $70/shr and is looking like it will have a strong 2009.
6. Remember the $168 billion original stimulus package? – That amount seems so little nowadays especially when Obama is bandying around an $800B to $1 trillion stimulus package. Add to that the $750B bailout package given to financial companies and automobile companies. This is a year of bailouts and stimuluses and so far they have not helped the economy. Instead, the state of the economy is at its worst at the end of 2008. The expected package by Obama will be an early focus of the Obama administration. I think most people could use an extra few hundred dollars in their pockets.
5. The survival of American automobile companies – General Motors, Ford Motor Co. and Chrysler became the poster child of the current economic crisis hitting main street. On display was the millions of jobs, especially blue-collar jobs, in America at risk of disappearing due to the recent decades of mismanagement, overhead and foreign competition of the US auto industry. With the finance industry easily getting a $750B bailout, it seemed absurd that an industry that for decades represented hard working Americans and unions had to literally beg for a few billion dollars to survive. It was obvious where the attention of politicians were. Although Bush recently said that $18B of the $750B bailout would be immediately used to prop up GM and Chrysler, the long fought battle was wasted time and energy by the attention garnering and bureaucratic Congress.
4. Bernard Madoff arrested on $50B Ponzi fraud scheme – When the $50 billion Ponzi fraud scheme by Bernard Madoff was revealed in early December, it was the main headline of major news websites for a mere few hours. Since then, as more details trickle out, the fraud continues to take a back seat to the macro-economic recession covering the globe. In any other year, the news of a legendary and consummate businessman (and a former NASDAQ chairman) being arrested for a fraud-scheme covering possibly the largest dollar amount in Wall Street history would ripple for weeks, if not months. However, with white collar crimes dominating the post-dot-com era (Enron, Worldcom, Martha Stewart, Tyco and the 2008 unraveling of the hedge fund industry), the public is now immune to financial fraud. Quite unfortunate. (See here for What is a Ponzi scheme)
Corporate bankruptcies on the rise in 2008.
3. Bankruptcies and those near it – It has been a sad year for many corporations as they head towards bankruptcy. Many of them well-known with years of solid profits. The list continues to grow and the impact of the recession on the consumer and his/her buying habits is only beginning. Circuit City, Linens ‘N Things, KB Toys, Frontier Airlines, Mrs. Field Cookies, Steve & Barry’s, Whitehall Jewelers, Mervyns, Sharper Image and Waffle House are some of the big name bankruptcies. And this list doesn’t even mention financial companies, which I discuss in #2. See this list for a more comprehensive list of corporate bankruptcies in 2008.
2. The demise of the hedge fund and mortgage finance industry – The derivatives market has become a multi-billion (if not, trillion) dollar investment industry that is complicated and largely misunderstood, even by the most astute financial advisors. Derivatives, as its name suggests, are investment products that are created off of actual traditional investment products. That means their intrinsic value is conjured up and their existence puts them closer to full-blown gambling. The current financial laws and oversight are not suited for such trading. Over the years hedge funds and derivatives took on more and more of the investment strategy of major financial corporations. Derivatives that were based on risky mortgages and insurance eventually collapsed as housing prices plummeted with lendees’ inability to pay the mortgages. The result has been a credit lockup unforeseen in decades. Major financial companies toppled and its effects are still not fully known. Major companies that totally collapsed include Bear Sterns, Lehman Brothers, Washington Mutual, ANB Financial, Fannie Mae, Freddie Mac, and AIG. See this list for a more comprehensive list of financial collapses in 2008.
KBW Philadelphia Bank Index - performance since 2004
U.S. Recessions since WWII (Courtesy of CNN)
1. Recession or Depression – Which leads to the number one financial news in 2008. Are we in a deep and difficult recession or a depression? In early December, it became official that the U.S. went into a recession in December 2007. To some analysts, this is good news because it means we are closer to coming out of it. As you look at the chart on the right, most recessions last around one year. Based on the official Dec 2007 start date, historically we would already be on the tail end of the recession. However, to other analysts, this is bad news because the worst is yet to come, and we are already twelve months into it. With no light seemingly at the end of the tunnel, these analysts portend a long recession. Bad news from around the world keep coming in and the bottom of the current economic crisis still has not occurred. Oil prices continue to drop, gold prices have since rebounded (bad for economy), and the dollar index has begun dropping again. Signs of major inflation on the horizon are evident, especially with the massive bailouts and the Feds lowering the overnight interest rate to its lowest level ever, 0%-0.25%.
The entire 2008 Top 10 in Finance is all bad news. Most of them have to do with the current economic crisis. The key hope is that the Bush administration is finally over and 2009 brings a more adept and intellectual administration that will do just about anything to get America out of the economic dump. An administration that seems focused on the middle class and job creation. However, with it comes more and more national debt and the mortgaging of the future. There seems to be no alternative. This will most likely lead to long-term inflation when countries such as China, India, Russia and other Asian countries continue their rise to redefine the existing economic world order. This is not to say that the United States is doomed to be a second-bit player, as we know that is unlikely. However, the country needs to refocus on what made it a superpower in the first place, investments in technology, jobs, science, and innovation.
Most people in the country still have not felt the impact of the economic troubles, but make no mistake, the economy is teetering on the brink of a major crisis. When financial stalwarts like Bear Stearns, Merrill Lynch, Lehman Brothers, and AIG collapse, you know something is brewing. The last two recessions, both during the two Bush presidencies, never saw the collapse of major corporations. What most economic followers know is that they should have. Instead of letting the recessions naturally play out, the Bush administrations and the Greenspan Feds interfered too much by playing with our futures for the sake of the present. The early 1990s recession ended because of a huge increase in credit card use and personal loans. The early 2000s recession ended because of easy access to home mortgages and personal loans. Both recessions saw a huge infusion of dollars onto the world markets. Both of them are now biting us in the butt. This is a major credit crisis on our hands. The government must let it play out. Another band-aid and we will just have a more devastating crisis in the near future.