Wednesday, April 1, 2009

Social Mood Turns Ugly

Yesterday I talked about the deepening economic fundamentals plaguing the world's biggest economies. There appears to be little light on the horizon apart from modest month over month improvements. But as readers of this blog understand fairly well by now, it is not the actual statistics that tell the story - rather the actors behind the statistics. 6 or 8 months ago, the numbers were looking as grim as numbers for the early 80's or mid 70's. But looking through the lenses of generational theory and socionomic theory, it was clear that previous bear market nadirs would not hold.

The two independent theories were telling us that social behaviours were on the verge of undergoing a sea-change. Similar to what they have done in fairly regular intervals throughout history. As soon as it was apparent that the ball was rolling down the hill, it was inevitable that the natural herding instincts of humans would take over and ensure it's continuation. In January, I outlined my Themes for 2009. One of them was:

- Social "witch hunts" for those responsible for the common plight. Multiple scandals uncovered. Persecution and enormous tax increases on the extremely wealthy

Only three months after writing that, it appears to be proving itself in spades - and accelerating in its ferocity. Consider for example:

Banker's Home Attacked As Pension Fury Grows

LONDON, England (CNN) -- A warning of more attacks on UK bankers was made on Wednesday after the home of former Royal Bank of Scotland boss Fred Goodwin was vandalized.

A recovery vehicle removes a Mercedes from the Edinburgh home of Fred Goodwin.

Windows were smashed in Goodwin's house in the Scottish capital Edinburgh and those of a Mercedes-Benz limousine parked outside.

It is not known if anyone was at home at the time. Goodwin -- dubbed "Fred the Shred" by the media for his ruthless cost-cutting -- and his family have not been living in the house since it was revealed that the 50-year-old Goodwin was receiving an annual pension of $1 million (£700,000) for life.

A statement issued to media organizations including the Press Association after the attack said: "We are angry that rich people, like him, are paying themselves a huge amount of money and living in luxury, while ordinary people are made unemployed, destitute and homeless.

"Bank bosses should be jailed. This is just the beginning."

3M Boss Held Hostage By French Strikers

Striking French workers for US manufacturer 3M were holding their boss hostage today at a plant south of Paris as anger over layoffs and cutbacks mounted around the country.

A few dozen strikers took turns standing guard outside factory offices where the director of 3M's French operations, Luc Rousselet, has been holed up since yesterday. The workers did not threaten any violence and the atmosphere was calm at the factory on the outskirts of Pithiviers

England appears to have turned into a police state ahead of this week's G20 summit. Eavesdropping on web conversations, agent provocateurs being inserted in the crowds and helicopter cameras will be used to quell dissent. The media will be controlled to portray "rabid anarchists" as the aggressors even though history shows aggression is usually initiated by the riot police themselves.

In times of positive social mood, large anti-globalist protests are generally peaceful. Parents bring the kids, police and protestors joke with each other, etc. But when social mood turns negative, the protestors are more likely to express their outrage physically and riot police are more likely to overreact on command from paranoid politicians wary of their counterparts perceiving them as "weak."

I would not be surprised to see the G20 protests get out of hand.

Shifting gears now. Many are beginning to see the irony in a famous quote from Warren Buffett, "when the tide goes out, you learn who has been swimming naked." It appears Buffett's Berkshire Hathaway had been doing a little skinny-dipping themselves. The reinsurance giant had taken on far too much risk in something Buffet years ago termed "financial weapons of mass destruction" - derivatives. Just a few weeks ago we learned about BRK losing its vaunted AAA rating on many parts of its business.

For decades, Buffett has maintained a somewhat god-like stature in the financial world. Back in November, I hinted that his "buy and hold" strategy may backfire and leave him destitute. The Great Depression left many rich men penniless. Irving Fisher and Jesse Livermore to name a couple. This depression will likely do the same to those who refuse to believe that times have changed.

A few weeks ago, I was talking about Pension Funds in "The Next Shoe To Drop." I mentioned the massive losses they have been taking on their investment portfolios. I highlighted the absurdity of their assumptions on investment returns, and how it drove them to taking on way more risk than was responsible. Thankfully, many of America's largest companies have pension insurance to mitigate the risk of the company going bankrupt and thousands of retirees being left with nothing. The appropriately named Pension Benefit Guarantee Corporation was the primary insurer for the US market. They are responsible for the pensions of 44 million Americans in the event of a worst case scenario, including those of the major auto manufacturers.

One would think that a company with such a massive responsibility to the nation's most vulnerable would be the most adept at mitigating risk and preparing for such a worst case scenario. Right? I wish I could say so. But it appears that they were plagued by an even greater incompetence than the pension fund managers they were meant to insure. We learned this week that in the summer of 2008, the pension insurance giant shifted a large portion of their assets into global equities. Unsurprisingly, they have yet to report their Q4 performance. When it finally comes out, we will learn of a loss nearing $15 Billion dollars. This means they would be grossly underfunded for any major liability they were hit with, just as the economy tanks and business bankruptcies accelerate.


The last bit of uplifting news I will bring to you this morning is a video of some California teenagers expressing their thoughts on the economy.

Can you imagine these kids 5 years from now lining up at the door of their bank manager begging for a loan so they can buy a boat, a new car, a new house? Or will they learn from the mistakes of their parents, scrimp and save their money, and learn to minimalize their consumption? The obvious answer to that question will also tell you whether Bernanke and Geithner's reinflation attempts will work.

It won't.

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1 comment:

dacian said...

Buffet is a brilliant mind and lately Berkshire was selling stocks and from the last letter to investors, it's obvious they realized this recession is not like others. At a moment, I was thinking this recession will make an example out of Buffet who took advantage of the "market fundamentalism theory" (markets always return to the mean) for decades. But it seems he learns much faster than others and he understands (even if late) what's going on.

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