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Thursday, September 29, 2011

 

(Jewish) New Year's Blogpost

Several years ago, the Mets utterly collapsed down the stretch and missed winning the division and the wild card. The swoon was a bit inexplicable, but to a great degree, it was a pitching staff breakdown, starters and bullpen.

The same thing has now happened to the 2011 Red Sox, who first lost their division lead to the Yankees and then during a simply awful September, where they never won even two games in a row, they handed the wild card to Tampa Bay. The regular season's final night was perhaps the most amazing, when the Rays rallied in the eighth inning from a 7-0 deficit against the Yanks to win in extra frames, (Rivera was held out after pitching earlier in the series), while the Red Sox closer allowed a two run rally by the lowly Orioles in the ninth after striking out the first two batters of the inning! To add to the irony, ex - Ray Carl Crawford fell short of the last line drive hit, a catchable ball.

In the National League, the Cardinals, who struggled all year, emerged with the wild card when the Braves, who seemed to have a playoff spot locked up most of the year, simply stopped hitting the last month of the year and their previously reliable bullpen imploded.

Both the Braves and the Red Sox were playing so badly that it was doubtful either was going to go very far in the playoffs if they had made it, but the nature of baseball is such that a short series is largely a roll of the dice and any team would love to get their chance. So now, in the American League, you have the Tigers coming in playing very well, and the Rays playing their best ball of the season with a pretty good starting staff. The Rangers and Yankees are both too good in too many dimensions to discount. So I think all four teams have legitimate hope, but my gut tells me it might be Detroit's year.

In the National League, the Phillies' starters give them an edge, no matter how shaky their bullpen has been during much of the season. I don't think the Cardinals are a threat but the Brewers certainly are, since they are almost impossible to beat at home. Arizona is a dark horse team, having played so much better than anyone expected and done so consistently. If forced to make a pick, I've got to pick the best pitching staff and that's the hated Phillies.

The team that had a fantastic second half, but too late to threaten a playoff spot, was Don Mattingly's Dodgers. In my opinion, he should be a Manager of the Year candidate. Maybe the Dodgers will return to contention next year. One of the year's feel good stories was the mentoring relationship between Don Newcombe, one of the few remaining survivors of Brooklyn's Boys of Summer, and star slugger Matt Kemp who contended in the Triple Crown categories. "Newc" was 20-5 in 1955 and 27-7 in 1956 as the Dodger ace and was a dangerous hitter with power throughout his career. He frequently pinch hit and occasionally batted 7th in the order when he pitched. One article I remember in Baseball Digest claimed that the ball was dead when Newcombe pitched it and lively when he was hitting it. He later pitched well for the Reds but his career was shortened by a severe bout with alcoholism. He has spent much of his retirement visiting clubhouses around the major leagues to speak to players about alcohol's ill effects.

For a significant segment of his playing career, Don Newcombe was a Hall of Fame caliber player. He has always been a Hall of Fame caliber human being.

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A significant downside to the Great Recession of 2008 and the financial crisis that spawned it is that there was never consensus about its cause or even about its economic underpinnings. This has hampered discussion about the form its cure should take and how to prevent the "next financial meltdown." It has also contributed to the low level of political discourse in this country.

Of course, everyone wants someone to blame, a scapegoat, whether it's greedy bankers, the Bush administration, the GSE's, mortgage fraudsters, the ratings agencies, the hedge funds, and on and on. This blog pointed out well before the crisis took hold that the mortgage industry was laden with fraud and that Fannie and Freddie were accidents about to happen. There was no great genius there; the WSJ had been railing about the GSE's forever.

The bankers took a lot of flack because some of them got bailed out (notably not Lehman, Bear Stearns or Washington Mutual by the way) but I always viewed them as victims or collateral damage, with the possible exceptions of the aforementioned WaMu and Goldman Sachs, a true maker of mischief. Bank executives exacerbated their bad PR by taking outsized bonus compensation, another of my pet peeves.

Failing to achieve consensus on the cause of the crisis has led to very dysfunctional cures, among them, the Dodd Frank legislation, the BASEL banking standards, the determination to identify Significantly Systemic Financial Institutions (SIFI's) for Federal Reserve Bank regulation, etc. It has also emboldened those economists favoring Keynesian solutions, never mind that those have been the wrong prescriptions since the the 1980's. A good example is David Wessel's WSJ column today where he parrots progressives like Mark Kleiman in ruing that the Obama stimulus efforts have been too passive.

Many felt that way about the New Deal, and they were probably correct in that instance. Certainly Ben Bernanke's academic work has its grounding in that view. But the 1930's are not quite the same as our current state of affairs. Going into the depression, the federal government's debt load and obligations, funded or otherwise, were nothing compared to today's. Adding more and more debt to the $14 trillion already owed, knowing that at least that much has been promised in the form of entitlements and pensions to government employees, can't do anything but make our economy weaker. The Keynesian mechanism works when debt creates money for investment. Today, we are awash in cash even while we work at the task of deleveraging consumer and business debts. We need to start sovereign deleveraging too. Take on more sovereign debt to create money, pass it back to consumers in the form of payroll tax cuts, and it will be used to deleverage because consumers and businesses understand that when the government comes calling to delever, it means much higher taxes AND inflation. That's why we are in the Japan scenario, a (probably) 20 year no-growth phase predicted by Robert Prechter and others who understand the long range cycles that occur when debt formation alternates with debt liquidation.

As for banks, the requirement that banks hold more capital may seem logical, but in reality, it will do little or nothing to stave off future crises. That's because the nature of banks is to take on risk by borrowing short and lending long. When those mismatches go against banks, they overwhelm any capital that it might be reasonable to hold. Increasing capital to 7% as the Basel agreements propose (over many years) is like building an eight foot embankment to hold back the ocean. When the storm comes, the embankment is nothing but an underwater sandbar.

It's about 30 years since we deregulated banks by first breaking down the barriers between thrifts and commercial banks. It didn't take long after that to bring on the S&L crisis, and a huge bailout. Then came Gramm, Leach, Bliley, breaking down the barriers between banking, investment banking and insurance. The added risks in the system allowed by GLB led directly to the 2008 debacle. Dodd Frank can be seen as a partial repeal of GLB, but it is at best a halfway measure that purports to leave GLB in place. So now we will have the worst of all worlds, a purported free market in financial services where the Gullivers are tied down by the Lilliputian regulators.

I am not really advocating a return to New Deal regulation a la Glass Steagall, though the stability it brought to the system allowed other businesses and industries to thrive. But I am saying that if banks are going to be free to take risk, indeed, if they have to to attract capital, it is a mistake to tie them down, and a bigger mistake to bail them out, or somehow achieve an orderly resolution when they fail. In a true capitalist system, failure must be allowed, and it has to be painful; otherwise moral hazard takes hold.
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An interesting column in today's WSJ posed the question of why Herman Cain's candidacy shouldn't be taken more seriously. Indeed. Mr. Cain is a solid businessman with an outstanding record of achievement. What a role model he would be and what a boon for so far laughable attempts by Republicans to woo Black voters! If you haven't noticed, there is a little boomlet underway for him, as he and Paul have been the primary beneficiaries of the deflation of the Perry candidacy (predicted here 10 days ago). I still think Romney is the likely candidate, and don't think Christie is ready to run (though it seems to be his for the taking), but wouldn't it make a lot of sense to consider Cain for second spot on the ticket?
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On 9/19, we bought 100 shares of ING preferred at 17.94 for the IRA (ISP), reaching the maximum number of shares we want to hold in that one. On 9/21, we bought 100 shares of Stiefel Financial (SF) for the IRA at 27.42. On 9/23, we bought 200 shares of our longtime trucking fave, Knight Transportation (KNX) at 13.07. On
9/26, we bought 50 shares of AES Preferred (AES.PR.C) at 48.49. Finally, yesterday, we bought 200 shares of Alcoa (AA) at 10.50. All of these transactions were in the IRA.

One of the oldest of market axioms is to "sell them on Rosh Hashanah and buy them back on Yom Kippur." Like the Super Bowl indicator, there is no logical reason for this, but it does seem to work more often than not. Obviously, I prefer to follow my own formula. This has been a really bad quarter for the market, and most players on the long side are down meaningfully for the year. Lets hope that once we've atoned for our many sins, we can be redeemed, financially as well as spiritually.

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