Wednesday Night #1417

T H E  R E P O R T

A video tape of President Obama’s Press Conference set the tone for the early part of the evening, allowing Wednesday Nighters to formulate their own answers to some of the questions he addressed before listening to his answers.
Torture and war
President Obama has announced an end to torture, especially water boarding – arguably sanctioned by the previous administration – to obtain intelligence in the belief that it would save American lives. [Regarding the sanctioning of torture, this quotation from Condoleezza Rice is worth pondering: “By definition, if it was authorized by the president, it did not violate our obligations under the Conventions Against Torture,” Ms. Rice said, almost quoting Nixon’s logic: “When the president does it, that means that it is not illegal.” ] While torture in many forms has existed through the ages (e.g. crucifixion, the rack), it does not belong in the arsenal of civilized nations. While it may be true that some information obtained by torture might have saved American lives, the practice becomes a spiral amongst nations. Despite the good intentions of the oft-cited Geneva Conventions ( generally spoken of in the singular and referencing only  the treatment of prisoners of war) , and the UN Convention against torture (to which the U.S. is not a signatory, but a remarkable number of questionable regimes are) , torture continues. Its most frequent user may very well be the United States, but it is almost universal in its scope and most certainly not limited to totalitarian regimes. Great Britain (Ireland) and France (Algeria) are both known to have engaged in the practice, generally on the premise that the truth elicited from the victim would save lives of innocent people, leading one to the conclusion that regrettably torture is more the rule than the exception. Especially in today’s world, the quality and availability of good intelligence may be the key to survival and the position of the United States among world countries makes it the prime target. President Obama’s insistence that“I am absolutely convinced [that] the best way I can do that [keep the American people safe] is to make sure we are not taking short cuts that undermine who we are” will probably not put an end to questionable means of acquiring intelligence but it does put an end to the symbol of the previous administration’s overtly sanctioned, hence legal, torture under the guise of ‘enhanced interrogation techniques’.
Surely the existence of the survivors of the nuclear bombings of Nagasaki and Hiroshima, or napalming in Vietnam, or genocides in such countries as Armenia, Cambodia and Darfur has been no less tortured. The memory of the victims and their countrymen extends indefinitely, with the greatest danger to the victor coming from the vanquished. On the surface, such anomalies exist as the close relationship between the United States and Japan at the end of World War II, the friendly relations between the Allies and Germany following the wanton destruction of Cologne, or the relationship between the U.S. and Vietnam. In truth, the breach of civilized conduct in each instance was forgiven following hostilities. A bond was formed between the U.S. and defeated Germany and Japan through a constructive post-war occupation, the generous Marshall Plan and through successful attempts to cooperate at the end of the conflict.
It is the responsibility, even the duty of the powerful to forgive if eternal enmity is to cease to exist.
As the greatest military power today (with over one thousand military installations around the globe), the United States must not initiate military action against other states (the Bush Doctrine) and may indeed have to suffer certain losses before acting against the less powerful. We must also not lose sight of the fact that U.S. policy has often been to impose American values, i.e. ‘democracy’, on other peoples without regard for or understanding of indigenous cultures. Is Europe stronger today precisely because of the diversity of its languages and cultures?
[A Post-Script on Churchill, Obama and Torture President Obama’s citation of Churchill during his remarks on torture has been the subject of much debate in the days following.]

The economy
The only way to restore confidence is to clean up the excesses of the financial system
There is a variety of predictions  concerning the world’s, but more especially the North American, economy and the direction in which we are heading. In Canada there are two large secular problems.
The first is the automotive industry. One and a half million people are normally employed by General Motors and Chrysler which now faces probable bankruptcy, even if there is a new improved automotive industry, how much of it will remain in Canada?
People are not reading newspapers, therefore advertising revenues have gone down; newspapers are failing and turning themselves into websites. The financial stress in that industry has severe and possibly irreversible consequences for the second problem area: the pulp and paper industry, principally in Quebec.
Oil sands are profitable only when the price of oil is high. The industry is suffering, drilling is down and industry experts believe that recovery will be slow. [Furthermore there are environmental issues with importing countries (e.g. California) that must be faced and overcome by creating an image of Canada as a clean-energy source.] Bottom line? The U.S. will probably emerge from the crisis far more rapidly than Canada, while the Canadian governments will have to decide how to finance the exit of the large labor force from the pulp & paper industry.
Another of our economists maintains that we should add to the list of ‘dinosaur industries’, the telephone utilities and networks.
Good news now consists in “it hasn’t dropped as much as predicted”. The lack of impact felt from the injection of trillions of dollars into the economy is worrisome. In earlier days, we were limited by the amount of money we could print – by the ink supply if nothing else. One is The euphoria arising from the recent minor stock market recovery belies the disconnect between the stock market and consumer confidence. It must be remembered that while figures for the real economy relate to past performance, the stock market simply discounts the future.  Unemployment figures do not reflect those who have stopped looking for jobs, nor those who do not qualify for unemployment insurance (self-employed, consultants, etc.) – figures may well be closer to 20% rather than 8%. The market will continue to go up and down, but the real (industrial) economy will likely continue to decline for the next three to four years and what will emerge at the end is a very different structure from the one we are familiar with, partly because much of what has happened had little or nothing to do with the collapse of Bear Stearns and other giants in the financial sector.
An interesting and certainly credible observation is that the last quarter of a decade is a reasonable predictor of the following one. If one reflects on the last quarter of the twentieth century, what stand out particularly are the burgeoning information technology, with the release in 1995 of the world wide web to the public, and rising energy costs, the former enabling much greater production, lower costs and a smaller workforce, the latter causing hardships in a shrinking labor market of which the current automotive manufacturing crisis may very well be a precursor.  Joseph A. Schumpeter wrote of “creative destruction“, the essence of his argument being that there is a perpetual process of innovation, some things fall by the wayside, new products and new markets are created. The theory is illustrated by  the effect of the printing press, John McKay’s flying shuttle, Henry Ford’s assembly belt, all of which had a painful short term but incredibly beneficial long term effect on the economy. ‘Creative destruction’ implies new winners and new losers; my fear is that there will be fewer winners and more losers and the winners will not be able to replace the 6 million lost jobs.
[ Editor’s note: this piece, although it does not solve the problem of the pulp & paper industry underlines the relevance of the creative destruction theoryThe Transformation of the Media and Entertainment Landscape The era of “creative destruction” in media and entertainment is best thought of as a round-robin boxing match. It is time to reassess the prospects for the three contenders: (i) artists; (ii) media companies; and (iii) technology. Each of them, we believe, continues to bob, weave, block, and jab – and the outcome remains in doubt.]
Although the Luddites are still alive and well, if the fuel shortage and its concomitant pain and conflict are ultimately resolved by revolutionary energy technology, future generations may be able to escape the oblivion caused by conflict and war. The Internet may well be the catalyst for a new world economic order – one that could well last another 60 years.

The market
Investors are currently on the sidelines – they are not involved. Huge amounts of money are in money-market instruments that are paying bubkas and there is a general reluctance of money managers to invest these funds in the stock market. Eventually this situation will change. The decennial cycle suggests that years ending in 9 are excellent years for the stock market (1929 being a glaring exception), while years ending in 0 have been decidedly worse. Forecast: short term we are extended and will probably need a minor correction, after which (medium term) the market will go higher, likely until January 2010. But 2010 will be a difficult year. There are some opportunities out there now. The CN proposal to move oil from the tar sands by rail rather than pipeline makes the stock very attractive. Canadian Tire has just had a major break out. One strategy recommended by Wednesday Night’s Technical Analyst for the mini-bull markets is to use covered call writing – more on this soon.

How is wealth destroyed?
Accounts of the destruction of wealth are puzzling to many – isn’t wealth transferred from one individual or group to another? In the commodity business, there has to be a buyer and a seller, and whatever the buyer makes in a subsequent transaction, the seller looses. This is not, however, the case with a stock, or for that matter, real estate. If the value of the purchase goes down, the owner loses money, but nobody makes that money. There are variations on this theme, including tax gimmicks (realized versus unrealized portfolio losses) and failure of businesses, but the underlying logic is the same. Then of course, there is the Ponzi scheme most recently illustrated by Bernard Madoff. Another view is that the financial economy is a zero-sum game, some people win, some people lose, but the sum of the gains and losses is always constant. In the real economy, if  for some reason – the financial economy, a pandemic … people stop producing and the world GNP goes down, then everyone loses. By the same token, when the real economy expands, then everybody gains. So in the real economy there can be positive or negative sum games.

What comes after the crisis?
In light of the global crisis which has confirmed the need for much greater global governance, and taking advantage of the new sensitivity in Washington, the New School of Athens is opening a major initiative in the U.S. with the objective of longer-term (5-year) funding in order to focus on what is going to replace the current system. While the NSOA has benefited over the past years from private sector financing, the situation today calls urgently for public sector participation.

The recent article on The Crash of the Chicago School of economics leads one of Wednesday Night’s economists to ask whether one of the  casualties of the current economic crisis is precisely what some of the academic economists have been teaching. Or not teaching , says another, who believes that one of the leading academic failures in his faculty has been the elimination of the course on Business cycles. He continues, the notion has always been that people act out of rational self interest and that everything will work out accordingly. In the current situation, we have seen how it does not work out. Theoretically, rational mangers should maximize the present value of the firm, but recently people have been rewarded for maximizing this year’s value – not a flaw in the theory, but an indication of our inability to apply the theory as it should be. A third suggests that it is not economics, but finance and commerce ( MBA and business) studies are the casualty. As there is a shift from private and market to public economics, economists will be looking at the imperfections of markets.

T H E  I N V I T A T I O N

We cannot resist the Huffington Post headline: Obama’s First 100 Days: The Good, The Bad, and the Geithner
However, putting things in perspective is Roger Cohen’s comment that “the world’s lingua franca is now bad English. It’s strange then that a U.S. president who speaks good English, far better than his predecessor, seems able to communicate with that world. This may even be Barack Obama’s biggest achievement in his first 100 days.”
In the words of the Economist:
BARACK OBAMA completes 100 days in office on Wednesday April 29th. He is set to hold a “town-hall” meeting in St Louis, Missouri, as all-round judgment is passed on the new president. There is much to ponder. Mr Obama has responded to the credit crunch and economic crisis with bank bail-outs and stimulus packages. He has fundamentally shifted the previous administration’s policy on climate change and is attempting to remodel relations with Russia, Iran and Cuba. So far, however, he has made little progress on health-care reform, which was supposed to be his main domestic policy beyond the economy.
The BBC notes  ” Since taking office on 20 January, Mr Obama has, among other things, passed an economic stimulus package, ordered the closure of the prison camp at Guantanamo Bay, set a timetable for the withdrawal of US troops from Iraq and signalled a willingness to open up a diplomatic dialogue with countries like Iran and Cuba. But as the president enters his 100th day in office, he faces a major domestic emergency in the form of the swine flu outbreak. And the economic turmoil that has engulfed America since before Mr Obama entered the White House shows little sign of abating”.
After the Great Recession
President Obama discusses how his policies on schools, energy, health care and regulation might change daily life.

While he may have bargained for the financial crisis, although likely not as severe as it has proven to be, and he knew there would be bumps along the way in putting together new healthcare, education and environment programs, problems with cabinet appointees didn’t help, nor does Iran’s on-again-off-again dialogue, the stepping up of the Somali Pirates’ incursions was not readily foreseeable and now there is the threat of pandemic swine flu. Still, by maintaining his air of cool and calm, President Obama seems to reassure the American people and many around the world. The first hundred days are never easy and always beset by unpleasant surprises (see the excellent set of essays in the New York Times by presidential historians on this topic). We wonder how useful all the penetrating analysis of the first hundred days is – perhaps as a guidepost, but not particularly illuminating as an assessment, and can only agree with David and Terry Jones that “There is such an artificial hoopla over the ‘First 100 Days’–of anything. President Obama has been very busy, but nobody knows the likely outcome of any of his initiatives in either domestic or foreign affairs. Some ‘sober second sight’ is the least likely perspective when one is trying to fill column inches or construct sound bites”.
House passes $3.6 trillion budget plan

(CSM) The plan, which will help fund Obama’s healthcare reform and education agenda, is also on track to pass in the Senate Wednesday.
Wednesday Nighter Rodrigue Tremblay has published his assessment of the first hundred days: The Mixed Economic Report Card on Obama’s First 100 Days He is not impressed, but places much responsibility on the shoulders of the President’s advisors. Meantime the Wall Street Journal Online reports President Barack Obama’s done a decent job in his first 100 days, National Review Online’s conservative editor Rich Lowry (sort of) concedes. But “It’s the next 1,361 days that should be the worry. Obama’s presidency will be defined by how he handles the stresses inherent in his ambition domestically, his humility abroad, and his polarizing approach politically. Obama has made the financial crisis the occasion for massive spending that, if he were to do nothing else, would be a significant legacy. But if the fiscal flood isn’t seriously restrained once the economy rights itself, inflation, onerous taxes, or both beckon. While exploiting the crisis atmosphere of the financial mess, Obama has floundered in addressing it directly. He’s hoping to catch a virtuous cycle — a recovery begins that eases the banking crisis and provides the revenue to make his program look more affordable. This dynamic would probably recharge his store of political capital for the duration of his first term. Then there’s the opposite scenario. The fragile financial system lurches downward again. It requires even more taxpayer dollars to forestall a meltdown and delays or dampens a recovery. The long-term fiscal picture looks even bleaker than we can imagine, and Obama’s ambition is transformed in the public mind into rank recklessness.”
Leaving aside the economy and financial crisis for the moment, what about some of the other issues?
In our opinion the appointment of Hillary Clinton as Secretary of State (which we did not support) has proven to be a huge success. She has conducted herself with intelligence, poise and enthusiasm. Relations with the rest of the world are improving. We are happy with the overtures to Cuba; Latin America seems to finally be getting some attention after so many years of neglect.
Healthcare Plan – still not clear, but already being attacked by such as Charles Krauthammer who has set up a hue and cry about ‘rationing of healthcare’ (“Why do you think the stimulus package pours $1.1 billion into medical “comparative effectiveness research”? It is the perfect setup for rationing. Once you establish what is “best practice” for expensive operations, medical tests and aggressive therapies, you’ve laid the premise for funding some and denying others.” Scary, even if one discounts Dr. Krauthammer’s right-wing credentials.
Education: One thing that we admire is the President’s commitment to education science and technology and his recommendation that scientists and educators encourage students “to get a degree in science fields and a teaching certificate at the same time.” We like his ideas of merit pay for better teachers (even as we admit it will be tough to allocate) . We had a heated discussion at the time that he unveiled the plan , but in general, we subscribe to the Obama view of what is needed.
Climate change: not sure where domestic policy is headed yet , although there is certainly much talk of energy independence, clean energy technologies, green technologies creating a new economy, but we do not fault the administration for trying, and the administration’s positive approach is being hailed at the Climate Change conference in Washington this week.
Swine flu cases increase, hurting markets, airlines
[who will face traffic declines] but at this stage there are more questions than answers . Still, the ramifications for the world economy, trade, travel and manufacturing are already being felt and are potentially very serious. Meantime, of course, the drug companies stocks are rising.
The pirates pose a frustrating dilemma for the great navies of the world and their governments, but there seems to be a small light at the end of this tunnel, as Somali vigilantes, Yemeni coastguard and now the Seychelles authorities are moving ahead without worrying about issues of maritime law. What to do with a captured pirate]

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