In Search of the Perfect Investment

Europe will be in recession for the next five years. That will hurt the U.S. and Asia (especially China). It will hurt every company that sells there. Read today’s New York Times. You’ll get the message. My bolding::

In Euro Zone, Debt Pressure Tightens Grip
With August fast approaching, Europe’s summer just got a lot less relaxing.

Signs that cracks in the euro zone are widening sent markets on the Continent down sharply on Monday, as doubts grew about Greece’s ability to make good on its debt payments and Spain’s economy – the region’s fourth largest – was straining under the pressure of the government’s austerity measures.

Additionally, in a blow to the euro zone’s most stable countries, Moody’s Investors Service late Monday cut the outlook for its AAA credit ratings for Germany, the Netherlands and Luxembourg to “negative” from “stable.” The agency cited the fallout from an increased likelihood of a Greek exit from the euro and possible greater costs for supporting countries like Spain and Italy.

In recent years, financial turmoil has tended to materialize in August, when the trading volumes in stocks, bonds and currencies shrink, making it easier for sellers – no matter their size – to move markets as they head to the hills, or the beach, for a long holiday.

All signs again point to a nerve-racking end of summer.

Greece must pay 3.1 billion euros ($3.75 billion) in bond payments to the European Central Bank next month, and will be in default if Europe does not somehow provide it with the cash. In Spain, soaring bond yields on Monday had government officials pushing hard for help from central European authorities as well.

“Europe has become incapacitated,” said Alessandro Leipold, a former deputy director at the International Monetary Fund.

The immediate concern is that if Greece does not present an acceptable budget-cutting plan – as it has promised to do as a condition of its bailout – Europe will not give it the money it needs to make interest payments. That in turn could lead to a default on its debt, causing financial contagion as investors worry about what will happen to bigger economies like Spain’s and Italy’s.

European leaders have pulled the region back from the brink of collapse time and again. But many investors, economists, government officials and international monetary officials are worried that finding a solution keeps getting tougher now that Europe’s debt crisis is in its third year.

“Everyone is looking for an easy way out, but there isn’t one,” said Stephen Jen, a former economist at the monetary fund who runs a London-based hedge fund. …

Spain’s interest rate on 10-year government debt spiked to 7.51 percent, its highest level since the euro currency was established in 1999, before ending Monday at 7.43 – still well above the 7 percent level that many analysts fear could eventually shut Spain out of public markets and force it to seek a bailout.

Italy’s 10-year bond yield climbed to a six-month high Monday, to 6.35, as it wrestled with its own debt problems and the risk of an economic collapse in its autonomous region of Sicily.

Spanish and Italian stocks hit new lows for the year, down about 30 percent and 27 percent, with banks and conglomerates leading the way. And while the government in those two countries took steps to stop the slide by barring investors from making negative bets by selling stock short, there was little to be done to halt the persistent decline of the euro; the currency settled at a low of 1.21 to the dollar – down 6 percent for the year.

Greece has survived for nearly three years on money doled out by European taxpayers. But among the Greek people, the new prime minister, Antonis Samaras, is under pressure to make good on election pledges to soften some of the harshest austerity terms linked to Greece’s loans.

The country is burdened by debt that is 165 percent of overall economic output and an economy set to shrink by 7 percent this year. Now the new government is proposing to cut 11 billion euros in spending without laying off any of its 150,000 or so public sector workers – a trick that most economists see as impossible.

“I don’t see how you do that without firing people,” said Miranda Xafa, a former investment banker and independent consultant based in Athens. …

Greece must make the 3.1 billion euros in bond payments to the central bank on Aug. 20.

While analysts believe that Europe will figure out a way to get Greece the cash to make good on this obligation, they are not so sure about what will happen after that.

According to one official from the group, it is near certain that the official target that underpinned the debt restructuring agreement last spring will need to be revised. That in turn would force Europe to come up with more bailout money because the monetary fund was not expected to volunteer more funds. …

“In the end, I believe the euro zone will break up, it is just a question of how many more crises we will live through before that happens,” said Douglas McWilliams, the chief executive of CEBR, a London-based economic forecaster.

Mr. McWilliams believes that a Greek exit, if it comes, would prompt investors to question the membership of other countries with competitiveness problems like Spain and Italy. And he disputes the view, said to be held by a growing number of German public figures, that Europe can afford to let Greece leave the zone, as its new 500 billion euro rescue facility can serve as a firewall to halt the spread of contagion.

“Once Greece goes, then you start to look at the other troubled countries,” he said.

Using email effectively. My friend just sold his construction/cement business for megabucks. He is now a consultant to the company for three days a week. He’s teaching them how to negotiate and win contracts. He tells me the biggest lesson he has to cram down the throats of the younger managers is you can’t do deals on email. You have to speak to the prospect, visit him, look him in the eye, find out what he wants, match it with what you want , talk, negotiate and eventually seal the deal. “You can’t do that on email,” he says flatly.

Email is excellent for two things:

1. Confirming an arrangement (“15  tons at $15″ or I’ll be there are 7:30”) and sending information (“Here’s my address” or “Here are the machine’s specs.”)

2. Sending compliments and thank yous. “You’re doing great work.” and “Thanks for the dinner.”

The growing culture of dishonesty? When I ran my own business, I believed all people were honest. They did what they said they would. They told the truth. When I started investing the gains from selling the business, I found a different mentality.  A lot of dishonesty and lies. I have racked my brain in recent days. Is dishonesty a new happening? Or it just because, with my investing, I moved closer to Wall Street and that den of well-dressed thieves?

There are plenty of reasons dishonesty has worsened. The publicity given to Wall Street’s and corporate executives’ high rewards (bonuses, salaries and commissions) has magnified many peoples’ sense of entitlement. More and more feel they’re entitled to millions. They’ll do basically anything to secure those millions.

There have been contributing factors: Like Clinton allowing (in fact, encouraging) banks to gamble by scrapping the last remains of the Glass-Steagall Act. Suddenly, there’s more money in trading than banking.

I don’t want to dwell on this unpleasant subject. Others clearly have become concerned with it, also. Here’s he latest piece by the New Yorker’s excellent financial writer, James Surowiecki:

Bankers Gone Wild

In order to work well, markets need a basic level of trust. As Alan Greenspan said, in 1999, “In virtually all transactions we rely on the word of those with whom we do business.” So what happens to a market in which the most fundamental assumptions turn out to be lies? That is the question in a scandal that has roiled the banking industry all summer. The LIBOR (London Inter-bank Offered Rate) index is the most important set of numbers in the global financial system. Used as a benchmark for interest rates around the world, it’s assembled by asking a panel of big banks to estimate what it would cost them to borrow money today, if they had to. Hundreds of trillions of dollars in derivatives, corporate loans, and mortgages are pegged to these rates. Yet we now know that for years LIBOR rates were rigged. Barclays has agreed to pay nearly half a billion dollars to regulators for its manipulations, and a host of other big banks are under investigation for similar misdeeds.

Rigging LIBOR was shockingly easy. The estimates aren’t audited. They’re not compared with market prices. And LIBOR is put together by a trade group, without any real supervision from government regulators. In other words, manipulating LIBOR didn’t require any complicated financial hoodoo. The banks just had to tell some simple lies.

They had plenty of reasons to do so. At Barclays, for instance, traders were making big bets on derivatives whose value depended on LIBOR; changing rates by even a tiny bit could be exceptionally lucrative. In the years leading up to the financial crisis, these manipulations were, in the words of the Commodity Futures Trading Commission, “common and pervasive.” And, once the crisis hit, banks had a new incentive to distort LIBOR: if their estimates were higher than their peers’ (meaning that it would be expensive for them to borrow money), investors, creditors, and regulators would worry that they were about to go under. So the banks sent LIBOR downward in order to make themselves look stronger than they were. The result was that, instead of reflecting what was real, LIBOR reflected what the banks wanted us to believe was real.

The most striking thing about this scandal is that it was predictable—the way LIBOR was designed practically invited corruption—yet no one did anything to stop it. That’s because, for decades, regulators and people in the financial industry assumed that banks’ desire to protect their reputations would keep them honest. If banks submitted false LIBOR estimates, the argument went, the market would inevitably find out, and people would stop trusting them, with dire consequences for their businesses. LIBOR was supposedly a great example of self-regulation, evidence that the market could look after itself better than regulators could.

But, if recent history has taught us anything, it’s that self-regulation doesn’t work in finance, and that worries about reputation are a weak deterrent to corporate malfeasance. To begin with, traders at a bank are typically rewarded according to how much money their trades make, not on whether they enhance the bank’s reputation. Bank C.E.O.s, meanwhile, are now paid so lavishly that even when they wreak havoc on a bank’s good name they can still walk away with immense amounts of money. What’s more, it’s not clear how good the market is at sniffing out and punishing bad behavior before serious damage is done. During the housing bubble, the stock prices of the banks that were making hundreds of billions of dollars in bad loans soared instead of falling. Once the crisis hit, the market did a great job of slamming the barn door. But it did nothing to stop the horses from escaping in the first place.

Even in the absence of market discipline, self-regulation could work if institutions had strong internal safeguards against corruption. But while every institution says that it has these norms—that’s why scandals like LIBOR are always blamed on a “few rogue traders”—the track record of the banking industry over the past two decades doesn’t inspire confidence in its devotion to the truth or to the public interest. The Barclays traders, for instance, sent e-mails casually thanking their colleagues for lying, and sometimes talked with their supervisors about their plans, revealing a culture in which deception was simply part of how things got done. As the behavioral economist Dan Ariely writes in his new book, “The Honest Truth About Dishonesty,” cheating is contagious—when we see others succeed by cheating, it makes us more likely to cheat as well. So when institutions tolerate, and even reward, bad behavior, all that self-regulation gets you is bankers gone wild.

How do we rein them in? We could start by making it harder for the banks to game the system—LIBOR, for instance, should be revamped so that it reflects actual market rates, not self-serving guesses. Then we need to admit that fraud is a crime and throw some people in jail. That shouldn’t be too hard in the case of LIBOR, which involves no complicated debates about who knew what when. Bankers were asked a simple question, and they lied in response. Most important, though, we need an attitudinal shift on the part of regulators, who need to recognize that their gentleman’s-club ethos is ill-suited to today’s financial world, and who need to be aggressive not just in punishing malfeasance but in preventing it from happening. (For some tips on how to do this, they might look to the way that American police forces have dramatically lowered big-city crime rates.) This new approach would be intrusive and overbearing, and would make it harder for bankers to do what they want. In other words, it’s exactly what the financial industry needs. ♦

Harry Newton who wonders why he still can’t beat Skip. Beating him is on the top of my bucket list. I was leading three love in the second set early this morning. He came back and beat me 6-3. Is that fair? My poor bruised ego.