Honesty & Optimism

I've gotten a lot of feedback so far on my post from earlier today on The Quadruple Down Recession, and one of the interesting things about the feedback is that there is on the one hand an objection to the "negativism" of my outlook on the other hand to its honesty.  It confirmed an important tenet of my business philosophy (which developed as I witnessed the consequences of its inverse) that in our imperfect world, most optimism is simply not based on Truth.  If there is one thing we must all cling to, it is Truth, no matter how unpleasant it might be.  For if we avoid Truth in favor of our own concocted reality, then we will suffer significant psychological (and in the context of business, economic) pain.  

Over the last few weeks I have been doing a slow re-read of M. Scott Peck's masterpiece The Road Less Traveled, which continues to rank as one of the most influential books on my life and philosophy.  In the first section of his book, the one dedicated to Discipline, he discusses several techniques of dealing with the pain of problem-solving "which must continually be employed if our lives are to be healthy and our spirits are to grow."  One of those tools he terms "dedication to reality."  

Peck writes:

Superfically, this should be obvious.  For truth is reality.  That which is false is unreal.  The more clearly we see the reality of the world, the better equipped we are to deal with the world.  The less clearly we see the reality of the world--the more our minds are befuddled by falsehood, misperceptions and illusions--the less able we will be to determine correct courses of action and make wise decisions.  Our view of reality is like a map with which to negotiate the terrain of life.  If the map is true and accurate, we will generally know where we are, and if we have decided where we want to go, we will generally know how to get there.  If the map is false and inaccurate, we will generally be lost.  While this is obvious, it is something that most people to a greater or lesser degree chose to ignore.  They ignore it because our route to reality is not easy. 

 

How timelessly true this is, not only in our individual lives but in our corporate life  also (I use this term in its original meaning, not in its modern economic context, though it certainly applies to that context as well) .  Collectively, corporately, whether it is in our public policy-making for society as a whole or in our investment strategies, or our capital allocation strategies, we must be dedicated to reality, no matter how painful it is.  Many people are much happier with living in a fantasy land.  They want life to be as myopically twisted as Michael Jackson's Neverland Ranch.

These are the people, however, who bear the blame for the irresponsibility of the boom years.  They were the Federal Reserve analysts and policy-makers who advocated continuing to hold interest rates artificially low in the aftermath of 9/11.  They were the CEOs of Lehman Brothers, Bear Stearns, and AIG, who either willfully or negligently believed that unbridled debt could propel their firms to historic prosperity in perpetuity.  They were the realtors who sold houses to unwitting homebuyers with the promise of flipping the house for a mega-profit in only a few months.  They were the homebuyers who left their common sense at the door and bought the snake oil the realtors were peddling.  They were the investors in Bernie Madoff's ponzi scheme who never bothered to ask questions when their returns were too good to be true. They were the SEC investigators who ignored warnings that Madoff was a bad guy.

Unfortunately these people are not gone, they are simply with us in a new form today.  They are the politicians promising us pain-free government panaceas to our economic woes.  They are the Federal Reserve policy-makers who are repeating the mistakes that led to the 2001 tech bubble burst and the 2008 credit crisis.  Yet the mistakes are simply being repeated on a much larger scale.  They are the politicians promising "free" government health care with no cost to 98% of Americans.  They are the people who are buying into this false promise.  

How can we be so quickly forgetful?  Rudyard Kipling, in his timeless poem, "The Gods of the Copybook Headings" observed this phenomenon thusly--

As it will be in the future, it was at the birth of man,

There are only four things certain since social progress began:

That the dog returns to his vomit, and the sow returns to her mire,

And the burnt fool's finger goes wobbling back to the fire.

There can be no optimism without brutal, transparent honesty.  Optimism should arise out of a confidence in what we are going to do in response to our own problems, and how we will respond to the world's problems.  That is warranted optimism, for it is something that is within our control.  When our map reflects the way the world actually is, then we can respond accordingly.  We do not have to worry about disappointment, because when we are dedicated to reality, there will be fewer unforeseen obstacles.  What You See Is What You Get.  Even when what you see is not what you like.

I am most optimistic when I am most real.  Real about the present and about the future.  

Is it pessimistic to say that the European Banks are insolvent?  Is it pessimistic to discuss the $1.6 Trillion price tag of President Obama's health care plan?  Is it pessimistic to acknowledge the prospects of inflation?

Not if these are the realities.  And in acknowledging these realities we can find a source for warranted optimism: coming up with the alternatives and solutions to the negative reality we may face.  I am not filled with hope when I hear a political speech full of empty promises and meaningless rhetoric.  I am filled with hope when I spend an hour with my white board solving the next facet of the problems I face.  That means acknowledging the problems I can't solve and coming up with a way to work around them, rather than locking myself in my room and crying because I can't wave a magic wand and make the problem go away.

I will close tonight with a final thought from Peck.  It should be etched in our consciousnesses, both individually and collectively.  It should guide our policy-makers, our business leaders, our voters, our households, our private equity & hedge fund managers, our bankers, and everybody else.  It should also motivate us not only to dedicate ourselves to reality, but also to transparency about reality with all around us.  This transparency, predicated on honest reality, is the source of trust, whether in a marriage or in a business partnership.  If we all take Peck's counsel to heart, our world will be a far better place:

Truth or reality is avoided when it is painful.  We can revise our maps only when we have the discipline to overcome that pain.  To have such discipline, we must be totally dedicated to truth.  That is to say that we must always hold truth, as best we can determine it, to be more important, more vital to our self-interest, than our comfort.  Conversely, we must always consider our personal discomfort relatively unimportant and, indeed, even welcome it in the service of the search for truth.  Mental health is an ongoing process of dedication to reality at all costs.

Posted via email from skinnerlayne's posterous

The Quadruple-Down?

With all of this talk about green shoots and recovery, you'd think that Ben Bernanke, Barack Obama, and Tim Geithner were living in a different reality.  Just that they happen to be living in the same alternate reality as Mr. Market  who seems to have infected Wall Street yet again.  We are living in the midst of another bubble.  The MSM in the United States has turned to happy talk, primarily out of their sworn duty to keep Barack Obama's popularity rating high, while neglecting their ethical responsibility to the Truth.  The bubble this time is what I'd like to call the Recovery Bubble.  It is built on hype, a lot of government spending, and a lot more fiat money created by the Federal Reserve.  Incidentally it bears a close resemblance to the last bubble in all of those respects.  But underneath the surface (even apart from the long-term implications of the U.S. government's unfunded liabilities in social security and medicare) there are several looming collapses that could trigger the next domino effect.  

We looked at one of them yesterday in my article entitled Private Equity Hit & Run, where I analyzed a recent article from TheDeal.com discussing the maturation of more than $400 billion in senior debt in the Private Equity Market.  

Today I'd like to discuss a few others.  Nobody I have read so far in either the U.S. media or the foreign press has put all of the pieces of the defaults puzzle together, so I want to do that today.  

(1) Insolvent European Banks

(2) Credit Card Debt Defaults

(3) U.S. Sovereign Debt Rating

(4) Inflation (The UK is our Canary in the Coal Mine)

Insolvent European Banks

It [European Central Bank] said it is expecting fresh bank writedowns to hit $283bn (£173bn) by the end of next year..."The deterioration in the macro-financial environment has continued to test the shock-absorption capacity of the euro-area financial system. Prospects for a significant turnaround in the short term are not promising," it said.  In a ghastly day for Europe's lenders, Moody's downgraded 25 Spanish banks as rising defaults eat into reserves...The ECB's report said eurozone bank losses would reach $649bn by late 2010: split between $218bn on securities, largely written down already; and $431bn on loans, where the real damage lies. The banks have written down $150bn of loan losses so far.  The report said accounting rules were lax in some countries and there may be "under-reporting". There is a risk that "write-off rates could increase by more than currently anticipated".

In what is another prooftext for the argument that no amount of regulation can prevent financial crises, the highly regulated banking system on the Continent, seems to be in even worse a position than the U.S. banks, including several that have been taken over by the FDIC.  Western Europe is reeling from the near-default status of several Eurozone countries (Greece, Ireland, and Spain), while Northern Europe and Switzerland are on the hook for the now out of control downward spiral in Eastern Europe, especially Latvia.  Sweden, which had previously been insulated from many of the problems besetting the rest of Continental Europe, is now acutely endangered by virtue of its disproportionate share of Latvia's consumer debt orgy.  The Kronor's independence of the Euro had been one of the strengths of the Swedish economy.  It could quickly turn into its Achilles' heel.  

Assuming these write-downs are only as bad as projected, the situation looks grim, not only for a recovery in Europe, but in the United States as well.  Europe's spuriously perceived resilience (particularly Germany, in light of its dogged refusal to engage in the government spending binge advocated by Gordon Brown and Barack Obama) was, if not a silver lining around the storm-clouds, at least a candle in the midst of pitch-darkness.  Those ill-conceived notions are all but abandoned today, yet the American financial press and Mr. Market seem to ignore this fact regularly.

Massive write-downs in Europe can lead to only three outcomes:

(a) Government-bailouts

(b) Capital markets crowd-outs

(c) Defaults

(a) At least in Germany (assuming Angela Merkel's government is returned to power in the Autumn elections), the prospect of bailouts seems slim.  However, Germany is in a classic catch-22.  If they do not assist in preventing defaults in the rest of the Eurozone, they risk a severe devaluation of the Euro, hurting German purchasing power, and significantly altering the realities surrounding existing German industrial policy.  If they do assist, however, they will only undermine their own national fiscal policy efforts to maintain a disciplined and reasonable approach to the situation in addition to the prospects of inflation that would be raised in light of massive pan-European bank bailouts (see #4 below for the implications of quantitative easing as a means for bank bailouts with the UK as our shining example).  

(b) The European banks can of course go to the capital markets like the U.S. banks have, and raise additional capital.  Investors in U.S. banks did not have the benefit of watching this process, and if they had, the banks would have either had greater difficulty in raising capital or else would have been forced to raise it at far less desirable valuations.  European banks now must go to investors who have watched the continued drag on U.S. bank investors and consider the prospects of good returns in light of the foregoing reality.  In my view, at least, this is why the European banks have not raised more capital from the private sector.  Sovereign investors from Asia and the Middle East are shying away from the risk currently surrounding the developed world's banking system.  Even if the Euro banks can raise capital in the private sector, the amount needed to sustain themselves through the next round of the crisis is likely to be so substantial that it will adversely affect other private sector enterprise on the Continent, forestalling recovery even longer.

(c) The specter of default must still loom on the horizon.  Though the EU finance quango will not allow outright defaults, we must monitor the "behind the scenes" actions of the Eurocrats to discern when these pseudo-defaults are occurring.  We will likely see some forced M&A activity tantamount to the BofA and JPM deals arranged by the Federal Reserve.  Then there will be most likely a couple of "credit lifelines" tossed to then-Too Big To Fail banks rather than dozens of smaller bailouts.  I do not expect honest outright defaults and bankruptcy proceedings simply because it will be too politically damaging for the Eurocrats who were drubbed in the recent European Parliament elections and who are scrambling to save face and stave off their doomsday scenario of a Referendum on the European Constitution Lisbon Treaty in the UK.

Given that there are no pain-free options here, it seems that the insolvency of Europe's banks poses an indeed significant barrier to the Developed World's recovery, and even more likely will contribute to a second crisis.

Credit Card Defaults

The troubles sound familiar.  Borrowers falling behind on their payments.  Defaults rising. Huge swaths of loans souring.  Investors getting burned.  But forget the now-familiar tales of mortgages gone bad.  The next horror for the beaten-down financial firms is the $950 billion worth of outstanding credit-card debt--much of it toxic.  That's bad news for players like JPMorgan Chase and Bank of America that have largely sidestepped--and even benefited from--the mortgage mess but have major credit-card operations.  They're hardly alone.  The consumer debt bomb is already beginning to spray shrapnel throughout the financial markets, further weakening the U.S. economy.  "The next meltdown will be in credit cards," says Gregory Larkin, senior analyst at research firm Innovest Strategic Value Advisors.  Adss William Black, senior vice-president of Moody's Investors Service's structured finance team: "We still haven't hit the post-recessionary peaks [in credit-card losses], so things will get worse before they get better."  What's more, the U.S. Treasury Department's $700 billion mortgage bailout won't be a lifeline for credit-card issuers.

This would be bad enough under normal conditions, or even in a situation we are facing today on its face, but there is another layer of complexity that will make this segment of the crisis even more difficult to handle.  Unlike the mortgage market, where there are assets (although devalued ones) to back up the bad debt, the revolving credit market does not benefit from simply repossessing the property the loans were used to acquire, since in many cases these revolving credit lines weren't used to buy any durable property at all.  The cost of litigation is high, and not only is it not scalable, it suffers from the truth of the old adage about getting blood from a turnip.  Suing consumers with no net worth is a losing prospect for everybody.  So the financial institutions are going to have to absorb the losses and write them down.  Market forces are cleaning out all of the misallocated capital in the economy, even as the government and the Federal Reserve system are trying to infuse more capital to prop up the malinvestment.  

Furthermore, under normal circumstances, the credit card companies would have the ability to adjust the prices, terms, and conditions in order to recover some of their losses.  Higher fees, higher interest rates, etc., could normally be employed to limit their damage.  But Capitol Hill and the Obama Administration have made it clear that they will not allow this to happen, and are in the process of passing a series of new regulations under the guise of consumer protection that will only complicate matters further.  

We should expect the Credit Card tailspin to double down the U.S. economy independent of any Hail Mary the Europeans can achieve with their banks.

U.S. Sovereign Debt Rating

Technical analyst Robert Prechter on Monday said he sees the United States losing its top AAA credit rating by the end of 2010, as he stuck by a deeply bearish outlook on the U.S. economy and stock market.  Prechter, known for predicting the 1987 stock market crash, joins a growing coterie of market heavyweights in forecasting the United States will lose its top credit rating as the government issues trillions of dollars in debt to fund efforts to bail out the economy.  Fears about the long-term vulnerability of the prized U.S. credit rating came to the fore after Standard & Poor's in May lowered its outlook on Britain, threatening the UK's top AAA rating. That move raised fears that the United States could face a similar risk, with the hefty amounts of government debt issued in both countries to pay for financial rescues causing budget deficits to swell...Despite the government and Federal Reserve's massive rescues for financial companies and securities markets, Prechter expects credit markets to clam up again as they did in the first phase of the global financial crisis and for the U.S. economy to sink into a depression.  Although U.S. banks' recently passed government "stress tests" that assessed the adequacy of their capital levels to absorb losses and have been able to raise some capital in debt and equity markets, "the banking sector is in severe trouble," as more loans turn bad, he said.  The economy "is obviously heading toward a depression," despite the government's efforts to dodge one, said Prechter.  Federal Reserve Chairman Ben Bernanke has not averted a re-run of the 1930s Great Depression, even though investors are becoming firmly convinced that the Fed has avoided disaster and that the economy has hit bottom.  "It's the next leg down (in stocks) that will make it clear that these things are not true," Prechter said.

The implications of the U.S. government's sovereign debt rating being downgraded cannot be underestimated.  Even if the ratings agencies shift their "outlook" to negative, the consequences could be severe.  We should pay careful attention as the next several months unfold to see if there is any appearance of political pressure on the independent ratings agencies to maintain both the AAA rating and a Positive Outlook for U.S. sovereign debt.  It will be ironic, considering the fact that the present administration has levied substantial criticism against the ratings agencies for playing favorites and turning a blind eye on corporate credit ratings in the past.  But nobody has ever accused politicians of being above some good old fashioned hypocrisy.  

So when the credit rating is cut, interest rates will skyrocket.  There will be major crowding-out as the Treasury tries to keep itself afloat in the private debt market.  There will be increasing pressure on the Federal Reserve (and increasingly will call its independence into question) to engage in yet more quantitative easing, which can and will only lead to inflation.  There is no other course.  The only other alternative is for the current Congress and Administration to radically reverse course on spending policy, something that has about as small a chance of happening as Mahmoud Ahmadinejad voluntarily stepping down as President of Iran.

Higher rates or inflation (or both, which is what is most likely), far from boding well for a recovery, are merely further circumstances that call into doubt these fantasy claims of recovery.

Inflation / Staglation & the British Canary

The Consumer Prices Index (CPI) - the Government's preferred measure of inflation - fell to a 16-month low of 2.2pc from 2.3pc in April, but it was a smaller fall than City economists had predicted.  However, that had been anticipated and factored into economists' forecasts, and it was the so-called discretionary spending categories which prevented the expected fall in inflation..."We continue to see upward pressure in 'high street' prices and we continue to attribute this in part to the sharp depreciation in sterling seen over the past quarters, notwithstanding the significant rally posted in recent weeks," said David Page, economist at Investec.  Inflation has now come in above economists' expectations in five of the past seven months.

It should be noted that it was the Bank of England that first embarked on the policy of quantitative easing in the Developed World.  That inflation has now several times surprised economists' expectations in the UK should not surprise those of us who believe in sound money.  It is almost humorous that these economists are baffled by the twin prospects of inflation and economic contraction, as if they have a completely blocked out the lessons of 1970s stagflation.  For Gordon Brown and the already beleaguered Labour Party, the Winter of Discontent should haunt their dreams.  Nevertheless, the rest of the world, at least those whose futures are tied to the Dollar, should take note: quantitative easing has consequences.  Either we will sustain severe stagflation or else the Federal Reserve will be forced to abandon its easy money policies once again to tame the inflation beast, thrusting the American economy directly back into the throes of recession.  Recession of course is the best medicine for malinvestments, and had the government permitted the recession to run its course, we would at least be closer to the path to recovery.  Instead, government and Federal Reserve policies tried to avoid the pain of recession by manipulating the markets with massive infusions of cash which will either have to be pulled out or allowed to run their course.

The further problem we should observe in this situation is that avoiding a further massive contraction becomes ever-more costly.  For it is not only a matter of leaving the current inflationary dollars in the system that is required to keep the economy on life support, it is the need to continually feed the monster with more and more newly-minted money.  Virtually any policy pursued by the Federal Reserve at this point will have adverse circumstances.

Conclusion

So what's an investor/entrepreneur to do?  The answer is to look to the handful of countries pursuing responsible economic policies.  The trouble is, you won't find many.  The Developed World has gotten itself into a position where it bet everything on Red 15 and the roulette ball landed on Black 7.  Doubling down on its debts in the hope that the new bets would pay off has only doubled downed the consequences (both immediate and long-term) of our current unpleasantness.  There is plenty of capital sitting on the sidelines today, and it has to have a place to go.  Developing Countries with stable monetary systems offer some haven for investors looking to escape the uneasiness of the over-leveraged developed world.  Emerging market equities in Asia, and Latin America's stable countries have a far greater chance of holding the value and outperforming investments in the developed world not only in the short-term, but over time.  

Posted via email from skinnerlayne's posterous

Private Equity Hit & Run

An excellent article on TheDeal.com [ http://bit.ly/AN1D5 ] validates my view that leverage is a speculative tool that endangers not only the long-term health of companies, but of the Private Equity industry itself.  The article doesn't make these conclusions, but they do follow from the observations the author makes.  Let's look at them one at a time.

(1) Deleveraging Changes the Landscape: "The deleveraging of the economy in the wake of the economic crisis has dealt an especially crippling blow to private equity, an industry long as reliant on debt as candy makers are on sugar.  For a blissful four-year span that lasted into 2007, leveraged buyout sponsors raked in vast profits fueled by oceans of cheap debt and by soaring asset valuations and a booming economy that were debt-propelled.  Today that golden age seems as remote as the lost empire of the Incas."

Indeed, it was private equity firms, far more than the much demonized hedge funds, that were responsible for much of the leverage bubble that tipped off the financial crisis when the game of Hot Potato ended.  Private Equity now must forge a new existence (a more responsible existence) in an era where their favorite food has been taken away from them.  Imagine Michael Moore without his Ben & Jerry's, that's where Private Equity is without cheap debt.

(2) Bright, but Dim Future: "In one key area, it turns out, private equity is sitting pretty.  Before the economy worsened drastically last fall, the industry replenished its coffers, drawing more than $550 Billion in pledges from institutional investors in 2008, a near record...But for now, that alluring prospect is vying for sponsors' attention with a worrisome, brewing development that could lay waste private equity returns and foster an industry shakeout.  Though previous downturns have forced slews of poor performers, including some well-known names, from the business, the body count this time could be great.  The problem lies in the staggering amounts of equity and debt capital that poured into LBOs from 2004-2007.  From 2012 to 2014, about $430 Billion of senior debt tied to that deal spree is set to come due.  And unless the leveraged loan market roars back to life by then--something experts consider doubtful [Skinner: I concur]--an avalanche of defaults could wipe out much of the equity the buyout industry wagered on scores of deals."

Casino capitalism strikes again.  This is the problem with leveraged deals in the first place.  Saddling good companies with a lot of debt for a quick turn sure made the gamblers a lot of profits, but those who were caught at the end of this game of Hot Potato are getting their hands burned, and they are going to have to make a choice between survival (read: burn through all that cash they have sitting around) or doubling down on sure losses by letting it ride.  There is a time and place for debt capital: financing the purchase of new equipment, expanding the operations of a company buy acquiring a smaller competitor with an innovative product offering, financing additional inventory to open up a new export market, etc.  But the time and place for debt capital is not leveraging the lifeblood of a company on 15 Red.  

Before we move on to (3), some math is in order.  PE funds have raised $550 Billion in pledges, but there is $430 Billion in Senior debt coming due.  So that's a net of only $120 Billion.  Not as much capital on the sidelines after all.  As I have stated before on this blog and elsewhere, there is another wave of defaults coming anyway, assuredly from the even-more insolvent European banks, and people are naive if they think it won't further ripple across the Atlantic.

(3) Big Deals Go Bust: "'There will be a lot of RJRs,' one buyout specialist predicts, alluding to KKR's $31.3 Billion buyout of RJR Nabisco in 1989, which held the size record for an LBO for 16 years and which lost money for KKR.  'Not bad companies, necessarily, but companies with capital structures the sponsors can't extricate themselves from and that can't be refinance.'  This investor says he expects one-quarter of the megadeals to be total busts, another quarter to make a profit and half to post a partial loss. 'But that's only if the economy recovers,' he adds. 'If it doesn't, those deals are all toast.'"

Notice that the problem isn't that they invested in bad companies; it's that they invested in bad deals.  There is a difference.  There is also such a thing as a good deal in a bad company.  I threw together a quick color-coded visual to help us understand the differences.

Private Equity's future no doubt must focus on Value Plays and Turnarounds rathe than chasing the biggest, sexiest headline-making deals.

(4) The Interest Rate Storm Cloud: "One top LBO banker calls even that scenario too bullish. 'If we do have capital markets in, say, 2012, sponsors could have to refinance at grotesquely high interest rates, and that will permanently impair their equity,' he says. 'That's the good case.'  If, on the other hand, credit is scarce, sponsors may have to sell stock in their albatross deals to pay off debt, massively diluting their own stakes.  Weak performers may end up being sold at a loss to deep-pocketed corporations or broken up and sold in pieces.  Creditors would recover of what they lent, and sponsors would get zilch."

Debt-heavy Private Equity can't operate in vacuum.  It is going to be subject to the topsy-turvy nature of an unstable bond market over the next several years.  For firms operating primarily in the U.S. market, this means interest rates that are only going to increase in the next few years (whether to tame inflation, or as the markets revolt against it), with the less probable, though still possible apocalyptic prospect of being forced to take out future debts in Yuan or IMF SDR-denominated bonds in order to refinance their investments.  

This data all points toward a leverage-free approach as the optimal way not only to preserve wealth for investors, but to create more of it--just on a less aggressive timeline than the speculators can traditionally "promise" (the problem with debt-driven speculation is that it always collapses.  It is a universal truth that is ignored when everybody gets bubble fever.  Investing with managers who maintain active awareness of these dangers will help investors protect their capital in the future).  

(5) Debt + Excessive Valuation = Low or Negative Returns: "Nevertheless, the returns that LBOs done at the market's peak ultimately deliver, many say, are apt to be skimpy at best, and not solely because of the colossal debt.  Another drag on returns will be the bloated LBO valuations of that era.  With money now tight, sponsors have little chance of selling their holdings for close to the valuations they paid.  'My prediction is that many private equity funds of that vintage won't return capital, won't break even.  Those that do will be top-quartile [performers],' says an executive at a mayor buyout house.  'The industry will be challenged and tested in a way it never has before.'"

Or, as Warren Buffett once said "When you combine ignorance and leverage, you get some pretty interesting results."  

(6) Will Private Equity Learn? "'What's more, there will likely be a drastic overhaul of how private equity operates, some sponsors say.  Many expect the hefty transaction fees firms have collected, which in some megadeals topped $200 million, to be reined in.  Megadeals themselves will be a casualty, and buyout funds will be scaled back to reflect the downshift in debt financing. 'A lot of people now are talking about a new alignment of financial incentives for private equity and hedge funds,' a buyout sponsor observes. 'The incentives to do deals were skewed by the fees that sponsors and bankers were pocketing.' Likening the deal binge to a hamster running furiously on a wheel, he says: 'People will look back and ask, Why did the hamster run like that? It was because of the food it saw in front of it. 'That kind of incentive makes sense for a hamster, but it led to the insanity' that gripped the buyout market, he says."

"He and others argue that when LBO activity revives, banks and sponsors alike, chastened by the pain they caused themselves in the mid-2000s, will keep a lid on leverage and structure deals prudently. 'It will be like what happened to venture capital' after the bursting of the tech and telecom bubble in 2001, he argues. 'People didn't dispose of the VC model,' but overhauled it.  Others aren't so sanguine about private equity's ability to learn. 'At some point the competition for deals will heat back up,' says UBS's Smith, 'People's memories fade.  I'm highly confident that we will overcook the market again.  It happens every 20 or 30 years."

Conclusion

Private Equity needs to be overhauled.  The inertia in the industry, however, will make it slow-going.  The guys with 20 years of experience in private equity will continue to long for the "good 'ol days," and will have the play book to prove it.  Like the music industry with the advent of online music downloads, like the telegraph industry when the telephone came along, like the American automotive industry in the face of Asian competition, most private equity managers will keep up their old ways in an era where they are archaic, outmoded, and useless.  

Out-sized returns are possible in a world without massive leverage and disproportionate debt levels, but they simply require more hard work.  It takes the full-court press.  

[To read about how David defeats Goliath with the Full Court Press, read this great article in the New Yorker by Malcolm Gladwell, Author of The Tipping Point http://bit.ly/m9zFn ]

The future of Private Equity will be mixed.  For those who respond to the changing times, who are willing to invest more in adding value than flipping for a quick profit, for those who are willing to invest in companies that they would be happy owning even if the stock markets were shut down for 10 years (to borrow again from Buffett), and that big IPO simply were never possible, for those managers, the future is bright.  But those who cling to the past will be eaten up by the mountains of debt that they once thought were their road to riches.

Posted via email from skinnerlayne's posterous

National CFOs

Yesterday, I was reading an article that quoted the head of Iceland's Central Bank as saying that they would soon be joining the Euro because Iceland might know a lot about fisheries but maybe they didn't have specialized knowledge about monetary policy. This was interesting enough (though I tend to think the European Union is an undemocratic bureaucracy that is expanding, destroying every economy in its path, but that is a topic for another day).
 
So it got me to thinking--why do some countries so consistently make bad economic and governing decisions? I look at my current neighboring country, Argentina, and the case is simply puzzling. I travel to Argentina with relative frequency, and have collectively spent several months in the country. The people I encounter there are intelligent, many are well-traveled, and they all recognize Argentina's caricature government and economy. The 10-year boom/bust cycle is accepted as an unalterable fact of life.
 
Economic policies in many countries are dictated from the top of the executive branch, since it is the economic health of a country that usually makes or breaks an executive's popularity. The Finance Minister is one of the most coveted jobs in a government, and it carries tremendous prestige. As a result, it is a tremendous political reward to the chief executive's most loyal constituencies. Or else it is given to somebody who can "tow the line" appropriately. Rarely are the finance ministers, who are in fact the CFO of the country, chosen on the basis of providing quality, independent counsel and direction on finance and economics matters. Instead, the tail always wags the dog. Economic policy is made out of political needs, rather than out of economic realities. This is no less true in the United States than it is in Argentina.
 
In the world of international business, CFOs are often accountable to the Board of Directors, not to the CEO. Perhaps Finance Ministers should be too--either accountable directly to the voters or else to the Legislative authority of the country. Greater independence could prevent election year business cycles from propping up otherwise weak executives. Since their own job wouldn't be on the line if the chief executive loses the election, the Finance Minister could make decisions that are wholly independent of their desire to "get the boss re-elected." Imagine the radical shift in government economic policy that could result from this relatively minor change.
 
It's at least worth considering.

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Rhetorical Lesson for the Republicans

I woke up this morning and began perusing the news, as I do most every morning, and the Daily Telegraph www.telegraph.co.uk is always one of my first stops, along with the Drudge Report.  I am increasingly finding that the British press is simply more insightful and well-rounded than the filth that passes for journalism in the United States these days.  Indeed, one can still distinguish between the News and Opinion sections of even the more partisan British papers--something that can hardly be said of the New York Times or Washington Post.  But I won't explore that issue today.  Today I wanted to make an important rhetorical observation that the Republicans would be wise to heed.  Here is the quote from the Telegraph article:

In Friday's Financial Times, Alistair Darling, who saw off Brown's attempt to replace him with Ed Balls, sounded a quite different note to the PM on Labour's spending plans. Gordon clings to the tired old formula that the Tories will "cut", while Labour will "invest". Mr Darling's position is altogether more nuanced. "I have always been clear," the still-Chancellor told the FT, "that, just as we support the economy now, in the medium term we have got to live within our means and I set out a clear commitment to halve the deficit over a five-year period."

The Socialist Left loves to use the word "invest" to describe their own hair-brained political constituency-appeasing largesse that they are permitted to pass off as "economic policy."  And they are equally apt to enjoy hurling the "cut" accusation across the aisle.  The Republicans need to turn the tables.  They need to say "every time you hear a Democrat say they are going to 'invest in education' or 'invest in healthcare' or 'invest in the economy' what they are saying is that they want to raise your taxes, take bonds out in the names of your children, and destroy America's standard of living.  What they really want you to invest in is a government-run version of Enron."  

This will be far more politically effective than "spending is out of control."  I don't think the current Republican leadership in Congress or at the RNC is smart enough to pull this off, but there's a new generation of Republicans brewing out there.  They are Ron Paul-supporting, little "L" libertarians who see America's promise of "the land of the free" as a lie, and who see the Republican and Democrat establishment as virtually one and the same.  If this new generation of Republicans will rise up, kick the Establishment out, and put together their own manifesto for decentralizing power, non-interventionist foreign policy, and a less intrusive, less paternalistic police state, they will win allies on the Left, the Right, and in the Center.  

This is what the Republican Party needs--not a bunch of wishy washy moderates--not a crowd of gay-hating evangelicals--but firmly committed, principled advocates of freedom and of a government that does not wreck our economy in pursuit of its ivory tower social agenda.  Not only does the Republican Party need this, but America needs this, badly.

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Skyscraper Capitalism has Killed the Free Market

Skyscraper Capitalism (which is hardly capitalism at all) is the real culprit in the waning affection for free markets in North America. The big banking interests, who utilized their political clout during both boom and bust, who abuse the average person through the manipulation of the credit systems and take advantage of their plutocratic connection to the Federal Reserve System--the big automotive industry that the government has been propping up for nearly 30 years now that had also been the beneficiary of three decades of loose credit and easy money (who buys a car with cash anymore? and that's precisely the reason car prices have so radically inflated compared to other consumer goods)--all of these and more have created a murky debate around "free markets" versus "state intervention." The reality is that for the entirety of American history since the New Deal, we have had far more of the latter than the former.

Much of the state intervention in the last 30 years has been to aid private sector interests, especially the interests of the major players (and therefore major campaign contributors). The development of bloated securities regulations has been a boon not just to law firms, but to investment banking, and created an entire industry around broker-dealerships with significant barriers to entry, not just for people wanting to get into that business, but for people who have to pass through those businesses in order to finance any nascent enterprise. Indeed, the state-interventionists have created the very financial services monster they now decry. The average guy wanting to start a business either has to get a bank loan (and pay interest to the banking plutocracy) or else go through the nearly insurmountable trouble of raising equity capital for his business, involving at least two attorneys and likely a couple of financial services providers. Now the state-interventionists want to implement price controls on the industry they created, meaning there will be a bigger black market in financial services, more of the business will move overseas, and there will be all kinds of other externalities to the proposed new policies that the policy-makers and politicians haven't even bothered to consider.
 
Far from being a defender of the Skyscraper Capitalists, I view them as the root cause not only of many of our political problems, but our business problems as well. These are the corporations that want to keep their shareholders at arms-length, who view the Board Room as their provincial palace where only their chosen insiders who have "played the game" are permitted to enter. It is the Skyscraper Capitalists whose abuses have turned people from free markets, and have instigated a massive rise in support for not merely a bit more state intervention, but the radical takeover of entire private sector industries by governments in the United States and abroad.
 
Ian Brown, writing in The Globe and Mail, discusses the new interest in Marxism that has been precipitated by the financial crisis. Those who care about the future not only of capitalism but liberty itself will be wise to read this article and consider its implications. http://bit.ly/bFYNq
 
What we need is a new generation of capitalists: Hard Hat Capitalists who are willing to get their hands dirty, who are willing to create long-standing partnerships and relationships with their shareholders, whose communication with their investors is more personal than an annual report. We need people who are willing to leave their ivory towers and go to where everyday commerce happens. Sam Walton and Warren Buffett are shining examples of Hard Hat Capitalists--men who did not allow their wealth or position to lead them to obsession about tall shiny buildings and New York cocktail dinners.
 
This week, I read that more college graduates are looking for work as government bureaucrats (the article termed it "public service," but we all know what that is a euphemism for) than ever before, and that there has been a substantial drop in college grads seeking jobs in business--even Business school graduates. We should not underestimate the long-term impact this will have on the efficiency of our economy. Our best and brightest should be engaged not in economic policy-making but in actual economic decision-making--ensuring capital is allocated most effectively with a profit motive, and their shareholders in mind. If not, we face a steady decline of our economic output, consumer demand being met less and less efficiently over time, and with all of our smart people in government, they will surely not be content to sit by and do nothing. They will use the force of law to try to "fix" things. America's status as the world's economic engine will go out (to borrow T.S. Eliot's words), "not with a bang, but a whimper."
 
A new generation of capitalists could not come along too soon, not simply to restore faith in free markets, but to be genuinely good stewards of our society's resources, invested with self-interest, but not greed, seeking returns for shareholders year after year, not a big bonus at the end of this one. There is no autopilot in the history of progress. We must all work hard to keep the faith in our values of liberty strong. The alternative is not so pretty.

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Testing

I have started using Posterous (http://www.posterous.com) to post to my blogs, but there are some serious formatting issues apparently. Fortunately, the folks over at Posterous are being helpful and trying to remedy this situation for me. (Can't say I have had customer service this good from a free site in a very long time.)
 
So the issue is that I have been sending in posts with several paragraphs, and the problem is that the paragraph spacing is completely lost when it makes it to my WordPress blog. In previous posts I have had to go in and add the "br" tags manually in order to get the paragraphs to show up properly spaced. I'm going to type another sentence here and then go on to my next paragraph.
 
By this point, assuming the problem is continue to persist this evening as it did yesterday and this morning, you can see that it's not spacing the paragraphs properly. It is pretty clear where the new paragraph is supposed to be, but the line spacing just isn't there. If this issue were to be remedied, I'd start recommending Posterous without any sorts of hesitation because I really do love the service. I appreciate Customer Service's support in trying to get this fixed.
 
Thanks so much!

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Pay Attention Private Equity: Enterprise 2.0

Andrew McAfee's blog today contains superb insight into the pattern language of Enterprise 2.0, and it is well worth a read for anybody involved in private equity trying to improve their portfolio companies using technology.  The framework McAfee outlines is really golden.  For those of us working in emerging markets, the question of being able to "leap-frog" a decade of technology advances cheaply is an attractive value proposition of Enterprise 2.0.  It also means we face less internal opposition from those who have spent millions of dollars already on now antiquated technologies.  The closer the starting point is to "zero" the better, when it comes to Enterprise IT.  Aggressive, but judicious implementation of Enterprise 2.0 methods and practices can really jump start an ailing project and open up new worlds of possibilities, not only in terms of efficiency, but creativity too.  And it is the creativity deficit that is usually so hard to overcome.  Unfortunately most of "high finance" is stuck in the dark ages when it comes to collaboration, openness, and the other things that characterize Enterprise Web 2.0.  Those of us who have caught on to it have an advantage facing off against the "big boys."  Let the full court press begin.

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Borrowing from Peter to Pay...Peter

The Wall Street Journal is reporting that the US Treasury is making $25 Billion in "recovery bonds" available to the states as part of the economic stimulus package Congress passed earlier this year.  So the US government is borrowing money in the name of future taxpayers to cover State spending that current taxpayers are not willing to finance.  It would be one thing if this were simple one-for-one exchange, but it isn't.  It is a special subsidy for the states who can't keep their financial affairs in order (California, Michigan, New York) paid for by the states who can (Texas, Florida, and others).  What is so outrageous about this is that Texas and Florida manage to keep their budgets balanced on a much lower tax burden than California and New York, who can't keep their budgets balanced.  It is more or less the federal government stepping in and equalizing the effective taxes paid by the citizens of all states, destroying our federalist system and usurping the power and autonomy of the states.  If the Union is to survive, it will require ending these perverse policies.

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Saving the City won't Save Brown

--But it is the right thing to do.

Today's Telegraph has an excellent article about the looming political crisis surrounding growing economic regulatory power in Brussels.  The City of London, the heart of global finance risks being crushed under the weight of growing European bureaucracy.  Gordon Brown, in spite of his overwhelming and unprecedented political weakness at home may yet have enough credibility in Brussels to put his foot down and stop the Europeanization of the British financial services industry.  

The Brown conundrum no doubt has faced many political leaders in the twilight of their power: Do I do the right thing or do I give my country what it deserves for abandoning me?  

Assuming this is indeed the calculation going through Brown's mind (admittedly he may be too myopic yet to see that Britain has abandoned him, so we mustn't take that for granted), then it shows how truly pathetic he is.  If the CIty of London is lost, it will be a loss to the world, to free markets, and to economic prosperity.  I care because I hate to see liberty and prosperity destroyed by the the growth of government, whether in my own country or in another.   But, the loss will only be temporary though.  The offshore financial centers will boom.  The Cayman Islands, Hong Kong, Singapore, and Panama will be the beneficiaries of the crushing regulatory hand of the European Commission.  Europe and Britain will be the primary losers.  

The lesson Brussels will soon learn, as Washington is going to learn as well, is that you cannot demonize the people who produce the money that you take in taxation for too long or else those people will simply disappear.  There are more than 180 countries in the world, and the world is a much different place than it was 60 years ago.  People have options.  The Internet and mass accessibility of air travel have made the world a smaller place.  

Living in Santiago de Chile 60 years ago would not have been an option for me--it would not have provided even close to the quality of life that America would have provided for me.  But the rest of the world has caught up.  Twenty miles outside of Santiago, I have cable television (half of which is in English), broadband Internet, a cell phone with crystal clear reception, and access to top of the line health facilities in a merely 10 minute drive.  The big countries with their mammoth bureaucracies will soon learn the lesson of David and Goliath.  

Gordon Brown could rescue his legacy.  Instead of going down as "The worst Prime Minister in modern history" he could go down as "The man who saved the City of London from the Eurocrats."  Let's hope he makes the right decision.

[Any UK residents who want to give me their take on this issue, email me by clicking on my name to the right: Skinner Layne]

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Austerity and Prosperity: Not Mutually Exclusive

An interesting blog today on the New York Times website entitled "The Joy of Less" that extolled the virtues of, well, living a scaled down lifestyle.  There seems to be a common perception that a robust career (especially in business or doing anything else that makes money) is mutually exclusive with a Thorequ-esque quiet life on Walden pond.  The NYT blogger writes,

I certainly wouldn't recommend my life to most people--and my heart goes out to those who have recently been condemned to a simplicity they never needed or wanted.  But I'm not sure how much outward details or accomplishments ever really make us happy deep down.  The millionaires I know seem desperate to become multimillionaires, and spend more time with their lawyers and their bankers than with their friends (whose motivations they are no longer sure of). And I remember how, in the corporate world, I always knew there was some higher position I could attain, which meant that, like Zeno's arrow, I was guaranteed never to arrive and always to remain dissatisfied.

No doubt his description of corporate America--or the corporate world in virtually any country, is apt.  It is an endless ladder to climb, with another wrung left no matter how high one makes it.  The corporate serfs who have dedicated their lives to making money for other people are forced to settle for the title on their business card or the pittance they are paid in relation to the actual hours they spend away from the people and activities they truly love.  These are not the most pitiable sorts though--the ones who know what they are missing out on.  The ones to be pitied are those who think their job defines their meaning in life, whose paycheck is the sum of their self-worth, and who stand ready to be anybody's mercenary for the right position and the right pay.

It is not difficult for those of us who have lived the "high life" for any period of time, driven the fancy car, lived in the expensive house, and who have left it, to realize that striving for those things was a waste of our time, a waste of our life.  Time (and its ultimate consequence, Death) is the one thing I have yet to see any technology overcome.  It is sure and certain for us all.  We must all ask ourselves what it is we want to do with that precious time we do possess (the quantity of which is our greatest unknown).  Many would argue that the austerity of "simple living" is mutually exclusive with a successful business career and financial prosperity.

The two are not mutually exclusive, but they do in fact require a most ardent dedication to discipline.  The shiny objects flashed in front of those of us who do work in the world of finance are alluring, and even distracting.  It would surely be easier to eschew all of them, move to the backcountry of Alaska or New Zealand with one's family, and live off the land with a stack of books as entertainment.  This escape has crossed my mind on more than one occasion just this week.  But this sort of escapism is a denial of our potential to do good, to utilize our talents in the most impacting way possible, and to work hard for something other than the applause of others or the number of zeroes after our net worth.  

Indeed, it would be easier to live one's life by a set of rules than by a set of guidelines.  Rules are hard and fast, they tell us exactly when we may and may not do something.  Surely, some rules are necessary, but not too many.  Living life primarily by guidelines is much more difficult.  It requires a heightened sense of awareness of ourselves, of our motivations, of our own purpose in this world.  It requires us to continually and relentlessly self-assess and self-criticize, painful and often depressing tasks that expose our weaknesses and yes, our sins too.  But we will only be two-dimensional beings if we live life only by a set of hard and fast rules that prohibit us from experiencing so much that life has to offer, though in moderation.  

In the context of our present subject, this means we must be willing to suit up and engage in an imperfect world in order that it might be made more perfect.  Most of human life centers around our economic needs--the allocation of existing resources to maximize our collective and individual utility.  Therefore the most aware, the most talented among us, must be willing to enter the vocation of business, and be the light where otherwise there seems to be so much darkness, and to make the world a better place through the seemingly mundane decisions of how to allocate certain resources the most profitably, without the central purpose of our work being our own profitability.

It is a great challenge to enter the halls of high finance and not be corrupted by money.  It is a great difficulty to enter the stately conclaves where our political decisions are made and not be corrupted by power.  But we must each ask ourselves that Kantian question--if not me, then who?

Austerity and prosperity are not mutually exclusive.  One can be in the world of money without being destroyed by it, but it requires discipline that can only be forged through the strength of will, for none of us are born with it.  Yet each decision, whether to pick up that phone call at home, whether to check our email incessantly on the weekends, these are all decisions we make at the margin.  These are all decisions for which we can choose the alternative.  We can cut out all of the sycophantic behavior that characterizes much of the corporate world, we can stop attending social functions and being a part of the chaos that poisons our own souls and those around us, too.  We can retreat to our modest homes, share our meals with those we love, and spend our evenings immersed in some work of literature or else emptying our minds of the clutter accumulated throughout the day.  

This is the challenging life we are all in some way called to--a life of engagement and not retreat.  It is the only way our problems, both individual and collective will ever be solved.  And it is a choice we must make daily or else the influence of laziness will drive us too far one way or the other.

[I would love to hear you feedback, so either post a comment or click my name to email me:  Skinner Layne]

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What a Difference 30 Years Makes

Today's 30-year Bond auction went off without a hitch, surprising many bond market observers who witnessed a near-catastrophe earlier this week with 10 year note yields rising at the fastest pace since 2003. The 30-year has had a rough time lately, as the increasing time preference of Asian & Middle Eastern sovereign investors has driven down demand. Far from today's bond auction serving as a "positive sign," I think there are more complicated issues at play than an rise in confidence in the U.S. Government's future ability to repay its debt obligations. It seems to me that Asian & Middle Eastern sovereign investors are working out a Prisoner's Dilemma "with fear and trembling."
 
30 years is a long time from now, and the likelihood that U.S. taxpayers and voters will tolerate significant inflation and government irresponsibility over the long-long-term is rather low. As foreign investors begin to price in the dynamic political prospects in the United States, I think it is possible that we will see an upside down V- or U-shaped yield curve emerge, where yields on the 10-year are higher than short term notes and bills but also higher than the 30-year bond. The real inflation (and default) danger for the United States is not 30 years from now, but 10 years from now. If I were a bond investor (which I am not), I would be better on a significant recovery for the U.S. in the long-term, with serious troubles in the medium-term. The question of course is, can the U.S. survive the medium-term and make it to the long-term, or will the 30-year bonds be priced in massively inflated dollars from the sticky period in the medium-term?

These questions require a decidedly political answer. What happens to the rest of the years of the Obama administration? Who will control Congress after the 2010 mid-terms? These questions have a more direct bearing on the political risk of the 10-year note than the 30-year bond.
 
And that is why I am not investing in bonds. Too many non-economic factors influencing the future. If there's one thing I don't want to bet on, it's whims of politicians and voters.

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Leviathan Marches On

"Power is in tearing human minds to pieces and putting them together again in new shapes of your own choosing. Do you begin to see, then, what kind of world we are creating? It is the exact opposite of the stupid hedonistic Utopias that the old reformers imagined. A world of fear and treachery is torment, a world of trampling and being trampled upon, a world which will grow not less but more merciless as it refines itself.Progress in our world will be progress towards more pain. The old civilizations claimed that they were founded on love or justice. Ours is founded upon hatred. In our world there will be no emotions except fear, rage, triumph, and self-abasement. Everything else we shall destroy everything. Already we are breaking down the habits of thought which have survived from before the Revolution. We have cut the links between child and parent, and between man and man, and between man and woman. No one dares trust a wife or a child or a friend any longer. But in the future there will be no wives and no friends. Children will be taken from their mothers at birth, as one takes eggs from a hen. The sex instinct will be eradicated. Procreation will be an annual formality like the renewal of a ration card. We shall abolish the orgasm. Our neurologists are at work upon it now. There will be no loyalty, except loyalty towards the Party. There will be no love, except the love of Big Brother. There will be no laughter, except the laugh of triumph over a defeated enemy. There will be no art, no literature, no science. When we are omnipotent we shall have no more need of science. There will be no distinction between beauty and ugliness. There will be no curiosity, no enjoyment of the process of life. All competing pleasures will be destroyed. But always -- do not forget this, Winston -- always there will be the intoxication of power, constantly increasing and constantly growing subtler. Always, at every moment, there will be the thrill of victory, the sensation of trampling on an enemy who is helpless. If you want a picture of the future, imagine a boot stamping on a human face -- for ever."

--The character "O'Brien", George Orwell's 1984

The Treasury Department wants more power for the Federal Government to oversee our financial transactions. 

The German Government is targeting Swiss banking privacy in order to pursue potential tax evaders.

Bit by bit, measure by measure, the governments of the "civilized" world are crushing freedom in subtlety.  It is easy for Americans to forget the plank in their own eye while criticizing the speck in our neighbors.  We look at China, and hypocritically think to ourselves that "nothing like that" could happen here.  And yet our government snoops into our financial transactions on a daily basis, and even turns our own banks against us as enormous institutional narcs.  But this power isn't enough.  The mortgage recession, like all recessions since the New Deal, have been used by government to expand its power.  Cases like Eliot Spitzer are broadcast in the news, where the government, through its extensive spy network amongst financial institutions turned him in.

This creates fear.  Fear is the greatest source of power, for people in power utilize fear to convince people to agree with them.  The whole notion of "fearmongering" is certainly nothing new in politics.  It is as old as the profession itself (which of course Ronald Reagan likened to the oldest profession).  In ages past, the Church and other institutions invented crises and fears in order to enhance their power.  Modern politicians and church figures have become more cunning and savvy in their operations, waiting for the forces of time and chance to product circumstances that allow for some demogoguery.  Fortunately for them (and not for the rest of us), the world itself is a tumultuous place, and there are ups and downs every day.  When it comes to economic matters, the creation of the Federal Reserve and its cycle of expansion and contraction of the money supply guarantees that a recession will come around every few years during the contraction phase. 

Terrorism and WMDs are real.  I'm not a crazy conspiracy theorist who believes the government planned 9/11 or fabricated evidence about WMDs in Iraq.  We live in a very cruel world.  Yet at the same time, the government never hesitates to jump on opportunities to expand its own power.  I have little doubt that the people doing this honestly believe they are doing good.  Intoxicated with power, they believe they are doing something positive by taking their friends' keys and driving instead, not realizing that the very elements of human nature that caused the problem to begin with will necessarily infect the solution and its implementation. 

I have heard President Bush talk about the long march of freedom.  But what we have seen in this administration, the Clinton Administration, and especially in the campaigns of Senators Clinton, Obama, and McCain is instead the long march of Leviathan.  Liberty is not something that is on a constantly upward trajectory.  Rather, it crescendos and decrescendos throughout civlizations and throughout history writ large.  America's great crescendo began in 1776, climaxed in the 1920s, and began its long decrescendo in the 1930s.  There have been respites to the decrescendo, but we are on our way down.  China, on the other hand, seems to be at the nascence of its crescendo.  I hope that the people of Tibet keep fighting, and that the broader population of China will continue to demand more and more liberty.

I wish the same for my own country, but not hopeful that it will resurrect itself.  It has fallen too deep in the mire of materialism and consumerism.  G.K. Chesterton once remarked that "America is the only nation ever founded on a creed," and I would respond that it is likely the only one that ever crumbled on a fad.

Jesus said that "the love of money is the root of all evil."  Oppression is its fruits.  We spent a hundred years trying to abolish slavery, and another hundred trying to clean up after it, and yet each day we subject ourselves to a new form of slavery, one that is voluntarily entered into, and exited only with great difficulty.  We have lost our way. 

Senator Obama claims that we have talked too much about the federal budget deficit and should instead talk more about what he calls "the empathy deficit."  He went on to say "Not only that - we live in a culture that discourages empathy. A culture that too often tells us our principle goal in life is to be rich, thin, young, famous, safe, and entertained. A culture where those in power too often encourage these selfish impulses."

If there is one thing I have learned to spot a mile away it is a charlatan and a hypocrite.  Senator Obama is both, for although he disparages our culture that discourages empathy, he is quick to mandate a host of laws that violate the precious liberties of individuals, individuals who contribute to society, take the risks of an entrepreneur, provide the jobs that millions of people rely on, and give more to charity each year than the good Senator and his wife have given in the last ten.  He is quick to call for more laws that criminalize some perfectly legitimate commercial behavior, steal the profits of the rest, and demonize anybody who would oppose his draconian economic agenda.  It is not that Senator Obama loves money too little, it is that he too loves it too much.  He thinks that the value of a person's life is measured by how much disposable income they have, and that is precisely why he advocates raising the value of some people's life by taking it from others.  If in fact, all men were equal and granted protection of their natural rights, then it would not matter what their net worth was, their rights would be protected just the same.

Instead, the Democrats advocate creating two classes of citizens.  One class against whom the violation of the right to privacy, property, and the unmitigated pursuit of happiness is ok, and another class which is to be the beneficiary of the violation of the rights of the first. This is just as heinous and just as egregious a violation of rights as the last 8 years of the Bush administration with respect to Habeas Corpus, the right to privacy, free speech, the Patriot Act, etc. 

Each day it is Leviathan that marches forward, flanked on the Right by the War Party and the Left by the Welfare Party, and joined by all in the utter obliviation of privacy. 

We must all bring ourselves to love liberty for its own sake, for its inherent good, rather than the "things" it brings to us.  We must value it more than food, more than cars, houses, money of any kind.  We must value it more than prestige, more than even life itself. 

Alas, though, it takes men and women of good character to do such a thing, and I fear we have to few of those left in this country.

Obama Against His Own Standard

Jesus said "For in the same way you judge others, you will be judged, and with the measure you use, it will be measured to you." (The Gospel According to St. Matthew, Chapter 7, Verse 2, NIV)

Unlike most interpretations that see the Sermon on the Mount as an intensely moral, "God will punish you if you don't listen" kind of Sermon, I find that Jesus's most famous speech is full of rather practical admonitions. Some are more spiritual than others, to be certain, like "Lay up for yourself treasures in heaven, for where your treasure is, there your heart will be also." But others are just good pragmatic recommendations, like the one quoted above. There is nothing in the text to suggest that Christ is saying that God will judge us in the standard we use against others, but rather warning us that if we judge people, other people will judge us in the same way.

Essentially, it seems, Jesus is giving perhaps the best advice I've ever read on not becoming a hypocrite. It is, I think, the same admonition St. James records in his epistle, saying "Not many of you should presume to become teachers, because you know that those who teach will be judged more strictly." Again, there is nothing in the text suggesting that James is writing about the judgment of God. It is merely convenient for many teachers of the text to assume that, in spite of the lack of textual evidence to support the claim. Yet on a human and practical level it makes much sense.

Jimmy Swaggart, the famous televangelist, was judged by others according to the standard he set. Republican sex scandals have been much worse for the perpetrator than Democrat ones precisely because many Republicans hold up family values as their crowning issue. And people, not surprisingly, say "well by his own standard he's unfit to serve." That is the measure we use being used against us. This is why Jesus says we probably shouldn't be in the business of judging at all.

I write all of this as something of a pretext for a thought I had this morning concerning Senator Obama's candidacy for the White House. I think it is time for the thinking members of the electorate to start judging him according to his own standard, and looking for some sort of reason to buy into his claims. I would be willing to admit fault, and even support the Senator from Illinois if I had reason to believe even some of his promises.

The main issue the electorate needs to examine is Senator Obama's claim that he will unite the country in some sort of a post-partisan utopia where party labels, racial differences, religious variations, etc. simply don't matter any more. In contrast, he suggests that Senator Clinton is a hangover of the divide and conquer method of politics, destructive, personal, and ultimately self-defeating.

As an entrepreneur and employer, I have hired and fired a number of people before. I have also conducted many job interviews. Imagine somebody walks into my office and says to me "I will be an excellent salesmen for you." My first response would be "show me where you've been an excellent salesman for somebody else." If they say "Well I haven't ever been a salesman, but I know I would be good at it," then i have two options. 1) Pass on the candidate and tell them to come back when they have experience or 2) Say "well, let's have a trial run and see how you do," that is to say "let's see if you aren't full of it." I would only do the latter if I really though the person had potential...they are energetic, intelligent, and seem dedicated.

Many might suggest that Senator Obama should be given a chance to prove himself. I tend to agree. Certainly if we ask him "If you are such a great uniter, could you give us examples of extremely hostile groups you have united before?" he would have to say that his promises of unity are purely theoretical. He certainly has not brought a post-partisan utopia to the floor of the United States Senate, or in the Congress generally, though it is something he promises to do as President since as President "[he] will set the agenda." (Though I wonder where in the Constitution he read that the President sets the agenda....for a Harvard Law Super Star, I would have hoped for somebody a bit better read in our nation's most important legal document)

Why don't we give him a chance to unify something, but without making him Commander-in-Chief. Senator Clinton claims 30 years of experience--I think she should be judged against her claims (the claims are clearly farcical).  Senator McCain on the other hand claims that he's qualified, he's tough, and he will not be partisan.  So far, Senator McCain is the only one who can point to his actual record to prove that he is capable of doing the things he promises.  

Here's a thought.  Senator Obama doesn't like the Senate much, because his star power isn't terribly influential there.  (Thank God the Senate still retains some of its originally intended culture as the Upper House comprised of Senator Statesmen who are deliberative and slow). So let's give him a chance to be a uniter.  I bet that John McCain won't run for re-election in 2012.  President McCain could appoint Obama as a special envoy to the Middle East or the Sudan, or perhaps China--and let's see if Obama has what it takes to bring people together.  Or perhaps President McCain could make Senator Obama his lead Congressional go-between to push through genuinely bi-partisan health care reform.  Another possibility would be for him to be President McCain's energy task force Chairman, since the two agree on most climate change-related issues.  There are many avenues that during the next four years Senator Obama could prove himself and make a fine Presidential candidate in 2012.

But today, the record is not there, and it is far too high a risk to let him prove himself with a four year term in the White House.  The possibility of failure, and the far-reaching impacts such a failure would have, are something the country cannot afford in a time of war and economic turmoil.  

Alleluia! Alleluia! Christ is Risen!

This Lent, and especially this Holy Week and Easter, have served as the most reflective period of my life in over two years, likely since the last time I went backpacking in Alaska. In this reflective process, I have thought a lot about the spiritual journey of my life. I feel like I can describe it in the following way...

As a child, the church of my parents (the Southern Baptist Church) introduced me to Jesus. We carried on an on and off friendship, the off periods due to indifference and the on periods due to crisis. Many people talk of "fair weather friends" and "fair weather Christians" but I was a foul weather one instead. I have found it easier to be a faithful devotee when things are rough than when things are good. Through this on and again off again friendship with Jesus, I figured that being a thinking person I ought to learn a bit more about Theology, and that is what would lead me to greater belief, greater understanding, and greater obedience. It was at this point that a dear friend of mine (one who I have sadly become estranged from, and with whom I long for reconciliation) introduced me to Calvinism and Christian Reconstruction.

Though I hold on to few of the theological positions I acquired at that time, I intensely value that period of my spiritual journey because it was the first time that I was challenged to challenge much of my closely held dogma, to question if my presuppositions were correct, and then to attempt to vigorously defend my new positions against the inertia of my stagnant and theologically empty Baptist church. Essentially,it was John Calvin who introduced me to St. Paul. Yet he certainly filled me with many preconceptions before he made that introduction.

St. Paul and I went on to have one of those relationships of paradox--at once dissonance and concord, though I would contend that much of the dissonance can be blamed on the introduction. Calvin, St. Paul, and I were constant companions for several years. I held dogmatically to the twin doctrines of predestination and limited atonement, and that God's sovereignty was complete, though his reasons opaque. That opacity was not like the mysteries of the faith--instead it seemed at times pernicious, even cruel. Out of one side of my mouth I sang "Jesus loves me" and out of the other I argued vociferously that God predestined many souls to eternal damnation in a literal hell to glorify himself. Quite obviously, the tensions there could not long sustain without snapping the theological rubber band, or else stretching it to the point of weariness such that it could no longer perform its function of keeping things together.

Finally, as a more-than-decade long personal crisis finally came to its climax, my religious house of cards collapsed under the weight of reality. Mr. Calvin and I didn't have coffee anymore, and St. Paul and I stopped doing lunch. Jesus and I remained friends, but the relationship became more distant, not out of anger, not even out of indifference, but rather merely out of fatigue. I delivered a final plea to the people who surrounded my upbringing, and it seemed that the meat of the message fell on deaf ears. That is when the fatigue really set in. I recognized that I needed to reexamine things, but I really didn't have the energy.

So I decided to distract myself with work and wine. The work was interesting, but frustrating. The wine was alluring, but empty. For just over a year (from October 2005-January 2007) I was in what amounted to a period of distracted agnosticism, a spiritual limbo where like Sisyphus I rolled my stone up a hill just to do it all over again the next day. The night life was not exciting and adventurous, it was dull and redundant. Like a metronome calibrated to tick off quarter notes in 4/4 time, the people of the restaurants and bars repeated the same routine evening after evening, weekend after weekend, with an emotionless devotion that made them more machine than man. To stop for but a moment and reflect on the vanity and meaninglessness would have been self-repudiation, and none would dare to face such an emptiness.

Very soon, however, I decided to do just that. For a thinking man, the allure of the empty soon wears off, and the obviousness of vanity is painfully on the mind at all times. And so, like a maid who had neglected one particular room of a house for far too long, I made my way to dust off the cob-webs of my spiritual self. Perhaps ironically, perhaps providentially, it was on Epiphany Sunday, 2007 that I first darkened the doors of the Church of the Incarnation, an Episcopalian Parish near Downtown Dallas. I did not know where I was going after that, but I knew where I was: I was home.

Like returning from a lengthy vacation, no matter how interesting or exciting the trip was, there is a distinctive comfort about going home, and my spiritual coming home was just that: comforting. I have heard the psuedo-spiritual inspirational preachers turn such ludicrous phrases as "there is no growth in the comfort zone and there is no comfort in the growth zone." This is not wholly untruthful, and much of our greatest learning comes from times when we are thrust away from what is comfortable and known, but the comfort I am speaking of is the kind that has fostered and unprecedented level of spiritual and psychological growth.

Although I had been introduced to Jesus many years before, and followed his example through Baptism, it was during Lent and Holy Week 2007 that for the first time I discovered the Christian Faith and Life. Jesus was no longer just a spiritual friend, or an ethereal example to be followed, but rather the full embodiment of genuine forgiveness, faithfulness, hopefulness, and love. For the first time I sang "These Forty Days," and contemplated Christ's fasting in the wilderness as I walked "this pilgrim-way of Lent." I learned what Liturgy was, and I marveled as its beauty. I was forced to encounter my "manifold sins and wickedness" and admit publicly that I had not "loved my neighbor as myself." And at the same time, I was thankful that I was a member "incorporate in the mystical body" of Christ and amongst "the blessed company of all faithful people" and moreover an "[heir] through hope" of God's "everlasting Kingdom."

I took part in the Eucharistic Mystery and feasted on the body and blood of Christ Crucified. I learned why Ash Wednesday was on the Calendar and was grimly reminded with black and gritty ashes that I am dust and to dust I will return while listening to the ominous words of the Misere mei, Deus from Psalm 51,

"Have mercy on me, O God, according to your loving-kindness, in your great compassion blot out my offenses."

Indeed, in 2007 I for the first time experienced the Ashes of Ash Wednesday, the Palms of Palm Sunday, the New Command, Stripping Away, and Betrayal on Maundy Thursday, the Emptiness of Good Friday, and the greatness of the Passover of Christ and the mystery of the Paschal Lamb at my first Great Vigil of Easter.

This year, my reflections and progress have been dramatically different. Where last year was my introduction to the Christian Faith through the Liturgy, this year has been my introduction to the Christian Religion through the Liturgy. Last year it was new--it was pageantry and spectacle, as I had never experienced it before. This year, it was familiar, but not in the boring and laborious familiarity of the outside world's grinding machinations, but rather the comforting familiarity of an old friend. Indeed, I came to understand this year that this thing we do, this Lent thing, this Holy Week thing, this Easter thing, it is something we do every year. And we do it the same way every year. And we do it with focus and devotion to carrying it out. It is ritualistic, but it is full of meaning, hope, and joy.

Like a mechanical instrument that must be re-calibrated on a regular schedule, and like a beautiful grand piano that must be re-tuned, our spiritual lives require that same re-tuning in order to remain virtuous and beautiful, in the way that Christ was always virtuous and always beautiful. Lent, Holy Week, and Easter represent this annual re-tuning and re-calibration. These rituals do not make us more robotic, but rather more human and more divine. But it is not something we can always be doing. And this is perhaps the most valuable realization I have come to on this Easter Day: our lives are represented by the Liturgical Calendar.

Just as crops do not benefit from being pruned and fertilized every day (though they must be fed and watered each day), we would not benefit from having Holy Week every week, Good Friday every Friday, and Easter every Sunday. Although Easter is my favorite day of the year, and my favorite Holiday, it would not be as special if we celebrated it every week. This leads me to the explication of the statement I made at the end of the last paragraph:

In life, as in the life of our liturgy, we cannot have Christmas without Advent, we cannot have Easter without Good Friday, and we can't have Maundy Thursday without Palm Sunday, nor can we have Lent without Ash Wednesday. And in between all of these things we must have Ordinary Time. Advent Prepares us for the Birth of Christ by reminding us that the Israelites waited the Messiah for centuries. Ash Wednesday reminds us of our mortality so we can appreciate the sobriety of Lent. Palm Sunday brings Christ to the focus of life, foretells of his Passion, only to have him give his parting words a few days later, witness his betrayal after giving us the new command, and then being turned over to pain and death. Good Friday is our period of emptiness, our experiencing of that pain, and though it is a remarkable thing, it is not one we can or should do everyday. And Easter is the restoration of all things. It is the celebration of life--indeed, of new life, resurrected life.

Our individual lives likely do not follow the liturgical calendar, but we can learn much from the liturgical calendar. We will have days of mourning, and we will have days of dancing. Each should be appreciated when it comes. The weeping as a reminder of our sin, pain, and mortality, the dancing a reminder of our blessings, life, and vitality. And in the midst of it all, there will be ordinary time. And we must appreciate that for what it is too, for it is what allows us to understand the feasting and fasting when those times come. There is no Easter without Ordinary Time either, for Christ spent most of his time on earth not suffering and dying, nor resurrecting. These were but brief, though significant moments in his earthly existence. Most of the time he was admonishing and teaching, serving and loving, praying and traveling.

With Holy Week behind us, and as we enter into the Easter Season looking ahead to the celebration of Christ's Ascension, let us utilize the time of celebration to prepare us for Ordinary Time. For I think we are keenly aware of our need for Lenten Preparation for Holy Week and Holy Week's preparation for Easter, but we must then prepare ourselves to settle back in to Ordinary Time, where we labor for Christ in the details of life, working to make our prayers a reality that

"Thy kingdom come, thy will be done, on earth as it is in heaven."

But for the time being, let us celebrate. The resurrection and new life we have through Christ is reason for much fanfare and much rejoicing. We are no longer captive to sin and death, hell and grave. The grave has been conquered, the sting of sin extinguished.

For, The Lord is Risen Indeed! Alleluia! Alleluia!

The Goodness of Good Friday (Holy Week Reflections, Part 4)

"Where there is doubt, (let me sow) faith." -St. Francis of Assisi

Yesterday I heard what was probably the most remarkable sermon on the crucifixion of Christ that I have ever heard or read in my life.  I'm not sure the Priest realized the profundity of some of the things he said, perhaps because he never came out and said them, but rather there was a distinct desire to move to them as a logical conclusion of what was said.

The question of theodicy--that is, how an omnipotent, omniscient, omnibenevolent God and evil can co-exist in the world--is the primary objection I hear to religious faith.  It is perhaps the most difficult issue I must wrestle with myself, in fact.  Many different answers are given, in the Christian context, to explain this.  

The Calvinists say that ultimately everything was pre-ordained before time that God might glorify himself.  This answer was initially appealing, because if you granted the premise (that the ultimate end of all of history is the glorification of God), then the conclusion followed quite nicely.  Yet it doesn't sit quite right, as it makes God into an egotistical, self-absorbed being who pleasures in the pain of his creatures.  This kind of masochistic deity is not only unappealing, but unpalatable.   Other explanations tend toward limiting God's omnipotence (saying there really are things God is incapable of doing) or his omniscience (that God does not have foreknowledge of future events, the claim of Open Thesists, for example, would mean he isn't morally culpable for letting something occur since he didn't know of its occurrence).  

None of these have ever been satisfactory to me, either, and all have seemed to diminish God in some unnecessary way.  Baptists from my childhood told me that God is sovereign and everything works together for some sort of good even if we can't see it.  This, I think, makes good sense if we are talking about ordinary evil, but not egregious evil, or horrendous evils, like the Holocaust, Nagasaki, etc.  It is hard for us to imagine what overall good really came from the slaughter of millions of innocents.  (Though the Calvinists and many Baptists would suggest that they weren't innocent because they were born with original sin and thus deserved what was coming to them.)

I finally came to the point of accepting this as one of the great mysteries not only of Christianity but Theism in general.  This hasn't changed significantly, but yesterday I had a new insight and realization about the subject that would have sown faith in me were I sitting there as an agnostic or questioning believer.  The Crucifixion of Christ, and the symbol of the Cross itself are the evidence of God's solidarity with us in our suffering.  Indeed, the Cross is the image of the Suffering God.  The Priest delivering yesterday's sermon rightly noted that the very Christ that ought to inspire the most belief is the one who was ridiculed by Nietzche for being weak and inept.  

Christ's death on the Cross does not give us great insight into why there is evil in the world, but it does give us a better understanding of why it is ok that evil is present simultaneously with the existence of an omnipotent, omnibenevolent, omniscient God.  

I am not sure if the idea I am about to espouse has been espoused before (I'm sure that it has, I just have not read it), but it is the epiphany that I had yesterday that has suddenly caused me reason to love God even more.

Most people, commenting on the Crucifixion, focus upon the justification it provided for sinners--that substitution, or propitiating sacrifice for the sins of the whole world.  Certainly this is the central theme of the rest of the New Testament as it reflects on the death of Christ.  Yet I think almost equally important, and virtually completely overlooked in the exegesis not only of the Crucifixion accounts in the Gospels but also in the reflections on the Crucifixion by the other New Testament writers, is that the suffering of Christ, and the suffering of God, is equally a vindication of God himself.  

It would seem that prior to Christ, there was a legitimate reason to doubt God's love for his creation.  Not that he didn't love his creation, but rather the evidentiary record left room for reasonable doubt.  Not bearing to look upon his creation and see the great violence committed by it on itself, he flooded the world.  Looking upon the violence of ancient cities, he destroyed them.  His mercy on his people was manifested, he relented, indeed, but there was no evidence of his giving of himself.  After all, the creation of Manna ex nihilo did not cost God anything.  Nor did his absolution of the sins of people when they made animal sacrifices at the Temple.  

Although, I would contend that the Flood and other examples of God destroying large groups of people is evidence not of wrathful vengeance, but instead of God putting them out of their misery, for violent hateful people are the most miserable and unhappy form of humanity one can find.  

When Job asked that eternally human question "why?" God did not respond with an answer.  And I do not think we are any closer to such an answer, even after the Crucifixion.  God instead responded with over 60 rhetorical questions, "Where were you when I laid the foundations of the earth?"  and so on.  A modern day Job asking why might get a different set of questions, or at least a supplementary set.  

"Where were you when I was suffering in flesh as you are now?  Where were you when they hung me on the cross?  Where were you when they pierced my side?  Where are you when they mock me now and continue to crucify me today?"

Although no less of a mystery, I believe evil and suffering are softened in light of the Cross.  Indeed, Paul recognized this when he so boldly asked "Death where is they sting?"  For now we have a new perspective on God's relationship to our suffering, one of co-experience.  The greatest act of solidarity, and indeed I believe much of the meaning of the salvation (which comes from the word salve, as in ointment rubbed on a wound to heal it) is wrapped up in this very solidarity.  Indeed, his sacrifice was able to cover the sins of the world by veritably annihilating the gap between man and God.  God's mercy was ever heightened for his Creation after experiencing humanity, in all of its pains, turmoils, and struggles.  

A couple of years ago, I wrote this poem, and it seems to have recognized something that I did not even understand at the time.  The last stanza truly expresses and I think sums up the thoughts I have already written today:

But when the pain seems at its worst,
The light of glory will then more brightly shine,
And there walking beside me
Is Christ whose wounds are mine!

Perhaps rather than focusing on the miraculous nature of the Resurrection this Easter we can instead put it into practical use.  That is, in place of marveling at the risen Lord, we can instead commiserate with him.  Then we can have more than merely an ethereal comprehension of the simple old hymn that says 

What a friend we have in Jesus,
All our sins and griefs to bear.
What  privilege to carry, 
Everything to God in prayer
Oh what peace we often forfeit
Oh what needless pain we bear
All because we do not carry
Everything to God in prayer.

"For it is in dying that we are born again unto eternal life. Amen." -St. Francis of Assisi