Connelly on Commerce

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

The dollar is way down, oil is way up, consumer confidence is down, foreclosures are up, and heads of major US investment banking firms have less job security than Joe Torre: what’s a Fed to do on Halloween?

The ghosts of moral hazard are lurking everywhere — or at least in the rather extraordinary performance of the equity markets in the face of all the seemingly bad news — not a case of “the worst is over” psychology, but more a case of “the Fed is going to bail us out” perhaps? Surely a (finally) really good quarter from Microsoft is not the whole reason the market made a leap on this Friday.

Equities in fact seem to lurch from precipitously down days that seem a cry for help from the Fed (it worked before!) followed quickly by a couple of up days driven subconsciously by wish-fulfillment fantasy — i.e., the Fed has heard our cries and will act accordingly!

But that does not mean the fantasy won’t come true; it merely defined the parameters of “trick or treat”{for the Fed’s October 30-31 meeting. “Trick” would surely be no rate cut — either of the discount rate or the Federal funds rate. The market for “treat” probably wobbles between a 25 and 50 basis point cut, with some money on the proposition that a cut of 50 would really be a trick in disguise, suggesting that things are even worse than we fear because the Fed knows something (awful) that we don’t.

Speaking of the “unknown unknowns” — market psychology has not really been helped by the latest emanations from the banking/US Treasury  subprime laundry — the SIV holding tank (really a subprime septic tank) for parking now under collateralized paper that the banks don’t wish to mark to market but which their accountants won’t let them “mark to model” — the latest version of the scary accounting shenanigans reminiscent of the old savings and loan industry as it finessed its way to oblivion in the 1980’s, unsuccessfully hiding the true face of their financial situation with custom-made accounting “costumes”. Frightening things tend to happen when you borrow short and lend long.

You heard it here first. Recession talk; the Subprime Dollar; the Fed’s Carbon Tax — all coming true. What’s next?

With oil flirting with a $90 price in the trading markets, and with $3.69/gallon at the pump in San Francisco (admittedly the highest-priced market)  witnessed on the way to work this very morning, we are looking at the possibility of $4.00 gasoline by Christmas, if not Thanksgiving.

Agreed thatwe  have apparently not yet reached price points which have the effect of demand destruction among the nation’s drivers. While hybrid vehicles are popular, SUV’s still out pace them four to one in sales. While the $90 price of crude surely reflects heightened risk premiums due to threats and troubles between Turkey and the Kurds and continuing US/Iran rumblings, we are probably only one serious incident away from even reaching $100 (say, if the truck bombs yesterday had been a step or two closer to Benazir Bhutto’s vehicle).

More importantly, the bad news on the earnings front today even fron multinationals like Caterpillar, Schlumberger and Honeywell is coupled with renewed  speculation on a Fed rate cut at Halloween (the “Trick or Treat” Fed meeting) due to continuing problems in the credit markets will in turn put more pressure on the US dollar (mitigated only by any global “flight to quality” to US treasury securities). And downward pressure on the dollar means upward pressure on oil prices, because as noted in previous blogs, oil is (for the moment) still priced in dollars.

In this light, Secretary Paulson’s choice to meet today in Washington in the midst of the G-7 finance ministers summit with the Saudi representatives (not part of the G-7) may be even more significant than meets the eye; the Saudi’s have a unique role in OPEC still, and a strong indication from them relative to increasing OPEC production could help tamp down the run-up in crude in time to  prevent the Gas Pump Grinch from stealing Christmas (as if US consumers don’t have enough problems what with their homes being foreclosed or their rents going up).

If the declining dollar push comes to $4.00 shove at the pump by year end, we will be getting closer to a circumstance where the political catch-phrase for the 2008 campaign may once again be “It’s the Economy, Stupid”!

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

 What we are learning about the environment lately is that business and the money behind it sees green in Green. Just as in health care, where business is beginning to make a real difference in the national debate about affordable access to a universal base of treatment –it was a CEO who wondered aloud recently why we are a country where one has a right to a lawyer but not a doctor– the issue of global warming has been addressed head-on more by commercial interests than governmental.  

As a political issue, environmental concern ranks somewhere down the list after Iraq, Iran, terrorism, the economy and health care. If global warming were a college football team, it might rank in the top ten, but not get to a BCS bowl. With political discourse governed almost totally by the safety-first mantra of consultants and focus groups, and with the me-generation in its last throes of acquisitiveness before retirement, the notion of sacrifice for a common (not to say planetary) good is non-starter. Nobel prizes are nice, safe rewards for retired politicians that make us feel good about caring about CO2, so long as it doesn’t cost us anything.  

But business sees an opportunity in the technology of alternative energy and particularly in Silicon Valley is not afraid to be out ahead of the general populace in terms of thinking through the risk/reward equations. And it is technology that will clearly precede legislative mandates or executive orders in creating the potential to truly challenge our addiction to fossil fuels. Even business schools are not afraid to adopt green curricula any more (lest they be considered soft on profits); profits are what business sees ahead (and is making even now) in solar and wind power alternatives, clean fuel technologies, and the like.  

Where some political leaders see the developing world as a convenient excuse for doing nothing about CO2 emissions in the developed world, business sees vast potential markets for clean energy solutions that can best work (and profit) on a massive scale. Where it used to be only oil companies that planned in twenty-year cycles, it is now possible to look at alternative fuel development in similar ways: not the quick-fix synfuels game of the 70’s and early 80’s, but a venture-backed, patiently capitalized, trial-and-error development of a variety of techniques to address the problem of sustainable development in a warming world. 

It all starts with water; business sees that now as the commodity of the decade; and not because Greenland is melting! It is the core issue of sustainable life in the developing world; clean water itself jump-starts truly universal health care. And micro-lending is making a business of water purification where it is needed the most. 

And along with water of course is air; and again business sees the size of the opportunity — just think about cleaning up pollution in say, mainland China: now, that’s a market! And even in the US, there is so much more to do than remain stuck in the age of catalytic converters. 

Much environmental degradation is itself a product of technology that hangs on past its “use by” date because there is nothing commercially viable to replace it with — yet. Business sees opportunity in this circumstance, as it has in the past. While the political and governmental policy process may be stalled, business accurately perceives that there are far more consumers than voters, so it will leave the States and the Federal Government to the “Red/Blue” fight, and get on with getting Green. 

Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.

So now we learn that there really was not a dip in job creation in August but actually a modest gain of 89,000 (along with a preliminary September guess of 110,000 more). The question arises whether the Federal Reserve would have lowered the federal funds rate at all, or perhaps made only a 25 basis point cut rather than 50, had the August figure been reported then as now.

Of course, the data on the credit crunch when the Fed acted was real and pressing, and may alone have justified the dramatic rate cut. But we’ll never know the “counterfactual” because it turns out we didn’t really have the facts. Indeed, the dramatic sharemarket drop, which served as a backdrop to the Fed’s decision, which occurred when the original August number was released itself may not have transpired in such an adverse dimension, and again that eventuality could have changed the Fed’s thought process.

This blog has previously questioned whether the billions of dollars of investment and market capitalization that trades on release of official data on such measures of the economy as GDP and job growth is being ill-served by the apparently premature release of flawed data that is almost always revised a month or so later to a significant degree. Of course, the markets are free to discount the value of the early estimates, but with nothing else to go on, markets will “print the legend” (as the reporter famously explained in “The Man Who Shot Liberty Valance”). But movies about the old Wild West are one thing — we should not be making momentous policy decisions about the direction of US economic policy by an “oops” factor!

Putting aside private gains and losses on the basis of bad official guesses, it seems a serious question whether official actions, like those of the Federal Reserve, are being adversely affected, in terms of policy direction, by premature “data” (the Fed has trumpeted its “data-dependence”) that turns out not to be data at all, but rather a miss by a mile!

What would be the harm in waiting until the first week in October to release good, solid data on the employment picture for August? We would all just have to bear with the delay, but at least we could more confidently take action based on the data rather than pretending we have something reliable to act upon. Same goes for GDP. Why not wait until the end of November for a really reliable look at third quarter figures rather than getting a preliminary estimate at the end of October that, on recent track record, could turn out to be from 10% to 50% wrong within the month.

Halloween could bring us a lot of phantoms.