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IOU 240 Euros, It’s My Problem; IOU 240 Billion Euros, It’s Your Problem!

The first thing to know is that nobody should sell or buy a lot of US stocks or bonds because of the unfolding late-inning melodrama between the new government of Greece and the same old government of the Eurozone community about whether or not to extend Greece continuing credit despite its insistence on breaking the terms of its existing 240 billion euro bailout from the Eurozone, the European Central Bank (ECB) and the International Monetary Fund (IMF). At least for the next several days, all that’s going on are negotiations, carried out in a variety of public threats and private acrimony, signifying nothing until the very last minute. That’s what games of “chicken” are, even if they are carried out under the influence of modern “game theory.”

For five years, the Germans have essentially insisted on severe austerity (that must have a German root word, as in root canal) measures on the Greeks in exchange for temporary support in the wake of their nation’s de factor bankruptcy – classic “shock therapy.” While leaving the Greek public debt to European institutions under the bailout in place at normalized market interest rates, the program focuses on attracting external investment that would ultimately lead to the growth needed to repay the Greek debts and put the nation on sound economic footing by mandating externally supervised market structure reforms. These include liberalizing employment laws making it easier to fire workers, lower minimum wages and pensions, later retirement ages, reduced welfare payments, privatization of state assets like ports, media and roads, and crackdowns on corruption and tax cheating. This approach is also “standard issue” for the IMF when dealing with troubled economies. Enforcing this line of thinking before the start of critical Eurozone meetings this week with Greek representatives, German Finance Minister Wolfgang Schäuble summed up the situation as requiring Athens to stick to the existing bailout terms with no room for compromise just for the sake of compromise because Greece had lived beyond its means and no one wants to lend them any money without guarantees of the already agreed structural reforms being implemented, however painful to the Greek electorate.

The new Greek government is basically fine with corruption and tax cheat crackdowns, but parts company with previous Greek administrations by rejecting the “investment” model and instead proposes breathing-room financing to provide time to set up a new “contract” with its European institutional debtors.  This is based on a “demand stimulus” agenda that would put more money in workers’ and pensioners’ pockets through minimum wage increases and a halt to draconian spending cuts, as well as a reduction in the bailout’s requirement that the Greeks produce an operating (before debt service) surplus of 4.5% of GDP. Put simply, the government won election on a promise to voters to re-do rather than renew the deal with its Eurozone and IMF creditors when it expires on February 28. But that would mean that it would not receive 1.5 billion euros due to it in March under the existing bailout program, and risk end to day-to-day bank funding support from the ECB.

But the new Greek government seems prepared to take that hit and risk in order to honor its electoral commitment to the voters. Moreover, the crux of the Greek government’s case seems to be that it makes no sense, at least to the new Greek Finance Minister, to load more debt onto a bankrupt economy in an effort to stimulate growth – that “fiscal waterboarding” has only served to make Greece a “debt colony.”

It is clear that the two main antagonists (Schäuble and his Greek counterpart) agree that loaning more money to Greece, without reforms, is not the answer. But clearly the nature of the reforms required is a matter of profound disagreement, both substantively and procedurally. While the Germans have let slip the idea that perhaps the 4.5% surplus benchmark could be cut by one-third rather than the two-thirds proposed by the Greek government, but that such a deal could only be accomplished within the framework of the existing bailout agreement, which the Greeks want to scrap and start over.  Asked what happens if the Greeks insist on this posture, German Finance Minister Schäuble said simply that the Greeks can’t “negotiate about something new,” and if they forego the next bailout payment due to their insistence on abandoning the current deal, then “it’s over.”

Indeed, it looked to be fairly well over on Monday evening, February 16, when the meeting of Greek representatives with other Eurozone Finance Ministers, Eurozone and ECB officials broke up early and bitterly over the wording of a draft document, which, while showing flexibility on reforms and timetable, committed the Greeks to working within the existing bailout structure – essentially, the German position triumphant except in outcome. The Greek Finance Minister quickly insisted that Greece would do “whatever it takes”  to reach a deal, the lead Eurozone negotiator just as quickly shot back that it would take a commitment to the existing bailout to get a real agreement. Some have likened the situation to a classic case of “game theory” at work in the political/economic field rather than in Las Vegas or the drivers’ game of “chicken,” the Greek Finance Minister himself  (who once taught game theory at university) denied on the record that he and his country were playing games, a position that Minister Schäuble would also probably assert about himself and Germany if asked.

What the financial markets want to know, however, is whether the apparently semantic game of “chicken” about whether “flexibility” on Greek reforms and debt repayment timing (about which there appears genuine maneuvering room) must come under the “existing “or a “new” bailout framework or not at all, will instead turn into a “chicken little” situation for Greece, the Euro and the European community. Not only are the consequences of a potential Greek exit from the euro currency a “known unknown” to the markets, it is not clear if such an exit (or banishment) is legal or feasible, or if either the Greek economy or the Euro itself could survive the event in present form.  Moreover, existing Greek economic ties with Russia suggest that Putin may introduce his own form of “game theory” into the equation if the talks collapse and Greece needs a “white knight,” a potentiality that brings the US and even Israel (which has benefitted from Greek support in the region) into the mix of “stakeholders” in the outcome of current negotiations.

The lead Eurozone negotiator left open the possibility of further negotiations before the end-of-February bailout expiration deadline, even as soon as February 20. But he reiterated an ultimatum that the Greeks must play within the existing bailout deal. Some observers said that could again backfire, while others suggest that only more political turmoil about the uncertainly could bring all parties to a real deal in time. Let’s hope that doesn’t mean financial market turmoil as well.

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By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Recently published on Huffington Post.

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education

Maybe the Federal Reserve Has Been Right about the US Economy All Along

Hard as it may be for its legion of economic, political and media critics (and even some of its own members) to accept, the most recent bullish jobs report from the Labor Department looks like a ringing endorsement of Federal Reserve policies and perspectives on the economy. The Fed has kept its benchmark short term interest rate near zero for six consecutive years and also provided three huge batches of “Quantitative Easing” in the form of aggressive monthly bond purchases to hold longer-dated bonds within a range of interest rates that made mortgages attractive and stock investing less risky, all in the face of a constant barrage of criticism from its internal dissenters and external antagonists.

Just as the Fed itself has consistently averred that its monetary policy decisions would be “data dependent” rather than be driven by predetermined rules, theories or timetables, is it not fitting that judgment of whether the Fed has been right or wrong in its decisions also be driven by the incoming data more so than preset ideology, political persuasions or trading positions?

Moreover, would not a sense that those at the helm of our monetary system really have proven to know whereof they speak add a needed measure of confidence in government that would itself act as a boost to economic recovery (but of course only if it has been duly earned)? It looks from here like the Fed has indeed earned a much fuller measure of respect for its judgments and current posture than has been offered so far.

The Fed bashing certainly started early and often in the Great Recession, exemplified by the constant clamor for an “audit” of the Fed’s decision-making first proposed in 2009 by Texas representative and GOP presidential candidate Ron Paul and now championed by his senator son Rand. These two vigorously opposed the Fed’s monetary policy (indeed, the Fed’s very existence) in terms echoed and amplified with a bond trader’s perspective by Tea Party cable TV champions Peter Schiff and  Rick Santelli of CNBC.  They lambasted Fed Chair Ben Bernanke for his “easy money” policy, with Santelli warning it would lead to hyper-inflation and economic failure.

While Santelli has continued his attack on Bernanke’s successor Janet Yellen for creating conditions that would destroy the US dollar as well as the economy, he was finally taken on late last year by one of his CNBC colleagues, Steve Leisman, who asserted that even at that point Santelli’s Fed critique had proven wrong on all counts given the strong position of the dollar and the revival of US GDP growth.

Meanwhile, both Chairs Bernanke and Yellen and their governing majorities faced critiques from within the Fed’s membership, especially from regional Fed Bank Presidents Richard Fisher of Dallas and Charles Plosser of Philadelphia, both of whom actively took their dissents public arguing for urgent increases in the benchmark interest rates and quick termination of “QE,”  in each case because of their concerns about inflation. Both Fisher and Plosser had been dissenting from Fed policy off and on since 2008, when they resisted Fed moves to reduce rates in the face of an incipient recession. Nothing like being wrong both coming in and going out!

In point of fact, even before the most recent report on jobs and unemployment, US economy data showed that the annual inflation rate had decreased in December to 0.8% from even the low (in terms of the Fed’s 2% target) 1.3% rate shown in November, undercutting the anti-Fed case of Santelli, Fisher and Plosser quite decisively. The Fed, in fact, has been quite consistent in terms of holding its interest rate fire in view of the fact that inflation has been running too low during the recovery to support the growth in incomes that a solid recovery demands. Check out the Fed’s focus in its most recent policy statement concerning when it would begin to raise rates on the “progress – both realized and expected” toward full employment and 2% inflation.

The Fed got a fist full of progress in the results of the Labor Department’s monthly jobs and unemployment survey for January 2015 – progress which should put the Fed’s doubters to shame. Not only did the report show a 257,000 jump in net jobs for the month – the 11th straight increase over 200,000 and the best streak of growth in nearly two decades. Even the slight uptick in unemployment was due to the “good news” of the many thousands of individuals who were encouraged enough by “expected” jobs   growth to return to the job search themselves! Those expectations, as noted above, are as important to the Fed as the “realized” progress that the January report documented.

Moreover, the report also went some distance in proving that the Fed had been right in its January statement, cited above, when it observed that the jobs market had been showing both strong job gains and a reduction in the under-utilization of labor resources generally. And how! The January jobs report showed major corrections to the upside in previously reported figures for the two prior months, to 423,00 new jobs in November (up 20%) and 329,00 in December (up 30%).  These adjustments mean that America has created a million new jobs just since November 1, 2014.

In addition, a surprise increase of .5% in wages in January, possibly due to the onset minimum wage increases in several of the 29 states with their own wage standards over and above the federal law, should also encourage the Fed in its view that the economic recovery is on a good path, since such a turn toward a reasonable level of wage inflation has been cited by Chair Yellen as one of the key indicators  of emerging recovery that the Fed would be looking for (and may now have found). The Fed, in its January statement referenced above, agreed to be “patient” in initiating a rate increase and be guided by the incoming data. It may soon be getting additional indications of the economy’s progress toward normal growth which could further validate the Fed’s deliberate approach.

The upward revisions in the recent job statistics could be a signal of a forthcoming upward adjustment in the somewhat disappointing initial estimate of 4th quarter 2014 GDP growth, which came in at 2.6%, off the projected level of upwards of 3%. If that statistic is revised upwards by 25% like the average of the past two months of jobs data, it would bring the revised number right back on to the expected target, at 3.5%. That prospect should give Janet Yellen some measure of confidence as she delivers her semi-annual economic assessment to Congress on February 24 asserting that the Fed’s largely positive assessment of the US economic recovery in its January statement was fundamentally correct.

The revised GDP data for the last quarter of last year will be released just a couple days after Yellen’s testimony, and if the second and third quarters’ data are any guide, the revision will be upward just like the jobs report. Looks like the “academics” at the Fed do know a good deal about the real world after all – maybe even more than Congress and Cable TV. But that’s setting the bar low.

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 Recently published on Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education

Blocking Minimum Wage Increase, Boehner Relies On Lies

In the January 25 broadcast of CBS television’s “60 Minutes” program, House Speaker John Boehner dismissed any chance of increasing the current federal minimum wage as: a bad idea. “I’ve had every kind of rotten job you can imagine,” he said, “growing up getting myself through school, and I would not have had a chance at half those jobs if the federal government had kept imposing higher minimum wage.”  Well, let’s see about that.

John Boehner was in the vanguard of the post World War II  baby-boomers, born  November 17, 1949, and his biographical information notes that he got his first job working in his family’s bar (at age 8), which means around 1957.  At that point in time, the federal minimum wage was set at $1.00 per hour. Maybe this was even more than young John got from his dad and granddad. In any event, by 1961, that figure had been increased by the federal government by 15%, to $1.15. Boehner did not mention in his interview that this increase cost him his sweep-up job. In any event, let’s be fair to Boehner and look where the minimum wage was when he was just out of high school: in 1968, it was up 60% from when Boehner started, all the way to $1.60.  That is equivalent to over $10.69 in current dollars, higher than the level Boehner now rejects as imprudent. But more on that later.

By the time Boehner left the Navy due to a bad back and was, to his great credit, working his way through Xavier University as a janitor, the federal minimum wage had been further increased to $2.00 per hour in 1974, $2.10 in 1975, $2.30 in 1976, and $2.65 in 1978, by which time Boehner was settled in a job with the local manufacturing company that would eventually install him as its president.

In short, what Boehner said to CBS was a double lie. First of all, the federal government in fact did increase the minimum wage multiple times while he was working his way up the ladder, and secondly, none of those increases seems to have stopped him from getting the “rotten jobs” that kept him moving up the ladder to eventual success.

The fact that Boehner, like so many politicians, got away with these bald-faced lies is a “tribute” to modern sloppy TV journalism, in this case, as practiced by his underprepared interlocutor, CBS’s Scott Pelley. (Mike Wallace, where are you when “60 Minutes” really needs you?) But the problem of finding the truth in debates about increasing the minimum wage goes well beyond Boehner’s misleading sound-bites.

Let’s start with the notion that current proposals are calling for an “increase” in the level of the federal minimum. That’s true only in nominal terms. The current proposal to increase the standard from $7.75 to $10.10 over two years merely moves the level of purchasing power, as noted above, to the level in effect when John Boehner finished high school. In fact, the purchasing power of the US minimum wage has been steadily decreasing since 1968: to reach parity it would have to be raised by $3.44 (47%), far less than President Obama has proposed but in line with the range of state and local changes recently enacted or under discussion.

The other prevalent “big lie” about minimum wage jobs is that they are largely held by teenagers. This blogger has personally heard multiple commentators on CNBC, a cable TV financial news source, routinely parrot this outright lie, at least for anyone who has bothered to look up the facts. But they may have an excuse. Congressman Paul Ryan, widely celebrated for his command of economic and budgetary facts, stated outright that “the majority of those on the minimum wage are young people just entering the work force.” Not so. Eighty-eight percent of those earning the minimum wage are over 20. Their average age today is 35 and “she” is most likely to be a full-time bread-winner for her family.

In citing these facts pulled together by the Employment Policy Institute, The New Yorker magazine also called attention to the most common and persistent argument used against any proposal to increase the national minimum wage level: namely, that it would be a “job killer.”

While it may have been one thing to argue against Roosevelt’s proposal in the late 1930’s as a communist plot, and for Ronald Reagan to link the very idea of minimum wage to the decline and fall of the Roman Empire, the “modern” version now equates fighting off any increase in the minimum wage to the fight against terrorism. A Koch Industries executive told a gathering of high-roller political donors in Dana Point, CA last year that the 500,000 he expected to be unemployed due to an increased minimum wage would constitute the main recruiting ground for totalitarianism, for fascism, even for suicide bomber recruitment.

The tens of millions of minimum wage workers who would benefit from a minimum wage increase (estimates range from 15 to over 25 million) would far outnumber such minimum wage “victims.” Moreover, again the facts belie the lies: research showing that minimum wage increases either have no adverse effect, or have even a minor positive effect on job creation have never been effectively discredited.

In calmer times, it has also been argued that direct tax-system income subsidies to the working poor are a more economically efficient means of addressing the problem of poverty-level wages in a free-market system where businesses should not have to pay more than the “value add” of any worker. Even the godfather of interventionist economic policy, John Maynard Keynes, himself took up this argument for while. (See “The Battle of Bretton Woods; John Maynard Keynes, Harry Dexter White, and the Making of a New World Order”, Benn Steil, Princeton University Press 2013, at p. 82.)

In fairness, this argument is not a lie but a reputable economic theory, which does omit, however the wage-depressing effect of the earned-income tax credit, which in the real world can only be counteracted by some level of minimum wage increases alongside. Moreover, why should the American taxpayer be obliged to subsidize the business plans of McDonald’s and Walmart in a free-market system? Or is the real lie that we continue to believe in the American dream that if you work hard you can get ahead – just like John Boehner, who clearly benefited from minimum wage increases as he was working his way up, even though he denies it. Washington is sometimes an alternative universe.

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Recently published on Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education

CNBC – The Lame Duck Network: Shilling For Short Sellers and Hating Obama Are Not Enough Anymore

Daytime ratings for the financial news network CNBC have been in free fall since the summer, when they hit a rock-bottom 21-year low.  The CNBC response, of course, has been to shoot the messenger by firing Nielsen as its rating agency! In fairness, CNBC has a point: Nielsen only logs at-home viewership and the financial news networks all have considerable out-of-home audiences, in gyms, offices and trading floors for sure. CNBC will design its own ratings system using the market research firm Cogent to include its mobile viewers,  while its competitor, Fox Business, sticks with Nielsen, and Bloomberg continues to sidestep the ratings game. But is there something more behind the change in CNBC’s fortunes besides not counting the office and gym audiences? After all, the same audiences also watch Fox and Bloomberg as well.

Just a couple years ago, the beginnings of CNBC’s ratings fall was attributed by some commentators to the allegedly more “liberal” or at least “market promotional” bias of the network.  This despite its history of championing the views of its Chicago commentator Rick Santelli, who was the godfather of the Tea Party and actually coined that phrase during an on-air rant against the then-new Obama Administration’s initiatives to help homeowners with underwater mortgages.

Santelli now enjoys a privileged position in CNBC’s morning programming, including his own “Santelli Exchange” segment that features animated, if somewhat repetitive and predictable, rants against Obama, ObamaCare, federal spending, “quantitative easing,” Central Bankers in general and the US  Federal Reserve in particular, as well as its Chair Janet Yellen and European Central Bank President Mario Draghi. This steady stream of daily invective against Obama and the Fed is amplified by “interviews” Santelli conducts with various market participants and commentators who share (not to say ‘parrot’) Rick’s views.  Typically these “interviews” represent the  views of some Chicago-based  option, futures and bond traders who hate Obama ideologically and have similar sentiments about the Fed , which has taken a lot of juice out of their trading activity by maintaining interest rates next to zero to help the broader (i.e., non-trading) economy recover from the near-depression of 2007 to 2009.

Santelli’s daily stream of invective-laced advice has not generally been beneficial for CNBC’s viewers who may have taken it. Santelli, for example, consistently argued, over several years, that the Fed’s easy money policies regarding interest rates and quantitative easing would have by now produced rampant inflation and a crash in the value of the US dollar, and advised investors accordingly. But in his usual manner he simply screamed and interrupted when CNBC’s only true expert on Fed policy, Steve Leisman, called him out in a live discussion. While Rick apparently simply denied he had made such forecasts, it is clearly on the record that he did (hat-tip to Business Insider).

But Rick Santelli is not the only reason certain viewers may be turning off CNBC, at least those at home (i.e., the retail investor).  Just last Friday, prominent “Fast Money” CNBC regular Guy Adami flatly declared that the US “economy is lousy” despite the most recently reported 5% quarterly GDP growth rate, in order to support his generally anti-Obama and anti-Fed views. Expression of such views is now obviously encouraged on CNBC as led by its key executive editor Patti Domm, who regularly posts blogs such as the one posted early on Friday, January 9 predicting material downturns in the market on the basis of ideological views, generally in line with the Tea Party and short-oriented hedge fund traders’ views of the economic policies of Obama and the Fed.  Beyond Ms. Domm, other CNBC staff writers who regularly post pieces suggesting imminent “corrections” or even crashes in the market include Jeff Cox, whose views seem to coincide with short-selling hedge funds as in his disparagement of the 321,000 November job creation report, which no doubt surprised some short-the-market hedge funds.

CNBC has been tracking Tea Party positions on issues like ObamaCare since 2009. This is perhaps understandable given Santelli’s paternity, but even more, he has been correlating the balance of its market commentary to promote the views of some short hedge funds that bet against the market in 2014 (and were wrong) and who seem poised to double down on that negative view entering 2015,  according to the Wall Street Journal. Not to be outdone, CNBC’s Jeff Cox jumped in a few hours after the Journal to propose that the recent dramatic fall in oil prices would  necessarily lead to poor corporate profits in the coming earnings season. This view, of course, is certainly within the pale of possible outcomes – that’s what makes markets.  But the fact is that you won’t find a contrary view on CNBC, just the negative, which tends of course to send retail investors to the “sell” button: just as when the same Jeff Cox made a similar downbeat prediction just before the 2014 earnings season started in mid-April. It turned out to be a pretty good year for investors who did not sell off stocks despite his advice and for the short hedge funds who profited on the stock market’s way down, and then could buy them up cheap before the stellar earnings reported during the rest of 2014

In short, CNBC should be asking itself why on earth it continues to show such favoritism for the views of market pessimists and short sellers – indeed, even facilitating such traders profit strategies – at the expense of their retail TV audience. Maybe the hedge fund titans take the CNBC folks to some fancy lunches, or maybe they’re mostly just like Rick Santelli who are heavily invested in their Tea Party political views and determined to impose them on its coverage patterns. But at the end of the day, why should anyone watch CNBC for actual market “news” on finance and the economy when the network seems determined to turn off its audience with programming that just mimics the style Fox News and at best helps only the short hedge fund crowd by scaring off retail investors just when the hedgies want them to be scared? If viewers want pure unadulterated negativity, they can get that on the Fox channel.

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Recently published by Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education

The Business School Dean’s Quiz For 2015

Give yourself three points for each right answer until the last, which, if you guess correctly, is worth four points. The Dean’s guesses are shown at the end.  We’ll compare our guesses with reality at the end of 2015.

  1. The most successful IPO of 2015: (a) Palantir (b) Shake Shack (c) DropBox (d) Uber (e) Vine (f) Koch Industries (g) 0ther.
  2. The national leader who will not survive the year in office: (a) Vladimir Putin (b) David Cameron (c) Kim Jung-Un (d) Raul Castro (e) Bibi Netanyahu (f) none of the above.
  3. M&A deal of the year (a) Yahoo/CNN (b) IBM-Fortinet (c) News Corp-Twitter (d) Apple-PayPal (e) Google-GoPro (f) Pfizer/ISIS Pharmaceuticals (g) Netflix-Pandora.
  4. Leader facing the strongest challenge from within his or her own support base: (a) Barack Obama (b) Pope Francis I (c) John Boehner (d) Hillary Clinton (e) Roger Goodell.
  5. S&P 500 at year-end 2015 vs. 2014: (a) up double digits (b) up single digit (c) basically flat (d) down.
  6. Federal funds rate at year-end 2015 (a) 1.25% or higher (b) 1% (c) .75%: (d) .50% (e) .25% or lower.
  7. Car maker of the year: (a) General Motors (b) BMW (c) Ford (d) Tesla (e) Fiat Chrysler.
  8. Will go out of business in 2015: (a) Sears (b) RadioShack (c) Sandridge Energy (d) Uber (e) JC Penny (f) AirAsia.
  9. Will default on its debt in 2015: (a) Russia (b) Argentina (c) Greece (d) Venezuela (e) Ukraine (f) Illinois (g) none of the above (h) all of the above.
  10. Surprise political event of the year (a) Hillary Clinton chooses not to run for President (b) Elizabeth Warren chooses to run, beats Hillary in New Hampshire (c) Obama-Boehner do a deal on immigration backed by Silicon Valley, Chamber of Commerce and Catholic bishops (d) Supreme Court again saves ObamaCare subsidies by one vote (e) Democrats concede nomination in advance to Mrs. Clinton, hold primaries for VP choice only (f) Romney runs again (g) none of the above.
  11. GOP presidential candidate who makes the most progress in the polls in 2015: (a) Jeb Bush (b) Dr. Benjamin Carson (c) Ted Cruz (d) Carly Fiorina (e) Mike Pence (f) Rick Santorum (g) Rand Paul.
  12. Print edition goes dark: (a) The New Republic (b) Time (c) Playboy (d) The Village Voice (e) Variety (f) The Atlantic Monthly (g) none of the above.
  13. “Comeback of the Year”: (a) Tiger Woods (b) Twitter stock (c) President Obama (d) General Electric (e) McDonalds (f) Oil (g) other.
  14. First producer to curtail oil production in 2015: (a) United States (b) Saudi Arabia (c) Russia (d) Venezuela (e) Iraq (f) none of the above.
  15. Keystone XL pipeline gets final approval: (a) True (b) False.
  16. Congress and the President agree on a corporate tax reform plan: (a) True (b) False.
  17. Microsoft spins-off X-Box business (a) True (b) False.
  18. Pope Francis conditionally allows communion for divorced/remarried Catholics: (a) True (b) False.
  19. Obama’s immigration executive order effectively blocked by Congress or the courts: (a) True (b) False.
  20. The European Central Bank initiates government and/or bond purchases (“quantitative easing”) to prevent European recession: (a) True (b) False.
  21. Unemployment in the US ticks up above 6% again due to oil industry layoffs: (a) True (b) False.
  22. A top-100 American private college files for bankruptcy protection (a) True (b) False.
  23. China GDP growth slows below 7%: (a) True (b) False.
  24. A major Canadian bank requires a bailout due to soured oil loans (a) True (b) False.
  25. Oil bust dooms Rick Perry’s presidential campaign from the get-go: (a) True (b) False.
  26. The interest rate on the ten-year Treasury note ends the year above 3.25%: (a) True (b) False.
  27. Campus fraternity bans challenged in court as a form of sex discrimination: (a) True (b) False.
  28. President Obama has the opportunity to replace one or more Supreme Court Justice: (a) True (b) False.
  29. Political rioting significantly disrupt commercial activity in (a) United States (b) Australia (c) France (d) Denmark (d) Germany (e) Greece (f) Spain.
  30. Private Equity deal of the year: (a) Whole Foods (b) any mattress company (c) RiteAid (d) VeriPhone (e) Garmin (f) Under Armour (g) none of the above.
  31. Hottest growth stock of 2015: (a) GoPro (b) Twitter (c) ISIS Pharmaceuticals (d) NXP International (e) Apple (f) Hortonworks, Inc. (g) New Relic Inc. (h) other.
  32. First CEO to go: (a) Dick Costolo – Twitter (b) Marissa Mayer – Yahoo (c) Ginny Rometty – IBM (d) Michael Lyntton – Sony Entertainment (e) Mark Emmert – NCAA (f) Debbie Wasserman-Schultz – Democratic National Committee.
  33. ‘Product of the Year”: (a) Apple’s I-Watch (b) the GoPro drone (c) NASA-derived ‘meal-in-a capsule’ (d) 3-D printers for kids (e) all-electric motorcycles (with recorded engine sounds) (f) Vines.

Guesses from Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University: 1(a) 2(f) 3(b) 4(b) 5(a) 6(c) 7(e) 8(b) 9 (g) 10(c) 11(b) 12(a) 13(c) 14(a) 15(b) 16(b) 17(a) 18(a) 19(b) 20(a) 21(b) 22(b) 23(b) 24(a) 25(b) 26(b) 27(a) 28(a) 29(c) 30(a) 31(f) 32(f) 33(d).

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By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Recently published on Huffington Post.

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education

The Fright Before Christmas

‘Twas the week before Christmas

And all through the Street

Not a hedge fund was buying:

Instead—in retreat!

They’d bet big on oil—

Now they weren’t in the black,

So they sold off their winners

To take up the slack.

The stock market tone?

Like taps on a bugle:

Down Apple, down Exxon;

Down Chevron and Google.

Through sixty, toward fifty,

The oil price descended;

Sayonara to fracking,

That party seemed ended.

The Saudi oil barons

Had put on a squeeze,

To force US frackers

To fall to their knees.

The banks how they quivered

To fund Bakken field;

And don’t even bother

To think of high yield!

It’s goodbye to boom times,

Dakota and Texas:

You’ll take a big hit,

Best trade in the Lexus.

The big city bankers

Knew they were hurt, too,

So they called in their chits

At the Washington Zoo.

Their minions in Congress

Played games with Dodd-Frank,

And gave Morgan and Citi

A deal that just stank!

A little old rider

So quietly drafted

That none knew the score

Until they were shafted.

The law had told bankers:

Hive off your swap stakes,

So taxpayers won’t have to

Bail out their mistakes.

But a twist of an arm,

And a wink of an eye,

Let Congress make sure that

This mandate would die.

A government shutdown

Was thereby curtailed,

But the process revealed

That we were blackmailed!

Banks swore they were acting

For the good of the nation

But the Journal said greed

Was their main motivation.

If swaps get to stay in

Insured institutions

The banks get best prices—

A perfect solution!

So to maintain big profits,

The banks pulled a fast one;

Pelosi and Warren

Said it won’t be the last one!

Next, Senator Cruz tried

A fresh point of order

To tie up the Senate

On the Mexican border.

He said he was willing

To shut D.C. down,

To make sure illegals

Would be run out of town.

But despite (and because of)

The Cruz machinations,

Harry Reid passed the Bill,

And won key nominations.

Obama’s executive

Order prevailed;

Merry Christmas, five million;

You’re not going to be jailed.

And then, just as wild market swings

Before the next Fed meeting flew,

Came a slew of predictions

Easy money was through.

GDP is up strong

And so is employment,

Why would a quick rate hike

Spoil the enjoyment?

But Europe is slowing,

And China is, too;

And on top of all that,

Greece defied the EU!

There’s Putin, there’s ISIS,

The Afghanistan War;

But the truth is we’ve all

Seen this movie before.

The trick of the hedge trade—

Get others to panic

That the Fed will cause stocks

To sink like Titanic

By hinting they plan to

Raise interest rates quickly

When, despite some good data,

The world is still sickly.

The prediction,

Whatever the reason or rhyme,

Was the Fed would no longer

Take “considerable time”

Before they decided

To press on the brakes—

That thought would give most of

Investors the shakes.

They’d part with their holdings

Before the Fed meeting,

Which then would give the hedge funds

A frenzy for feeding!

But the Fed’s Janet Yellen

Was steadfast and bold;

She surprised TV pundits

And kept rates on hold!

“Considerable time”

Remained on the table:

Even  “patience” was added—

(Just to stick it to Cable?

Joy reigned in the market

For stocks of all sorts,

As hedge funds moved quickly

To cover their shorts.

On the very same day

The lame duck Obama

Decided to normalize

Dealings with Cuba.

Marco and Jeb said,

We shouldn’t take chances;

But Obama had cover

From good old Pope Francis!

The Spirit of Christmas

Was abroad in the land,

If just for an evening;

Who knows what’s at hand?

2015

May bring new solutions:

New Congress, new leaders,

New Year’s resolutions.

Just be careful next year

Not to give too much cred

To rumors, and phonies,

And all that you’ve read.

When writing your e-mails,

Don’t be a buffoon;

Don’t get on the wrong side

Of young Kim Jong-Un.

Things are looking better—

California’s turned soggy;

And Europe’s still trusting

In Mario Draghi.

And there seems a consensus

What’s best for our nation

Would be increasing pay

And a bit more inflation!

The Court will decide

If ObamaCare stays;

One way or the other,

Somebody pays.

But we’ve kept out Ebola,

When too many panicked;

Let’s send more help soon

Across the Atlantic.

Trust nurses and nuns,

Give our kids renewed hope;

And pray CEOs

Get as wise as this Pope.

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By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Recently published on Huffington Post.

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education

Could The Oil Price Crash Kill Keystone XL?

In late November, the lame-duck Congress came within one vote in the Senate of sending a bill to the President mandating approval of the controversial Keystone XL pipeline. That project would bring oil produced in western Canada – primarily from tar sands but also from conventional drilling – down to Nebraska and then on to refineries in Texas and Louisiana for processing into petroleum products for export to Asian markets. Republicans planning their takeover of the Senate and enhanced majority in the House of Representatives quickly vowed to renew their effort to force Keystone construction  as a priority after the first of the year, with visions of a possible ‘veto-proof’ two-thirds majority, including Democrats pushed by their unionized supporters attracted to the job-creation benefit, however temporary, associated with the Pipeline’s construction.

Just a few days later, the Organization of Petroleum Exporting Countries (OPEC) decided not to reduce their oil production below the current target of 30 million barrels annually, even in the face of an already precipitous fall of that commodity’s price from over $100 per barrel to a low $70 range since early summer. This fall is due to an oil glut on world markets, partially as a result of tremendous growth in domestic American oil production from shale rock through the process known as ‘fracking.’ The day after OPEC chose not to cut, the price of West Texas Intermediate crude oil (a proxy for what is essentially oil produced in the U.S.) sustained a further, dramatic drop of 10%, down to $66 per barrel.

Oil market professionals and observers had been speculating that Saudi Arabia and a couple of its Arabian neighbor states were purposely playing a ‘long game’ in terms of being willing to tolerate much lower per-barrel prices for their oil (and lower current returns to their ‘petrodollar’ economies and social welfare benefits keeping their young, restless unemployed off the streets) with the security of hundreds of billions of dollar reserves. The object of that game, it was supposed, was to force the oil produced by marginally and precariously financed shale oil producers in the U.S. out of the market. That is, shifting the burden of reducing the global ‘oil glut’ and ultimately increasing demand and a return to higher prices, from OPEC to America’s upstart producers. If a goodly number of U.S. producers happen to go bankrupt and cease shale oil production permanently because they become unable to service their debt due to lower market prices, so be it: all the better to restore and enhance Arab market share once the dust settles.

All of which seems to beg the question: even though we have waited through over six years of environmental studies and political haggling to settle the question of whether to build the Keystone Pipeline to bring more oil to American refiners and more jobs to the American recovery scenario, what’s the hurry now with so much oil product floating around the world that prices have fallen nearly 40% in less than six months, and look to fall even further into the coming year? “On further review,” as they say in football, maybe we need to replay the Congressional debate on Keystone to see if the apparently ‘obvious call’ to move forward really ought to be reversed rather than ratified by the new Congress. Indeed, there seems to be a case to be made that the Saudi’s real objective is not just to crush wildcat shale oil firms in the U.S. but also, and more importantly, to put a spanner into the tar sands works up in Alberta, which produces the same type of oil as most of OPEC’s Gulf States. Here we get into the ‘sweet’ and ‘sour’ distinctions in the oil market, which has a certain charm given that the Arabs and the Canadians are really caught in market share war over the Chinese market!

The fundamental difference between ‘sweet’ and ‘sour’ oil (the former predominant in the U.S. fracking production and the latter in the Canadian tar sands and Arabia) is the amount of sulfurous impurities (primarily hydrogen sulfide) mixed in with the oil. Hydrogen sulfide smells like rotten eggs in low quantities but can be life-threatening in higher amounts.  Sour oil is generally defined as having more than .5% of such impurities and must be shorn of them in the refining process before products like gasoline, kerosene and diesel fuel can be safely refined, increasing the production costs. So-called sweet oil (which actually tastes that way, and smells nicer, too) has less than .5% impurities and thus can be more routinely and cheaply refined into those core fuel products.

Since both the Saudi sour oil and the Canadian tar sands sour oil are thus in direct competition for efficient production and marketing to Asian market, particularly China. It is apparent that the Keystone Pipeline project itself is intimately involved in the Saudis’ ‘long game’ calculations.  If OPEC can drive down the market price for oil to a level where the process of extracting tar sands oil in Canada, and then shipping it to costly refinement in the U.S., becomes uneconomic, then Keystone itself could become potentially uneconomic as well. Oil prices sustained below $85 per barrel could force deferral of new tar sands extraction project, but opinions differ on how low oil would have to go to cut ongoing production headed for Keystone. Some say as low as $65 would threaten such curtailment, while others point to long term contracts with Keystone customers that could tolerate prices even below $40. Interestingly enough, some market observers are lately predicting just such a fall to the $40 level — recalling that the Saudis previously engineered a crash to around $12 in 1999. The Financial Times reports that Saudi Arabia holds three-quarters of a trillion dollars in reserves to keep its economy and welfare state going, so it is prepared for a ‘long game’ indeed. Meanwhile, the Keystone XL could become a ‘pipeline (with nothing) to nowhere,’ a sensitive point for a Congress already famous for approving a bridge to nowhere.

On the other hand, however, if prices were to stabilize at higher levels more toward a floor of $65, the Keystone Pipeline – as a cheaper, less cumbersome and less costly distribution route for tar sand producers than rail or alternative pipelines to Canadian port refiners – could make the critical difference in whether tar sands production is sustained economically.  This could eventuality provide a stronger environmental objection than heretofore recognized by the U.S. State department in its previous reviews of the Pipeline’s likely environmental impact on greenhouse gas emissions.  This report presumed that at then-current oil pricing, the tar sands oil production would find its way to market in any event with or without Keystone. If Keystone makes the critical difference to whether tar sands production continues in a much lower oil price environment, as its opponent contend, then it would surely fail President Obama’s announced policy not to approve its construction if doing so would contribute to significant additional greenhouse gas emissions from tar sands oil and its production processes.

Why, indeed, would U.S. shale producers want to use public policy to subsidize Canadian oil producers in an extreme and sustained low oil price environment? Perhaps North Dakota and Texas entrepreneurs will turn out to be ‘for Keystone XL before they were against it?’ Time for a replay in Congress?

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Recently published on Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education