January 30,2011: The uprising in Egypt these last few days has demonstrated the power of social media as an element of how rapidly a foreign relationship can deteriorate and how difficult it has become for the Obama Administration and its State Department to set policy or react to what is happening on the ground. President Obama and his advisors have fallen rapidly behind the curve of actions on the ground in Cairo due largely to the speed with which opinions and directions to the masses marching in the streets have been communicated. We used to learn from back channels of State Department contacts when something was about to happen or how serious an event was likely to become before having to make and set policy for our reaction to any incident. When I think back to the post war political battles that took place between the super powers and their satellite nations, I recall that we discovered major changes were occurring by the means of radio, newspapers, or the release of information from our Foreign Embassies. Today it is vastly different. On a recent Sunday news program, the producer created a large TV screen divided into four columns. On those columns there were displayed copies of Twitter messages and Facebook entries. The top one on the list would disappear when a new message was displayed on the bottom of each column. The speed with which transmissions and replies to communications were taking place in this real time demonstration was mind boggling. It was impossible to read one message and create a response and not have a follow up message make your answer to the first irrelevant. The consequences of this development are causing government Foreign Service analysts to become less effective and in some cases downright superfluous.

Supposedly, Egypt is one of our most important friends in the Muslim world. Located smack dab in the center of the Mid Eastern Muslim Nations, and a partner in the Israel peace agreement of 30 years ago, Egypt is considered a rock in our efforts for offsetting the potential rise in influence of Iran, and the Islamic terrorists working out of Afghanistan, Pakistan and Yemen. Mubarak has been gently nudged over the recent years of his increasingly totalitarian regime to begin to initiate a democratic means of choosing his successor. Like a simmering volcano, the citizens of Egypt have slowly built up public opinion in opposition to him and this weekend fueled by Social Media conversations at break neck speed and orders from the Mullahs in the Mosques, the country has exploded with tens of thousands of people marching in the streets battling the Government police forces and breaking in to shops looting and setting fire to government buildings.

In the meantime, caught like the deer in the headlights, the Obama Administration had no idea what to do about the situation. On the one hand Mubarak and Egypt have been one of our closest allies in the area, having participated in the Gulf War and maintaining peaceful relations with Israel. But if we continue to show preference and unconditional support for his troubled regime, our entire Mid East policy could come apart. While some might say Obama and Hillary Clinton are handling it just right, the President’s calls for supporting individual’s rights to demonstrate by expressing opposition to their government’s policies are putting America, the “Dark Vader” in the minds of some demonstrators, in a bad spot. We look on the one hand like we are throwing Mubarak under the bus and other islamic nations are going to be less likely to enter into agreements with us in support of out policies. The President and his State Departent have clearly lost the initiative and are clearly behind the curve in reacting to political changes in the area. The fact that the Sunday talk show guests on NBC and ABC are actually making statements that one acceptable alternative for a change in the Egyptian government would be to have the Muslim Brotherhood organization take control should make the Western Powers very uncomfortable. While this anti America organization is allegedly dedicated to peaceful political and non jihad methodology for exercising political power, their aim is to instill the Quran and Sharia Islamic law as the basis of a society they would govern. The situation appears to be getting worse and although our State Department and the President may be voicing words intended to calm the rhetoric, it appears we have found ourselves in a circumstance where instead of killing the messenger, we should have and should be listening to the message or at least ramping up our efforts to find a solution to this erupting volcano. If we continue to look weak and unresponsive to the dangers developing, the Iranian threat, the future of Israel and our access to the Mid East oil could be jeopardized Obama apologies notwithstanding.

One Man’s Opinion—Bud Brewer

This is a video from a women who simply does not get it!

The Triage of Arrogance

During Congressional hearings, they sit on a dais elevated two or three feet above any witness that is testifying voluntarily and typically show little if any respect for the individual or panel of witnesses. I’m not talking about when a Committee is investigating an actual or potential defendant in a criminal act, I’m talking about those meetings where a witness is educating the Congress and appearing voluntarily. No, there is something that happens to those that enter government service or run for and are first elected to office. The success in their campaigns seems to cause them to become even more narcissistic than they otherwise might be.

There is a quote from Lord John Emerick Acton (1834-1902) saying, “Power tends to corrupt and absolute power corrupts absolutely.” Well, Barack Obama and his fellow Democrats took office with absolute power one year ago and as we look back, not just at the lack of his governing through a two party system, but more at the effectiveness or lack thereof by his 60 seat Senate majority to get important legislation passed, it has become clear that he seeks to have legislation done behind closed doors with little or no debate or the transparency he campaigned on. This combined with attemps to posture the United States as a conciliatory power that has made terrible offensive mistakes and now wants to be more accomodating to countries like Iran, Yeman, North Korea, and other nations dominated by dusruptive forms of Islamic or totalitarian governments. His unsuccessful efforts to influence our foreign allies to join with America in the pursuit of stronger anti terrorist policies can explain why voter confidence in his ability to govern is cascading down from the high level present at his inaugural.

During my lifetime, perhaps with the exception of the Roosevelt era, every successful president has governed from the center of the political spectrum. It is true that this was usually required to get bi-partisan support for any proposed legislation simply because they could not get it passed without them. But in most cases there was genuine regard for the leaders of the other Party and many of its members. I can remember how Ronald Reagan and Tip O’Neil, the Speaker of the House at the time of Reagan’s election, would be able to have discussions on serious matters, laugh at each other’s jokes and slowly but surely gain respect or at least a modicum of appreciation for the other’s point of view.

In the current period, Americans are increasingly becoming polarized. Is that part of a plan or a consequence of Obama’s leadership? If a plan, we better watch out because the next step is a potential non reversal of government authority over our everyday life and a diminishment of freedom, liberty and our standard of living.

After listening to the Barney Frank crowd express their ideas for regulating the financial industry into a state of atrophy and steadily losing hope that our free enterprise system will endure, I was heartened as I watched and listened to Frank Blankfein (Goldman Sachs CEO) and Phil Angelides (former California State Treasurer and Chairman of the “Financial Crisis Inquiry Commission Committee”) exchange views on what roll Wall Street played in the near Collapse of the Global financial system in 2007-2008. The reason I was heartened was that there in front of the World, Blankfein laid out a clear explanation, with all its strengths and weaknesses, of what capitalism is, how it works and why it is so effective in fueling economic activity for the betterment of American society. He went through just how investment banking, capital markets, brokerage and financial asset trading works and how it fuels capitalism. He described the role of the investment banker serving one client’s need for raising capital and then serve the needs of another through other divisions of its own structure to distribute it. Usually the investment banker is joined by others to provide the means of distribution of that financial product, (i.e. stock, bonds, or other securities) to or through investment brokers or advisors responsible for managing the investments of institutions and individuals. He explained that in this process, the investment bank, acting alone or heading a group of other underwriters, assumes extreme risk related to the process of underwriting and distribution of financial products. During this time, its equity capital becomes increasingly leveraged as its ratio of equity to its liabilities could and does require effective risk management to protect its shareholder interests. He said the demand for financial instruments to fund the need for mortgage capital necessary to enable individuals to purchase homes did cause his firm and most firms to build liabilities to a risk related level of 40-50 or even higher multiples of its equity. Recognizing that increasingly those applying for loans to buy homes were not going to be able to service the debt called for (so called sub prime mortgages) the firm accelerated its effort to address its exposure to risk. But at the time there was a common belief that the underlying collateral (real estate properties)for these securities and their derivatives would continue to rise or at least hold its value. Nevertheless, since the inherent loss potential with such risk can and did threaten the equity value of Goldman Sach’s shareholders interests, they took appropriate steps to hedge those risks. Some of those steps involved the use of derivatives that effectively made the company’s position be a seller of comparable securities to those it was underwriting. It was at this moment that Phil Angelhides made his remark “It sounds to me a little bit like selling a car with faulty brakes, and then buying an insurance policy on the buyer of those cars.” In fact that isn’t far off the mark but it is no different than what any person, corporation, law firm or whoever would and should do when, attempting to manage potential liability risk exposure. They prudently transferred risk to counterparties.

Unfortunately, his comment was picked up by the media and headlined “Investigating panel rips Wall Street”. The question and the response is clear evidence that our current Administration along with most liberals in Congress and of course the fawning media does not understand or appreciate the process of free market capitalism and in fact assures that until a change occurs, we are doomed to the consequences of that ignorance,

One Man’s Opinion –Bud Brewer

December 24, 2009: I know the Obamacare battle has probably been talked to death in most crowds but this past week’s legislative process is probably the worst exhibit of what has befallen the American People as any in modern times. When he was campaigning, Obama said he was going to open up the debate for legislation by having full disclosure on C-span and the Internet so everyone could see and listen to different points of view. But now that he has taken office, his strategy for open government has been trashed. Yet we still have the partisan majority creating law in ways some call horse trading while others call it bribery. In either case it smells and makes me want to go back to just not knowing how bad and less than honest these people really are. I must add that the record of the Republicans in recent years was not much better. Such a disgusting exercise as that we have just seen by the United States Congress makes people of integrity wonder whether this country can endure. If this isn’t enough, when you look at the world through economic bifocals, I am amazed how much our country has slipped in terms of its place of influence in the World.

Modern Beijing

China, India and Brazil are becoming such dynamic economies in the global markets that it will be a mistake by money managers to give only token consideration for investing more in them. While many of us have been enthusiastic about opportunities in these countries, investing more than a relatively small amount of capital carried perceived risks that could have seriously damaged a portfolio if they became manifest. The situation is changing now though and I think many more investors or their managers will ratchet up the percentages of their capital that they invest in these dynamic economies. To be a major investor in China, India and Brazil, the investor must have a significant understanding of the strengths and weaknesses of these countries. That means some professional advice or counsel by people who are associated with entities that have serious presence in those countries and a meaningful understanding of their politics and socio-economic conditions. Don’t be fooled by the images we see in western media of masses of people struggling to survive in these highly populated countries. While it is true that only 25-30% of the populations are well educated or enjoy comparable purchasing power adjusted life styles, these minorities are growing rapidly and in absolute terms represent more people than the United States, Japan and Europe combined. It is likely that within the next fifteen years, China will far surpass Japan’s gross domestic product and will begin to threaten the United States as the World’s largest economy. By 2025, China’s Gross Domestic Product should be approximately $12-15 Trillion (currently $4.5 Trillion). If the U.S. is lucky, its GDP could grow to $14-15 Trillion by that same time. The difference will be in the make up of that output. Faced with mammoth debt, confiscatory tax policies, some Federal Reserve manipulation of interest rates creating cross curents for deflation or potential price inflation, higher than normal unemployment and rising government mandates upon individual spending, the American consumer is not likely to be buying too much over their level of purchases in 2009 for some time. The Governments of most states will have faced enormous fiscal problems and many will have experienced some form of default.

While a majority of Americans will struggle through this period and be able to maintain most if not all of their present life style, many, due to their extended debt, little or no reserve savings, etc., will not be able to sustain theirs and will fall into that group supported by the our government welfare and unemployment benefit programs. Many traditiional American businesses will be turning to the government to help with their deteriorating financial situations. Some government help will be provided allegedly to save jobs in either what they call a bailout or by corporate reorganizations in which creditors and the government become owners of the enterprise.

Many in the finance industry (Wall Street) already entrenched in the Global markets administering their own capital or that of individuals, institutions and sovereign funds, etc., will begin accelerating the process of making a major adjustment to their strategy to become less dependent upon U.S. investment and more committed to the markets created by and serving the 2.5 Trillion people in China, India and Brazil. Their economies are growing at 8-10% per annum, they have huge trade surpluses, little or no consumer debt and more savings than they know what to do with. This means that their relatively more conservative consumer demand for many products and services, that we have always thought indigenous to the Western consumer life style, will be developing in these countries. While the United States will be mired in debt and struggling to produce enough GDP to service the interest and principal payments on it along with the requirement to pay for the explosion in entitlements, China, India, and Brazil citizens will shift some of their trade surplus and savings to increasing their standards of living. For example, did you know that this last year, the Chinese purchased more automobiles made in China than Americans did here in the U.S.A.? Did you ever believe that would happen in our lifetime? During this past year when the U.S. economy contracted 2.5% and Japan’s shrank 5.2%, China’s economy grew 8%, India’s 6% and Brazil ended up even or slightly in the black. China has emerged as the economic engine driving the global economy. Its economy is set to grow another 9-10% in 2010. In October, their industrial production rose 16%, fixed investment 33%, car sales 77% and consumer spending 16%. China has a small fiscal deficit and a large trade surplus. It has $2.3 Trillion of foreign reserves, a number that has grown $60 Billion per month during the 2008-09 crises. These reserves have given China the flexibility to stimulate its domestic economy without incurring mammoth debt like our Democrat friends in Washington.

The stories are much the same in India and Brazil. All the while Japan and the United States are competing to become the world’s largest debtor nation. Total U.S. Debt to Gross Domestic Product has risen to 358%, on a par with Japan’s bloated levels. This 350% level for both the U.S. and Japan is far above the 100% level for China, India and Brazil on average. The federal and state government’s fiscal positions are in a crisis. The federal deficit in the U.S. this year will be 11-12%, the worst since World War II. The Federal debt has expanded from $2 Trillion in 2000 to $12 Trillion this year. The American consumer debt has risen to 100% of GDP and the saving rate is still barely zero. Only the corporate sector of the U.S. economy is healthy, with high levels of cash and low leverage. A recent study done by Goldman Sachs predicts that China will eclipse the United States as the world’s biggest economy sometime in the 2020-2030 timeframe.

What does all of this mean relative to what we do with our investment capital? To me and I believe to many serious investors around the world, it means that we ignore these trends at our peril. We must reallocate more of our investment capital to the faster growing economies outlined above. We should maintain more modest investment in domestic companies and then only in those that have global presence and distibutive strength. Our investment in service companies should be conditioned upon their ability to exploit the opportunities from the expanding economies of China India and Brazil. My working number for investors with time horizons of 10-15 years is 50-75% of the equity segment and perhaps the same ratio of fixed investment. The next few years of such a strong shift will likely be volatile as transaction demand and supply temporarily distort fair market value but by 2020 such a shift in weighting should be and have been experiencing stable superior growth.

There likely will follow a shift in the political power and economic influence of the United States and that change will be a weakening one leading to negative forces upon stock and bond valuations. Don’t misjudge the pace of these changes. The U.S. economy will not fall off a cliff and the expanding role of government will mask the longer term consequences and rate of change in relative prices of business assets vis a vis the rest of the world, but the change will be real. Today there is little or no premium one has to pay to play so to speak. Tomorrow there will be! The WesternWorld will continue to be an important even if diminishing segment of Global economic activity, but we will be experiencing a rising pace in the rate of decline of our relative economic and political influence in the world.

One Man’s Opinion– Bud Brewer

October 17,2009: The following five paragraphs are excerpts from an article written by Kelly O’Connell and published in the October 17th issue of the American Thinker. It describes in cogent terms the background for and the most probable result of “Obamanism” here in the United States. I thought it worth including in this week’s Blog.

“Marxism is a violently revolutionary doctrine. Marx claimed capitalism’s Armageddon was inevitable, but followers should bear arms to hasten change. Since the rich will never give up their capital voluntarily, it must be taken by force. As Lenin in Russia, and Mao in China launched Communist revolts, the prophesied global apocalypse seemed imminent. But the staggering failure of Marxist theory to make productive societies, coupled with the West’s relentless growth forced an intellectual crisis.

Twentieth century leftist progressives developed a Neo-Marxism less warlike and more psychologically attractive approach by combining Marx with Freud, creating a highly sexualized socialism. The Frankfurt School Marxists who escaped Frankfurt, Germany to avoid Hitler’s wrath, relocated to the U.S. where they successfully infused Marxism into American universities. For example, “Political Correctness” is a Frankfurt movement, and the first modern use of this phrase is found in Chairman Mao’s “Little Red Book,” according to Geoffrey Hughes’ article, “Political Correctness: A History of Semantics.”

Neo-Marxist theories now dominate Western universities. Movements like Race Theory, Feminism, Gay Rights, Modern Art, Critical Theory, Animal Rights, Gender Studies, abortion advocacy, Deconstruction, penal reform, Hate Crimes legislation, etc. are all informed by Frankfurt scholarship. Redefined Marxism has produced spectacularly disruptive results. Some argue Obama’s election is a direct result of cultural Marxism’s success. Universal Health Care is another Marxist holy grail. The USSR had free medical treatment, notable for a staggering lack of basic supplies, horribly outdated methods, and horrifically filthy conditions.

Ominously, in 1966, Columbia University scholars Richard Cloward and Frances Piven published a theory outlining methods to destroy a healthy capitalist economy and force communist revolution. This eliminates capitalism by making impossible state budgetary demands, thereby bringing government insolvency.

Critics claim Obama’s budget is an example of the Cloward-Pivin model of planned economic destruction of a functioning capitalist economy via sabotage. Outlays are so gigantic, and so dreadfully misspent, that our financial infrastructure will soon collapse. A trillion dollar tax increase and spending rising by $10 trillion dollars over the next decade is probable. If so, government default will occur, only offset by mass currency printing, which will then bankrupt the general populace. The middle class will fall. Chronic inflation will result, causing America to lose its sterling credit rating. Global financial players must dump the dollar as it swan-dives. Then, hyperinflation will accelerate, and the era of superpower America will end.”

I have spent many hours during the last year trying to brace myself for the anticipated sharp move to the political left by the electorate of this country. Never, however, did I entertain serious consideration that the new liberal President and his Democrat majority in Congress would seek to address the serious financial deficiencies in our banking system and overleveraging by consumers and businesses with government deficit spending programs that are mega huge and not only threatening our very ability to recover economic and financial stability but also preserve the integrity of our currency. America has the highest Gross Domestic Product of any country in the World, but to continue to produce this output, we will need to depend on increasing domestic demand and rising global trade. This means trade agreements that bar placing tariffs on products from importers supposedly to protect less efficient domestic companies both here in the USA and in the foreign country from losing business. Unfortunately our President signed an executive order recently to slap tariffs on auto tires imported from China, for reasons I suspect that have root in the fact the U.S. Government is knee deep in the auto business now. The problem with exports is that to be competitive with developing countries with labor costs well below ours, we will have to devalue the U.S. Dollar, or increase the productivity of our labor force, or both. But how do we do this with a government whose policies appear to be designed to shift to a more command type economy and to redistribute wealth by bringing more regulation or government restrictions, tax rates and politically correct policies to our business community? I believe that the entrepreneur commits his savings or investor capital to economic or business risk as he gains expectations that he will be able to earn a satisfactory return thereon. Otherwise he is unwilling to take those risks that create businesses, employment and eventually a basis for government tax revenue. Our country’s political leaders don’t seem to understand the calculus that goes into creating economic growth from a free market system based on capitalism. Or as Kelly O’Connell suggests in the above extracts, maybe they do understand but they have a different agenda.

One Man’s Opinion- Bud Brewer