August 2008 Newsletter
Issue Four, Volume Nine

RUBBER BAND & CHEWING GUM ECONOMICS

By Mike Gasior

Much has transpired since I last sat down to write this newsletter and quite frankly almost all of it was bad. More huge losses by financial institutions around the globe. More declines in the value of U.S. housing. Rising unemployment. Slowing productivity and economic growth. And more and more horrifying bailouts of the ilk I lamented in the most previous edition of this publication. Not surprisingly, the prospects of a slowing global economy and perhaps even a global recession has reduced the demand for oil and other commodities while making the U.S. dollar not look like that bad of a currency versus others. My problem and boggle with all of this is that the stock market has remained high and interest rates remain low, even though not a single thing has been fixed in the debacle. My argument will be that all of these moves being made by the Federal Reserve and U.S. government will only make the ultimate economic downturn much worse than it ever had to be. I will try gallantly to make the case this month that recessions are a natural and cleansing part of capitalism and why the one we are in the midst of slipping into is going to be worse than it needed to be. With this auspicious and ominous primary topic, I'll try to mix in a little lighter fare for fear of being overly depressing.

First a little business.

NEW YORK AND GRAND CAYMAN TRAINING SESSIONS

I will be presenting two extremely timely seminars in New York in October and a particularly relevant slate of "a la carte" one-day sessions in Grand Cayman in November. Here is brief list of those programs and you can see the details of all New York and Grand Cayman classes at the following links:

NEW YORK

Introduction To Securities & Markets - October 27, 28 & 29, 2008
http://www.afs-seminars.com/introsec.html

CMO, ABS & CMBS Securities - October 30, 2008
http://www.afs-seminars.com/cmo.html

GRAND CAYMAN

The Hedge Fund Industry 2008 - November 17, 2008
http://www.afs-seminars.com/services-hedge-fund.html

Securities Operations, Processing & Accounting - November 18, 2008
http://www.afs-seminars.com/securities-operations_offshore.html

Mortgage & Asset Backed Securities - November 19, 2008
http://www.afs-seminars.com/mortgage_offshore.html

CMO, ABS & CMBS Securities - November 20, 2008
http://www.afs-seminars.com/cmo_offshore.html

Swaps & Swap Derivatives - November 21, 2008
http://www.afs-seminars.com/swap_offshore.html

I look forward to seeing you or your colleagues at one of these seminars.

There is also a new video commentary from me on many of the same topics in this newsletter and you
can view it on this page:

http://www.afs-seminars.com/v-commentary.html

THE MILLENNIAL ECONOMY

If I thought it was actually catchy or valuable terminology, I would likely cough up the money and time to register the term "millennial economy" since I am claiming here to have coined the phrase. This is no brilliance on my part, but a take-off of the title granted to the latest generation; the millennials. I was personally unaware of the awarding of this title, although I was aware of the Baby Boomers, Generations X & Y and, of course, the Greatest Generation. Several months ago I was watching 60 Minutes on U.S. television and they ran a story about the difficulties employers are having adapting to the attitude and habits of this new generation as members of the corporate community.

It seems this new generation was raised somewhat differently than previous generations and I have observed first hand some of the reasons why these difficulties exist. My daughter attends one these
new types of schools where everybody is a "winner". Nobody is a loser. Everybody gets a trophy for participating. There is no honor roll because it would be demeaning to children who didn't make the list. On and on and on it goes with the coddling and protectionism, now even into college. I read an article recently that suddenly colleges and professors are bowing to pressure from parents (pressure up to and including lawsuits) over bad grades on papers or to allow make up exams if junior misses his finals.

So what we are suddenly left with is a generation of supposed adults who don't like being told what to wear. Or when to show up. Or what to do. And wonder why THEY aren't the bosses within 90 days of being hired.

My absolute favorite thing to hear during the 60 Minutes piece was a human resources professional telling Leslie Stahl that it is becoming commonplace to have mothers of these kids calling her to complain about junior's performance review.

I can tell you one thing as someone who has run their own business for 18 years: The moment your mother calls me to complain about your performance review, you can head directly to your desk, pack your sh** and leave right now. NOW! The only time I ever want to hear from your mother is to find out that you have died and you won't be into work today. That's it.

The fact of life is that there ARE losers. Lots of them. Some people win. Others lose. This is a fact of life in nature and in capitalism. Sheltering junior from the fact that he can't actually compete with the rest of the world in a heads up environment only makes his emotional devastation later in life worse than it needed to be. Thus, let me begin my argument that we are now faced with an economy with similar characteristics to this generation.

Most anyone reading this newsletter is keenly aware of the way that nature and markets work. The tide comes in and the tide goes out. It's cold in the winter but then warms through the spring and summer
before beginning to cool again in autumn only to become winter once more. Stocks go up and then decline. Currencies grow quite strong and then weaken. All of these things are inevitable and natural
and the same holds true for economies at large. An economy can grow quickly and nicely, but then will naturally slow and perhaps even contract. This is a completely natural phenomenon and not at all
unlike the spring thaw that sends a torrent of water through river and stream beds shoving useless debris and deadwood out of the way making room for nature to operate more efficiently.

So why do officials from the United States government and the Federal Reserve suddenly fear even the most minor of recessions. Secretary Paulson and Chairman Bernanke are both of adequate age and have vast experience to know that what I stated in the previous paragraph is true and inevitable. Yet both are using literally every arrow in their quiver in an attempt to keep the U.S. from slipping into the
most minor of downturn. I struggle to understand why.

I've already lamented the idiotic $168 billion tax rebate mailed out to U.S. taxpayers (minus myself and others within my income category), which simply resulted in plunging the government into that much
more debt with more interest expense for these tax payers for many years to come.

There was the bailout of Bear Stearns and potentially more large financial companies who quite apparently ran their businesses like crap and took on more risk than they should have and ought to be
flushed down the river bed having lost the gambles they took. They are losers and they should lose.

I've written endlessly about the massive moral hazard being created by bailing out companies and homeowners who took on too much risk and are effectively being bailed out by the others who did "the right thing".

The simple fact here is that I can explain what will right the economic ship in a very simple four words:

Let economies cure themselves.

If the government and the central bank wonder what they should do about all these various economic ailments afflicting the U.S., I would counsel "as little as possible".

I'm old school in my approach to economics and markets as well as my core beliefs with how government should operate, but simplicity is often the most elegant and efficient answer to many problems. In my own opinion there are only three things that governments should actually worry about:

--External defense

--Internal order

--Maintaining an honest currency

In my nearly half a century of life I have seen my government (and others) do many, many things other than what's on my list, but almost always at the expense of neglecting one of the core three. You would
have to agree with me that the U.S. government has certainly been a "do everything" kind of government in recent years, worried about everything from what kids watch on television to the mating habits of earthworms. But how are they doing on the core functions that only government can do?

If external defense was being adequately handled, would the U.S. have somewhere in the order of 13,500,000 illegal immigrants living here undocumented and another perhaps 400,000 more entering annually?

If internal order were a priority would bridges carrying interstate highways be collapsing during rush hour?

An honest currency? Given the hideous and irresponsible levels of debt and deficits run up by the Federal Government and their programs every year I don't think I need to spend any time making the case for no control here whatsoever.

Recessions aren't new, nor are they bad; unless they are improperly handled. I'm the teacher by choice and profession so let me give you some historical references and lessons.

The first substantial downturn in the U.S. economy came very early in our history during 1819 after there had been a rush of immigrants and a clamor by politicians to end it immediately. As is common with
politicians, nothing was ultimately done about immigration and within two years the economy was once again booming.

There were other substantial panics during 1837, 1857, 1873, 1883 and 1893. The reaction from the Federal Government was minimal and all of these downturns effectively cured themselves. The panic of 1907 was serious but was ultimately solved by J.P. Morgan, a private individual with no governmental powers, who sat down with other financiers to determine which businesses would continue and which would fail.

Another large panic ensued in 1920 and President Warren G. Harding did absolutely nothing about it and trouble cleared up completely by its own accord.

Then came the market crash of 1929 and the actions taken by President Herbert Hoover over the objections of his Treasury Secretary Andrew Mellon who had lived through 1907 and 1920 and counseled his president to stand pat. Mr. Mellon understood that the key to a successful, capitalistic economy was to let badly run businesses go bust in a down cycle. Unfortunately social engineer Hoover would have none of this and begin to tinker and interfere keeping basically insolvent, badly run businesses floating. Secretary Mellon had warned Hoover that the crash should be left free to "liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate [and so] purge the
rottenness from the economy".

But Hoover didn't listen and as the crash became The Depression, he continued to tinker and interfere until the situation was painfully intense. When FDR was elected in 1932, he didn't alter Hoover's
policies, but actually increased and intensified them making things worse still. What had started as a straightforward recession had been amplified into an epic tragedy for America. Had it not been for the
onset of World War II who can predict when the United States might have begun to recover? We are still stuck with the infrastructure of this Hoover-Roosevelt style of government and seem to be implementing the worst of its tinkering at this critical moment in economic history. I fear that things will become much worse right now than they ever had to be and I watch the pundits every day wondering
why no one else sees what I see.

I personally like Barrack Obama as a man and he is truly a classic American success story. He is self-made, articulate, attractive and extraordinarily bright, not to mention his wife and children are as
well. But as much as he is proclaimed to be the next John F. Kennedy, he appears to me to be the next Hoover-FDR hybrid. Not that I think John McCain has all the answers either and I would personally hate
to be the one who inherits the next four or eight years since they will be faced with historic challenges. I doubt that either candidate will have the fortitude to do the "right thing" and let the deadwood get flushed out.

That's a fact of life though. Some people win while other people lose.

The majority of the American people have been wonderful children of their government in how they have learned to conduct themselves financially. Spend more than you make, don't save any money and be in debt up to your ass. The fact of the matter is most Americans are like their government and are simply broke.

I suggest it's time the both of them learn the errors of their ways and grow up.

ABOUT THE ELECTION

I try VERY hard to avoid discussing politics in any business conversation and I'm going to try hard here too. But here is my observation about the upcoming presidential election.

Out of 300,000,000 Americans who could be president, these are the two guys I've got to pick from? Really?

A guy younger than me who has never had an actual job and has been a U.S. Senator for a couple of years and another guy who is four years older than my Dad. Really?

Is this really the "cream of the crop" for us?

I already expressed worry whether either guy is going to be able to prevent the inevitable economic downturn, but I simply can't believe that these are the choices I've got.

The proposals floated from the Democratic side not only defy economic fundamentals and facts, but are just plain stupid. Like the argument that any new oil drilling in the artic or offshore "will not produce a
drop of oil for four or five years". So then what is the suggestion? Just forget it and leave it in the ground? Many of you know my love of analogies and this argument is the equivalent of telling a high
school senior; "Going to college is stupid. It's not going to increase your income for four or five years."

Oddly, these morons who suggest no new drilling for oil all have degrees from some of the best schools. All evidence to the contrary.

Obama talks every day out on the stump about so many American jobs being sent overseas and how his priority is to create more jobs at home. What is his proposal for accomplishing this? To raise the
corporate income tax rate, which unfortunately the United States is already among the highest in the world. This idea sounds like it will cause more companies to make more of their products in the U.S.
and create more jobs all right. Yet Americans listen to the garbage on their televisions and eat it up like Halloween candy.

My observation in recent years is that we've got the politicians and government that we deserve and that quite frankly I think the electorate is basically just too stupid to be governed. Whatever ultimately happens with the debt, deficit, Social Security and Medicare and all the other ticking time bombs laying all over the place, we'll deserve that pain thanks to the people we elected to keep watch over it.

In summary, as much as I love politics as spectator sport, this upcoming election makes me just plain sad. Both candidates predict change and so do I, but it's going to be a change for the worse and there seems to be nothing I can do about it. Kind of like watching a car accident happen right in front of you in slow motion.

ONE REASON WHY WE'RE BROKE

Since I am ever the economist, I love looking at numbers and statistics to see what sort of story they tell and I came across a terrific tale I will share with you here. It paints a fairly vivid picture of why Americans are as broke as they are suddenly finding themselves.

Back in my broker days of the 1980's I helped raise many millions of dollars in limited partnerships to finance the advent of a new industry aptly called "self storage". It actually struck me as a terrific business model with much potential. For example, did you know that these storage facilities charge as much per square foot for space as a very nice apartment building? And they obviously cost a small fraction of what residential housing costs to build and there is no heat, plumbing or electricity in the units. An added bonus was that they also try to select real estate at the fringe of growth area and when the land becomes valuable for development of a higher use the bulldozers level the place and something new is built. Genius. Honestly.

But let me now start painting by numbers for you and see what sort of picture emerges in your head.

--The average American home has grown from 1,400 square feet in 1970 to 2,300 square feet today, but the average number of people in each of households has shrunk from 3.1 to 2.5.

--The self-storage industry grew from about 289 million square feet in 1984 to nearly 2.2 billion square feet by the end of 2007, according to the Self Storage Association.

--It took 25 years for the industry to build its first billion square feet of storage space. The second billion square feet was added in just seven years, from 1998 to 2005, according to the Self Storage
Association.

--In 1995, one in 17 American households rented storage space. By 2007, that ratio had increased to one in 10, according to the Self Storage Association. I'm sorry, but that's not just tax returns and Sally's Cabbage Patch Kids collection. It's a symptom of a society that went on a credit-fueled shopping spree and didn't know how to stop.

--Five years ago, the total amount of revolving debt, primarily credit card debt, owed by Americans was $800 billion. Today, according to the June credit report released by the Federal Reserve, it's nearly $1
trillion, even as millions of us regularly plundered home equity to pay off plastic.

--Although home-equity borrowing has slowed (in case you hadn't heard that), the party raged for a long time: In 1995, Americans borrowed about $11 billion in home-equity loans; by 2005, we'd borrowed $243
billion worth of equity.

While most of you might not expect me to quote poetry (or have even HEARD of poetry), poet William Wordsworth penned these lines about 200 years ago. He could have written them this morning:

"The world is too much with us; late and soon,

Getting and spending, we lay waste our powers"

The summary point is that we live in a culture that encourages constant consumption. Very few people can actually afford all the stuff that is supposedly part of the American dream or what people see on "Lifestyles of the Rich & Shameless". Very few understand that debt is a drag on your personal financial health.

The relentless focus on having and buying and wanting and owning, and using your credit card or your home equity to cover it, has landed us here: with crates of things we don't need, stuffed into compartments where we never see it, throwing yet more money down the drain for the meaningless thrill of knowing we have it.

Why? Because we don't want to admit we were wrong, that buying all that stuff didn't add up to what we had hoped.

In the 1980s, massive deregulation throughout the banking industry created a climate suddenly favorable to widespread use of consumer credit. Suddenly, rates were low, and terms were lax. Americans began to borrow because they could.In 1994, Time launched InStyle magazine, giving consumers directions about how to buy things they
couldn't possibly afford and feeding a new phenomenon: the financial fantasy mind-set.

The same year (coincidence?), the sitcom "Friends" began a decade-long campaign to instill doubts in the mind of every hardworking American about our national values. Maybe it really was possible to live
in a gorgeous home, wear hip clothes and barely have to work? Answer: Visa.

In 2001, after Sept. 11, Americans sought the security of home and by watching countless cable shows about do-it-yourself renovation projects, helping to fuel the astonishing expansion of granite countertops nationwide.

It's amazing to me that anyone needs to struggle with how we ended up with this credit crisis or why we are likely to be taking some extremely bitter medicine very soon. While I don't know precisely how this whole thing is going to play, I get the feeling more and more that it's going to be more uncomfortable than 99% of Americans could ever imagine.

SOME PROFESSIONAL ADVICE

After nearly 30 years of working in a "white collar" environment (boy, that seems like an antiquated term), having run my own company for nearly two decades and served in many consulting engagements at large companies, I am still amazed how little people know about proper corporate etiquette.

This month's lesson is a list of eight things you should NEVER say in a meeting, although I have heard every one of them said more often than once. Here goes:

"I have to leave now"

Unless you've already gotten permission from whoever is at the top of your respective food chain, this is a very bad move. Corporate meetings are a delicate dance where you never step on toes unless it's
on purpose. If you must leave it has to be handled strategically. Have someone call your cell to create the impression that something important is happening and walk out. Lacking that, pull out your
Blackberry and read a pretend email while squishing up your face looking really annoyed and storm out quietly. Then later, make certain to visit whoever called the meeting and explain to them the
pressing situation that required you to leave and ask what you missed.

"Man, was I drunk last night"

I've sat in conference rooms prior to the beginning of a meeting and have borne witness to some incredible stories. Almost all of which I shouldn't have been privy to and left me with a bad impression
of the teller. Leave your tales of debauchery for the bar and chat about some corporate nonsense. This is even more important when the meeting is also a conference call and involves a speakerphone.
Remember that silence is golden.

"It's not my fault"

This one is a personal sore point for me. It is also the one that will create the most animosity among the other members of your team since it must obviously indicate you believe it's the fault of one of them. My favorite one was when I left my assistant a business envelope with $1,000 cash in it to pay a landscaper for some work I'd scheduled for the office. Well, she proceeded to drop this blank envelope into a mailbox with the rest of the day's outgoing mail. When I called her the next day from the road she was nearly in tears explaining what had happened and then added "it wasn't my fault" to the end of the story. When I asked whose fault it was then, it became somewhat clear to me that she considered it to be my fault for leaving money in an envelope since I guess I was supposed to know she'd be stupid enough to drop it into a mailbox. She wasn't my assistant much longer.

"Did you hear the one about two lesbians in a pay toilet?"

Okay. It's the year 2008 and any jokes that are racist, sexist, transgenderist, heightist, religionist, continentalist, immigrant, transient, or just plain dirty, have no place in any sort of meeting. You can probably also skip the Monday morning departmental meetings where all the managers discuss who got lucky over the weekend. Frankly, I shouldn't even have to be telling anyone all this but I've seen it too many times.

"I can't make that number"

Nobody actually appreciates candor, and definitely not when it comes to financial matters. I have personal knowledge of someone who went into a budget meeting as a senior vice president and came out as a consultant in charge of nothing. It seemed like a smart idea for him to tell the chairman who had called the meeting that his revenue expectations were "unrealistic in this economic environment". Maybe they were, but he probably would have gotten a better reaction to taking a leak on the boardroom table instead. From my own experience and observation, the rules for any financial meetings are strict and as follows:

--All current assumptions are to be accepted
--No definitive statements will be tolerated, especially negative ones
--Every word you say should strengthen the impression that senior management is in charge

The only time you should tell the truth about anything financial is during a deposition and you can then remind them of senior management's terrific ideas.

"I've had enough of your crap Steve"

Although I come from a hard-core Wall Street background and the above statement might be the nicest thing said during one of our meetings, I have learned that most corporate environments are more genteel. With few exceptions, most companies don't like conflict and try to stifle hostility. This doesn't mean you can't make your points, but you have to be more measured. For example:

DO - "Here are the six places I disagree with you on this, Steve, with all due respect."

DON'T - "Your work on this project sucks you moron, and I'll tell you why."

Yes, I know the second one is way more fun, but trust me on this one.

"General Electric does this much better"

It's true. There are actually people dumb enough to compare their current employer and it happens all the time. You can get away with saying that General Electric has tried something and maybe we might
want to try it, but walk delicately here.

"This meeting is bullsh**"

Of course it is, but you don't have to remind everyone of it. Grow up you Millennial.

FINALLY

I already don't like the idea of doctors, dentists and lawyers advertising on local cable television, but an ad I've been seeing lately bothers me particularly.

Doctors are terrifically smart people who do some of the most important work in society. And they might have made it through many years of college without ever attending a marketing course. But wouldn't anyone find a problem with this hook for a TV commercial:

"The Urologist You Can Trust"

As opposed to what? A urologist I can't trust?

I've seen he ad 50 times and it bothers me more the more I see it. Truthfully? I don't trust him now.

YOUR AUGUST BRAINTEASER

Part of me thinks this might be the toughest brainteaser I've ever given you guys, but maybe I just found it that way. I've been accused of favoring mathematically inclined questions so at least I'm not favoring that audience this month since this is an English language themed quiz so hopefully that will level the playing field somewhat.

Here it is:

"To the best of my knowledge, only one word can be made from using all of these letters:

AACDEGLMNNORSS

Can you figure out what the word is?"

Good luck, and when you can't take it anymore you will find the answer at the following link:

http://www.afs-seminars.com/brainteaser_Aug2008.html

Copyright 2008, Michael Gasior. All Rights Reserved

AFS Seminars LLC
500 Chamberlain Hill Road
Middletown, CT 06457-5564

http://www.afs-seminars.com

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