An Optimist’s Lament
There are ‘stock’ people and there are ‘bond’ people. I am a stock person and have been all my life. It suits my personality because stock people are optimists. We see the glass as half full. We like to buy and hold stocks for the long term because most of the time things are going well and we make money. We are different from bond people who tend to be cautious and are much more likely to be pessimists. They usually see the glass as half empty.And that is why I am so worried right now. Because try as I might, I am catching myself falling into pessimism. I participated in a conference call late last week with Bill Gross - the genius bond manager. As might be expected, he was a pessimist, and who could blame him. But what made me so uncomfortable as he spoke was that I felt he was taking the words right out of my mouth. We were on the very same wavelength.I cannot find a way to predict that the recession that we are in will be short and sweet. US economic growth over the last quarter century has been achieved on the back of a huge surge in consumer debt, and the lenders now want to get paid back. The only way to pay back those lenders – the banks and the credit card companies - is to forego purchasing something else. That means recession first and then paltry growth for years until the debt burden is reduced.The “Important Change in Terms Notice Enclosed – Please Read” letter I received from Chase yesterday brought the reality into my own sphere. The letter informed me that the new ‘cash advance’ and ‘overdraft advance’ rate would be the Prime Rate PLUS 15.99%. How odd, I thought. I actually have an existing equity line of credit with the very same Chase at rate of Prime MINUS 1.01%. That’s an 1800 basis point spread between two types of debt from the same lender to same borrower!! What could the rationale be? After pondering it for a while, the message seemed to be – we need to start collecting on all that easy credit we extended for the last twenty years, so we are going to make it very painful for you to borrow to buy new things. Fortunately for me, I pay my entire Visa bill every month, so the rate change is irrelevant. However, for all those customers that credit card companies wooed by extending their lines of credit and offering new cards instead of forcing them to pay off what they owed, their day of reckoning has arrived. The negative impact on the economy will be felt for a long time.A couple of hours after reading the notice from Chase, I had a conversation with a friend who owns one of the largest private automobile dealerships in this country. He gave me a few statistics that were sobering. For the last ten years, on average 16,400,000 cars have been sold in the U.S. Today we are running at a rate of 10,900,000 which means that car sales are only 2/3 of what they have been for the last decade. That’s more than a recession.Listening to the CEOs of the three U.S. automobile manufacturers in Congress yesterday afternoon, I couldn’t help but be completely convinced that there is no way in the world that a $25 billion loan from the taxpayers would ever be repaid. While it may sound heretical, I really think bankruptcy is the best option for GM, Ford and Chrysler. Unlike what Richard Wagoner, CEO of GM, stated in the hearings, bankruptcy would not mean Chapter 7 liquidation. Rather, a Chapter 11 bankruptcy would allow the automobile manufacturers to continue to operate while reorganization was worked out. The airline industry has operated off and on in that mode over the last twenty years, with various companies going in and out of bankruptcy while continuing to fly. Passengers have generally not noticed the difference. As someone jokingly said to me recently, “General Motors is an HMO that makes a few cars on the side”. Bankruptcy it seems to me is the only way to put the ‘Big Three’ on a more level playing field with the foreign manufacturers who seem to be able to generate profits in their U.S. manufacturing facilities.So what does an optimist like me do? I can’t stand the thought of turning into a pessimist, particularly as I am convinced that optimists live longer than pessimists. I do think there is really good value in corporate bonds which in many cases are offering returns that compare favorably with long term historical returns for stocks. So while I wait for the economic picture to start to brighten, I hunt and peck for the bonds of healthy companies.