The Latest WSJ Inanities

I am actually a fan of the Wall Street Journal, and have subscribed for the better part of 25 years, either in paper or electronic form, since the day my economics professor, J.J. Seneca, handed out discount cards in class. Their reporting gets right down to the heart of an issue, without reiterating all sorts of basic information from yesterday’s news story.

However, I have never been a fan of their editorial page, as it is too far to the right for the son of a teacher and life-long Democrat. Friday’s editorial by Stephen Moore, recounting all the glamour of the Ayn Rand days (something Alan Greenspan did in his biography), is no exception. As the free market melts around us because it was not properly regulated, here we have a guy whining about both past and present economic stimulous packages on the table. The sheer lack of humility exhibited by the article is appalling. When Alan Greenspan can admit that he was wrong, the Wall Street Journal seems incapable of allowing for the possibility that Libertarian methods might not be the only path to salvation.

This follows up a previous article in which the WSJ claimed that the New Deal had failed. Failure is in the eye of the beholder, and simply putting food on the table in the 30s was considered quite an accomplishment. Perhaps this is why FDR was elected four times.

But this isn’t the worst of the WSJ’s latest crimes. Last year they added a feature where readers could comment on stories by simply clicking on a comment tab. More recently that tab has disappeared from political editorials. So go ahead and comment on a factual story, but please save your disdain for their snobbish opinions for somewhere else. How very Murdoch-esque.

Mind you, I don’t know if a New New Deal is the right approach. But I guess I’m just a little more chastened than these guys.

What the heck is a target price?

You often hear analysts say that they have a particular target price for a stock or a commodity. That means that in their heads they expect the value of that thing to hit that price over a certain period of time. But now we have OPEC saying that they have a target price of $75 per barrel of oil.

YEAH RIGHT.

One of two things is the case here. Either OPEC has no price control, or they are simply lying, and they really just want the price as high as it will go, as it did go in the summer. I tend to think both. For one thing, the statement may be a sap to Iran and Venezuela, who have been publicly pushing for a cut in order to get prices back up to stabilize their own oil-based economies.

What seems to have happened with oil is that the speculators had their day both ways. First they drove the price up, and then they drove it down. They were helped a little bit by demand having first climbed, and then fallen. Once prices were clearly dropping, they piled on and just drove them down further.

So where is OPEC’s role in setting the price? How many millions of barrels will they have to cut in order to have a significant impact on prices? The general economic answer would be that they would have to stop supplying the world with enough oil to meet current demand, a shrinking target, as we speak.

So why have prices stablized at $50 or so? Who can say? Perhaps traders believe that demand has leveled off and is now stable. Perhaps there is simply a consensus view as to what production and the econony will be 90 days from now, and it is reflected in that price.

Two things have happened this weekend that should make Monday trading very interesting. First, Black Friday has come and gone. This will give some indication as to the state of U.S. retail, and hence a good portion of the economy. Second, OPEC has said that they will not cut current production levels.

If Black Friday turns out to have run red, then we may well see yet a larger drop in demand, based on lower production. Butt his depends on whether or not producers have already anticipated a miserable Christmas season. Even so, Monday will be very interesting. When you see reports about this weekend’s retail sales, think of oil.

Will the Bail-Out Help?

Today some of the questions many people wonder are precisely what has gone wrong, what is going wrong, and what will a bailout fix. What has gone wrong is that the credit default swapping market was not sufficiently capitalized to account for a heavy rate of defaults. Normally banks are required to meet a reserve ratio as part of their regulation. However, when debt is sold to non-bank entities, like Merrill Lynch, they no longer have to meet a particular reserve. One of the requirements for Goldman, now that they are a bank, will be to meet this reserve. This is why they needed to find a sugar daddy, like Warren Buffet.

What is going wrong still is that now that banks have been burned they have become increasingly more conservative, and have refused to loan not only home owners money, but also businesses money. Businesses, in turn, are being increasingly conservative with their precious dollars, for fear that they won’t be able to get more of them. Because of this the U.S. is likely to suffer a recession, and no place will suffer worse than the entrepeneurial capital, Silicon Valley.

There is also the matter of all the failed loans. We don’t know where all the debt is, because banks can take their sweet old time deciding when a loan has failed, and hence reporting it to their stockholders. The bailout will give creditors incentives to get rid of debt that is likely bad.

What the bailout may not fix is the confidence problem that creditors now have. Creditors may, however, be of two minds, one being that they could fail by taking on too much debt, and the other being that the U.S. government will provide a backstop to any serious failure. If the latter is true, even if unwsie, then those companies will make capital available.

Who wins in the current climate? Large companies that are their own banks can take advantage of their position, because there will be fewer smaller disruptive competitors. Venture capitalists will win because they will be able to drive better deals with startups. Employers on the whole will win because the job market will slacken.

The consumer, however, may not win. The cost of imported goods and services remains high in this environment, and is unlikely to change for some time, until capital markets open up again. This is because the dollar remains near all time lows. Worse, because other economies are beginning to faulter, we will not be able to export our way out of the hole (we’ve been doing that for some time).

Put another way, everyone is still in for a rough ride.

McCain Tactics Wrong

Americans measure both leaders and potential leaders against how they would handle problems of the day. The problem of the day is the crisis on Wall St., and Senator John McCain is violating the first rule of campaigning: he’s not. Now- if he were the chairman of the Federal Reserve, that might make sense on at least two levels, that he would have been central to having caused the mess, and central to clean it up. But he is neither.

He does not want to show up at a debate on Friday night in Mississippi if the crisis is not resolved. Question: what business gets conducted on a Friday night? Practically none. It’s not to say that people can’t work on Friday night, but very little need be done then. Especially by him.

John McCain made his mark on foreign policy and on generally conservative domestic policies. He is not now, nor has he ever been a banker, sat on a banking committee, or promoted policies relating to banks.

This very much reminds me of the time President Carter barricaded himself in the Whitehouse during the Iranian hostage crisis. McCain should expect the same results Carter got.

Final Thoughts on Airline Upgrades

As we discussed, customer loyalty is worth something to airlines. They spend billions of dollars worth of free services each year in order to maintain that loyalty, and their strategic alliances are intertwined with that customer loyalty.

And so let’s look at the customer. Be the customer a frequent business traveler or a casual tourist, one problem that could exist is that he or she may not be able to afford an upgrade if it is somehow connected to actual dollars. And while in my previous post I suggested that the cost would be in miles, there would be a conversion from dollars to miles. And so some segment of the customer based could end up unable to participate in the auction because of wealth disparaties. Such a customer might then be inclined to pick another airline that has a different upgrade allocation mechanism such as what we mostly have today.

That’s the risk. Is it worth it?