Plain Vanilla Banks Must Wax and Wall Street Must Wane

John the Baptist told his disciples, "He must increase, but I must decrease." (John, 3:30.) I doubt we will see the same humility from the Masters of the Universe, those investment bankers whose universe has come crashing down on all of us.

The harsh reality is that commercial banks must wax while Wall Street wanes. Over the last fifty years security markets have grown enormously at the expense of plain vanilla banking. Wall Street's juggernaut has finally ended and the whole world is suffering from the hangover. The metaphor is apt: early British visitors of India coined the term, "juggernaut" to describe their highly colored description of Hindu processions. They maligned Hindus as drugged frenzied fanatics who in the processions for their Lord of the Universe would throw themselves under the cart wheels to be crushed in the insane state of their delirium. Does that sound like the buyers of many financially engineered securities?


John Kay with his usual perspicacity and disdain for cant, advises us to "Wind down the market in five-legged dogs."

What's that you say? Read on:

"Abraham Lincoln posed the question: “How many legs does a dog have if you call a tail a leg?” Honest Abe’s answer was four. A tail is still a tail even if you call it a leg.

"The world of finance is a bit more complicated, but not much. How can a package of loans be worth more than the sum of their individual values? The amount borrowers pay is just the same even if you call the loans an asset-backed security or a collateralised debt obligation."

As usual his analysis is good economics and good sense. Do read it all.

One implication is that both the City of London and Wall Street will have to shrink, but that, in my opinion, is a good, necessary, but painful reality.

To quote John Kay's conclusion: "The objective should not be to revive the originate and distribute model of banking, which has demonstrably failed, but to secure its orderly winding down. Banks should retire to the traditional and profitable business of taking deposits to make loans: the business we want them to do and the business they really understand. The British government plans to provide insurance for new asset-backed securities. That is like helping a junkie to detox by guaranteeing drug supplies until the local dealer resumes normal service."

Is 2009 the Year the Credit Crunch Crimped the Aircraft Industry?

2007 was a boom year for the airline industry. The new year is so far characterized by caution and layoffs that are shedding the workers the industry just hired last year.

The Wall Street Journal's Daniel Michaels and David Pearson report that "Airbus, which just finished a record year of plane deliveries, is now preparing contingency plans to cut production if demand for jetliners weakens significantly." They cite Airbus Chief Executive Tom Enders as their source.

Furthermore Boeing and Airbus are building plans to offer customers financing, never an appealing choice. This bitter pill is to be swallowed because financing for new plans has dried up along with so much other credit. Mr. Micahels and Mr. Pearson quote Bertrand Grabowski, a managing director of German bank DVB Bank SE, "Airbus and Boeing definitely will have to cut production because there will be aircraft that cannot be funded." DVB Bank SE funds aircraft purchases.

Still more evidence that Wichita's economy is becoming more vulnerable to the global economic forces that have laid most major economies low.

China's the #3 economy.

The Economist reports that China is now the world's #3 economy. It slipped by Germany in 2008.

Exports are down and imports down big time thanks to 1) lower commodity prices and the drop in materials sucking exports. China’s "imports fell .... by 21% in the 12 months to December (compared with over 30% growth in the first half.)" South Korea and Taiwan fell by 17% and 42% respectively in the same 12 months.

None of this is good for Australia, that mother lode of Asian commodities.

Imports Are Down!

Yesterday, Bob Davis reports "A wave of protectionism is swelling around the world that could further damage struggling economies" in the Wall Street Journal.

Today, the Department of Commerce released the November trade data. It announced "that total November exports of $142.8 billion and imports of $183.2 billion resulted in a goods and services deficit of $40.4 billion, down from $56.7 billion in October, revised. November exports were $8.7 billion less than October exports of $151.5 billion. November imports were $25.0 billion less than October imports of $208.2 billion."

The big drop in imports reflects, at least in part, the fall in oil prices. Goods imports are now 13.3% below last year (we are spending 3.6% more on service imports than a year ago.) It also indicates how drastically U.S. manufacturing is declining.

Banco Pine SA

In Sao Paulo Rogerio Jelmayer of Dow Jones Newswires reports a very curious thing. There is a bank in Brazil is that buying back its equity. Thus instead of increasing capital, it is buying shares thus back using up capital.

He reports, "The board of Banco Pine SA (PINE4.BR), a Brazilian mid-sized bank, approved a buyback program of up to an additional 2.07 million shares, the bank said Tuesday in a statement.

"Banco Pine, which trades on the Sao Paulo Stock Exchange, or Bovespa, has 21.67 million shares outstanding. The program will be in place until July 3, 2010.

"In October, the company approved a plan to buy back up to 1.2 million shares.

"On Monday, Banco Pine's stock closed at 5.50 Brazilian reals ($2.40) on the Sao Paulo Stock Exchange, the Bovespa."

Perhaps, it figures it can help itself more by driving up the share price than by selling shares at a depressed price. Or maybe Brazil is doing better than the rest of the world.

Curious.

2007 is Looking increasingly looking like it Was a Bubble Year for the Aircraft Industry

Today's Wall Street Journal reports that Boeing is eliminating 4,500 jobs. Both Boeing and Airbus are trying to reduce costs. "The cuts will reduce the division's employees by 6.6% to 63,500 by the end of the year, level with employment at the start of 2008. The reduction will involve a mix of attrition and layoffs focused in the second quarter.

"Boeing and archrival Airbus have bulging order books after a three-year boom from 2005 to 2007, though Boeing announced this week that new contracts fell 53% in 2008."

New orders for the U.S. industry have fallen for nine straight months and the industry's backlog fell in November, only the third time in the last three years.

The huge surge in orders in 2007 in increasingly looking like a bubble.

All this is worrisome for the local Wichita economy with its heavy dependence on this industry. Bubbles have a painful way of correcting themselves.

What Tesco knows and Woolies forgot

John Kay is an economist who believes markets do a better job than governments in organizing the economy, but his understanding is nuanced. He is keenly aware of the value of institutions and he knows that "market economies function because they are embedded in a social, political and cultural context, and cannot work otherwise."

He writes in his current column,"I do not think children should be taught that greed is the most powerful human motivation. The people who are most successful in business in the long run are people who are passionate about business, not money."

It is not greed that drives capitalism's success but the dynamism that freedom and incentives set in play to unleash human creativity. Some of its defenders are its worse enemies: they talk "about 'wealth creation', although most of what they described seemed to be a diversion of wealth for the benefit of particular individuals rather than the creation of new wealth."

John Kay is mostly devoting himself to writing these days. He has a weekly column in the Financial Times. His forthcoming book (The Long and the Short of It - everyone's guide to investment and financial markets ) is recommended by the Institute for Economic Affairs, the think tank that supplied Maggie Thatcher with economists.

Wichita's Unemployment Rate Is 4.7%

The U.S. Bureau of Labor Statistics (BLS) report on employment in America's metropolitan areas showed Wichita's labor force grew by 2,800 in November over November, 2008. The unemployment rate of 4.7 percent was two percentage points below the national average, but has crept up a percent since November, 2007. November's unemployment rate was a tenth percent higher than October.

The BLS's survey of establishments showed their count of jobs unchanged from October and up 2,500 from November, 2007.

The BLS released its report this morning.

Kearney Calls Volume Decline the "Greatest Since the Depression"

NPR's Tamara Keith looked at the Recession's impact in her broadcast, "Postal Service Sees Less Mail In Slumping Economy." She quotes Stephen Kearney, Senior Vice President of Customer Relations for the Postal Service, as saying "[the drop in mail volume] accelerated throughout the year. ... Our mail volume had its greatest decline since the Great Depression."