Rampant Rabbits
General Electric, AIG and the Effects of Cleaning crisis: Part I
Justice Litle Director, Publisher, Taipan Publishing Group
Could be any possible upside to global recession and market declines to rival the Great Depression? Believe it or not, the answer is yes … General Electric answers to why.
Although it seems hard to believe, sometimes, there are positive aspects in a crisis. As nature renews itself through a cycle death and rebirth, markets also have to be renewed.
A classic example of renewal in nature is the forest fire routine. Over time, brush and debris accumulate on the forest floor. Meanwhile, mature trees dominate the landscape. When the fire arrives, the slash and burn waste as fuel – as do the trees have been weakened or killed in recent years.
Then, after the fire was burning, the forest begins a new cycle. Debris and dead wood of the last cycle have been, of course, he said, making room for new growth. The forest grows back in a healthier state than before.
We in the western U.S. are painfully aware of how man has failed this natural cycle. Through a consistent pattern of small fire suppression, Forest hapless administrators created the conditions which produce large fires.
When debris and dead wood are burned every few years – as happens with the natural – fuel accumulation never reaches catastrophic levels. But when an area of forest is allowed to accumulate layers of fuel dry, became a tinderbox through many years of fire suppression over-zealous, a single spark can set off an inferno.
At a cost countless billions in the wanton destruction of fire, forest managers seem to have learned the hard lessons. But influential policy world currency does not. Refusing to allow a recession – suppress at all costs with easy money – is the economic equivalent of fire fighting overzealous. Let the rubble "of bad behavior, bad ideas and arrogance accumulate bull market for too long, and what you get is a powder keg.
Through poor administration of resources, a constant feed of dry tinder and a complete disregard for risk, we have created the conditions that now feed this hell. Not only did a man, but many men … Alan Greenspan, at least not among them, plus a virtual conga line of successors and facilitators that followed.
Firefox still works
So the bad news is, we have our hell. The fires are raging now. What else can you call it when the S & P is down more than 60% (!) From highs when adjusted for inflation and the World Bank predicts a contraction of the economy world this year for the first time since the Second World War.
The good news is that the fire is still working as a cleaning element.
A number of excesses gross, bad ideas and flat-rotten Wall Street practices, born of a long-term bull market and comfortable, are turning to ashes now, hopefully never to return. This is the good that comes from all this pain. So when you look around and wonder whether the destruction of the incredible wealth was worth in For the most part the answer is "no" – no one really needed this. But at least in some ways the answer is yes.
That stalwart old market General Electric (GE: NYSE), is a clear example of the cleaning process at work.
According to our analogy of the fire has burned GE to ashes. The mighty colossus that once was face to face with Exxon (XOM: NYSE) for the title of "world's largest company" now sports a market capitalization on par with Apple Computer. "
As a company, General Electric has a bit of a split personality. One side build things, invent things and repair things. The other side makes mysterious acts of financial engineering. The problems now are not in the jet engine or the side of the light bulb business. They are at GE Capital, the financial institution mysterious revelations so complex that analysts never really understood from day one.
As much as a magician pulls a rabbit from a hat, for many years was GE Capital's black box that the company made profits took perfectly. Quarter after quarter, General Electric beat estimates by a penny or two – like a clock.
Jack Welch, the legendary predecessor, current CEO, was removed this trick smoothing by moving things in the part of GE Capital with an eye for the game the quarter. The assets are sold or shuffling around to get the numbers just right.
Now that the world has met Bernie Madoff we're all a little more wary of trends perfectly smooth. But back to the happy days of the late twentieth century bull market, achieved gains were seen as a good thing, not a bad thing.
Wall Street analysts covering GE may not have been geniuses, but were certainly not fools. They knew they had a lot of hocus pocus going on … and knew that GE Capital's revelations are too complex to be reasonably understood. But Wall Street loved the reliability of such currency or strike two, quarter after quarter, so did Jack Welch. And he was honored as a hero for her.
Some rooms only have to die
Do not put any gloss on it: The whole concept "income managed" is silent.
In the real world, things move. Earnings go up and incomes down. In addition to the companies that rely exclusively of locked-in contracts with minimum fluctuations in labor costs and material inputs, almost any type of business makes the same amount of capital each quarter. The idea that a company would reach its target bang calculated on the nose every single quarter, without fail, is too silly. The real world is unpredictable. The real world is bulky.
But investors, such as stability supernatural – or at least they thought they did before Madoff – so happily accepted income managed process that Welch was a pioneer. He smiled and nodded and happily ignored the fact that half of General Electric's earnings comes from an entity arrogant stranger (GE Capital) that no analyst understood.
These are the kind of bad habits and indulgences bull market as we say goodbye to result of the current crisis.
Old habits die hard – sometimes too hard – and often can take a mass exodus, heartbreaking to remove them. (Some refer to this as "the time forced awareness." A bumper sticker I like to say: "Avoid painful forced awareness: accept reality now. ")
Now that General Electric has been shot and forced to reflect on the very real risk of its own demise, it is unlikely that bad old ways of GE Capital return. And now that investors have taken a collective pan pan to the face as revenge for artificial soft addiction is unlikely that the black boxes will play an important role in the markets after the crisis to come.
Reason for hope
However, the humiliation of General Electric gives us grounds for hope. As mentioned, the jet engine and the side bulb of the company – bring good things to another life – will likely survive, and maybe down the road and even thrive once again.
And so when the question is, "What good has come of this crisis, "at least we can say that the likes of managed earnings, black boxes, and pranks off-balance-down in the way of the dodo. Absence such things make for a stronger economy and a better future investment.
And further, we note that, as stubborn and foolish investors may be on a collective basis, if you hit in the head enough that you can still learn something. In the end the burning and evil ingrained habits of old, the odds are best for a better tomorrow.
This is silver lining "side of things. Then we'll take a closer look at the disaster AIG plunge into the dark cloud.
http://www.taipanpublishinggroup.com/taipan-daily-031009.html
About the Author
Justice Litle is editorial director for Taipan Publishing Group. He is also a regular contributor to Taipan Daily, a free investing and trading e-letter, and editor of Taipan’s Safe Haven Investor. He is the founder and editor of Taipan’s newest research advisory service, Justice Litle’s Macro Trader.
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