8 Tips for Smart Investing and Grilling

You know what is coming as well as I do, so I won’t belabor the point. Maybe it is a recovery and maybe it ain’t. Remember, this is mostly a psychological drill, at least for Wall Street. If you feel good, you act good. I am as tired of the continuing crisis as I am of the stupid winter, so we are going to have some fun for a minute.

So, unemployment is down a little according to the numbers yesterday, and everyone is smiling and the market continues to lurch up a bit.

I don’t claim to understand it all, except for the feeling dread, since this recovery seems to be fueled by that little Bernanke fellow cranking out bogus dollars and dumping them into one end of the money supply, permit me to be a little skeptical about the general durability of this enterprise. Still, like the housing bubble, we are along for the ride whether we like it or not, so we may as well enjoy it as long as it goes on.

What goes up, must come down, right? I am betting that when Mr. Bernanke gets done with his quantitative easing this summer the party will be over. Accordingly, there is a certain urgency to all this, just as there is about getting a new jug of propane fuel for the grill down at the farm.

It is time to review some basics, both for safeguarding the pathetic amount of money put aside for the retirement we probably won’t get and review the tips for making something decent to eat.  I would call Warren Buffet and ask him what to do, and I think he would probably say something like “go short, and set aside $30 billion in cash reserves.”

Useful, I suppose, but there are some more generalities that might be more applicable for the situation. I asked around for a smart person who might have some general tips that would outline the way forward. A pal out west suggested Peter Lynch, who was one of the original Motely Fools.

He has outperformed the market consistently over the last couple of decades, and his underlying principle is that smart investing is more about guts- stomach for risk, if you will- more than it is about smarts.

I think that if you shop smart, and cook well, the stomach part of the equation will take care of itself. Peter says: “any normal person using three percent of their brain can pick stocks just as well as” the carnivorous morons who inhabit The Street. “Stop listening to professionals,” he says, and that of course, goes for the crap I put out.

One this about this though is clear: your portfolio may not do that well, but you are going to have a decent burger at the end of the day.

1. Know what you own and what you are going to cook.
That is the first and most basic principle of all this. My pal out West challenged me answer the easiest one. What do you already own? What is in your 401k? I did not have a clue, and after stammering that there were, like, three funds in the one fund I hadn’t rolled over from some other job, the Euro-centric one, from the days when I thought the Euro was the way of the future, and a bunch of panic-purchased blue chips in another.

I actually took a look at the Prospectus information and was surprised that most of the stocks that made up the portfolio were things I had independently liked. For the burger, it is the same deal. DO NOT buy that pre-packed crap. I won’t go in to the horror story of where it comes from, except to note that it is exactly like derivatives and credit default swaps. Ground beef at the store is like the third trenche of a Collateralized Debt Obligation and just as toxic.

If you don’t grind your own beef, have the butcher do it for you. That is a bit like hiring a broker, and no one does that any more, but what the hell. Ask for a sirloin steak or rib-eye with fat-to-meat at about a quarter to three. This is, like the portfolio, the single most critical aspect to the whole process.  Be generous With the salt and pepper and your attention. Add onions to the food processor when you are grinding the meat, and a dash of Worcestershire sauce and some hot Korean pepper.

By the way, you can use the food processor to make a perfectly good patty out of chickpeas and avoid the messy argument about the food chain and exactly what our place in it is as a species. That would take us down the line of the falafel-burger, and that is an honorable way to go. We will get to that some other day, but it is a slightly different deal and a challenge for the grilling part.

2. The smart guys- the ones that the US Attorney for the Southern District of New York has not put in jail- have already scooped up the easy profits. We cannot predict what they have done, or what Mr. Bernanke is doing by the coal chute out back, so don’t bother trying. DO NOT squeeze the meat with your spatula. Leave the juices in both stocks and burgers.

Trying to time the market is futile. Set up a financial plan that allocates your assets based on your risk tolerance, which you have already done by not buying that store-bought toxic ground beef. Be able to sleep at night. Resist the impulse make the patties smooth.

3. You have plenty of time to identify and recognize exceptional companies and put the beef- once you have made the patties- back in the fridge to cool before cooking. Let other people do the heavy lifting. Do not apply pressure to the patties- you can form them with the lid to a Hellman’s-brand mayonnaise jar- though you really ought to save one from an empty jar, since you are going to feel pretty foolish standing there with you perfectly-formed patty smeared with premium ground beef and a quarter of a jar of perfectly good Hellman’s on the counter in front of you.

The lesson of Wal-Mart, Microsoft, and Amazon.com? You don’t need to immediately jump into the hot stock you just heard about. You are at least a lap behind the smart guys. There’s plenty of time to do your research first. They are all in the portfolios I bought without thinking.

4. Avoid long shots. When I was in government some concerned citizens in expensive suits came to see my boss, and he was way too busy, so he would send them down the hall to talk to me. These wise guys had what they claimed was an injectable antidote for radiation poisoning, a matter that I considered really important, considering that the government official position was that Bin Laden and his boys were going to detonate a radiological device in New York or Washington. I did not allocate any of your tax dollars toward the project, you are very welcome, but I did invest in it after I retired. It was a freaking scam, those bastards.

5. Good management is very important; a well-run P&L is a good thing indeed. Run your portfolio and your kitchen with due diligence. good businesses matter more. Peter Lynch says it best: “Go for a business that any idiot can run – because sooner or later, any idiot is probably going to run it.” Same thing for your kitchen. Procter & Gamble is an example, for what reason I don’t know, but it turns out I own some. Keep your grill hot. The point, when you take the patties out of fridge, is to sear the crap out of both sides and keep the juice in.

6. Be flexible and humble, and learn from mistakes. Hitting safely four times out of ten gets you to Cooperstown.

7. Before you make a purchase or grill, you should be able to explain why you’re going it. This is nothing you should be doing all the time. It is special, since where we sit on the food pyramid has the spiky part that will poke you in an ample buttock if you do as anything except an occasional treat. And speaking of he pointy end of the food pyramid, dimple the patty.

When it cooks on that blazing hot grill, the meat contracts, and can leave you with a rounded, uneven burger. Push a thumb in the middle of the patty. This is the only exception to the don’t squeeze the little buggers. Make the dimple an inch or two around and a quarter-inch deep. You will be amazed to discover that the burger will be perfectly flat when they’re finished cooking.

Resist the inclination to push things around on the grill trying to prove you know what you are doing. Touch it as little as possible.

8. There’s always something to worry about. Do you really know what you are doing? Is the threat real? Hell yes. Over time, though, the market has always come back. The problem is the Keynes Corollary: in the long run, we are dead. Enjoy yourself, but don’t spend all your time doing it. All things in moderation, including moderation.

Minimize risk by ensuring that the components are the freshest and the best you can get. The bun is half the deal. Carbs may be our collective enemy, but if you are going to splurge, do it right. Try Kaiser rolls from the Heidelberg Pastry Shoppe. I defy you to not feel good after a visit there, and they do all sorts of German sausage on their own grill in season, right in front of the shop. Don’t park in the joke of a postage stamp lot in front- your car will get creamed. Use the school lot down the block. Heidleburg is located off the Lee Highway at Culpeper Street. The farm is in Culpeper. Coincidence? I don’t freaking think so.

While you are there, try the Laugen Brotchen, theoval-shaped soft pretzel roll with salt on top with a brat. Did I mention you can do brats on the grill at the same time? And cheese. Don’t get me started on the cheese part, but don’t do all the melting on the grill. Just get it started to soften, and let the burgers rest a minute or two one they come off the grill. The cheese will not have run off into the burger and onto the grill, and will be nice and soft and appealing when it gets to the table.

Kinds of cheese? Knock yourself out. As “Long Charlie” de Gaulle cogently observed, you cannot possibly hope to govern a nation with 365 types of cheese and he didn’t try.

There is the matter of the toppings, which would make a ninth category of both smart investments and what tops the perfect burger. I would remind you that the Glory that was Rome was fleeting, and all empires have their time in the sun, and their Vandals and Visigoths that bring the clouds. But the Italians are still living better than we are, if you count the time at the table, and the odd glass of wine, so eat and drink up.

Besides the standards — lettuce, tomatoes, pickles — try at least five or six other, less common options. You can always ask your broker if you run out of airspeed and ideas all at the same time.

Time to grill. Gas on!

Copyright 2011 Vic Socotra
www.vicsocotra.com

Happy Days

I am about ready for a dose of irrational exuberance, al la the quote from the evil gnome Alan Greenspan about the housing bubble years ago.

I wish I could find a gig like that- utter a sphinxlike line in the morning, and then take off for a long lunch and a longer weekend.

Alan is one of those guys who got away Scott-free in the mess he did so much to create. There is happy news from Washington; we have found a Don Quixote to tilt at the windmill on behalf of the nation that was defrauded so blatantly and so roundly.

Preet Bharara is a United States Attorney for the Southern District of New York. He has my nomination for Great American of the Quarter, Spring 2011.

Mr. Bharara was born in Punjab and came to the States with his folks in 1970, becoming a citizen a decade later. He advised Sen. Chuck Schumer, who is not on my list of favs, about the best response to the Bush Administration’s firing of the eight US Attorneys who were not willing to toe the new party line.

My understanding of how this works is that political appointees- including US Attorneys- serve at the pleasure of the person in the office that appointed them.

Oh well, that probably goes along with my misunderstanding of the Constitution.
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Still, US Attorney for the Southern District of New York is a grand title, and that just happens to be where the physical stones that bear the name Wall Street reside. Now, I understand “Wall Street” is actually an action verb with no boundaries in the digital world, and much of it is smeared in some unholy alliance with the Stones of the District of Columbia.

Still, legal niceities have jurisdcitions, and Mr. Bharara has his. He appears to be the only one in the United States Government who has heard the squeals of outrage against the greedy pigs who ripped us off. Since being appointed by Mr. Obama, he has secured guilty pleas from almost thirty high-profile traders, financial execs and other apparatchiks who constitute the “expert network” firms that are the conduit for the transfer of prohibited insider information.

I don’t know why the initial targets of prosecution happen to be other Americans of South Asian extraction; I would not think that Mr. Bharara holds them to a higher standard than the other scum who are scouring our inheritances out of the national bank account.

It is enough for me that Mr. Rajat Gupta, an alumni of the criminal conspiracy known as Goldman Sachs and current principal at McKinsey & Company, is going to provide some theme music that will cause others to face it directly. Based on evidence collected by Mr. Bharara, Mr. Gupta is accused by the Securities and Exchange Commission of providing illegal information to Raj Rajaratnam, the founder of the Galleon Group hedge fund. He is going to trial next week, frabjous day, caloo calay.

Someone is finally going to have a chance to pay the way the rest of us did for the wholesale corruption that made the insider trade the lingua franca of the Street, and played all the rest of us for chumps.

I invite you to do your own research on McKinsey & Co, by the way. It is fun. One of their big accounts was Enron, prior to the meltdown, and some of the other alumni of the deliberately low-profile but extraordinarily well-connected firm include Chelsea Clinton and her Mom, who I think has some government job or another.

Let me stipulate that I wish no harm to the younger Ms Clinton, nor to her mother, for that matter. But I do indeed look forward to hearing about how the other snakes think this was all supposed to work.

There is enough to be happy about and the animal level. Whatever the bug was that laid many of us low is receding. My pal Mac is out of the hospital and home again, still feisty.

The women in the building appear to be sensing, like the spring flowers, that it may be nearing the time that the imposing boots can go back in the closet for the season and we can all stick our heads up in the lengthening rays of the longer days.

If the boots give way, can open sandals and the gloriously exposed midriff be far behind?

Copyright 2011 Vic Socotra

Burying George

It was one of those mornings; no reason for traffic to be horrific, but it was, anyway. Pulling out of the garage under Big Pink I spied the traffic backed up on Route 50 East in front of the building. Since it is almost a mile to the first of the two lights that slow things down, it looked bad.

I wished I had time to stop and drop the top. It was a little chilly, but not quite overcoat weather and brilliant sunshine. Maybe the back of this endless winter is broken, I thought, and roared out of the lot.

All I had to do was get to Arlington, but I had let the morning slide until I was within the half-hour window for the mourning party to gather at the visitor’s center, and I was well on the way to being late.  I made an executive decision behind the wheel of the Hubrismobile and swung right to take Pershing parallel to 50 and defeat the back-up.

It was not a bad strategy; Pershing intersects the big road when it swings north to skirt the perimeter of Fort Myer, which is the fat on the green kidney of the national cemetery. The problem was that no plan survives first contact with the enemy, and traffic was just as bad further down on 50 approaching the I-66 bridge into the District, and with increasing anxiety, I had to bail out at Rosslyn at Meade Street, and hook a u-turn to and motor past the back gate to the Fort.

That is where the Buffalo Soldiers once had their stables, and past the edge of the cemetery near the Netherlands Carillion where the Freedman’s Village once stood under the bluff where the cannons had protected Mr. Lincoln’s capital.

I stayed parallel to the cemetery wall, having a Homer Simpson moment. “Doh!” There is no exit to the Visitor’s Center off 110, which, if I get interred in one of the niches in the cemetery-side of the imposing wall, will be a useful thing.

Right now it was a pain in the butt. There was no way to get off 110 except the Columbia Pike exit onto Washington Boulevard north of the vast gray bulk of the Pentagon.

Time for Plan B, as Diane Rehm calmly announced the top of the hour on the radio and I realized I was now officially late. The funerals run with military precision- they have to, since there are so many to be buried each day, and there are a lot of moving parts to the full honors of the ceremonial process.

For George, by way of example, the Army’s Old Guard had to be up and get the horses ready to haul the gun carriage, which meant the tack had to be pulled down, and the harnesses placed on the patient ponies, and the saddle horses had to be prepared, and uniforms triced up, just as they were on the buses bringing the Navy Ceremonial Guard and the Band to section 64 of the cemetery from the barracks at Anacostia.

Damn. It would have behooved me to get my ass in gear a little sooner, just as a matter of respect to all concerned.

Waiting at the light at the bottom of the bluff I realized I did not have to retrace my steps. I had a Cemetery Pass, courtesy of Cousin Jo Anne’s father-in-law, a WW II bugler who is now in the Columbarium. She gave the pass to me, thinking she lives in Florida and I might have more use for it as a local.

I made an entirely new plan.

I had missed the procession, but given the fact that it proceeds at the pace of the gun carriage, I might be able to sneak in the back gate and meet them at the grave, VFR-direct.

I drove up the hill past the Navy Annex, where I once worked when the Bureau of Personnel was located there, and through the gate to Joint Base Henderson Hall-Fort Myer, and then past the MCX Exchange building and through the back gate to Myer proper.

There was a time, no kidding, when real US Marines protected their service Headquarters compound from possible invasion by the US Army, but times and fiscal privation have finally brought sweet reason.

I swerved through the back gate, past the Rader Clinic and the Commissary entrance and the new Child Care facility, then past the PX and the new Chapel and the long line of support activities that lead to the historic Old Post where the Old Guard beds down, and the stables still hold the horses, and the Old Chapel sits stately near the back gate.

Rent-a-cops protect the Cemetery from vehicle traffic, but with a pass I could get through. The gates beckoned, but I was stymied by the official arrival of one of the ten o’clock ceremonial guests, who was being unloaded from a hearse in front of the chapel by an honor guard. I waited quietly and turned down the radio in respect.

It was a complete crap-shoot now, and I had only a vague idea of where Section 64 might be. There were at least three interments in the nine o’clock round, so there were all sorts of opportunities to get turned around inside the grounds.

Oh well. My fault. Should have started earlier, and I tried to keep the speed down as the guard glanced at my pass and let me drive through. I followed the bike route past the Amphitheater and the Tomb of the Unknowns and Arlington House, where Bobby Lee used to live when this was his plantation.

I drove down the hill, across the main entrance on Eisenhower Road, where the guard just waved me through. Construction has forced a detour on that main access road, and I could see a gathering under a mobile canopy to the south, but it looked Army. I kept going.

There is a remarkable amount of activity involved in the management of a national cemetery with two wars in progress and a generation of WWII vets passing away. Backhoes and heavy construction equipment riding around, security sedans, tractors, all sorts of stuff.

The place of the dead is quite a busy place for the living who support it. I was trapped for a while behind a honking-big front-end loader and a dump-truck exchanging views, driver’s window-to-window.

There was no point in getting anxious. I dropped the top and let the sixteen precision German motors do their thing. The cold clear air of early March in Arlington flood in. Eventually the workers finished their social business and the front-end-loader lumbered off and let me by.

I turned right, heading toward where the 9/11 folks rest, and I saw the horses and the gun carriage and a band in Navy uniforms marching up the road. A woman waved at me to say that I could not pass, funeral in progress, and I nodded and said:

“It is OK. It is George’s and that is what I am here for.”

She let me park the car, and I grabbed the Canon EOS 50D, and this is what happened:

http://www.facebook.com/jayare303

It was right around that time that a German national of devout Islamic faith was climbing onto a US Air Force bus parked on the military side of the ramp at Frankfurt-on-Main with a gun. He opened fire and shot four US Airmen, killing two.

Word was, when I happened to be listening to the radio after George had been buried and the reception held at the Fort Myer O Club, that Spokesmen were doing their best to be politically correct. “It is not immediately clear if the gunman’s motive was political,” they were quoted as saying.

Driving off post, I just had to shake my head in wonder at how hard we have to try to be so stupid.

Then, I wondered if the Airmen who were killed would be buried here?
Copyright 2011 Vic Socotra

Slouching Toward Bethlehem

02 March 2011

(Irish Poet William Butler Yeats.)

Slouching Toward Bethlehem

Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.

– First Stanza of The Second Coming, William Butler Yeats, 1865-1939

I am feeling good enough to go to a funeral this morning. I have competing obligations, as does my pal Paul, but he is going to be the one in the uniform, and I am going to don my trench-coat and slouch-brimmed fedora with the press-pass jammed in the grosgrain ribbon.

We are saying goodbye to George, one of the Old Comrade’s of The Organization up in New York. I did not know him well, except by reputation, but he knew Mac and Tom and the other luminaries of the business whom I hold in high regard.

It is a matter of honor.

Accordingly, there are some issues that we will have to defer this morning. They are important ones, and include:

The lyrical design of the Fender Stratocaster guitar;
The astonishing lengths to which we are prepared to level the State of West Virginia in search of Coal;
The price of oil, and the coming commodities bubble;
The next collapse of the Dow.

As to the last of these, we actually know the trigger that will burst the next stock bubble, and I am hereby announcing a little project to keep you posted on how I attempt to follow Peter Lynch’s extraordinary eight principles of investment and attempt to minimize my losses in the fixed game of global finance.

There is something abroad in the land. I saw it at the gun-show down in Dale City, where I had to go while still in the grip of the fever on Sunday to pick up a package. Americans like their guns, always have. But there is something wary in the eyes of the overwhelmingly white middle-and-lower-middle class that prowled the aisles.

The rifles on display are something else. They are not bolt-action scoped hunting rifles; in fact, they are not hunting rifles at all, unless Bambi and her sisters are now traveling in shock brigades.

I think I know part of what is fueling the clear sense of unease and building tension. Clearly part of it is distrust of government, at most of the levels in which it exists. The tension is clear across the spectrum, from the union protestors in Wisconsin to the prowling trucker ballcaps in the in the aisles of the gunshows.

Lest anyone think this is another of those squeals of partisan outrage, it is not. The phenomenon that I am attempting to capture and describe is one that first pricked my attention in the second Bush Administration, though it long predated W.
President Reagan began to append what is called a “Signing statement” to legislation that came to his desk to enacted as law under his signature. It is usually printed along with the bill when it is published in U.S. Code, and released in the Congressional and Administrative News. The Administrations of George H. W. Bush and William Jefferson Clinton continued the practice, but in the second Bush Administration the Signing Statement became ubiquitous.

Critics maintain that the statements under him were unusually extensive, and heavily modified the meaning of statutes as ratified by Congress. The practice has been continued by the Obama Administration, and is a handy, if ad hoc, modification to what some of us consider Constitutional process. The American Bar Association agrees with me, and issued a statement in 2006 that held that the use of signing statements to modify the meaning of duly enacted laws serves to “undermine the rule of law, and the separation of powers.

That was reiterated last week, and the event has passed without much negative comment because it was a popular.

The President announced last week, though his attorney general, that he has determined a law duly passed by the Congress is unconstitutional. His Justice Department will henceforth cease to enforce them. This happens to be the “Defense of Marriage Act.” I personally find it an appalling piece of legislation.

I do not think the Federal Government has a role in stipulating who can sleep or marry whom, any more than I think DEA agents should have the right to kick the doors of state-sanctioned medical marijuana boutiques, or that wandering bands of TSA officers should be able to pat down children and their parents EXITING an AMTRAK train in Savanna, Georgia.

You should check out the improvised video captured by a bemused citizen of the event on youtube. It is the queerest thing. It looks just like an internal check-point in some tin-pot banana republic.

My understanding of the Constitution is that there are three co-equal branches of government:

There is Congress to pass laws, raise taxes and dispense money.

There is a Supreme Court to interpret the legality of such laws against the baseline of the Constitution, and,

There is an Executive Branch to direct the operations of the central government, having proposed a budget for Congress to modify in the appropriations process, and to enforce the laws judged constitutional by the Court.

That is close to what I was taught in civics, anyway.

I don’t agree with the Defense of Marriage Act, as I said, but I missed something along the way. When was Eric Holder appointed to the Supreme Court?

Selective enforcement is not new. Federal laws regarding illegal immigration for decades have stipulated all non-citizens in the US have on their person documentation as to their rightful presence. For the legal citation, check the legacy of Senator McCarron of Arizona in the law that still provides the benchmark: McCarran-Walter Public Law No. 82-414, 1952, as amended.

For a variety of reasons, this is now considered controversial. Arizona mad, racist bigoted state law requiring law enforcement to inquire as to legal status caused a firestorm. Attorney General Holder and his Department of Justice in fact have enjoined the state in legal proceedings to have the law nullified.

The interesting thing is that the state statute is patterned directly on the Federal statute on the books that are not being enforced.

I am sure this is all a misunderstanding. I am glad I am not a suspicious person, since were I, it would be possible to be convinced there is something going on. Mr. Yeats must have had a more profound view, shaped by the observation of The Great War, and presaged by the certain knowledge of the second war bearing down upon him. He wrote this before he laid down his pen.

Surely some revelation is at hand;
Surely the Second Coming is at hand.
The Second Coming! Hardly are those words out
When a vast image out of Spiritus Mundi
Troubles my sight: a waste of desert sand;
A shape with lion body and the head of a man,
A gaze blank and pitiless as the sun,
Is moving its slow thighs, while all about it
Wind shadows of the indignant desert birds.
The darkness drops again but now I know
That twenty centuries of stony sleep
Were vexed to nightmare by a rocking cradle,
And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?

Don’t know. More on some of this tomorrow.

Copyright 2011 Vic Socotra
www.vicsocotra.com

Contingent Convertible

(1957 Ford Skyliner, dropping the top in front of the Glass House, Dearborn, Michigan. Photo courtesy FoMoCo.)

“Beware the Ides of March. The bastards are at it again.” – Punk Playwright Bill Shakespeare, Act 1, Scene 2, from Julie-the-Caesar

I had not quite forgotten why I was in the office. I had decided it was bronchitis that had driven the malaria-like symptoms of the First (and hopefully last) Big Cold of the Year.

It might all be connected with the vertigo that ushered in the frigid month of February, and it was the endless cold of Michigan at the end of the month that finally caused my usually reliable autoimmune system to collapse in confusion. I knew I had driven the pony hard and put it away wet, between travel and emotions. Oh well.

Having no choice, I decided to enjoy the free disorientation, which normally costs me a lot more to acquire at Willow.

I was thinking that age, or illness, made me much prefer the idea of going back to Big Pink and crawling back to bed than going to the bar. I was attempting to update a spreadsheet to forecast potential take-away work and not doing that well in the out-years when the cell phone went off.

It flashed at me from the mouse pad. My pal Mac had been to see the doctor that morning and I was hoping for an update. It was not Mac, and it was not an emergency from the Northland, or at least my Northland. It was an investment banker in Sweden, riding on a subway under the streets of Stockholm.

“Hej,” said the disembodied voice.

“Hej, right back at you,” I responded. “How the hell are you keeping a cell call in the subway?”

“You forget this is the home of Erikson. They have this all worked out. Swedes have had cell phones since they carved the first ones out of Elk horns.”

“I imagine you are right. I finally watched the DVD of “Girl Who Kicked the Hornet’s Nest. I can imagine the darkness there, and the cold.”

“I did not call for the weather report. I am here. I know. I have a question for you.”

I am a little uncomfortable about my depth in anything beyond looking out the window and predicting what just happened, but I am game for anything.

“Shoot,” I said.

“I have been telling my clients that the rise in the stock market is totally dependent on the Quantitative Easing that Ben Bernanke is doing to your money supply. When he turns off the spigot in the third quarter of the calendar year, your 4th Quarter of FY-11, the bubble is going to come out of the market.”

“Seems reasonable. I have been happy with the recovery in the market even if it doesn’t make any sense.”

“It doesn’t, or maybe it does, and is just designed to show economic recovery, though it actually just represents more smoke and mirrors out of the Fed. When the Fed money stops there will be a very sharp sell-off. The Fed has only pledged to keep the flow going until early fall, and the Smart guys already know when that is. It is a game of chicken to see when it will tip over.”

“So, I should be making plans to get out ahead of the bubble? Or should I be planning to expand holdings and reinvest when it deflates? Is this a bubble engineered by Bernanke, or Goldman Sachs.”

“Both, I imagine,” said the banker.

“Crap. At some point I have to know what I have so I can retire. And since you know all this, what on earth can I tell you? I have questions for you…”

“Hej- gotta call you back. My station.” I looked at the phone blankly as it disconnected, and I went back to evaluating whether I should build a wedge into my plan for additional Libyan contract analysts with Maghreb social skills into FY-11.

The phone went off a few minutes later. “I am driving a nice Volvo that belongs to my stepson. He is unemployed and on a ski vacation. The car is nicer than mine, and he thinks this is right.”

“There is a lot of that going around,” I said. “So what was the question?”

“What do you know about Contingent Convertibles?”

“That’s easy. Ford introduced the Skyliner in 1957. It was the first mass-produced hardtop convertible. It was cool. Really sleek bodyworks and the hardtop was segmented so it could fold down into the trunk.”

“No…”

“Oh, yeah. Ford said it offered the motoring the carefree, open-top motoring of convertible with the safety and security of a hardtop. My little SLK-320 had one. Pity, since the top takes up the whole trunk, and you can’t store a damn thing in it except maybe a Dopp kit.”

“No, that is not what I meant. You Detroit kids are all the same. I mean a CoCo- a Contingent convertible bond that Credit Suisse is pushing here in Europe. There was a new release today.”

“Wait,” I said. The name tickled a memory though I confess my first thoughts were of the dark-side version of Kellog’s corn-puffs. “Hang on, let me Google it.”

I tapped the keyboard. I recalled that Barkley’s bank was talking about an innovative way for banks to raise capital while simultaneously rewarding management for responsible risk taking that doesn’t drive the institutions into the ground in exchange for obscene personal profits, enabling the crooks to walk away from the wreckage with their personal fortunes intact.

I looked at the search results for something relevant. “I thought it was tied to a two-tiered bonus compensation scheme.”

“Well, that is one aspect of it. I was hoping you knew what was going on.”

“I don’t have anything more than the usual dread I feel when a new ‘creative’ security is launched by those buccaneering bastards.” I looked at the Google results on my screen. “Here is what I know now, and it doesn’t make me feel good, or secure.” I scrolled down the screen. “Says here that a convertible bond is one in which the price of the underlying stock on which it is based must reach a certain level before conversion is permitted.”

“How is that supposed to be connected to responsible risk taking by the institution?”

“I dunno. Says here as an example that the conversion price for a CoCo may be $10 bucks a share, but if the stock price is below $20, the owner can’t convert. I guess it means the smart guy is supposed to get stuck with it, and this public offering is a way to get us chumps to share the risk.” There was silence on the line.

“Hej- gotta go. I have had a glass of wine, well, two, and I have to watch for Polisen. If you get caught here, it is one strike and out. Call you from the land-line.”

“Hej då,” I said, and put my chin in my hand.

I tried to puzzle it through. Traditionally, banks had two sources of capital: debt they incurred by issuing bonds, and equity, which is real and permanent. That was the whole deal with the housing melt-down. The Goldman Sachs smart guys and their quants figured out a way to get everything confused, and created a huge incentive for the banker to raise capital from debt to avoid having their own private money at risk. They coopted the regulators, part of the cozy inside group, to let them have much less than sufficient equity to cover the company obligations, which is why Bear Stearns and Merrill Lynch had to be sold, cents on the dollar, and why Lehman Brothers was allowed to die.

Regulators and bankers are aware of the current perception that they are unrepentant thieves, and the CoCo bonds appear to be a creative way to avoid a repeat of the recent meltdown. One thing is pretty clear about reality: human nature has not changed a whit. The Rules of Business may be constantly mutable, but when people smell collapse, they panic. The CoCo actually has a trigger at which point the debt must automatically be converted to equity- which says the bank is in trouble and the run on it begins.

The phone rang, an unfamiliar number showing on the screen. “Hej, home. Time for one last glass of wine.”

“I am glad you called. Here is the deal. The Industry is saying the CoCo bonds are the most concrete new idea for solving the inherent conflict between management and investor greed, though they don’t quite use that word. Merrill Lynch says they are going to include the bonds in some of their investment offerings, which means some index-following investors are going to buy them.”

“I would check your portfolio to see if you are going to be one of them.”

“If the past is prologue, I am betting that is true. I want to get out of the market.”

“There is no way out,” said my Swedish banker. “It is a lot like the old Irish Republican Army.”

“You mean, ‘Once in, Never out?”

“Ni har helt rätt,” said the banker. “You got that right.”
“Crap.”

Copyright 2011 Vic Socotra
www.vicsocotra.com