-- Posted Thursday, 5 April 2007 | Digg This Article
London, England
Thursday, April 5, 2007
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*** Give Zell Hell?…in Michigan, not only are the subprime payments late, but the prime ones, too…
*** Whatever your weakness, the market will find it…mirror, mirror, on the wall - who is the greatest publisher of them all?
*** The private equity swindle… who gets left holding the bag when Zell parachutes out?…and more!
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Sam Zell's purchase of the Tribune Company, owner of the LA Times, the Chicago Cubs, and 25 TV stations, has piqued our interest. Zell made his money in real estate - by buying and selling wisely. When he unloaded his Equity Office Partners to Blackstone a few months ago, we figured the man knew what he was doing. It looked like a top in the property market; and it looked like the old pro had found it.
But now Zell proposes to do something even more remarkable. He is entering a business that appears to be a long-term, structural downturn - like the U.S. auto business. The Tribune Co. stock sells for only half what it did in 2000…and only 60% of what it did a few months ago. The Tribune Co. publishes old-fashioned newspapers, while readers are migrating to the Internet, with advertisers following them.
We pause here just to turn our heads to Detroit. Motown is leading the nation towards a slump, is our guess. Michigan has 350,000 people out of work - the highest unemployment rate in the nation. Not only its sub-prime mortgage payments are late, so are its prime payments. After Louisiana and Mississippi, Michigan its homeowners have the next highest overdue rate in the country.
And in Detroit, housing prices are off 5.8% over the last three years - a period in which they rose 14% in the other 49 states (based on data from the National Association of REALTORS). But the damage to property prices has barely registered yet. Many streets are forested with "For Sale" and "Foreclosure" signs. Many houses are vacant…some abandoned…waiting to be ground down by the millwheels of legal procedure and market prices. Lenders are getting reluctant to put more money into Detroit property; sub-prime and Alt-A mortgage offers are said to be disappearing. Surely, property prices have further to fall. And to see how much that fall will impact the U.S. economy (and you wallet) see here:
The Subprime Sting
So back to Sam Zell. Maybe he saw it coming. Maybe he didn't.
But what's he doing now?
"Whatever your weakness, the market will find it," says Richard Russell. And one weakness to which we are all prone is vanity. We say this from recent personal experience.
"Did you hear…[a prominent, prestigious publication in London] is for sale?" asked a friend who came in the office just yesterday.
"They want too much for it, of course. But I think we might be able to put together a group of investors to buy it. And I know we could make it much better. Like everything else in the publishing world, the Internet is hurting it. Ad revenue is down. Subscriptions are down. And the thing just seems to have lost its way editorially. But I think it could be rescued…"
For about two seconds, we were tempted. Yes, we could see our own name in the British press, followed by the hallowed words, 'publisher of the prestigious….' All of the sudden, we would go from being a lowly scribbler on the margins of polite society - to being at the very top of it. People would talk about us…and put our family into the society pages. Our telephone would start to ring. We'd be invited us to lunch…to soirees…to charity events and dinner parties. Our photo would soon be in "Country Life," with the caption: "Lord Griefbottom and publisher William Bonner greet guests at the annual Save Britain's Bats fundraiser at Havasham Hall."
It must have been at that moment that we awoke from our quick dream. Wait, we don't even like charity events and dinner parties - unless there are friends to make them amusing. Get our name in the paper? We might as well send the IRS a graven invitation - Audit Us… R.S.V.P.
No, we prefer to write to our small group of dear readers…and enjoy the meager fruits of our labors in well-deserved obscurity. Whatever other merits it may have, there is less temptation to take ourselves seriously.
More below…after the news:
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Byron King, reporting from Pittsburgh…
"…The Port of Long Beach, south of LAX, is similarly congested, with just plain miles of waterfront lined with pier facilities, steel forests of massive crane systems, and the adjacent and necessary railroad…"
For the rest of this story, and for more market insights, see today's issue of
Whiskey & Gunpowder
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And more thoughts on Sam Zell and private equity:
*** There is nothing particularly glamorous or prestigious about being a real estate mogul. Traditionally, it's gritty work, better than running a string of dry cleaning shops, but not much. So it would not be surprising to find that a man like Zell wanted to spend some of his loot to acquire a little better place in society. At 65, he is still a young man. He can still enjoy it.
And we hear that his wife has gotten very interested in contemporary art. That is always a danger signal. Like a man who buys a convertible and has hair transplants, she must be looking for something more than money. The next thing you hear, she will be buying tracts of land the size of Delaware in Patagonia in order to protect nature from her fellow humans.
So what's the deal?
In the old days, private equity purchases really could increase shareholder value. Old companies often needed a shake-up. A corporate raider could buy a public company, fire the fossils in the executive suites, sell off non-performing units, pay down debt…and then, for his reward…he would have a better, more profitable company.
But the present fad for private equity is largely a swindle…and Sam Zell seems to have fallen for it. Management will stay where it is, he says. And instead of selling off the non-performing units, he's selling off the best ones - the Chicago Cubs and the TV stations. Plus, he's not paying down debt…he's adding to it. Seven billion dollars of new debt are to be added - while the old debt stays where it is. Since the market value of the entire company is only $8 billion, that leaves the company with very little actual equity. And like Robert Maxwell, before he drowned, Zell is drawing on the employees' pension funds to help finance the deal…and putting the remaining equity into an Employee Stock Ownership Plan for the tax breaks.
At least, that's how we see it - after the 10 minutes we gave to trying to understand it.
Zell wasn't born yesterday. He's got plenty of money from the Blackstone deal. But he's not fool enough to use his own money in this deal. Instead, he's putting up just a bit over $300 million. If the deal goes bad, he loses the money. But it represents only a small part of his fortune. If it goes well, on the other hand, he can make 10 times his money.
But here is the part that we find interesting…and telling. Thanks to the wonders of modern finance - the thing for which all the world envies the United States, and the thing credited with being the source of so much wealth generation around the world - a rich, experienced investor can now make 10 times his money while enjoying the prestige of newspaper publishing. Whether it works out or not, he will be able to enjoy his modernist art and his lifestyle of the rich and famous.
*** Meanwhile, the pensioners…the lumpen investors…the employees - what will they get?
Not much, according to Andy Martin. At a New York press conference where the Internet publisher, broadcaster and media critic made very clear that he will continue to oppose the Zell's takeover, and will shortly file a competing proposal with the Securities and Exchange Commission.
"I think it is ironic that on the day when New Century Financial filed for bankruptcy, the Tribune Company agreed to a takeover with a 2% down payment. That sure looks like a risky deal to the stock market, which has posted a tepid response in early trading," Martin said. "Talk about a subprime corporate deal. Mr. Zell knows nothing about newspapers, but he is expected to now 'know more' than the entire industry. It makes no sense. And who gets left holding the bag when Zell parachutes out? Why the employees, of course.
"Once again, the investment bankers and brokers will profit by all of the transaction fees, and the public will be the loser. The Tribune will be left weaker, and under the direction of a man with no commitment to journalism and very little financial commitment to the enterprise. Mr. Zell has little risk and some upside; the employees have virtually all the risk and all the down downside."
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Money is like a mighty river that flows from our homes out into the world…
We scrimp and do without so we don't run dry! But what if you could turn it around so the river of money flows back to you… And the cash floods in much faster than you can spend it? What if you could turn your pocket change into a multimillion-dollar legacy?
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The Daily Reckoning PRESENTS: Those who champion the reinstatement the gold standard in the United States are often brushed off as delusional fanatics - often with good reason. However, in the essay that follows, Nate Lewis has created an alternate universe in which the dollar is rejected - and a viable gold standard is introduced. Read on…
THE NEXT GOLD STANDARD
by Nate Lewis
It appears that we are slowly drifting into a period of monetary turmoil. Turmoil leads to change, and ideally the result of a widespread desire for change will be the establishment of a new gold standard. Indeed, there are some indications that this may be achieved by the end of this year, although it may seem unlikely at this moment.
A necessary condition of a new gold standard is that at least a small group of people must understand what a gold standard is. So let's start with that.
Humans have used gold (and its adjunct silver) as money since prehistory because it is the one item best suited for this role. The primary reason being that gold's monetary value is stable, or at least more stable, than the alternatives.
It follows that anything whose value is linked to that of gold must, by definition, be as stable in value as gold. It is not particularly a stretch to link the value of a paper currency to gold. In fact, the world's first gold-linked "paper money" was made of clay, during Sumerian times, around 3500 BC. Clay tablets were used as warehouse receipts for gold, and traded among third parties.
It is not difficult to link the value of a paper currency to gold, even if the issuers of currency own no gold whatsoever. This is accomplished via the adjustment of the supply of currency, much like a currency board operates. Currency boards, such as those in use in Hong Kong or Estonia today, can just as easily and reliably link to gold instead of another currency.
One of the most straightforward ways to link the value of a currency to gold is to, quite simply, make the currency out of gold. In the past, when economies and currencies collapsed, people sometimes just started doing their business in gold and silver coins. Most of the dollar bills in the world today are actually being used outside the United States, and it appears that most of them are being used in under-the-table or even illegal activities of one sort or another. The popularity of the dollar outside the United States has been in steep decline in recent years, and many people that had used the dollar for their business have been transitioning to euros or other currencies. Apparently, some of these underworld elements have even begun to do their business in gold coins.
However, there really isn't enough gold in the world today to run today's economy with gold coins. And since all of the existing gold is already owned, the question is: what is everyone else going to use? Unless we are going to have a worldwide collapse of the most dramatic proportions, which would make the Great Depression look like a hiccup, it will be necessary to establish a paper currency linked to gold. A few governments have indicated a willingness to step up to the plate, including a number from the Islamic world who share the tradition of the gold dinar. Russia has also shown some interest. These incipient attempts have generally foundered on a lack of confidence in the technical ability to actually get the job done right - a conclusion which appears to be correct. It is better to have no gold standard than one that soon collapses due to incompetence. Operating a proper gold standard is easy, but it does take more than simply declaring a hope and crossing fingers.
That said it is also necessary to know how to create and maintain a viable gold standard. That is a subject rather more complicated than we can deal with in these pages, but at least we can now identify the steps along path from the present state of worsening chaos to the land of monetary milk and honey. If the man-in-the-street has the knowledge of why and how to operate a gold standard, governments will likely follow along. People get the government they deserve, it is said, and by increasing the average person's understanding they will come to deserve a better monetary system as well.
Another crucial stage will be to sweep away the encrustations of generations of misunderstanding of what a gold standard is supposed to accomplish. Many of today's gold standard advocates cling to the most implausible notions decade after decade, just as today's lovers of floating fiat currencies spout their own brand of ridiculous nonsense.
Here are some fallacies debunked:
A gold standard does not prevent a government from running a budget deficit. For example, the British government piled up impressive amounts of debt in the 18th and 19th centuries under a gold standard. A gold standard does not prevent a current account deficit, which is another term for the importation of capital. The United States ran a current account deficit in every single year of the 19th century, with a gold standard, as European capital flowed to the New World. In fact, a gold standard makes both government deficit financing and capital importation easier, because it tends to lead to lower interest rates and currency stability. As governments and other economic actors are forever engaged in all sorts of reprehensible behavior, and it is foolish to expect a gold standard to solve all those problems - just as it is foolish for the floating-currency advocates to think that the Fed can make any economic difficulty disappear by waving its magic wand over interest rates.
What can you do today? Imagine that a world of gold-linked money already exists. Things are considered politically impossible, but when they happen, and the historians call them inevitable. In this alternate universe, you can't even remember when Europe was a grab bag of over a dozen currencies. Now the euro is more commonly used in the world than even the U.S. dollar.
In this hypothetical world, the euro may be in turn replaced by the gold dinar, which got its start in Dubai in the autumn of 2007. The gold dinar was equivalent to one gram of gold. The Dubai Commerce Bank - it was supported by the government, which provided deposit insurance on amounts less than 5 kilograms - offered certificates of deposit in gold dinars, which proved popular as they paid 1% interest and were redeemable in gold bullion. (Exchange-traded funds based on these CDs almost immediately appeared worldwide. After deducting management fees, they paid a 0.80% dividend.) The bank then lent at 4.5%, in gold dinars. The gold dinar was quickly adopted as payment for oil exports throughout the Middle East, especially since the oil futures exchange in Dubai priced its crude oil contract in gold dinars. Soon the Middle Easterners were anxious to reinvest their oil revenues, leading them to make loans to governments and corporations around the world - loans (and bonds) denominated in gold dinars, of course.
Consequentially, governments and corporations were eager to borrow in gold dinars because they bore interest rates of only 3.5% for a ten-year bond for governments, and 4.5% for corporates, rates that were common in the 19th century. This was far better than borrowing in dollars or other local fiat currencies, which bore rates in excess of 15% due to worsening inflation. The trade-dependent countries such as Korea or Malaysia, which had always linked their currencies to those used in international trade, soon gravitated towards the gold dinar (local corporations were doing more and more of their financing in dinars), and eventually finalized their links via currency boards. China's sheer size and international ambitions were too great for that country to become a monetary vassal of Dubai, so China established an independent gold-linked currency. The gold yuan soon became popular in Africa, where it was received in payment for commodities exports. Because both the gold dinar and the gold yuan were linked to gold, their exchange rates were effectively fixed. Russia followed soon thereafter, with an independent gold ruble. Japan and Switzerland were next.
The Federal Reserve eventually raised its interest rate target to 85% in an attempt to support the dollar, but that policy was not able to counteract the dollar's worldwide rejection. Cindy Sheehan camped out in front of the Federal Reserve building, asking for a meeting with Chairman Bernanke. "I just want him to explain what 'In God We Trust' is supposed to mean," she told the media. She was soon joined by over two hundred others.
Despite becoming the first Chairman of the Federal Reserve to win a Nobel Prize in economics only six months earlier, Chairman Bernanke stepped down in disgrace, in the middle of his term. He then became president of the World Bank, replacing Paul Wolfowitz. Hyperinflation in the United States eventually led to a new political party, formed by dissatisfied Congresspeople from both the Republican and Democratic parties, which took a strictly Constitutionalist approach to monetary affairs. The unused Federal Reserve building in Washington DC was eventually converted into a museum of Native American art.
Regards,
Nate Lewis
for The Daily Reckoning
P.S. Although the above was a purely hypothetical situation, the allure of gold still stands strong…but is often seen as risky and out of the average investor's reach. However, one precious metals expert has found a way to make as much as you want as gold goes up, without any risk of losing money if it suddenly reverses. It's written into the legally binding statutes that govern this account. There's no risk. None. You're actually insured against losses, up to $100,000. Interested? Click here for all the details:
Government-Guaranteed Gold
Editor's Note: Nathan Lewis was formerly the Chief International Economist of a firm that provides investment advice to institutional investors. Today, he is part of the investing team at an asset-management company. He has written for the Financial Times, Asian Wall Street Journal, Daily Yomiuri, Japan Times, Pravda, Dow Jones Newswires, and other publications. He has appeared on financial programs in the United States, Asia, and the Middle East.
He writes about economics and other matters from time to time at his website:
http://newworldeconomics.com
-- Posted Thursday, 5 April 2007 | Digg This Article
