Twenty years ago, a wise and rich businessman gave me some advice. He said… “Never believe your own bullshit.” He went on to tell me that it’s important to develop a good story and bluff in business from time to time, but it’s critical that you never convince yourself it is true. I laughed politely then and have continued laughing through the years when I ran into someone who was obviously violating the “bullshit rule.” Every time I hear someone from the Fed discussing how the risks of a slowing economy or further credit market turmoil have diminished, I wonder….did any of these people ever hear of the “bullshit rule?” And if they did, are they believing the crap they are spewing? I know Bernanke and the Fed are all about managing expectations these days and maybe they think they can talk us out of the mess we are in, but if that is what we are expecting to tame inflation or strengthen the dollar to halt the commodity pressures….we are screwed.

I used to love politics - before it became mostly a battle for power rather than a debate of ideals. One of the remaining hopes I had for the merits of respectful politics died yesterday. I cannot remember being more affected by the death of someone I did not know.

Tim Russert was a Democrat - you knew that. But when he asked a question of a Democrat - you didn’t know Russert was a Democrat. When he asked a question of a Republican - you didn’t know Russert was a Democrat.  You just knew he was a journalist that cared about the truth.   I used to respect journalism for the important role that it provided to present the facts and perspectives of our culture. That was before the news became so increasingly political - regardless whether the topic is political.

One of the remaining hopes I had for the merits of factual interviews and dissemination of information died yesterday. There were no softballs to promote a political agenda - either his or his guests. There were no beanballs to promote a political agenda and harm the other side. Russert not only asked the toughest questions - but he asked the questions that needed to be asked. There was no opportunity for guests to escape with lies of omission. He did not accept non-answers or dodges or bullshit responses. He listened to answers and followed up. The words and the tone from Russert were precise and they left little option for lies. And on the rare occasion that someone tried pulling off an untrue statement - it would haunt them if they ever reappeared on Meet The Press.

Russert loved politics and reporting it for all of us. He was so prepared and knowledgeable on so many topics that I couldn’t help but compare….Russert vs. the guest. Which one would I rather have answering the questions? Tim Russert. Values, ethics, intelligence, listening, diplomacy, respect, leadership,…name a quality you would want in a politician - the qualities that are so lacking in our “leaders”. Tim Russert had all those qualities. I had thought about which candidate I plan to write in for President - Tim Russert would have been a great choice.

I can hear Russert saying - “it’s a great, great day.” But it isn’t - not for his family and friends….not for American politics….not for journalism….not for America.

Here’s a snippet from KeyCorp’s most recent 10-Q  filed on May 6, 2008 for the period ending March 31, 2008.

Capital adequacy. Capital adequacy is an important indicator of financial stability and performance. Key’s ratio of total shareholders’ equity to total assets was 8.47% at March 31, 2008, compared to 7.89% at December 31, 2007, and 8.37% at March 31, 2007. Key’s ratio of tangible equity to tangible assets was 6.85% at March 31, 2008, above Key’s targeted range of 6.25% to 6.75%. Management believes Key’s capital position provides sufficient flexibility to take advantage of investment opportunities, to repurchase shares when appropriate and to pay dividends.

In that same filing, they said their Tier 1 capital was 8.33%.

Only a month has gone by since Key’s last report, but a lot has changed. Here’s a summary of their decision on June 12, 2008 to cut the dividend in half and raise $1.65 billion. The press release (click here) indicates that an adverse IRS ruling of about $1.2 billion caused management to pursue this capital. I don’t think the market that whacked the shares by over 20% believes them that this is the sole problem with capital. Raising $400 million extra with highly dilutive offerings might be one clue. Cutting the dividend by 50% to save $200 million per year might be another clue.

I doubt that management still believes what it believed just a month ago that their “capital position provides sufficient flexibility to take advantage of investment opportunities, to repurchase shares when appropriate and to pay dividends.”

I have written repeatedly about my dislike of buybacks when they are done for the wrong reasons. Okay, so Key didn’t buy any shares in the last two quarters, but they bought 16 million shares in the first 3 quarters of 2007. Back then, the stock traded between $31 and $40 per share with an average of about $35/sh. Not only were those purchases expensive compared to today’s $11.73, but wouldn’t it be nice to have the $500-600 million in the capital they spent on themselves? Was that a good opportunity to “repurchase shares when appropriate”?

So what about their dividend policy decisions? They raised quarterly dividends in 2007. In 2006, it was $0.345/sh. In 2007, it was $0.365/sh. And they raised them a few months ago to $0.375/sh. Small raises really, but raises nonetheless. They had to (I guess) to keep up their record of 43 years of consecutive dividend increases. After one quarter and a one-time tax ruling, they decide to cut dividends by 50%. So much for the record.

Key is not alone. Many banks have spent their capital in prior years on buybacks and dividends and expensive acquisitions (aka “investment opportunities”). During that time, stocks were heading higher and there appeared to be no downside. Now, the reverse is true.

I know people far smarter than me have assured everyone that the worst is behind us. They apparently know more about the key to capital than I do.

I don’t believe that “jawboning” or “moral suasion” works - especially not more than a day or two. Besides - the jawbone powers of President Bush or Chairman Bernanke or Secretary Paulson aren’t quite comparable to Samson - the real “strong man”.

When President Bush tried to jawbone OPEC into increasing oil supplies to reduce oil - how did that work out and for how long?

When Paulson said “strong dollar” policy over and over for the past several years, we got continuous devaluation.

So forgive me if I am more than skeptical about the jawboning powers of Chairman Bernanke in his attempts to fight inflation or lower oil prices via strengthening the dollar by uttering a few words.

Actions….not words. Evaluate the actions for the past few years - they have not created confidence and directly led to dollar destruction and inflation. Now, in their infinite wisdom, the guys who contributed heavily to this mess with failed monetary and fiscal policies and who cheered the wonderful impacts of a weak dollar to support our exports, have decided that a crumbling dollar isn’t good for our economy. BRILLIANT!

On June 2nd, Bernanke said the Fed was going to be “attentive” to strengthening the dollar. One whole day after Paulson had definitively stated (for the gazillionth time) that he “strongly favored” a “strong dollar”. I am sure he had a “strong” look on his face as he “strongly” pounded the table and used “strong” volume in his voice. No one “strongly” cared about Paulson’s promises in the past or June 10th on Bloomberg when he said he would tell his G-8 buddies this week that the “strong dollar” would be representative of “strong” economic fundamentals. Okay. Got it.

But as for Bernanke - his jawboning appears to have worked. On June 2nd - it worked for about 3 days. The dollar went up, oil went down and commentators were convinced that he and the Fed would singlehandedly jawbone the oil / inflation into submission. OOPS. That failed so this week on June 9th, Bernanke stepped it up again and said “The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing from growth as well as inflation.” That has worked too - at least 4 days so far.

Actions…not words. Evaluate the actions he is taking now and opening his mouth does not qualify as an action. Do you really think that currency traders are bidding up the dollar because they believe what Bernanke says is true or will be true? I don’t. I think they just look at his jawboning as an opportunity to make a trade that they can undo when it fades in a few days.

After all the jawboning - the dollar has appreciated about 1% since June 2nd and oil is up $10 per barrel. As for expectations of inflation - mine haven’t changed despite Bernanke’s words. They have changed because of his actions. Actions…not words.

Before getting excited about Fed Funds rate hikes being good for the dollar and for the fight against inflation, please consider the rationale for the rate cuts and whether they worked. Monetary theory says that all the easing since last fall should have boosted the economy. Last time I checked - wages are declining, unemployment is rising, consumer confidence is dropping, etc. etc. I missed the part where the Fed’s prior actions have solved much of anything other than contributing to inflation and a weak dollar. As you may have gathered from my prior posts about the Fed (and Central Banking in general), I don’t feel it is effective and it can be very counterproductive. More importantly, I am increasingly concerned about the reliance on Central Banking decisions to dictate the sentiment of market participants.

As for all this jawboning about the strong dollar - it is a lame attempt to “strongly” convince people that oil will go down if we can just “strongly” talk it down through “strong dollar” talk. Actions…not words.

Economists and other financial commentators frequently debate the likelihood of Stagflation in America. Usually the conversation degrades into a comparison to the 70’s and it’s common to hear that our current situation isn’t stagflation because it isn’t as extreme as we had 30 years ago. I think that’s bullshit. I don’t care if you call it by toned down names like “Blahflation” (Kass) or “Stagflation Lite” (Roubini) - we have lower growth and higher inflation and higher unemployment.

I looked back through my previous posts to see how long I’ve been talking about Stagflation - it’s been about a year and a half. The happy talk people want to reserve the right to set a numerical standard for terms like “recession” or “stagflation” and say that our current math doesn’t hold up to those definitions. I, on the other hand, focus on direction and it would be more than negligent to look at our recent past (while these economic debates have been raging) or our current situation and suggest that we are not heading down the wrong path.

Here are some of the posts where I mention Stagflation that may make for some fun retrospective reading:

• Not A Goldilocks Fan 09/27/06
• Fine Lines 12/04/06
• Goldilocks And Stagflation 03/15/07
• BlahFlation 04/27/07

You might think that the US has some preferred right to be the center of attention or set the standard for Stagflation because many people probably believe it was invented here or discovered here or named here. Actually - nope. The term “Stagflation” appears to have its first recorded use in a 1965 speech to Parliament from Iain Macleod, a leading British Conservative politician, who later became Chancellor of the Exchequer. And as for the concept…..that was first used to describe the economic situation of stagnation and inflation in post-World War I Europe by John Maynard Keynes in The Economic Consequences of the Peace published in 1919. The Stagflation of the 1970’s in the US may have been the most extreme or most recent or the most American, but it is not uniquely contained to our mess. While most economists we get treated to in the financial media seem to focus almost entirely on the US and our crappy economy, Europe is largely being ignored.

Note that I don’t think the European economy is bad, I just don’t think it’s so great and I am concerned about the direction. I am seeing a lot of things that remind me of the US when I wrote the posts mentioned above. Housing price declines, mortgage defaults, slowing retail sales, increasing inflation expectations near 4%, decreasing economic growth expectations to 1.5%, increasing unemployment etc. etc. Meanwhile Trichet is determined to fight inflation with higher rates. I guess he needs to follow the ECB singular mandate to fight inflation but it’s getting to a critical juncture. Some countries in the EU are doing better than others in key economic areas and yet the pain being felt is rising. I am not advocating that the ECB should hold rates or cut. That is not for any American to tell them - not even Bernanke. Each country or economic region and their Central Bank needs to evaluate its own rules and represent its own constituents. At some point though ( and I think we are in it now) - it’s a race towards deepening stagflation. I am just not sure whether European Stagflation will happen faster or more extreme than the variety being denied in the US.

Please read these two posts first….1) Minimum Wage and 2) Minimum Wage - 2

When the BLS came out with the employment data last week and the bullish spin from the happy talk people - including President Bush - was that the jump in unemployment was due to teen workers (and therefore not so bad?), I was surprised. Not surprised that teen employment was on the decline, but that so many people were supposedly shocked that it would happen or feel that the loss of teen jobs is not so important. Read this forecast from the Center For Labor Market Studies at Northeastern University - it is titled - The Continued Collapse of the Nation’s Teen Job Market and the Dismal Outlook for the 2008 Summer Labor Market for Teens: Does Anybody Care? I guess people cared a little bit, regardless of how much the teen job market really dominated the jump in unemployment.

I’ve decided to politicize this issue. Go back to what the politicians who pushed for the Minimum Wage increase promised about how this would help people out of poverty. How did that work out? Just go with the political spin and do what they do. Make stupid associations between the legislation they proposed and the results that actually resulted. Assume that most teens start off or continue working in jobs paying close to the minimum wage. Therefore, maybe it would be appropriate to suggest that we need to lower the minimum wage to get all these newly unemployed teens back into the work force and reduce the growing poverty problem we have in America. Just blindly forget all the other reasons why the economy is sucking and make a “political statement of fact” (usually not factual) that one thing will cause another with a perfect correlation - like raising the minimum wage will lift people out of poverty. Except this time, make the reverse argument and suggest that raising the minimum wage last July actually caused 100% of the rise in unemployment (teen and adult). Why not exaggerate and ignore almost every economic principle by isolating on just one thing that supposedly has no negative side effects or unintended consequences - isn’t that what politicians do? To make your case, it should be easy. Just show a chart of unemployment stats in the year before and the year after the minimum wage increase. Then pull up (click here and scroll down) the arguments for supporting the minimum wage and point out how many of them have not worked out so well in the past year. Then review the arguments for not having the minimum wage and point out how many of them have turned out to be true since last July.

In this election year, there are a lot of policy initiatives being offered by both candidates. The campaigns love to do what they did with the minimum wage legislation, make stupid assumptions and then make promises that are impossible to keep (because economic reality trumps political economics). Later, when the results trickle in and things didn’t turn out as planned, there are few political consequences, only real consequences for American citizens. As I said last year, increasing the minimum wage is not a solution to fixing the growing income and wealth gap that is growing in our country. It’s certainly not the cause of it (as per my politicizing in the previous paragraph) but the reality is that it did not help.

PDCF vs. Regulation ….take your pick. The Fed and the Treasury and influential members of Congress are suggesting that they need to regulate the investment banks because they didn’t in the past created a new facility to bailout JPMorgan Bear Stearns and since public money is going to be lent to these institutions, some political agency deserves to provide oversight. Okay, I got that.

But I think this debate will string out as long as the firms really need the liquidity that the PDCF offers. If that period ever ends, I expect that they will evaluate the goodies being available at all times vs. their desire to not have big brother looking over their shoulder. Stronger firms like Goldman Sachs may want to opt out. Is it fair that - if you don’t borrow or never have borrowed, that you have to be regulated? I can hear the bullshit arguments now….”that will stifle financial innovation”….”that will cause us to be less competitive compared to non-US investment banks”…. “that might cause us to have to leave the US.”

The industry got what they needed to avoid a meltdown and I have a feeling they are going to say “no thanks” if that means they can go back to minimal / no oversight. It’s the best of both worlds actually. The Fed has made it clear that they will not let one of these guys fail. Bear Stearns set the precedent. So why not just end the PDCF when it isn’t desirable or necessary? That leaves everyone off the hook. No regulation.

And if they get themselves into trouble again???? How much do you want to bet that the Fed will make another short term creative exception, bail out the industry and then revisit this whole debate. Whoa…wait a minute… you might say. The Fed/Treasury/Congress is in charge here. ((((((LAUGHING)))))) Maybe the politicos will force this regulation upon them. Just remember that they get a win if the PDCF goes away too. With regulation comes responsibility and accountability. At least it should (but hasn’t.) If they are supposedly providing regulation and something goes wrong, then it might make the politicians look bad.

Representative Maxine Waters (D-CA) suggested that unless oil execs promised to lower gas prices in exchange for drilling wherever they want - she would make it the duty of “this liberal” (her) for “basically taking over and the government running all of your companies.” She said “socializing” - she meant “nationalizing.” Neither are good. Please click here to watch the video. Unlike the other Congress members laughing in the background of that video, I don’t find it funny. Unlike many Americans who increasingly want a socialist country, I find Representative Waters and her concepts on solving the energy crisis to be extremely dangerous.

Venezuela nationalized its oil industry over the last few years - they have more oil reserves than we do. Click here for summary of global reserves and look where the US sits. Many countries with the most reserves have nationalized oil industries. Some of those countries are actually drilling wherever they want. And some countries are actually finding some new oil every once in a while. With all that, you might think that oil would be free. And yet, somehow it escapes Rep. Waters and anyone like her to understand that nationalizing oil has not lowered global oil prices. Doing so in the US with our relatively low level of oil reserves is ridiculous - we are a “drop in the bucket” or if you prefer, a “bucket in the barrel” when it comes to affecting world oil supplies.

But let’s just play along with her concept for a while. Let’s say she and her socialist friends in government would take over. Wouldn’t that be fun? First of all, let’s look at the financial consequences. Let’s say that the taxpayers would pay market prices for the top oil companies and pay off their debts - for XOM, CVX, and COP - that would be about $900 billion to $1 trillion to nationalize. If this means that oil prices and those pesky “excessive windfall profits” would decline, then the US taxpayer would be overpaying for assets and cash flows at their peak for an industry that the socialists want to put entirely out of business. HMMM? What a waste of money not to mention what would happen to the loss of our entire ability to have confidence in ever investing in any US business. And let’s remember that the US oil industry is just a part of the global energy industry. That means we’d have to renege on commitments to foreign companies who have drilling rights in US territory or compensate them for taking those as well. Please remember that much of the “obscene windfall profits” of the 5 oil companies interrogated by Congress came from outside the US. So does much of the exploration and production of those companies. If their businesses were nationalized, the new US national oil company would be restricted to current US production and revenues and we’d have to get rid of the non-US operations just as we would have to kick out the non-US companies operating here. As a result, we would almost certainly end up in a serious shortage situation. That should do a number on foreign investment in the US. And what about all the other companies. I know the Congress only wants to blame the biggest 3 US oil companies. But how about the drillers and other oil service companies or the independent refiners or the pipelines? What would we do to nationalize the retail network which also includes a bunch of small businesses that operate the local gas station? Financially, we are now in the trillions for this nationalizing program. And if you say, we shouldn’t pay fair market prices then our entire financial system is screwed more than it already is.

In the end, the US dollar - it would be worth less than worthless. Oh and never mind the inflation that would result. Yep inflation - sadly making gas is not free and even if you price it at nationalized prices - we will have shortages and inflation in other products. Just check examples like Venezuela. I know socialist dream worlds suggest that there are no negative consequences for nationalizing industries, but you might want to read this article.

A few more ridiculous points about this ridiculous idea - if the socialist US government would run the oil industry, where would they allow themselves to drill? Do they know precisely where the oil lies? If so, would they just tell us now? If there is no way to drill in an environmentally responsible manner in ANWR or the continental shelf or Florida or wherever else, then what would the socialists do to increase supply? Do Rep. Waters and the other socialists know how to explore, drill, transport, refine, and distribute oil in a sterile manner? If so, could they save the planet and just tell us now? Finally, by what mechanism do they plan to do all the work of the industry without having to raise taxes to pay for it, with or without 10% profit margins they call “obscene” and “excessive”?

Maybe you can watch Rep. Waters and feel comforted that she cares about the effects of high gas prices on her voters and Americans in general. I do not doubt that her feelings are genuine and well intentioned. They just happen to be wrong and dangerous. Like many socialist ideals - these good intentions are ignorant of all the complexities and interdependent relationships that would result.

When you hear the term “demand destruction”, it’s typically followed immediately with a claim that prices will decline with it. Many economists and financial experts make this assumption. I don’t agree, especially not in the short term. We’ve seen some statistical and anecdotal evidence over the past few weeks that US consumers are making marginal reductions to gasoline purchases and miles driven. Here’s an example from last month’s MasterCard Advisors gasoline report. And we all know that the price per barrel and the price of a gallon of gasoline hasn’t declined at the same time. If you want further examples, you might want to read this article from last August about the drop in gasoline demand. HMMMM? The $3.23 per gallon back then sounds like a bargain - doesn’t it? Gas demand declined and gas prices increased - that is just not fair!

Lowering demand / consumption in the US is certainly something I’ve been hoping for on both economic and environmental levels. In past posts (last year), I argued that consumers weren’t changing their energy consumption behavior - only the amount of their complaining. That has changed a little bit so I am not saying that now. However, it’s important for Americans and economists to understand that price predictions based upon econometric models may look good on a chart, but that doesn’t mean it will happen.

We could have $4.00 per gallon gasoline even if US consumers drop demand significantly. I wish I could go along with the idea that this is just an oil bubble caused by speculators and it will get better if we would just park all the SUVs, carpool, take mass transit to work, or use many of the available means of reducing energy consumption. I just don’t find that to be a reasonable cause-and-effect promise. Gas prices could stay high or head higher - sorry if I burst that bubble.

If you drive less and gasoline prices hold constant, you will save money by mathematical definition. However, demand destruction is more than a US situation. High oil prices are a result of many factors including failures of US economic fiscal and monetary policy, their effects on a crumbling US dollar, US overconsumption of energy, and US this or US that. One more time, oil is a global product. The highest energy demand growth rates are coming from emerging economies. And this idea of removing subsidies in countries like India and China may sound like a surefire way to immediately drop prices, but I doubt they will be so dramatic (click here for video). Demand destruction in the US means that high prices cause us to drive less, a situation we would survive, if not benefit from. Demand destruction in poorer countries will likely have much more harmful consequences.

Draw all the beautiful supply and demand curves you want. Throw out fancy econ terms like “elasticity of demand” and “demand destruction” every few minutes. Unfortunately, none of those things guarantee that oil or gasoline prices will decline.

I’ve decided to stay out of the Lehman Brothers discussion … until now. I think they should rename the firm “Oh Brother!” As in what you might say when you get disgusted.

I am not going to get into the absurdity of the Einhorn vs. Lehman or Bloggers vs. Gasparino situations. I think these debates speak for themselves. Honesty has a way of becoming apparent. Honest questions as well as honest answers. In my opinion, there have been a lot more honest questions than honest answers.

Personally, I struggle severely with money center and investment bank financial statements - I call it Financial Fudge. Simply put - I have no faith in the integrity of their numbers - whether that means revenues, margins or net income or the related desires to manipulate the balance sheet via marking methods. Part of this lack of trust comes from my self-recognition that I don’t understand many of the products that they are selling (derivatives and the like).

But I am not alone even though I may be one of the few that is not embarrassed to admit that I don’t get it.   And this is where it gets scary - it is clear that the board and management team did not and does not understand it as well as they may have thought when things were going well.  As for the analysts - those supposed “experts” in understanding all this crap and being able to create reasonably accurate forecasts of revenues…they showed they didn’t understand very much over the past few years and they showed they didn’t understand Lehman’s situation today. Average earnings estimates polled by Thomson Reuters was a loss of 22 cents / share with the lowest estimate at $1.28/sh. How good is that? Do you really believe they understand this business when the real loss is $5.14/per share.  So  - the average investor who might use fundamental analysis and valuation metrics based upon questionable accounting and hopelessly inaccurate analyst estimates…well they are relying very flawed information.  Oh Brother!