The Blog Of The Securities Industry Professional Association


Pushing the fragile economy to the brink

What a month it’s been for two of my favorite subjects. You might be wondering right now why I would mention the Union work force and Oil in the same breath and the answer is obvious: Both are choking this country to death and both are as corrupt as a Chicago politician. This past month we have witnessed the fall of Egypt as well as uprisings in several other Middle East countries. We have also seen Union workers flood the streets of Wisconsin demanding that their benefits not be cut. In both cases we have corruption and misguided education driving the forces that are producing this crisis. Let’s start with the Unions in this country and then move on to my oil buddies in the Middle East and Wall Street.

Unions made a lot of sense a hundred years ago and even today they are a way of making sure workers are not abused and mistreated. We can all agree that sweat shops, 7 day work weeks and 18 hour days were not a good thing during the industrial revolution. Some where along the way the unions went from protecting workers to intimidating them as well as our Government. I never really understood this phenomenon. GM, Ford and Chrysler have had strong unions for years and years and it afforded workers solidarity and negotiating power. That was until a guy with a high school education started making $80,000 per year to run a bolt through some sheet metal. These salaries and these benefits and the fact that it was nearly impossible to terminate the employee drove the big three to the brink before and will certainly do it again. Chrysler for instance has been bailed out twice in my lifetime and was bought and spit out by Mercedes Benz because they thought it was a dog. Despite this you have workers with little or no education taking home high salaries (after they reach their tenure) and receiving highly funded pension plans. Call me a miser or a Capitalist but don’t call me stupid. Paying anyone on a manufacturing line or in some cases on the back of a Garbage truck over $100,000 per year for an entry level job is insanity. There has to be a point whereby you have to make a choice and either replace the worker with a lower cost alternative or as has been the case for the last 20 years, out source it to Asia. Years ago I worked for a Clearing firm as a Margin Clerk and I ran circles around everyone else and would catch things that others wouldn’t. I would come in early and stay late and was one of the few that actually knew how to figure out the margin call on complicated option spreads. I wanted a raise to about $5000 per month and my Operations Manager explained to me that it just wasn’t going to happen. Not now and not in two years or ten years. There was only so much a South Florida firm would pay a margin clerk no matter how good he was. I remember being told by my beloved manager and mentor George Loveles that if I want to make real money you have to get into another area like compliance or sales. The rest is history but the point is that any sensible business knows that there is only so much you can budget for an employee. This area gets even touchier when you bring up the teachers union as well as the other Government workers. This may be unpopular and land me in hot water with friends and some relatives but I’m going to say it any way:

There is only so much that a Teacher working in a public school can be paid or should be paid. At some point a teacher who has been teaching kindergarten cannot be paid $100k per year in salary and benefits to teach kids the ‘ABC song” or to make paintings for mom and dad. Sanity has to prevail and somebody has to say this is crazy and hire a 25 year teacher who will do it for $30k instead. The same applies to the men and women who haul garbage or work in the water department. Bankrupting our states and country to keep pouring money into these union jobs is not working. More importantly most of these jobs are neither important nor needed. Would your life change dramatically if the City Sanitation department started using minimum wage workers right out of High school? I can hear it now: “Oh NO!!! He threw our new garbage can and dented it, that wouldn’t happen if we had our Union employed $80,000 per year Garbage man!”

This Wisconsin mess will spread to other states and create a long awaited showdown that will either get the country back on track or contribute to its demise. I once had over 50 employees working for me and we would give out bonuses and contribute to their 401k plans and provide insurance assistance. However one year was particularly hard so guess what? We cut bonuses, contributions and other benefits to ensure the company would survive. This doesn’t happen with Government union workers. They want to continue to receive the maximum benefits, cost be damned. The time has come for our Local, State, and Federal Government to start running their budgets like they are running a business not a halfway house. Union leaders need to understand that the business is hurting and that no business means no workers to unionize. The problem is that they are too busy running around rallying people into a frenzied state. These union leaders are as corrupt as the oil production/price scam that has been sweeping this country.

Oil scares are nothing more then a way to push prices higher for Wall Street firms like Goldman Sachs who, incidentally, put a price per barrel projection on oil at $103.00 months ago, even though there was little or no demand for it. The global recession is still hitting most countries hard and the demand has shrunk worldwide. Here in the U.S. we have near 20 year highs in oil surpluses yet prices have been soaring for over a year. High unemployment usually means less people commuting to work every day yet Oil is surging again based on speculators betting on a global recovery, off shore drilling bans to continue, Middle East turmoil, Lindsey Lohan’s pending court appearance and the Carmelo Anthony saga finally being resolved. Everything and anything that can be used as a reason to drive up the bidding. This uncontrolled run up being caused by traders has to be dealt with once and for all. The last time we had out of control leverage we collapsed a housing market for a generation. The time before that, uncontrolled leverage was the cause of the internet bubble and collapse that lead to day trading rules being installed. The large institutions and floor brokers are able to buy tremendous amounts of contracts on oil with barely a nickel down as collateral. What’s even more disturbing is the fact that it’s driving up the cost of oil for consumers not just other traders. When speculators flood the stock market and force the price for stock up, it makes buying Apple and Google shares more expensive, however those are investment choices we make and are not a vital element to our economy and our daily lives. Oil is the one commodity that seems to be immune from the laws of supply and demand. That in its self should tell the folks in Washington and at the World Trade Organization that something’s corrupt. In 2005 Hurricane Katrina hit the Gulf of Mexico and damaged a couple drilling rigs and disrupted production for a few weeks. 15% of the oil in the United States comes from the Gulf. One would expect that a couple weeks disturbance on 15% of our supply might cause gas to go up about 15-25% but instead gas prices in the U.S went up over 100% in just two weeks. To date there has been no investigation, hearings, testimony before congress or anything else that would indicate someone from our government was troubled by this lack of supply vs. demand ratio. Over the past four years from the Bush administration to Obama’s, we have seen top brass from the auto industry, banking industry, mortgage industry, hedge fund industry, and others grilled before congress on everything from bad loans to brake failures on Toyota’s. BP’s CEO was grilled over the oil spill but there has not been a hearing about supply vs demand in the oil industry. Neither the oil companies nor the trading companies and the regulators who are supposed to regulate them have been questioned before Congress. Don’t ask don’t tell is not just for the military anymore.

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February 25th, 2011


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