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Anthony Alfidi
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Anthony J. Alfidi is the founder and CEO of Alfidi Capital, an investment research firm in San Francisco, California. Alfidi Capital publishes free investment research with honesty and humor. Mr. Alfidi holds a Bachelor's degree in human resource management from the University of Notre Dame... More
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  • Treasury Secretary Jack Lew In California And Australia 0 comments
    Feb 23, 2014 10:33 PM | about stocks: TIP, IPE, STPZ, LTPZ, TIPZ, STIP, RINF

    I attended US Treasury Secretary Jack Lew's talk last week at the World Affairs Council. I like hearing from top public officials firsthand. They're going to hear from me eventually once my reputation achieves critical mass, so they might as well get used to seeing me at their public appearances. I held back from publishing my comments on Secretary Lew's remarks because I wanted to compare his San Francisco talk to comments at the G20 ministerial summit in Australia. He stopped in San Francisco on his way to that summit and I assumed he would stay on message.

    I agree with Secretary Lew that resolving the debt limit conflict in Congress is a positive development. The long history of the debt limit proves that it has never actually limited the growth of the national debt. Eliminating it completely will end the hypocrisy of pretending to be serious about reducing the national debt. His comments on international relations were more circumscribed, endorsing Iran's oil and financial sanctions and advocating IMF-style reforms in Ukraine. Most Americans probably don't know that the US Department of the Treasury has a significant international portfolio. Treasury has extensive guidelines for implementing the sanctions against Iran.

    Secretary Lew addressed Bitcoin obliquely, leaving open the possibility that existing regulation and settlement systems could adapt to digital currencies. He did not say whether Bitcoin would satisfy any legal tender requirement, which in the eyes of common law is really the most important test for settling transactions. The IRS has not yet ruled on how gains realized in Bitcoin transactions may be taxed. I'm guessing they'll be taxed as capital gains because Bitcoin acts like an asset when investors take positions. If it quacks like a duck . . . it's probably not a swan.

    I do not agree with the Secretary's belief that raising the minimum wage will raise significant numbers of Americans out of poverty. His office should read the CBO's report from last week that projects large job losses from an increase in the minimum wage. The Treasury's own data shows that most minimum wage earners are young and not heads of households. They have the rest of their careers to seek wage gains.

    I was very shocked to hear the Secretary refer to the cash reserves many large US corporations maintain as "retained earnings." Oh wow, that is just so wrong. Retained earnings is an accounting classification for the excess shareholder's equity built up from many profitable reporting periods. It is not at all the same thing as holding cash! The retained earnings accumulated in a year may not precisely match the cash committed to capex or other functions. I can't believe this guy was COO of Citigroup's wealth management unit. He learned nothing about corporate reporting if he thinks cash on hand equals retained earnings. I couldn't forgive that misstatement after he said he wanted corporations to spend that cash pursuing growth. I assess corporate America's huge cash hoard as a hedge against another financial market crisis. The hoarding reflects the rational belief that Washington has not resolved the underlying causes of the 2008 crisis. The US Treasury Secretary has a role to play in doing the right thing, and jawboning doesn't cut it. It's nice that he's listening to corporate executives talk about workforce skills training, infrastructure, and immigration reform. Here are some other things he needs to hear, straight from the CEO of Alfidi Capital. Bring us real stress tests for banks, the resurrection of Glass-Steagall, and the prosecution of fraudster financial executives if you want us all to get serious about risking cash on growth.

    I would have preferred to hear Secretary Lew discuss the financial condition of the US government in more detail. The evidence of mounting problems has been in the public domain for years. The Federal Reserve's balance sheet is larger than ever and is extremely sensitive to rising interest rates. Any potential losses would end its remittances to the Treasury. The Foreign Credit Reporting System tables reveal the US government's small exposure to foreign debtors. That is a huge change from much of the 20th Century when the US was the world's largest creditor, and US development aid opened new markets for American exports. The annual trustees' report for Social Security and Medicare made it clear in 2013 that some of the funds' programs were facing imminent depletion. Secretary Lew's signature is on those reports.

    Here's the postscript from the G20 meeting. The assembled finance ministers agreed on a two percent GDP growth target for this year. They do not seem to know how to meet that target. No one wants to talk about austerity anymore after riots in Greece and Spain spooked the European troika away from policy reforms. Secretary Lew's advocacy of IMF-type monetary reforms was reserved for the home audience at the World Affairs Council. The IMF prepared a report for this G20 meeting with notable changes in rhetoric. The old advocacy of shock therapy through free market reforms is less visible now. The new tone embraces indefinite monetary stimulus and infrastructure investment. The Keynesian revolution is complete among the world's policy elite.

    Secretary Lew talks a good game. I like the guy. His staff needs to prep him some more on financial terminology so that he doesn't appear to be a fish out of water with offhand references to "retained earnings." This year's G20 action items will be judged by their success or failure in any future crisis. The Secretary upheld his office's traditional reluctance to comment on the Federal Reserve's monetary policy. That's a wise choice. The hard part today is that so much of the G20's agenda is hostage to continued central bank monetary stimulus. Specifics on just how the Secretary and his counterparts intend to realize two percent global growth are extremely relevant. The Secretary's case for recovery so far rests on ARRA and Dodd-Frank. He owes America a stronger case.

    (Note: The original version of this article appeared on the Alfidi Capital Blog on February 23, 2014.)

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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