Case Blog

In early May David Cameron realized that the Conservative Party had not won enough seats to form a majority government. Rather than trying to form a minority government, he surprised many by forming a coalition government with the Liberal Democrats and their leader Nick Clegg, who had acquitted himself well in the U.S.-style debates against Cameron and Gordon Brown. With this eleventh hour Hail Mary pass, the new team formed a government and Cameron became Prime Minister, with Clegg serving as his deputy. In politics, business, and life in general, one cannot choose when they take center stage, but given the opportunity, this coalition led by Cameron and Clegg seems to be making the most of the opportunity to set the United Kingdom on a new course in these early days. They have been able to withstand grousing within their own parties and hold the center — for now.

In spite of being very forthright about the need for a real austerity program, containing spending, and raising taxes, Prime Minister Cameron has risen in the polls since taking office on May 11. “He has played a blinder,” says one senior figure from the opposition Labour Party. “The way he presents himself is extraordinary and we saw that to full effect when he was in Washington — he looks every bit the prime minister.” In the Guardian, Martin Kettle, an associate editor of the left-leaning daily, wrote an encomium to Cameron titled: “A man of grace - Cameron has been good for Britain.” Officials contrast the 43-year-old prime minister’s “decisive, inclusive, calm” style with the more chaotic regime of Gordon Brown, his predecessor. (Financial Times: July 26, 2010)

With decisive measures at home, high marks from his early visits to the United States and India, and an improving European economy as a backdrop, the new team’s coalition has a solid foundation as they move forward. The improved economy in Europe is certainly helping to restore confidence and we have seen both the Euro and the Pound Sterling rise markedly from their lows during the last 60 days. The president of the European Central Bank, Jean-Claude Trichet, offered a somewhat more optimistic assessment of the Eurozone economy on Thursday, saying that the bank stress tests in July were “an important step forward in restoring market confidence.” Mr. Trichet made the comments after the European Central Bank, like the Bank of England earlier in the day, left its benchmark interest rate at a record low. He said that he was not signaling plans by the European Central Bank to raise rates, and cautioned that growth was occurring in “an environment of uncertainty.” In previous months Mr. Trichet had used the phrase “high uncertainty.” The subtle shift comes after recent data, particularly from Germany, showed the European economy performing better than expected. (NY Times: August 5, 2010)

The recovery from the Great Recession remains fragile on both sides of the Atlantic, and political and business leaders will be judged on how well they move the economy onto a more sustainable growth trajectory. It is much too early to know if this coalition will achieve its goal of governing 5 years prior to calling for new elections, but for now the early reviews are solid.

This past week we heard from Fed Chairman Ben Bernanke that the U.S. recovery would continue to be slow and uneven and that the unemployment rate would remain stubbornly high into 2012. “Of course, even as the Federal Reserve continues prudent planning for the ultimate withdrawal of extraordinary monetary policy accommodation, we also recognize that the economic outlook remains unusually uncertain,” Bernanke stated. (NY Times 7/21/10)  In his second day of testimony before Congress, Bernanke clarified his statements from the day before and assured them that he would take action if necessary and the Fed could extend very low rates of interest out into the future to insure that we do not fall back into recession and a perilous deflationary spiral.  The term “unusually uncertain” had clearly roiled the markets during his first day of testimony.

The Federal Reserve, together with the Obama administration and both houses of Congress, needs to understand the necessity of restoring both business and investor confidence to get the economy growing at an acceptable pace once again. Raising taxes during this low point in the recovery, combined with consistent criticism of business, particularly our financial institutions, is not going to give anyone the reassurance needed to start adding jobs. A focus on tax incentives to create new jobs would go a long way to restoring both business and shareholder confidence and to get the economy growing at more than 3%-4% again.

Both parties need to “Cool the Populist Rhetoric.” I called for this in January and it remains true now. Restoring our economic engine remains a bipartisan task and voters, particularly those that are unemployed or underemployed, will remember those who focused on job creation and those who did not when they go to their polling places this November.

On a much more positive note, Mary Claire and I spent several vacation days this past week in Healdsburg, California (Sonoma County) with our good friends Elise and George Riggs. We did not have to drive too far from home (less than 2 hours) to be reminded of simpler times and the true beauty of the Golden State.

We spent our first afternoon over a leisurely lunch at Copain with Wells Guthrie, the proprietor. (Copain’s tasting room sits on Eastside Road in Healdsburg, with gorgeous views.) Guthrie’s focus on quality and the need to pair wines and food is consistently on target.  Back in the winter of ’09, Eric Asimov, who writes The Pour, wrote in the New York Times (3/11/09): “As the rain slanted down onto the vineyard around Copain Wine Cellars, just outside this town in northern Sonoma County, Wells Guthrie, the proprietor, poured a glass of one of his 2006 pinot noirs. The wine was fresh and light with aromas of flowers and red fruit. Even in the gray dimness of his tasting room I could see my fingers on the other side of the glass through the pale ruby wine. It was vibrant and refreshing, nothing like the dark, plush, opulent wines that have made California pinot noir so popular. Mr. Guthrie used to make wines more along those heavier lines, but not anymore. After the vinous equivalent of a conversion experience, with his 2006 vintage he renounced the fruit-bomb style in favor of wines that emphasize freshness and delicacy.”

The next night we went for dinner to Cyrus, in downtown Healdsburg, and we paired a 2007 Copain Wentzel Pinot Noir with an extraordinary dining experience.  Cyrus lives up to its two-star Michelin billing.

Finally, we took the time to make the trip up Spring Mountain to Pride Mountain Vineyards, in St. Helena, California. This spectacular vineyard straddles the border between Napa and Sonoma counties. This mountain winery makes outstanding Cabernet Sauvignon. We also enjoyed a delightful picnic lunch, paired with their ’09 Viognier.

On Sunday evening we welcome back Mad Men and the enigmatic Don Draper!

Two weeks ago in my posting, $1 Trillion Dollar Rescue Plan & a Changing of the Guard, I closed with: “This was clearly a historic week on the continent and in the United Kingdom. There is a new determination to deal with the structural issues that have left most of the countries with debt loads that the global bond markets can not support in the long run, and there is a new a resolve by these countries to put themselves on a course that will support sustainable long-term growth. The Obama administration will need to start addressing deficit reduction as well as we approach the November mid-term elections. Those of us in the private equity business will be closely watching the impact of government actions on recovering credit markets.”

Since I wrote that, Treasury Secretary Geithner visited England and Germany on his way back from China and advised them to take action to put the $1 trillion dollar rescue plan into effect. “After two years in which an historic financial crisis seemed to deprive the U.S. of its self-confident global economic leadership, Mr. Geithner signaled a newfound willingness to reassert American authority on the future of the world economy… ‘What Europe should do is implement the program they laid out,’ Mr. Geithner said Wednesday. The basic lesson of financial crises is that you have to come in and act quickly and with force.” (WSJ: May 26, 2010) Then on the 27th China denied it was reviewing its holding of Eurozone debt. “The denial—which followed a Financial Times report Wednesday about the State Administration of Foreign Exchange, an agency that rarely answers questions from the media—highlights China’s awareness of how volatile financial markets have become increasingly sensitive to even hints about how Beijing deploys its enormous foreign reserves.” (WSJ: May 27, 2010)

In spite of all of these efforts, the global equity markets were pummeled in May. “Between the ‘Flash Crash’ and angst over the worsening crisis in Europe, stocks suffered a dismal May, posting their worst decline for the month since Franklin Roosevelt was in the White House.” (WSJ: May 29, 2010) To further contribute to the slide, Fitch announced that they were downgrading Spain’s credit rating. (FT: May 28, 2010) What does this new religion about reducing deficits as a percentage of GDP mean going forward? I turned to Bill Gross’ June Investment Outlook letter, “Three Will Get You Two (or) Two Will Get You Three.” (Pimco) “So the developing predicament is becoming more obvious to Shakespeare’s ‘lenders and borrowers be,’ ” Gross writes. “Fiscal tightening and budget conservatism may have come too late for Greece and its global lookalikes. Continued deficit spending may be an exorbitant privilege extended to only a few. Caught in the middle are many developed countries that likely face New Normal growth rates and a continued bumpy journey toward that destination. Investors must respect this rather tortuous journey in the months and years ahead for what it is: A deleveraging process based upon too much debt and too little growth to service it. No longer will ‘two get you three’ in the investment world. Not 1,000%, but 4-6% annualized returns for a diversified portfolio of stocks and bonds is the likely outcome. And be careful — sometimes ‘three gets you two.’ ”

On a more positive industry note, the conference and exhibition business is showing signs of life after a very difficult ‘09. Informa, which derives almost 50% of its global revenues from events and training business, is a candidate “for promotion in next month’s Footsie index reshuffle.” (FT: May 25, 2010)

We are also enjoying a strong recovery in our events business at Asset International. On May 20th and 21st, ai5000 Editor-in-Chief Kip McDaniel produced our first Chief Investment Officer Summit (CIOS) in New York City. The event received high marks from all the attendees and sponsors. Our featured dinner speaker was Nassim Nicholas Taleb, best-selling author of The Black Swan, which has just been released in a second edition with a new section, “On Robustness and Fragility.” I highly recommend that this book gets added to your summer reading list.

We will hold our second CIOS event of the year in London on October 7th and 8th and once again Nassim Taleb will be the featured speaker and will explain how Black Swan events result in the market volatility we are experiencing.

As we headed to JFK early on Monday morning for our BA flight to London, we learned that over the weekend the Eurozone leaders had fashioned a rescue plan that went well beyond Greece and assured the world that Spain and Portugal would not be the next dominoes to fall. Shortly thereafter both countries announced new austerity moves to further assure the world debt markets that they were serious about bringing down their debt levels as a percentage of GDP. The I.M.F. and the U.S. Federal Reserve contributed in their own way to further assure the world markets. By the time we landed in London on Monday evening the world’s stock markets had rallied for their biggest one-day gain in over a year.  As the European leaders went home, the Euro remained under pressure and by the weekend had fallen to an 18-month low — below $1.25 to the EU €1. The world markets remained concerned that the new austerity measures imposed on the PIIGS (Portugal, Ireland, Italy, Greece & Spain) could lead to another recession in Europe while the world slowly recovers from the Great Recession. (NY Times: May 14, 2010)

Against this backdrop, when we retired on Monday evening Prime Minister Gordon Brown was still clinging to the hope that he could derail the discussions between the Liberal Democrats and the Conservatives by entering into discussions with the Liberal Democrats on forming a Labour-led coalition.  While Mary Claire and I were out to dinner with friends late on Tuesday evening, it became clear that Labour’s 13-year run had come to an end. The next day Gordon Brown tendered his resignation to the Queen and a swift transition began with David Cameron meeting with the Queen and then quickly moving into 10 Downing Street as the new prime minister. The Conservatives and their new allies, the Liberal Democrats led by Nick Clegg, quickly announced to the country that they had formed the first coalition government since Winston Churchill’s coalition government during the darkest hours of World War II.  Labour will have a new leader, but Gordon Brown will retain a seat in Parliament. Nick Clegg has become David Cameron’s deputy and at their first cabinet meeting announced their own set of austerity measures to deal with the large deficit that grew out of the Great Recession. The Pound Sterling strengthened versus the Euro as the week unfolded.

This was clearly a historic week on the continent and in the United Kingdom. There is a new determination to deal with the structural issues that have left most of the countries with debt loads that the global bond markets can not support in the long run, and there is a new a resolve by these countries to put themselves on a course that will support sustainable long-term growth. The Obama administration will need to start addressing deficit reduction as well as we approach the November mid-term elections. Those of us in the private equity business will be closely watching the impact of government actions on recovering credit markets.

Mary Claire and I have flown to Dublin for the weekend and will return to New York on Monday evening.

As we close out the first quarter of the new calendar and fiscal year, almost all businesses are finding that their year-over-year performance has improved significantly. The first quarter of ‘09 represented the depth of the Great Recession, when the world as we knew it unraveled before our eyes. When earnings are released for the first quarter of ‘10 we will see, without exception, improvements in all sectors of the business media, including those newspapers that survived the downturn. This will provide momentum for continued improvement as we head into spring and leave behind a difficult winter on the east coast.

Mary Claire and I returned last week to Blackhawk for the first time since early January. The Bay Area’s spring is in full bloom. Spring shipments from Napa and Sonoma are arriving, most from the ‘07 vintage. As many wine critics have reported, ‘07 represents the best vintage for most varietals in Northern California wine country since ‘97. It is time to restock the wine cellar, with many wineries actually lowering their prices to reflect the reset that has taken place in the consumer economy!

While we continue to see the U.S. and U.K. economies recover and grow, albeit at slower paces than we saw in the fourth quarter of ‘09, the eurozone remains challenged by its PIIGS.  ”Greece, along with Portugal, Ireland, Italy and Spain, are Europe’s PIIGS - euro-zone members with fragile economies and large debt loads. Fitch Ratings poured fuel on the euro fire last week by downgrading Portugal’s long-term foreign- and local-currency debt to a notch, to double A-minus, with a negative outlook, meaning another downgrade is more likely than not. The euro promptly fell to 10-month lows against the dollar before rebounding Friday.” (“Helping Hand for Greece Also Helps Hedge Funds,” Barrons, March 29, 2010)  Those of us who have business interests in the eurozone will continue to monitor the German-French brokered deal to keep Greece from defaulting. I was surprised to see Chancellor Merkel prevail on the side of fiscal discipline and the IMF being invited to join the bailout of Greece in order to preserve the Euro.

I wrote back in September of ‘07 in Global Brands, “In our global economy, even proud islands like the UK need to acknowledge that we all operate in a very interconnected world. Will the pound some day give way to the Euro?” I stand corrected; the Pound Sterling will survive and will continue to show strength versus the Euro. I was much closer to the mark in my last post, The Pound Sterling. We will continue to watch with great interest the upcoming spring election battle of Labour vs. the Tories. Closer to home and after our long health care debate, I recommend you read “Game Change: Obama and the Clintons, McCain and Palin, and the Race of a Lifetime,” by John Heilemann and Mark Halperin.

This is a guest blog post by Jason Cassidy, Asset International’s Senior Vice President of Strategy and Development.

By Jason Cassidy

Our Strategic Insight Global team recently published a detailed report on the rapidly growing middle class investor in emerging markets.  The report describes the rapid growth in markets such as China and India and the need for asset managers looking to grow to find ways to enter these markets and to be sure to not underestimate the differences and potential obstacles these markets pose versus their home markets.

The report reminds me of the classic story of Kellogg trying to enter India with breakfast cereal.  The story was described to me by a good friend and business partner in Mumbai, Prakash Iyer.  There were so many potential eaters of breakfast cereal and the market was virtually un-penetrated, so Kellogg entered.  However, there was a big cultural obstacle that was missed.  There was a general preference in India for hot breakfast.  Cold cereal was a foreign concept and not very appealing.

However, with Prakash, I also saw firsthand an ultimately more successful, more culturally centered rollout with my experience at a McDonalds on the highway between the Taj Mahal and New Delhi.  (As a side note, I make it a point to try McDonalds in every country I travel to – my favorite for its irony is the outdoor McDonalds in Red Square in Moscow.  Some of my colleagues tend to dread this tradition of mine.)  The McDonalds menu in India, as some of you may have experienced, is very different from the menu you find in the U.S. or anywhere else in the world I have seen, for that matter.  For one there is no beef.  And there is a big focus on vegetarian options as well as chicken.  I tried the McAloo Tikki (potato and pea patty) and did get to have the signature fries.  They also have the same golden arches and style in the restaurants.  This struck me as a great combination of taking what you do well and integrating it with elements that make it uniquely appropriate for the country’s tastes and culture.

I generally defer to my Strategic Insight colleagues on the details and nuances of asset management around the world.  However, there is an example from China that I find particularly relevant.  From some conversations I had in China, I found that there is a general desire from investors in China to control their own investment decisions.  This is partially due to distrust of asset managers (especially for a large group of people who have had investable wealth only in the past few years of financial turmoil around the world),  There is also the desire to have the thrill and excitement of placing “bets” on specific stocks.  People enjoy going to their broker’s office, making trades, watching the stock ticker, and feeling part of the excitement.  Thus, a traditional asset manager has some cultural hurdles to overcome to build assets under management.  Trust and excitement are two key values they need to get across to the retail investors.

Overall, these cultural nuances can make or break a company’s expansion into new countries (just ask Kellogg).  Beyond the regulatory hurdles, the cultural hurdles need to be a primary driver in determining the product and service offering in a country.  Assume nothing that is a given in your home country applies to your global footprint.  Keep in mind the McAloo Tikki as you begin your global journey.<

About Jason Cassidy, Asset International’s Senior Vice President of Strategy and Development.

Prior to joining Asset International, Mr. Cassidy was Vice President of website solutions for Register.com, where he oversaw sales, operations, customer service, marketing and product management with the primary focus on small business customers. Previously, as Vice President of Reed Business Information, he was actively involved in global strategy and development, including M&A initiatives and international development, and managed a portfolio of websites. Mr. Cassidy earned an M.B.A. from Duke Fuqua School of Business (2007) and an A.B. from Harvard University (1998). Originally from Boston, he and his family reside in Staten Island, New York.

With the concerns about the fiscal integrity of Greece and several other Eurozone members, the Euro has been under the most significant pressure since it was introduced as a common currency more than 8 years ago. There has been much speculation that it could fall to parity with the US dollar. Few recall that when it was introduced in 2002 and replaced national currencies, for example the German Mark, the Euro fell by approximately 15% vs. the US dollar in the first half of the year. It reached its peak of $1.599 vs. the US dollar in July of 2008. but since the global financial crisis began it has been under pressure. The Euro is the second largest reserve currency after the US dollar and the UK’s sterling is the third largest reserve currency. (Wikipedia: Euro)

In February, the world’s best-known bond trader, Bill Gross of Pimco, wrote in his monthly report: “…the UK is a must to avoid. Its Gilts are resting on a bed of nitroglycerin. High debt with the potential to devalue its currency present high risks for bond investors. In addition, its interest rates are already artificially influenced by accounting standards that at one point last year produced long-term real interest rates of 1/2% and lower.” For the developed countries, Gross favors fixed-income investments in Canada — its conservative banks did not participate in the housing crisis — followed by Germany. (Pimco: Investment Outlook, Ring of Fire: Red Zone Countries, February 2010) While Pimco runs the world’s largest fund, Total Return Fund, and I hold Bill Gross in high regard, I do not believe that the United Kingdom is the next Greece or that we will repeat 1992. (The Wall Street Journal reported that the “bets against the pound are the highest since 1992″ and credited Camilla Sutton, currency strategist at Scotia in Toronto. [WSJ 3/6/2010])

The Bank of England, founded in 1694, and its Governor, Mervyn King, along with Chancellor of the Exchequer Alistair Darling, understand what the sterling represents on the world stage and how important it is to defend. During the dark days of the global finance crisis they introduced quantitative easing as one tool to support their banks. I have been reading Hank Paulson’s book, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System”. In it he relates a call he received from Darling during the search for an acquirer for Lehman Brothers, before its collapse into bankruptcy:

“I understand one of your possible buyers is a British bank,” I remember him saying. “I want you to know that we have some concern, because our banks are already under a lot of stress. We don’t want them to become overextended and further weakened.”

“Afterward I commented to Jim Wilkinson that Alistair seemed to be telling me that the British didn’t want their banks to catch the American disease. But because he couched this as a general concern, I didn’t see his words as the red flag that in retrospect they appear to have been.”

Barclays management team could not get the approval they needed to acquire Lehman Brothers, but did end up buying Lehman’s best assets after the bankruptcy filing. I find this supportive of my view that the Bank of England will not let the pound weaken further. (It did bounce back towards the end of this week from below $1.50 to close the week on an uptick at $1.5145.)

There is concern that the spring election between Labour & the Tories, which once seemed like a sure bet for the Tories, now appears too close to call. The Tories have squandered a 20+ point lead in the polls over the past year. They are going to have to become proactive & let the British electorate know where they stand on the issues of the day. In the final analysis, I believe that the British pound will withstand this storm better than the Euro and will reinforce the sentiment in the U.K. that they made the right decision not to join in the Eurozone common currency, which allowed them to avoid the budget restrictions imposed upon Eurozone members. I sense that both the U.S. and the U.K., with an assist by their respective deficit stimulus plans, will recover faster from the Great Recession than their Eurozone counterparts.

With one week left in Fed Chairman Ben Bernanke’s first term, a sense of unease rattled the stock markets yesterday as several Democratic Senators (Boxer & Feingold) announced that they would not support President Obama’s nomination of Chairman Bernanke for a second term. I wrote “A Second Term for Ben” (see below) in late August and shortly thereafter the president nominated him for a second term. I stand by my original position: Chairman Bernanke has earned a second term. We would be better served without the revisionist history that is taking place in Congress and with a forward look to the ongoing recovery from the Great Recession.

A Second Term for Ben

In my last posting, “Goldman Sachs’ Swagger,” I received more feedback than usual and it was more mixed than usual, but I stand by my position that while the company’s over performance has resulted in some arrogant behavior, the firm and its partners are not evil. One of the people I heard from was the famous journalist and columnist, Robert X. Cringely. Bob and I were colleagues long ago in the early ’90s at InfoWorld, where he wrote the well-read “Notes from the Field” column. We have remained friends over the years, but we have always seemed to come at things from a slightly different vantage point. My last blog inspired him to write “Is Technology Evil?” (www.cringely.com) He clearly did not like my sports analogies and found wisdom and inspiration in the Google motto, “Don’t be Evil.”

Now I am not ready for a steady diet of point counterpoint with Cringe, but our exchange lead me to the question: Should President Obama appoint Fed Chairman Ben Bernanke to a second term when his current term ends on January 31, 2010? I am confident that Cringe and I will arrive at very different conclusions.

Alan Greenspan’s long tenure as Chairman of the Board of Governors of the United States Federal Reserve began when President Reagan appointed him in August of 1987. He was appointed to successive 4-year terms by President George H.W. Bush, President Bill Clinton and President George W. Bush until he retired on January 31st, 2006 and Ben Bernanke was appointed to succeed him. Today, historians are re-evaluating Greenspan’s tenure, particularly in light of the sub-prime crisis that shook the foundations of the financial systems around the globe. Prior to this, though, he was heralded for maintaining stability and continuity in the global markets and for keeping down inflationary pressures. (We should never forget the inflation of the Carter years.) When faced with the option of reappointing a Republican appointee or replacing him, President Clinton twice decided that the country was better with Greenspan at the helm. During this period, the country experienced unprecedented growth and actually ran large surpluses.

President Obama is faced with a similar choice: should he reappoint Ben Bernanke or go to his own bench for Larry Summers? Chairman Bernanke has studied and written extensively about the causes of the Great Depression and understands that one of the underlying causes was the lack of credit. When he saw the credit markets freeze after Lehman Brothers filed for bankruptcy, he immediately worked to pull us back from the abyss with then Treasury Secretary Paulson and Tim Geithner, who was then head of the New York Federal Reserve and is the current Treasury Secretary. I sense that as confidence is slowly restored in our financial institutions globally, we would be best served, as would President Obama’s own interests, by his reappointment of Ben Bernanke to a second term.

Cringe, your turn at bat.

On a very long flight west last evening, I started Pat Conroy’s latest novel, South of Broad, which takes place as all of his novels do in Charleston, that charming, historic, southern city. This is his first novel since Beach Music, which was published over 14 years ago. I am finding it to be a very special way to end August, with Leo King narrating and bringing us back to the South Carolina coast.

As we closed out calendar year ‘09, our largest financial institutions were able to end a very difficult chapter of the Great Recession by paying back their TARP funds. These funds were paid back with interest and the federal government realizing an additional return through warrant coverage. This signified that our financial system was on the road to recovery. At the time, it was pointed out by the press that this freed these institutions from government oversight of their compensation plans, just in time for bonus season. Once again, Goldman Sachs (GS) was singled out along with JPMorgan Chase (JPM) and several others for the size of their bonus pool.

On Thursday of this past week, President Obama and his financial team took aim again at our 50 largest financial institutions, those with more than $50B in assets, by proposing a new Bank Tax. [This tax would exclude the Tier 1 Capital of these 50 large financial institutions. (NY Times 1/14/10)] The President outlined a plan to recover $90B over the next 10 years to cover TARP funds that would not be able to be paid back by Chrysler, General Motors, AIG, Fannie Mae and Freddie Mac. President Obama has called this new tax “a financial crisis responsibility fee.” (NY Times 1/14/10)  He also said that his determination was tied to “massive profits and obscene bonuses” as well as “to their reckless risk taking” that lead to the financial crisis from which we are slowly recovering.  This new tax will be presented to Congress along with the budget in February and would go into effect after June 30.  It would need to be voted on and passed by both the Senate and the House.

I sense that this populist appeal will play well with both main street Democrats and Tea Party Republicans, but it will not strengthen our financial institutions during a recovery cycle and will probably result in curtailed lending and could end up being passed on to companies and consumers.  If both parties were really interested in avoiding a replay of the risk taking that lead to the meltdown of the global financial system, they would be trying to find ways to strengthen the capital base of these institutions and avoid the amount of leverage that resulted in the risk taking in the first place.  I believe that the leaders of our largest financial institutions would react positively to a call to strengthen their capital base, as opposed to being singled out again for blame and to pay for the government’s decision to bail out the automotive industry.

After a U.S. jobs report from the Labor Department showed modest gains in November, last Friday’s report for December showed a loss of another 85,000 jobs. We also learned on Friday that the Eurozone’s unemployment rate has now joined the U.S. at 10%+. These unemployment rates remain stubbornly high, in spite of the fact that both economies grew in the second half of ‘09. (FT 1/9/2010)

So it’s not surprising that job creation remains at the top of the list in most political polls, but politicians on both sides of the Atlantic seem more interested in tax increases, as opposed to tax incentives, to drive job creation. For example, the U.S. Congress is starting to once again discuss changing the way “carried interest” is taxed for venture capital partnerships. (Yes, I am backed by Austin Ventures, but I have held this belief for more than 20 years.) I believe a more productive discussion would be how to incentivize venture capital firms to make more investments that lead to new jobs, rather than trying to tax their partners’ gains as ordinary income. To get a better understanding of this issue, I recommend visiting the site of the National Venture Capital Association and reading “Carried Interest Tax Policy.”

President Obama did acknowledge that the December data represented a setback, “while outlining plans to deliver $2.3 billion in tax credits to spur manufacturing jobs in clean energy.” (NY Times 1/9/2010) As I have stated in the past, the U.S. midterm elections in the fall will revolve around jobs and both parties will need to address this issue. This will also be a major issue in the U.K. election this spring that will determine if the Tories replace Labour.

As we have made our way through this very difficult economy, most of my wine recommendations during ‘09 were driven by value. I decided to kick off 2010 on a more optimistic note, at a small dinner party Mary Claire and I hosted at our home in Blackhawk, by tasting several older California cabernet blends. I went into my cellar and chose three wines:

1982 Dunn Howell Mountain: Randy Dunn has a long history working at some of northern California’s best-known wineries, including Caymus and Pahlmeyer. His Dunn Vineyards offerings have a storied past, particularly his Howell Mountain wines.

1985 Rubicon Estate: This is the flagship release of Francis Ford Coppola’s Rubicon Estate. Coppola is still best known for the Godfather, which was released in 1972. 1985 was a very good year in Napa Valley.

1995 Dominus Estate: This winery is owned and operated by the celebrated French winemaker Christian Moueix, of Château Pétrus fame.

The votes came in and gave a slight edge to the Godfather’s ‘85 Rubicon,over the ‘82 Howell Mountain. Both wines still had fruit that was remarkably young, soft tannins and excellent balance.  The only disappointment was the Dominus, which did not stand up well next to the two other contenders.

Here’s to the winners and a recovery that creates jobs in 2010!