The Garrett, Watts Report (Written in 67 degree weather in Berkeley, California, February 23, 2010)

To Our Clients, Colleagues and Friends,

What happens when governments run massive deficits and then create/print too much money to fund them? Here’s some data on the world’s worst inflations, and note in the third column that this is the daily rate. If we were to look at it annually, there would be too many zeroes for this page. The famous German inflation had prices rising 29,500% in one month, but if you look at the monthly rate for Hungary , the number comes to 4.19 x 1016. That’s 4.19 times 10 to the 16^th power.

Country	Peak of inflation	Daily inflation	Time for prices to double
Hungary	July, 1946	207%	15.0 hours
Zimbabwe	November, 2008	98%	24.7 hours
Yugoslavia	January, 1994	65%	1.4 days
Germany	October, 1923	21%	3.7 days
Greece	October, 1944	18%	4.3 days
China	May, 1949	11%	6.7 days

And isn’t it interesting that inflation so often goes hand-in-hand with disruption of civil society and personal freedom? Hungary and China had inflation concurrent with takeovers by Communist thugs, and in Zimbabwe , the inflation left something like 90% of the population unemployed. Let’s not forget that Germany ’s 1923 inflation is widely credited with giving rise to Hitler. With enough inflation, governments can pay off their debts for pennies on the dollar, but they will destroy the country. Look no further than Yugoslavia . The time of their great inflation was when the country came apart, and today there is no more Yugoslavia .

Some 25-30 years ago, this writer went to Rio de Janeiro for the Carnival at a time when Brazil was suffering from runaway inflation. We did a little test by buying a can of Coke Cola at the same time every morning in the hotel lobby, and at the same time every evening, and it was scary to see prices move up so quickly and inexorably. .
Will the mortgage broker ever go away? We know some smart people who’ve started up broker shops recently, and we think they’ll find good niches where they add value and make a good living. Scott Van Dellen and Preston James are two such people, both of whom we helped make the move. The days of mortgage brokers making bazillions of dollars are gone, but you can make decent money and be your own boss. There are worse things in life.
Do you want to acquire a failed bank with those great terms from the FDIC? Fine, but in order to qualify, you must have at least 10% total risk-based capital, Tier 1 risk-based capital of at least 6%, a Tier 1 leveraged capital ratio of at least 4%, and a CAMEL rating of 2 or better. The management component of your rating must also be a 1 or a 2.
The last requirement reminds us of a friend who was CFO of a San Diego bank that got a CAMEL 1 but a 2 for management. Their argument to the Examiner-in-Charge was essentially, “How can you give us an overall rating of 1 and then give us a 2 for management? Who do you think did all the things that got us the CAMEL 1 if it wasn’t management? Was it little fairies that came in during the night?” A hilarious and true story, but we forget the outcome. If they appealed it to the Ombudsman, we doubt he changed it. The Ombudsmanalways rules in favor of the regulators.
Last week we wrote “This week’s cartoon is…….. mostly a comment on yes-men, brief-case carriers, ass-kissers and sycophants.” We just re-read that sentence and were particularly pleased with it. Do you ever do that, write something you really like? By the way, Ardythe Brandon was the first person we heard who referred to someone as his boss’ brief-case carrier.
You know that 2-3 minute Hitler video that has subtitles about the USC football program? Someone now put in sub-titles having Hitler screaming about HVCC. It’s pretty clever.
Last week we mentioned that almost $42 out of every $100 of the federal budget goes to service the debt. Maybe we’re being simplistic, but isn’t that a bit like a family spending 42% of its money on credit card bills? Yes, a government can print money the way a family can’t, but printing too much money almost always leads to disaster. Zimbabwe went crazy the last few years printing new money, and the result was inflation last year of 231,000,000%. Yes, that 231 million! If that happened here, that $4 bag of popcorn at the movies would cost $920 million.
You say it can’t happen here? Going back only 150 years to our Civil War, inflation in the confederate states was 9,000% by the end of hostilities. In the North, inflation peaked at “only” 80%.
We see lots of smaller companies whose owners decide they no longer like personally guaranteeing warehouse lines, who are struggling, and who want to join a bigger organization. We also see few of these “mergers” really succeed. Client (and one-time Real Estate Finance student of mine at Cal ) Evan Stone did one such “merger” and it’s been a big success. The company he absorbed was much larger than his own Pacific Union, and one reason it may be succeeding is that he’s letting the acquired company maintain a separate income statement, keep almost their entire management staff, and retain their corporate culture. We just find this interesting.
What did Bob Gibson, Lew Burdette, Randy Johnson and Mickey Lolich all have in common? All won three games in a World Series, and that’s quite something. Here’s Randy Johnson, and if 12 year old kids still put together All Ugly Teams, he’d be the starting pitcher.

It’s amazing how much time we spent the summer after 7^th grade doing All-Star Lefties teams, All-Star Jewish teams and so on, but the one we worked on most was the All-Star Ugly Team. Don Mossi (below) was always our starting picture. Bill James wrote of him “Don Mossi was the complete five-tool ugly player. He could run ugly, hit ugly, throw ugly, field ugly and ugly for power. He was ugly to all fields. He could ugly behind the runner as well as anybody, and you talk about pressure … man, you never saw a player who was uglier in the clutch.”
We mentioned the movie Valentine’s Day, and we forgot to mention that Taylor Swift can really act. Her portrayal of an airhead cheerleader is hilarious.
Remember National Bank of Detroit (NYSE: NDB), Nice But Dull? Mike McMahon reminds us that they never did big deals, just lots of small ones, and hence their other nickname for NBD, No Big Deals.
Farmers Bank and Trust is a great example of a successful family-owned community bank, and we’re proud to have done work for them. The banks owns an excellent mortgage company, CapWest Mortgage, and their head of secondary marketing Director dug up the Sinatra version of “I Left My Heart in San Francisco,” which is attached. What do you think? We think it’s good but lacks the soulfulness of the Tony Bennett one.
We made a donation to the U.S.O. in lieu of Christmas gifts to our clients, and the more we learn about this great organization, the more we like what they do. Whether you’re for or against the wars in Iraq or Afghanistan , we all support the young men and women stationed there. We strongly urge all of you to send a small donation to them, even if only $10. Contact them at www.uso.org.
We were just in Maryland , and what do you make of their state motto? It’s Manley Deeds, Womanly words. What the heck does that mean? Well, we’re off to Seattle . See you soon.