BUSINESS INTELLIGENCE BRIEF

January 26, 2010

Bernanke Fight – What Does This Really Mean

The battle over confirmation for Ben Bernanke’s second term is dominating the economic debate these days
and when one examines the commentary from some of the leading economists in the country it is apparent that
the debate is over a great deal more than whether Bernanke is the right person to lead the Fed for another term.
He is a proxy for a series of much bigger fights. The outcome of this bruising exchange will have a profound
impact on the function of the Fed and ultimately the performance of the economy in the next few years. There
are at least three separate contests under way under the guise of whether Bernanke should be confirmed.

Analysis: The first is over the very independence of the central bank. The fact is that there has always been
tension between the Fed and the political leadership. The danger that every Fed Chair faces is that they will
become too politicized and will lose focus on the core issues facing a central bank. In the great scheme of
things a central banks must consider inflation fighting as the core issue but there is considerable temptation
for politicians to react to the issues that matter most to voters in the short term – such as unemployment.
Thus far the Fed has been working on the recession but sooner than some would prefer it will be forced to
turn its attention to tightening monetary policy. If the short term panic in the Senate prevails, the impact on
the Fed’s independence will be negative and the global markets will slam the dollar very hard.
The second issue is whether there was too much concern for Wall Street over the needs of Main Street. Details on page 4.
The bank bail outs and the decisions to pump trillions into institutions that were, in many ways, responsible
for the debacle has been a focus of much criticism. Consider the alternatives. If the largest banks had been
allowed to fall one after the other – what would have become of the economy? Some assert that this
massive collapse would have been devastating for a quarter or two and then the economy would have
perked up but others asserted that a breakdown of that magnitude would have extended the recession by
many more quarters. The Fed chose not to take the risk and rescued the banks. The fact that these banks are
profitable again is basically a good thing although their behaviors continue to offend. The question is how
deep one wants the government to become engaged in the day to day business of a private corporation –
regardless of what ones feels about that company. This is a deeply divisive ideological question.
Finally there is the “real” motivation behind the debate – the political impact of a given politician’s
position. The mood in the country is decidedly sour and voters are angry – both those on the left and the
right. The populist approach is being adopted by both parties to some degree and this requires some targets.
The Fed has been at the center of the economy and Bernanke is a suitable target. Of the 36 Senate seats up
for election there have been eight who have stated their support for Bernanke. There have been nine who
oppose him and the remainder has declared themselves undecided while they lob attacks at the Fed. The
selection of a Fed Chair is a major political move to be sure but its importance is magnified when there is a
very hotly contested election on the horizon.

What Does the President Do Now?

The facts are inescapable but the reaction to these facts can vary considerably and for the next ten months the Presidency of Barack
Obama will be tested in a fundamental way. The first fact is that Barack Obama will be President for three more years, regardless of what
happens in the November elections. For those who seek a better situation in the US economy, the fact is that the current occupant of the
White House will be an integral part of what happens next. The second fact is that economic forces have been set in motion that cannot be
reversed in a short period of time or without pain at some level. The US is facing a massive deficit and that will have an impact on every
policy decision made. If the debt is ignored, it will keep piling up and debt service will continue eroding the federal budget. If the deficit
issue is addressed, there will be less money available for the programs and services provided by the government and there will be higher
taxes. The deficit is not an issue that can be escaped but reactions can and will vary.
There are other cold hard facts to contend with. There have been close to 8 million people rendered unemployed in the course of this
recession. There has been a profound weakening of the dollar. There has been a collapse in the housing sector that has reduced the value
of homes. There have been record levels of foreclosure. There are key industries in decline – such as the automotive sector. The facts
keep piling on but the reactions to them remain varied and controversial. The question now is what Obama does with the rest of his term.

(Continued)

Contact information:
Armada Corporate Intelligence
ckuehl@armadaci.com ksanchez@armadaci.com kprather@armadaci.com
(816) 304-3017 (785) 550-7129
 Analysis: The first and most basic question in any new President’s first year is – who did we elect? The campaigner is rarely what a
President comes to be once in office – especially a campaigner who is in opposition. The Obama who ran for office was required to
adopt a persona that would allow him to defeat his Democratic challenger and then go on to defeat the opponent fielded by the
opposition. There were some dramatic changes along the way as the Obama who fought Clinton was different than the one who fought
McCain. Then the real metamorphosis starts to take place. The role of the President is immensely different from that of the campaigner
and for the most basic of reasons. Suddenly the role requires representation of the entire nation – not just the minority of eligible
voters who bothers to turn out for you in the contest.
Who did the country think it was voting for? The Obama of the campaign trail was running on a platform that asserted that politics
was broken and that what the nation needed was a President who could build consensus and become a conciliating factor in the
process. Polls showed over and over that the appeal of Obama was grounded in his pragmatism and his pledge to repair what is wrong
with how DC works. The overall opinion of Congress among voters is miserable. It is seen as a collection of bickering ideologues who are
incapable of putting the needs of the nation ahead of their own parochial interests and Obama ran on a platform that suggested he
would change that situation. Granted, this is task that is far beyond the capabilities of any one President but there is not much evidence
that Obama has actually tried to address that key issue.
Analysts have pointed to three mistakes in the first year of Obama’s Presidency and most assert that all three are reversible – should
this become the goal for the next three years. These are mistakes of strategy as opposed to mistakes of ideology. There will always be
opponents to Obama who do not share his basic orientations and they will work diligently to replace him in the next election. This is as
it should be in a democracy. The mistakes that have been identified are those that transcend political beliefs and go to the heart of
leadership.
The first is that Obama did not move to take control of the agenda from the leaders in the House and Senate. The agenda of the
Democratic Party has become the agenda of Nancy Pelosi and Harry Reid. Neither of them was elected nationally and both have truly
horrible national ratings. It is not the job of the President to interfere directly in the actions of Congress but as leader of his party and
the nation as a whole, he must be driving the agenda and thus far he has allowed others to play that role. The prominence of Pelosi and
Reid has come at the expense of Obama and he has to wrest that power away from them for the sake of his own political effectiveness.
The second mistake has been that Obama has failed to establish a clear interpretation of himself. He continues to be more
chameleon-like. This is highly effective in a political campaign when the object of the game is to appeal to different voting blocs and
groups but it can be disastrous as President when the glare of the press exposes every nuance and contradiction. The latest
manifestation of Obama is the least believable of all. The “populist” Obama looks odd on a man who seems to prefer that role of
conciliator and consensus builder. This approach polarizes and makes enemies more implacable. In the hands of a pugnacious President,
that confrontational approach might suit but thus far this has not been Obama’s reputation. Obama needs to figure out what his
Presidency will become – he doesn’t have the power that Lyndon Johnson had, derived from years of dominating the Senate. He
doesn’t have the ideological clarity of a Ronald Reagan. He may have some of the charm that propelled Bill Clinton but he has yet to
exploit that ability effectively. He remains personally popular but over 60% think he is doing a poor job.
The third error is that he has been tentative on key issues. He has been content to let others take the lead on parts of his agenda that
are supposed to be at the heart of his Presidency. The health care debate has been a case in point. This is supposed to be the linchpin of
his first year and he has remained a cheerleader on the sidelines. The effort has been legislative sausage making at its “finest” and no
there is almost no support for it – opponents still hate the idea and former supporters are disappointed in what has been sacrificed. The
most successful Presidents have been those who threw their weight fully into their key issues and demanded that the focus of the effort
remain with them. Obama has been too careful – appearing to want to stay aloof from the fray to some degree.
The most serious challenge of his Presidency now looms. The elections this year could put Republicans in a much stronger position in
the Senate and that will make consensus building more vital than ever. The Obama of the campaign trail would be the right person for
that job but that has not been the Obama of the last year.

Housing Sector Stumbles

The sales of existing homes slumped at the end of the year and analysts are divided as to the future. The primary cause for the abrupt
reversal in existing and new home sales was the imminent expiration of the $8,000 tax credit for new home buyers. It was set to expire at
the end of November and that dampened enthusiasm for buyers. It has been extended through April of this year but the impact has only
just started to be felt. Analysts expect the market to rebound a bit in the next few months but the weakness of the sector is underlined by
how dependent it is on these tax breaks.
Analysis: Thee median price of a home has stabilized at about $178,000. That is 1.5% higher than it was at the end of 2008 but that was
the trough in the housing market and few expect much of a rebound in the next few months. The homebuyer is still very cautious and
the banks are even more conservative. The impact of the jobless rate is still strong and the pressure of high foreclosure rates will be
with the sector for a while yet as inventories of unsold homes have remained stubbornly high.
Business Intelligence Brief is an online information service, published electronically by Armada Corporate Intelligence. It is prepared by
Armada CI. The publisher has taken all reasonable steps to verify the accuracy of the content of this information. Armada Corporate
Intelligence shall not be responsible for any errors or omissions.

2
 STRATEGIC GLOBAL INTELLIGENCE
January 26, 2010

British Economy Revives in Fourth Quarter but Only Barely

The six straight quarters of economic reversal came to an end in Britain but only by the narrowest of margins. The growth in the fourth
quarter of 2009 was slated to be in the neighborhood of 0.4% and some had even contended that the growth would be closing in on 1%.
The figures released by the government showed a rise of just 0.1%. In the coming weeks that number may well be revised and it could
conceivably dip back into recession – or it could increase a bit. The point is that the economy is hardly poised for an early surge. The
decline over the last six quarters has been the most profound since the end of the Second World War. The economy as a whole slumped by
over 6% in this period and GDP fell by 3.2%, the steepest decline in almost 60 years. The impact of this economic slump has been obvious
and very few have expressed much surprise at the grim statistics.
The real issue is what all this will mean for Britain in the next few months. The economy has already cost the Labor Party dearly and
will soon result in the defeat of Gordon Brown at the polls. As Chancellor of the Exchequer under Prime Minister Tony Blair he hung his
political career on the performance of the economy and for a while that stood him well. But as the recession emerged, he was blamed and
vilified to the point that he has fallen very far behind in polls. In the beginning of the Brown tenure it was asserted that the economy of the
UK was more resilient than most and would resist the downturn but Britain became the first in Europe to slide into decline. Then it was
asserted that Britain would exit before the others and that has not come to pass either. In the end the UK was the first into recession and
now they are the last to come out of it. Their exit has been weaker than those in the rest of Europe and weaker than that of the US.

Analysis: The actions of the government and of the bank of England will be affected by this news to some degree. Mostly there has been
a change in the expectations of the business and investment community. The sense is that the Bank of England was preparing to take
some steps to contend with the development of an inflation threat but now these steps are thought to have been put off indefinitely.
Rates will stay low for a while longer and the BoE will continue focusing on efforts to pump prime. The actions of the Brown government
have been somewhat erratic already and this is also expected to continue. Brown has attempted to make the banks the villain in this
drama and there have been a whole series of efforts launched to punish and control the banks. These have included new regulatory
regimes, special taxation and efforts to grab back bonus payments. The end result thus far is that London has started to lose its position
as a financial center as banks are shifting their operations to more benign homes in Switzerland and in the US or Asia. It is doubtful that
these efforts will yield the political results expected. Brown and the Labor Party continue to lag the Conservatives in the polls. The
aggressive positions taken by the Tory shadow government of late suggests that they think a power shift is imminent.

German Business Confidence Expands

Is it or is it not expanding? That is the question that is posed regarding the German economy as the rest of Europe tries to figure out if the
“engine of Europe” is ready to start pulling. The recovery looked imminent in the third quarter and Germany has clearly been the big
winner in terms of coming out of the recession. They grew at 0.7% in Q3 but then it looked as if the fourth quarter was a stall. The latest
numbers suggest that industrial output was much more robust than had been expected. The statistical office originally thought that
industrial orders had gained by just 0.2% but it appears that they grew by 2.8%. The latest survey of confidence by the Ifo Institute also
shows a big gain as business expects to see some dramatic improvement in the months ahead. The expectations part of the index was higher
than it has been since 2007 and the index as a whole reached levels not seen since the collapse of Lehman Brothers. The mood is in striking
contrast to that of the press of late.

Analysis: The key driver in Germany remains the export sector but there are signs of a consumer rebound as well. The two issues that still
cause fears within the general population are job losses and the potential for new taxes to handle the growing deficit. The government
has been engaged in some aggressive stimulus efforts and these have provided some relief to investors and the business community.
What they have yet to do is impact employment and that worries the general public. If the jobs don’t come back and the tax hikes start,
there will be some very uncomfortable situations developing.

Will the Real Central Bank Head Please Stand Up?

The battle over who heads Argentina’s central bank would be somewhat comical were it not for what is at stake. The longest serving
central bank head in the country’s history was summarily dismissed by President Cristina Fernandez when he refused to empty the bank’s
reserves to pay debts that she has incurred with her frantic populist attempts to buy voter approval. She appointed his deputy to take control
but Martin Redrado refuses to leave. He is convinced that Fernandez will destroy the nation’s economy and is determined to block her. She
is just as determined to rid herself of Redrado and the impasse now involves police barricading his office. Go ahead and cry for Argentina.
Business Intelligence Brief is an online information service, published electronically by Armada Corporate Intelligence. It is prepared by
Armada CI. The publisher has taken all reasonable steps to verify the accuracy of the content of this information. Armada Corporate
Intelligence shall not be responsible for any errors or omissions.

3
 Teacher Confidence All Important
It seems that if the teacher is worried about their math skills their students will become worried as well. A study has revealed that many
female elementary school teachers have severe math anxiety and this anxious attitude gets passed on to their female students. The little
girls are encouraged to be better readers but they are also discouraged from thinking they have math abilities and are essentially taught to
believe that boys are “hard wired” to have math skills. This should not really come as a great shock given the impact that teachers at that
level have on kids – especially these days. The average kid is fighting to get attention at home from harried parents. There is far less of the
community atmosphere that existed in the past and that tends to deprive kids of neighborhood role models. This leaves the teacher as the
dominant figure – the person outside the immediate family that can play the role of encourager. If that role model has a problem with
something like math it becomes a problem for those who have placed the teacher in that mentor role.

Analysis: The education system is asked to do a great deal more than it has in the past and that is neither fair nor effective. The solution
to this dilemma is not to put elementary school teachers into math camp although it wouldn’t hurt to improve skill sets. This is where the
parents and friends need to play a bigger role. The network of neighbors and friends were important parts of my development. My father
was an engineer and intimidating in his intelligence. It was sometimes hard to understand what he was trying to tell me about math as he
was so far ahead of where I was expected to be. But his friends proved to be great resources. One in particular used to laugh and explain
that he spent much of his day interpreting my father to his co-workers and that he could help me understand him as well.

Introducing the Armada

Strategic Intelligence System
Armada has been providing private intelligence briefing services for Fortune 500 companies for over nine
years. After developing a proprietary scoring system for analyzing the impact of a news event on a
corporation’s operations, we have taken that process and are making it available to a limited number of
partners in two different levels of service to meet budget concerns of many different sized companies.

The briefings are custom written for each client, each day. We get to know you, what grows your business,
what adds risk, and we collect, analyze, and disseminate actionable intelligence in a briefing system we
have perfected over the last decade.

Our system is similar to the type of briefing Government officials receive. They are easy to scan. And, they
provide insight and foresight – allowing you to be proactive against events that will impact your company.

In many cases, we will uncover customer activities and trends that will help you better meet their needs –
providing a direct return on investment from our briefing system.

For less than the price of an entry-level analyst, Armada is able to provide a limited number of partners
with a senior-analyst driven intelligence system – with no limits on how broadly you disseminate the
briefing. Send it to your entire organization – for the same fee.

For more information Contact:

Dr. Chris Kuehl Keith Prather Karen Sanchez

Managing Director Managing Director Director of Operations
ckuehl@armadaci.com kprather@armadaci.com ksanchez@armadaci.com

Armada Corporate Intelligence

P.O. Box 733
Lawrence, Kansas 66044

Business Intelligence Brief is an online information service, published electronically by Armada Corporate Intelligence. It is prepared by
Armada CI. The publisher has taken all reasonable steps to verify the accuracy of the content of this information. Armada Corporate
Intelligence shall not be responsible for any errors or omissions.