Mark Byron

A Haircut Only a Jarhead Could Love

Cyprus usually flies under radar, only making news when some ship involved in neighboring conflicts docks there or folks get evacuated there. The ongoing divide between the Turkish and Greek sides of the island gets little coverage as well, as the two NATO states back their kin to a four-decade-long stalemate, with the Turkish side setting up an independent government that only Turkey recognizes.

Bad banking has put Cyprus in the news; the EU wanted to impose a 10% hit on deposits as part of a bailout. Loans to their Greek allies have gone sour, and a bailout on the order of half the Cypriot GDP is needed.

One interesting factoid on those deposits is that quite a few of them belong to rich Russians, stashing their cash in an Orthodox Switzerland of sorts. A revised plan exempted deposits under 20K Euros and hit the folks with over 100K Euros with a 9.9% "haircut."

That's actually not far from what would happen in the US if a bank went under. Stuff under $100K is covered via the FDIC and stuff above that is left to the mercies of the regulators. Usually, they try to cover the big boys, but it isn't guaranteed, so the big deposits are often quick to leave when a bank looks to be in trouble; "hot money" was the term that got used for such big deposits when I was taking my finance classes in the 80s.

Interestingly, the Cyprus legislature voted down the EU plan without a single yes vote. The Russians are nervous, looking to possibly swap some help for rights to a natural gas field off the coast that would more than pay for the financial fubar.

 

Some People Enjoy Being Scroogled

I'm not sure I'm seeing what the stock market is seeing. I haven't seen any major signs of improvement on either the domestic or international level and Washington is at a high level of disfunction, so I'm not seeing the rationale for a new market high.

I hope they're right. I don't see us as Greece at T-10Years as the nattering nabobs are wont to do, but I'm not seeing a lot of upward push for the rest of the decade.

Google hit the $800 a share level. One of their competitors are making hay over the concept that Google tailors the ads they show you based on what they know about you. That's a bad thing?

I'm supposed to appreciate ads for working Latinas or yet another dating site ad? I'd rather they target me with things I might be interested in rather than something J Random User would be interested in.

The one area that seems to fall flat is when they work on the location of your ISP. The two lamest concepts are (1) [Fill in city] mom gets rich running web site and (2) assuming since I'm from Michigan that I'm from metro Detroit.

On the first; anything that has Midland in the title gets put in my mental spam folder, along with any "one trick" to instant gratification. Plus, the Midland mom looked very much like the Lexington mom I recall from when I lived there.

On the second; It's an hour and a half to the northern suburbs of Detroit. I'm not going to be in the market for a exercise place or grocery store that far away.

Getting ads for a web site you just visited a bit ago might be a bit spooky, but it beats the heck out of yet another one trick to boosting your maleness.

Burmese Liquidity Trap? No, Japanese

Via Drudge, CNBC is announcing a currency war.

Not quite, but QE2 has set sail in Japan.

Japan has set the stage for a potential global currency war, announcing plans to create money and buy bonds as the government of Prime Minister Shinzo Abe looks to stimulate the moribund growth pace.

You don't want to do too much of that, lest you get run-away inflation. Devaluing your currency is helpful somewhat in trade calculations, but if everyone eases, the economy sneezes over the funny money. The loose-money Abe lobby seemed to have worked.

China has been nortorious as of late in keeping the yuan low, so there's pressue to race to the bottom. If they're not careful, the two might be fighting over the Marianas Trench like they're fighting over those islands in the East China Sea between them.

The only thing missing is for the US to flip a trillion-dollar coin down the trench to keep them company; have you ever tried to break a trillion dollar coin at 7-11?

Printing Money

One of the side-effects of a liquidity trap is that government can flood the zone with cash and not have inflation be a factor. However, all that extra cash is going to need to be extracted somewhere down the line.

The key downside here is that if the Fed is buying long-term debt at relatively high prices, thanks to low current rates, they will likely be selling them at a loss if inflation returns and the Fed needs to turn the expansionist dial off of 11. Given that the bonds are what back the value of the dollar, an inflationary cycle might kick in, since the bond-porfolio-backed-greenback will be worth less.

Thus, this announcement from the Fed is a bit scary, especially with the magnitude of the bond buy-

The US Federal Reserve has said it plans to keep interest rates at close to zero at least until the US unemployment rate falls below 6.5%.

The Fed previously had a date-driven target, rather than a data-driven one.

The Fed also said it will continue to buy $85bn (£53bn) a month of government bonds and mortgage-backed securities to try to boost the economy.

$85 billion a month; that's a smidge over a trillion a year ($83 and a third billion would get us a trillion on the nose). What's our deficit? Right about that; this site has FY2013 pegged at $901B.

Governments running big deficits have been accused of printing money; we're not that far from that given the Fed's policy. Yes, they'll be buying some stuff other than Treasuries, but they are coming darn close to monetizing the debt outright.

Kissing Your Sister... Near the Castro District

We're looking at the first tie in the NFL in 4 years if the St Louis-SF score holds up. Colin Kaepernick seems to have worked nicely coming off the bench for Alex Smth, but not well enough to win, using some of the dual threat skills he had at Nevada.

QE3 Sets Sail .. But to Where?

Lots of folks on the right (Paul Ryan is the newest member of the scrum) have gotten on the case of the Fed as it tries to game the yield curve with a third bout of buying long-term debt; mortgages are the target in this tranche of "quantitative easing." Normally, the Fed buys short term-stuff, mostly Treasury bills, when it wants to add liquidity to the system, but with short-term rates near zero, they've shifted gears to buying long-term debt, trying to drop long-term rates in order to stimulate capital spending.

The lower rates would lower the cost of borrowing for both homeowners and businesses, which (in theory) should prompt them to buy more houses or do projects that didn't make financial sense with higher costs of capital.

The problem seems to be that the cost of capital might not be much of an issue if

(1) you're too lame of a credit risk to be lent to

Cheap mortgages are nice, if you can get them. Banks have been skittish about lending money in a rough economy, especially with a risk-adverse regulatory system giving banks the white-glove treatment. Low interest rates mean a small margin of error for banks, which contributes to their gun-shyness.

or , (2) those projects you want us to do are iffy given the economy and the lay of the land in Washington.

Businesses have been playing things close to the vest, partly due to the lack of available capital and partly due to the added regulation and possible tax increases that a second Obama term would bring. Even a Romney win might not help much, as budget cuts might slow the economy down and what would be left of the Affordable Care Act might still be not all that affordable for businesses.

In Defense of Dirty Harry

Here's a National Review piece on Harry Reid that is financially ilitterate.

Try this thought experiment. Imagine that someone grows up in poverty, works his way through law school by holding the night shift as a Capitol Hill policeman, and spends all but two years of his career as a public servant. Now imagine that this person’s current salary — and he’s at the top of his game — is $193,400. You probably wouldn’t expect him to have millions in stocks, bonds, and real estate.

But, surprise, he does, if he’s our Senate majority leader, whose net worth is between 3 and 10 million dollars, according to OpenSecrets.org. When Harry Reid entered the Nevada legislature in 1982, his net worth was listed as between $1 million and $1.5 million “or more,” according to the Las Vegas Review-Journal. So, since inquiring minds inquire, let’s try to figure out how Reid’s career in public service ended up being so lucrative.

Let's look at the stock market, shall we. In January, 1982, the S&P 500 was at 120.40. Today, it is at 1405.21. Had he just had his money in the stock market for the last 30 years, he'd take $1 million and turn it into $11.67 million without any insider trading or skullduggery. 

The piece mentions a few interesting deals, but he'd have had to spend some of his 1982 nest-egg to keep things in a 3-10M window.

There are reasons for not liking Harry Reid; his current stinker on Romney's taxes comes to mind. His wealth isn't one of them. Merely making market returns over a 30-year span shouldn't throw up red flags.

Shooting the Messanger

This story hits home on a number of levels. My sister-in-law and two of her best-buddy bridesmaids are Aggies, so anything Texas A&M throws up a flag for Eileen and I. Secondly, I worked briefly for a firm who did process-serving, delivering legal paperwork to individuals; my job was to double-check on various databases the possible addresses that the folks might be and make sure we weren't missing any when they came up empty.

Well, in College Station, just off campus, someone did the inverse of Bob Marley's famous song; he did shoot the sheriff's deputy who was serving eviction papers.

The National Law Enforcement Officers Memorial Fund noted that the slain constable, Brian Bachmann, is the sixth law enforcement official killed so far this year in Texas.

According to his Facebook campaign page, Bachmann was a 41-year-old from College Station who had been a Brazos County sheriff's deputy since 1993. The county's website indicated that his four-year term as constable -- a position that involves, among other duties, serving court documents such as eviction notices and subpoenas to citizens -- was set to expire on December 31, 2014.

I'm surprised in the down economy that someone else hadn't taken their frustration out on a process-server delivering foreclosure documents with a gun. The shooter was killed by police, but not before Mr. Bachmann and an innocent bystander were killed.

Why We Keep the Fed Independent

Mexico just got done with a presidential election, putting the PRI back in power after 12 years out of office. The last time the PRI won was in 1994; the Mexican central bank, managed directly by the government, goosed the money supply leading up to the election, which helped goose the economy and pave the way for a PRI win. However, by the end of 1994, the peso was in free fall due to the inflationary pressures and an US-led bail-out was needed.

The Federal Reserve is somewhat independent of the government of the day, having its decision-makers appointed by the president and approved by the Senate, but serving fixed terms that can't be terminated early if they tick off Washington. That gives the Fed some distance from the politics of the day and allows them (in theory) to do what's best for the economy in the long-term rather than what's best for the party in power.

Case in point on why that's a good thing was a Drudge linked-to piece from the Washington Examiner-

Sen. Chuck Schumer, D-N.Y., exhorted Federal Reserve Chairman Ben Bernanke to stimulate the economy before November through some form of quantitative easing or other monetary policy, which Bernanke said could create jobs.

“Despite two false starts, we’re having a much rougher time than we ever imagined getting unemployment down,” Schumer told the Senate Banking Committee. “So get to work, Mr. Chairman.” Schumer said Bernanke needed to stimulate the economy because Congress refuses — “maybe after November we will,” he opined.

Two problems with that. The first is that monetary policy has largely hit a wall; the normal tactic of lowering short-term rates was taken to its end-point, and short-term rates are just above zero. The next stop is for the Fed to start shifting its habits from buying short-term Treasury Bills for its portfolio and shift to longer-term T-bonds; in theory, that should lower long-term interest rates and thus encourage firms to expand and individuals to buy more cars and houses.

The problem there is that banks are hesitant to lend these days; even if they can get money from the Fed for next to nothing, the Fed doesn't pay their default risk when loans go bad, nor does the Fed help them get new post-2008 regulations off their backs. Low interest rates are only stimulating if you can get them.

Secondly, we could well see a bad bout of inflation once the economy does recover and all the cheap credit being issue starts to result in too many dollars chasing too few goods. We likely won't have the same problems the Mexicans did in 1994, but it Bernanke did take Chuck Schemer's (that's what my spell-checker wants, so I'll go with it) advice, we'd be running the risk of some big inflation.

That's why having the Fed be independent is a better idea than the Ron Pauls of the world would have you believe.

Diamond in the Rough

The Barclays' LIBOR story claimed some scalps, as CEO Bob Diamond and Chief Operating Officer Jerry del Missier. Diamond is slated to be grilled by a UK paliamentary committee on the issue tomorrow.

What seems to be happening is that a lot of banks seemed to have been fudging on their stated LIBOR rates and Barclays was coming in on the high side; a Diamond memo seemed to encourage Barclays to do likewise.

If there is legs to this story, we could see a massive rebate to customers who overpaid on their loans if there was illicit interest-rate fixing done by banks; that added to the problems with European debt, and it would seem to be a bad day to be an international banker. Joe Bank Manager in Smallville might not be caught in the fray, but the big boys might well be.

Organized LIBOR

A quick finance primer-LIBOR is shorthand for the London Inter-bank Offered Rate, the interest rate that banks lend dollars (and other currencies) to each other on the international market. It's often used as a key benchmark for floating-rate loans, where loans might be stated as LIBOR plus a premium and go up and down as LIBOR does.

Big British bank Barclays got caught mistating LIBOR to its benefit; if it issued LIBOR-based loans, having the stated rate be a few hundredths of a percent (basis points in financese) higher than it should be can net them an extra $100 per million per basis point fudged.

LIBOR would seem to be more market based than the Fed Funds rate, which is managed by the Fed, but if it is being manipulated to a bank's benefit, that will mean that some other more neutral measure of interest rates will have to be looked into.

Between the Hedges

No, we're not talking UGA, although I am looking forward to a funky college football season.

In this case, we're talking about airlines hedging their fuel costs via oil futures. That works fine when oil prices stay high, but when oil prices come down, hedgers are stuck paying for high-priced oil. Delta took a $155m hit in the last quarter on hedges.

I recall two cases where hedges like this were costly. Locking in electricity prices at peak levels cost CA billions and Grey Davis his job when prices dropped back, sticking the Grey Gentleman with a hedge loss. Another had ethanol maker VeraSun hedging corn prices when they were causing riots in Mexico; once the market adjusted and corp prices came back down, VeraSun was stuck with their high hedge prices and proceeded to go CH11, since their peers were unhedged and could afford to drop prices.

 

Not a Bug, a Double Feature

Oil prices are falling based on a more-passive-than-expected Fed? That's not a bug, that's a double feature.

First off, lower oil prices help everyone who doesn't own oil stocks or was long in oil futures. What's not to like there? Well, if you were a GOP operative who wants to hang high oil prices around BO's neck, you might be disappointed, but I don't think we need $4 gas to send him packing.

Secondly, having the Fed pass on what the wags were calling QE3 is a good sign. A third round of "quantititive easing"  (finance wags made a nod to the Diamond Jubilee girl by christening the last round QE2) would merely have the Fed doing something about a sluggish economy; having hit a liquidity trap on short-term rates (once you take the Fed Funds rate down to near-zero, that monetary policy bullet has been shot), the Fed has tried to spur investment by lowering long-term rates via buying up Treasury bonds rather than T-bills.

Sounds good on paper, but it puts the Fed's balance sheet at risk, since they're buying bonds when rates are at rock-bottom, any move upward will put the money supply at risk, since it's all those T-bill and T-bonds, rather than gold, that are by-and-large backing up the dollar. A spike in long-term rates will make those T-bonds worth less and put the Fed in an awkward spot where it might lose money rather than make money off the interest it gets on all those securities.

Thus, the Fed passing on a QE3 is a good thing; the drop in oil prices might be signaling a worry about a second recession driving the demand for oil down or (more positively) seeing less inflationary pressures in the absence of a QE3

A Ripe Apple

Interesting news from the world's biggest company; Apple is paying out its first dividend in 17 years-

The technology giant will pay a quarterly dividend of $2.65 per share from July, the first time Apple has declared a dividend since 1995.

That's the sign of a mature company, where they literally have more money than they know what to do with. It's a rather small half-percent yield given the current price of $562 as I go to press, however, if that's done quarterly going forward, that puts things in the 2% range, which is more than Uncle Sam's paying on T-bills.

Given that Apple is sitting on about $29/share in cash as of their last 10-Q filing for the end of March, that's not that big of drain on the budget. They have another 80 billion in outside long-term investments, so about $100 billion in cash is available to ether finance the US deficit for a month or two or buy back about 20% of the company's stock.

Apple is talking about buying back stock, which is one modern way to get rid of excess cash without making stockholders do double-taxation on dividends; dividends also make firms look too mature, especially when they want to put forward a hip, growing persona, so buybacks let them get rid of cash without looking like a fuddy-duddy income stock.

With Apple's size, getting up in the morning is nearly an anti-trust violation, so the takeover game is hard for them to do with excess money;  that makes buybacks more likely.

Maturity isn't Fun

Here's an interesting piece on McDonalds disappointing Wall Street with its earnings-

Sales at restaurants opened at least 13 months rose amid what CEO Jim Skinner called a "challenging global economic environment." Same-store sales gained 3.3% in the U.S., 3.5% in Europe and 1.1% in the Asia/Pacific, the Middle East and Africa. Growth has slowed from earlier this year, when McDonald's reported global comparable sales of 6.7% in January and 7.5% in February.

Last I checked, McDonalds is a mature company. You can expect it to grow at about the rate the economy grows unless it does something to add to its cut of the American budget or tastes shift towards it. Tweaking value members and marketing coffeehouse-style brews will help, but everyone else is tweaking their offerings as well.

In a tough economy, 3% growth isn't bad. It isn't anyone's idea of a growth stock, but it has ceased to be a high flyer a long time ago.

 

Half a Trillion

That's what Apple is worth- it has a market cap (price*shares outstanding) of $515 billion as we go to press. That's over a $100B more than Exxon, the runner up in market cap.

Strangely, Apple isn't overpriced. It earned just under 33 billion dollars last year, giving it a modest price-to-earnings ratio of 15.72. That PE ratio is normal for the computer industry, and if you think Apple's prospects with its iPhones and iPads and other iCandy is better than those mere mortals in their wake, them Apples might be a steal at a new record of $552 a share.

A stock split might be an order, but with odd lot costs being a lot less than in the bad old days, that might not be as much as an issue as it used to be.

Barry in Your Pocket

I passed on Mondays GOP debate and tonight's State of the Union; the lowlight of the evening seems to have been the president's desire to have a 30% minimum tax on millionaires. That's likely to play well, given that a certain former private equity CEO with an eye on Obama's job showed that he's paying 15%.

One problem with that proposal is that the people who would be most affected would be people getting capital gains, and some people who aren't normally millionaires in income can become one for a year when selling a family business. For instance, a farmer who has a million-dollar spread may only make $50K a year (farmers usually don't make a good return on their investment), but he'd suddenly be making a million for this year if he sold off the family freehold.

We already have the Alternative Minimum Tax to get some of the game-playing out of the system, but there are reasons why we have special treatment for capital gains; a lot of long-term profit is actually inflation.

Swapping Deck Chairs on the Euro

Somehow, I have to stifle an inner Ron Paul here on the news of the Fed easing credit terms for European central banks borrowing dollars. That screechy voice is hollering "all that funny money is going to come back to bite us in the butt; they're dollar-swapping deck chairs on a financial Titanic."

The financial markets liked the news; the US markets had a very good Wednesday. However, such moves are mere window dressing unless governments get to the ugly business of balancing their budgets. The British public sector took to the street yesterday, protesting budget cuts, pension cuts/age delays and wage freezes. However, it's tough moves like that that are likely to be needed in order to get governments at a level that is sustainable for the economy to support.

In both Greece and Italy, technocrats are now in charge; in political cultures that are used to having the cabinet ministers being members of the legislature, having non-elected outsiders is abnormal and seemingly undemocratic. It doesn't seem that odd from an American perspective, since the US cabinet is usually about 2/3rd technocrats and 1/3 politicians; the current cabinet has two ex-governors (Sebelius and "Big Sis"), an ex-senator (Hillary) and two-ex-congressman (Panetta and LaHood), with the rest being more technocrats.

However, since the politicians are not in great position to cut programs they campaigned for  not too long ago, cooler heads can sometimes be helpful. They can often lean towards continuing the big-government status-quo rather than more radical downsizing, but consensus is needed in such a major overhaul.

The British government seems to have something of a backbone. PM Cameron seems a bit RINOey by US conservative standards, but he seems to be facing down his critics with some Thatcheresque steel. What's surprising is that he's managing to keep his Liberal Democratic coalition partners on-board through all this.

Cameron gave the vocab lesson of the day, calling the protests of the left a "damp squib." That has a different meaning in US football, where a squib kick is a low, hopping kick that doesn't go far but is hard to return, saved for very late in a half when a long KO return is more of a danger than good field position. In Cameron's use, "wet firecracker" would be the best translation to US English.

It's Called Fundimental Analysis, My Dear Watson

Here's an interesting piece on how web searches for a company increase just before trading in that stock spikes. That should be a no-brainer; if a stock is being researched, some folks will look to buy or sell based on what they're finding out and the research will likely be a leading indicator of activity.

However, that seems to skip past the folks at MIT-

That's surprising because Cristelli and co say that most webusers check each stock of interest just once per month. This implies that they are not expert traders. So the effect emerges from the collective but uncoordinated activity of many inexpert users--a kind of wisdom crowds.

Checking one a month might be a fair pattern for a stock that is either in your portfolio or is being tracked for possible purchase, but expert traders might well do research into a stock before trading; if something came up on their radar via any variety of screening tools, they might go on the Web to see what is making the company tick.

Note that this just tracks trading activity. It doesn't say that the stock will go up or down, just that extra shares will be traded.

Twist and Shout

I'm not a big fan of this Operation Twist 2.0 that the Fed is trying. They have shot their monetary policy wad a while back when they drove short term interest rates down to zero (or at least under 0.25%), putting themselves in a classic liquidity trap, where the economy fails to respond to any additional money pumped into the system.

Usually, the Fed has short-term debt, mostly from the US Treasury, in the mix. Here, they're redoing their portfolio, selling off some of their short-term stuff and buying long-term debt in its place. In theory, this should lower long-term interest rates, as a reduced supply of longer-term T-notes and T-bonds will raise their price and (since price and yield go teeter-tottering in opposite directions) lower interest rates. That would then lower the cost of raising money for both individuals and businesses, making mortgages more affordable and making marginal projects that might not pass present-value muster at higher costs of capital doable at a lower cost of raising funds.

There are two main problems with that premise. The first is that it leaves the Fed vulnerable to a hike in interest rates. Since the value of a dollar is largely backed up by the Fed's stash of investments, getting a portfolio with a longer duration leaves it more sensitive to changes in interest rates; the longer a bond has to go, the more you have to suffer the lower rate you're now stuck with and the bigger the hit its price takes if you sell it early. Much as banks suffered in 2008-9 when their mortgage portfolios took it in the neck, the Fed might suffer if their twisted portfolio goes down in value.

Secondly, the problem is not as much with interest rates but with confidence in the future. The feeble European economy coming to grips with too much government debt in the Eurozone has markets queasy, and the increased scope of government, with business and their owners getting hit with more regulation (including a looming mandate to cover health insurance for employees) and possibly higher taxes, has expansion plans for businesses frozen in many cases.

That uncertainty will be on the table through November of next year, when markets will see if they have to deal with the Obama team through 2016 or not. The president kept saying that we can't afford to wait 14 months, but unless he and VP Biden are willing to resign now and cut to the chase, we're likely to have things stay sluggish until then.

The Fed is in "do something!" mode. The Twist 2.0 is like giving a dead man an enema; it can't hurt. It could hurt if interest rates rise and the Fed takes a hit, but for now, it's doing something.

 

 

Sailing on the QE3

It's worth taking a look at what the Fed's up to and what the Fed's balance sheet looks like (go to page 6 for it on the PDF). This will help counter some of Ron Paul's more outre rhetoric and give a whoa-mule two-by-four to some of the more desperate moves of the Fed.

Our US currency is largely backed up by... US debt. The Fed owns about $2 trillion in US debt on its balance sheet of $2.427 billion in assets. The liability side has $941 billion in currency, $1.3 trillion in deposits from banks and Uncle Sam, about $200 billion in other stuff and $53 billion in equity.

Here's Ron Paul from the last presidential debate

We owe the Fed $1.6 trillion in treasury bills.  Where'd they get the money to buy it?  They created it out of thin air.  So we pay them interest.  Now that's on our books.  So we literally, with legislation, could wipe $1.6 trillion off that is not a solution to the monetary problem or our spending problems, but it would give you a year to work this out.

The figure is closer to $1.0 trillion in pure Treasuries and another trillion in government-sponsored debt (Fannie Mae and Freddie Mac most likely), but the concept is still in play. The balance sheet I referenced was from Jan 1, so we might be a bit higher now.

Were we to take the advice of Paul and just repudiate that debt, the dollar would be worth about 20 cents of what it is worth today, since the Fed would have about $400 billion of assets to cover $2.37 billion of liabilities. That's about 16 cents on the dollar.

What it would create is hyperinflation, as we would see prices rise roughly 600% overnight given the decreased value of the remaining Fed balance sheet. If Ben Bernanke's safety in Texas was questioned by Gov Perry after doing QE3, a President Paul would be need bullet-proof undies 24/7 if he tried to pull that, for the resulting chaos would... at least make for a very interesting poli-fi novel.

___________________

Meanwhile, back to reality as we know it. Washington and the Fed have very little tools in the arsenal for stimulus. Fiscal policy is largely moot given the huge deficits; there is little room for any big tax cuts or spending programs when the lean is towards reining in deficit spending. Standard monetary policy is largely moot as well, as short term interest rates border on zero; we've hit what economists call a liquidity trap, where any extra money pumped into the banking system just sits there.

Normally, the Fed buys short-term Treasury bills as part of its balance sheet, buying them to add to the money supply and selling them to take money out. However, since short-term interest rates are at zero, the Fed has been playing with buying longer-term Treasuries and other long-term debt in order to try and bring long-term rates down as well; higher bond prices mean lower interest rates, as the two go in opposite directions. In theory, the lower rates will lower corporate cost of capital and make marginal projects worth doing at a lower CoC.

"Quantitative easing" is the new buzzword for that strategy. The Fed has done two rounds of that, with the second tranche getting the shorthand QE2, likely as a nod to the luxury liner and/or her royal namesake. A proposed third batch thus gets the shorthand QE3; that's the policy that has Rick Perry hot and bothered.

Why is QE3 dangerous? If we do have a return of inflation, it may do to the Fed's balance sheet by accident what Paul would do on purpose. High inflation leads to higher interest rates and... lower values of existing bonds, since as I mentioned earlier, interest rates and bond prices are on a teeter-totter. Short-term securities don't lose much in value, but the longer the term, the more sensitive it is to interest rates.

The Fed could easily find itself where a lot of banks were back in 2008, with negative equity due to a drop in value of its portfolio.

Bernanke and company want to do something. However, we're at a point where the Fed can't do much without compromising its core function of maintaining a stable dollar and a stable financial system. Washington can't do much, either.

The economy is going to need to get out of this largely on its own; lowering the regulatory burden on businesses, especially including ditching "Obamacare", would be a net plus, but fiscal and monetary policy have emptied their barrels at present and have no good ammo left.

Weekend at Bernanke's.... Neck

During the pre-straw-poll debate, both Newt and Ron Paul went after the Fed, rather ill-advisidely in my view. Newt was a bit more measured, but Paul acted like if he had a spare nuke to use, it would go at the Fed rather than Iran.

Rick Perry has joined the Fed-as-piñata game in a nasty way.

“If this guy prints more money between now and the election, I dunno what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas,” Perry said. “Printing more money to play politics at this particular time in American history is almost treacherous or treasonous in my opinion.”

If that's Perry's working level of treason, I might be heading east on I-69 to Sarnia for safety come 2013. Not that QE3 would be a great idea, but the idea of executing a central bank boss for bad policy sounds like something out of a banana republic (or a bananas one). Threatening bodily harm via lynch mob doesn't look great either; Jewish bankers might not want to be around this new strongman from Texas.

There is a long history of anti-big-city-bank populism; that's one of the reasons we didn't allow national-scope banks until the last few decades. However, I don't recall seeing a serious politician want to put a Fed chairman up on treason charges.

 

AA+? Is That a 13-Step Program?

S&P dropped the hammer late yesterday and moved Uncle Sam down from the top-drawer AAA down to AA+. While there is a non-trivial chance that the US might default somewhere down the line, the timing might be more a policy hissy-fit from S&P than a coherent asessment of American default chances.

One interesting aspect to S&P is that five US companies have AAA ratings from S&P (I think this is up to date); Microsoft, Exxon-Mobil, Pfizer, ADP and Johnson and Johnson.

There is a logical flaw in that set-up ; the US can tax the above companies into the ground in order to pay its bills. Exxon is an inviting target for "windfall profits" taxes, even as Microsoft makes a bigger return on sales than the oil companies. As a drug maker, Pfizer is at the mercy of future government monopsony of the drug market if a more nationalized health care system does materialize.

Most of us computer uses wind up having to give Bill Gates his pound of flesh for the latest version of Office and Windows, but we have the option of going with Open Office or Linux if we want to. We don't have the option of not paying our taxes unless we either want an extended stay in Club Fed or want to move to a country without an extradition treaty.

We may well see a day where the US makes like Peru did a while back where it gave the world financial community the middle-digit salute and renigged on its debt. However, its more likely that any of the five AAAers wind up going belly-up before then. Only Johnson and Johnson is fairly immune to heavy government regulation, and even they pay taxes.

Investors are giving Uncle Sam a 0.01% interest rate yesterday; there isn't a lot of room to slide any default risk premium into that yield.

Mellon-collie Mattresses

Here's an interesting story; one of the big money center banks, Bank of New York-Mellon, is charging corporate clients for putting money in checking accounts. We're used to seeing that for small-fry individuals, but this is being applied to the big, multi-million dollar accounts.

The reason is that with short-term interest rates at near zero, banks are losing money on checking deposits. They have to pay the FDIC a tenth of a percent a year as deposit insurance and T-bills are making less than that; at the peak of l'affair debt-ceiling, it had gotten up to 0.09%, but has crashed back down to 0.01% at last check.

When savings accounts are earning squat, there is little reason not to keep spare cash in cash. Banks are used to making their money on the difference between what they pay to get money and what they lend it out for. Normally, checking accounts are cheap money, with a zero interest rate less any transactions costs. However, when they get next-to-nothing on their investments, that interest spread starts to become effectively negative.

Interesting times, indeed.

Apples and Oranges

Here's a semi-cute story that shows more than a bit of financial illiteracy; Apple has more cash on hand that the US government does. The reason that that is a illiterate statement is that you're comparing the Fed's checking account to Apples checking and short-term savings account.

That's because the first line on a big-company's balance sheet is typically cash and marketable securities; companies often keep only what they need in the very short term in checking and keep the rainy-day money in T-bills, CDs and other short-term investments. Even there, you have to include 12 billion in cash, 16 billion in short-term investments and 48 billion in long term investments to get to the stated 76 billion for Apple. Conversely, the Treasury's checking account has a mere 74 billion, but that's six times what Apple has in its checking accounts.

If we used that same standard with Uncle Sam, all the TARP investments would count towards their account, as would the stock in "Government Motors" and Chrysler. Sadly, they'd have Apple easily beat if you used the same metrics. Making the government a stockholder in a company leads to some odd conflicts of interest, which is why that's been done sparingly over the years.

Outside of those oddities, Uncle Sam doesn't do much saving; if it does run a surplus for a stretch, it will issue less new T-bills than otherwise. Thus, today's Apple piece is comparing apples and lemons.

 

Moody's Off-key Blues

One of the bullet points in the coverage of the debt ceiling "crisis" is that the credit agencies are warning of a rating drop, potentially taking the US out of its standard position as the benchmark "risk free rate." However, the big ratings agencies like Moody's and Standard and Poors generally make changes after the market has moved an issuer's interest rates up, being more the Master of the Obvious rather than a prophet.

That isn't happening yet. Looking at the bond page at Bloomberg (the dude has bad policies but good financial info; that's why he can self finance a NYC campaign), the three-month T-bill is at 0.06%. Not 6%, 0.06%. Not a lot of room to include much if any default risk; at that interest rate, you'd be better off putting it in a mattress if things were nearly as dire as the headlines read.

The "smart money" isn't getting out of Dodge yet. That's not to say that things might not get messy in the next few weeks, but there seems to be more talk about a financial meltdown than any evidence of fear of one. If Wall Street were as jittery as the talking heads make them out to be, we'd at least see a 0.6% T-bill rather than a 0.06% one.

 

Marshalling Your Contacts

Here's an interesting irony given that Jim Tressel got forced out of his Ohio State coaching job earlier this year for lying about improper player perks. Tressel got his OSU gig courtesy of a great run in the 90s at Youngstown State, taking them to the I-AA title game six times and winning four.

The first three of those trips were against Marshall, headed up by Jim Donnan; Donnan parlayed his good fortune at Marshall into a gig at Georgia (somehow I don't recall him at UGA). He's now accused of helping run a Ponzi scheme by his creditors.

The federal court documents, filed Thursday and Friday, are part of a larger bankruptcy case involving West Virginia-based company GLC Ltd.

Formed in March 2004, GLC Enterprises, as it was known then, attracted investments from several high-profile figures from the world of sport. Among them are former University of Oklahoma and Dallas Cowboys coach Barry Switzer; Virginia Tech football coach Frank Beamer; Texas State football coach Dennis Franchione; and Texas Tech football coach Tommy Tuberville.

Here's a copy of the complaint. There's echoes of Bernie Madoff scamming the folks he knew in New York Jewish circles or the Mainse brothers using their 100 Huntley Street connections to bring Canadian Pentecostals into another Ponzi scheme; Donnan seems to have used his football connection to bring a who's-who of college football coaching into the mix. He's yet to be charged with a crime, but the SEC and FBI might well be interested in what comes out in Donnan's bankruptcy filing. 

This seems a lot bigger than fibbing about free tattoos, but it is a sad state of affairs that the two top coaches in college football's "second division" of two decades ago are now getting disgraced within months of each other.

 

Ghosts of Weimar

The European Central Bank, the Eurozone's analogue to the Fed, is raising interest rates, trying to tighten things up to get ahead of inflation. This Reuters piece tries to make hay out of the Europeans turning their backs on Fed leadership, but this is nothing new.

In the second screen of the piece, they get around to this paragraph-

Historically the Fed, which does not have a formal, explicit inflation target, has been somewhat happier to accept higher inflation than the 12-year-old ECB and Germany's Bundesbank before it.

Although the euro zone and the United States face similar external inflation pressures, their central banks take a different view of their economies. The Fed's mandate requires it to promote full employment in addition to keeping inflation in check; the ECB's focus is delivering price stability -- a reflection of its mandate, but also the legacy of the hawkish Bundesbank, which the ECB carries in its DNA.

The German bankers make up the spiritual core of the ECB, and German economic history is tragically marked by hyperinflation. Between the World Wars, Germany had a nasty bout of inflation, where the mark's value went down a million-fold and more. The financial chaos that that 1920s hyperinflation caused helped bring the Nazis to power in the early 30s; the harsh financial reparations that the WWI victors placed on Germany helped cause the problem, as paying back the tab in hard foreign currency put inflationary pressure on the mark. That helped give the Nazis a boogieman in foreign bankers with a large Jewish presence to play into their mythology.

Post WWII, German central bankers have been inflation hawks, making sure that doesn't happen again. The Eurozone has kept a lot of that attitude, so being quick to bail out of an expansionary cycle is within their character.

In the US, it's the Great Depression and deflation that is the bugbear; we've had bad inflation in the late 70s-early 80s, but a stalled-out economy is a bigger fear to US bankers. Thus, we have a Fed-ECB mild disconnect, as the Fed worries about a double-dip recession and the ECB worries about runaway inflation.

The New Sugar Daddies

Here's an interesting story out of northern Canada, where one local mining company is looking to buy out another, but doesn't have the cash to do it and is looking for Chinese help in financing the deal.

Baffinland Iron Mines suitor Nunavut Iron Ore is seeking backing for its bid from deep-pocketed Chinese investors, sources say.

Getting involved in a fast-moving hostile takeover battle is not viewed as something that generally interests Chinese investors, but sources said that hasn't stopped Nunavut from approaching potential backers that could help the company compete with ArcelorMittal's cash offer for all of Baffinland.

Chinese investors have been keen on snapping up natural resources, including ore. From investing in the Australia outback to the Inuit side of the old Northwest Territories, Chinese investors are looking to feed their industrial machine and make friends while they do it.

Such activities are more political in developing countries, where investment in local infrastructure can make friends at the UN, but extending those deep pockets to US allies like Canada and Australia can erode US influence. That's not to say that every deal done by a Chinese company has an ulterior motive, but Chinese "soft power" in world finance is a force to be dealt with.

Starter Castle Parsonage

Do you have $180,000 a year to pay for a mortgage? Mike Huckabee does-

According to the Arkansas Times, the 2008 presidential candidate is constructing a $2.2 million home on a lot in Blue Mountain Beach he acquired earlier in the year for $800,000. The beach is located near Destin Florida, on the state's panhandle.

The Arkansas Times, which viewed local tax records - also reports the former Arkansas governor has taken on a $2.8 million mortgage to buy the land and build the home, while paying $250,000 out of pocket. That mortgage is in addition to a near-$400,000 encumbrance on Huckabee's vacation home in North Little Rock, Arkansas, according to the Times.

The new home will consist of 8,224 square feet of living space and nearly 3,000 square feet of deck and porch areas.

I've been doing some online finance tutoring and had my mortgage-math spreadsheet at the ready. If we plug in a 30-year mortgage at a jumbo (too big for Fannie Mae or Freddie Mac and thus a bit more illiquid/hard to resell) rate of 5.125%, we get a monthly payment of $15,245.64.

Huck is doing well these days. However, most folks who are in position to run for president often are. Between speaking gigs, books and money from his Fox News work, he's likely more than good for it. That might also mean that he might be too extended to give up the pundit gigs to make a second run for the White House in 2012.

I had a piece in by story-to-blog folder on Huck's pathway to the White House. That largely requires That Woman not to run. Since it looks like the queen of TLC is running, Huck can enjoy his new Redneck Riviera digs until 2016 or later. Or, he could parachute in an take on Bill Nelson for the Senate in 2012; the Florida GOP could do far worse.