The Ostrich Head

Seven reasons why the euro is headed to parity with the US dollar

    Markets celebrated throughout the world last week when the European Central Bank decided to follow the lead of the US and the UK by printing money by the bucketload.

    The euro, since it has existed, has been a strong and reliable currency.  This isn't because of the underlying governments, which are as bad as governments anywhere.  Nor is it because the economies have been strong or weak.  It's because the Germany's influence on the ECB prevented it doing anything idiotic, such as printing money, buying sovereign junk debt, or keeping interest rates at absurdly low levels.

    As a result, the US dollar fell from 1.07 euro at the start of Bush Jr's term to 0.77 at the end.  The result: a 28% decline in the value of the US dollar.  It would have been over 40% if the financial crisis hadn't been engineered.

    The dollar losing 28% of its value had the embarrassing effect of reducing the world's #1 economy to the world's #2 -- though most American publications like to ignore this fact.

    With Germany vehemently against the ECB doing any of the circus acts of the Fed, the euro was widely seen as the preferred currency to be in.  After all, the euro was as good as gold -- there was a limited amount of it and it wasn't being created out of thin air like the US dollar, the UK pound, and the Japanese yen.

    From the moment Obama took office to the end of November that year (2009), the dollar lost 14.8% of its value.  Something HAD to be done.

    Now, I don't want to cast aspersions here, but we all know that ratings agencies are either corrupt or incompetent or more likely both (remember all that "AAA" mortgage backed securities that ended up worth cents on the dollar?).

    Having said that, it's interesting that just at the US government's time of need (to issue record volumes of debt), the rating agency Standard & Poor's put Greece on ratings watch with a negative outlook on December 7, then downgraded the debt a week later, again in March, and again on April 27.  In just five months, Greece's long term foreign currency rating fell five ratings from A- with stable outlook to BB+ (junk grade) with negative outlook.

    S&P has NEVER downgraded a sovereign A- rating this fast since it began sovereign ratings in the 1970s. 

    Other notable attacks on eurozone countries by S&P were:

·        Portugal -- went on credit watch on December 7 last year, downgraded on April 27

·        Spain -- same as Portugal

·        Ireland -- downgrades in March and June last year

    This isn't to say that Greece didn't deserve the credit rating.  Heck, the country probably didn't deserve even a BB- at the time it joined the euro.  That brings me to my first point:

 

1. The PIIGS will NOT implement effective measures to bring down their deficits

 

    When Greece joined the eurozone, it had a budget deficit equivalent to 1.6% of its GDP -- down from 10% in 1995 -- thanks to a major selloff of state owned companies.  But you can only sell so many state assets. 

    Upon joining the eurozone, Greece projected its 2001 budget to be just 1.3% of GDP.  But without more assets to sell off, the budget blew up.

    By 2006, Greece got its deficit back down to less than 3% of GDP as per the rules.  Or, to put it another way, since Greece joined the eurozone it has only once gotten under the 3% deficit limit. 

    But "this year will be different".  Sure.  Every year since 1997 Greece's budget deficit has been revised sharply higher.  In 2001, for example, Greek accountants "forgot" to book  €1.6 billion of defence spending.  In 2009, the budget blew out slightly from 3.7% of GDP to nearly 14%. 

    For the 2010 budget, Greece has promised to improve the deficit by €4.8 billion.  With a gun to its head, the Greek parliament passed the bill.  But just as with its promises in the past, the bill is a mere promise to collect more and spend less. 

    The reality is that it's more important to get re-elected this year than to worry about what's happening next year.  So, not much will get done and we'll be back for more in 12-18 months. 

    Italy, Portugal, Ireland, and Spain aren't going to be much different.  I'm just picking on Greece here because of its trade deficit: Greece imports three times as much as it exports: $64.3 billion vs $21.4 billion.  This is a unique recipe for disaster.  12 months from now.

 

2. The ECB is now essentially monetizing PIIGS debt

 

    The European Central Bank (ECB) now has a €750 billion (around $1 trillion… for now) plan in place to buy eurozone sovereign and bank debt.  This is bought with brand new money.  Essentially this means that no matter how much the PIIGS go out of control with their spending, they can depend on the ECB to guarantee their debt by buying it up. 

 
 

    The €750 billion will be enough for Greece (around €400 billion), but it won't be enough for the combined PIIGS, and the "shock and awe" value is rapidly wearing off as financiers run the numbers. 

    Now that the central bank has gone down this road and the pressure is off the PIIGS governments, it will be a self reinforcing cycle creating a steep vortex directly into the sewer.

 

3. The ECB is now monetizing European bank debt

 

    Along with sovereign debt, the ECB is buying up a bunch of European bank paper.  Why? 

    European banks account for about three-quarters of the $4.7 trillion of cross-border loans to emerging markets.

    A large portion of those loans are to Hungary, Poland, Ukraine and other eastern European countries that have been even harder hit by the recession.  European banks made euro loans to people and businesses with local currency revenue streams, which means when the local currencies tanked, the loans went the same way as the sub primes in the US. 

    Europe has two choices: either bail out the banks (bad for the euro) or devalue the euro.  At this stage, the ECB seems set on doing both.

 

4.  The world's central banks will begin rebalancing their portfolios from the euro back into dollars

 

    One of the major reasons for the dollar's demise was central banks losing their religion and buying alternative currencies.  The euro was the obvious one and has been gaining momentum over the past ten years.

    Purchasing the euro was a simple decision: the ECB was financially disciplined and had Germany there to keep it on the straight and narrow.

    Selling the euro is just as simple: the ECB has stepped into the La-la land of sovereign bailouts and Germany was simply overruled. 

 

5.  The US Federal Reserve is now more dependable than the ECB

 

    Sad but true.  The world knows the Fed will keep rates down for 2 years.  The world knows the Fed will paper over anything beginning with an R.  The world knows the Fed will bailout banks next time around as well. 

    This is all factored into the price.  But who on earth knows what the ECB will do next?  That's a mystery even to the ECB!

    Better the devil you know…

 

6.  Germany will either leave the euro or kick out the PIIGS

 

    Already 59% of Germans believe the government should consider returning to the deutschmark.  When they see inflation begin to take hold because of the new "Print Money To Bail Out PIIGS" policy, the other 41% will join in.  The German constitutional court will also have something to say about the bailouts, which are in a direct violation of the German constitution. 

    The prospect of kicking out the PIIGS seems to have become rather more difficult now that Germany was overruled and they have their snouts firmly in the trough.  But if Germany's central bank can find a way of doing so, it probably will.  Otherwise it will have to leave.

    Needless to say, if the largest economy and most financially responsible central bank leaves the euro, then the currency will go the way of yesterday's Zimbabwean dollar.

 

7.  The US -- along with its ratings agency friends -- will continue what it started

                            

    As I said at the start, the US doesn't take kindly to threats to the dollar's hegemony. 

    We all know what happened when Iraq started selling oil in euro and yen.  The writing is also on the wall for Iran, which is now doing the same thing.

    With the euro now under siege, the ratings agencies have carte blanche to downgrade just about any nation within the eurozone. 

    If one looks at Germany on its own, the economy and currency seem rather stable and well managed.  But once you throw in other countries in the eurozone that have deficits of more than 3% -- i.e. every country except Germany -- the eurozone financial management seems to be spiralling out of control.

    With higher taxes and less spending, the European economy isn't going to get much growth for the next few years, which will mean projected  tax revenues will be well below forecasts -- especially in Greece. 

      It won't take much for the ratings agencies to downgrade the whole mess.  With the US treasury likely to issue $1.5-2 trillion in debt this year, it may need to make the euro look even less attractive to guarantee buyers at today's absurdly low rates.

    The final blow for the euro will be when S&P or Moody's downgrades Germany and France simply because they are effectively guaranteeing the debt of the rest of Europe.

    This is years off yet, but it's the logical result of the direction the ECB has decided to take.

    The worst part of it is that the euro doesn't have the same absorption properties that 25% linen and 75% cotton US dollars do.

 

    So, with the euro in freefall, the yen getting pummelled, and the pound taking a well-deserved thumping, the US dollar is looking nice and strong.  It's a wonderful perspective: calling a weakening currency strong. 

    The three better measures of value -- land, gold, and oil -- are going to go streaking by so fast that we'll hardly notice them climb to $1,500 an ounce, $120 a barrel, and 2006 levels for land. 

 

Cheers,

 

Peter.

Australia and Canada should support the Global Bank Tax

    Following the 2008 financial crisis, dozens of countries bailed out hundreds of banks, costing tax payers trillions of dollars.  Clearly, something has to be done to share the burden. 

    The IMF has come up with the fairest idea to share that burden: a global bank tax.  This obviously fair and simple way of ensuring that there's a big fund -- to bail out banks tax payers in the event of the next another financial crisis -- is now in danger of failing to become reality thanks largely to Australia and Canada.

    The arguments put forward by these two recalcitrant countries are as weak as they are irrelevant:

 

1. Neither country had to bail out any banks

2. Both countries have sound financial systems

3. Neither country plans to bail out Greece

 

    These arguments, while true, are clearly not very neighbourly. 

    I mean, Australian and Canadian tax payers are pretty fair minded people (I've never been one myself, but I've met some) and would be happy to step up to the plate by paying higher bank charges to cover this tax.  Australian bank charges are so extortionate already that a few more percent would hardly even be noticed.

    Compare the Australian/Canadian arguments with those of the main proponents and you'll see how unfair these two countries are being.

    America's argument is that banking and finance is global (Goldman Suchs sells junk bonds mortgage backed securities in dozens of countries, for example) and therefore the pain should be shared globally as well. 

    Sounds fair to me.

    After all, when American tax payers bailed out over 700 banks, it was for the global financial good -- and not because banks were the top contributors to Barack Obama's presidential campaign.

    And on the European end, Germany, France and the UK strongly support this tax.  Sure, these countries had to bail out a few banks of their own, but it's more the community mindedness that's behind this push.

    Specifically, they're worried about the European Community.  Even more specifically, they want a great big slush fund to bail out Greece (initially), Ireland, Portugal, Spain, Italy, and then Greece a second and third time.

    Fair enough.  I'm worried about these countries as well.  The idea of simply forcing them to live within their means is as repulsive to me as banks placing credit limits on VISA cars. 

    The two taxes being proposed are: a) a percentage of the on-balance sheet and "possibly" off-balance sheet items; and b) a percentage of bank profit plus total compensation. 

    This is awesome.  Obama's 0.15% balance sheet tax alone would bring in $120 billion from JP Morgan's $80 trillion balance sheet in the first year.  It may bankrupt JP Morgan and trigger another financial crisis, but at least we'll have the tools to deal with it!

    If you feel as strongly about this as I do, write letters to the treasurers of Australia and Canada, enclosing cheques to the value of how much you would like to contribute to bail out failed US banks and mismanaged European governments.

 

    I think JFK put it best when he said:

 

Ask not what your country can do for you. 
Ask what you can do for someone else's country.

 

 

    Cheers,

 

    Peter. 

Making sense out of the airline baggage fees

    Shame on the airlines for charging baggage fees.  Shame.

    In the land of the free, it should be our democratic and libertarian right to have two free checked in bags and free carry-on baggage.

    Indeed, last week, Senator Chuck Schumer introduced a bill to protect precisely those rights. 

    In his heavy hitting statement before introducing the bill, Chuck decried that, "When you charge for a carry-on bag it is a slap in the face for anyone who flies.  We're fed up with airlines that keep nickel and dime-ing the passengers from departure to arrival."

    Precisely.  Heck, I'm even fed up with airlines and governments that gouge me for hundreds of dollars.  But best to start with the nickels and dimes.

    But hey, this isn't nickel and dime territory.  United, US Air, and Delta now charge $25 for the first checked bag.  And then up to $600 per bag for your sixth checked piece of luggage.  Who can go anywhere for more than a weekend with less than six bags?

    Even Southwest, the super cheapie who still lets you check in two bags free of charge, is going to dong you $50 a piece for your third and, if you are going on a longish holiday, another $110 for your tenth checked bag. 

    Is this unfair or what?????

    Not that it's fair over here in Asia, where we only get to check in one bag free of charge and then pay through the nose for the rest.  I'd just never realized that I should be subsidizing other passengers' excess baggage.  Damn unthoughtful of me.

    On top of checked in baggage, the People are up in arms about Spirit Airlines now charging up to $45 for carry-on baggage.  Duh!  They never expected that charging for checked baggage would result in more carry-on bags -- that came as a complete surprise.  Especially as the carry on limit is one bag plus one briefcase!

    But what on earth could have prompted airlines to, all of a sudden, begin charging for checked and carry-on luggage after decades of not charging?

    Some would say that it's healthy competition.  Others (such as I) may contend that this is merely the free market following a natural progression due to changes in the regulatory environment.

    Back in January, the Treasury ruled that airlines should receive preferential tax treatment for fees on services that are not deemed necessary for air transportation -- and that transporting bags through the air wasn't necessary for air transportation. 

    I think the responsible treasury official either had a massive brain fart at the time or, more likely, is approaching early retirement through the revolving door into the airline industry.

    Nevertheless, it's an interesting concept.  Naturally, more legislation will be required to undo the impact of earlier legislation to simplify the tax code.

    If we follow this to its logical conclusion, we can break down the basics of what is "deemed necessary for air transportation" and what isn't.

    Here's what's necessary:  Transport you from A to B.

    Here's what's not necessary: Check-in baggage, carry-on baggage, food, water, seat, toilet, stewardess service, climate control, airport check-in service (you can do it on the internet), internet check-in service (you can do it on the phone), phone check-in service (you can do it at the airport), and the fuel surcharge left over from when oil was at $130 a barrel.

    Think I'm being absurd?  Think again.  Ryan Air is already planning a fee for using the toilet!

    The logical conclusion is that flying in the US will follow the £3 model from Ryan Air:

·        Ticket: Awesomely cheap at just £3

·        Online check-in: £5

·        Administration fee: £10

·        Airport boarding card: £40

·        First bag fee: £20        

·        Second bag fee: £40

·        More if you don't take your own pot to piss in.

    Compared to this, US airlines charging for bags may seem somewhat innocuous.  But this is just the thin edge of the wedge.  Just as well senators are on the ball to prevent this dastardly threat to life, liberty, and the pursuit of free.

   

Cheers,

 

Peter.

SEC brings a harsh judgement against arms dealer Adnan Khashoggi

    Bad boy Adnan Khashoggi, the Saudi arms dealer who negotiated the arms sales to Iran in the Iran-Contra affair, has finally been brought to justice by the ever-vigilant SEC.

 

Let me give you some background:

    Having started his career as an honest businessman, brokering arms deals in the Middle East for Lockheed Martin, Raytheon, and Northrop-Grumman, and investing in diamond mining in the Central African Empire, Khashoggi became the world's richest man in the 1980s.  (It was his yacht below that was used in the James Bond film Never Say Never Again.)

    However, business wasn't always good.  His Triad Holding Company, for example, went bankrupt after he was indicted for using it to channel money for the Iran-Contra deal.  Fortunately, he made his $4 million bail thanks to his friend, Peter Munk, chairman of Barrick Gold.  Barrick Gold, which was founded by Khashoggi in the first place, is also deep into illegal government activity.  He still held onto his Barrick Gold shares though -- despite them being held as collateral for the arms deal.

    Business was good for a while, having helped out his good friend Imelda Marcos hide her gold and assets -- legally according to the verdict.

    Having got off that one, Khashoggi started another business, called GenesisIntermedia, a telemarketing company.  This was during the .com boom. 

    The stock was the best performer in 2000 despite losses of more than $17 million on just $229,000 revenue.   

    However, it wasn't the best performing stock for no reason.  And this is where Khashoggi began breaking the law.  Didn't see that coming did you?

 

    A well known financial commentator, Courtney Smith, helped push this stock on CNBC, Bloomberg, and elsewhere, for a tiny $1.1 million fee. 

    Having pushed the stock from $1 a share all the way up to $17, Khashoggi paid off some brokers to borrow his stock and lend it to Deutsche Bank Canada to the tune of $130 million.  (Yup, the very same company with internet revenues of less than half a million.)

    Under this scheme, Deutsche borrows the stock and pays Khashoggi the value of the shares.  Or, to put it another way, Khashoggi gets the cash for his shares without having to sell them and give away his game.

    After 9/11 his stock crashed and he owed Deutsche Bank Canada and other brokerages $130 million.  Naturally, GenesisIntermedia went belly up and Khashoggi made out like a Saudi oil tycoon.  Deutsche Bank and a few securities companies were left holding the baby.  Khashoggi made the $130 million disappear -- cleverly done considering the FBI was watching every international bank transfer at the time!

    Now what Khashoggi did was illegal.  As were the actions of the Deutsche Bank employee who circumvented the safeguards, other principals of the company, and Courtney Smith.  The SEC went after them with the speed of an oak tree.

 

    This month, however, the SEC finally brought them to justice. 

 

    As a result of this fraud, Richard Evangelista, who enabled the $130 million stock lending fraud was fined a hefty $40,000 in settlements and penalties.

    But Khashoggi didn't get away anywhere near as lightly as that.

    Nope, the arms broker, in a settlement with the SEC, agreed to a five year officer and director ban in return for the SEC dropping all charges, fines, and penalties.

    And you think that's stiff?  The SEC managed to get even more from him than that.  Khashoggi even had to agree to an order preventing future violations.  Take that!  Now it's illegal and, and... you promise not to do it again too.  So there!

 

Cheers,

 

Peter

Operation Iraqi Freedom a resounding success

    Since the invasion of Iraq in 2003, the number of Iraqi deaths by suicide bombers, car bombs, gunfire and executions has fallen from a peak of 72 per day to just 9.6 a day this year.  That corresponds to just 11.2 per 100,000 population per year. 

    If we call that the murder rate (and it's probably pretty close), see how well Iraq stacks up:

Sources:
http://www.cdc.gov/nchs/data/nvsr/nvsr58/nvsr58_08.pdf
http://www.nationmaster.com/graph/cri_mur_percap-crime-murders-per-capita
http://www.census.gov/compendia/statab/cats/law_enforcement_courts_prisons/crimes_and_crime_rates.html

 

    Heck, if Thailand gets any more dangerous, I'll head to Iraq for safety.  Well done George W Bush and Obama.  You guys are terrific. 

    Still, it gets me thinking that if the US had spent $3 trillion on New Orleans instead of Iraq -- $26.5 million per family instead of $0.6 million per Iraqi family -- it could have reduced the murder rate there slightly, as well as turning it into a show case city.  A hard sell politically of course.  They'd have to get the Congressional Budget Office to forecast a budget of just $20 billion a year and then watch it blow out 30-fold!

    It worked for the war, it will probably work for health care, so why not for the poor souls in New Orleans.

    Realistically, though they are probably better at helping to reduce Afghan civilian casualties.

 

Cheers,

 

Peter. 

Radical terrorist group planning to overthrow the US government with Weapons of Mass Destruction thwarted by FBI and Detroit Police

Luckily for Obama, the Detroit Police (without the help of Axel Foley) and FBI managed to infiltrate and shut down the operations of the Hutaree Christian militia group.

     Eight suspected terrorists have been arrested, indicted, and jailed because they "conspired to overthrow the US government."

     Whew!  Damn lucky the police moved when they did.  I mean, look at these masterminds who would easily have brought down the government and used their superior intellects to dominate America.

 
 

The shallow end of the gene pool

    In addition to conspiring to overthrow the US government, these religious zealots are charged with seditious conspiracy, attempting to use weapons of mass destruction, and possession of a firearm in relation to a crime of violence.  David Stone Sr and David Stone Jr also are charged with teaching/demonstrating use of explosive materials.’

     Let me clarify that for you.  The indictment actually said they were planning on attacking and killing local, state, and federal police officers.  Their method?  Kill one, and then attack the funeral procession later. 

     Damn.  That's some elaborate plot.  Definitely worthy of seditious conspiracy charges, which carry a 20 year sentence.

     But worse, they conspired to attempt to use a weapon of mass destruction!

     Shock horror.  Aren't these the things that Saddam was supposed to have? 

 

For your information, a "weapon of mass destruction" is now defined as just about any weapon excluding standard firearms.  These include: bombs, grenades, mines, and missiles having an explosive or incendiary charge of more than one-quarter ounce.  A whole quarter ounce?  That's huge.  They also include any firearm that isn't a shotgun with a bore of over 0.5 inches.  I just looked on line, and found a weapon of mass destruction for sale.

    Man, when I was a kid, I remember my letterbox getting blown up by a bunch of local kids using a pool chlorine and sugar bomb.  I didn't realize at the time that my house had come under attack by WMD.

    This is scary.  The maximum sentence of life in prison seems comparatively light for the offence of conspiring to use one of these things.  Oh, and don't imagine that being outside of the US gets you off the hook.  Any US citizen owning, possessing, or using a WMD outside of the US is also up for life in prison.  This guy must be in jail already.

 

    But what's worse about the Michigan 8 is that one of the guys was even teaching other people (let's call them "terrorists") how to use explosives.  That's also a criminal offense with a 20-year jail term by the way -- even if they had no intention of using the explosives.  Don't follow this link or I'm going to jail as well!

     The final charge, which they all got banged with, was possession of a firearm in relation to a crime of violence.  So, having a licensed firearm is ok, but if you happen to have a firearm and conspire to do something violent, then it carries a mandatory 5-year license.

     Good, get these thought-criminals off the street.

     The judge -- sensibly in my view -- refused them bail on the grounds that they would be a threat to the community.  Heck, one of them even has a record of aggravated assault -- from driving his truck into the path of a police car 20 years ago!

     The prosecution is rapidly building a water-tight case against the Michigan 8, having seized firearms, grenade smoke, ammunition, military uniforms, a copy of Adolf Hitler’s “My New Order,” a samurai sword, and a jewelled dagger. 

     Yup, damning evidence indeed.  I mean a jewelled dagger?  That's what the terrorists in "Romancing the Stone" gave to Danny DeVito. 

     But it gets worse for the Michigan 8.  The prosecution alleges that their leader delivered a speech including the words, “How much longer are you going to put up with a foreign army controlling your streets and highways?  Now it’s time to strike and take our nation back so that we may be free again from tyranny.  Time is up.”

     Indeed.  The right to freedom of speech should only be stretched so far, and this clearly goes beyond it.  Imagine if they'd said something as like:

    We can do this. It will not be easy. It will require struggle and sacrifice. There will setbacks and we will make mistakes. And that is why we need all the help we can get.  So tonight I want to speak directly to all those Americans who have yet to join this movement but still hunger for change - we need you.  We need you to stand with us... This is just the beginning of our efforts to take back our country... We will not let America sink into further... without a fight.   - quotes from Sarah Palin's Facebook and an Obama campaign speech

     I mean, the group discussed various way of killing people, how to take over a county, and even plotted to take over a handful of counties in southeast Michigan -- including Hillsdale, Washtenaw and Lenawee counties -- to lure the enemy to them.  All 20 of them.  I remember doing a similar exercise in primary school to take over Tasmania.  Thank god I got away with it.

     So in summary, we have a group of guys with guns that trained 3-4 times a year, an outspoken leader, wacky plans, and an explosives expert who could create all kinds of WMD.

     Explosives expert?  It recently came out that the explosives expert was actually an undercover FBI agent.  So the police that arrested them actually provided the reason for arresting them in the first place.  Now that's efficient police work.

     In fact, it's so efficient that it is becoming the modus operandi of the FBI, having worked so well previously.

     So now we know why America is so safe despite having so many terrorist training camps!  The FBI infiltrates disgruntled right-wing paramilitary groups, supplies the WMD and arrests them.  This is MUCH more efficient -- not to mention safer -- than waiting around for them to actually attempt to commit a crime. 

     Heck, having a full time agent on the inside and mounting a massive surveillance team is pretty expensive, and if the group actually decides not to break the law it would all go to waste anyway.  Much better to get them to commit "seditious conspiracy", arrest the lot of them, throw 'em in jail, and move onto the next target.

     And I gotta say, I'm very pleased they are going after Christians as well as Muslims now.  This ties in nicely with Obama's recent policy shift in dealing with Jihad, Islam, and crusades.

 

Cheers,

 

Peter.

The idiocy of government sponsored energy savings

I’m visiting my parents’ place in Melbourne and was hit by the garish colour of fluorescent bulbs everywhere.  What the hell happened?

It seems that the Australian government, in its enduring wisdom, is offering a cash rebate if you swap your old power hungry incandescent light bulbs with hideous power efficient ones.

As with every bold government initiative, this one has created new employment digging holes and filling them in.

My parents were visited by a pair of Indians from one of the new companies that swap out your incandescent bulbs for fluoro spirals, take your old light bulbs, and claim the cash from the government.  My parents lost all their friendly 2,300K lighting and are now subject to 6,500K lighting, which is so bad that it makes normal fluorescent strip lighting seem super friendly. 

The company cleverly visited during the brightest daylight hours, so when my parents checked the lighting it seemed fine. 

Evening came as a total shock.

They now have to try to buy a bunch of new incandescent bulbs to replace the repulsive fluorescent spirals.  Better be quick too... they are flying off the shelves and not being replaced because they are soon to be outlawed.

Imagine that?  A black market for lightbulbs!

The net result of the government action is that a Chinese company has sold a bunch of cheap light bulbs to Australia, unemployed underpaid Indian electricians got a few hours of pointless work (yes, you got that right: ONLY certified electricians are allowed to be involved in the difficult and dangerous employment of light bulb changing), and new demand has been created for incandescent bulbs. 

What scares me here is that this is probably one of the best and most successful programs the government has ever wasted tax payer money on. 

In the US, where there seems to be even more stupidity and less oversight it must be going out of control.

I used to look down on people who tried to avoid their civic duty of paying tax to fund worthwhile government programs (not that I have ever paid tax), but over the years they have gained my full respect. 

To change the subject completely, does anyone want some 14 watt 6,500K spirals?  I’ll be heading back to Bangkok with a bag full.

Cheers,

Peter.

Geithner to adopt bankrupt firms’ plan to regulate derivatives

    Geithner, knowing full well that he isn’t qualified to actually regulate anything (isn’t that the SEC’s job?) has turned to four experts:  Credit Suisse, Goldman Sachs, JP Morgan, and Barclays Plc.  These banks have all demonstrated their ability to fully understand the risks of derivatives and are models of conservative banking and fiscal responsibility except that:

Goldman Sachs received a $10 billion bailout directly from the government and, while maintaining it had nothing to gain by its independent advice, advised the government to bailout AIG for $180 billion.  AIG promptly paid $13 billion to Goldman.  It helps of course when the CEO of AIG was a former director of Goldman, and was appointed by the former Treasury Secretary Hank Paulson who was a former CEO of Goldman.  After receiving the handy $13 billion from AIG, Goldman crowed about how it was so financially responsible that it could repay the TARP funds early.  Thanks Tim!  After giving such blatantly self serving advice to the government that benefited nobody but itself, secretary Geithner is rushing back to Goldman for even more independent advice.

Barclays narrowly avoided getting a bailout from the UK government, which would have involved taking on subordinated debt and preferred shares at a hefty cost of 11% per year.  Instead, the bank courted the states of Qatar and Abu Dhabi for $7.3 billion in convertible preferred shares and subordinated debt paying a ridiculous 14% interest.  The management considered this a better option for shareholders because it avoided the executive compensation limits that the UK government was trying to impose.

JP Morgan was one of the first in line when the TARP funds became available and received $35 billion off the top to shore up its derivative losses.  Meanwhile, other banks further down the foodchain that went bankrupt due to the mortgage crisis were told to get screwed. 

Credit Suisse was forced to arrange its own $10 billion bailout from the same Middle Eastern sources that Barclays tapped.

    Having received advice from the experts, Geithner is now considering a few wise moves in regulation, such as:

    Making the Federal Reserve the regulator

This makes sense because the banks own the Fed, so there won’t be any conflict of interest.  The SEC seems to have missed this job because it failed to notice a $50 billion ponzi scheme and lost all credibility.  The Fed, on the other hand, failed to notice the entire banking system it was supposed to regulate going bankrupt to the tune of $12.5 trillion -- the equivalent of 250 Madoffs -- and actually GAINED credibility. 

    Increasing capital requirements for banks, corporations, hedge funds, and energy companies that trade in the OTC derivatives market.

Who ever heard of capital requirements for hedge funds?  And for energy companies???  In fact, the only corporations that are set up to meet any sort of capital requirements are banks such as Goldman Sachs, Barclays, JP Morgan etc.  The rest will be barred from trading in the OTC derivatives market except by paying commissions to banks such as... ah, I get it... great objective advice wasn’t it?

    Having OTC traders report to the Fed

This is probably the most blatant power grab by the banks.  ALL traders in OTC derivatives, such as hedge funds and energy companies, would now have to report everything to the Federal Reserve.  From being a simple bank-owned and operated money printing machine, the Fed will become the de facto regulator of industry, hedge funds, pension funds, and securities companies.

 

    The final version of the draft legislation hasn’t yet been released -- except to bank which are working on it to ensure that it is as fair as possible (to banks).

    Once it does go through, American corporations won’t be able to enter into hedging contracts without paying commissions to banks for execution.  No wonder banks make up such an outlandish percentage of US market cap -- they own the market!

 

Two more banks fail

    Two Illinois banks, Strategic Capital Bank and Midland States Bank, were shut down by regulators on Friday.  In the first 18 weeks of this year, 36 banks have now failed.  The steady stream of two banks a month hasn’t slowed down at all.  There were still 76 banks undercapitalized based on the updated regulatory capital guidelines as of March 31.  There are now 74 and falling.

    With bank failures being a leading indicator of economic recovery, it does make government claims that the economy is bottoming look like the brown stuff that comes out of the rear end of a bull.

 

Cheers,

Peter.

Quantitative easing: Great Britain’s doing it, Japan’s doing it, birds are doing it, bees are doing it… US?

	Quantitative  easing was developed by the Weimer Republic in the 1920s, further developed in Hungary , where the largest banknote ever printed — 100 trillion pengo — originated, and then perfected in modern day Zim­babwe which achieved an annual inflation rate of 89.7 sextrillion percent (152% per week). But faced with the specter of deflation, central banks are taking their cues from the Weimer Republic and Zimbabwean experts.  Why? Simply put, deflation is neutral (or even good) for the economy, but really, really bad for banks.  We saw what happened with housing price deflation: it crippled the whole system (which was totally screwed anyway).  Further deflation will mean companies make fewer profits because their products are priced lower, even though their fixed costs remain fixed.  Commercial real estate is suffering twice as badly now because not only are retail sales down, but the sale prices have fallen as well.  A 40% margin of $4 is considerably lower than a 40% margin of $5.  This lowers the re tailer’s profit and lowers the value of the premises.  Inflation works the op posite way of course.  It’s been widely reported that the Bank of England has been buying up long maturity gilts — and issuing crisp new currency in return — and that the Bank of Japan has upped its purchases of debt by $18.3 billion of govern­ment debt each week, which amounts to printing 11% of Japan’s GDP in new money.  These are hugely inflationary, but with the economy tanking, it isn’t being reflected in reported CPI, although according to shadow statistics, CPI is already on the rise.  Breaking news: CPI just hit 1.8% compared to a year ago… despite the price of oil falling by 50%.  Maybe, after all, the Federal reserve HAS been printing money. Now, on a 60 Minutes interview, Ben Bernanke admitted to doing exactly that  for several months.  The amount of money in the system — M3 — is expanding at an unprecedented rate (the Fed no longer publishes M3 num­bers). The thing is, as long as all major countries print money at the same time, there’s no immediate impact on the currency, and therefore from imported inflation.  And with oil and natural gas prices having fallen off a cliff, year over year inflation is looking really good (1.8% being just about ideal ac­cording to just about everyone).  It will probably continue to look good be­cause of lower interest rates (leading to lower mortgage costs) and lower rents.  The big problems will come when enough money has been dumped from helicopters that people get sick of stuffing it in bank accounts earning less than 1% and start spending it at the same rate it’s being printed.  I don’t know when it’s going to happen, but one thing’s for sure: we’re all getting screwed: buy condoms.
	Now that everyone’s out of work and hubby’s coming home from work early, we’re all doing it
	Couples are having fewer romantic $150 candle-lit dinners in expensive restaurants, and spending more time at home doing what couples around the world do nearly every night: watch TV.    However, even TV can get boring, and condom sales are rising, up 1.5% in the first two months of the year in the US (compared to population growth of 0.8%).   That’s just the US.  How about Asia, where the population is growing at break-neck speed and awareness of VD continues to rise.  Yeah, I know, STDs.  Whatever.  The point is, Asia is wealthier now, so condoms are more affordable and sales are growing.  If you are looking for a stock to buy right now, Ansell is probably the stock to own.  I’ve done extensive research on it’s products and have been pretty impressed.  The Research Project is still ongoing, however, so don’t ask me for any advice.    Nevertheless, if you are looking for somewhere to park your money that won’t be affected by government policy screwing with your products, this is a good bet.
	Cheers,            Peter.

Mortgage lending: The criminally insane leading the incompetent

 

Freddie Mac, the world’s second most bankrupt listed entity (after Fannie Mae), last week eliminated many fees to lenders that compensate for risks of low credit scores or small equity stakes -- and urged other lenders to follow suit.

 

This is the largely the same management team that steered Freddie to a $25 billion loss in the third quarter last year. 

 

The reason for the losses was a failure to use information on credit scores and equity stakes to manage the risk -- most commonly done through charging fees to offset the risk.

 

Now, having partially fixed the system that didn’t manage risk and encouraged moral hazard, Freddie is trying as fast as possible to unfix the system.

 

The reason is pretty simple: there aren’t enough buyers out there at current prices so to move to equilibrium, they have to either let prices fall or expand the number of willing buyers. 

 

“No deposit?  No problem.  We’ll call your first payment the deposit.”

 

“Only temporary part time work?  Don’t worry about a thing: we’re willing to waive the mandatory first year payment insurance fee.”

 

There are three major problems with embarking on this course of action:

 

1. It will reduce profits for Freddie and therefore reduce payments to its owner, the US tax payer

 

2. It may not work and housing prices will fall anyway.

 

3. It may work and keep the bubble partially inflated… only to deflate further down the road.

 

At least Fannie hasn’t followed her brother’s lead.  Hopefully other banks will try to maximize profit rather than let themselves get blown around by political brain-farts.

Geithner: Global stimulus plans may need extension

That’s right folks.  Not only have the US stimulus plans been too small and the record $3.6 trillion budget been way too tiny, but the rest of the world’s governments are failing in their duties to spend tax payers’ money in unprecedented levels as well.

The big problem is that US tax payers are saving their money.  This is great for the long term US economy, but really bad in the short term (i.e. the coming election cycle).  The government can’t tax savings, but by god can it spend them!

The even bigger problem for the US government is that other countries’ stimulus packages are smaller than America’s.  If these prove to be more effective, Geithner will look like a complete idiot.

Whereas the US $800 billion wastes 4.7% of US GDP, Germany, France and the UK are only willing to waste 1% of their GDP -- and probably on stuff like infrastructure rather than sod and government department headquarters.

The other problem is that the Europeans seem willing to let companies go bankrupt.  This of course is the main reason for having recessions: lose the deadwood and new shoots will appear.

The trouble is, markets never get things quite right: often the companies that are important to the national well-being (GM, Citigroup, AIG) are the ones that go bankrupt by mistake, while others fluke it through good management. 

What you really need here is government intervention and good judgment.

Leave it to the bureaucrats.  They KNOW how to distribute wealth better then the market.  And don’t let conservative politicians and tax payers interfere with the spending by asking where it’s going. 

My favorite quote on the subject comes from Canada’s Prime Minister Stephen Harper on his $30 billion stimulus bill:

“We cannot have the opposition in parliament replacing bureaucratic red tape with political red tape.”

Exactly.  We need both.

 

Cheers,

Peter.

GDP -- the metric that got hijacked into stupidity and meaninglessness

Gross Domestic Product has become the one and only metric that anyone cares about these days, although it’s actual meaning has become completely FUBAR.

If you actually read the three words, you’ll notice that the word “service” isn’t included.  But as “stuff” became cheaper compared to “services”, two economists at a restaurant started arguing about whether they were buying food or paying for the service.

From that point on, GDP became “Gross Domestic Production of Goods and Services”, although how the hell service is “produced” beats me.

But the importance of including services in the GDP numbers was absolutely essential, politically, as US companies stampeded into China and the only “Production” left was McDonalds, the defense industrial complex, the minting of ever larger numbers of banknotes, and a car industry on life support.  

Importing became as American as apple pie.  Especially as most apples are now imported from China.  

But it didn’t affect GDP did it?  

Take a nylon stocking for example.  Some Chinese company manufactures a stocking and sells it for 20c to a US importer.  This has added 20c (less the cost of raw materials) to the Chinese economy. But at the US end, it is branded, warehoused, transported, advertised, marked up, and retailed for $5.  So that 20c Chinese stocking added $4.80 to the US Gross Domestic Product -- even though it wasn’t a US product to begin with.  

Each time a factory closes and moves production overseas to produce it more cheaply, prices come down, demand rises, and GDP increases.  

The whole US retail industry has become a mere service for Chinese manufactures and “contributing” up to 25 times the GDP created by the production by not actually producing anything.  

This is all thanks to credit, of course.  If the US had to actually produce something to trade with China and Japan, wages would have to drop to make actual “production” price competitive.  

The whole “service” industry, which is as bloated as a week old corpse, would have to shrink to the point where it provides the services required rather than the services that credit cards and national debts can support.  

Ironically, as real Gross Domestic Production increased, the shrinking of the bloated corpse would make reported GDP numbers actually shrink and the politicians would think we had a crisis on our hands.

As usual, they would revert to stupidity.

“Quick, spend more, import more!”  After all, the more the US imports on credit, the stronger the reported GDP numbers.  

How’s that for a meaningless metric?

 

Imagine if you measured your household this way?  If you measured your household success by your family’s “Gross Domestic Production of Goods and Services” you wouldn’t bother trying to save money.  You’d look at ways to simply “do stuff”, no matter how pointless, to increase GDP.  

“Hey Randy, my family GDP grew by 11% this week.  We dug ten holes in the back yard and filled in the nine we dug last week.”

“Well done Hank.  We’ve been even more productive.  My wife hired this Mexican guy to dig our holes now.  We spend our time naming and branding them, which doubled their value. Our GDP is now up 120%.”

Maybe not a precise metaphor, but you get the idea.

 

Incidentally, US GDP fell by 6.2%.... it would have been 7.3%, but for the positive contributions by “services” and federal government.  

The US taxpayer bailed out GM (again), but what about the parts suppliers?

    GM, the car maker that produces more cars than it can sell at a higher price than it sells them, clearly needs to go bankrupt.  Ok, so it’s an American icon and gets bailed out.  

    But how about the little guys?  The suppliers.

    The treasury department is working on a plan to bail out the entire industry -- over 4,000 companies -- and prevent them from going bankrupt.  Now there’s an idea.

    The market for cars has shrunk and will go on shrinking as the baby boomers retire and commute on foot between their retirement homes and the Vietnam Veterans’ Club.  They don’t need new cars every five years (not that anybody really does, but that’s not the point).

    So Detroit has been making too many cars.  By definition, the parts suppliers have been making too many parts.  The whole industry has to rationalize down to the size of the market through mergers and bankruptcies.  

    But the thought of a company going bankrupt and people losing their jobs is so repugnant to us (and especially politicians) that we want to do something to help them.  

    But I’m not volunteering to pay for it, and fortunately I’m not a US tax payer, so the government can’t conscript me into paying for it either.  I feel for the US tax payer.

    What seems to be missing here is even a passing consideration that perhaps a wave of bankruptcies is EXACTLY what the industry needs.  

    When a manufacturer goes bankrupt, nothing actually disappears from the economy.  The machines are still there, the skills are still there, and the reduced demand is still there.  

    If creditors liquidate the company, someone can buy half the machines, hire half the workforce, and create an efficient business model.  Meanwhile, the other half of the machinery is recycled through selling it to someone else or melted down and turned into useful stuff.  Similarly, the half of the workforce that’s no longer needed are available to other industries to do real work.

This is called “capitalism” and “free markets”.  

    Everything seems to indicate that the government wants to turn back the clock on production and hope demand returns.  

    It’s like a mousetrap producers in London.  London has a mouse problem and mousetraps are in huge demand.  Then one day Dick Wittington arrives back from Siam, let’s the cat out of the bag, which then eats half the mice, and demand for mousetraps drops by 50%.  

    Does the government step in and try to support the whole industry to prevent bankruptcies, even though it’s as clear as day that it’s now a bloated corpse?  

    What happened to governments sticking to governing?  Oh… they got concerned with GDP…