The Destroyer of Finance

This just in: all we have to do to slow global warming is slow down our economy!  Thanks, President Clinton, for that tidbit.  I think, perhaps, your timing with the comment is poor however true it might be.

I saw this AP article on Yahoo and thought it was very interesting.  I’m a big AP fan, even though sometimes you’ve got to go elsewhere to find the action.

After the first paragraph, I was hooked.

American voters have a decidedly negative view of how things are going in the country but they are confident that the next president will have the power to change much of what is wrong.

Word. to. your. mother!  There is nothing that ails your quality of life that a new president can’t fix?  Right?  Guys, back me up!

Back in 1776, when those guys got together and pounded out the Constitution (the paper, not the boat) in, like, 3 days, their priorities were:

A) Send those those servants out to get some ice and good wine.  Tobacco anyone?

B) Determine the form of government most effective at resolving the citizens’ problems

And so, when George Washington defeated King George in hand to hand combat at the Battle of Yorktown, he forced King George to personally sign the Constitution, his Royal Family rookie card, and the Bible Washington used at his inauguration three days later.  This singular event secured the rights of all Americans to all forms of happiness and success for all time.  Except those other people, but let’s not get distracted.

 The point of my historical monstrosity is that the framers selected a republican form government not because it was responsive to the people, but because they believed that it was the best way to protect the freedoms of it’s citizens.  OK, again, don’t worry about all that other stuff.

 Even a cursory glance at the design of the federal government will show it was cunningly structured to optimize inefficiencies and maximise the ability of the government to trip over itself.  Of all the branches, the legislative branch was given the most power… and then provided with so many members that it wouldn’t be feasible that they would spend more time working than bickering.

 Oh, but the great American voter doesn’t want that anymore!

According to a new Associated Press-Yahoo! News survey, large majorities of voters believe the president has considerable sway on issues such as inflation, interest rates, the federal deficit, taxes and more. Fully three-quarters believe the president has at least some influence over health care costs. And 69 percent can see the president making gasoline prices go up or down.

Six issues are explicitly named here.  The President only has a limited ability to deal with two of them:  the deficit and taxes.  Even then Congress can instruct him to stick it, if they double dare.  Interest rates are the sole domain of the Federal Reserve, and therefore, indirectly, so is inflation.  Healthcare and gasoline?  Market demand, baby.  Don’t matter if you nationalize healthcare, it gonna cost da same in the end.  Only ting dat change be who you give da money to: da dockta or de tax man.

Gasoline makes me giggle, too. 

Hi.  I’m an American.  I don’t really like paying $3 a gallon for gas.  I sort of thought about changing my habits to include car pooling, cutting down on short car trips, and/or utilizing mass transit, but I can’t really be bothered to adopt a lifestyle change that might make a tangible movement toward resolving the issue that is troubling me.  I decided to vote for the Easter Bunny, because he promised to lower gas prices so that I can maintain my gluttonous gasoline consumption with minimal unpleasantness.

 What is the end result of political tampering with gas prices?  Ultimately, higher gas prices… or an enormous tax bill, which is the same result.

The latest poll, third in the series, found that Democrats are more likely to believe in the power of the president—whatever his or her background—to change things. Republicans and independents, for their part, are much less likely to think a president can have influence over the big issues.

Giggle.  To be fair, changing “things” is a little vague.  There are a lot of “things” that can be “changed,” if for no other reason than for the sake of appearing to do something.  Actually succeeding in improving “things” is a totally separate case, and if you’re not improving “things” by changing them, what the hell is the point.

 The average American voter is not very informed, which is unfortunate since our system of government really only works properly with a well functioning voting public.  What’s even more tragic is that not only do both major political parties encourage this status (I reserve special venom for the Democratic party for their encouragement of ignorant voting), but such a half-ass attitude is a generally accepted way of life.  This is what happens when you take a privilege and make it into a right.

And everyone, remember to go vote.  Easter Bunny 2008!

Live from a fluorescent lit office,

Suck it.

Dateline – Anal Fissures: Conspiracy or Coincidence?

Thanks to one of my cats eating a catnip toy (after one of my dogs was almost killed in a dog attack), I’ve now dropped $3-4K at the vet in the last week.  In case you were wondering, fixing up a huge dog bite wound is a *lot* cheaper than fishing a small furry toy out of a cat’s intestine.

If you are a veterinarian, I want to be your friend in exchange for discounted rates.  Please.
Who do be the Fabians?

I was watching the TV the other night when Brian Williams came on the air and said,

“Who is Fabian, or was he the guy who posed for romance book covers?  I’m Dwayne, good night.”

Certainly one of the most confusing sign-offs ever delivered by a professional broadcaster, but putting forth the salient point that most people don’t know anything about the Fabian Society.

The Fabians were first founded in the 1600’s by Sir Fabian McDonnell, a wealthy and mildly ego-maniacal Scotsman.  His concern was that his business ventures, which had run into a rash of failures, were being undermined by the Masons.  The Society formed to in turn undermine Masonic activities after identifying the members of local chapters.  In addition to business failure, they would usually try to arrange for great social turmoil by framing the target in either scandalous or illegal behavior.

So, none of that is true, and Sir Fabian McDonnell probably never even existed.

The Fabian Society was actually started in 1884, named after Quintus Fabius Maximus, the Roman general behind the “Fabian Strategy” that was designed to defeat Hannibal through attrition.  The Fabians ultimately have become perhaps the most successful activist group in post-enlightenment politics by pursuing their socialist government and Keynesian economic political goals through a strategy of gradual reform as opposed to pushing for a rapid change.

They participated in the formation of Britain’s Labour Party and over time successfully lobbied for many changes that are taken for granted in the political landscape of Britain today such as minimum wage and national health service.  Of course, some of their motivations were a little… different (eg: national health service would help create a higher quality soldier).

George Bernard Shaw, H G Wells, and John Maynard Keynes were all Fabians, which means that they didn’t support Keynesian economics at first, since it wasn’t known as that yet.  Also, the London School of Economics was founded by the Fabian Society, but has moved away from it’s founding philosophy over time.  Other irony from this is that LSE produced Friedrich von Hayek, the mortal enemy of Keynes… and that Keynes, the Fabian’s greatest economist, was from Cambridge (the arch rival business school).

The Fabian’s greatest victory is the Crown Jewel.  The Subcontinent.  India.  Jawaharlal Nehru, first Prime Minister, and key political leader of during the formative times of India’s independence, was heavily influenced by Fabian thought.  As a result, Indian law has been encased in Fabian principles since the first laws were laid down.  Of course, India is also the Fabian’s greatest failure, as Fabianism has failed to protect individual freedom, dissolve the rigid caste system, or promote economic development, all things that Nehru had intended when creating his Fabian laws.  Indeed, India is usually held up as a prime example of the failure of socialist economic policy in general, and Fabian doctrines in particular.

Anyway, Fabians: wildly successful.  Of course, good luck finding such patience and cunning in a political group today.

The death of an entire industry?

While mortgage lenders and banks are struggling through this time, one financial sector is in DIRE straits.  No, not GEORGE Strait, dumbass.

The bond insurance agency is teetering on the edge of total collapse.  ACA Capital, in 52 weeks, has lost 97% of its value and could be essentially out of business by midnight tonight.  No major insurer has seen it’s stock lose LESS than 37% in the last month.

The problem is that not only do the companies insure regular bonds, but they also got into the practice of insuring more exotic items… like mortgage debt investments.  And hedge funds.

Whooops!

I’ll leave you all with some closing thoughts from Uncle Milty (Milton Friedman):

In the realm of ideas, the <redacted> persuaded the public that capitalism was an unstable system destined to suffer ever more serious crises.  The public was converted to views that had already gained increasing acceptance among the intellectuals: government had to play a more active role; it had to intervene to offset the instability generated by unregulated private enterprise; it had to serve as a balance wheel to promote stability and assure security.  The change in the public’s perception of the proper role of private enterprise on the one hand and of the government on the other proved a major catalyst for the rapid growth of government and particularly central government….

So, Friedman died in 2006, so he’s not talking about the present.  I’ve redacted the historical reference in the quote, and I’ll leave you to ponder what time this refers to.

Enjoy your MLK day vacation.  I know that the banking world respects MLK enough to take a day off for him.

We’ve seen inflation, hyper-inflation, deflation, stagflation all within the last 70 or so years (not in the US, but worldwide).

What’s next?

How about Biflation!

Makes me feel a little randy, yeah!

It feels a little made up, honestly, and at first blush I’m not sure it’s a durable trend rather than a precusor to something else.

Anyway, if this “biflation” thing exists, we’ll be able to sniff it out when the interest rates get cut and we get our “economic stimulus” from Congress.  They’ll try to flood the system with hot off the presses dollar bills, and if there’s a biflationary monster under the bed we’ll see the price of oil, food, gold, and other commodities rise while other stuff (clothes, cars, electronics) stay basically the same, or at least go up at a much lesser pace (although technically their prices should “deflate” according to biflation… I just can’t see the mechanics of that working unless things are going really poorly).

The Fed, of course, will say that everything is OK, because if you strip out food and oil price increases, inflation is under control and not bad.  Hmm, sounds like I’ve read that before, but it was probably in some current events thriller fiction book.

If there isn’t a biflationary monster, then everything will get more expensive roughly equally and we’ll just have regular inflation.  That’s a great thing if you’re trying to service debts, so the government will be thrilled.

Fed Chairman Bernanke is fully expected to make a “bold” [not my wording] 50 point cut to interest rates.  If everyone thinks 50 points is a foregone conclusion, how is that “bold”?  From the great philosopher Mr. Rock:

“I ain’t never been to jail!  What’chu want?  A Cookie?”

And also, he also opined that, “Cornbread.  Ain’t nothin’ wrong with that!”  Straight Talk your way out of that, McCain!

I rest my case.  If Bernanke is really bold he’ll make a 25 point cut instead of a 50 point cut, and then play the fiddle while sitting on the balcony overlooking the NYSE trading floor.  If he’s sucker “bold” he’ll make a 75 point cut, and I’ll pop a cork on some champagne as the price of every commodity on earth goes through the ceiling.

For my parting commentary, I ask:

If you re-read Frank Herbert’s Dune books (the first couple at least) as prophetic texts regarding the islamic middle east and the world’s dependence on oil, would you be creeped out?

Instant Feedback: Blog Gladiator style: a 75 point cut eh?  How about 125 points, suckaz!  Commodities through the roof?  Well, gold and platinum have set about 3 records since since, and oils even back above $90 (and as I said before [jan 2nd?], I’ll be happy if oil ranges from $90-105).  Biflation still seems made up to me… like a psychologist making up a new syndrome to explain every nuance of behavior possible.

For historical evidence. let us compare the “Age of Government Regulation” in the US, when Keynesian type economic theory ruled, v. the “Age of Deregulation” in the US, when Austrian economic theory (as put forth by Hayek and Friedman) ruled.

Starting at the LOWEST POINT on the Great Depression, the DOW closed at 41.22 on July 8th 1932.  We’ll pick at time approximating the beginning of the Reagan presidency as the end of Regulation.  On Jan 2nd, 1981, the DOW closed at 963.99.

An increase of 23.39x over 49.5 years, or an annualized average gain of 6.58%.  Feel free to check my math, I could have erred in my formula [ 23.39^(1/49.5)].

The DOW opened today at 12.777.50, an increase of 13.25x in bascially 27 years, or an annualized gain of 10.04% [13.25^(1/27)].  Pretty much exactly 50% more economic growth per year when measured by investment returns.

We can also extract out the highpoint of the Age of Regulation, when red tape ruled the most supreme: from 1964 to 1981 (somewhat arbitrary, I’ll admit, but this was the highwater mark) the DOW moved from 762.95 to 963.99… an increase of 1.39% per year, on average!  Wow!  I can see why we want to go back!

The rich are richer.  The poor, relative to the rich, are poorer.  The middle class is shrinking.  These things are all true.  The rich fuel the economy and fund innovation.  They bear the risk of progress, they reap the reward.  The poor are still living, on average, better lives than 27 years ago, and judging well being by relative income is a meaningless metric unless your purpose is to mislead or antagonize (it plays only to the base natural instinct of jealousy).  The middle class is shrinking because more and more of the middle class is earning TOO MUCH money to fall into the traditional earnings range considered “middle” ground.  Ah, this is all too techincal, though, and doesn’t fit in a 30 second or less sound byte.

Frank Herbert was right:  Fear is the mind killer.  Keynsian ideas feel good to the fearful, and when they fail it’s not because the policy is bad: it’s because it wasn’t done right, or didn’t receive enough funding, or wasn’t given enough power.

Well, hopefully it won’t take us 50 years to shake this episode of childishness.

Practical Prognostications for a Precocious 2008:

 As I sit at work gazing, lovingly, into my crystal ball of future event predictions, I will reveal to you all, free of charge, my lock of the week game pick via recorded message.

I see a year filled with hot women and concubines rolling at the Kingsbridge manse I see yet another year where Mike goes without a girlfriend. I see Austin being really tall. and asian looking. In 2008, we will also all get really excited about a movie that turns out to be digital diarrhea.

Ok, so it’s a made in China “really brutally obvious ball” that I picked out of a wal-mart returned item basket.

So let me turn to my patented Practical Prognostications for a Precocious (Insert year here):

1) It will probably be a wild year on the stock exchanges. Look for a seemingly high number a days with big ups and/or big downs. Do not attempt to lift the restraining bar while ride is in motion.

2) It will probably not be a great year for the markets. Given that many economists now see about a 50% chance of recession, any gain on the market would be cherished. I predict a drop of about 1% overall by year’s end.

3) Inflation pressures will continue to mount as foreign “disinflationary” labor benefits wane while energy and food costs rise, also due mostly to foreign influences. I say “disinflationary” because “deflationary” is somehow an economic curse word these days, so it’s like saying “doo-doo” instead of “shit”. And when I say “foreign” I mean China, mostly. I’ll put my chips on inflation in the 5-6% range for the year. Hardly Weimar Republic Germany, but unsettling. If the fed cuts rates to 1%, then I reserve the right to get a free pass on this prediction.

4) Terrorists could use new graviton pulse technology to cause an asteroid to crash into the Golden Gate Bridge. They could, is all I’m saying.

5) The weather will either be hotter or colder than last year and either wetter or drier. Either way will be used as evidence both for and against man-caused global warming. Enviromentalists will continue to be frustrated that no one seems to care.

6) As home prices continue to fall, consumer spending will struggle in the US, causing much pain for many. Credit card defaults will become the new credit issue. By the way, you know all these “mortgage backed debt” investments that are going bad? The same thing was done with credit card debt, so suck on that.

So what to do with your investments, if you have any? I tell you!

Follow my Actual Actions for an Alarmingly Amazing 2008 or opt instead for my Erudite Exploits for an Emotionally Emotional 2008. I made each plan the same thing to keep it simple.

A) Look to the emerging markets. I’m still big on Eastern Europe, but Asia (ex-Japan) and Brazil are cool too. Japan could be ok, but every year for about the last decade has started out with high hopes for Japan and ended with nothing but a ruptured sphincter. If you’re horny for japan, then go for it, otherwise, hunt for something in those other places.

   Thumbs up: Eastern Europe/Russia, Asia ex-Japan, Brazil

   Thumbs flat: Japan, Canadia, India, Chile

   Thumbs Down: US, Mexico, Western Europe, all 4th rate hell-holes

B) Attend yourself to natural resources. Oil is good, and if you dressed up an Iraqi baby in a red suit and a white beard, it’d be a little baby oil santa pinata. All you have to do is beat it with a bat, and money comes out! Oil prices might not go up as much in 2008 as 2007. In fact, they might hold roughly flat, trading $90-105 all year. That’s still a good level for the oil industry, and while the sector might not gain 50% like it did this year, it could still pull in 5-10% on a year where the market is down. The upside is that if the economy avoids a recession, the oil sector will gain more.

   Duck duck: Oil, Natural Gas, Natural Resources Services, Gold (that’s for you mike, but seriously: gold), Corn, Wheat.

   Goose: Timber, Copper, Titanium

C) Pucker factor is king. Historical data shows that the Risk/Return correlation gets broken at the high risk level. For those willing to assume a very high level of risk, return in excess of what would be expected of even that high level of risk can be achieved. If that made any sense at all, I will continue. I dub extreme aggressive high risk as “pucker factor”. It makes you nervous, causes self doubt, aggravates your ulcer, and makes your butt-hole pucker up. “pucker factor.” See? These sorts of investments come and go. Unfortunately, when they go, it might be into bankruptcy.

   Greenlight: Countrywide (CFC): A little bit a good news is worth a lot of money here.  Technically CFC is worth 3x what it’s trading at (according to Sep. 30th financials). Technically, it has advantages from its bank charter that some of its defunct competitors didn’t have. Technically, it never relied on Sub-Prime lending for that much of its income. Technically, It’s developing other lines of revenue that might allowing it ride through the rough patch. Technically, a lot of traders think it’s going to go bankrupt, otherwise it wouldn’t be selling for 1/3 of book value. Personally, I don’t think it will go bankrupt, but I haven’t decided if I’m willing to compound my pucker factor from owning CFC bonds with owning CFC stock. Investing in Pucker is always an individual decision since you might lose your money, but the rewards are big. I give Countrywide the greenlight. Choose wisely.

   Red light: any homebuilding company.

D) Calm waters are nice. If you can’t stand ups and downs and all arounds, this might be a good year to leave a good chunk of money in a money market fund and get 3-5%. In the end, that might beat anything else you’d get. Caveat is that some people think the Fed will be willing to lower interest rates to as low as 1% to avert a credit crisis (inflation be damned). In that case, the money market probably won’t be your best return, and you’ll wish you’d gone with my Pucker Factor Greenlight on CFC.

E) Addendum to B! Investing in Clean Energy is a good hedge/handcuff for Oil! The market for these techs is growing, and can be spurred by a hot/cold/wet/dry year, a democrat win in the election, or higher oil prices. Find an ETF of mutual fund for most efficent investment. I found QCLN. What’s up.

So there you go: A) Go Emerging Markets / Foreign B) Get an Baby Iraqi Oil Santa Pinata C) Be aware of opportunities to exploit market inefficencies that misprice the standard risk/reward paradigm (Pucker up bitch!) D) Getting out of the hurricane and into the pool is ok too. E) Get clean!

Keep in mind a general piece of investmend advice to watch your transaction costs (commsions and stuff). Frequent trading can let these costs cancel out your gains. Watch yourself.

Instant feedback: 15 yard facemask on me for Countrywide!  It’s been a rough year for oil and emerging markets, but I still have faith.  As for the market being down 1% at year end, I feel comfortable with that more now than I did then.

I’d say I told you so, but my proof was two message boards ago. What’s up! Inflation!

Let me sift through the chaff for you:

“Wholesale prices shot up 3.2 percent, the biggest jump in 34 years, propelled by a record rise in gasoline prices.”

That’s not an annualized rate. That’s in one month for an annual rate of 38.9%. Good thing they provided an excuse: gasoline!

Excluding the volatile food and energy sectors, the Labor Department said inflation rose by 0.4 percent.

So… exculding the two things that are the least flexible budget items for all consumers, it was still a 4.9% annual pace, which is sort of high. I don’t want to miss the point here though: what purpose does it serve to measure inflation if you eliminate the two most important items from the metric? Everyone needs food an energy. Demand is quite ineleastic, and we’ve already seen that it takes large increases in energy prices to impact our consumption. Furthermore, our economy is currently focused around just in time inventory systems, which require small inventories and frequent shipments of sales stock just before it is needed. Sound fuel intensive? Food is obviously even more inelastic in its demand for consumers.

The Commerce Department reported Thursday that retail sales surged by 1.2 percent last month, double the gain that economists had expected.

Wow this is really good news! Good news = no qualifiers, like excuses about gasoline. A few paragraphs later…

Excluding gasoline, retail sales would have been up by a still solid 0.6 percent.

Oh.

Sales were down, however, for autos, falling by 1 percent after a 0.6 percent drop in October. Domestic automakers have been struggling with weak demand in the face of surging gas prices.

It’s a good thing that we can strip energy prices out of the inflation report!

This is a WHOLESALE inflation report. This does not guarantee that you will see prices go up by 3% next month (or last month). Competitive markets will require that the various retailers of products will try and eat as much of the cost increase as possible for as long as possible in the hopes that costs will either go down or that they will not be the first in their market to blink.

What this does mean:

Increased possibility for consumer inflation

Downward pressure on corporate profits (from eating increases in wholesale costs)

So there you go. 38.9%. That’s a big number.

 Instant Feedback: Jan 31st: One month later, consumer inflation continues to resist the influences of high material costs at the wholesale level.

I am not a post.  I am a placeholder.

 What’s up.