Monday, June 29, 2009

The Sarcasm Report v.31

Rising oil, commodity prices pull stocks higher

NEW YORK (AP) -- A jump in oil prices sent investors rushing to put money into the stock market in the final days of the second quarter.

Tuesday, June 23, 2009


TIPS Gain in Market’s Worst Year; Validation of Pimco (Update3)

Here is the FOR case.

“The deflation scare has pretty much been taken out of the market,” said Kenneth Volpert, who oversees $180 billion as head of taxable fixed-income at Vanguard Group Inc. in Valley Forge, Pennsylvania. “The inflation scare has not been priced in yet, and we think that’s still to come.”

TIPS are the only long-term U.S. government debt to post gains in what is the worst year for U.S. securities since at least 1978. TIPS have returned 2.98 percent since December, including reinvested interest, while Merrill Lynch & Co.’s U.S. Treasury Master index slumped 5.7 percent.

Here is the AGAINST case.

“I’m in the camp that says this is overdone,” said Wan- Chong Kung, who helps oversee $89 billion in Minneapolis at FAF Advisors, the asset-management arm of U.S. Bancorp. “What we see is a really healthy rise in inflation premium with not much realized inflation behind it. At some point you have to have realized inflation be part of the story to continue to see breakevens perform from here.”

As usual, I am right in the middle. That's much like I am in the inflation vs. deflation debate overall. That being said, I have almost my entire nest egg in TIPS. I'm a believer in the long-term bull market in "safer" havens, and there's really nothing much safer than US Government backed debt that's also inflation protected. Note that I didn't say it was safe. I'm just saying it is safer.

Let's look back nine years. That's when the bull market in safer havens began.

Considering how much pain has been inflicted in both the stock market (twice!) and the housing market (once!), there really hasn't been a whole lot of deflation so far. We're looking at $70 oil even during one of the biggest downturns this country has ever faced. I am sympathetic to the deflationist arguments though. Don't get me wrong. I could easily see the price of oil drop by half. It would still be more expensive than it was in
2000 though.

As seen in the chart, the CPI ended at roughly the same point it started during the 2001 recession. It flat-lined. Note that while volatile, the CPI is also at roughly the same point it started during this current recession. That's not exactly the sort of deflation that the deflationists would point to as an overwhelming confirmation of their theories, at least so far.

Here's why I think TIPS is much better than buried cash, even if the deflationists seem right. It's certainly possible.

1. No matter how bad deflation gets, if we buy TIPS we still get the face value at maturity. If we buy $1000 worth of 10-Year TIPS during the next auction and hold the full 10 years then we are guaranteed to get at least $1000 in 10 years. That is absolutely no different than burying cash in our backyards for 10 years.

2. Unlike buried cash, TIPS pay interest. Therefore, if we are a believer in the long-term bull market in "safer" havens and we are absolutely convinced massive deflation will be upon us, then TIPS is still a better long-term play than buried cash.

3. What if we are wrong about deflation? What if we enter a stagflationary nightmare instead? That buried cash would be dug up so fast it would make our heads spin. What might we buy with it? I don't know. Maybe something with inflation protection that's reasonably safe. Perhaps TIPS. Of course, if we are digging up our cash to buy inflation protection at that time, chances are we won't be first. That means it will cost us more.

4. Some might argue that cash is safer than TIPS because the government might not pay us the interest it owes us and will quite possibly default on the principal too. I'm not in that camp. We would be owed little pieces of faith based paper (dollars). That's it. Ben Bernanke has a monetary printing press that can print them at "essentially no cost". We'd need brave politicians to explain to us why the government can't print us what it owes us at essentially no cost. There is no promise that the pieces of paper will be worth anything of course. The less they are worth, the easier it will be to print them. And lastly, just exactly where will we find these mythical brave politicians? I sure haven't seen many.

So yeah, I like TIPS. Deflation? Inflation? Stagflation? Whatever! If I am wrong to like them, then the "riskier" havens are going to be absolutely devastated. There's very little I can do to protect myself in that world though, so why even bother trying?

This isn't investment advice of course. It's just the rantings of what would best be described as a permabear I guess. We find ourselves in a hole (debts and deficits) we can't quite get out of. Our solution? Dig deeper.

Tuesday, June 16, 2009

Education and Debt

This just makes me sad. I could not read all of the following article without cringing nor could I read even a fraction of the 324 comments.

June 15, 2009

Student Debt, Fool’s Gold?

From the article...

I’m an academic advisor in natural sciences at a 4-year state school; day after weary day I advise students with below average grades who have unrealistic expectations and cannot accept the fact that — contrary to what they’ve been told all of their lives — they cannot be a scientist or doctor.

Virtually every day I advise one or more students with “C” averages in math, chemistry and biology who persist in the belief that they will get into medical school, all the while accumulating debt and wasting time. I don’t even really have the hope that one day they will wake up; I forget who said that “most people can’t stand too much reality.”
— Chris Silber

From the comments...

These are heartbreaking stories. I knew from common sense that student debt was undesirable, but reading these comment threads has convinced me that we are in a horrific situation as far as our young (and some not-so-young) people are concerned.

It seems to me that one “root cause” of all this madness is the desire to remain middle-class. That simply may not be possible in these circumstances. Perhaps parents need to teach their children how to be poor - because that’s where it seems a lot of people are headed, if they have been unfortunate enough to fall into the net of usury.
— stefanie

February 6, 2007
Bernanke: Education can help with income gap

WASHINGTON - Bolstering education and training — rather than erecting trade barriers — would help narrow the economic gap between low- and high-income workers, Federal Reserve Chairman Ben Bernanke said Tuesday.

How is more education going to help close the gap? I'd really like someone to explain that to me. Americans have embraced higher education over the last few decades in a major way. Has the gap narrowed? No. Note the yellow line in the following chart.

Gini coefficient

(Click to enlarge)

I'd also like someone to explain to me how taking on massive debt helps close the net worth gap, because I'm fairly confident that one is even further out of whack.

And lastly, here's a look at Tomorrow's Jobs.

Note the occupations with the largest numerical increases in employment, projected 2006-2016 (as seen in Chart 8).

Registered Nurses - 587,000 (Specialized Degree Needed)

Retail Salespersons - 557,000 (No Degree Needed)

Customer Service Representatives - 545,000 (No Degree Needed)

Combined Food Preparation and Service Workers, Including Fast Food - 452,000 (No Degree Needed)

Office Clerks, General - 404,000 (No Degree Needed)

Personal and Home Care Aides - 389,000 (No Degree Needed)

Home Health Aides - 384,000 (No Degree Needed)

Post Secondary Teachers - 382,000 (Doctoral Degree, Master's Degree, and/or Bachelor's Degree depending on the job)

Janitors and Cleaners, Except Maids and Housekeeping Cleaners - 345,000 (No Degree Needed)

Nursing Aides, Orderlies, and Attendants - 264,000 (Specialized Training Needed)

That's an additional 4.3 million jobs (in theory). A general college degree is not useful for most of the jobs, and mostly insufficient for the rest of them. I started this post with the idea that this makes me sad. I guess I'll end on that note too.

What Does the U.S. Need?

U.S. needs more bankruptcy judges: judicial group

WASHINGTON (Reuters) - A judicial body is urging Congress to authorize new bankruptcy judgeships to cope with a surge in bankruptcy filings that has tracked weakness in the U.S. economy.

Well, there you have it. I knew we needed something.

Andy Xie!

Andy Xie's thoughts often closely match that of my own. We've had another sighting over at Naked Capitalism. Must read!

Guest Post: Andy Xie - "Markets Are Trading On Imagination"

Here's a quote to wet your appetite, but the entire article is well worth a read.

Rising oil prices, though, lead to inflation and depress growth. It is a stagflation factor. If the Fed doesn't rein in weak dollar expectations, stagflation will arrive sooner than I previously expected.

Here's a previous link that's a modest summary of his previous predictions.

May 7, 2009

More from Andy Xie

My Least Worst Enemy (Musical Tribute)

PRACTICE MANAGEMENT: Charities Turn To Wealth Managers

NEW YORK (Dow Jones)--Wealth managers are seeing increased interest from charities and private foundations that, hit by endowment declines and shaken by prominent fraud cases, are seeking more professional help with investment decisions and due diligence.

Good luck on that one!

I'm fairly sure our government is bailing out the "professional help" as we speak. It seems the professionals came up somewhat lacking in toxic asset risk management and toxic asset due diligence. Other than that, I'm sure the professionals provide great wealth management in general though, lol.

Wealth managers shaken by an exodus of clients

UBS, the world's largest wealth fund manager, saw an outflow of $95billion as clients left because of the bank's exposure to toxic assets and its spat with the US government over offshore accounts it set up for American citizens.

Let's summarize. Wealth managers are seeing renewed interest by those who have not used wealth managers in the past. Meanwhile, existing clients of wealth managers are leaving in droves. Doesn't that just figure?

How Do I Know You're Not Bernie Madoff?

Still, this is the ultimate reverberation from the Madoff scandal: trust, the foundation between wealth manager and client, has been called into question, if not destroyed.

Here's a crazy thought. Be your own wealth manager. You certainly couldn't do much worse. Even if you lost it all, at least you'd have the satisfaction of knowing you didn't pay yourself excessive wealth management fees for the privilege.

My Least Worst Enemy

I remember, there was a time
We were told to invest in almost anything
As the lies came and the pain
One day wealth just went away
Yeah I remember, we lost most everything

That Kudlow's always trying to tell me
How to make money, how to believe
That Siegel's always trying to say
Markets, stocks are beautiful in every way
That Greenspan's always trying to push those ARMs
Trying to protect banks, keep them from harm
So that's why I always have to be
My least, my least worst enemy

My least, my least worst enemy
My least, my least worst enemy
My least, my least worst enemy
My least, my least worst enemy

In the gutters, in the graves, sit the nest eggs
There is no place, where wealth can just hide away
As all those taxes take their tolls
There is nowhere cash can grow
So we keep running, running from our destiny

That Kudlow's always trying to tell me
How to make money, how to believe
That Siegel's always trying to say
Markets, stocks are beautiful in every way
That Greenspan's always trying to push those ARMs
Trying to protect banks, keep them from harm
So that's why I always have to be
My least, my least worst enemy

My least, my least worst enemy
My least, my least worst enemy
My least, my least worst enemy
My least, my least worst enemy

Say I bought on margin
Say stocks go to the moon
That greed's never enough
No greed's never enough, no greed's never enough
Say it's illusion
It's all in my head
That greed's never enough
No greed's never enough, no greed's never enough
So why is it that we believe the lies?

That Kudlow's always trying to tell me
How to make money, how to believe
That Siegel's always trying to say
Markets, stocks are beautiful in every way
That Greenspan's always trying to push those ARMs
Trying to protect banks, keep them from harm
So that's why I always have to be
My least, my least worst enemy


Monday, June 15, 2009

The Wisdom of Pandit (Musical Tribute)

January 15, 2008
Citigroup's $9.8bn sub-prime loss

Mr Pandit has pledged to turn around Citigroup's fortunes.

Citigroup's Adjusted Close: $25.47

June 15, 2009
"Something went wrong over the last few years"

Citigroup's Adjusted Close: $3.37 (87% loss)

Something went wrong over the last few years? Sage wisdom from the man who ought to know. I now present you with the musical genius of yet another Pandit.

Oh yes! I can feel Citigroup's stock price healing as we speak. Look into Pandit's eyes and let Miserlou consume you!

Source Data:

Yahoo: Citigroup Historical Stock Prices

Thanks to Kevin for inspiring the post.

The Double Dip Deflationary Report

June 10, 2009
China’s Commodity Buying Spree

HONG KONG — Strong buying by China has helped lift commodity prices around the world this spring, but growing evidence suggests that a sizable portion of this buying has been to build stockpiles in China, and may not be sustainable.


Some economists say they are bullish on commodities because they believe that the United States and European economies are on their way to recovery.


Fifteen Hours Ago

You should get back into stocks if you'll stay in

Q: After losing a fortune on stocks I moved my money into a savings account. Now, I'm losing ground again as interest rates fall and stocks recover. Should I dip back into stocks of big, stable companies?


One Hour Ago

Stocks fall as dollar pushes oil, commodities down

Stocks slid Monday following steep drops in Europe and Asia as a stronger dollar pushed commodities and materials prices sharply lower. The market was also disappointed that an index of manufacturing in New York indicated that demand weakened in June from May.

From now on, when you take a [blue] chip, just take one dip and end it.

Thursday, June 11, 2009

Negflation Redux

First, I'm borrowing MaxedOutMama's negflation term.

MaxedOutMama: Busy Today, But....

So I don't think stagflation covers this situation. I think a more appropriate term would be negflation, in which negative growth is joined at the hip with rising fundamental costs which induce inflationary pressures on the spending power of consumers sufficient to reinforce negative growth.

In order to have a redux, we must first find the dux. Therefore, let's go back in time.

February 8, 2008

U.S. isn't falling into stagflation, Fed chief says

I don't anticipate stagflation.

He was right. We were already in stagflation.

"We are facing a situation where we have simultaneously a slowdown in the economy, stress in financial markets, and inflation pressures coming from these commodity prices abroad," Bernanke said.

That's stagflation. You cannot fall into something you have already fallen into. So what did he anticipate happening next?

"At the moment, I think the greater risks are to the downside, that is to growth and to financial markets," Bernanke said."

Score one for the Fed Chairman. He saw the Great Negflation coming.

Well, I think it is safe to say that we've found the
dux. So where's the redux?

June 10, 2009
China faces risk of stagflation

'In future, China is likely to see periods of stagflation, with CPI (consumer price index) rising above the long-term average level ahead of GDP,' said the centre, part of the National Development and Reform Commission, the country's top economic planner.

Silly China. We've already seen this once. If oil keeps rising, the entire global economy is going to crash again.

After writing this much it dawned on me to do a full search of the Internet for the word negflation to see what else appeared. There were a total of five occurrences. That surprised me a bit. I expected more. Two were on MaxedOutMama's blog, one was on my blog, one had nothing to do with the economy at all, but the last one was just plain spooky. It comes from the comment section of the following article.

February 29, 2008

Bernanke: "I Don't Anticipate Stagflation"

Bernanke has no credibility left. We are already in stagflation. The problem coming is not low growth with inflation however, it is negative growth with inflation.

How about Negflation?
- mmckinl

Imagine my surpise! Bernanke again! I wonder if mmckinl had any idea just how negflationary things would soon get?

Sorry Ben Bernanke. Negflation somehow seems linked to you. You wanted the job as Fed Chairman. Remember? I guess it was a pretty easy decision back then though. With
"no housing bubble to go bust", who wouldn't want the job?

Thursday, June 4, 2009

The Sarcasm Report v.30

Today's USA Today has a full page advertisement that offers a free safe if you buy 267 never-circulated U.S. Government coins and currency.

Here's what you get.

1. A free safe! Woohoo!
2. 12 presidential golden dollar coins
3. 250 never-circulated U.S. Buffalo nickels (minted in 2005)
4. 4 $2 bills (in a "banker's stack" no less!)
5. 1 American Silver Eagle

You'll need to cover $149 for the first shipment of coins. You'll also need to pay the same amount for the last remaining shipment of coins. It's a bit fuzzy on just how many total shipments there will be though. I wonder why that is? It seems to me that they could just put all the coins in the safe along with all that currency (all four bills, lol) and ship it to us in just one shipment. Wouldn't that cut down on shipping costs and save everyone money? What am I missing? ;)

Is it a good deal? Let's start with the safe. Free safe! Awesome deal! Enough said!

Now let's move to the presidential dollar coins. Probably best to just stick with the melt value of all that gold. Right?

2007-2009 Presidential Dollar Value (United States)

$0.0395132 is the melt value for the 2007-2009 Presidential golden dollar on June 04, 2009.

Oops! The one dollar face value was clearly the better way to look at it. Maybe we can make it up on ALL those nickels though. First, let's find out how many were minted.

Nickel (United States coin)

2005 P bison - 448,320,000
2005 D bison - 487,680,000

There were 936 million coins minted. Ouch. What about metal content?

As of December 14, 2006, the value of the metal in a United States nickel coin reached $0.055759, an 11.5% premium over its face value.

Fantastic! We're going to be rich once we melt them.

In an attempt to avoid losing large quantities of circulating nickels to melting, the United States Mint introduced new interim rules on December 14, 2006 criminalizing the melting and export of cents and nickels. Violators of these rules can be punished with a fine of up to $10,000, five years imprisonment, or both.

Bummer! How about those $2 bills?

United States two-dollar bill

The most significant evidence of the $2 bill's reawakening would be that, in 2005 alone, 61 million $2 bills were printed by the U.S. Bureau of Engraving and Printing. This is more than twice the number of $2 bills that were printed annually between 1990 and 2001.

People love hoarding $2 bills. I'd say they are worth about $2 though. Just a hunch. As a side note, people are strange.

That leaves us with the one American Eagle Silver dollar.

It's tough to put a price on just one unless you are buying through a full page advertisement in a national newspaper. Here's an attempt though.

Northwest Territorial Mint

Our Buy Price*
1 ounce rounds $16.90

In summary, we get 12 dollars worth about a dollar each, 250 nickels worth about a nickel each, 4 two-dollar bills worth about two dollars each, one silver dollar worth about $16.90, and a "free" safe.

Wednesday, June 3, 2009

Innovation Danger!

Before I explain the extreme danger we are in, I wish to offer two of my favorite quotes.

The first quote comes from the president of the division where I once worked. I saw it in a magazine. It needs a bit of back-story first though. We'd just gone through one of the biggest frauds in the history of the stock market (it was before Enron and Worldcom). It was on the front page of the Wall Street Journal for a good month. There had been layoffs. Morale was in the toilet. So what was the quote?

We have a fun environment with creativity and fun.

I don't think I have ever laughed so hard. What the heck was "fun" doing in there once, much less twice? Hahaha!

On to the second quote. I'm reminded of it quite often, especially when watching the financial news on TV.

You can discover what your enemy fears most by observing the means he uses to frighten you. - Eric Hoffer

Fun! Creativity and fun! The lack of "fun" is clearly what the president of my division feared most, and for good reason. Dark gallows humor was the only fun we had. I'm reminded of one team walking by my door. They'd just been laid off. One said, "Dead men walking." We all laughed, but nervously.

So, that being said, imagine what I think when I read the following quote.

Excerpt: 'The Innovation Zone'

That's our job and the purpose for this book, to re-innovate and by understanding not just how to innovate products and services but how to innovate innovation itself.

What the heck is innovate doing in there four times, two of which are back to back? It isn't just that sentence though. I'd encourage you to read the entire article. It's not long. It's an innovate, re-innovate, innovating, and innovation extravaganza. By my count those words are mentioned over 50 times! Keep in mind this is just one small excerpt from his book, lol.

Just how messed up are we? It's taking a fun environment with creativity and fun to a whole new level. It's a level I never thought possible.

Don't answer. I already know. We're seriously messed up. Here's one more quote from the article.

We are surrounded by more useless inventions than at any other time in history. Affluence seems measured by the number of things we can accumulate and then drag to the trash bin.

I hear that. We have an innovative environment with creativity and innovation no doubt. If we can simply translate the overwhelming successes of financial innovation into every other aspect of our lives, we'll all be eating cat food from the comfort of our cardboard boxes in no time.

Tuesday, June 2, 2009

Stagnation Nation

the contrarian - Are We Looking At Hyper-Stagflation?

If ever the stage was set for inflation, then, this would seem to be the time.

However - and here's the rub - having been an economy watcher for longer than I care to admit, I've never seen the so-called body of conventional wisdom correctly call a significant turn in economic conditions. It's had a decent track record in prognosticating a continuation of already existing conditions. But, as for nailing the timing of changes in the general direction of major trends, it's been an utter failure.

He makes a very good point. I think that if oil continues to rise, we're going to have yet another deflationary crash. The stock market is certainly primed for it. It's had an amazing run.

What if, instead of runaway, or hyper inflation, we enter a period in which the forces of deflation and inflation seem to offset each other? In such an environment, we might see prices continue to increase for a time until the negative impact on the consumer causes the economy to contract once again. Then, as soon as it appears that a floor is being laid to the new downturn, prices once again begin to soar. And this relatively rapid and concentrated up/down trend continues, negating the possibility of a return to what we might call normal conditions.

Behold Greenspan's Age of Turbulence. Greenspan ought to know. He helped create most of it.

This theory allows the market to inflict maximum pain on the most participants. Any fixed investment style stagnates, much like any fixed gambling style stagnates within a casino.

Think about it.

The stock market investors made a lot of money when the stock market skyrocketed. They then lost a lot of money when the stock market crashed.

The commodity investors made a lot of money when commodities skyrocketed. They then lost a lot of money when commodities crashed.

The housing investors made a lot of money when housing skyrocketed. They then lost a lot of money when housing crashed.

The long-term bond holders made a lot of money when interest rates fell. They then lost a lot of money when interest rates rose.

Why do we do it? The government wants us in the casino. CNBC wants us in the casino too. Think Fast Money! Think Mad Money!

Meanwhile, the casino continues to take its cut every time we make a bet. That allows the government to take a cut every time we win. Further, the casino is actually allowed to gamble against us and somehow we are all okay with it. Go figure.

December 7, 2007
Why Does Goldman Sachs Need 10 Acres of Trading Floor?

In the case of the new Goldman Sachs headquarters, we're talking about multiple huge floors: six, to be precise, each one 72,000 square feet. That's 432,000 square feet in all, or roughly 10 acres.

If I was playing poker and saw that my opponents were using 432,000 square feet of office space with the sole purpose of helping them win the game, I'd be very inclined to walk away. In fact, I do walk away. Day trading is not something I'm even remotely interested in. My idea of a gambling thrill is to buy the 10 year TIPS directly from the government and hold it until maturity.

Warren Buffett once said that inflation is like a tapeworm. In my opinion, there's more than one tapeworm in our society though.

Monday, June 1, 2009

Interest Rate Decay Simulation

Thanks to increasing leverage (debt) in the system, it takes smaller and smaller rises in interest rates to force a recession.

Let's assume that "toxic assets" require an interest rate environment that continually decays, so as not to cause a financial meltdown and extreme deflationary fallout. What might a chart of that look like? Glad you asked!

You know, that's a pretty darned good fit if I say so myself.

This model approaches 0% interest rates. It takes an infinite amount of time to actually reach 0% though. This is really good news.

At 0% interest rates, we would be able to take on infinite debt. Just look at Japan's attempts. That seems to be our current plan too. Fortunately, this model seems 100% sustainable well into the distant future. Oh happy days!

So what might go wrong? What external factor could cause a containment breach and leak our "toxic assets" out into the real world?

OIL FUTURES: Crude Shoots To New '09 High On Demand Hopes

"If current oil prices move up very fast in a spike, then it could have an impact on economic recovery," IEA head Nobuo Tanaka said Monday.

Oh oh. Once more unto the breach, dear friends, once more. You know what? I think I'll remain bearish if you don't mind.

This post inspired by Kevin.