Friday, August 28, 2009

Transparency, And America's Most Powerful Woman

There's been a couple of important developments this week that have gone almost unmentioned in the press regarding the Federal Reserve. Nearly simultaneously with the announcement that Ben Bernanke will be renominated for another term as Chairman, a court case was being decided in New York.

The case, Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan) was filed on November 7, 2008 by Bloomberg News under the Freedom Of Information Act. As President Obama was making his announcement,
Manhattan Chief U.S. District Judge Loretta Preska ruled against the central bank...rejecting the argument that loan records aren’t covered by the law because their disclosure would harm borrowers’ competitive positions...The judge said the central bank “improperly withheld agency records” by “conducting an inadequate search”...She gave the Fed five days to turn over documents it told the reporters it located, including 231 pages of reports (11 separate programs), and said it must look for more at the Federal Reserve Bank of New York, which runs most of the loan programs..

It is not yet decided whether the government will appeal the ruling which only covers the original $787 Billion TARP Fund. We may soon get a peek at part of the $2 Trillion portfolio of toxic assets, along with some interesting loan histories.

The other development comes from Forbes magazine (Sept. 7 issue). They published their 100 most powerful women in the world. Angela Merkel, Chancellor of Germany, came in first, but a surprise second was Sheila Bair, Chairman of the Federal Deposit Insurance Corporation (FDIC). She had been raising concerns about the sub-prime market since 2001, when she was at the Treasury Dept. As Chairman of the FDIC, she is clearly on the side of Main Street. Currently she is enmeshed in a dispute with both the Federal Reserve and the Treasury Dept. over a plan to move regulatory jurisdiction of the biggest banks to the Fed. A good background of her history and philosophy can be found in a Frontline interview from December of 2008.
A lot of this, it's not rocket science. Making loans people can repay, documenting their income, what's hard about that? Having compensation structures that reward long-term performance, that's not hard either; having leverage constraints that apply across the board. And again, it will be difficult to craft those, but I think the basic principle is not a difficult one to grasp.

Amen Sister, and let's not forget the bill to audit the Federal Reserve that passed the House on a bipartisan vote that is still in the Senate. It appears that the forces of Main Street are gathering for a counter-attack, and just in time for an election year. This could be good.

Monday, August 24, 2009

Lessons from 1907

In 2007, a book was published called The Panic Of 1907 as a way of documenting the crisis on it's 100 year anniversary. My original interest in the 1907 panic is that it was the last in a series of panics that led to the creation of the Federal Reserve System. Although the authors don't spend a lot of time on how this panic led to the Federal Reserve, it turned out to be a great history book anyway.

Starting with the San Francisco earthquake and the drought in Egypt in 1906, the authors show how these two unrelated events affected the movement of gold bullion around the world. As money was growing scarce in New York, Fritz Heinze, owner of the United Copper Company attempted a short squeeze that brought down the Mercantile National Bank. It would be the first of many bank failures.

Looming throughout, was J.P. Morgan, "Pierpont" to his friends. At the time he was the richest man in the world, semi-retired, and whose main interest was building an art collection. No one else had the financial weight, trust, or abilities to influence like he did. He would become the indispensable man during the crisis, and earn him a congressional investigation when it was over.

Unknown to the publishers, 2007 would see another banking crisis. They have since added another chapter that compares 1907 with 2007. It ends with the TARP bailout in 2008. There are several things these two crises have in common: system complexity, collective action, and the psychology of crowds among other things. Of particular interest was information asymmetry.

In boom times, banks can operate with quite a lot of information asymmetry. That's why they call it "trust". In a downturn however, trust disappears along with any sense of co-operation, replaced by a game of cut-throat poker. Who has the high cards and who's bluffing. When a banker approached JP Morgan asking for a bailout, the first thing J. Pierpont Morgan demanded was to see the books. He had to know what the guy had, and more importantly, what he didn't have. Only then could he make a rational decision as to what was needed.

With the Federal Reserve System, the US taxpayer now plays the roll of Mr. Morgan. The differences being that we're broke too, we have no knowledge of where our money is going, and nobody listens to us. As Pierpont once put it, "Open the books, or find another banker."

Sunday, August 23, 2009

Deflation Series

Be sure not to miss the thrilling conclusion of "Deflation Threat Debunked", appearing today only on This Is Reno. If you missed part 1, you can find it here.

Saturday, August 22, 2009

New Blog In Town

A couple of weeks ago I was scrolling through my Twitter feed and found that a couple of blogger/journalist friends of mine had started a new website called This Is Reno. Bob Conrad and Ryan Jerz have some unique views on what journalism is , and what it can be. You can find some insight into their views on the philosophy page. Another interesting aspect is that they're encouraging participation from other bloggers/writers/journalists from around the Reno area.

So I got to thinking, maybe I could contribute something sometime. Just about then, Bob emailed me asking if I'd like to double-post in the opinion section. Well, for a blogger, being asked to contribute to another bloggers project is the highest form of flattery, and as my old algebra teacher used to say, "Flattery will get you everywhere", so I agreed. In an effort to bring my reader(s) over, I wrote a 2 part series, "Deflation threat debunked", that is appearing only on This is Reno. You can find part 1 here. Part 2 will be published on Sunday.

Besides Bob of
The Good, The Bad, The Spin
, and Ryan of
Mr. Jerz
, and myself, Laurel of
Ann On Everything
, and Mike of
i am indisposed
have also joined the fun. Knowing these people, this could be more than fun, it could be revolutionary. What's more fun than a revolution?

Sunday, August 16, 2009

Notes On Woodstock Fatigue

Like weeds in a garden, Woodstock stories seem to be a fact of life. We are now at the 40th anniversary of Woodstock, and since I started growing weary of Woodstock stories 'round about 1975, this year marks the 34th anniversary of the onset of my chronic Woodstock fatigue.

Sure, I saw the movie, several times in fact. I bought the album. Everybody bought the album. What's an album? Ask the guy behind the counter at the antique store. He'll show you some.

Of the people who were at Woodstock, here's a true story you'll never hear anyone of them tell. "After attending Woodstock, I went back to New York City, coped-out to the man, got a job and got on with my life. Woodstock was a lot of fun, but in the end, it accomplished nothing, proved nothing, and meant nothing. It was just a big concert."

A lot of good bands were not at Woodstock. Led Zeppelin wasn't at Woodstock. Do you know why? Because they could make more money by not being at Woodstock. Jimmy Paige was no fool. Bob Dylan wasn't at Woodstock. Do you know why? Because he hated all the hippies hanging around his house who wouldn't leave, and the last thing he wanted to see was a big field full of more hippies. No doubt, when the hippies left his house to go to Woodstock, he looked at it as a kind of vacation.

A few years after Woodstock, Bill Graham organized what he called, "Day on the Green". Some called it the "Woodstock of the West." It was an all-day concert held at Kezar Stadium in San Francisco. I went to that one. A lot of good bands were there, some of whom had played at Woodstock. Led Zeppelin wasn't there either, but Bob Dylan showed up. It was a lot of fun. When it was over, I coped-out to the man, got a job and got on with my life.

Saturday, August 15, 2009

Faith, Les Paul, And Splatter Vision

We're all familiar with the term, "backed by the full faith and credit of the U. S. Government". Credit is difficult to quantify, as the recent banking troubles demonstrate, and faith even more so. Our credit deteriorates with each raised debt ceiling passed by congress. So, how's your faith doing lately?

In an article about reasons for optimism, Businessweek's Peter Coy describes "splatter vision", a technique used by law enforcement:
-a deliberately undirected concentration that allows the prepared mind to detect subtle irregularities like a hand in a crowd moving toward a gun.

Paul J. H. Schoemaker, founder and chairman of Decision Strategies International explains further: "The future manifests itself at the edges. The hardest thing to do in scenario planning is to get the periphery into the picture." Yes, the periphery; the ultimate enemy of those who wish to determine the future. It brings to mind Les Paul, a man who lived his life on the periphery, who passed away this week at age 94.

For whatever reason, a young Les Paul wished his guitar could be louder. He tried various methods, but none proved satisfactory. One day he took a phonograph needle and affixed it to his guitar. In 1929, a 15 year-old kid was sitting in his room, alone, playing the first working prototype of the electric guitar. Had you been sitting in that room with him, could you have predicted rock-n-roll, The Beatles, or for that matter, Twisted Sister? How about advances in hearing aide technology? Not likely. No more than those of us pumping quarters into Donkey Kong games in the 70's were predicting Guitar Hero or World of Warcraft.

So now here we are, waiting to see how the latest plan for government monopoly of the health care system will play out, waiting for the latest pronouncement from the Federal Reserve Chairman, and the latest stimulus plan for those deemed too-bankrupt-not-to-bailout. Meanwhile, somewhere out there, a 15 year-old kid is sitting in his room, alone, fiddling with what will be our future. I, for one, can hardly wait to see the looks of shock and dismay on the faces of those who would make our plans for us.

Thursday, August 13, 2009

Why Limit Death Panel To Children And The Elderly?

Just as I was giving up hope that the health care debate would serve no useful purpose, along comes Sarah Palin to the rescue. I think a Death Panel is a terrific idea. Not so much for the elderly, but I have long felt that what unruly children need is a good consultation regarding end of life scenarios. Threatening them with a trip to the Congressional Death Panel might be just what the doctor ordered.

I was discussing other possible candidates yesterday with Carrie, a friend at work. She suggested that people who leave their dogs in cars, with overturned water bowls, while they're in Baldini's Casino gambling, would make excellent nominees for a Death Panel Review. I offered the check-out lady at the grocery store. She's always gabbing with the person who has already bought their stuff and is trying to leave, while the people in line in front of me wait patiently. Oh, how I would love to see that lady hauled into a Senatorial Death Chamber for a little face-time with the authorities.

Now, we can assume the Democrats will win the argument in the end, they have the numbers. We can also assume that whatever government program is created, it will expand over time, and we know that every government program has an advocacy group. Therefore, today I am announcing the formation of the "Citizen's Death Panel Advisory Council" (CDPAC) Motto: There's no problem a Death Panel can't solve.

There are no dues to pay, no monthly meetings, in fact, this being the Internet, you don't even have to put on your pants to join. Personally, I would really dig it if we had a secret handshake, but we can discuss that later. For now, put on your grumpy-hats, tie a nice big knot in your digital panties, and submit your nominations in the comments. The council is always in session.

Tuesday, August 11, 2009

One More Reason Not To Eat Paint

From the current issue of Forbes Magazine comes a story about chemists at Procter & Gamble (P&G). Back in 1996, they came up with a substance they called olestra. The stuff wouldn't stick to anything, including human intestinal tracts. It was supposed to be a calorie-free fat; a dieter's dream come true. Sales projections for olestra were $1 Billion a year. Unfortunately, the non-absorptive properties in olestra also made it an excellent laxative. Customer complaints rolled in, and as you might expect, sales forecasts did not meet expectations. It was eventually withdrawn from the market. Olestra is currently used as a lube in the manufacture of PVC pipe.

But, they didn't stop there. The folks in the lab coats are an intrepid bunch. They found that by varying the amounts of chemicals and oils, along with varying the pressures when mixing, olestra went from something that didn't stick to anything, to something that sticks to everything. Voila! Paint! They call the new stuff Sefose.

P&G has formed a partnership with Kansas City based Cook Composites & Polymers to produce what they say is a more environmentally friendly paint. Sefose would replace some of the more volatile solvents found in both oil-based and latex paints.

All of which begs the question: What's the difference between a grocery store, a drugstore, and a hardware store? Might we one day go to Lowe's for our dietary needs and Longs for those springtime touch-up supplies? Buyer beware, indeed: Same stuff in a new improved box.

Monday, August 10, 2009

Moral Hazard And The CDS Exchange

Way back during the Bush Administration, when bailouts were measured in mere billions of dollars, many writers in the economic field warned of the "moral hazard". The idea is that when failure is rewarded, those that have failed will have learned nothing and will continue their failing ways. Evidence of the truth of this argument is now on full display. The Wall St. investment banks are back to raking in billions on the still unregulated, and privately traded, Credit Default Swaps (CDS). A rather lengthy article in Spiegel Online examines the situation world-wide:
...banks are back to behaving the same way they did before the crisis. Even worse, thanks to government guarantees for the financial sector and cheap money from central banks, it has never been easier for banks to make money..."The taxpayer is paying for the chips in the casino," the head of the German operations of an international investment bank says quite openly, but anonymously nevertheless. "It doesn't get any better."

Beyond that, since several large banks have gone away, and smaller banks, who were not bailed out, are unable to compete, there are fewer players.
The survivors of the crisis see the thinned out field of competitors as a historic opportunity, and they are taking advantage of it. "Right now, (Goldman Sachs is) one of only a few people on the beach, so they're getting all the girls," New York finance professor and former Goldman partner Roy Smith told the Wall Street Journal.

To date, congress has passed exactly one banking regulation; a cap on executive salaries with a giant loophole. There is no cap on employee bonuses. In the case of Goldman Sachs, who have made $22 Billion already this year, roughly $11 Billion is set aside for employee bonuses. A more ineffective regulation could hardly be imagined.

There are two ideas currently being debated in the House and Senate, regarding CDS regulations. The first is to form a clearing house for the CDS. It was proposed by Treasury Secretary Geitner and is supported by the nine largest investment banks who have formed the CDS Dealers Conglomerate to lobby for the idea. The clearing house would be regulated by the Federal Reserve Bank of New York. Under this plan, the CDS would still be a private transaction and only the banks and, to a lesser extent the government, would have access to most information.

A much better alternative is being proposed by Iowa Democratic Senator Tom Harkin. His proposal would create a CDS Exchange that would operate much like a futures market. Different futures exchanges could compete for business with the various banks and brokers. It would all be out in the open, with market prices made public, the same set of rules for all concerned, and hopefully, equal enforcement. An added bonus is it would have the effect of lowering prices and enable the smaller banks to compete.

The finance lobby is the wealthiest lobbying group in Washington, with strong ties within the Obama Administration. No doubt a lot of Democrats will be taking the money and voting for the private clearing house. I'm not one to agree with Senator Harkin on much of anything, but he's right on this one. Republicans should get on board Harkin's CDS Exchange. Open markets and transparency is the right thing to do.

Saturday, August 8, 2009

Health Care Soundtrack, And A Modest Proposal

I'm becoming increasingly dismayed at the trajectory of the health care "debate". Watching the videos of the town hall meetings, reading the hostile rhetoric of both sides, I see this as about to get way out of control. What's needed is a leader to calm everybody down, but I don't see that forthcoming. This morning, I was watching a video of a White House spokesman on Breitbart talking about references to Nazism:
I think anytime you make references to what happened in Germany in the 30s and 40s, I think you are talking about an event that has no equivalent. And I think anytime anyone ventures to compare anything to that, they are on thin ice, and it is best not employed.

I'll agree with that. The NAZI thing is always overdone. The reference to "thin ice" got me thinking about Jethro Tull's song, Skating Away (on the thin ice of the new day). Poets/songwriters always seem to understand things the best - perhaps because they are the least powerful to do anything about them. But, since the song is really about youth, the lyrics didn't fit.

I then turned to what could be an equivalent situation to today. Woodrow Wilson and the first progressive era came to mind. Back then there was the same co-operate or else mentality, the same spying-on-your-neighbors approach, and the first appearance of union goon squads. Maybe Tull's New Day Yesterday (but it's an old day now) would offer some guidance. Wrong again. That's a song about love, an emotion that is nonexistent in politics. There didn't seem to be any poem that properly describes the mud ball fight that passes for political discourse in the 21st Century.

What's the real problem here? Why all the shouting and shoving in this so-called "debate"?

Suppose the health care bill were something less than 1,000 pages long. Suppose too, that it was written in language that didn't require a lawyer to interpret it, something even a congressman could read and understand. Suppose then, that the congressman went to the people, and in a straight-forward way, explained what their representatives were planning for them. Suppose then, that the people, having a clear idea of what the plan was, and able to discern the logical result, could talk among themselves reasonably, regarding the relative merits of the plan.

We don't have to do things the way we're doing them. When those in power deem it necessary to hide behind nebulous legalisms and stealth legislation, they only breed uncertainty and mistrust. Meanwhile, those out of power fear the ever creeping tentacles of government destroying our freedoms, and they are right to do so. Things could be different. They probably won't be, but they could. Then again, maybe I'm just getting Too Old To Rock-N-Roll (and too young to die).
The old rocker wore his
hair too long,
wore his trouser cuffs too tight.
to the end -
he drank his ale too light.

A deaths-head belt buckle,
yesterdays dreams,
The transport CaF* prophet of doom,
Ringing no change in his
double-sewn seams,
in his post-war-baby gloom.

He was too old
to rock-n-roll,
but he was too young to die.

Yep, that sums it up pretty well.

*CaF is bookkeeping shorthand for Carry and Freight.

Thursday, August 6, 2009

My Lying Eyes

"Everybody in, nobody out", so sayeth the Oz. Or, as Benito Mussolini once put it, "All within the state, nothing outside the state, nothing against the state". You can flag me now.

Tuesday, August 4, 2009

Financial Flame War

One of the great issues of the age is the new-media/old-media debate. Over the last year, as I've slowly immersed myself in what is more properly termed "social media", I've seen it takes many forms. The most common is print journalism versus bloggers. Hardly a week goes by without a print journalist weeping over the death of newspapers. Recently, here in Reno, it took a generational turn with Myrna The Minx calling out baby boomers on their lackadaisical attitudes towards the many uses of the latest whiz-bang gadgets. But now, another front in the ongoing war has opened up.

In a lengthy, and well done blog post, John Reeder of Real Property Alpha examines the dispute between the CNBC meat-puppets and the financial bloggers. It's a much more balanced look than what you'll find here. In it, Mr. Reeder makes several good points. The first of which is;
Who would you rather get your information from? A reporter that might have gone to journalism school, or a professional trader/economist/investment manager?

I remember when the financial TV channels first made their appearance. The question of the day was; "If they're so smart, why aren't they on Wall St. making some real money instead of sitting in a TV studio reading the news"? It was a valid point then, and I think, it remains a valid point today. Many of the strictly financial blogs are written by people who are actively engaged in trading, or are professors of economics and so on.

Another good point Mr. Reeder makes:
The bloggers read each others entries, re-post portions of the entries, and add more comment on top. In theory the bloggers should be in competition with each other for reader attention, but in reality they benefit from powerful network effects of belonging to a group of financial bloggers that all link to one another.

The fact is, bloggers, of any stripe, really don't compete with each other, and financial blogs work the same as any other type. If you like one blog and that person links to another blog, that won't cause the reader to stop reading the first one. The reader will start reading both, and if both provide value, will continue reading both.

The idea that a simple investor like me would take on, say, Barry Ritholtz, in direct competition is insane. Mr. Ritholtz runs his own hedge fund. He writes books. Why wouldn't I look at him as a friendly source of information? To the extent that I understand what he says, I pass the information along. Why would he see me as a threat?

Which brings us full circle, back to the baby boomers and our lackadaisical ways. We've seen our retirements funds dwindle through two bubbles without a word of warning from the cheerleaders at CNBC. Any number of financial blogs were posting warning signs before the last one. Knowledge is power. You won't get knowledge from watching TV. For this boomer, the way into social media was through the financial blogs.

Monday, August 3, 2009

At Last, Some Transparency

Once again an old rule sheds some light: If you want to know what's happening in America, read a British newspaper. It turns out the Federal Reserve really is being transparent, at least for some people.
The Fed has emerged as one of Wall Street’s biggest customers during the financial crisis, buying massive amounts of securities to help stabilise the markets...However, the Fed is not a typical market player. In the interests of transparency, it often announces its intention to buy particular securities in advance. A former Fed official said this strategy enables banks to sell these securities to the Fed at an inflated price.

This is the same Federal Reserve that doesn't want to be audited by congress. That would be too transparent.
The central bank’s approach to securities purchases was defended by William Dudley, president of the New York Fed, which is responsible for market operations. “We believe that opting for transparency is a greater good,” he said. “If we didn’t have transparency, we’d be criticised on other grounds.”...However, another official familiar with the matter said the central bank “has heard that dealers load up on securities to sell to the Fed. There is concern, but policy goals override other considerations.”

Yes, let's all express concern as our representatives funnel taxpayer dollars to incompetent bankers.
Barney Frank, chairman of the House financial services committee, said the potential profiteering may be part of the price for stabilising the financial system...“You can’t rescue the credit system without benefiting some of the people in it.” Still, Mr Frank said Congress would be watching. “We don’t want the Fed to drive the hardest possible bargain, but we don’t want them to get ripped off.”

Really? You mean there are people who work in corporations? Who knew. We're being robbed in broad daylight while the powers that be express concern. Whatever would become of those poor shrinking violets on Wall Street if we were to demand a fair deal? Why, they'd have to start making a profit in some honest way. Would they even know where to begin?

There will always be crooks on Wall Street, but when the Federal Reserve actively enriches them, and hides behind congress, it's time to end the Fed.

Sunday, August 2, 2009

Recovery, Or Bear Market Rally?

It's true that one can cherry-pick any numbers and find an economist to support any idea one wants to imagine. With the recent upturn on Wall Street, the bulls-versus-bears battle seems to be tilting towards the bulls and a recovery. The question remains; is this the recovery, or is it just a bear market rally preceding another plunge?

Over at National Review, Head Wall Street Cheerleader Larry Kudlow is as giddy as a schoolgirl with a senior class ring. With a 10% rise in the DJIA in July and a 46% rise in the S&P 500 since the March 9 low, he's dreaming of a Dow at 14,000, an 8% growth rate, and a "Reagan rebound." A Reagan rebound? For God's sake Larry, have another scotch and calm yourself.

For a more balanced perspective, there was a good article in MSN Money yesterday by Jon Markman that compares the positions of the bulls and bears. Mr. Markman is decidedly bullish, and to his credit, he says so in his article. Mr. Markman's contention is that some foreign markets are doing well because they are buying American technology. The US tech sector historically leads the way out of recession. The place to buy now, he says, is US technology exporters.

Both articles mention several stocks, so I've been looking through them this weekend, especially the tech sector. I never found a split between foreign sales and domestic sales to confirm Mr. Markman's idea, but I have found some interesting info. Let's take our old perennial favorite Cisco Systems Inc., as an example. It's a good company with low debt and rising revenues. When the recovery comes, they'll be in a good position.

If you've sat on your Cisco stock through the recession, you're probably feeling pretty good right now. If you're looking to buy, there are some cautionary signs here. The top chart shows the daily prices with the 50 and 100 day moving averages (DMA's). The current price is about 2 points higher than the 50DMA, which is a bit high. The higher the spread, the less likely it will remain high. The middle chart shows the price/earnings ratios (P/E) over the last 12 months. It's about as high as it's been, suggesting there may not be room left for growth. The bottom chart shows the slow stochastic, which theoretically is supposed to track long-term trends. Notice that the long-term trends only last about 2 weeks. It's been that kind of year, I guess. In any case, it's heading down. I'll predict that Cisco, along with the rest of the market, is in for a rough week.

A couple of other things I noticed about all the stocks I looked at, both having to do with institutional investors. Every stock, about 15 of them, showed a negative buy/sell ratio among the institutions. This would suggest that the big money is already taking profits and getting out. Also, in the lists of top ten institutional investors, nearly every stock showed a combination of State Street Bank, Bank of New York/Mellon, Northern Trust, Barclay's, and Bank of America; all bailed out banks. I couldn't help but wonder if those billions of dollars invested were actually taxpayer funds that we'll never see again. Could the government be manufacturing a rally to give the impression of a recovery? Trust is such a fragile thing. I'll stick with the bears for now.