Archive for March, 2009

Green, Eggs and Ham

Tuesday, March 31st, 2009

To be green these day practically requires you buy into the need for ethanol as the fuel of choice for your car.  We saw last year how an incredible increase in demand for corn to produce ethanol resulted in a tremendous surge in the price of this grain.  Here is where my favorite law, the Law of Unintended Consequences, takes hold.  Since chicken feed also makes use of large quantities of corn, the competition for a limited supply caused feed prices to rise, which in turn forced up the cost of raising layers and thus of eggs.  Now it is a universal truth that you cannot produce more eggs by killing chickens.  The same can’t be said of ham.  In fact, the opposite applies.  So when corn-based hog feed prices rose and it became too expensive to keep raising those little porkers, all the little piggies went to market.  This sudden influx of supply caused a decline in pork prices.  See what happens when you play with your food?  I’m sure Adam Smith would have enjoyed a hearty breakfast watching this unfold.

Tenuous Tangos and Taxi Dancers

Monday, March 30th, 2009

The tango can be a complex, exotic dance with graceful movements between partners seeming to convey much more than just rhythm.   It demands a commitment from both sides.   In today’s current financial crises here in the U.S., there are two partners who appear paired up but are possibly hearing different tunes.  On the one side we find the Treasury and Federal Reserve, joined at the hip, trying to lead the country out of its credit freeze by offering a hand to the banks to help them divest of the toxic assets clogging financial pipelines.  But the banks seem to be playing coy.  They aren’t eager to accept this invitation to dance.  Like a taxi dancer, they are calculating the risks and rewards involved in dancing with an unpredictable stranger who might drop them suddenly during a dip.  The costs may be too great: bankruptcy, even nationalization.  Perhaps the best choice is to waltz around a bit longer.  But what happens when the music stops?

To Have and To Hold?

Friday, March 27th, 2009

March was a great month for the stock market.  It wasn’t so hot for the U.S. dollar though, which started a slow slide early on against a basket of foreign currencies.  This slide picked up tempo as the month wore on, becoming a full-fledged rout last week, leaving the dollar down more than 7%.  It has since found some support at these lower levels.  This big decline parallels domestic policy decisions to continue issuing hundreds of billions of new dollars destined to morph into trillions through the miracle of fractional reserve banking.  The Chinese, who happen to be holding a substantial sum of our dollars as a result to the trade imbalance between us, are becoming concerned.  Their holdings of dollar reserves seems to be dwindling, off by several hundred billion of late, to roughly one trillion.  That may mean they’re spending dollars to buy the raw materials needed for the ongoing infrastructure development program they are pursuing.  But they have asked us to provide some guarantee that our dollars will remain solid, that we won’t flood the world with them in a vain attempt to stimulate our way out of recession.  Apparently they weren’t satisfied with the response since calls from Beijing now discuss a alternative, new global currency to replace the dollar.  Thailand, Malaysia, and Indonesia have joined the chorus.  Should you keep saving those dollars under your mattress for a rainy day?  That just might be a typhoon kicking up over the eastern horizon.

Peaches and Screams

Thursday, March 26th, 2009

About six months ago federal regulators felt compelled to seize mortgage giants Freddie Mac and Fannie Mae so that they could be run in a more proper fashion.  Since then the Feds have been encouraging, apparently successfully, lower costs for refinancing.  They are also attempting to get banks to lower their loan standards to stem off foreclosures.  This too has seemed to work, aided by a moratorium on such action by many of the biggest players left in the business, a decision which may soon be lifted.  The terms of this hostile takeover are now becoming increasingly familiar as similar actions involving other industries are also mooted.  The failing companies give taxpayers preferred stock which carries a high dividend, thus ensuring we get the money back and everything ends up peachy.  So how is the government doing in their new job as CEO of U.S. housing?  Freddie has just asked for another $31 billion to squeak by for a bit and said more may be needed.  In fact they implied a total of $200 billion in loans may not cut it.  The new loan will add substantially to the dividend payment on the preferred stock.  Freddie recently said “this dividend obligation exceeds our annual historical earnings in most periods, and will contribute to increasingly negative cash flow in future periods.”  In other words, the government is engineering an obviously unworkable deal.  So what do we do now?  Luckily, the Treasury Department owns a printing press.  Turn that baby up so high it screams.  It seems likely that we’ll need a lot more of their funny money before this is all over.

Business, Systemic, and Exogenous Risks

Wednesday, March 25th, 2009

The game of golf provides many parallels to daily life; here’s another.  When you hit the ball, its trajectory depends substantially on your technique.  Having the ball land in the middle of the fairway 300 yards from the tee suggests you are executing well.  A hook, slice, or anything else you do that results in a less optimal lie suggests your business plan’s application dropped a stroke.  That’s a business risk.  If the wind picks up or new sand traps get added, that could be likened to a systemic risk.  Not only will it affect your game,  it will affect all the other players too, unlike the nuances of your swing,.  That’s a systemic risk.  When a bolt from the blue crisps your buddy as he lines up a putt, that’s an exogenous risk.  The tendency is to duck for cover in case you’re next, despite the obvious random nature of the event.  Exogenous events can’t be planned for, but they can affect group behavior for quite a while after they strike.  Today, Congress and the administration, normally systemic risks who telegraph their changes to the course in advance, are becoming incredibly exogenous.  On a whim they suddenly vote to obliterate constitutional protections, adjust private sector salaries, rewrite mortgages, cancel legal debts, and on and on.  Until they can be stopped, or come to their senses, the investor both here and abroad will be reluctant to participate in any of the financial cures being put forward by either the Treasury or Federal Reserve.  Insecurity breeds caution.

New Money Vesus Old

Tuesday, March 24th, 2009

Given the historic proportions of yesterday’s (3-23-09)  stock market rally, I would say the street took to Treasury Secretary Geithner’s early morning announcement favorably.  Much more so than his last “We’ll get back to you” speech.  He did, and the market rose big time.  So what’s all the fuss about? The government laid out a plan to scoop up to one trillion dollars worth of toxic assets from banks and put them in your back pocket for safe-keeping.  Where are they getting the money from this time?  Interestingly, they are using $100 billion left over from Paulson’s old TARP grant.  So it’s old money that’s being spent.  How does it work?  First, the treasury will match  every $7 a private investor, say a hedge fund, puts up.  They’ll use that money to buy $100 worth of mortgage-backed paper.  What about the missing $86?  The FDIC will leverage the original deposit by a factor of 6 and insure its safety!  Now that’s new money, but never mind.  Let’s see, 6 times $14 equals less than one hundred, so where does that shortfall come from?  The devil’s always in the details, eh?  We’ll get back to you.

Too Much Bran

Monday, March 23rd, 2009

The business cycle seems bound inextricably to Capitalism.  It cannot be repealed.  Some blame its failings on the basic weaknesses of human nature, our own fear and greed.   Others point to political machinations designed to apply an ameliorating social agenda over these raw animal spirits.   Such attempts sometimes produce unintended consequences and we find the business cycle becomes grossly exaggerated by poorly designed policies.  We are obviously deeply embroiled in such a moment now.  Without any doubt a goodly portion of this current mess can be laid at the feet of Wall Street’s greed.  But don’t let the clamor over bonuses distract you.  Equally culpable is a failed agenda of social engineering that employed too heavy a hand when guiding enterprise toward fulfilling certain ideas about fairness and equality.  The business cycle is a simple process where innovation produces growth, feeds on it, then eliminates excess.   All that social engineering is coming to resemble an excessive intake of fiber by some of the basic engines of production within our society.  We all know what that feels like, and the consequences can be dire.  After decades of legislating  an ever increasing surfeit of debt, the purge has begun.