Archive for September, 2011

Dollars and Percents

Friday, September 30th, 2011

I don’t think I’m going too far out on a limb here to suggest that mathematics is not the favorite subject of most people.  Money, on the other hand, seems to hold an endless fascination for many.  By subtle manipulation I intend to use the latter to hold your attention while I surreptitiously discuss the former.  If no one tells you of my plan, I may just get away with it.
We all know one dollar is made up of 100 pennies and that each of those cents is equal to a fraction of that dollar.  Thus if I say something is worth 25 cents, written $0.25, then we all know it is worth 25% of a buck.  Simple enough.

We also all know that interest rates in America are quite low.  How low is “quite?”  Here are some samples:  A thirty-year Treasury bond is currently priced to yield approximately 2.96%.  In other words, if you loan the U.S. government one dollar for thirty years, they will pay you interest totaling $0.0298 cents every year for the duration.  A ten-year note is quoted at 1.9%.  You do the math.  That’s $0.019 cents per year!  Shorter-term you can pick up either a three- or six-month T-bill, both dishing out .02%.  Here’s where the math really gets wild.  That would annualize out at roughly $0.0002.  Of course it is taxable so don’t spend it all at once.

One might ask, “Who in their right mind would lock up their money for any period of time at those rates?”  Well, you might ask that, but apparently the rest of the world isn’t.  The demand for our IOUs is quite strong; it even gets some of the credit for keeping rates so low although the Federal Reserve is also helping quite a bit in an attempt to stimulate the economy.  Given these rates of return, tell me, are you feeling stimulated to spend?

August Producer Prices

Thursday, September 29th, 2011

Inflation eased in August according to the Bureau of Labor Statistics’ most recent release on the Producer Price Index (PPI).  The month-over-month rate was flat while the year-over-year figure slowed to 6.5 percent from July’s reading of 7.2 percent. The core rate of inflation, which subtracts food and energy, ticked up 0.1 percent for the month and remained at 2.5 percent year-over-year.  Inflation has been a concern for many in the investment world, but the Atlas crew must be from another planet because price increases are not keeping us up at night.

There has been unprecedented monetary influence exerted by the world’s central bankers over the past few years. In fact, our own central bank will be celebrating the third anniversary of its virtually zero percent overnight interest rate in December, and it has committed to keeping the rate nailed to the floor for another two years.  While under different circumstances this action may have alarmed Atlas, we are presently more concerned about consumption than low interest rates.  Easy money policies can only help push prices higher if consumers are willing to spend.  The pace of the recovery does not illustrate an overwhelming willingness by Americans to hastily part with cash, and consumer attitudes about the future certainly are not pointing to a change in that part of the zeitgeist.  Atlas understands that at some point consumer behavior will change, we just think it will take a new group of consumers to start the trend.  These consumers exist, but unfortunately, aren’t old enough or wealthy enough yet to power the nation through its current headwinds.

Fade to Black

Wednesday, September 28th, 2011

Early in the month of September, 2011, a utility worker somewhere near Yuma triggered a series of events which led to a blackout covering part of Arizona, a broad swath of Southern California, and a portion of northern Mexico.  In most areas it lasted for a few hours, although some folks didn’t get power restored until the following day.  Unfortunately, it happened at a very bad time, a bit before rush hour.  This event was not the consequence of an earthquake or other type of natural disaster.  It was not a terrorist act.  It was just an oops.  What happened in the few hours it lasted?

Offices in this heavily populated area lost power.  Computers stopped.  Cash registers stopped.  Telephones wouldn’t work; even cell phones proved useless as capacity was overwhelmed by demand.  Elevators stopped.  Forced to close, employees left work, flooding onto streets and freeways where traffic lights had stopped.  The result was almost instant gridlock, preventing emergency services rapid access to places where help was needed.  Amusement parks had their rides come to a halt, stranding attendees.  Bank services, ATMs, credit card machines, all ground to a halt.  Emergency rooms turned to in-house generators while operating rooms completed what surgeries were in process, cancelling any still scheduled.  Airports cancelled out-bound flights, stranding passengers.  Schools cancelled classes.  Amtrak trains and local trolley service was interrupted.   At-risk residents were evacuated from a nursing home when the air conditioners quit.  Cars ran out of gas, clogged filling stations which couldn’t provide anything.  Other pumps stopped as well; some allowing sewage to be dumped into the environment.

This event should be seen as a dress rehearsal for others yet to come; events, inevitable, which may last much longer when they do.  Will you be ready?  Do you have some non-perishable food available if the refrigerator goes out and your stove won’t light?  Do you have any source of cash—small denominations—which could last at the very least for a few days?  Are you driving the car on empty?  Do you have clean water available?  Candles or a flashlight and extra batteries?  A transistor radio?  A first aid kit?  If necessary, could you sleep in your car?  Change into comfortable shoes for an unexpectedly long march home?  You just never know when something like this might happen.  Your readiness could help both you and others to survive.

Going Into OT

Tuesday, September 27th, 2011

When a football game is tied up at the end of regulation, the rule book outlines procedures resolving the situation by going into overtime.  Nobody wants to see things remain all knotted up and regardless of which team ultimately wins, resolution is the desired result.  Naturally there will be a loser, but ultimately that is the whole point of playing in OT.

Our economy has been tied up for awhile.  No one like the way housing has played out.  Ditto for unemployment.  Some feel penalties should be assessed against banks.  The opposing teams in Congress are definitely at loggerheads and the crowd wants to see something get resolved.  The Federal Reserve has been forced by default to assume the position of referee despite not really having a definitive rule book to consult.  So the game is going into OT, which doesn’t stand for overtime, but something named (at least in the press) Operation Twist.

What is Operation Twist?  In general it is an attempt by the Fed to bring longer-term interest rates down by buying such paper as Treasury bonds with maturities out seven, ten, even twenty years or longer, using proceeds from the sale or maturation of shorter-term bond, primarily those coming due in three years or less.  In turn it is hoped this will keep other rates low, rates for mortgages or commercial loans for instance, encouraging more borrowing which will then fuel a new economic boom.

Will it work?  Economists argue that a similar program was initiated back in the 1960s with little effect.  It seems to us here at Atlas that interest margins at U.S. banks will probably get squeezed a bit more if they can’t get higher long-term returns.  The Fed should know that already and must have considered the fragile state of those institutions before embarking on this course.  It will also put a real crimp in returns that pension plans and insurance company annuities can expect, aggravating some plans that are already underfunded.  But how about you; does OT make you want to buy a house or does it make you wonder how much longer your savings will survive when they earn virtually nothing at the bank?  A lack of public confidence in our current direction is considered one of the problems the economy currently faces.  We fail to see how squeezing returns a growing army of retirees can expect will turn that around.

Crossing the Median

Monday, September 26th, 2011

Down the block from my house, Euclid Avenue stretches from its southern extremity below Ontario north through Upland and into the foothills of the Angeles National Forest.  Two lanes of traffic flow in both directions, separated by a wide, tree lined median.  Residents can be seen any time of day walking up and down this strip, taking in the air, getting some exercise, perhaps giving their dog some exercise as well.  It may be one of the prettiest streets in America and in general traffic doesn’t cross the median, using instead the regularly spaced streets.

The median as a mathematical term is often applied to various measures of America’s population, sometimes denoting a change in one’s status (i.e. the sociological term upward mobility denoting an improved living standard).  The Census Bureau recently reported the median annual income in the U.S. in 2010 was $49,445.  In other words, half of our nation’s households make that (or more) while half make less.  A family of four making $22,113 or less are considered impoverished.  I mention this because in 2010, for the third year in a row, the number of people whose incomes place them below this poverty threshold has increased.  As last year ended, 15.1% of our population, some 46.2 million people, lived in poverty, the highest level seen in the 52 years over which the Bureau has been compiling this statistic.

With 2011 getting a bit long in the tooth, it is hard to see how this number could have made any substantial improvement.  The unemployment rate has hovered close or above 9% for over two years; it remains stubbornly high, even increasing with the latest monthly report.  At the same time, hourly wages have actually declined, even as inflation continues to reduce spending power.  With solutions becoming harder to find and political debate seemingly intractable, this may prove to the cardinal issue in next year’s election.

Take a Dip

Friday, September 23rd, 2011

Gil Standard took the kids up to Virgil’s for a day of fishing out on Evergreen Lake a couple of Saturday’s ago.  After a morning spent catching innumerable blue gill too small to keep, one pan-sized crappie, and a hit by something Virgil swore was “a big pike, maybe a muskie,” Gil nosed their boat up to the shoreline so they could lay out lunch in the noontime shade.  That’s when a situation began to develop.  Young Jimmy jumped out, turned and gave the craft a vigorous tug to moor it firmly upon the bank just as Gil stood to tilt the outboard up where it wouldn’t drag on the bottom.  The inevitable result placed him in the lake to Jimmy’s horror.  Virgil observed somewhat dryly, “The problem was you had yer feet movin’ one way and yer head in t’other  and that’s generally a sure-fire way to get wet.”  He made a sucking sound through his teeth, then continued.  “Nothing to be ashamed of though.  Heck, I’ve fallen into just about every lake in this state at least once’t.”

Such a dilemma is not relegated just to fishing.  While financial markets are forward-looking, economists are looking back.  Markets tend to price their components by constantly discounting future events, both positive and negative, thereby arriving at a dynamic consensus which can change minute by minute.  Economic analysis, while capable of making predictions, does so by relying on recent data which becomes dated just by the mechanics of assembly.  Thus by necessity we use last month’s sales, last quarter’s GDP, even summaries that date back by a year or more to determine just where our economy is situated in its ongoing cycle of boom and bust.

These days there is much discussion about the possibility of a “double-dip” or the chance the U.S. will once again enter a recession.  Some folks will ask, legitimately, when we ever got out of the last one but the official arbiters of such things assure us this is a recovery.  With the year’s first quarter GDP at +0.4% followed by an anemic +1.0% in Q2, I suppose we can’t quibble.  Any growth, no matter how slow, isn’t contraction, and that’s the basis for declaring recessions.  Of course those numbers are always subject to revision, but we hardly need such a report to convince us that times are tough.  Besides, looking back as they must do, economists point out that nine of the last 11 recessions were preceded by periods showing 1% or less growth.  That makes the odds favoring a second soaking hard to fight.  Perhaps that’s why so many of our indicators here at Atlas are pointing south.

Not So Angelic

Thursday, September 22nd, 2011

Housing is considered by many economists to be at the very heart of America’s current economic problems.  Values have fallen, leading to defaults, repossessions, and owners struggling to make payments on mortgages well in excess of equity.  Not willing to follow Greenspan’s suggestion that the government should buy up the excess inventory and burn it, Obama’s administration unveiled HARP (Home Affordable Refinance Program) in March of ’09.  It was designed to allow mortgages to be guaranteed by both Fannie Mae and Freddie Mac for amounts up to 125% of a home’s value in an attempt to let owners who are making payments refinance at a lower rate, thereby lowering their monthly mortgage and giving them more incentive not to send the keys back to the bank.

HARP hasn’t produced results anywhere close to those anticipated for a variety of reasons.  One in particular caught our attention.  Securitization, the practice of bundling mortgages together to provide banks a convenient way to sell these financial products, has given the buyers of these securities paper pegged to interest rates much higher than any available today.  Refinancing them would return the principle to these buyers, forcing them to reinvest the proceeds elsewhere at today’s lower rates.  The home owner might keep his house, but the lender would lose interest.

Who are these lenders that seem to have lost interest in playing the HARP?  Big institutional investors, according to a recent Bloomberg report, own most of these securities and also comprise the most important customers Fannie and Freddie have.   Some staff members there worry that these folks would lose too much if the plan was broadly implemented.  Others, including some senior officials, reportedly are seeking ways to make the plan viable, resisting suggestions that would reduce its efficacy while benefitting lenders at the possible expense of home owners.  Of course, two of the big institutions which would lose out if higher-rate mortgages were refinanced are the Treasury Department and the Federal Reserve.  In other words, refinancing could cost you, the tax payer.  How angelic does that make you feel?