Archive for November, 2011

Bad Breath

Friday, November 18th, 2011

I love TV commercials.  My own Lady Gaga complains when I fast-forward through her dramas while willingly watching the same ad over and over.  Different strokes I say.  Anyway, I’ll even spend some time analyzing commercials I don’t like very much.  One which comes to mind aired not so long ago with a couple in bed together who begin to greet each other with a kiss upon wakening.  Before they do, obviously fearing their partner may take offense, the lady protagonist covers her mouth, turns away and hurries into the bathroom to eradicate bad breath with the latest miracle product.

There can be little doubt that, in this age of global finance, the U.S. and European financial systems are in bed with each other.  Recently JPMorgan and Goldman Sachs revealed they have trillions of dollars of exposure to the Euro via derivatives.  They weren’t willing to divulge the particulars, but assure us everything is sufficiently hedged so we need not worry.  That much gobbledygook gets me worried though.  These are two of the same bad actors who got us in the last mess when taxpayer dollars were used to bail them out after similar, but smaller, bets had been placed with Lehman Brothers.

You may recall that Warren Buffett, in his 2002 Berkshire Hathaway letter to shareholders, referred to derivatives as financial “weapons of mass destruction.”  I understand that the purpose of the commercial I mentioned was to sell me on something like a breath mint to correct a malodorous condition.  Something really stinks, however, when our largest U.S. banks seem to feel they can cover up the Euro’s halitosis by employing the U.S. Mint.


Thursday, November 17th, 2011

In World War Two, General MacArthur employed an island-hopping strategy, dubbed leap-frogging, which undoubtedly saved many lives and probably hastened its end.  Rather than invade in linear order each island the Japanese forces held, he would skip past some, seize others closer to the mainland, thereby cutting off supply lines and starving out the enemy.

There seems to by a form of leapfrogging developing in Europe today which may prove as devastating.  The acronym PIIGS was introduced to our lexicon just a couple years back as shorthand for five economically challenged members of the European Union: Portugal, Ireland, Italy, Greece and Spain.  Since then we have seen both Portugal and Ireland reach a point of fiscal failure, requiring that they be bailed out by the EU.  Recently Greece has begun to dominate the news for the same reasons.  Now Italy is suddenly front and center.

This development in Italy brings global finance to a dangerous point.  Italy’s economy is bigger than the other four members of that infamous group combined.  It is the world’s eighth largest economy.  It is the world’s third largest issuer of bonds.  It seems both too big to fail and to save.  Should default on Italian bonds begin to occur, it may lead to a run on those banks which own such debt.  This, in turn, points directly to large French banks which hold these obligations.  Contagion could leapfrog over other smaller countries and drive straight into the heart of Europe.

Leapfrogging is also considered an economic term linked in part to Schumpeter’s thoughts of creative destruction.  In this context it implies an emergent and radically disruptive innovation which can suddenly replace the established order.  Unfortunately, there currently seems to be no logical replacement for the Euro, just a potential for its collapse.  Should that happen we may be surprised at the extent to which American banks are also exposed.

Field Goals

Wednesday, November 16th, 2011

If you know anything about American football then you probably know there is a goal post situated at both ends of the field.  These used to be placed there to provide inattentive runners something into which they could smash, a touch I thought added an exciting element of uncertainty to the game.  Having moved these obstructions out of the end zone, they are now used primarily for scoring points or as trophies for overly zealous crowds of drunken fraternity brothers.  In the first instance, goal posts become involved whenever someone successfully kicks the football from a location anywhere out on the playing field between two upright poles which form part of the entire structure.  I’ll come back to this subject a bit later.

The Federal Open Market Committee is a crucial component of the U.S. Federal Reserve banking system.  It meets frequently, at least every six weeks, to discuss the state of America’s economy and determine if they should try to do something about it. They issue statements concerning their deliberations which may contain economic projections for various measures which affect one or both parts of their dual mandate to promote both stable prices and maximum employment.  The Fed had been projecting unemployment would fall somewhere between 7% to 7.5% in 2013 (it sits currently around 9%), but after their last meeting in early November, 2011, they raised that projection to somewhere between 7.8% and 8.2%, hoping it will decline by 2014 into a 6.8-7.7% range.  This suggests, given their mandate, that we should not be surprised if low interest rates remain in place well into 2014.

In NCAA and professional football the goal post uprights are set 18.5 feet apart.  Any attempt by a kicker to score a field goal or “point after touchdown” requires that the ball fly between these two points.  In high school the distance is widened to 23’4″ (no, I don’t know why that mysterious 4 inches was added).  The Fed has obviously been unable to score any PAT in the past two years despite achieving, by their own account at least, lower inflation.  What did they do?  Sounds to me like they widened the goal posts.  I would never suggest that they return to high school for remedial lessons in perfecting their craft, but have they tacitly suggested the rules of the game are changing?

Ties that Bind

Tuesday, November 15th, 2011

I am to dieting what Mr. Ma is to cello. In other words, if dieting had a first name it would likely be synonymous with mine. Case in point, a few months ago when my own Lady Gaga went to visit her sister in Iowa, I embarked on a strict diet of fruit, nuts and yoghurt. Over the ensuing handful of months I’ve lost enough girth to require a new wardrobe. Give my propensity to yo-yo diet, I am used to this and have devised a permanent solution which I will gladly share.

I have two closets. One contains “skinnier” clothes while the other houses those of a more “robust” nature. Depending on which phase of the moon I’m in, I pull my attire from one or the other. I also do the same with my ties, keeping close to hand those of today’s fashionable width. The others go into boxes labeled by decade, allowing me to keep up with trends as they repeat their inevitable cycles. Everything may be a bit dated by now, even suggesting some similarity to the seconds rack at your local Goodwill, but I get by. Usually.

My main problem comes when I’m transitioning in size between closets. Then the one I consider primary fills with clothes selected willy-nilly from both. That is the condition in which I find myself presently and I can hardly keep anything straight. To make matters worse, I have had to go back twenty years or so to find ties which comply with today’s seriously narrower standards. Now I’m not looking for sympathy; all of this will work itself out in the end. What I do want to point out is the historically incontrovertible link between the economy and the width of men’s ties. Look it up. They widen as times get better, narrow as things take a turn for the worse. The rapid shift in style I’m witnessing now suggests we can expect to see no recovery for awhile yet.

Currency Spike Strip

Monday, November 14th, 2011

If you wanted to buy a Swiss watch with U.S. dollars, you might find you first must convert your currency into their francs.  If the two are at parity, then a 50 franc watch will cost $50, but if a dollar buys just 50 rappen, then you must either spend $100 for a 50 franc watch or decide to buy one made in another country.  Earlier in 2011, the Franc began to appreciate against most of the world’s currencies as investors began buying the Swiss currency as a perceived safe haven in lieu of riskier options such as Euros.  Ultimately, Switzerland found their strong currency had severely impacted their ability to compete globally, and the central bank began a concerted and somewhat successful effort to devalue the Franc.

About the same time Japan’s yen also began to strengthen for much the same reason, and their central bank employed similar maneuvers.  Our government has long insisted that China is guilty of currency manipulation by maintaining its peg to the dollar which favors their exports at our expense.  They in turn suggest we are trying to drive the value of our dollar down by consistently printing more of them in an attempt to bolster our own foreign trade.

The upshot of all this seems to be a global race by sovereigns to each devalue their currency as a way of increasing trade thereby promoting local employment and domestic tranquility.  I see a problem with that.  In any race, even a race to the bottom, there must still be winners and losers.  Everyone’s money cannot drop in relationship to that of each trading partner’s currency simultaneously.  It seems akin to driving a car over a spike strip sitting in the middle of the road.  When the air comes out of all the tires at the same time, no one is going anywhere.  No wonder recessionary indicators are beginning to appear in locations the world around.

Roach Control

Friday, November 11th, 2011

One thing about cockroaches is if you see one, you can bet there’s a whole bunch hiding just out of sight.  I can remember a time way back when and down south.  I was living in a commune for a spell back in the sixties, you know.  Anyway, some nights I would wander into the kitchen (in the dark so as not to disturb anyone) and flip on the light and hundreds of them bad boys would just take off in every direction all at once.  It was a sight to behold.  I’m sure glad I don’t do that anymore, and so is my own Lady Gaga.

This big debt mess going on in Europe with Greece and the other PIIGS, and the contradicting headlines which seem to be coming out daily–even hourly–have truly done their part to wreak havoc on global financial markets.  The more aggressive investment pools, specifically those known as hedge funds, have certainly paid the price, but none more so than MF Global, an old institution which got caught on the wrong side of some recent currency trades.  They are now in bankruptcy, their billions in asset seized by the government and questions of malfeasance being audited.

There are some easy parallels to be made between roaches and hedge funds.  Some folks find them both distasteful, even creepy.  They seem to do most of their work in the dark.  But my concern centers more on a matter of ubiquity.  Remember when Bear Sterns went under back in 2007?  About a year later we saw Lehman, AIG, the major U.S. banks, even GM collapsing into the helping hands of government oversight or just flat disappearing.  Bear was the roach we saw, but the seeds had been sewn and plenty more turned up later.  Will MF Global prove to be a similar harbinger today?

Geography Quiz

Thursday, November 10th, 2011

OK, here’s a quick geography quiz:  Where is Namibia?  Since this is barely a 100 level course, you’ll get full credit just by naming the continent.  Africa?  Yes!  Namibia, nestled there between Angola and South Africa, site of earth’s oldest desert (the Namib) and Kalahari, exporter of karakul skins (extra credit if you can show me one), home of the San Bushmen and click languages.  With a GDP around $12 billion they aren’t rich by any means but were still able to borrow money at 5.75% in their most recent action of 10-year government bonds.

One more question now:  Where’s Italy?  Sure, everyone got that right.  Come visit Rome; stand where ancient sand swallowed the blood of gladiators.  Yes, Italy, where you can cruise the Grand Canal of Venice past structures likely similar to those Marco Polo saw when he returned from China.  Home of Raphael, DaVinci and Michelangelo.  Europe’s third largest economy, and where, these days, they are paying a touch over 6% for 10-year bonds in their most recent auction.  Now, just a couple of weeks later, their borrowing costs have soared to over 7%.

This isn’t part of the quiz, but I have to ask, what is that all about?  If interest rates are a relatively handy way to measure risk, are global markets more willing to trust Namibians than Italians?  Even when Italians are using Euros, ostensibly backed by Europe’s combined wealth?  Go figure.  These are strange times indeed and the markets seem to be as confused as the latest headlines.  We’ll keep an eye on both for you.