Why balance a budget and reign in spending when you can just print your way out of it? That has been the US motto for years. The "super-committee" was only super at demonstrating how this problem isn't important enough to put politics aside. There are answers, there are solutions, they just aren't worth foregoing political bias because the problem hasn't been fully realized. The US can still borrow at insanely cheap rates, and has been able to print away without negative inflationary effects. Why fix an illness when its symptoms haven't slowed the body down?
All the "turmoil" in Europe is only in focus because they have decided to take the high road and fix their problems rather than hide them under a blanket of freshly fabricated Euros. They are attempting to deal with their debt problems, which are very real, by reigning in spending and imposing strict budgetary constraints. They are facing this head-on. That means that the short term pain will be felt greater than in the US, but the underlying issues are being tackled.
So say for a second that it actually works and in a few horrible years they have cleared the hurdle. That puts them in a long-term fiscally responsible position. Meanwhile, the US has continued to delay the inevitable and drink the punch of the printing press. The difference now is there is an alternative to the mighty dollar. That is when we would realize the follies of our ways. Right now, everyone is in the same sinking boat and we are still captain. But if Europe comes out of this in a righted ship then we go down hard as everyone jumps on board with them.
Most people seem to believe that Europe will have to monetize their way out, and I have been in that camp. The debt seems too large and the people too unwilling to fix it any other way. However, they are being bold and righteous and perhaps we should consider if they do have a chance after all.
Sean
Friday, December 9, 2011
Jon Corzine
I just finished watching the tape of Jon Corzine’s testimony to the Congressional Committee….
For those of you who don’t follow to closely what is going on, he is a former senator, former governor of new Jersey and former CEO of Goldman Sachs. He was CEO of MF Global - a hedge / investment fund. MF Global just filed for bankruptcy. MF Global had customer money and its own money. When investments in their own account started losing money MF Global stole $1.2B from their clients’ accounts, transferred that money into the firms account, and lost it all.
Not even Bear Stearns or Lehman Brothers did that……So what have we learned since the crisis?
When asked by a panel member if he ever transferred or knew of a transfer from client’s accounts into the firm’s account Corzine replied, “It was not my intent to use segregated customer accounts….” He was asked twice and gave the same answer. He used the “intent” word 5 times during his testimony.
This is really pissing me off…..Like cutting open an old wound…..The United States of America almost fell into the abyss in 2009, luckily backed away from the edge, but now we are right back there looking down again. Debt is exploding globally, jobs disappearing, middle class shrinking, etc. And for those of us who think we cannot go the way of a 3’rd world county meaning paper dollars everywhere, civil disobedience, etc., I suggest you re-evaluate that belief.
And I am struggling with what to do about it.
Michael
For those of you who don’t follow to closely what is going on, he is a former senator, former governor of new Jersey and former CEO of Goldman Sachs. He was CEO of MF Global - a hedge / investment fund. MF Global just filed for bankruptcy. MF Global had customer money and its own money. When investments in their own account started losing money MF Global stole $1.2B from their clients’ accounts, transferred that money into the firms account, and lost it all.
Not even Bear Stearns or Lehman Brothers did that……So what have we learned since the crisis?
When asked by a panel member if he ever transferred or knew of a transfer from client’s accounts into the firm’s account Corzine replied, “It was not my intent to use segregated customer accounts….” He was asked twice and gave the same answer. He used the “intent” word 5 times during his testimony.
This is really pissing me off…..Like cutting open an old wound…..The United States of America almost fell into the abyss in 2009, luckily backed away from the edge, but now we are right back there looking down again. Debt is exploding globally, jobs disappearing, middle class shrinking, etc. And for those of us who think we cannot go the way of a 3’rd world county meaning paper dollars everywhere, civil disobedience, etc., I suggest you re-evaluate that belief.
And I am struggling with what to do about it.
Michael
Thursday, June 16, 2011
Sneaky Sell-off
The market has had 6 (soon to be 7) down weeks in a row.
-Economic indicators have hinted towards slower growth than anticipated.
-The Fed is ending its QE2 program this month.
-Greece's continued debt problems are creating panic across the globe.
These concurrent issues have sent the major indexes moderately lower over the last month and a half. Panic selling is beginning to take hold. Recent 'scary' headlines include "mutual fund outflows and swap spreads are at levels not seen since the end of last November." The catch is November 30th marked the beginning of a 10% rally in the stock market. Then you have corporate profits at high levels and forward P/E ratios indicating attractive valuation. So what should we believe?
The market has been doing very well, and at this point there isn't much reason to panic. A sell-off might even turn out to be a good thing if we can put money to work at cheaper prices. However, the momentum is to the downside right now and it is tough to fight the current. I will be slowly picking my spots from here and protecting with options when possible. Taking short positions as a short-term hedge is a good idea too. This sell-off may have some ways to go, but at some point we should resume the up-trend.
Sean
-Economic indicators have hinted towards slower growth than anticipated.
-The Fed is ending its QE2 program this month.
-Greece's continued debt problems are creating panic across the globe.
These concurrent issues have sent the major indexes moderately lower over the last month and a half. Panic selling is beginning to take hold. Recent 'scary' headlines include "mutual fund outflows and swap spreads are at levels not seen since the end of last November." The catch is November 30th marked the beginning of a 10% rally in the stock market. Then you have corporate profits at high levels and forward P/E ratios indicating attractive valuation. So what should we believe?
The market has been doing very well, and at this point there isn't much reason to panic. A sell-off might even turn out to be a good thing if we can put money to work at cheaper prices. However, the momentum is to the downside right now and it is tough to fight the current. I will be slowly picking my spots from here and protecting with options when possible. Taking short positions as a short-term hedge is a good idea too. This sell-off may have some ways to go, but at some point we should resume the up-trend.
Sean
Tuesday, April 19, 2011
Trying to Find a Balance
The deficit and debt crisis that is staring the US in the face will take a dramatic turn very soon....one way or another. Obama proposes to make small spending cuts across the board while "fixing" tax loopholes that will essentially raise tax rates on the rich. This has been quantified as a $4 Trillion deficit reduction. The GOP has proposed much larger cuts focusing mainly on entitlement programs like Medicaid. $6 Trillion is expected to be saved in the same period of time. What will happen is anyone's guess, one thing for sure is there will be fireworks in Washington.
What should be done? If both sides truly wanted to solve the problem (and left politics out of it) they would do both. Higher taxes AND cuts to entitlement programs. In fact, that may not even be enough. I imagine the opposite will come true...negotiated spending cuts and negotiated tax hikes, but it's good to dream.
A few notes on gold:
1. If this "dream" scenario occurred, you could see a short term sell-off in gold as the prevailing thought would be a much more balanced budget. But again, not going to happen.
2. My father wouldn't be happy with this post unless I included the following excerpt which supports his conspiracy theories: "A bill proposed in the State of Washington seeks to capture "the name, date of birth, sex, height, weight, race, and address and telephone number of the person with whom the transaction is made" of every purchaser of gold. Furthermore, if passed, the bill will record "a complete description of the property pledged, bought, or consigned, including the brand name, serial number, model number or name, any initials or engraving, size, pattern, and color or stone or stones" and price paid, of course. What’s also significant in the bill is that any transaction in the amount over $100 would require a signature, photo and fingerprint of the person with whom the transaction is made."
First, the government recently tracked down all of our overseas dollars. Then this headline. If they knew the whereabouts and owners of all dollars and all the gold, couldn't they then control its movements? When the day comes that people no longer want their money in dollars because all faith has been lost in the ability to repay, they either move it overseas or into gold. Is the government trying to beat us to the punch?
Sean (and Michael, in spirit)
What should be done? If both sides truly wanted to solve the problem (and left politics out of it) they would do both. Higher taxes AND cuts to entitlement programs. In fact, that may not even be enough. I imagine the opposite will come true...negotiated spending cuts and negotiated tax hikes, but it's good to dream.
A few notes on gold:
1. If this "dream" scenario occurred, you could see a short term sell-off in gold as the prevailing thought would be a much more balanced budget. But again, not going to happen.
2. My father wouldn't be happy with this post unless I included the following excerpt which supports his conspiracy theories: "A bill proposed in the State of Washington seeks to capture "the name, date of birth, sex, height, weight, race, and address and telephone number of the person with whom the transaction is made" of every purchaser of gold. Furthermore, if passed, the bill will record "a complete description of the property pledged, bought, or consigned, including the brand name, serial number, model number or name, any initials or engraving, size, pattern, and color or stone or stones" and price paid, of course. What’s also significant in the bill is that any transaction in the amount over $100 would require a signature, photo and fingerprint of the person with whom the transaction is made."
First, the government recently tracked down all of our overseas dollars. Then this headline. If they knew the whereabouts and owners of all dollars and all the gold, couldn't they then control its movements? When the day comes that people no longer want their money in dollars because all faith has been lost in the ability to repay, they either move it overseas or into gold. Is the government trying to beat us to the punch?
Sean (and Michael, in spirit)
Monday, April 18, 2011
S&P Downgrades U.S.
Today, I am writing a check to the IRS.
The other bad news, the S&P put the US on a 'negative' watch this morning amid rising debt/deficit concerns. The credit rating agencies have been warning of a downgrade for well over a year so this really isn't that surprising. Bill Gross of PIMCO recently sold all of their US debt holdings and even went short on some. Then there is the timing of the publication...just days after Obama and the GOP announced their deficit reduction plans. What conclusions can be drawn from this...?
1. Gold is good. Why? Because it's timeless, unchanging, pure. Governments have been destroying currency, so it is important to have something to demonstrate its relative value.
2. Awareness! This should bring the debt/deficit issues to the forefront of the political spectrum. I am shocked to learn from friends and clients how little people understand about our fiscal situation. It all seems like monopoly money; how much is $1 Trillion? And what about the $100+ Trillion we owe? Why should we care? Until we understand it, we won't be able to hold our government responsible. Here is a great video if you want to learn more: http://www.iousathemovie.com/
Sean
The other bad news, the S&P put the US on a 'negative' watch this morning amid rising debt/deficit concerns. The credit rating agencies have been warning of a downgrade for well over a year so this really isn't that surprising. Bill Gross of PIMCO recently sold all of their US debt holdings and even went short on some. Then there is the timing of the publication...just days after Obama and the GOP announced their deficit reduction plans. What conclusions can be drawn from this...?
1. Gold is good. Why? Because it's timeless, unchanging, pure. Governments have been destroying currency, so it is important to have something to demonstrate its relative value.
2. Awareness! This should bring the debt/deficit issues to the forefront of the political spectrum. I am shocked to learn from friends and clients how little people understand about our fiscal situation. It all seems like monopoly money; how much is $1 Trillion? And what about the $100+ Trillion we owe? Why should we care? Until we understand it, we won't be able to hold our government responsible. Here is a great video if you want to learn more: http://www.iousathemovie.com/
Sean
Wednesday, March 2, 2011
Joke
A unionized employee, a Tea Party member, and a corporate CEO are sitting at a table. In the middle of the table is a plate with a dozen cookies on it. The CEO reaches for the plate and grabs 11 cookies, then turns to the Tea Party member and says, "Look out for that union guy, he wants a piece of your cookie."
Monday, February 28, 2011
The Middle East and Oil
The wildfire spreading across the Middle East is capturing all of the headlines in recent weeks. Country by country, people are taking to the streets in opposition of long-standing authoritarian rule. It almost seems like each country is trying to out-do the previous one. Currently, Libya is at the forefront in the most violent protests seen yet.
All of this has sent the price of oil way up (with some analysts predicting $200/barrel), which in turn sent oil stocks up. The rest of the market actually sold off for the most part amid all of the uncertainty. One of the most interesting observations is that the US dollar didn't strengthen like you normally see in times of crisis/shock. This comes back to our core theme of long-term dollar devaluation. Real, tangible goods are the best bet when currency is being destroyed. While recent events are clearly more of a supply side shock, it is all part of the same story. Hopefully, peace ensues and prices stabilize (Americans don't need $4 gasoline right now....although it will be far higher in the future), but our portfolios should be structured to gain from higher prices....much higher.
All of this brings up another very valuable point. Why are we still dependent on foreign oil? Well, the truth is because it is still cheaper for the most part. But times like this open our eyes to the plethora of other options we have and the benefits they will one day provide. Specifically, natural gas is abundant in the US, prices are low, and we have the means to implement the infrastructure across the country. We are huge advocates of the Picken's Plan and we hope this oil price spike reinvigorates the debate. We also have been watching (and investing) in companies that will hugely benefit from a conversion to natural gas. It keeps money at home, it creates jobs, and it's better for the environment. We shall see how this story develops.
Times of crisis are also times of opportunity!
Sean Kelly
All of this has sent the price of oil way up (with some analysts predicting $200/barrel), which in turn sent oil stocks up. The rest of the market actually sold off for the most part amid all of the uncertainty. One of the most interesting observations is that the US dollar didn't strengthen like you normally see in times of crisis/shock. This comes back to our core theme of long-term dollar devaluation. Real, tangible goods are the best bet when currency is being destroyed. While recent events are clearly more of a supply side shock, it is all part of the same story. Hopefully, peace ensues and prices stabilize (Americans don't need $4 gasoline right now....although it will be far higher in the future), but our portfolios should be structured to gain from higher prices....much higher.
All of this brings up another very valuable point. Why are we still dependent on foreign oil? Well, the truth is because it is still cheaper for the most part. But times like this open our eyes to the plethora of other options we have and the benefits they will one day provide. Specifically, natural gas is abundant in the US, prices are low, and we have the means to implement the infrastructure across the country. We are huge advocates of the Picken's Plan and we hope this oil price spike reinvigorates the debate. We also have been watching (and investing) in companies that will hugely benefit from a conversion to natural gas. It keeps money at home, it creates jobs, and it's better for the environment. We shall see how this story develops.
Times of crisis are also times of opportunity!
Sean Kelly
Tuesday, January 11, 2011
The Way Forward, From a 1960’s Former Radical
The problem with the current economists is they never dropped acid……It will take a former Timothy Leary devotee, like yours truly, to think of a way out of this economic mess. Any logical individual applying traditional economic theories would draw the conclusion that US credit quality and resulting rating will deteriorate rapidly in the near term, resulting in higher US Govt. interest rates on Treasuries. The problem is about $3-4T of US debt will be issued annually for the foreseeable future in the form of new debt and debt rolling over If rates go up by a point, or two, or three, the effect on the US budget will be unimaginable. (Let’s not even get into the fact that the majority of US debt is off Balance Sheet debt in the form of unfunded Social Security and Medicare).
Currently, annual US tax revenues come in at around $2T and annual interest on the national debt at around $200B. However the average interest rate for all interest bearing debt fell to 3.29% at the end of 2009. At the end of 2009 total public debt outstanding was $14T and was 99.3% of GDP of $14.1T. At year end 2009 43% of US public debt needed to be rolled over within 12 months. The average maturity was around 50 months. So some back of the envelope calculations: If around 40% of US public debt is due within 12 months, and the current average interest rate on that debt is .25% that is .25% times $5.6T, or about $15B annualized. If over the course of 1 year the interest rate jumped back up to the historical short term average of 3%, ridiculous I know but just for argument sake, that would increase the interest expense on $5.6T of debt 12 fold from $15B annualized to $180B annualized, on just that part of the debt. Longer term rates would go up in tandem. So quickly, very quickly indeed, we could see total interest expense double to around $400B or triple to $600B. If US debt were downgraded from AAA to some lower level, possibly even junk, then the interest rates could go to $1T annually, half of the current tax receipts. In addition US tax receipts are projected to be below expenditures by about $1T per year for the next 10 years.
So if the US Govt. raises tax receipts from $2T annually to $3T annually which is 50%.....that is insufficient to fund the projected deficits and increase in expenditures due to the higher interest rates even in the most conservative scenario above. If the more pessimistic scenario comes to pass, then even a doubling of tax receipts would not work. So the budget expenses would have to be cut and cut dramatically. This simply will not occur.
In essence the United States is like a person who has unknowingly run through a glass door, and noticed part way through. To go back against the glass, which is now broken but broken in the direction of the forward motion, would cut and bleed and kill. The only solution for that person is to keep running through. To shatter all the glass, to completely break the door, but at least be through it….
So how to do this – this would be the headline news:
“”””””The Federal Reserve announced today a bold new quantitative easing program to lead the United States economy to the next millennium. The program boldly embraces the Feds dual mandate of maximum employment and price stability. The program is called “All In” named after a manner of placing a wager in Texas Holdem. The Federal Reserve forthwith issues a standing order to purchase all newly issued United States Treasury Notes and Bills issued at Public Auction at even par. Any investor who desires to enter a bid is welcome to make an offer with par as the floor. Highest bids will continue to be accepted in the best interest of the United States taxpayer, but by purchasing any newly auctioned debt at par the Federal Reserve is essentially creating an intrinsic fair value floor for US debt. This fair value floor is consistent with the status of the United States as the premier economy in the world, the central marketplace for goods and services, the deepest credit and equity markets in the world, and the status as the global default currency under which world wide trade is settled. It is in the interest of global price stability that such an intrinsic floor value is created for all US Govt. debt.
In addition under “All In” the Federal Reserve will redeem any maturing treasury debt at par through the secondary market. This commitment guarantees all holders of US debt the full face value of their investment. This commitment is backed by the full faith and credit of the United States of America.
What does this accomplish? It maintains interest expense on US Govt. debt at stated interest. It fixes interest rates at par. The budgets submitted to Congress will not require increased allocation to interest expense. The Govt. can continue this program indefinitely until the deficits are eliminated. No social programs are cut, no decreases in defense spending. Dollars flow….Price inflation returns, and the threat of deflation or second depression are ended. Such measures may require commensurate restrictions on the flow of foreign held US dollars into the United States to mitigate potential inflation. The flow of foreign dollars into the US can be maintained at levels commensurate with the Federal Reserves target inflation.
The “All In” Fed program takes effect at Monday morning’s open……”””””””””
-Michael
Currently, annual US tax revenues come in at around $2T and annual interest on the national debt at around $200B. However the average interest rate for all interest bearing debt fell to 3.29% at the end of 2009. At the end of 2009 total public debt outstanding was $14T and was 99.3% of GDP of $14.1T. At year end 2009 43% of US public debt needed to be rolled over within 12 months. The average maturity was around 50 months. So some back of the envelope calculations: If around 40% of US public debt is due within 12 months, and the current average interest rate on that debt is .25% that is .25% times $5.6T, or about $15B annualized. If over the course of 1 year the interest rate jumped back up to the historical short term average of 3%, ridiculous I know but just for argument sake, that would increase the interest expense on $5.6T of debt 12 fold from $15B annualized to $180B annualized, on just that part of the debt. Longer term rates would go up in tandem. So quickly, very quickly indeed, we could see total interest expense double to around $400B or triple to $600B. If US debt were downgraded from AAA to some lower level, possibly even junk, then the interest rates could go to $1T annually, half of the current tax receipts. In addition US tax receipts are projected to be below expenditures by about $1T per year for the next 10 years.
So if the US Govt. raises tax receipts from $2T annually to $3T annually which is 50%.....that is insufficient to fund the projected deficits and increase in expenditures due to the higher interest rates even in the most conservative scenario above. If the more pessimistic scenario comes to pass, then even a doubling of tax receipts would not work. So the budget expenses would have to be cut and cut dramatically. This simply will not occur.
In essence the United States is like a person who has unknowingly run through a glass door, and noticed part way through. To go back against the glass, which is now broken but broken in the direction of the forward motion, would cut and bleed and kill. The only solution for that person is to keep running through. To shatter all the glass, to completely break the door, but at least be through it….
So how to do this – this would be the headline news:
“”””””The Federal Reserve announced today a bold new quantitative easing program to lead the United States economy to the next millennium. The program boldly embraces the Feds dual mandate of maximum employment and price stability. The program is called “All In” named after a manner of placing a wager in Texas Holdem. The Federal Reserve forthwith issues a standing order to purchase all newly issued United States Treasury Notes and Bills issued at Public Auction at even par. Any investor who desires to enter a bid is welcome to make an offer with par as the floor. Highest bids will continue to be accepted in the best interest of the United States taxpayer, but by purchasing any newly auctioned debt at par the Federal Reserve is essentially creating an intrinsic fair value floor for US debt. This fair value floor is consistent with the status of the United States as the premier economy in the world, the central marketplace for goods and services, the deepest credit and equity markets in the world, and the status as the global default currency under which world wide trade is settled. It is in the interest of global price stability that such an intrinsic floor value is created for all US Govt. debt.
In addition under “All In” the Federal Reserve will redeem any maturing treasury debt at par through the secondary market. This commitment guarantees all holders of US debt the full face value of their investment. This commitment is backed by the full faith and credit of the United States of America.
What does this accomplish? It maintains interest expense on US Govt. debt at stated interest. It fixes interest rates at par. The budgets submitted to Congress will not require increased allocation to interest expense. The Govt. can continue this program indefinitely until the deficits are eliminated. No social programs are cut, no decreases in defense spending. Dollars flow….Price inflation returns, and the threat of deflation or second depression are ended. Such measures may require commensurate restrictions on the flow of foreign held US dollars into the United States to mitigate potential inflation. The flow of foreign dollars into the US can be maintained at levels commensurate with the Federal Reserves target inflation.
The “All In” Fed program takes effect at Monday morning’s open……”””””””””
-Michael
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