Alphabet Soup Spells Blah

I'm getting lost. There's old programs like the FDIC insurance program to protect bank depositors. There's the new Obama Stimulus Package. And then there's TARP, TALF, EIEIO (no, wait, that's a song from kindergarten), along with seemingly dozens of other new catchy-named programs emanating from the nation's capital. All are intended to reverse the economy from its current downward death spiral.

 

Yesterday, Warren Buffett was pontificating on CNBC that the economy had "fallen off a cliff" but would eventually recover. Well, duh ... yeah, even Jimmy Buffett could have said that.

 

There's universal agreement that the stock market is a leading economic indicator. It almost always starts its recovery six months prior to economic upturns. So the question that I would have liked Warren to answer is "When will the recovery take place?". Once we know that magic date, a monkey could throw darts at the stock market listings and pick winners, just as long as he tosses those darts six months earlier.

 

An old stock market adage is: "They don't ring a bell at the bottom (or top)". This is really too bad; it would make things a whole lot easier. As I write this, the stock market has just rallied for the first time in weeks. Is this the bottom or just a "dead cat bounce"? Who knows? Check back in several years and we'll be able to figure it out.

 

So what's the average investor to do? Just listen to the experts and when you think that enough of them agree on a common course of action, immediately do the opposite.

 

Failing that sure-fire piece of advice, it seems to me that the Obama Administration and Congress can help jump-start the economy and the stock market with one simple action above all others. Reduce or eliminate the taxes on dividends and long term capital gains. This single action will pump huge amounts of cash into start-ups and the stock market, revitalizing the economy and creating jobs.  Obama is scaring the bejesus out of potential investors worldwide because he's talking about raising these taxes instead of lowering them.

 

One other thing. It might be a good idea to hold gold or some other hard assets in your portfolio. While I know that the current concern is deflation, at some point, the massive creation of money is going to set off a jumbo-sized round of inflation.

 

No! I don't have any idea when that magic date will occur. I sure wish I did.

 

Money For Nothing - Part 3

I've ranted about "money for nothing" several times before. If, by chance, you missed it, or you just want the sheer joy of experiencing it again, you can read it here, here and here. But last week, it actually was literally true: The U.S. government auctioned $32 billion in four-week T-bills at 0% interest Tuesday, the lowest auction rate ever. In the after-market, the price rose, and people bought T-bills at a negative rate of interest, apparently extraordinarily gleeful to lock in their losses.

 

This insanity is a result of the fear that investors have of taking any risk at all. For nothing is seen to be safer than T-bills, which will be repaid in their entirety with new, crisp, freshly printed, dollar bills. If the government needs some more dollar bills, it simply prints more of them. No limit. No questions.  Pretty clever, eh? (as our Northern neighbors might say).

 

Well, all this leaves me completely baffled. Normally when a government runs its currency printing presses overtime, the inflation rate soars and suddenly wheelbarrows are required to haul around all the paper needed to purchase a loaf of bread. But it seems that every country in the world is hyperactively churning out paper money. Nobody's money is worth more than the next. You don't bail out of the dollar for Yen, Euros or Pounds because they're devaluing too. Even the Chinese are printing and spending like mad.

 

So, what does this all mean? Apparently, that there's no limit to the size of the government stimulus (sounds erotic, doesn't it?) programs that suddenly are now possible. Both namby-pamby Democrats and hard-hearted Republicans can hardly contain their excitement.

 

The U.S. has made commitments so far of upwards of $8 trillion in an attempt to halt the economic slide. Is there an upper limit? Beats me. Even the Bush Administration is now saying they are ready to pump untold billions into the moribund US Big Three auto companies before the Obama Administration gets their wack at doling out more of the cash.

 

By the way, Detroit seem to be pretty scared of using the word "bankruptcy". What's all this nonsense about getting the government to negotiate with the "stakeholders to share the pain" so they can avoid bankruptcy? Sharing the pain is just what a bankruptcy judge does in a chapter 11 filing. The difference is that the judge is doing the pain sharing pursuant to the current law, while the government actions being proposed don't pass my smell test for legality at all. They're more akin to simple extortion that's probably unconstitutional anyway (The Fifth Amendment). 

Anyway, back to the topic, in bankruptcy the auto companies continue their day to day operations. They, along with all their employees, don't disappear overnight. It's pure hogwash to say that people won't buy cars if the manufacturer is in bankruptcy. Anyone who has been paying any attention at all to the pleading on bended knee in Washington knows by now that the Big Three are in serious financial doo-doo. 

And, if you'll allow me just one more "by the way," I heard a great line which referred to the $8 billion General Motors paid last year for retirees' and current workers' medical bills. The talking head on CNBC said: "General Motors is a health care company that just happens to make cars."

 

I also recently read an  economist's apparently serious proposal to revive the housing market (remember, this is what the whole mess is about) that struck me as something Lenin would adore. He proposed that the government just buy everyone's existing mortgage and refinance it at a 1% interest rate. The government would also offer new mortgages to new buyers at the same rate. 

While we're at it, how about if the government solved the auto companies' problems by offering auto loans at 1% interest to anyone who had or could obtain a driver's license? Why stop there? How about 1% loans to buy computers and networking gear so Silicon Valley doesn't implode? You get the idea. Since the money is for nothing, nothing is off limits. Just propose it and it happens...money is no object.

 

Money For Nothing - Part 2

Counting the $700 billion the congress and the president just authorized the Treasury department to use, almost $2 trillion has now been committed by the federal government to get the financial system functioning again. Several of our friends are also pitching in. The combined commitments announced by the US, Europe and Japan exceed $4 trillion.

The government politicos say "trillion" like it's an everyday number that just slips right off your lips. I can't really get my mind around such a staggering number. $4,000,000,000,000. I don't know about you, but all those digits look really scary to me.

Where does all this money come from?

I admitted in a previous post that I really don't understand money very well, but here goes. I assume that the Chinese and friendly OPEC nations will continue to lend a bunch of it to us by buying treasury bills and bonds. The rest will be created magically by just printing more of the paper variety we're used to seeing and by making some entries in an exotic "grand ledger in the sky".

This will increase our national debt to over $10 trillion. Some people think that this is really bad because our kids and grandkids will have to pay this back. But that never seems to happen. They may just pass the debt on to their kids and grandkids. In economic theory, I think this strategy is called "kicking it down the road".

Another possibility is that we'll experience a case of serious inflation (kind of like serious indigestion, but on a national scale). Thus, while we pay back the stated amount, it will not be worth very much in real money (whatever that is).

Just where does this leave us? In dire straits, where the money is for nothing (and the chicks for free). Hmm... I seem to remember something similar to that a while ago on MTV .

Money For Nothing

Several weeks ago I wrote about Money. There's a really interesting article in today's' Wall Street Journal describing the situation in Zimbabwe.

They are "enjoying" an inflation rate in excess of one million percent! That's correct. One million percent! Some of the descriptions of hyperinflation make for great reading.

Quoting from the article:

"Robert Mugabe has kept his embattled regime in Zimbabwe afloat on a sea of paper money...

Mr. Mugabe's regime relies on a steady supply of the paper -- fortified with watermarks and other antiforgery features -- to print the bank notes that allow it to pay the soldiers and other loyalists who enable him to stay in power. With an annual inflation rate estimated at well over 1 million percent, new notes with ever more zeros need to be printed every few weeks because the older ones lose their worth so quickly...

Zimbabwe's central bank stopped posting inflation figures in January, when it stood at a relatively modest 100,580%. A loaf of bread costs 30 billion Zimbabwean dollars...

Vending machines, which take coins, fell out of service in Zimbabwe years ago. A single soda would require the deposit of billions of coins. Imported from South Africa and in very short supply, a Coke sells on the black market for around 15 billion Zimbabwean dollars."

The lesson is simple. When your government cranks up the money supply, buy wheelbarrows!

Money, Money, Money and Money

I used to think that I understood money. Well, I've decided that I really don't.

If you want to get a headache, try reading the Wikipedia article on money. It's pretty darn confusing. Did you know that there are four different types of money? There's commodity money, representative money, credit money and fiat money. I'm sure that there's an economist somewhere that's defined a few more versions of money.

The type that really confuses me is fiat money. This is the paper stuff that we carry around in our wallets. In the case of the US, it used to be that you could turn it in to the Federal Reserve Bank and get a fixed amount of gold in return. Well, actually, that was true for foreigners only, since the government made it illegal for US residents to own any gold, except in jewelery. They relaxed that restriction when they canceled their promise to redeem dollars for gold, so it's OK for everyone to own gold now.

If you want to turn your paper money into the Feds today, the only thing they promise in return is to give you more of the same paper money.

How is it possible that we accept these (admittedly attractive) pieces of colored paper as having value? If the government wants to create more money, one simple thing they can do is just print more of it. They have other ways as well, but that would just get us more confused. Nevertheless, I can walk into the grocery store and trade some of this paper for a loaf of bread, no questions asked. I can get a car, or convince a girl to marry me, if I have enough of this stuff. Pretty amazing!

To make things even worse, each government around the world has it's own version of money. Conveniently, they trade against each other in the International Money Market. So anytime the mood strikes you, you can trade your U.S. Dollars for European Euros, for example, if you like. By the way, you don't have to swap your US Dollars for Lira, Francs, Marks, Shilling or a bunch of other obsolete European currencies, like in the pre-Euro days. And, of course, in case you ever worry about their intrinsic value, you guessed it, the Euros can always be redeemed for more Euros.

I think this fiat money is pretty cool. I just don't understand why the government won't let me print up some of my own money. They let the casinos in Las Vegas do it. They manufacture chips and put numbers on the chips and you can buy stuff with it. You can even get some very attractive women to spend time with you if you give them enough of the right color chips.