If we don’t do anything about it, it’ll go away. Right?

Obama’s Decision to Punt Oil Pipeline Pleases Almost no One.

http://www.dailytech.com/Obamas+Decision+to+Punt+on+Oil+Pipeline+Pleases+Almost+no+One/article23259.htm

Quotes:

” In one fell swoop the President of the United States (POTUS) Barack Obama managed to infuriate Canadians and Republican U.S. politicians alike.  Those are typically mutually exclusive feats, but his decision to bow to activist pressure and shelve the development of a critical oil pipeline is drawing criticism from both sides.”

“Dubbed the Keystone XL pipeline, the pipe in question was supposed to stretch 1,700 miles across the U.S. plains, transporting process oil sands crude — a low to mid-grade crude to U.S. refineries in Texas for procesing into fuel (the initial removal of sand would occur at local facilities in Alberta).

Currently the Alberta tar sands are underutilized due to insufficient refining capacity.  Meanwhile refineries in Texas sit idle due to insufficient domestic oil supplies.  The pipeline would have remedied both problems, pumping the equivalent of 700,000 barrels a day (249.2m barrels a year) into the U.S. market. ”

“The U.S. uses 19.15m barrels/day, so the new supply would offer approximately 3.7 percent of the domestic demand.  While that may sound trivial, it would allow the U.S. to potentially entirely drop one of its more hostile sources of foreign oil, such as Venezuela (806,000 barrels/day) or Iraq (637,000 barrels/day).”

“The cost of getting all that sand out is a 10 to 30 percent emissions hike in greenhouse gases [source]… However, that emissions hike occurs largely at the extraction level, meaning that as long as Alberta finds someone to sell/ship its crude to, the emissions hit will be taken, regardless of whether that someone happens to be the U.S.  It’s unclear whether the pipelines environmentalist adversaries realize this and are just morally opposed to being involved.”

“Recent studies have shown that in the last decade global temperatures flatlined, even as greenhouse gas emission continued to rise.  Yet many environmentalists and their powerful political allies remain convinced that the long-term trend will be continued warming.  Many of these parties predict a doomsday “runaway warming” scenario, in which soaring temperature amount to mass humans deaths.

Groups like 350.org, Bill McKibben, Bold Nebraska’s Jane Kleeb, and Friends of the Earth decried the potential environmental (mostly global warming) impact of the pipeline and threatened to drop support for President Obama if the project was granted a speedyapproval.  If these groups sound familiar, they’re among those who attacked the POTUS onhis support of modern nuclear power — pressure that the President Obama caved to in the wake of Japan’s Fukushima nuclear accident.”

 

My big issue here is that you cannot have it both ways. You can’t claim that we should avoid nuclear energy and simultaneously complain about the use of fossil fuels, otherwise you are just maintaining the status quo, which is unacceptable. We need to begin to change the way we think. On one end we need environmentally conscious and informed consumers who demand change and vote with their dollars, on the other we need politicians and companies to do the right thing without being coerced. If we don’t, well, we’ll just be living with the consequences and have no one to blame but ourselves.

These are exactly the kind of facts the IC is here to bring to light.

Keeping the Bottom 50% the Bottom 50%: Lets Make Pizza a Vegetable

If I had to design a system to guarantee that the bottom half of the country could never escape their fate there are a couple thing I would do (please bear with my sarcasm):
1. I would make their education sub standard, this way even if they make it to a good higher education institution they will fail there.
2. I would create standardized systems that reward those with money and recreational time.
3. I would attempt to flood as much useless information into their minds as possible. Shows like MTVs 16 and pregnant should replace any decent broadcast media (what an oxymoron).
4. I would make sure that the daily institutions that the bottom 50% rely on serve the nutritionally worst food and help to create the worst possible and most expensive and destructive habits.

Unfortunately for the United States, I am trying to achieve none of these things while the United States government is reaching these goals as fast as possible. In the past couple of days, they manged to think of something that even I could not have imagined (and lets recall that I really want to be a consultant): They declared pizza a vegetable.

This is, however, a bit of an oversimplification. Congress blocked the USDA from implementing strong guidelines that forbid the two tablespoons of tomato paste in frozen pizza to be considered a vegetable as it has been in previous years. A subsidized meal cannot be served if it does not contain a single serving of vegetables.

How can congress justify serving the least healthy food to the underprivileged children who require subsidized food? In this case it must be lobbying. No politician will vote against a budget bill because of such a provision, but maybe its time they should. If congress is going to help to turn the country around this is the kind of thing they need to take a stand for. I see no value in allowing schools to serve nutritionally poor foods, its just another case of kicking the cost down the line in the form of greater healthcare expenses in years to come.

http://today.msnbc.msn.com/id/45306416/ns/today-today_health/t/pizza-vegetable-congress-says-yes/#.TsVR7_JJ92M
Pizza is a vegetable? Congress says yes

The True Fiscal Gap of the United States, Adapted from a Discussion by Laurence Kotlikoff

Fixing the U.S. Economy: A discussion by Laurence Kotlikoff

Laurence Jacob Kotlikoff (born January 30, 1951) is a William Warren FairField Professor at Boston University, a Professor of Economics at Boston University, a Fellow of the American Academy of Arts and Sciences, a Research Associate of the National Bureau of Economic Research, a Fellow of the Econometric Society, a former Senior Economist and President’s Council of Economic Advisers among others.

 

All words below are paraphrases by Prof. Kotlikoff and may not be used as direct quotes. I lacked the resourced to properly record his statements with the accuracy required for quotes. I also re-organized them to make the summary more fluid. Boston University: School of Management, however, may have the discussion on file as a video if you choose to contact them.

 

 

 

• The Real Budget Deficit of the United States
• The current deficit numbers are meaningless. The United States has, originally unintentionally, hid the true size of its debt and kept it off the books.
• Instead of its current method which relies too much on labeling the U.S. should use infinite horizon fiscal gap calculation to determine its true debt.
• This calculation reveals that the United States has a Fiscal Gap (On book obligations + off book obligations) of 211 Trillion USD.
• This number indicates a fiscal gap of 14x GDP, Greece is currently at 12 and Germany at 3.
• What would be required to fix this?
• For the United States: 64% permanent hike in federal taxes or a 40% cut in all non-interest federal spending
• For Germany: A 13% permanent tax hike or 11% cut in transfer payments

• Social Security
• When all the major benefits are combined a baby boomer will receive, on average, $40,000 a year in todays dollars. This will represent about 80% of per capita GDP in 2020.
• The Social Security Administration’s Trustees’ Report disagree with the Congressional Budget Office that they are sufficiently funded
• Table 4B6
• Social Security is underfunded by 29%, it must be cut by 22% just to continue to function.
• This has essentially created a ponzi scheme and in the process wiped out the U.S. savings due to increased old age consumption. The net national savings rate (as opposed to the meaningless personal savings rate) is next to zero. Net investment rate is next to zero.
• This means investment is made up by foreign investors in the U.S. and the current account deficit.

• How the U.S. kept this off the books
• How did this happen?
• This originally started under Eisenhower when he created Social Security as a tax instead of recording it as a loan. They promised each person that they would receive the principal plus more. This allowed the U.S. to keep this debt off the books. Eventually healthcare benefits were added too.
• In order to prove his point, Prof. Kolikoff showed that he could create a scheme that would eliminate the entire U.S. deficit overnight without any money actually changing hands, requiring only the change of language used.
• His point was that the current deficit numbers are meaningless, but people are unable to look past them because it is easier. This is why infinite horizon fiscal gap should be used instead. With finite horizon it can simply be a language game.
• Censorship
• Both Republicans and Democrats have censured this.
• Both Clinton and Bust W. Bush’s administrations outright
• Obama Administration fudged the results by calculating as if Medicate and Social Security don’t exist.

• Private And Public Sector Examples
• When you adjust U.S. earnings for inflation and exclude fringe benefits they are no higher today then in 1964.
• Many companies had a defined benefit plan similar to the Social Security model, however, they are now receiving considerably less then they were originally promised (ex. Delta Airlines).
• The markets value the fact that the U.S. can print money, but this is not the panacea it is proposed to be. Already the fed had printed enough money to quadruple the M1, but banks are sitting on it. We may see prices increase four fold.
• Russia printed in the 1990s to cut real salaries of government employees and pensioners, it solved the government’s problem, but many starved and died.

• The instability of the U.S. Financial System as a whole
• In the U.S. the FDIC has only 3 Billion dollars to ensure 6 trillion dollars worth of deposits.
• One crash can have a ripple effect, such as Lehman.

• His solution
• Limited Purpose Banking, where investment banks become only middle men and are equity funded only.
• He details this more in his book Jimmy Stuart is dead.
• The Purple Plans
• Bi-partisan plans that can be found online.

 

Next Week I’ll start to go over the purple plans and limited purpose banking and post up what I find here. I’ll attempt to reach Professor Kotlikoff for comments as well.

 

Do I completely agree? Not necessarily, I wonder about how the nation could be left uncompetitive by a move to limited purpose banking. I also wonder if it will be as easy for people to invest their savings, I doubt it does us any good if everyone just sits on their savings instead of investing them.  I need to look into this issue much more before I make an opinion, but Professor Kotlikoff does an excellent job of highlighting the problems that many people, and especially our government, like to ignore.

Has China Sucessfully Cultivated its Domestic Consumer Market?

I’ve often said here that I don’t believe China is in the stable position that the world believes it to be because it has failed to capture its own domestic market. Many Chinese are not able to afford the products produced in its country and China relies on cheap exports for a large part of its growth.  The problem with cheap labor exports, is that they don’t produce a lot of revenue compared to other stages of manufacturing. I recall reading a report that claimed that China received only 6c per dollar spent on the manufacturing of the iPad compared to the 20-30c received by Japan, South Korea and Taiwan who fabricated pieces and participated in high tech manufacturing.

Am I correct? That, for now, is impossible to tell as the numbers coming out of China are often unreliable or coerced by the politburo’s long reach. McKinsey, however, just came out with a survey based study that I recommend reading and discuss below.

http://csi.mckinsey.com/Home/Knowledge_by_region/Asia/China/2011_Annual_Chinese_Consumer_Survey.aspx

Full Disclose: My experience with China comes from a few sources. I work for a company called China Programs that promotes summer study programs in China, I spent a little over a month in Shanghai at East China Normal University during the Olympics where I conducted studies of the local population  and have read many journals and taken classes on the subject.

 

Quotes and Analysis/Opinion:

“McKinsey’s 2011 Consumer Report, like those of previous years, is a snapshot of the buying behavior of China’s urban consumers.“

This is an important fact to remember while reading this report. China has millions of migrant workers and a large part of its rural lands are in poverty compared to its cities. Success of its cities does not mean that China has captured its entire consumer base, although cities alone may be enough to move them to the next stage of growth. This disparity may also cause political instability in China.

After being present for a small seminar (Boston University allows it undergraduate students to cross register for graduate classes) and asking questions of Dr. Ho Szu-yin, Taiwan’s former deputy National Security head under Ma Ying-jeou, Taiwan is acutely aware of this fact. The previous administration’s plan (and what it looks like will continue, blue or green) is to preserve the status-quo while civil unrest grows in China between rural and urban in hopes that fundamental change in China will neutralize the threat of reunification before demographic changes in Taiwan render it unable to defend itself due to social obligations maturing

“First-time buyers have been a major driver of category growth in China.
This year, however, among the urban population, only 5 percent of
consumers who spent more did so because they were first-time buyers,
down from 20 percent in 2010.”

This is the slowing growth that I am somewhat concerned about. If it is slowing this dramatically in urban centers, rural sectors will be considerably worse.

“Chinese consumers can be quick to adopt what were once unfamiliar
products, opening up whole new areas of growth. For example, 66 percent
of consumers in the survey said they bought chocolate this year, compared
with 46 percent just two years earlier. Similarly, fabric conditioner and pure
fruit juice were once unfamiliar to the Chinese, but penetration rates are
now as high as 42 and 60 percent respectively.

Although brand awareness is rising, there is little sign that brand loyalty is
following suit. In fact, an increasing number of consumers choose between
a growing number of their favorite brands.”

What I see here is massive opportunity for Western Company growth, but also a potential for them to fail. If they are unable to capture brand loyalty they will spawn domestic competition. When these companies end up inevitably making products that are as high in quality as their western counterparts these companies will face increased competition. These companies also do not have the disadvantage of paying off R&D costs since they can simply copy the current formulas of competitors, although they will have to overcome brand stigma.

“Although almost 60 percent of the population now has Internet access, as
a medium for obtaining product information, its reach remains relatively
limited—only 28 percent of those surveyed said they had recently received
product information from Internet advertising and other forms of online
communication for consumer electronic products, for example. In short,
the Internet has by no means replaced other media channels as an
important source of product information.”

Why? In my opinion this is because in China they have not yet managed to make consumer websites as friendly as western counterparts like amazon, they are not protected by the same laws as western countries so they worry they may never receive their products or they may be counterfeit, there is not a rigid price structure and you cannot bargain online, fears of identity theft, lack of unified shipping services (USPS priority mail helps online businesses in America more then the government realizes) and finally lack of cheaper prices online then in stores.

It could also be partly cultural as the Chinese culture values relationships highly, but I doubt that this is a strong factor.

“Emotional considerations, barely apparent two years ago, are playing a
more important role in consumers’ choice of brand, particularly among
wealthier people.”

Welcome to modern high end branding. Why wealthier Chinese? Most likely it is because it represents a significant status symbol, especially in a place where fake goods are so prevalent. From my anecdotal experience I saw people go to great lengths to prove that goods were genuine and not counterfeit while in Hangzhou and Suzhou.

“The Chinese have taken to consumerism with ease, embracing thousands
of new products, services, and brands. By 2020 and within the course of
one decade, real consumption will have doubled to $4.8 trillion and China
will then be the world’s second-biggest consumer market after the United
States.”

“The government, keen to rebalance the economy, has responded by flagging
domestic consumption as a top priority in its latest five-year economic
plan, which includes a range of consumption-boosting measures such as
subsidies on energy-efficient cars, rebates to rural consumers on purchases
of electronic goods, and an increase in the minimum wage.”

From here I’ll refrain posting and analyzing the rest of the 50 page report. I highly recommend reading it, especially for people who plan to enter the Chinese market.
I do offer some advise to those who plan to try to enter enter the Chinese market (any more then this and you’ll have to hire me):
The Chinese attitude is very different then that found in the western world. They perceive value very different and have a different chain of logic to the point that some unfamiliar with the culture would consider it circular (and even some experts). Traditional tactics will not yet work in the market. If you plan on targeting the rapidly growing middle class you have to take this into account. While the upper class (not including party and politburo members who intentionally avoid this image) has grown to favor high-end western products and product values, the middle class will likely demand a much more sino-centered product line and values. It will be nearly impossible to train sufficient amounts of current western talent to manage a market of over 100 million consumers (what I predict to be at least the middle classes market size in the coming five or so years), so any branch extended to China will need significant amount of domestic talent to be hired but also must be under close supervision to maintain quality and brand assurances as well as prevent ethical misinterpretations of a western logic centered policies.

 

The Size of the Greek Problem According to German Chancellor Merkel

I wouldn’t mind seeing a Sarkozy one too, even better would have been the size of the vein in Silvio Berlusconi’s head leading up to his resignation.

Chancellor

The Real Share of China’s Debt

I’ll post more tomorrow, but here is an issue that has constantly driven me crazy that I can type out in under half an hour.

A lot of sources often like to talk about China’s massive ownership of U.S. debt and refer to it by saying “China owns a majority of U.S. Debt”. I’ll presume that they are talking about treasury bills and public debt, but this statement is still a fallacy.
A majority is defined as 50% + 1. As the graph and pdf of the data show, China is no where near that amount of ownership.

US Public Debt Ownership by MSchapiro

The chart and accompanying data show that China owns under a quarter of U.S. debt. Japan is second at about twenty percent.
What does this mean?

25% is still a significant percentage of U.S. debt, but current economic conditions guarantee that China cannot easily use the debt as a weapon. There are a few reasons for this:

1. There is a nearly insatiable demand for bonds as a stable investment in the current market. Germany and companies such as GE don’t have enough to go around. This why U.S. T-bonds actually have a negative real yield right now. Which means that when you factor in inflation you are losing money.

2. China cannot simply liquidate or call in this debt. Treasury bonds, like any other bonds, have a maturity date. Until such a time as they mature, China cannot magically demand the money. At worst, China can dump them into the market. This would be terrible for everyone at the Federal Reserve and Treasury Department who would have to stay awake for weeks trying to re-balance everything, but at a same time a dumping of the bonds would plunge the yield down even further, making it cheaper for America to borrow money.

3. China’s economy, in my opinion, is not inherently stable. They have failed to capture a local consumer market, so as world exports decrease and hopefully pick up they will have to tide themselves over. Many Chinese companies are also in debt. They are in no position to start playing around with their safe money that underpins the country, or they too will find them in a Greece like situation but far more catastrophic.

 

In the end, China is more stuck with us then we are with them. They cannot dump their treasury bonds without serious repercussions to their own country. Its akin to picking up a stone only to drop it on your own foot. Most of peoples fears of Chinese debt warfare are unfounded and come from a media frenzy and over simplification of a complex financial issue.

Currency war on the other hand… That is a topic for a different day.

For the Weekend 11/5/11

I leave you with this, I found it funny:

Copyright KAL (Used for non-commercial purposes)
http://www.economist.com/node/21536664

Article of the Morning 11/3/2011

Splits Deepen in Greece Over Referendum on Euro Debt Deal

http://www.nytimes.com/2011/11/04/world/europe/greek-leaders-split-on-euro-referendum.html?hp

Quotes:

“Hours after Prime Minister George A. Papandreou of Greece emerged from a meeting with Europe’s leaders here, pledging to hold a referendum on a new European debt deal, key ministers in his government rebelled against the idea on Thursday, deepening rifts within his government on the eve of a no-confidence vote in Parliament that could lead to its collapse.”

“The two leaders also said that no more aid would be given to Greece until after the referendum. This would include the next $11 billion installment of aid; Greek officials have said that without the additional funds, the country will run out of money by mid-December.”

“Divisions within Mr. Papandreou’s government flared into the open on Thursday when Finance Minister Evangelos Venizelos and his deputy broke ranks publicly with the prime minister to oppose the ballot, saying it could jeopardize Greek membership of the euro single currency.”

“The disputes emerged soon after Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France held emergency talks with Mr. Papandreou on Wednesday night to express dismay at his surprise announcement on Monday that he planned a referendum.”

“It was up to the Greek people, they said, to decide whether they want to commit to the agreement — which includes banks’ taking a 50 percent loss on the face value of their Greek debt — and to continue to use the euro.”

“Mrs. Merkel said the referendum “in essence is about nothing else but the question, does Greece want to stay in the euro zone, yes or no?”

I have no idea what Greece is thinking. Their country is leaning off the edge of the cliff. The brain just asked the body to vote on if it should sprint as fast as it can or casually walk off the edge. It is bad enough that the deal is really only a temporary fix that hopes to create a small fire wall around Greece while the EFSF is built in hopes to deter another crisis.  The EFSF does not have the funds to tackle Italy or Spain should they crash as well.

I really wish that Greece and the Euro zone would do less to prove game theory, but instead of cooperating EU members are managing to push themselves further and further into crisis and worrying only about themselves. I would like to say simply let them lie in the bed that they’ve made, but the damage would be too wide if it spreads. Greek credit default swaps have a massive spread around the world, enough to force banks to need to recapitalize. If another country were to enter into a similar situation we would be forced into a global decline.

Here are my predictions for the coming months:

The Greek people will vote out of the plan and their economy will continue on a downward spiral. The European Financial Stability Fund will lack the firepower to stop the second country from entering into their own full blown debt crisis (Spain or Italy, France will probably be downgraded to AA). If they take the path of Greece then the Euro zone will be in a serious danger of crumbling.  The EU will continue to beg China to expend its foreign reserves to bolster the EFSF in crisis, to the point that they even guarantee the debt. China will not take this as its own debt crisis will start to emerge onto the international scene.

Already global economies have shrunk and have a chance to fork on an event most people will be unaware of. If the authorities on CDS decide not to declare the inevitable hair cutting of debt-bond values as a credit event then the entire market of CDSs will crash as they have little point if large haircuts are not considered a credit event (Greece’s debt turn in is voluntary at this point, so there hasn’t been this dilemma yet). On the other hand if they do, most insurance agencies and major banks will find themselves in the situation of AIG in 2008. Either option is bad, the second is catastrophic.

From there, who knows? The world economy is going to be in a very dark place. I imagine that people will start to look for scape goats (mirrors would be helpful) which was the point of the referendum in the first place. Instead we are in a time that I leaders need to take strong action. Our political leaders need to stand on their feet and fix the real structural causes behind these global problems. They have to account for the mistakes they, and their predecessors, made and put the world back on track. Business leaders need to do the same. The most important change, however, must come from the people. People who intentionally remain uninformed or misinformed are the causes of many of these problems. They are free to claim that things are unfair and that they were unaware of situations or what things actually meant, but who is this really an excuse for? If the change is not grassroot, and I do not mean tea party or occupy (they are part of the problem), then it will not become structural and it will not be change, instead it will be more of the same.

Case Study: Microsoft Courier 11/1/11

http://news.cnet.com/8301-10805_3-20128013-75/the-inside-story-of-how-microsoft-killed-its-courier-tablet/

This is an interesting article on how Microsoft lost out on an opportunity and I think the authors miss an important point. While they highlight the fact that Boston Consulting Group’s survey found that many people want an traditional windows business tablet, Microsoft is large enough to do both. Creating the Courier tablet would have given them immense expertise on tablet design, function atheistic, debugging ect. that would have at the very least put them in a position to make a substantially better business tablet since this market is by no means going to go away. This was somewhat of the strategy employed by Microsoft with its first generation of Xboxs as a loss leader. Instead it seems Microsoft will be left with another Zune. A product that comes late to the market and, although better then the competition’s offering and services, fails to properly drum up word of mouth advertising hype.

The real take away here is to let people properly preform their jobs. Microsoft particularly created a skunk works division for the exact reason of creating new and innovate products that help move the company towards a more diversified (read large and more profitable microsoft) product portfolio. In fact it seems that Microsoft has set up an innovation team that rivaled any consultancy team. They had done their homework and come up with an innovate idea and product, so innovative that it still seems interesting even with the iPad 3 launch on the horizon. Had Microsoft followed through, it is hard to believe that they would have regretted the decision. On a corporate level did sticking to their core base of products make sense? Yes. In the long term, however, if the company remains overly conservative how long will it really be relevant? If only people in the financial world are the ones using excel, then Microsoft has lost 90% of its business. I have a feeling AOL went somewhere down the same path.

You can contact me or any other American at informedconservative@aol.com… oh wait.

Articles of the Day 11/1/11

Well, that was an interesting Halloween. Here are a few extra to make up for the weekend, which included Monday, off.

MF Collapses under global euro zone bets
http://www.reuters.com/article/2011/11/01/us-mfglobal-idUSTRE79R4YY20111101

Quotes:

“Corzine, 64, who once ran Goldman Sachs before becoming a U.S. senator and then governor of New Jersey, had been trying to turn the more than 200-year-old MF Global into a mini Goldman by taking on more risky trades.

But once regulators forced it to fully disclose the bets on debt issued by countries including Italy, Portugal and Spain, it rapidly unraveled with no buyers willing to step in.

MF Global’s meltdown in less than a week made it the biggest U.S. casualty of Europe’s debt crisis, and the seventh-largest bankruptcy by assets in U.S. history.”

“Early this morning, MF Global informed the regulators that the transaction had not been agreed to and reported possible deficiencies in customer futures segregated accounts held at the firm,” the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission said in a joint statement

The New York Times reported later on Monday that federal regulators had discovered that hundreds of millions of dollars in customer money had gone missing from MF Global.”

“In the end, regulators and markets reacted swiftly to MF Global’s troubles, which may have been exacerbated by Corzine’s affinity for risk-taking over the course of a career that took him to the top echelons of Wall Street and then into politics.”

“The bankruptcy is reminiscent of the collapse of Lehman Brothers in 2008 at the height of the financial crisis. But market participants said the impact from this collapse, far smaller, would likely be contained.”

This is another matter of banks getting lazy and trying to pull in quick profits but substituting risk for research. A lot of hedge funds will turn a fortune in the eurozone crisis, but banks that took on considerable risk pre-crisis are finding themselves in a tough situation where their debt is only worth 35% of the face value.

Not to mention the fraud here, Occupy Wall Street is going to have a fit if they can actually understand what happened.

A Risky Game Retail Investors Play
http://www.forbes.com/sites/panosmourdoukoutas/2011/10/31/a-risky-game-retail-investors-play/

Quotes:

“With interest rates at record low levels, chasing after high-dividend paying stocks has been a popular trade among retail investors in the last two years… Trading Direct, for instance, lends investors who are willing to assume a heavy debt load at a variable rate of 1.25 percent. “

“On the surface, this game is like printing money, and then some. Investors, who have been playing this game for the last year, they have hit the jackpot: They have reaped off both the “spread,” the difference between the dividend rates and the margin rate, and the appreciation in the price of these stocks that ranges, anywhere between 14 percent and 26 percent, compared to 4 percent for the S&P500.”

“On a closer examination, this is a high-risk game for several reasons. First, it pushes the price of these stocks way above their fair value, e.g., the price warranted by economic and business fundamentals—utilities and tobacco are usually slow-growth industries. Second, as more and more investors chase after these companies, pushing their stock prices higher, the “spread” narrows, making them less appealing—the trade becomes crowding. Third, it leaves investors exposed to a sharp increase in interest rates that may hurt them in two ways: on the investment side, as utility stocks may take a big hit, and on the borrowing side, as borrowing rates may spike higher; and margin calls come in.”

This is one of those unforeseen (well, not really unforeseen, more like the specifics were unpredictable, but it was an obvious strategy) side effects of a low interest rate. Essential bankers can borrow money at a low rate and then invest them in high dividend paying stocks which returns a higher payment then the rate of interest. Free money… except for the risk. You’d think that the people who engineer adjustable rate borrowing that helped to crash the country would know to avoid it, although  my guess is they plan to dumb them and liquidize their holdings the moment the Fed issues signs that it will raise the interest rate.

The Magic Money Tree
http://www.economist.com/blogs/buttonwood/2011/10/euro-zone-crisis

Quotes:

“three aspects of the deal – Greek debt write-down, bank recapitalisation and the boosting of the firepower of the EFSF. On Greece, a 50% writedown of debt is what many people had called for. But this is just a write-down of private sector debt (even then it’s not clear whether this can be achieved on a voluntary basis). A lot of Greek debt is now owned by official bodies who are not willing to take a write-down at all. So Greece will still be left with an 120% debt-to-GDP ratio by 2020, a level that looks unsustainable. The word “solution” hardly seems to apply.”

“Any Greek write-down would hit the banks which is why recapitalisation is needed. But the €106.5 billion being raised is a lot less than others thought necessary (including the IMF). Nor is it clear from whom the money will be raised or whether the capital ratio will be boosted instead by banks shrinking their balance sheets, a development that would be unhelpful for the European economy.”

“The EU leaders really desire a magic “money tree” which would come up with a new source of wealth to deal with this issue. The French hoped that the European Central Bank would act as the tree, guaranteeing all Italian and Spanish debt. The Germans vetoed the idea. Of course, the ECB has no “wealth” of its own; European governments stand behind it. So an ECB bailout would be another back-door way of having the rest of the euro-zone support Italy and Spain, but without telling the voters. (The hope was that such an ECB commitment would act as a bazooka that did not need to be used. By itself, ECB backing might push down Italian and Spanish yields and eliminate the funding problem.)”

“So how to gear up the EFSF without a huge and explicit governmental commitment? The answer was to come up with two complex structures, either an insurance scheme or a special purpose investment vehicle (SPIV). Again, EU politicians were trying to dance round the problem of where the losses might fall. If the weak EU countries pay a market rate for insurance, they may be no better off than before; the insurance cost would offset the lower yield they would pay on the bonds. And if the strong EU nations bear the loss, then their own credit ratings might be affected (notably France’s AAA).

The idea of the SPIV was to get in outside money (from, say, China) to act as the money tree. But the Chinese are (quite logically, from their point of view) likely to drive a hard bargain. They have no desire to bear the losses. They may well demand that the strong European nations guarantee repayment. But if they do so, that leaves the Europeans bearing any losses (and thus back where they started). If the Europeans have to agree political concessions as well, this seems like a very bad bargain.”

“The big lesson from last week is that European governments could not (or would not) sort out the problem on their own. It is hard to see why this was a desperately bullish sign. The bond markets seem already to have seen through the plan; Italian ten-year bonds now yield 6.18% and are close to a record spread over German bunds. “

In my mind this refusal to take responsibility is what caused the crisis in the first place. Three Greek government refused to acknowledge that it had promised things that it could not possibly provide and lied to make them seem possible. The people  of Greece refused to admit that they had demanded these unreasonable benefits from politicians that created the situation and reduce their claims on previous government promises. Instead you have game theory at its worst, with almost all sides refusing to act together and in their self interest. You also has a storm that has the potential to curtail all global growth for this quarter.

Unpaid wages in China: Can’t Pay, Won’t Pay
http://www.economist.com/node/21534838

“EFFORTS to curb inflation in China are having some painful side-effects. A squeeze on bank lending has prompted some businesses short of cash to stop paying wages to blue-collar workers. Even the much-vaunted state sector is feeling the pinch. Work has all but ground to a halt on thousands of kilometres of railway track, and many of the network’s 6m construction workers have been complaining about not being paid for weeks or sometimes months.”

“This[migrant worker discrimination] has done little to protect the more than 150m rural migrants who perform most of the country’s manual labour.”

“Similar problems have also been reported in road building and property construction, prompting a growing number of demonstrations and violent incidents, including clashes with employers and suicides. Such difficulties are likely to get worse towards the end of the year, when companies traditionally try to settle accounts with employees. Wage inflation is adding to employers’ woes. Minimum wages have risen by an average of nearly 22% in the two-thirds of China’s provinces which have adjusted them this year. Nice if you can get it, but not much use if you are not being paid at all.”

This is one of the visible signs of the problems, that I believe, exists in China. No matter what the world believes, or what China convinces it to believe their economy is not stable. It is experiencing a major debt crisis and many of the major industries are unable to compete with their global counter parts without fudging on their financials.  Much of the global belief in the stability of their economy comes from the 1.2 Trillion in foreign reserves that the government holds (with the Europeans screaming my precious and trying to use that same money to revive Greece). In reality that money has been spent multiple times over, China is instead holding it as political capital, but that will not fix the long term problems that I believe are rampant in their economy.

Want an example? Look at China’s high speed rail corporation. Ridership is no where near it was predicted to be (about 50%) and the company itself is in so much current debt that it amounts to 5% of GDP, not to mention operating cost. There was also that ugly incident after that crash where survivors were probably buried along side in the wreckage.

I predict that we will continue to see such short term problems bubble up to the surface and, that for every one we hear about, ten are suppressed.

Student Loans in America: Nope, Just Debt
http://www.economist.com/node/21534792

Quote:

“The total amount of debt is staggering. The New York Federal Reserve Bank puts it at $550 billion, but includes a footnote in the “technical notes” section suggesting this may be an underestimate. Sallie Mae, the school-loan equivalent of the housing industry’s Fannie Mae and Freddie Mac, reckons there are $757 billion-worth of outstanding loans. A bank heavily involved in the area says there is at least another $111 billion in purely private loans, and with new lending estimated in excess of $112 billion for this year alone, the total amount outstanding will surpass $1 trillion in the not-so-distant future.”

I suggest reading this as summarizing it would be hard without quoting the entire article. This article does a good job of point out what will probably be a massive problem in the coming future. Also one can connect this to America’s poor education system. One that funnels (very badly unless your on one of the coasts) everyone into an academic track that may not suit their best interest. In order to promote those children who don’t belong they lower the standards. This creates a double standard in Universities. Many exist to educate those whom the high school system failed. Those students generally leave university with a massive debt and a degree that leaves them unemployable and unable to pay their debt. Ever heard of a better definition for toxic asset?

An important source is the chart provided by the economist. The majority of this debt is public and leveraged and the U.S. government is planning on receiving it as it balances out its budget. A scary thought, one which I don’t have the implications or time (waking up at 7am and going to bed at 2am, I don’t ever advise anyone in any university to take 22.5 credits. Ever!) to fully examine, although I’d be happy to discuss.

Globalization: Extreme Shipping
http://www.economist.com/blogs/banyan/2011/10/globalisation

Interesting to read about globalization first hand and the economy of scale involved in getting products to consumer. Particularly interesting is how few people it takes to run such a massive behemoth.

On a business note, America build’s the world’s biggest carriers, but we can’t use high-tech manufacturing to overtake South Korea for these contracts? It would be interesting to know actually how expensive our labor is that this isn’t feasible. The government of this country needs to start getting experts in to evaluate why we have lost advanced manufacturing that provides middle skilled jobs which this country expertly needs. Without those jobs and an improvement in the American education system I have a feeling for years to come I will be reading about the biggest ships in the world being built in South Korea with German and Japanese parts run by computers with chips fabricated in Taiwan.

Although there is a rosy outlook, with the insurance underwriters for sea voyages lifting its ban on armed guards aboard these massive ships, at least their guns will probably be American.

World Population: Space Invaders
http://www.economist.com/blogs/dailychart/2011/10/world-population-1

Hey, invest in property in cities. As long as Al Gore isn’t right and half the world isn’t underwater your apartment should be exponentially more value.

Maybe this is what college teaches students by forcing us to live in a shoebox?