Financial topics

[Tom Mazanec]

Matt:
Parts 3 and 4 give "page not found".

[StilesBC]

yeah, sorry. Blogger screws around with the URLs sometimes. Just go to the root, http://futronomics.blogspot.com and scroll down.

[wtf]

Just saw a Hyundia car advertisement while watching football that made me say wtf:

They are offering to let you buy a car and if you "lose your income" in the next year they'll take it back. Has anyone seen this offer? I think its a sign of things getting much worse.

FOUNTAIN VALLEY, Calif., Jan. 2 /PRNewswire/ -- Hyundai Motor America announced today an agreement with WALKAWAY USA, LLC to offer consumers unique financial protection in this uncertain economic environment called the "Hyundai Assurance Program." Beginning today, Hyundai will provide a private label version of WALKAWAY(R) Protection for Automotive Financing as a complimentary 12-month vehicle return program provided on every new Hyundai that is financed or leased at participating dealers. WALKAWAY USA, LLC is a wholly-owned subsidiary of EFG Companies, a Dallas-based, national performance management company serving the retail automotive industry.

[Higgenbotham]

Somehow this discussion of Federal Reserve Notes and Treasury Bills seemed to be a rehash of a previous discussion on this forum. In fact it was previously discussed under the topic of "Defensive Interpretation of Generational Dynamics" in October.

http://generationaldynamics.com/forum/v ... 4e829#p676

The post by Disillusionist linked to above contains a link to an article by AE Fekete that discusses the relationship between Federal Reserve Notes and Treasury Bills. Fekete writes:

"Thus there is a serious obstacle in the way of increasing the money supply by increasing the volume of FR notes in circulation, giving the lie to Chairman Ben Bernanke’s promise to air drop them from helicopters. The obstacle: falling interest rates. For example, if the T-bill rate dips into negative territory, then the market value of T-bills exceeds their face value and the Federal Reserve "cannot afford” to buy them in the open market. The shortage of eligible collateral will restrict the inflation of FR notes in circulation."

Below the post by Disillusionist there is a discussion of the Treasury Bill market and some speculation about how long T-bill interest rates could stay negative.

On a previous page here, I had interpreted one of Exter's statements to mean that the supply of Federal Reserve Notes can increase as bank reserves are converted to FR Notes. Fekete gives another view. Could all bank reserves that can be used to buy FR Notes go to a premium and therefore make the conversion uneconomic, so that the Fed is unable to buy reserves in exchange for FR Notes? I do not know the answer to this question.

We did see Treasury Bill rates go negative last month briefly. I have a Treasury Direct account and sold some T-bills since that discussion took place. The way such a sale works is the bill is transferred to the Federal Reserve Bank of Chicago and sold in the dealer market to the highest of 3 bidders. If T-bill rates go negative, the seller would get more than face value in such a situation, even though only face value would be paid at maturity. However, the sale is paid in electronic dollars wired to a checking account. Therefore, in order to collect the premium over Federal Reserve Notes in the event of a decoupling of electronic money from paper money as Fekete describes in the article, one would have to go to the bank that the funds are wired into and withdraw the Federal Reserve Notes before the actual supply of is exhausted, if there are indeeed real limits as Fekete claims.

However, as I stated later in the thread below the post referred to above, I am not sure negative T-bill rates can exist for very long because if rates go negative maturing bills can be rolled over into zero percent Certificates of Indebtedness instead of new bills (that would cost more than face).

So the parameters are considerably different than at the time leading up to the banking crisis in the 1930s and really I cannot be sure how it will all play out, but these may be some relevant facts that everyone can use to make their own interpretations.

[Higgenbotham]

Well, this question of negative interest rates is being addressed this weekend. President of the Chicago Fed says below zero rates are not possible. Wonder what he means by that, if he's referring to fed funds or otherwise. Fed funds are the first layer of bank reserves, referred to as primary reserves, as I understand it. Treasury Bills would be secondary reserves.

Evans says Fed needs to mimic below-zero rates

By Ros Krasny

SAN FRANCISCO (Reuters) - A grim economic outlook highlights the need for the Federal Reserve to step up quantitative measures to boost growth, with official interest rates already effectively at zero, Charles Evans, president of the Chicago Fed, said on Saturday.

Evans said that based on the outlook for rising unemployment, falling industrial production and a wider output gap, economic models suggest rates should be below zero.

"If it were not constrained by zero, those models would want to push it below zero, but that's not possible," Evans told reporters after a panel at the American Economic Association's meeting in San Francisco.

http://uk.reuters.com/article/companyNe ... dChannel=0


Well, the Fed governors are really out in full force this weekend. Here's another one.

Yellen says Fed can expand unconventional policies

By Ros Krasny

"As the nation's central bank, the Fed can issue as much currency and bank reserves as required," Yellen said.

Still, the Fed needs to ensure that it has an "exit strategy" to wind down its various programs in a timely way when they are no longer needed, she said.

That's kinda funny. Wonder if she'd like to join the forum and take questions on that.

http://www.reuters.com/article/ousiv/id ... Q920090104

[jwfid]

I look forward to your comments.

Matt Stiles

Hi Matt,

Very interesting blog. Please let us know when you post stuff like this. Like you said, it's like watching history in the making these days. I was thinking the same thing when I first became glued to economic news after AIG bailout.

I like many of your predictions for this year. I have four different scenarios that currently I'm thinking about. One of them happens to include massive nationalization of not only the financial industry, but also other major and important ones including the utilities. Your post, and I think a post by Nouriel Noubini also predicts more nationalization of the financial industry this year. Good job Matt. Keep it up.

"May you live in interesting times". -unknown

Joe

[freddyv]

Government stupidity and overregulation was the cause of all this fraud. The sickening scandals we have uncovered lately are an effect of the former.

I disagree with the root cause. If you understand Generational Dynamics then you see that it is the loss of those who had the needed experience that allowed all of this to happen. ALL OF THIS: Madoof; derivatives; Calpers; an average P/E of 20 for over a decade; sub-prime and alt-a loans; the belief that the stock market would never go down for any length of time; a lack of savings by Americans; the debt build up by Americans; the belief that government can bail us out; house flipping; CNBC [haha]; etc.

Any of those things could happen but they would not all happen without the generational dynamic. I don't mean to belittle what you say but that is what this site is about and there are lots of other sites that discuss economics while this is the only one I know of that discusses it with the focus on the generational factor and correct me if I am wrong, John, but the theisis is that Generational Dynamics is the underlying factor in causing all these outcomes; the outcomes are all but predestined; the specifics are what we can't be sure of until they happen.

If you know the real root cause then you know the cause and also know what will stop it: true capitulation. The kind that comes when nobody wants to own stocks anymore and people are only worried about how to pay the power bill and could care less about becoming a millionaire by flipping houses and even though the housing market has bottomed nobody is willing to speculate in it anymore because houses are for living in not for making money off of.

--Fred

[freddyv]

And I'd also like to point out to all the GD readers that I have finally completed the final part of my 6 Part preview for 2009 on the financial markets and economy. Do take a look:

Part 1 - http://futronomics.blogspot.com/2008/12 ... eview.html
Part 2 - http://futronomics.blogspot.com/2008/12 ... tlook.html
Part 3 - http://futronomics.blogspot.com/2008/12 ... tlook.html
Part 4 - http://futronomics.blogspot.com/2008/12 ... tlook.html
Part 5 - http://futronomics.blogspot.com/2009/01 ... tlook.html
Part 6 - http://futronomics.blogspot.com/2009/01 ... ughts.html

I look forward to your comments.

Matt Stiles

Excellent insight.

From part 2:
"To me, the most important manifestation of this worldwide crisis is in the change in psychology and the resultant change in consumer behaviour. Previously, saving money was of no real use. Everybody “knew” that buying assets was the way to get ahead. Assets always rose or at least held their value. But that psychology has changed. Prices have begun falling, and people would far rather save their money or pay back debt than buy something that is falling in price. Banks appear to be operating on the same premise"

I think this is the key of it all. This is at the very essence of what is happening and what has already been set in motion and can't be stopped, IMO.

--Fred

[Gordo]

The price of gold -- in any given currency -- is determined by the
marketplace. Nothing else. The value of a currency -- relative to another currency -- is
determined by the marketplace. Nothing else.

True, but a somewhat pointless statement. The price of ANYTHING is determined by the marketplace (unless its specifically set by a government). The question to ask is - what influences market participants? what changes in supply and demand are expected? If you think dollars are going to become worthless, you look to exchange them for some other "store of value". Goldbugs think that "other store of value" should be gold, because gold has been a "currency" for thousands of years, although it certainly doesn't play the same monetary role today that it has in the past and you can't directly spend it anymore except perhaps if you are doing small business with a fellow wacky goldbug.

I don't consider myself a goldbug. I'm quite a "gold skeptic" actually. Supply is always increasing, you can't do much with it (little industrial use) so pretty much all that has ever been mined for thousands of years is still sitting around. Its basically as big a leap of faith as paper currencies as far as its "real" value goes. The industry is full of charlatans & hucksters who play on people's fears, and charge obscenely high commissions.

That said, the value of a dollar was pretty stable for over 100 years while we were on a gold standard, yet since 1913 when the Federal Reserve was chartered, the value has fallen by 95 percent. If you REALLY believe the government & fed with a fiat currency CANNOT devalue/depreciate the currency, how do you explain the massive loss in value over time, which happens at a pretty steady annual pace most of the time and seems to accellerate when the government is blowing more $ then normal (like they are doing now)??

There are reports of a "race to the bottom," as different countries
try to devalue their currency.

In general, all fiat currencies are always falling including the dollar, the only thing that makes one appear to be going "up" is that its falling "less fast" than the one you are comparing it to.

In the past week, we've seen devaluation stories for the won, yuan and
dong. (I really wanted to write that sentence. It refers to the
currencies of Vietnam, China, and S. Korea.)

The dollar cannot be devalued in any similar way, because it's the
world's reserve currency.

WHO CARES ABOUT "IN ANY SIMILAR WAY"???? Why does the way it happens matter AT ALL??? Do you actually believe that it is impossible to depreciate the US dollar? If so, I will be rolling on the floor with laughter.

If the US tries to devalue the dollar by "printing money," then the
only reaction of other countries will be to further devalue the won,
yuan, dong and other currencies.

Competitive currency depreciation is to be expected.

Geez, of COURSE the government can default. The supposed ability to
print infinite amounts of money would be unacceptable to other
countries

This has to be the strangest things you've written. Printing money to pay back a loan with depreciated currency (which is what we've been doing for decades already by the way!) is unacceptable but DEFAULTING IS OK??? Uhhh, yeah...

"Backed by gold" is totally, utterly meaningless.

Yea, we finally agree on something!! Yes, people that want to return to a gold starndard are naive. A gold standard doesn't help you when you have no idea when your government will just abandon it! There are ways to protect yourself against inflation, so just the fact that your money is always decreasing in value alone doesn't necessarily mean a fiat system is "bad". Government abuse can make it "bad" but that can happen under ANY system including a gold standard.

> And why would you accuse Thomson/Reuters of fraud for reporting
> analyst estimates? They can report on anything they want, even
> indicators that are notoriously horrible at turning points in the
> economy (analysts as a group always remain wildly bullish long
> into downturns, well they are normally bullish at all times
> anyway).

Anyone who wants to begin to grasp the debauched generational values
that have created the current financial crisis, or would like to
understand how almost an entire generation can be totally lacking in
morals and ethics, need only read this paragraph.

Sure, why not? An investment bank can sell any worthless securities
it wants, and lie about it. Who cares, as long as the sales people
get their fat commissions. Who cares if millions of investors, old
people, and local communities are totally screwed? Let them do
anything they want.

Or who cares if they collude with Moody's and other ratings agencies?
They "can report anything they want," as long as they get their fat
fees and commissions by providing AAA ratings for worthless crap?
Who cares if widows and orphans have to starve? I mean, screw 'em.
Let Moody's do what they want.

Or who cares if people like Madoff screw all their friends and
relatives, leaving them to discover that their lifetime savings -- 60
years of working and saving -- have been wiped out? Fuck 'em. If
these investors are so utterly stupid that they can't spot a simple
Ponzi scheme using two sets of books, then they DESERVE to lose their
entire life savings. Madoff can do anything he wants. Why not?

Or who cares if politicians and regulators don't want to say anything
about Fannie and Freddie because they're making so much money for
themselves on the fraud? Why not? Who cares if millions of
homeowners get foreclosed and have to live under bridges, as long as
Barney Frank and Christopher Cox get what they want? Fuck everyone
else.

The answer to your question is this: The same earnings estimates have
turned out to be wrong for five quarters in a row. Thomson Reuters
would have to be total morons not to have noticed this. "Fool me
once, shame on you; fool me twice, shame on me!" Well, they were
"fooled" five times. If it turns out that they didn't do enough due
diligence -- or that they looked the other way -- because they didn't
want to lose their fat commission and fee checks from the companies
they were reporting on, then it's securities fraud, and they should go
to jail.

I think you are confusing Reuters - which is a NEWS AGENCY and Fitch/Moody's which are RATING AGENCIES. There's a BIG difference. Reuters has been reporting ON analyst "calls" for decades, kind of like how CNBC has idiots on EVERY DAY who gives their own estimates.... Notice I said: "They can report on anything they want", but you changed this around to "can report anything they want" (even using quotes for some reason as if you were quoting me?). Maybe you don't see the difference, but I do... I share your concern and outrage about fraud. I do NOT however think its fraud to report on analyst estimates, no matter how bad they are, if it was, then you would be guilty as well! You act as if Reuters is somehow scheming to rip people off, but I just went to their website and its anything but "perma bull". I see they have a whole section linked right on their front page dedicated to covering news about the global credit crisis:
http://www.reuters.com/news/globalcoverage/creditcrisis
First article in that part of their site: "Economists see jobless surge, deeper housing hole"

So they obviously report on economists that are pessimistic as well as optimistic.

[Gordo]

By the way, the best investment opportunities in the past century mostly occurred during the Great Depression, when the overall U.S. stock market rose an average of 93% on five separate occasions over a period of just eight years. We are in a period like that now, and 2009 will be one of the first chances in seven decades to double your money in a year. That doesn't mean it will be easy, but it will be within reach to those that understand the market.

TBT up another 6.5% today by the way. I think this dramatic rise in the last few days is a very important new trend.