Author: Matthew G. Saroff

Stupid Federal Reserve Tricks

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I have, on a number of occasions mentioned that the Fed has a habit eliminating statistics that might show them in a less than stellar light, so we have them dropping M3 from their reports, for example.

Well, we have another case of this now, with the Cleveland Federal Reserve ceasing the publication of their TIPS spread derived inflation expectations.

OK, so what is a, “TIPS spread derived inflation expectations?”

Well, the TIPS are, “Treasury Inflation Protected Securities”, basically bonds, with a twist, and the twist is that the principal is indexed to the consumer price index, so over the life of the instrument, you have interest and principal, your original investment returned to you.

They are set up so that the bond stars with an index of 1, and can never go below 1.

The spread derives inflation expectations are a measure of the difference in price between new 5 year TIPS and 5 year old 10 year tips.

Assuming that they pay the same interest, you would assume that they would be identical. In both cases you pay your money, and you get all your money back, plus interest, after 5 years, right?

Wrong.

This is wrong, because after 5 years, those 10 year bonds are at an index of 1.2 or so, while the new bonds are at an index of 1.0, which means that if you have deflation, the 10 year bonds can drop back to some number between 1.2 and 1.0, while the 5 year bond will, under those circumstances, stay at 1.0.

In the event of flat prices, or inflation, they are identical.

So, the 10 year bond with 5 years left is somewhat riskier, because you can lose up to 20% through deflation.

So the question is, what do people who buy these bonds think of this risk?

If they think the risk is small, then the price difference (spread) between the two bonds in the open market will be small, and if they think that the risk is large, the spread will be larger.

So, the market has increasingly been saying that they have high deflationary expectations, which translates to “Depression” for the rest of us, and the Federal Reserve Bank of Cleveland finds this inconvenient, so they will stop publishing the data.

It’s Become a Much Less Friendly World for Secret Bank Accounts

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I don’t know who found pictures of Lichtenstein’s royal family engaged in unnatural acts with a sheep, because, they have announced that they have, “agreed a landmark deal with the U.S. to drop bank secrecy in cases of tax evasion and could make similar concessions in the European Union.”

They now have to show evidence of likely tax evasion, as opposed to proving that there is deliberate tax fraud, which, you know, you generally cant without having access to the accounts in the first place.

You are going to see a whole bunch of people paying back taxes soon.

Family Bragging Rights

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My daughter, Natalie is on the “Principal’s Honor Roll” at Franklin Middle school, which means that she is maintaining an above “B” average.

Considering the challenges Natalie has had, she had problems learning to read and she is still on an IEP,* this is a very pleasant development.

We took her out to an Italian restaurant that she rather likes by way of reward.

*Individualized education plan, a personalized plan to address the specific needs of a special education student.

Automaker Updates

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Well, let’s be clear here, the problem is not just that people are not buying cars from the Big 3 (Big 2½), it’s that they are not buying cars from anyone.

Year over year, we have domestic sales filling by: GM ↓41%, Ford ↓30%, Chyrsler ↓47%, Toyota ↓34%, Honda ↓32%, Nissan ↓42%, and Hyundai ↓40%.

That is simply not sustainable, and with its lack of a foreign presence, Chrysler is clearly in the worst shape of the lot.

So, we now have the CEOS of the Big 3 (Big 2½) going before Congress and abasing themselves for operating cash, along with the obligatory promise to pay themselves $1/year.

The investment bankers did not do this, and they are still getting multimillion dollar bonuses.

Chrysler and GM are still saying that they need the money to function, though Ford is still saying that they just need a loan guarantee to in case one of the others goes belly up, and it sets up a cascade of bankruptcies among the parts suppliers.

Also, the amount of money has increased, from $25 billion to 34 billion…Which is still a lot less than the $7 trillion promised in one form or another to the Wall Street set.

Election Update

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Well, in Minnesota, the Coleman campaign withdrew 650 ballot challenges in response to the withdrawal of challenges yesterday by the Franken campaign.

It will come down to the challenges and the excluded absentee ballots, but I think that Franken has a slight advantage.

Also, on a sad note, Tom McClintock (R) beat Charlie Brown (D) in Doolittle’s old district in California.

A heart breaker there…Less than 1800 votes out of about 360,000 cast.

Pass the Popcorn

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Well, it appears that Nora R. Dannehy, the US Attorney assigned to investigate the politically motivated firings of US Attorneys, has been aggressively pursuing the case, “meeting with defense lawyers, dispatching subpoenas and seeking information about the events.”

What’s more, one of her investigators has formally contacted Alberto “Abu” Gonzalez, which means that any lies or omissions to that investigator are handled under obstruction of justice, which is much easier to prove than perjury.

I Don’t Wish That This Was Still England,

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But I do wish that we had their banking regulators:

Banks will face huge fines if they do not treat their customers fairly, under a crackdown to be announced by the Government today.

Ministers have decided to turn the voluntary code of practice operated by the banks into a legally-binding one, amid mounting concern that they are flouting their own rules during the credit crunch. The move follows claims that small businesses and individual customers have had the terms and conditions of their loans and overdrafts changed overnight by their banks.

PM Harper Closes Canadian Parliament for 7 Weeks

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It’s to prevent a no confidence vote of his minority government, which went completely nuts following the last election, and attempted to defund the opposition parties, pass strike bans, and fight the downturn with Hoovernomics.

The mask slipped, and it was enough to make the various members of the Liberals, NDP, and BQ decide to form a coalition government, and throw him out.

While I do think that the Conservatives might be able to do something in the next 7 weeks to hold onto power, it would involve dumping Steven Harper and finding someone who is not a serious right wing nutjob as party leader.

As it stands right now, the Conservatives are running around screaming, “Coup”, and saying that it would be a disaster for the BQ to be a part of the government, because they want to secede from Canada (OK, they are right on that one, but the Tories are a worse disaster).

There has not been a government change in Canada without an election since 1924, but it is a legal move, and it’s intended for moments like this.

It should be interesting to see whether the Conservatives can peel off some Libs or BQ, or whether some Tories will move away from Harper.

Any Canadians want to handicap this?

Economics Update

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First, Calculated Risk’s Credit Crisis Indicators are either flat or down, and the 3 month treasure note is still at 0.005%, which means that people basically put their cash in a mattress, so that is how freaked investors are, and how much they look for a safe haven.

Of course, what with the Bank of England cutting its rate by 100 basis points to 2%, it’s not like there is a whole bunch out there that is going to generate decent return anyway.

The weekly jobless claims posted a surprise drop, but continuing claims rose to a 26 year high.

Additionally, we have factory orders falling by the most in 8 years, which is completely unsurprising, as factories do not order much if consumers are not buying, and we are seeing double digit drops in buying this holiday season.

Considering that demand for commodities is falling with the economy, it’s not a surprise that oil has fallen to less than $44/bbl, and retail gasoline price has falls below $1.80/gallon.

Illiquid

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Remember how I said that it was the scariest word in finance?

Well, now that Harvard is trying to get its endowment out of some private-equity stakes, we are seeing illiquidity in these markets:

A push by the richest U.S. universities to unload their stakes in private-equity funds is flooding the market, driving down prices for the world’s best- known buyout firms.

Investors led by Harvard University, which manages the largest U.S. endowment at $36.9 billion, may increase so-called secondary sales of private-equity funds to more than $100 billion during the next year, overwhelming available pools of capital. Interests in funds managed by KKR & Co., Madison Dearborn LLC and Terra Firma Capital Partners Ltd. all are being offered at discounts of at least 50 percent, according to people familiar with the sales

(emphasis mine)

Illiquid: You have assets, but no buyers, so those assets are worthless, or near worthless. This is what Greenspan’s “financial innovation” have gotten us.

Iraq’s Parliament Approves SOFA

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Im not sure how I missed it, but it appears that the Iraqi parliament approved the status of forces agreement with the US in a rather raucous session.

The final capitulations required of Bush and His Evil Minions™ to get this passed are an indicator of just how weak Bush is. He gave away the store, because to do otherwise would require him to admit that Iraq was a mistake, and he’s to narcissistic to do that.

More Money to Steal

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It looks like Hank Paulson and His Evil Minions™ and his evil minions have are considering they need to steal the second half the $700 billion in bailout money:

U.S. Treasury Secretary Henry Paulson is debating whether to ask Congress for the second installment of the $700 billion bailout package, concerned about competing demands for the funds and a potentially hostile reaction from lawmakers.

This is an easy one for members of Congress.

Paulson is incompetent and corrupt, choosing to serve his friends over the nation, and doing even that incompetently.

Legal Humor

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So the good professor Dorf is discussing the issues caused by the 2nd amendment intersection of DC v. Heller and the sad matter of New York Giants receiver, and sad sack, Plaxico* Burress, who shot himself with his own unregistered gun in a New York night club:

Which brings us to Plaxico Burress. Suppose he had applied for a NYC handgun license. As I read the application materials, he could not have gotten a carry license because he had no reason related to his business to need to carry a handgun. His story that he needed a gun because he wears a lot of expensive bling and carries a lot of cash, while touching, doesn’t establish a business need. Burress’s business is catching footballs, and with the possible exception of playing the Eagles on the road, would not generally expose him to the risk of armed attack.

(emphasis mine)

After cleaning my screen, my thought was, “Ahhh yes….Philly sports fans….The only people capable of making me feel empathy for former Dallas tight end Michael Irvin.”

*Ask your physician if Plaxico® is right for you. Nursing and pregnant women and persons with sensitivity to lead should not take Plaxico.†
†As much as I’d like to, I cannot claim credit for this line. Manny at Stellar Parthenon came up with this.

What the Other Matt Said

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Matthew Yglesias again:

To go stronger here, it’s worth observing that absolutely integral to starting to achieve success in Iraq was the rolling strategic decision to abandon our main war aims. In particular, we’re now neither trying to create a strong Iraqi state, nor trying to create an Iraqi state that isn’t dominated by pro-Iranian forces, nor trying to create an Iraqi state that’s a base for American military power, nor especially trying to create a stable Iraqi democracy. I think all of those decisions were the right decisions, based in smart pragmatic thinking about Iraqi realities and American interests. But if we didn’t want to do that stuff, that we could have just not invaded in the first place. Which is exactly what we should have done!

(emphasis original)

Too true.

Obama Staffing Update

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Somr more leaks;
Mary Beth Maxwell on for Labor Secretary, which is interesting. She is gay and the founding executive director of American Rights at Work…..I’m not sure if this is good sign, that Obama wants a strong labor person , or a bad sign, that he could put a gay person there to act as a safety valve to diminish pressure on eliminating DADT.

It also appears that Rep. James Ramstad (R-MN) is his choice for Drug Czar, which counts as a Republican on the cabinet, though there is a lot of opposition.

Ramstad has a record of opposing things like needle exchanges to bring down AIDS rates, and voting against increased funding for treatment. He is a lock them up kind of guy.

For Trade Representative, the word is that it is, Representative Xavier Becerra (D-CA), who has some fairly good cred on the free trade agreement skeptic side of the house. He did vote for NAFTA, but has publicly regretted it ever since, and has been a harsh critic of recent agreements.

Election Update

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Well, the Franken campaign is now explicitly claiming that it is in the lead over Coleman, maintaining that his campaign is using bogus challenges to keep their numbers up.

They say that their lead is somewhere in the mid 20 vote range (here and here)

Basically, they took notes of all the challenges, and recorded the precinct staff’s opinion as to the clear intent of the voter.

Additionally, it appears that 133 ballots have gone missing from a solidly Franken precinct.

Even if the missing ballots are a clerical error, and I doubt it, it’s been clear from the start that Coleman is going full Bush 2000 on this.

Economics Update

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Well, some employment numbers are out, and they suck wet farts from dead pigeons. Job cuts in November were up 148% from last year, 181,671 according to Challenger Gray & Christmas said and 250,000 according to ADP.

Other metrics are bad too, with the Fed’s Beige Book showing economic slowdown in every one of the Federal reserve districts, and the Institute for Supply Management’s Non-Manufacturing Index dropped off a cliff, falling to 37.3 from 44.4 in October.

Service activity in Europe is falling, with the Euro Zone service activity falling to a 10 year record.

In retail, we have Retail Tracker more than tripling its estimate as to the decline in this years holiday shopping season.

There is some bright news, with mortgage applications rising 112% in last week, though I tend to believe this analysis, that this is not new demand, but people scrambling to lock in the rate.

It’s one of those things that makes week to week stats noisy.

What isn’t noisy is the fact that Manhattan empty office space has doubled, and if there is a glut of office space there, there’s a glut of office space everywhere.

In international finance, we have, VEB, a Russian State Bank asking for a $34 billion cash injection, and the Kiwis% and the Thais central banks slashing their rates by 150 and 100 basis points (1% and 1.5%) respectively.

This makes it no surprise that the dollar gained against the euro and pound.

In energy, despite OPEC’s announcement of its intent to cut wasdown again today, and retail gas prices fell for the 77th straight day.