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  • Prophet Bernanke Plans for Inflation
    This article seems either to be simplistic so that it can be frightening, or else frighteningly simplistic. The author seems to ignore the linkage between deflation and inflation; namely, that there is a point in between where there is neither inflation nor deflation. If a central bank is taking action to avoid deflation, it must risk overshooting its mark to be effective. Clearly, the Fed is more concerned with preventing a deflationary spiral than it is with causing higher than desirable inflation in the future.

    However, this does not mean that high inflation is certain. To understand this, one must have a little basic knowledge about the money supply, and more than a cursory look at Bernanke's quotes above.

    First off, there are basically two major economic actors when it comes to the money supply. There are the banks (collectively) and the central bank (the Fed). The former is far more powerful than the latter. The creation of money in the economy primarily occurs through banking activity; then a bank takes a deposited dollar and lends it, that loan is are subsequently deposited in another account, and where there was one dollar in deposits there are now two. When the banks stopped lending, this primary driver of money creation also stopped. Worse, as banks have collectively moved to shore up their capital positions, they have been reducing the money supply, which will tend to make money more valuable - deflation.

    The Fed (backed by Treasury) is a much smaller player than the collective banking sector, and so to counteract the deflationary actions of the banks has had to move in unprecedentedly large ways. But these actions are not necessarily inflationary.

    In a normal time, in fact, in any other time since 1933, recent Fed actions would have had huge inflationary impacts. But because of the shrinking the money supply resulting from the credit contraction, these actions are not currently inflationary. The question is what impact these actions will have in six months or a year or two years, as the credit markets heal and begin expanding again. The author, and lots of others, are quite sure that the answer is that we are certain to see very high levels of inflation.

    But a more careful look at these carefully considered actions is warranted. After all, Bernanke's been studying the Great Depression, or more specifically the monetary aspects of the Depression, for virtually his entire academic career. Those who would assume he doesn't know what he's doing, or has not thought this through, or doesn't care about future inflation, don't really understand the problems and solutions.

    The trick here is not in flooding the markets with Fed-derrived money to replace that lost through the credit collapse. The trick is on the other end, in removing the additional money as the banking industry moves back to a more normal money-creating paradigm. The combination of Fed actions to date and Bernanke's quote above show that the Fed is well aware of the upcoming problem.

    The TARP preferred investments in the banks are a good example of thoughtful government action (even if it wasn't what they originally said, and even if the idea came from overseas). The banks will take the money and it will help them improve their capital positions, enabling them to get to normal lending faster (that it hasn't happened yet doesn't mean that it won't). As banks become more comfortable with their position, and more importantly with the economy as a whole, they have a strong incentive (high dividend payments) to pay back the government equity, which will take money out of circulation, which will be anti-inflationary.

    Bernanke's discussion above about buying 2-year Treasuries to manage interest rates is also very thoughtful. The idea here is that a two-year period is long enough for the economy to recover from vitually any deflationary shock (if managed well on the front end through massively expansionary monetary policy). The Fed buys the 2-year-ish notes, injecting money into the economy, which then goes elsewhere. In two years, when the credit markets are recovering, the federal government pays off those notes, but instead of the cash re-entering the markets, it goes to the Fed instead.

    Basically, the Fed puts money into the market now that would normally not re-enter the market for two years. The net result in the money supply in two years is zero, so that beyond the two-year period the action has no impact on inflation. In the short term, however, it is inflationary -- or anti-deflationary, which is exactly what is needed.

    Basically, the Fed isn't run by a bunch of morons. Give them some credit for being thoughtful and being studied, and take some time to try to understand the forces at work. What they're doing may not work exactly, as crisis intervention is sloppy work. But it is NOT sure to fail.
    Dec 28 14:04 pm |Rating: +7 0 |Link to Comment |View article
  • TARP Is Bad for Dividend Investors
    I couldn't disagree more. It's not the TARP that's bad news for investors, it's the current economy and credit crisis. That State Street is using the TARP as its excuse for not raising the dividend is unsurprising, as it wants to maintain this "dividend aristocrat" reputation, but can't responsibly raise its dividend currently. There's nothing in what is quoted that indicates that the TARP means the end of dividends or dividend increases.

    The first paragraph is quite similar to language seen in any preferred share prospectus; the company may not pay dividends on common stock unless it pays dividends on the preferred, and in the case of cumulative preferred unless it has paid all dividends owed to date.

    The second paragraph says the Treasury must give consent for an increase in dividends. It doesn't sound at all that Treasury is putting undue restriction on dividend payments. Rather, it's making companies justify any dividend increases. Sounds logical to me.

    I don't think any company that's successful enough in this environment to increase its dividend would face a Treasury "veto." I also don't think rational investors should expect any company to increase dividends these days. I'd rather see companies conserving cash or making smart acquisitions.
    Dec 31 10:58 am |Rating: +5 -1 |Link to Comment |View article
  • Get Ready for a Fed Induced Period of Inflation
    "So the Fed... print[ed] money. It’s a great tactic short term to get things going…normally (but usually a bad mistake longer term for the economy)."

    But these are not normal times, and not because banks normally pass low rates along. These are not normal times because we have not seen a deflationary threat like this since the 1930s.

    "Just as the markets have gone through extreme swings, so have the banks in their lending habits. Since they perceive more risk now, they keep rates higher to compensate for that risk even though the Fed has reduced interest rates to a range of 0% to 0.25% (effectively zero)."

    No. Credit didn't stop flowing because of a perceived increase in risk. Credit stopped flowing because banks are faced with losses they are unable to quantify, and must increase their capitalization to cover their losses, but don't know by how much. This is clear from the halt of not just "risky" lending, but all lending. When ALL commercial paper comes to a screeching halt, it is not increased risk perception driving the train.

    "However, with the extreme amounts of money that they’ve had to pump into the country and with effectively zero interest rates, once the banks do start to loosen their grip on the money, it’s going to unleash an inflationary wave."

    Not necessarily. Consider the TARP innvestments. The government injects capital directly into the banks. The banks use that money to improve their capitalization, which will lead them to normal lending sooner. As they recover (and more importantly as the economy recovers), they will increasingly wish to be rid of the high dividend payments due on the government's preferred shares, and will repay them. The money injected today comes out as the economy improves; the anti-deflationary action of today does not become the cause of inflation tomorrow.

    I'm not Pollyanna-ish enough to think this will work precisely, but the mechanism is more thoughtful than most seem to understand.

    "When this happens, the “bond bubble” in Treasuries will pop, as money floods out of there back into stocks and commodities. So the cost of goods will go back up, stocks will finally recover and so will the economy."

    You have it backwards. While there will certainly not be inflation until the credit markets begin to heal, risk aversion will subside first. As investors realize the world's not ending and are willing to take on more risk, money will flow out of Treasuries and into everything else, which will cause yields to increase. But rising yields are not inflationary (they can be a symptom of inflation, however, as investors demand higher yields due to increased inflation risk).

    As Treasury yields increase, so will yields across the board, and banks will have a greater profit motive to drive lending. As credit markets normalize, that's when inflation becomes a potential problem, but not a certain one.

    "However, the excessive amounts of money pumped into the economy will produce the next “bubble type” environment."

    Upon what do you base your claim of "excessive"? Compared to what?

    "We do run the risk of [hyper-inflation] in light of the stimulus that the Fed has already put into play."

    Nonsense. Again, upon what do you base your assumption that the stimulus has been inappropriate, excessive, or medium-term inflationary?

    "If you remember, Alan Greenspan took interest rates to 1% and held them there for a while. Many economists blame the latest bubbles on that “super cheap money” type environment."

    Many more pundits than economists. Economists tend to understand that the Fed didn't force any bank to make any bad loan, didn't force any insurance company to write any CDS, and didn't allow the CDS market to remain unregulated. Rates of 2003 were comparable to rates in 1950 - why didn't we melt down then?

    "Well, if you thought 1% produced an eventual bubble, wait until you see the eventual effects of a 0% policy that we currently have. On top of that, consider the trillions of dollars being pumped into the economy

    "...and the Fed’s purchase of Treasuries that will only exasperate the Treasury bubble and thus further exaggerate the stock and commodity bubble to follow."

    Consider this. Suppose the Fed pumps money into the economy by purchasing lots of securities (Treasuries, agencies, even corporate and other debt) with an 12-month to 24-month maturity. Yields on these instruments fall, and hopefully interest rates across the board also fall, helping to lead the economy out of the current crisis. In one to two years, as these bonds mature, the cash is repaid to the Fed, which takes it out of circulation. The impact today is an increase in the money supply. The impact in two years is zero, as the money that would otherwise have entered the market when bonds matured is instead retained by the Fed.

    Basically, the Fed's action moves the growth in the money supply from the future (when we hopefully won't need it) to today - when we desperately need it. Does it mean no inflation? Nope, I don't think anybody can say with certainty that there will not be inflation. But I also don't think it's prudent to say with certainty that there will be.

    The Fed's not run by incompetents.
    Dec 28 14:58 pm |Rating: +5 -3 |Link to Comment |View article
  • Baltic Dry Index Signaling a Market Bottom?
    "...in tow years time the dry bulk fleet will double (no one know how big cancelations will be) which will continue to put pressure on the rates..."

    Don't think so. The economic incentives for entering this market are greatly reduced, capacity scrapped in October alone was greater than for the previous two years combined, and companies are walking away left and right from contracts to buy and build new ships (e.g. DRYS, NM).

    "Key is to see what the values of the ships are; today a capesize vessel built in 1997 was sold for $27m."

    This is an extraordinarily thin market, understandably distressed, with very few "comps" to try to determine a market price. I would no sooner assume a single sale is representative than assume a house is worth no more than what the foreclosure next door sold for.
    Jan 07 12:17 pm |Rating: +3 0 |Link to Comment |View article
  • Deflation: The 800-Lb. Gorilla in the Room
    "As a percentage of GDP, federal debt is roughly at the depths reached in the 1980s..."

    No. It's much worse than that.

    Refer to Economic Report of the President table B-79. As a percentage of GDP, the national debt has increased from it's post WWII low of 32.6% 1981 to 50% in 1987 to 60% in 1991 to about 68% today (higher really, based on a shrunken economy).

    "Summing up, deflation first, followed by inflation. Details on timing to be determined. Next question."

    Don't think so. The Fed and treasury have made it clear that deflation will be prevented by any means necessary. Significant inflation is likely, but not certain. Here's an example of why.

    The Fed is actively buying Treasuries and now agency securities, and has indicated a willingness to buy other types of debt, paying for them in new dollars. This should be inflationary, but in today's environment, it's counter-disinflationar... (same thing, just with a different starting point). This is just what the doctor ordered. In the future, as the economy comes back to life and private money creation returns, the excess Fed-created money that's buying debt should contribute to too-fast growth in the money supply -- unless the Fed exchanges the debt for money and takes that money out of circulation.

    Here's where the fun part starts. If the Fed has to sell securities to pull cash out of circulation, there will be more debt on the market, yields will tend to rise as buyers have more options, and interest rates would rise, which would slow the economy, reducing inflation. But the problem then is that we might not be able to grow the economy very quickly without inflation becoming a problem.

    There's a good answer, however. Suppose we gaze into a magic ball and find that the economy will stop contracting in 12 months and will really pick up speed in 24. The Fed could concentrate its debt purchases on those bonds that mature in 12-36 months. As long as the yield curve remains intact, interest rates across the board fall in response to the additional buying. And as the economy begins to grow, the Fed is repaid for the debt it has bought, and removes that money from circulation.

    A mechanism for money supply contraction is in place to counteract the private money supply growth that will occur as the economy recovers. And there is no negative impact on interest rates that would come from the Fed selling debt as the economy recovers.

    The Fed is essentially borrowing future money supply growth - which is desperately needed now - and then repaying it as the economy recovers. Short term impact on inflation? Positive. Long term impact on inflation? Zero. The trick comes in getting the timing right.

    Don't expect miracles along these lines. But at the same time, don't expect disaster. These people are not morons.
    Jan 06 14:49 pm |Rating: +3 -3 |Link to Comment |View article
  • Baltic Dry Index Signaling a Market Bottom?
    Ricard -

    I'm not the one who wrote an article basically saying that ALL dry bulk shippers are going up because of the orientation of the moon and Venus in the seventh house.

    Anyway, the answer to your question is - a little. I decided that the sector deserved a flyer and I have a position in SBLK, because it was in relatively good financial shape and it was not very much higher priced that EXM, which has significantly more debt. While trailing PE is of questionable value generally and very little value in the current economy, in the dry bulk shippers it means nothing at all. What matters is survivability. Some of these companies are not going to make it, and the survivors are going to be in good shape in a smaller market. So financials are quite important here than.

    Naturally, SBLK has been hit like everybody else, and because it also last quarter paid out a dividend (which I don't like), its cash position isn't as strong as I would like. However, its debt burden is smaller than most if not all of its competitors, it has pretty high contracted utilization, and it will have very good cash flow last quarter and into 2009.

    Naturally, it's been outperformed by... just about everybody. Sigh - such is life.
    Jan 06 13:56 pm |Rating: +3 -1 |Link to Comment |View article
  • Baltic Dry Index Signaling a Market Bottom?
    Inverse head and shoulders, eh? I call it a "Fat Bastard Turtle Head."

    Have you done any research into any of these companies, such that you might find any of them to be any better than any other? Or are you one of these witch doctors who doesn't believe looking beyond the chart can yield additional useful information?
    Jan 06 09:09 am |Rating: +3 -8 |Link to Comment |View article
  • Taking Profits - Thanks, Obama
    "Obama actually said that changing light bulbs and heater systems in Federal buildings would save the economy."

    Really? Can you cite a legitimate source for this "quote"? Didn't think so.

    "Obama's simply retarded plan to waste taxpayer money 'building whatever' is the worst idea possible for the taxpayer at a time like this."

    Who said "building whatever"? Can you tell us specifically what is in Obama's plan that you don't like?
    Dec 10 17:32 pm |Rating: +3 -6 |Link to Comment |View article
  • Time to Revise Our Gold Expectations
    Georealist: "As for currencies..they are ALL depreciating...the wannabe analysts who don't know that really should check the most recent liquidity and interest rate move by EVERY country."

    I love people who know everything. Tell me...depreciating against what exactly?
    Dec 09 14:59 pm |Rating: +3 -1 |Link to Comment |View article
  • The Downfall of Keynesian Economics and the U.S. (Part 3 of 3)
    Once again, the author fails in his stated attempt to lay blame for our ills at the feet of John Maynard Keynes. The discussions here have very little to do with Keynesian theory at all.

    Now, specific problems:

    1. If the banker is aware that there is only $300 in the monetary base, and he has it all, he won't be a banker. Why would he lend out money if there isn't any money to repay as interest?

    2. "The answer is hyperinflation, and that is most likely the course that the Federal Reserve will take." Most likely based on what?

    3. You show the scary monetary base chart, which takes off higher in the end. What you don't show is the actions of banks in the last year, while they have been deleveraging like mad to raise their capital levels. This IS a decrease in the overall money supply (which we used to measure - M3), and the fed's recent actions are meant to counteract this hugely deflationary action by the banking industry.

    4. "Those signs come in the form of negative net sales of U.S. treasuries by foreigners..." Really? Why then is the dollar appreciating against all currencies except the Yen and why then are treasuries currently trading at historically low yields?

    5. "...credit crunch making new loans more and more unavailable..." Which is because the banks have had to deleverage in response to much greater potential losses than previously expected.

    6. "...and the deflation seen in financial markets." And commodity markets. And all other markets EXCEPT for US Treasury securities, which are seen by the market as SAFER THAN ANYTHING ELSE.

    7. "The U.S. government and Federal Reserve will fight this with every tool they have, resulting in an end game of hyperinflation." Hogwash. The preferred share investments by the TARP aer structured such that as the banks regain their footing, take their losses, and start to function normally again, they will have a strong incentive to pay off the loans (reducing the monetary base) as they increase to normal levels their leverage (increasing the monetary base). The Fed and Treasury are well aware that in normal times their actions would be highly inflationary. These are not normal times.

    8. More worthless, unsupported attacks on Keynesianism. And then: "We had a near implosion as a result of these theories in the early 1980’s." Without even a mention of the oil shocks of the early 1970s, which sent inflation rippling through the economy, or of the institution and repeal of wage and price controls, which, like a coiled spring, sent prices much higher. These had nothing to do with Keynes, and had much more impact on prices in the late 1970s than anything related to theory specific to Keynes'.

    9. Let us not forget that Ronald Reagan's huge deficit spending (well, at least at first, during the recessions) fell nicely into line with Keynesian theory.
    Nov 21 08:58 am |Rating: +3 -1 |Link to Comment |View article
  • GE, Goldman Bond Spreads: Unrealistic and Unsustainable
    I suggest that much of the discrepancy identified by the writer is due to a change in the overall cost structure of CDS in a world of heightened risk aversion.

    I am no expert in CDS. That said, I find it impossible to believe that the heightened risk aversion that permeates every other part of the financial economy has left this part untouched. Just as banks' appetites for risk in their loan portfolios has decreased markedly, so should that of sellers in the CDS market. In the face of the failure of AIG, the risk profile for CDS should certainly be different than it was before.

    The result of this should be greater costs to insure the debt of all companies. I would love to see a comparison of the "average" CDS rate today vs. three months ago, six months ago, and a year ago.

    Also, I advise readers to be mindful, when making investment decisions, of the markets behind the numbers. The CDS market is extraordinarily thin, with very few sellers, especially when compared to the corporate bond market. The thinner the market, the more likely pricing errors will occur. I suggest that any discrepancy not due heightened risk aversion is more likely due to a pricing error not in the bond market, but in the CDS market.
    Nov 12 07:48 am |Rating: +3 0 |Link to Comment |View article
  • Payday for Car Contrarians
    All you have to do is put what you have left on black - problem solved. Either you're back to even or you have nothing left to worry about.
    Dec 02 14:12 pm |Rating: +2 0 |Link to Comment |View article
  • Looking Good: Genco in Particular, Shipping in General
    Last year's PE is meaningless, as shipping rates got to be almost 15 times what they are now. You should expect these dividends to go away completely as these companies hold cash in anticipation of a prolonged slowdown. Genco has a particularly high debt burden, and while its current ratio indicates it is well able to meet current obligations, a prospective investor would be wise to dig into their debt to see when it comes due - others will.
    Nov 24 08:38 am |Rating: +2 0 |Link to Comment |View article
  • Baltic Dry Index Signaling a Market Bottom?

    > As for my witch doctor ways, well they resulted in nearly 400% gains
    > in 2008, how did the fundamental techniques work out for you?

    I think that means "yes, I'm a witch doctor, and I've got a voodoo doll with your name on it."

    > And, TBSI is my favorite of the group (GNK as well), but I've already
    > stolen 800% gains in the call options, so I am trimming back"

    Why is this one your favorite? Did it exhibit a voluptuous curves pattern?
    Jan 07 15:31 pm |Rating: +1 0 |Link to Comment |View article
  • How Will Fortune Magazine's 10 Stock Picks for 2009 Fare?
    "The Chinese and the Japanese, who have been these bonds’ primary buyers ..."

    Utter nonsense. China recently supplanted Japan as the largest foreign holder of US debt, with a total at the end of October of $652.9 billion, or 6.17% of all US debt. Japan's total was $585.5 billion, or 5.54% (www.treas.gov/tic/mfh....).

    "...[China and Japan] will transform from net buyers of US Government bonds to sellers. By drastically increasing the supply of such bonds on the market..."

    You seem to ignore your own word - transform. IF China or Japan were to become a net seller of US debt (questionable), it would do so gradually. It's not like they would one day drop all of their securities onto the market.

    "Any new US Government bonds that could be auctioned under such circumstances would be forced to pay much higher rates of interest, which would make such new issues too expensive and thus impractical."

    First off, you make no prediction about what interest rates will be.
    But US borrowing "too expensive and thus impractical"? Seriously? Has the going interest rate ever had any impact on the issuance of US debt? Did the government slow borrowing in 1981 when 3-month treasuries, which now yield close to zero, were yielding more than 14%? No, it INCREASED borrowing. So you think that in 2009 we'll see 3-month treasuries yielding at least double-digits, right?

    But beyond that: you think the Fed will have no "interest rate control mechanisms" that aren't "out of commission." Sounds like you mean that the federal funds rate will remain near zero while short-term interest rates are double-digits.

    Think about it, or take a look at a chart - federal funds is almost always very close to the 3-month rate, and when it's been out of whack fed funds has always been higher. You're trying to describe a world where a bank can borrow from the Fed at near-zero rates, then use that money to buy short-term US debt that yields 10+%. It's pure fantasy.
    Jan 05 12:37 pm |Rating: +1 -3 |Link to Comment |View article

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