Monday, March 1, 2010

Monday Observations March 1st 2010

I am feeling a bit under the weather today so I think this will be a short post.

Long Time Reader Checks In
For those that have been reading the site for a long time you may recall a loyal reader named G who used to visit and engage in the discussion. G stops by from time to time, but his new career in the US Military keeps him very busy. It seems G has made it all the way to 2nd lieutenant! I wish G all my best and I hope all is well.

G asked about the silver bars/rounds that I highlighted a while back that could be split into 1/4 ounce pieces. As of now the Northwest Mint has a delivery lead time of 3 months or more and the communication I have had about the bars is not encouraging. Secondary sellers have some of the bullion, but the mark ups are crazy wild (from 30% to 60%!!) due to the popularity of these items. I think I will be waiting on these. I did buy a good amount of my cousin's junk silver (dimes and quarters pre-1965) this weekend though!

Water Water Everywhere, But Not a Drop to Drink
Water issues are an area I keep an eye on. Water is of course the number one most important commodity in the world. Here in the US we do not think all that much about quality water, but all over the world water that can be safely imbibed is getting more rare every day.

The Business Insider ran a piece from The Mad Hedge Fund Trader today that is worth a look if this interests you:
If You Thought The Coming Energy Shortage Was Scary, Check Out What's Going On With Water
This bears attention.

The Bull Market in Tungsten
Tungsten, it's not just for light bulb filaments anymore!

In another example of gold bullion bars being shown to have been faked using tungsten see Zero Hedge:
German ProSieben TV Channel Finds 500 Gram Tungsten Bar At W.C.Heraeus Gold Foundry With Bank Origin
How many of these exist? Look on the bright side, maybe your paper gold can one day be exchanged for tungsten bars! And the gold bugs said you would wind up with nothing, what do they know?

How Can Shorting the Euro Be Wrong; It's Policy For Crying Out Loud
My read has the target for the Euro at 1.20 against the dollar in the very near term. Everyone thinks the Euro is going lower and in fact one could argue (I will) that all the hand wringing over the inevitable Greek bailout is nothing more than a show to weaken the Euro. Devaluation can be helpful at times and Euro 1.6 was not quite the exchange European exporters were looking for.

That said, if indeed a lower currency is policy, why would the very mechanism for the drop via banks going Long USD/Short Euro be looking at trouble? Rumor of the day via Zero Hedge:
From The Rumor Bag: Financial Firms Receiving Widespread Subpoenas For Euro Shorting Collusion
Can you really get in trouble for executing policy? This one smells fake.

About That All Powerful Dollar
One major reason why I hate Forex/Currency trading is the game of "it's all relative" requires one to suspend quite a bit of macro thinking in exchange for headline scanning and psychology trend watching. While the Greece situation is hurting the Euro, the dollar gets stronger in the face of deteriorating structural fundamentals for the US. Of course this does not matter right this second (does it?) so a higher buck is all the rage. Until such a time when somebody puts up a graph of Greece/Italy budget woes against that of say California/Illinois/Various Pension shortfalls this should remain intact.

Mish has a great post up today titled:
I'm Sure Glad the Recession Ended
The post is short on words and heavy on visual aids. Included is my number one exhibit A for the prosecution that we can talk about ISM numbers, retails sales, and any other data point all we want but the rubber meets the road at tax receipts as far as I am concerned regarding a possible turnaround. Tax receipts are how we are supposed to pay for stuff, well until we decided we can just print money and buy our own debt that is.

State and Local Government Personal Income Tax Receipts

Still dropping.
From the graph this sets states, in aggregate, back to budget year 2004-2005 in terms of tax balance. How many states are scaling back budgets that far? I will guess not many. Added to this is the fact that many fees and taxes associated with the all time high housing turnover during the bubble years are not coming back for maybe as long as a decade.

For you "rate of change" second derivative thinkers, Mish has this one showing the percent change from year ago levels:

Green shoots anyone?

Again, the dollar is stronger as of late in a relative sense but no honest look at the underlying issues warrants that kind of view. Still all currencies are looking ugly so I guess it is all relative! HA!

Food for Thought
I will stick with ripping off charts from all over the Internet!

EconomPic offers the following chart for consideration with the header "Why Save?":

The author notes:
One reason for the continued low savings rate (and continued spending)?
No place to store it (unless you want limited return).
The below chart details the historical savings rate vs. the three year Treasury yield (I used three year yields as this is a relatively safe investment on the duration side).
Coincidence or a legitimate relationship?

I commented:
Indeed, yet another dark side effect of zero interest rates for years was the absolute punishment of savers. Not a coincidence IMO.

I would be interested in the reader input on this one.

Have a good night.


Dave in Denver said...

Nice post tonight. Zero interest rates are for sure the Fed's way to encourage dis-saving and consumption in an attempt to stimulate the economy. It ain't working.

Zero interest rates also mean that eventually the bond market is going to shit the bed.

getyourselfconnected said...

yet another thing that I can never get; if money is free to borrow then how can anyone not expect major capital dislocations/malinvestments? Almost has to be the plan, yes?

Remy said...

Nice post!

Stagflationary Mark said...

"Almost has to be the plan, yes?"

Kohn told us that it is exactly the plan.

From 2009...

Fed's Kohn sees no asset bubbles building in U.S.

CHICAGO (Reuters) - The Federal Reserve's low interest rate policy is meant to encourage investors to move into riskier assets in order to promote economic recovery, and there are no signs currently the policy is resulting in the build-up of a U.S. asset bubble, the central bank's number-two official said on Monday.

Of course, some might argue that the riskier the assets are, then the riskier the assets are. Some might argue that anyway.

From 2004...

Just How Risky Are Fannie and Freddie?

Not very, says a new report. But it probably won't sway the mortgage giants' critics

From 2003...

Interest rates won't rise 'for a considerable period'

"The risk of inflation becoming undesirably low remains the predominant concern for the foreseeable future," the Fed said in a statement accompanying the unanimous decision. Thus rates can stay low "for a considerable period."

From 1998...

Fed Chairman Renews Hopes For a Rate Cut

''We have to bring the existing instabilities to a level of stability reasonably shortly, to prevent the contagion from really spilling over and creating some very significant further difficulties for all of us,'' Mr. Greenspan told the Senate Budget Committee.

In hindsight, the level of stability is continually stabilized as the contagion continues to really spill over and over.

It's like being hit with an interest rate déjà vu stick, repeatedly, every few years or so, lol.

sedentary state said...

Regarding water, in the Dominican Republic where I vacation occasionally, the policy is no one, including the locals, drinks the water from the tap. In fact they warn not to even brush your teeth with it.

And being a care free caribbean paradise, no one even wonders what the hell is going on with that situation.

GawainsGhost said...

As to the savings rate vs treasury yield debate, there is no question that low interest rates have been hell on savers. But I don't think that was the intention, rather the side effect. The purpose was to prop up the banks.

Interesting article in BusinessWeek a couple of issues ago on exactly this subject. How heavenly have low interest rates been for the banks? $56 billion. That's the amount of extra interest income banks booked since the Fed started cutting interest rates in 2007.

From the article: "Banks are getting a pretty sweet deal for nearly blowing up the financial system. Not only did the Fed ratchet down rates to save them, but wary depositers rushed to the comfort of their government-backed accounts. Banks have been able to use those ultra-cheap funds to make lucrative loans and investments since longer-term interest rates have remained relatively high. It's a hidden subsidy that may be as important to the bank bailout as the Troubled Asset Relief Program and the bond guarantees from the Federal Deposit Insurance Corp.

The problem, says Joseph R. Morgan, a finance professor at Lousiana State University in Baton Rouge, is that savers are bearing the cost, and they won't be getting their money back. 'We're all funding the bailouts, whether we want to or not, both as taxpayers and depositors,' he says. As the Fed lowered short-term interest rates to near zero, banks sliced the rates they offered on savings accounts, certificates of deposit, and the like. The average rate paid to depositors dropped from 4.23% in September 2007 to 1.55% in September 2009. . . .

Banks are making a nice profit on the funds, helping them to offset bad loans. Rates on 30-year fixed-rate mortgages declined only 1.24 percentage points during the two years, or less than half the 2.88-point decline in rates paid on a six-month CD. . . . 'The banks are making more money than they have ever made' on the difference between borrowing and lending, says David Bianco, equity strategist at Bank of America Merill Lynch."

Anonymous said...

It is not a "side-effect" of ZIRP that we are punishing savers. It is policy. Tax policy discourages savings as well.

Why else is the tiny amount of interest income from savings taxed as ordinary income?

Meanwhile income from short-term capital gains like hedge funds (aka gambling) is taxed at a far lower rate. WTF is this, if not conscious policy?

Anonymous said...

Good stuff in your post.

I have heard directly from higher up:

War will not stop.
War will be over resources.
We will fight wars over fresh water.

You heard it here first. ;)


PS: Keep buying with that good old dollar cost average.