Monday, July 18, 2016

The Interest Rate Conondrum

Everyone who has assets is beholden to interest rates. As rates fall, asset prices go up. Finance 101.  

When you discount a future cash flow, the cash flow is in the numerator and the discount factor is in the denominator.  The more subtle takeaway from this formula is that a change in cash flows  (numerator) has a smaller difference on the value of an investment than a change in the discount factor (denominator).  The denominator has a much greater impact on the value of the investment.  

This being the case, when interest rates are at zero, money and cash flows have greater value than they do when they are at, say, 8%.  This is because at 8% your money doubles every nine years and at 0% it never doubles at all.  In order to get your money to grow, you have to find an investment that provides you a growing or stable cash flow at a price that affords you a yield. Today, bonds do not provide this.  Stocks might, if you have a long enough timeframe (like twenty years), and real estate still does in a lot of cases because of the massive inflation in rents we are seeing. 

But in all cases, what this means is in order to find yield you have to take on riskier investments.
The problem is that interest rates (and yields) are a function of the likelihood of getting your money back.  

Today, the ability of sovereign governments, companies and people to pay back their debts in fiat currency that holds its value in the future is nil.  There is simply too much debt.  Sovereign borrowers will not be able to pay it all back unless they print money, and if they print money the value of the currency you get back in the future will be further weakened.  

Said another way, every day there are more and more debts backed by unproductive money and if they are to return that capital to shareholders, money will have to be printed which will lead to inflation.

Flash forward to today:  Bonds are at their highest risk ever, yet paying their holders the  lowest returns ever.  Because stocks and real estate get dragged along, they both  are also at their highest risk ever.  At some point, some country or large bank is going to default, which will either bring down a  Central Bank, or, to save itself, the Central Bank will fight it tooth and nail with their printing presses and there will be massive inflation.  

It is like the old margarine commercial, "It isn't nice to mess with Mother Nature".

Sunday, July 3, 2016

The Parable of Saltwater

This is something I came up with for the Money and Banking class I teach to illustrate why artificially low interest rates distort the economy by misallocating assets.
Picture a beautiful ridge, perhaps in California.  On the left there were beautiful views and an easy path down to the ocean, and on the right, there is a rockier slope that leads to a crystal clear bubbling brook.  All day long hikers walk along this ridge taking in the beautiful scenery.  Part of the local culture of this ridge is that two old men, no one knows their names, sit at the top and play cards on an old wooden table.  Occasionally, they stop a hiker and ask him to go down to the bubbling brook and fetch some water to drink.  The hiker selected not only received a dollar for their troubles, but being asked to fetch water was widely considered to be good luck.
One day, one of the card players said to the other, "Guess what?  My uncle Ben Bernanke died last night and left me 4.5 trillion dollars."
The other card player says, "Wow.  That is fantastic.  What are you going to do with all of that money?"
The heir to the money replied, "Well, as you know, I have always wanted a saltwater pond.  You see this ravine behind me?  I am going to get these hikers to fill it up by paying them $5 for every bucket of saltwater they retrieve."
Shortly a hiker passed and the heir offered him $5 for a bucket of saltwater.  He gladly complied and the first bucket was dumped in the ravine.  He asked if he could bring another bucket under the same arrangement, and the heir nodded.  This went on all day, and the hiker walked down the ridge that evening with $180 in his pocket.
The next day the hiker showed up with two buckets.  The day after that the hiker showed up with two friends, each with two buckets of their own.  And word spread.  It was not long before others showed up and the ridge became a hive of people moving buckets of saltwater.  Within a couple of weeks one of the hikers devised a pulley system which allowed him to move more buckets than his competitors.  Another hiker with bad knees, realized that all of the new people on the hill built up a hunger running buckets of water all day long, so he set up a restaurant.  His food was good and lines were long, so it was not long before three other restaurants opened to handle the overflow. 
More ambitious people asked the heir if they could work later into the evening, and soon a market for temporary housing developed. A news station did a story on the miracle economy on the hill, and it was not long before economists were writing articles featuring charts and graphs of how monetary stimulus creates opportunity for all. This brought in more development by those hoping to cash in on this windfall.
Of course it was not all positive. Because a bucket of saltwater paid $5 and was an easier climb, the cost of freshwater skyrocketed to $7. Similarly, food was scarce, but everyone had money in their pockets, so the restaurateurs were able to continuously increase their food prices.   Fewer hikers came to the ridge because it was no longer sparsely populated and beautiful.  Billboards for the restaurant and hotel now dotted the hillsides, and there was litter everywhere. But the indisputable fact was, the hillside entrepreneurs were flourishing. 
After 18 months, the heir looked behind him and noticed the ravine was nearly full.  In fact, if one more bucket of water was dumped into it, it would overflow and the two men would no longer have a place to play cards. And so, just like that, all of the free money stopped.  The heir stopped paying $5 for saltwater. 
The very next day, the economy on the hillside crashed.  What had appeared to be a vibrant economy just the day before, seized.  The smartest waterfetcher on the hill and the dullest waterfetcher on the hill realized simultaneously that their investments and labors over the prior eighteen months contributed no real value.  They sickeningly came to the realization that the only reason they were asked to fetch saltwater at all was because the Heir had too much money and did not care if he used it wisely or poorly.

Within days, the number of people on the hill was down by half.  By the end of the week, the number was halved again. The only people still making the trek were those who had investments in lodging and eateries. But soon they realized without customers, there was no reason for them to come to the ridge, and they boarded up their establishments in very short order.  Perhaps most sadly, because the hillside was now spoiled with abandoned buildings and remnants from the "Saltwater Rush", hikers did not even come by anymore. Within a month, the hill was an empty, littered ghost town.
The two men had the hillside to themselves to play cards, but after "investing" $4.5 trillion dollars filling the ravine with saltwater, they no longer had anyone to get themselves any water to drink, so ultimately they disbanded their card game, and the culture and value of the ridge was finally and terminally decimated.

Saturday, May 14, 2016

The DUI Task Force

A friend of mine got pulled over for a DUI last week driving my drunk ass home from a Kentucky Derby Party.  Over the course of five hours she had a gin and tonic and three smallish glasses of wine. I know this because at this dinner party we were all drinking out of our own bottle and she still had a quarter bottle left at the end of the night.

Out of nowhere the blue lights were behind us...two cars and a "DUI TASK FORCE" vehicle.  They said they pulled my friend over because she "pulled too far into an intersection at a stoplight" (meaning the hood of her car was on the white line).  

They asked if she was drinking.  She told them what she had.  They said the car smelled of liquor (neither of us were drinking liquor.)

They made her take the field sobriety test.  I got out to try to watch but they forcibly made me get back in my car threatening me with prison for obstructing justice.

I tried to watch out the back window.  The cop saw and pulled the DUI wagon over to intentionally obstruct my view (really??).

They told me she did poorly on the sobriety test.  (The video shows otherwise).

The took her to the detention center where she was interviewed.  The official statement determined she appeared inebriated. (The video shows otherwise).

She submitted to a breathalyzer.  The results showed no alcohol, and were deemed inconclusive, so she did it again.  Again the results were inconclusive, so after taking the breathalyzer twice, they marked her down as "UNWILLING" to take a breathalyzer.  In our state this means you lose your license automatically for six months.

They kept her in jail overnight and released her on her own recognizance and she is awaiting trial.

How did this country reach the point where policing like this is viewed as a service to the community?  

1.  She was not drunk (statutorily or otherwise)
2.  She passed her sobriety test according to our attorney after viewing the videotape
3. She was sober and cooperative in her interview also evidenced on videotape
4. She took and passed two breathalyzers, because of which she is now unable to drive to work.

The attorney assured us this is an open and shut case, nothing will go on her record, but that we will probably be on the hook for $15,000 or so.  

Please tell me how we let this happen to our country?

Friday, May 6, 2016

Why Monetary Policy Will Not Work

It is not an original thought to say that asset prices are simply too high.  They are.  Nor is it original to ask why. When you make increasing amounts of free money available by forcing it into the economy through asset purchases, the price of assets are bound to go up.  

The original thought I bring to the table today is why this additional inflow of money has not created "inflation".  The reality is that it has created inflation.  A lot of it.  But the inflation it has created is in assets, not necessarily in goods, as they are traditionally measured.   

Why is this?  Wealth inequality.  Think about it.  If you have a billion dollars, how much crap do you actually need?  I suspect for billionaires even though the toys get bigger, they do not necessarily buy more toys.  

So...follow this logic:

IF

inflation is caused by too much money chasing too few goods,

AND

The Monetary transmission mechanism is putting money exclusively in the hands of wealthy people who are not buying goods, but investable assets

AND 

The same monetary transmission mechanism is starving the larger mass of people who are buying progressively fewer goods and services (in favor of higher rent, higher health care, and higher education costs)

THEN

Developing sustainable price inflation is nearly impossible, because the market of people who are willing and able to buy products is shrinking.  To those who are finding that money is being sprayed on them like a fire hose, they have no choice but to buy ever inflating assets with their excess funds because they do not need another iPhone.

The problem is, that like a company that buys back its stock at stupidly high prices, the moment that the Leaning Tower of Pisa tips over, all of this wealth evaporates.  Meaning them no malice, if I could buy puts on billionaires net worth, I would.  This imbalance is reaching the tipping point.

Saturday, March 5, 2016

-No Bagel No Bagel No Bagel No Bagel! -Cosmo Kramer

I saw an episode of Seinfeld the other day and it made me realize why Trump can win the election.  The episode was called The Strike, and in it, the audience learns that in 1985 Kramer worked at a bagel shop at which the workers went on strike demanding $5.75 an hour.  In 1997, twelve years later, the minimum wage hit $5.75 an hour and he went back to work.

The reason this rang true with me is because that is what is going on in the world right now.  People are not demanding much, but they are demanding their opportunity back -economic and otherwise.

Economically, whether you just graduated high school and are seeking a higher minimum wage, or you have an MBA but cannot find anything but "on the come" jobs that don't really pay a salary or benefits, the opportunity in this country has vanished.

That is not to say that there are not still a vast number of people still living the American dream.  If you had a good job before the financial crisis, and you survived the cull, you probably have a good job afterwards. Maybe better.  But if you had a good job before the financial crisis, and were among the slaughtered, your job has not been recreated.  It is forever gone.

Nor is it to say that there are not some great jobs for someone PROVIDED they have an ever narrowing, specific skillset AND they live in the right city, AND are willing to work for a multinational company.  If you reside in this shrinking concentric circle of qualifications, you are golden.

But if you live outside of either of those two golden nests, the world does not look like it used to.  Not even close.

That is why for the first time EVER more businesses are failing than starting in the United States.

It is why the number of those on food stamps is so much higher than it was before the Financial Recession.

It is why there has been a complete loss of faith in the two most primary institutional forces in this country, Business and Government. Both have lost their God Damned minds.

This marked shift is not about a failure of capitalism or of the American People.  It is a shift that has been accelerating throughout my lifetime...Somewhere along the way it has become acceptable for the leaders of each and every node of these two institutions to abuse their power for the betterment of themselves in complete dereliction of their duty.  We are at the point in this country where it is not even hidden anymore.

"If you give a million dollars to the President, your concerns are valid.  It doesn't even have to be your money."

"You can bank here, but only if you have $1,000,000 or more...oh...or unless we implode again."

"If you trade on inside information you will go to jail...unless you are in congress.  In that case it is both legal and encouraged."

"I am proud to be a successful big business Democrat.  Now sign up for Obamacare and let me know how it goes for you."

The hypocrisy and disequilibrium has hit a boiling point.  The amazing thing is that it has taken this long.  But, the number of Americans, like me, who love their country, but have given up the ghost, has hit the threshold.  Since I neither work for big business nor big government, neither provides anything for me that I really want.

Big Business?  Fees, shitty customer service, contracts, disclaimers, and inflation, advertisements.

Big Government? Rules, taxes, overbearing security forces, wars, politicians, robo-calls, propaganda, NAFTA, TPP, $60 trillion in debt...I will stop here for no other reason than I am bored.

And that, is why Trump will win this election.  He will be the only candidate in history who wins the general election with most of his backers saying, "Yeah...I know.  I wish he was someone else too.  But I am going to vote for him even though I know it will not necessarily help the country itself...but it will help me feel better...even if it means messing up my life for a while.  At least it will mess theirs up to."

You know what that sounds like?  A strike.  A vote for Trump is a national strike.  We know it won't be pretty, we know it won't be easy, and we know it will cost us in the short run. But these fuckers who have usurped the free money and power illegally bestowed by the government used it to cement a monopoly on the opportunity this country provides owe us.  Not money, per se, but opportunity.

Americans will vote for Trump this year because they are striking in order to get back to a livable minimum opportunity.

https://www.youtube.com/watch?v=OS40PH3g6kA




Wednesday, January 6, 2016

Bank America Sucks Beyond Comprehension

Background:  Bank America talked me into an exotic mortgage way back when.  Rather than getting a thirty year mortgage, they talked me into doing half thirty year and half HELOC.  Because they talked me into that structure, they now refuse to refinance it.  They con me into a bad structure, now they won't let me out of it.  But that is not even the catalyst for me coming out of hibernation and writing today.

I called Bank America with a customer service issue today and, after thirty or so minutes of cursing at an automated computer voice and relentlessly pushing zero on my keypad, I finally reached a typically unhelpful person.  No surprises to anyone thus far, I am sure.

Here is how my call went with  Luana Bitchface:

"Please be aware that I am recording the call for quality assurance."

"I am aware.  So you are aware, I too am recording this call too in order to assure quality."

(Angrily)  "If I you are recording the call, then there is no way to proceed."  

"Let me get this straight.  It is Bank of America's policy that they can record their customers, but their customers cannot record their "service agents."

"That is correct."

"Hey Luana, you stupid whore...in what way do you think that is fair?"

"I do not make the rules, I just follow them."

So...yet again, the arrogance of the large banks reigns supreme.  When they go bankrupt in another six months or so, please vote for the congresspeople who vote NOT TO BAIL THEM OUT.

Also, if you can, move your money to a community bank.  Those fuckers at BofA do not deserve any of your hard earned money upon which they will make more money.

I cannot believe this is happening in America.  When did it go wrong?  Oh yeah...1998 when Clinton repealed Glass Steagall.
.