Random Musings

Lazy, stupid, or lying?

2011-05-25T08:45:00.003-04:00

This is in response to Dr. Krugman's May 24, 2011 blog entry: Debt Arithmetic: Wonkish

"Still, Serious People tell us that investors will turn on us unless we slash the deficit immediately — and they know this because, well, um..."

Apparently, these "Serious People" think that investors won't want to buy US Treasury debt at anything like the current, very low, interest rates. Rather, these "Serious People" seem to think that investors will demand much higher interest payments to be willing to loan money to the US Treasury. I think that is the core of Dr. Krugman's argument.

Let's look at that.

Right now interest rates are low, very low. They have been low for a couple of years now. At face value, that sure seems to indicate that investors are willing to loan to the US Treasury for very little nominal return. Case closed.

Or not.

There is one massive elephant in the room that Krugman, (and the myriad of others who I've seen make this same argument), just ignore. Who are these "investors" that are willing to loan the US Treasury over $1.4 trillion a year for the past 3 years at such low rates?

And this is where it gets interesting, (by "interesting" I mean, "bad").

Last year, the Federal Reserve was the buyer of 60 to 70% of the net US Treasury issuance. In January, they bought ~ 80%. In February their purchase of $94 billion in US Treasury debt exceeded the net debt increase of $85 billion. Via QE2, the Federal Reserve is purchasing $100 billion in US Treasury debt each month. This is at a time when the net US Treasury borrowings are ~ $133 billion a month.

Fully 3/4 of the money the US Treasury is borrowing each month is coming from a single investor.

That investor has no opportunity costs associated with their purchases -- their purchase of US Treasuries does not come at the expense of being able to buy some other asset. The money for these purchases is brand new, created by the Federal Reserve for just this purpose.

Currently, the Federal Reserve intends to let QE2 end in June (as originally planned). Who steps in to fill the gap when they do?

What other investor or group of investors has $100 billion to loan to the US Treasury in July, and August, and September....

"Serious People" are wondering why these investors will suddenly step forward in July to buy US Treasuries at these ultra low rates. After all, if there really was $100 billion in additional demand for US Treasury debt at ultra low rates, why would the Federal Reserve have to "print" up $100 billion in fresh new dollars each month just to buy US Treasury debt?

When you actually look at the really interesting question regarding US Treasuries, what you discover is that the US Treasury market is a whole lot like the mortgage market. Would mortgage rates increase if Fannie and Freddie simply stopped buying mortgages? Even those that aren't "Serious People" recognize that the housing market would more or less collapse overnight if lenders were stuck keeping the mortgages they made or sell them to an investor that can't absorb billions of losses each quarter indefinitely. In fact, it was this exact argument that led to Fannie and Freddie being taken into conservatorship.

There is one thing I would really like to know though: does Dr. Krugman ignore this massive support/intervention in the US Treasury market because he is:

too lazy to see who is buying US Treasuries,
too stupid to realize that having the Federal Reserve buy 75% of the net issuance matters,
or simply lying.

I can't tell. What I do know is that the lazy, stupid, or lying questions keep coming up when I read the stuff he writes.

Corporate tax musings

2011-05-13T16:15:00.001-04:00

This is a response to the following:
http://blog.darkuncle.net/post/5413503554/i-wonder-what-my-libertarian-friends-think-about

Corporate person-hood and its relationship to taxation...
The deal isn't that of course money is taxed multiple times, it's that the same bit of revenue is taxed multiple times for the same people. First, it is taxed proportionally across t...he pool of owners via corporate taxes, and then whatever portion is distributed to the owners via dividends is taxed again.

The gist of the person-hood is that corporations have some of the rights of natural persons because they are freely entered into associations of natural persons, and as such limiting what the association is allowed to do is limiting what the people are allowed to do. That such limits must not violate the members' rights has long been upheld for precisely that reasoning. Mikehudack apparently looks at these same facts but misses the point of them. Corporations are NOT people, they are associations of people.

Use of the tax code to achieve policy ends...
There are two things to consider here. The first ties directly back to the realization that corporations are associations of natural persons. The idea that the government has an enormous interest in what corporations do with their money is predicated on the assumption that the corporation has lots of money. If corporations had very little money "in the bank" you would not see this. Think about the volume of discussion regarding the savings of S corps (charitable organizations) that you've seen. Effectively, this argument boils down to either envy or justice. The envy is that its essentially the same as the desire to level punitive taxes on the rich. In the US, the poor generally don't favor punitive taxes on the wealthy. I suspect that's largely from the sense that envy is just wrong. Anyway, there's also the notion of justice going on. Not taxing corporations provides the owners of the corporation a means of increasing their wealth without being taxed on the increase (until such time as they are actually receive the increase and it is available to them). That makes being a member of a corporation a bit like owning an IRA.

Secondly, using the tax code for ANYTHING other than raising revenue is inevitable tyranny. Period. In the past, I've written about the use of the tax code as a means to "level the playing field". I think what I've written about that is worth reading. It addresses the inherent dishonesty of this approach: http://happybobblog.blogspot.com/2010/12/how-to-level-playing-field.html

The fourth argument is actually a pretty good one. The owners of a corporation derive a benefit to their association from the infrastructure in the city, county, state, nation that they are operating in. Deferment of taxes on the corporation until profits are distributed to the owners allows the owners' association to use the infrastructure for "free" (sort of, they still pay for it via its embedded costs in their vendor's prices and the cost of labor which includes taxes for that infrastructure). So, while they indirectly pay for the use of this infrastructure, I'm much more in favor of direct and obvious payment than indirect hidden ones (a notion that is quite consistent with the above link).

The fifth argument is essentially no different than the second one, tax corporations because they have the money. On the surface, that seems pretty obvious. Let its proponents talk just a few more sentences and the deeper reason comes out: tax corporations because they are rich. Envy. I want what you have and you don't deserve it anyway. Years ago, back when I thought I was going to become a lawyer, a co-worker joked that I needed the law degree to "defend corporate polluters." So, in that vein... Exxon Mobile. "Big oil" always, always comes up as the poster child for we need to tax corporations more. Lets look at that.

Exxon Mobile has a market cap of $397 billion today. Revenue is running about $364 billion. And that's as far as every single "tax the corporations" argument looks. Ever. Given that profitability information is ON THE SAME page, it's very difficult to not conclude that the proponents of this argument are not stupid or envious (both is always an option). So, what is Exxon Mobil's profit margin? 9.56%. That's pretty crappy. Seriously. The value of this organization is roughly $400 billion, and it's only able to make 9.5% profit for the owners? Let's look at some other companies so that we can look at this data in some actual perspective. Apple: 22% profit margin on a ~ $300 billion organization. Adobe: 22% on a ~ $17 billion organization. ADP: 12% on ~ $25 billion. Verizon: 3% on ~ $152 billion. Boeing: 5% on ~ $62 billion. Chipotle: 9.7% on ~ $8 billion. Johnson & Johnson: 19.8% on ~ $171 billion.

Since 1980 the average profit margin for the S&P 500 has been 8.4%. "Big oil" has averaged about 9.5% over that same period. But think about the HUGE volume of cash the owners of these companies have had to pool in order to pull that off -- especially relative to those companies that have had much higher profit margins on smaller pools of capital.

If the advocates for corporate taxes actually talked about the corporations that had high profit margins, it would be much easier to believe that their concern was motivated by other than envy -- because I can absolutely see the justice argument and would be willing to make it. However, that's not what we see because that isn't the argument they make. The problem with that is that the very people that would make good allies (those that are willing to look at data and make the JUSTICE argument) don't want them as allies. What rational person joins with a partner that seems to clearly be operating out of envy? What rational person wants an ally that is either drastically ignorant or blatantly dishonest in their use of data? Not me. No thanks.

TL/DR;
If you want to win the corporate taxes argument, talk about corporate profit margins. Essentially, be honest, and don't be ignorant.

Links for profit margin data:
http://finance.yahoo.com/q/ks?s=xom
http://finance.yahoo.com/q/ks?s=adbe
http://finance.yahoo.com/q/ks?s=adp
http://finance.yahoo.com/q/ks?s=vz
http://finance.yahoo.com/q/ks?s=ba
http://finance.yahoo.com/q/ks?s=cmg

The value of a metaphor.

2011-03-01T16:35:00.004-05:00

A bar hires a police officer as a bouncer. He cards people as they come in, breaks up the occasional fight, and tosses people out when they need tossing out. At the end of the night, when the bar closes, he writes the owner tickets for serving minors.

Seem just a little bit ridiculous?

I read that this weekend as a metaphor for punishing the businesses that hire illegal immigrants.

I've always thought that businesses who knowingly hire illegal immigrants should suffer penalties. I still think that. But, I'm now a bit less certain about how stiff those penalties should be and just how deep a business' responsibility should be to determine they are not hiring somebody guilty of one crime vs. another when the business and its owners pay taxes that are SUPPOSED to cover enforcement of the border.

The value of a good metaphor I suppose -- makes me question things that I used to be so certain of.

As for the metaphor, it seems that Common_Cents22 was the source of it. I can't find an earlier instance -- at least not without looking hard.

High Priced CEOs... why?

2011-03-01T16:05:00.003-05:00

A rather funny comment got me to thinking about something:

"A unionized public employee, a member of the Tea Party, and a CEO are sitting at a table. In the middle of the table there is a plate with a dozen cookies on it. The CEO reaches across and takes 11 cookies, then looks at the Tea-Bagger and says, "Look out for that union guy, he wants a piece of your cookie.”

There is a funny lesson in this -- be the CEO!

But, there is more to it than that. It raises the question of why CEOs are paid so much more than the ordinary employee. That's a good question to ask, and I haven't yet read an analysis that was much deeper than "because they are" or "because they're crooked."

That isn't to say that such analysis hasn't been done, just that I haven't seen it.

So, here's my take on the compensation gap -- and how it is misunderstood.

Too often the CEOs of very large businesses are mostly caretakers. They are paid lots of money, not because they will result in a rapid increase in the profits for the owners of the business, but because as CEO they could really screw things up royally. That's what the owners of most businesses are trying to buy when they spend "way too much money" on the senior management team. Sure, they'd like to get a CEO in that will cause the company to be worth 10-20% more within a year or two. But, they also recognize that it is much easier for a big business to loose 10-20% of its value by making bad decisions than it is to grow that much. Just maintaining past income and profit levels at most big businesses requires doing the right things and doing them rather well across the board over and over across tens of thousands or millions of transactions.

If we look at the outrageous CEO compensation from that light -- as a form of insurance taken out by the owners of the company -- then it doesn't look quite so insane. It's only when we try to make an apples and oranges comparison between the CEO's compensation and the compensation of an employee who can screw up royally for weeks at a time without tanking the company do things look crazy.

All that said, I don't like big companies. Especially companies big enough that the insurance factor of the CEO or other senior management is a "big deal." I much prefer those businesses where the CEO and other senior management is either doing real work a portion of the time, or has done real work recently enough that they know how to tell the difference between an employee who is getting stuff done and one that is just looking busy.

Further, I think that if we could eliminate corporate welfare, we'd see the small and medium sized enterprises absolutely eat the lunch of most of the big businesses. There aren't all that many enterprises that can only be efficient and effective at massive scales.

"Wisconsin lie exposed" is bunk

2011-03-01T15:42:00.005-05:00

I haven't done too much reading about the situation in Wisconsin. But, a few Facebook posts pointed to an article by Mr. David Clay Johnston that merits response if only because of the juxtaposition of the title and the actual reporting that Mr. Johnston does in the article.

The Wisconsin Lie Exposed – Taxpayers Actually Contribute Nothing To Public Employee Pensions

The article by Mr. Johnston only really makes sense in the context of defined contribution plans. In the context of defined contribution plans, saying that employees need to "contribute more" to their pension doesn't make any more sense than Gov. Walker saying that I need to "contribute more" to my 401(k) or my IRA.

However, Wisconsin is a bit more complicated than that. The pension that a pensioner receives is the HIGHER of either a defined benefit pension of 1.6% of final average salary for each year of service, or the results of the pensioners defined contributions. See page 3 from:
http://www.swib.state.wi.us/WRSsustainability.pdf

If the employees total contributions (including compensation deferred via contributing it to this program) are less than the defined benefit, the taxpayers of Wisconsin eat the difference. The odds are very good that the defined benefit payout level is way better than the pension managers can pull off (for a variety of reasons that are just crooked as all hell, but I'm going to ignore them for now as they're not really the point.)

I'm actually sort of annoyed that Mr. Johnston didn't bother doing some of the research that he rails against reporters not doing. Either that, or he just tacitly assumes that the State of Wisconsin Investment Board (the source of the above PDF) which manages Wisconsin's pension fund doesn't know how pensions are structured in Wisconsin.

If the current employee contributions are larger than needed to meet the defined benefit amount, then there is no legitimate reason to increase the required contribution. But, as I mentioned earlier, that seems really unlikely.

As an aside...

The level of just lousy reporting and investigation by those who should be able to do better sucks. Mr. Johnston has won a Pulitzer Prize for crying out loud! It took maybe 20 minutes of Googling and reading to find out how Wisconsin's pensions are structured. This shouldn't be a monumental hurdle that actual reporters can't clear.

A free press is key in keeping any form of representative government from devolving into tyranny. But, it isn't enough to just have the press be free. It is equally important that the press actually print the facts. Frankly, that is probably even MORE important -- if the press is not free but still prints the actual facts, then the citizens will be able to make informed decisions. But, if the free press doesn't bother with getting the facts and truth out, the key ingredient for making informed decisions doesn't exist and the citizens have a MUCH harder time making properly informed decisions.

It is the need for the the press to be able to print the facts and the truth when they are politically unpopular that is at the heart of the demand that the press be free. Sadly, like so much else in the U.S. we have preserved much of the form and lost sight of the function.

2012 Budget Proposal - a Broken Process

2011-02-15T02:28:00.002-05:00

On my drive home today I listened to some Senators speaking about President Obama’s proposed 2012 budget. Their speeches reminded me of just how broken our government is.

First, to Federal politicians who think it is important for the Federal government to “live within its means,” put up or shut up. And if you’re not a member of the House of Representatives, shut up. The President doesn’t make the budget; the House of Representatives does with the appropriations bills that are required to originate there. It is the House’s job to pass the necessary spending legislation that funds the Federal government’s operations. Period. Senators and the President are irrelevant until the House has decided what spending authorization bills it is willing to pass.

Further, if a balanced budget is important, then make it happen today. To propose a budget that shrinks or “eliminates the deficit” sometime down the road is disingenuous at best. The spending authorization bills for this year are for this year! This year’s spending authorization bills don’t constrain or affect the spending 3 or 5 or 10 or 20 years from now at all. Such claims have been so much blather every single time they have been made by Republicans and Democrats alike.

If the Republicans who currently control the House of Representatives are unwilling to pass spending authorization bills that are in-line with reasonable expectations of tax revenue, that is their prerogative. But please, please, stop lying to us about how important a “balanced budget” or “deficit reduction” or “living within our means” are. I don’t care if you pass such authorizations knowing that the Senate will refuse to pass matching legislation or that the President will veto the bill. Not one dime can be spent without the House’s authorization. The party that controls the House of Representatives can make this happen; all it takes is the courage to insist that no other spending will be authorized. Everybody else is along for the ride.

Likewise, the President can insist on a balanced budget this year, right now. Or, he can insist on a deficit of not more than some defined limit. All it takes is vetoing any spending authorization that exceeds revenues. If the House and Senate insist on spending more than that, let them override your veto.

As for the various arguments over proposed cuts in the proposed budgets… Just stop. Just stop unless and you have figured out what the goal is.

Is the goal a deficit of $1,000 billion, $1,500 billion, $300 billion, or no deficit? Is the goal to spend the maximum amount of money on every desirable program with no regard to revenue? To some extent, the actual goal doesn’t matter. What matters is that there is a goal and that at least a handful of people share that same goal, and that it is simple enough that it can be clearly articulated so that it can be used to inform spending decisions. Without at least some defined goal, every argument for cutting or increasing the allocation for any department or program is inevitably juvenile bickering.

If the deficit is reduced by cutting spending then it is a foregone conclusion that every single cut will be made to a program or agency that was sufficiently worthwhile to have garnered support in the past. When the Federal government has to borrow over 40 cents of every dollar it spends, any meaningful spending cuts will not be easy. Similarly, if the goal is to increase tax revenue to fill the gap, the additional $560 dollars per month that will need to be collected from every adult that isn’t in prison looks mighty steep.

One very important fact has been glossed over in the budget discussion at all but a few online sites: of the $130+ billion the Federal government is borrowing each month, only a paltry 14% is coming from actual investors. Each month, the Federal Reserve is printing over $100 billion dollars to buy Treasury debt in order to keep the interest rates on it from skyrocketing. We have already passed the point where “the market” is willing to buy our debt at interest rates low enough that we can afford to keep borrowing.

Even if we were to completely eliminate the Departments of Defense, Energy, Education, Transportation, Agriculture, of Energy, Housing and Urban Development and NASA, we would still be unable to borrow this money from “the market” at today’s interest rates without the Federal Reserve printing the money for most of it. That is how serious the current budgetary situation is. And it is our fault, yours and mine, for electing three decades of morons who appear to be unequal to the challenge before them.

How to level the playing field

2010-12-04T00:17:00.002-05:00

In a conversation on reddit today, I read a comment that I think most of the people in the US and the "western world" would agree with.

Part of the point of taxation is to keep the playing field level.

That idea is a deadly mix of popular and completely and totally wrong. :)

The only legitimate purpose of taxation is to raise funds for the goods and services the state purchases.

That raises a very obvious question:

How do you level the playing field without using the tax code?

That is a really good question.

It also raises a few other questions, only one of which I'm going to address:

Is it the state's job to level the playing field?
Just how level should the playing field be? What level of wealth disparity will the state allow.

I'm going to assume, for the sake of discussion, that the answer to the first question is "Yes." Likewise, let's assume that some metric for permitted wealth disparity exists. It doesn't really matter what this number is when we look at the question of "How to level the playing field?"

How to level the playing field?

Quite simply, some wealth needs to be taken from each person that is "too wealthy" (probably in proportion to how "too wealthy" they happen to be) and given to each person that is "too poor" (also probably in proportion to how "too poor" they are). If we do this, then the playing field will be, by definition, made level to within our permitted wealth disparity.

(Please note: I am ignoring a number of other dimensions of "too wealthy" and "too poor", things like genetic predisposition to diseases, good looks, height, pre-existing medical conditions, etc. can all constitute some notion of "wealth" that a one person can have "too much" of relative to others' "too little"; for the sake of argument, I'm suggesting that these dimensions can be distilled down into some dollar figure, which doesn't seem totally unreasonable - and those that can't be distilled can't be "leveled" so they can't really be addressed anyway).

The first thing to recognize is that this is not a function of the government needing funds. The government isn't going to buy something from each of the people deemed "too poor." They're not vendors to the state, and therefore it is dishonest to acquire the funds given to the "too poor" via taxes (taxes being how the government raises funds to pay for the products and services it purchases).

Here is an honest way to achieve a leveling of the playing field. My emphasis is on the method being an honest reflection of the intent instead of intentionally obfuscatory so as to hide either the intent or the method from the ordinary citizen.

Each year, the net worth of each person in the US will be calculated on a mark-to-market basis.
Software will assign each "too wealthy" person a number of "too poor" persons that they are to transfer funds to and the amount of each transfer.
The state will insure that each transfer payment is received by each "too poor" person within the appointed time, say 1 month after the annual audit.
Any "too wealthy" person who does not transfer funds within the time allotted, will be have the amount of their proscribed transfers taken by the state and transferred to the proscribed "too poor" party(ies). In addition, a fine of 3x the amount untransferred will be levied against said "too wealthy" person, one-third of which will go to the "too poor" party(ies) that were denied their transfer, and the remaining two-thirds will be used to offset the administrative costs of this transfer system.

That achieves the goal of leveling the playing field, and it does so honestly.

It is honest about the intent: that some people are "too wealthy" while others are "too poor."
It is honest about the means: the "too wealthy" person is deriving precisely zero direct benefit from the transfer of their funds, and the "too poor" person has done precisely zero to deserve the receipt of said funds.

I believe that such a system would face monumental opposition, even though it is a fundamentally honest way to tackle the problem of "an unlevel playing field," and some of the strongest opposition would come from many of those who would directly benefit. And the opposition would make a very, very valid point:

such a system is clearly and obviously unfair.

I think that it is only through indirection and obfuscation that a system designed to take from those who have "too much" in order to give to those who have "too little" can garner sufficient public support to remain the law in a democracy.

The end result is a system that inefficiently does that which the public would be unwilling for the state to do if it was done in a clear and honest manner. That sounds like the worst of both worlds to me.

"Create jobs" idiocy

2010-11-02T13:37:00.002-04:00

If I see another politician claiming that they'll "create jobs" I'll probably cry. How did the electorate become so mentally decrepit that such a line doesn't get tossed back in their face every single time they utter it? *sigh* Businesses create jobs. Small businesses do a better job of it than large. Individuals start small businesses. Individuals with capital. Capital comes from savings.

You want to destroy job creation, then destroy savings. Here's a good recipe for doing just that, steadily drive down interest rates. Even better, inflate the cost of necessary goods (food, energy, housing) at the same time so that even the frugal have a harder time saving money.

Make a person have to be foolish in order to accumulate the 6 to 12 months worth of necessary savings in order to be able to take the risks inherent to starting a new business. After all, what sane person will scrimp and save for the prerequisite 3 to 5 years when the real return on saving their money is essentially zero to negative? In that environment, the incentives are towards spending, buying cars, houses, dinner out, bigger and better TVs, vacations on the coast, new clothes that are "in style", etc. Or, if they actually want some return on their investment, it makes them have to chase risky assets like stocks or high yield bonds.

Even better, keep inflation going while driving interest rates down. That makes the value of their savings worth even less.

In that environment, the only practical way for most entrepreneurs to have the capital to start a small business is to borrow it. Now, instead of having to earn just enough to get by on their savings, they have to earn enough to service their debt. Oh, and since they're a small business, in order to get that loan they've had to pledge whatever equity they have in their house or autos or whatever. Now, when their small business tanks (and 9 out of 10 do in the first couple of years), they lose everything instead of just losing their savings.

What semi-rational person would start a business when this is the fiscal environment? Not many. Which is sort of unfortunate since the actual unemployment rate (if you measure it the way it was measure up until around 1994) is right around 22%. We sure could use those small businesses starting up.... Unfortunately, we've spent 20 some years absolutely killing the necessary pre-conditions for small business creation and therefore job creation.

At some point, we just might see candidates that actually understand this. I lost hope years ago of the Democrats ever fielding such a candidate, unless they're in a state like Wyoming, Colorado, Montana, or Idaho. It's taken me a few decades to conclude that the Republican party doesn't really get this either.

Economically, the real difference between the two parties really does seem to boil down to who their economic corruption favors. For Republicans, this has been the ultra-large businesses. For Democrats, it has been the labor unions. Neither approach does anything but buy votes and campaign dollars from the favored constituency. Hmm... that's actually not quite true. Both approaches also align nicely to destroy the fundamental incentives for small businesses -- because handing out cash that the Federal government doesn't have to ANYBODY both drives down interest rates (as a matter of necessity otherwise the US Treasury couldn't afford the interest payments on the growing debt) and increases inflation by pumping more dollars into the economy.

So, economically, they're both worse than useless. I'm not sure which approach will kill the nation's economy faster. :(

So, off to vote. :)

What would be a good investment in the near term?

2010-10-27T17:57:00.006-04:00

Right now is generally a bad time to play in the stock market. The enormous levels of Federal Reserve interference in the markets (as well as either rampant stupidity or malfeasance by most every single financial regulatory body) has resulted in a market where the performance of individual stocks has become highly correlated. On days when the "market" goes up, all stocks tend to go up, largely independent of the fundamentals of the individual companies. For most of last year, the stocks that went up the most were the ones with the worst fundamentals... go figure.

Fortunately, there have been good ways to tell if the market would go up on any particular day. The best strategy was to only buy on days when the Federal Reserve conducted Permanent Open Market Operations (POMO days). That's when the NY Fed creates new money to buy US Treasury bonds back from the Primary Dealers (who are required by law to bid at U.S. Treasury debt auctions). Each POMO day, another couple billion dollars gets dumped into the big banks and has more or less guaranteed an up day for the market. Unfortunately, people have started to notice this and front-run the Federal Reserve... So, it's not as lucrative as it was a while back.

That's what makes the market (as a whole) go up, and since stocks are now way out of whack, in terms of correlation, it makes individual stocks go up also.

There are loads of reasons NOT to buy stocks right now. About the ONLY reason to consider buying stocks right now is if you think that the Federal Reserve will be able to print somewhere north of 1.5 to 2 trillion in new dollars and hand them to the banks which turn around and recycle them into stocks (or more likely, S&P 500 futures market for greater impact).

However, in spite of all the reason that the market should go down, there is one major reason to beware betting that the market will go down anytime in the immediate future -- You're playing chicken with the most powerful central bank in the history of the world, and it is intent in debauching the world's reserve currency. If this strategy actually worked, Zimbabwe and the Wiemar Republic would be held out as examples of monetary genius -- instead of examples of how to completely and totally destroy the middle class and starve anybody on a fixed income.

Here is my take on why one SHOULD NOT be buying stocks (or bull ETFs or mutual funds at this time):

Horrific corporate balance sheets that US companies have -- all that "flush with cash" BS ignores the debt they had to sell to get the cash and the way that the items being depreciated aren't getting repaired or replaced.
The finance sector would have ceased to exist in 2008 and be replaced by entirely new banks if Congress hadn't extorted FASB to allow the financial sector to carry somewhere north of $3,000 billion in mortgage related assets at mark-to-model/unicorn/fantasy levels rather than mark-to-market levels. There is a market for EVERYTHING if you lower the price sufficiently far. Instead of banks actually having MORE than sufficient assets that can be sold (at any given time) to pay off their liabilities (which just happens to be a key tenant of the Federal Deposit Insurance Act and the only reason why such a little Deposit Insurance Fund could possibly backstop the insured deposits of US banks), the banks are almost universally under-capitalized on a mark-to-market basis. Every single large one is. Most of the smaller ones are. Almost every single Friday for the past 18+ months we get another example of this when the FDIC takes over a bank and has to incur a hit to the Deposit Insurance Fund or enter into a loss sharing agreement with the purchaser. If the banks assets could actually be sold on the market for what the bank claimed they were worth, there would be no loss.
Consumer sentiment surveys that for the past 2 years have shown that people's assessment of their current situation is "lousy", but they're hopeful about the future (eventually the hopium wears off and people start to notice they've had flat to negative real wage growth for a decade during which prices of the things that they really actually need (food and energy) have gone up),
If unemployment were counted today the way it was counted up to the early 1990s, the unemployment rate is in the 22% range. -- which is awfully close to the 25% it hit in the Great Depression.
40.7 million people in the U.S. are receiving food stamps. In the Great Depression you had bread lines. Now, in the Greater Depression, you can see the same thing by going to WalMart at 11:45PM on the last day of the month (food stamps charge cards recharge at midnight on the first of the month). There's our breadlines.
The rampant fraud in mortgages from origination to securitization to foreclosure. This is probably going to kill no small portion of the banking sector all by itself. With lawsuits and criminal charges (every single instance of a falsely sworn affidavit is an instance of perjury -- and typically a felony that packs a handy fine) on the foreclosure front, tax claw-backs from counties and states (MERS was essentially a way to let "Wall Street" (I hate that term) transfer mortgages around without actually having to refile each time with the county and state land offices -- the same counties and states that have budget holes that make MERS self-proclaimed $2.4 billion in tax and fees savings look awfully appealing), and finally pushback suits from MBS investors who were sold securities that contained massive violations of reps and warranties (to the tune of 80+% for at least two of the MBS sets that Deutche Bank sold) that the bank's execs KNEW for a fact were violations (Citigroup's chief underwriter has testified that over 60% of the mortgages sold in 2006 were defective, a level that rose to 80% in 2007).
At some point, it seems inevitable that the SEC will be forced to investigate the dealings of the big banks. There's simply too much testimony already extant indicating that the fraud at mortgage origination and securitization time was well known by senior management.
Ditto for Sarbanes-Oxley liability for the senior execs.
In FY2010, the U.S. Federal government spent $3.4 trillion and the total borrowed by the U.S. Treasury increased by $1.6 trillion. Almost HALF of federal expenditures were borrowed money. That's either ALL of the social services (medicare, medicaid, and social security) or more than ALL military spending. For 2 years now, the Federal government has propped up 12% of the GDP... that can't possibly continue forever, and it hasn't "primed the pump" on an actual recovery.
Over half a year of consecutive retail outflows from equity mutual funds. People are either pulling their money out because they need to eat, or because they want to "take profits," or because they've lost faith in the market itself.

None of that paints a pretty picture of the immediate (or medium term) outlook for the US economy. But wait... there's more... :)

The rise of high frequency trading has created a stock market where we have volume (and not much of that to be honest) but very, very little liquidity. The flash crash on May 6 demonstrated that the actual organic bid (an investor looking to hold onto the stock they bought for at least a minute or two) was at least 10% below the market levels at the time. When the HFT engines shut down, the market mostly ceased to exist. With HFTs simply opting to not participate "on the way down," the market suffers significant loss of liquidity at a time when it is needed most. Since the May 6th flash crash, there have continued to be flash crashes in individual stocks multiple times a week.

Over and over again the market is demonstrating that the exit door is very narrow, and the doorway is very sharp. If you buy a stock with the idea that you can always sell it if the price starts to fall, you could be in for a rude shock.

All that said, I actually have some ETFs and mutual fund positions. Every single one of them is bear oriented. And every single one of them is currently below water -- that's the risk of playing chicken with the central bank.

I don't really know how the market will play out in nominal terms. In real terms however, it, like the rest of the U.S. economy faces the enormous headwind of a credit bubble collapse. And, like all credit bubbles that have collapsed before, this one too will bring about a depression since we were unwilling to have the smaller recessions necessary to clear the bad debt earlier.

The good news is that you can see it coming -- if you look in the right places. The bad news is that those responsible for helping regular folks like you and I see this coming are intent on hiding the full extent of the problem from us.

Whenever you see an article or a news program that talks about the intentional filing of falsely sworn affidavits in court as a "document problem" or a "technical problem" rather than what it is, perjury and fraud on the court, you can know for a fact that you have found yet another person who's telling you that's rain falling on your foot.

I get most of my information reading the work of people who have been writing about the mortgage fraud and securitization fraud, and SEC malfeasance and FDIC failure to enforce the Prompt Corrective Action section of the Federal Deposit Insurance Act since back in 2007. But, that means spending a lot of time reading some rather detailed articles from a handful of sites on the web, and it took probably 3 months to even begin to get a handle on the terminology involved -- which is sorta far removed from software development.

The mainstream news media probably can't afford to go into detail, but they could start calling a spade a spade. When the head of our central bank manages to miss the biggest credit event in the past 70 years, maybe it's worth wondering out loud if he's a moron (since a large number of people saw it coming and explained how and why), or he's complicit in creating the problem. Instead, we got some more, "this guy is smarter than all of you so you'd better listen to what he has to say" treatment.

Here are the aggregators and commentators that I read (beware, the first two frequently contain "salty" language and course imagery and metaphors):

www.zerohedge.com
Market-Ticker
Global Economic Analysis

I've tracked others off and on over the past few years, but those guys seem to consistently cover all the major points -- including several that I really lack the expertise to follow.

Naturally, nothing in this post is investment advice. I'm not allowed to give that. Most things in this post actually constitute "don't invest" advice. I think I'm allowed by law to suggest that.

New York Times article from 1910: doctor complains, medical prices are too low

2010-03-26T18:18:00.005-04:00

I've transcribed the text of this New York Times article since it's a bit hard to read in the scanned version. This is worth a read because it helps with one of the most important questions about the price of health care: why is health care expensive?

Though it almost kills me, I have not highlighted the sections that I find the most telling. Note, that the American Medical Association formed within a handful of years of this particular article with the purpose of making the medical profession pay better by reducing the number of doctors.

Please let me know about any typos in the transcription.

PHYSICIAN CONDEMNS PRACTICE FOR LODGES

Medical Profession Degraded, He Says, by the Wholesale Work Done for Societies.

AN EVIL ON THE EAST SIDE

Regular Practitioners Hardly Able to Make a Living Now -- Lodge Doctors Canvass for Their Election

The complaint is made by a physician of the lower east side, through the medium of one of the standard weekly medical publications, that the "lodge practice evil" is hammering medical progress and efficiency in that section of the city and depriving a large number of worthy and capable practitioners of the fruits of diligence and a protracted course of study which they feel they have a right to expect.

The complaining physician is Dr. Morris Joseph Clurman of 142 Rivington Street. In the course of an article in the Medical Record, entitled "The Lodge Practice Evil on the Lower East Side," he says: "Among the local medical community, especially of the lower east side, there has sprung up of the late years an evil so virile, so powerful, and so destructive toward medical ideals, that in time only a mythical Perseus will have to spring forth to destroy this Gorgon Medusa if concerted action on the part of the east side medical profession is not taken to check it now.

"This alarming evil is nothing more nor less than the existing state of east side lodge practice with its concomitant train of manifold degradations to the local medical fraternity. At the present time there are in existence downtown somewhere between 1,500 and 2,000 lodges, societies, and benevolent associations founded mainly by the poorer class of workingmen for a double purpose: namely, social intercourse and mutual aid or benevolence.

"An iron-bound practice or custom has arisen for4 each society to elect some physician to take care of the health of the society members -- for a consideration. What this consideration amounts to we shall see later.

"Twenty years ago, when lodge practice was in its infancy, societies would send humble delegates to some physician and ask him to accept the office of lodge doctor for a fair and reasonable consideration. In most cases the physician would think twice before entering into such an agreement, since, very naturally, routine family practice, with its direct returns for every call, seemed more remunerative than cheap contract practice. However, young and ambitions medical tyros naturally sought some means of getting patients to come to them, and this seemed an easy way to help make both ends meet, and also to obtain what seemed to be a legitimate and ethical way of advertising one's self.

"The lodge doctor found that he cam in contact at the sickbed with a large class of patients who would not have patronized him in any other way. In time, however, the lodge physician, after establishing a reputation as a busy practitioner -- and, perhaps, as a good one -- became more or less independent.

"Hand in hand with the increasing number of physicians on the east side a keen competition now arose among them to be elected as lodge physician in as many societies as possible. Many sought these positions, and it now seemed that another Eldorado had been discovered.

"But now the guilt had been reversed. It was the doctors who sought after the societies, and not vice versa, as formerly. The societies found that, inasmuch as physicians were so anxious to be their lodge doctors, they could well afford to discriminate and choose from the numerous candidates.

"What a degrading spectacle it is to see three or four medical men at one of these society elections. Each candidate comes fully prepared with printed ballots bearing his name, which he distributes among the lodge members. while the vote is going on and the ballots are being counted, these physicians sit like culprits and await the result of the election. It is difficult to say who should feel more chagrined after the count is over -- the lucky (?) winner or the defeated candidates.

"To-day there is scarecely an east side workingman who is not a member of some association which has a physician to take charge of its members. Let us see what are the average rates of remuneration for the lodge doctor. With very few exceptions the market price 'per head' is as follows: One dollar a year for each unmarried member and $3 a year for every married member, including his family. And let us not forget that the east side workingman when married does not believe in race suicide.

"For these terms he is supposed to make as many professional visits in time of sickness as he is called upon to do. very often he may be called upon forty or even fifty times during the year by one family. Time and again he is called for the most trivial of complaints, since his presence is so easily obtained. What a shame and degradation that our noble profession should become so cheapened.

"As a natural result the lodge doctor becomes careless and slipshod in his medical ways. His diagnostic ability not only remains at a dead standstill, but from 'disuse-atrophy' retrogrades so far that his advice is of no more value than that of the corner druggist.

"We are in too enlightened an age not to be able to remedy or at the least make lighter most evils, and the evil of lodge practice is one that can be solved and eradicated. To do this vigorous and strenuous action must be taken by the east side physicians."

We don't need to pay more people to ignore the problem

2009-10-24T17:41:00.003-04:00

This is just asinine.

WASHINGTON, Oct 23 (Reuters) - The Obama administration plans to unveil on Monday a new plan for dealing with troubled financial giants, said a senior U.S. lawmaker, who also mentioned potentially big changes for the insurance industry.

No doubt, many people will be saying "about damn time." But that's missing the actual point.

Instead of enforcing existing laws, the plan is to come up with new laws. We aren't suffering from a shortage of laws (well, except in the repeal of Glass-Steagal), we're suffering from our government not enforcing the existing laws.

There are basically two types of loans -- those that are backed by the government (FDIC insured deposits) and those that aren't.

If you make a loan to a bank (by making a deposit or buying a CD) and the bank fails, the FDIC covers any loss you would have incurred by the bank not having the ability to repay your loan. (Yeah, up the FDIC insurance limits per deposit account per institution.)

If you make ANY OTHER LOAN at all, and the borrower can't repay, you loose the amount loaned (excepting whatever you can recover from any assets pledged as collateral for the loan).

That's it.

If the government were to actually enforce the law, then your tax dollars wouldn't be going to pay the large salaries and bonuses of companies that made stupid, NON-FDIC insured loans that went bad. Instead, your government decided to use you, me, my kids, your kids, and probably our grand kids to protect the financial giants that made hundreds of billions of dollars worth of stupid loans.

Oh, and the FDIC refuses to do its job of shutting down the banks that are STILL gambling capriciously with your deposits. Instead of banks being shut down before they become massively insolvent, the FDIC is waiting until they are dramatically underwater. That's a violation of the law.

Is this just a jobs plan for more people who will ignore the problems they are required by law to address?

Stress Test BS

2009-05-10T15:35:00.006-04:00

With the stress test behind us, we can all breathe a sigh of relief.

The nation's biggest banks aren't insolvent.

Decisive action by the Fed and Treasury has kept the nation's economy from careening into the abyss.

Ah... these giddy feelings are wonderful.

The only really distressing thought is that so many of "my fellow citizens" are so completely clueless that they'll believe this corn-littered raft of crap coming out of Washington and regurgitated by the various morons in the financial press and mainstream media.

Now you know my take on the "stress test." Time for the rest of the story, or "Why Bernanke, Paulson, and Geithner need to be thrown in prison.

Overview

"More Adverse" scenario is already here
Capital requirements "fudged" -- complete with nuts
Government will backstop the need for funds

More Adverse Scenario

Prime Delinquency
One of the main assumptions that went into the test of these banks was that defaults on prime mortgage loans would not exceed 3-4%. That's important because so much of the potential losses to the banks (roughly $455 billion is attributable to residential mortgages and consumer related loans) are mortgage driven. That would be really bad. The really bad news is that this level of default on prime mortgages isn't some "way out there" unlikelihood. Just how probable is it?

Fannie Mae's Q1 2009 report shows that 3.15% of their prime mortgages are three or more months past due. If you haven't paid your mortgage for the past quarter of the year, what are the odds you're suddenly going to make a payment next month? You'd better have one helluva couch with magic cushions.

It's a safe bet that we've already hit this key level in the "more adverse" scenario. Naturally enough, not a thing was said about this in the news. You certainly didn't hear Geithner or Bernanke mention it, even though this information was available prior to the release of the stress test results.

As a quick aside, the amount of total mortgage related losses predicted in the "more adverse" scenario is also laughably optimistic. Where the test results were predicated on losses just south of $1,000 billion by the end of 2010, the IMF is expecting between $2,400 billion and $4,100 billion, Roubini is expecting losses to exceed $2,000 billion, and Karl Denninger of Market Ticker is expecting between $2,500 billion and $3,000 billion in residential mortgage losses. Once again, the "adverse scenario" is wildly optimistic.

Unemployment -- dreaming of jobs
Another key metric of the "more adverse" scenario was that unemployment could hit 8.9% by the end of 2009 and go all the way to 10.3% by the end of 2010. Unemployment is a key measure impacting banks because unemployed people:

Tend to stop paying on their credit card
Tend to stop paying on their car payment
Sometimes even stop paying on their mortgage
They don't purchase additional financial "products"

Again, this "more adverse" scenario is currently being hit. Mainline, (U-3) unemployment hit 8.9% in April. U-6 (which is what the labor market actually feels like to real humans as opposed to Bureau of Labor Statistics droids), hit 15.8%. Did I mention that this is for April? Don't expect these numbers to turn around by the end of the year. In fact, don't expect them to improve by the end of next year either.

The "more adverse" scenario is actually the "dreaming of candy and unicorns" scenario.

Capital Requirements

The other side of the stress test was an evaluation of the banks ability to withstand the losses under the various scenarios. You might expect that this is more straightforward -- a loss of $100 dollars burns through $100 dollars in capital. If we were talking about this a decade ago, you'd be right. We would be measuring the capital cushion of the banks in terms of their Tangible Common Equity (basically the value of the assets of the company minus liabilities, and most importantly, minus things that would be worthless if the company had to liquidate (like deferred taxes and goodwill). In a nutshell, TCE is what a bank actually can use to absorb losses in its loan portfolio.

The initial plan for the stress test was that it would consider the banks need to raise capital in light of their potential losses (from the unicorns and candy scenario) as gauged by the TCE of the various banks.

Well, that was dumb. This turned out to be a horrible way to measure the ability of the banks to withstand the losses they are facing. The numbers looked really bad this way. The "stress test" would hardly be effective at convincing investors that all was okay when the results clearly indicated that large chunks of sky had been crushing banks and would continue to do so for the forseeable future.

Instead, the banks were able to negotiate with the Fed to instead use consider their Tier 1 Common Captital. This worked out much better for the banks. Naturally. Some samplings of Tier 1 ratios vs. TCE ratios (note that TCE ratios don't hit 5% at any of these guys):
That whole "capital cushion" that banks are supposed to maintain to avoid getting shut down by their regulator... Well, yeah, not so much. Fortunately, banks intend to increase their revenues in order to help fill the huge enormous gastly gaping void.

Right.

All of this seems really odd until we get to the final point, after which everything starts making sense again.

You're the Backstop

If you have even half a pulse it is obvious that the banks are seriously short on capital. However, instead of the FDIC shutting the banks down, breaking up their assets and selling them in pieces off to solvent banks, Tim Geithner has committed to the government backstop them. If the banks can't raise the money they need in the market, then the government (or the Federal Reserve -- which isn't really part of the government) will provide them the capital they need. Heads they win, Tails you lose.

You can fast forward to about 9:30 into Charlie Rose's interview with Geithner for that gem.

Here's what I'm wondering. Why bother going through the sham of a "stress test" if the insolvent banks aren't going to be allowed to fail anyway? It seems pretty clear to me that the results were known more or less in advance and that the only purpose was to convince investors that "everything was going to be alright."

Frankly, I think we are about to get Fed'rolled (in the spirit of Rick-rolling).

It's now quite reasonable that the results of the test dribbled out in leaks over the course of a week or so. The "stress test" was purely a marketing tactic. At the end of the day, you are on the hook to either pay off the enormous loan the Treasury will need to backstop these insolvent banks, or suffer dramatic inflation at the hands of a rapacious and completely opaque Federal Reserve bank.

All the purported good news has helped drive financial stocks higher, which has in turn played a key role in helping some big names sell new shares to the public -- increasing their capital cushion. Increasing the capital cushion is good, necessary even. What I find to be seriously fraudulent is the government taking an active role in lying about the health of these companies in an effort to put lipstick on a zombie so that people will be duped into investing in them.

Before the schadenfreude sets in, it's worth considering some of the trends that have been analyzed of late over at Zero Hedge. Basically, the smart money has been heading out of the market. The large institutional buyers, yeah, they're not playing because the valuations are making no sense whatsoever. Instead, the growth in price is coming on decreasing volume.

There's talk of panic buying -- people calling their broker in a rush to buy to avoid missing out on the "bull market." While a fool and his money are soon parted, the government shouldn't be actively trying to punch him in the nose as a distraction for the pickpockets.

Thank goodness for the new-found transparency in Washington!

Senior Secured Debt and Thugocracy

2009-05-03T02:35:00.003-04:00

The current fiasco with Chrysler is illuminating. Two things are very clear:

The bulk of the people interviewed appear to have basically no clue about contracts and/or contract law
President Obama has forgotten that "the point" of the Executive branch is the enforcement of US Federal law

Chrysler's situation is pretty rough, $39.3 billion in assets and $55.1 billion in liabilities. What to do about that is where things get interesting.

The senior secured lenders to Chrysler are owed $6.9 billion. In order to really appreciate the actions of President Obama, we need to know what it means for a debt to be senior and secured.

We're gonna have to start by defining some terms. Otherwise, you could hit the far end of this article not one bit more aware of what's coming than the morons in the media. That's not acceptable.

Secured Loan / Secured Debt
In a secured loan, the borrower pledges some asset as collateral for the loan -- making this a secured debt for the lender. If the borrower defaults on the loan, the pledged asset becomes the property of the lender. Your car loan is a good example: if you stop making payments, the lender has the right to take THEIR car back. Because the lender has the right to the pledged asset in the event of default, secured loans are less risky and tend to be available at relatively low interest rates.

Unsecured Loan / Unsecured Debt
An unsecured loan is one where the borrower does not pledge any asset as collateral in the event of default -- making this an unsecured debt for the lender. In the event of a bankruptcy, unsecured debts have a general claim on the assets of the borrower AFTER the secured debts have been paid. This places unsecured creditors at a higher risk of loss in the event of default, which tends to result in significantly higher interest rates for unsecured loans. Your credit card is an example of an unsecured loan.

Senior Debt
A senior debt is one which takes priority over other debts owed. In the event of a bankruptcy liquidation, senior debts are paid first. Because of this reduction in risk to the lender, senior debt tends to be less expensive, (lower interest rate), than debt that has a lower repayment priority. Your home mortgage has a senior claim on the house.

These differences are why your home mortgage rate is between 5 and 7 percent, and your credit card is between 10 and 33 percent.

Back to the matter at hand.

The senior secured lenders to Chrysler are owed $6.9 billion. By law, these lenders have first dibs on the pledged Chrysler assets in order to satisfy this debt. There are only two legal provisions to change this:
* either both parties agree to a change in the terms of the loan,
* a bankruptcy judge changes the terms of the loan.

Obama's team has offered to pay these senior secured creditors $2.25 billion for their $6.9 billion claim (32.6 cents paid back for each dollar of senior secured debt).

Some of the senior secured creditors have taken this offer. In particular, those banks who were recipients of TARP funds have agreed.

What I find to be especially appalling is that the US Executive branch is villifying those people who hold a valid contract and aren't even so audacious as to insist on its enforcement. These "holdouts" are asking to be paid 36.2 cents for each dollar of senior secured debt.

It is President Obama's job to enforce US Federal law. His attempt to stir up popular sentiment against those whose legal rights he doesn't like is at odds with his sworn duty.

One of the senior secured lenders who originally was holding out for 36.3 cents on the dollar was Perella Weinberg. They changed their position after they were threatened that the full force of the White House press corps would destroy their reputation if they didn't agree to the lower payout rate.

That isn't enforcing the law, that's thugocracy.

You might be wondering if there are any long term consequences to this whole fisaco. If you aren't you should be -- unless you don't think it takes much wondering.

Think back to the definitions at the top of this. Certain types of loans are less expensive because of their inherent risk to the lender. If a lender can't trust that a secured claim will be enforced, their risk exposure isn't being meaningfully improved -- that means the loan will be more expensive unless they are just completely stupid.

President Obama says he wants to get the credit markets "working again". Maybe he should stop kidney punching their legal underpinnings.

What do you think your next mortgage rate will be if lenders are taught that their senior secured debt will be treated like (or worse than in the case of the Chrysler mess) a lower-priority unsecured debt? Do you really want to pay 20% interest on your next home loan?

What about your favorite "small business"-- vintage clothing store, coffee shop, ethnic restaurant? What are the odds that they can secure relatively inexpensive financing if pledging their assets as collatoral doesn't reduce the interest rate they pay on their operating line of credit? Will there be new "little businesses" if credit is only obtainable at credit-card-level interest? Or, will there just be the already-established big chains-- plenty of Wal-marts, but no independents?

These are the sorts of unintended consequences that come from the President of the United States publicly insulting and back-alley-threatening people who "holdout" hope that he will keep just over one-third of the promise he made to enforce contracts.

Goodbye Democracy, hello Oligarchy -- rule by the privileged few. Hope you're already friends with the few. 'Cause "he's" gonna make you an offa you cannot refuse, and if you do refuse, he cannot be held responsible for the actions of his associates....

Politics, Chicago-style.

Relevant links:

Bloomberg
Business Insider
FinancialStability.gov
The Atlantic
Wikipedia: First Lien
Wikipedia: Senior Debt
Wikipedia: Unsecured Debt
Chrysler Ultimatum and the holdouts

Look, a Distraction! I Mean, Bonus

2009-03-17T12:40:00.003-04:00

This is actually funny in a very sad and cynical way.

Daily wrap up from Talking Points Memo.

The administration (Bernanke, Geithner, Frank, and Obama -- as well as Bush, Paulson, and Greenspan) disparately need the general public (GP) to not stampede (either literally or figuratively in terms of cursing the memory of Greenspan). However, the GP is getting screwed so severely royally that they are actually noticing -- considering the absolute lack of uproar over the destruction of the dollar's buying power since the Fed was formed in 1913 (down by 95%) it takes a hell of a lot for the GP to even be aware that the pot of water is warm.

However, they're upset now. That anger has to go someplace. It is politically non-productive for the anger to be directed at those actually most responsible for the current crisis (Federal Reserve, Treasury, Laws, FDIC, GSEs, and decades of regulatory agencies malfeasance). So, there needs to be a tangible enemy for people to be mad at. Bankers with their large salaries and bonuses are a great target because people can't relate to them, the natural jealousy regarding their income level, and they are in fact actually responsible for specific losses.

They're clearly a great target, even a correct target for anger. Just not the best or most important target if we want to avoid messes like this in the future or have this one suck less.

With the disclosure of where something like $110 billion of the AIG bailout money went (more or less shipped immediately to other banks due to AIG's counterparty obligations) people are mad. They're forgetting that the POINT of the AIG bailout was to make these stupid counterparties whole. And, when you consider the list of counterparties, you're sorta left realizing that the Fed and Treasury knew more or less who the big ones were when they made the deal with AIG. But, we don't want people angry about that.

So, let's raise a big stink about the bonuses, because that's a simple, tangible thing that the GP can sink their teeth and rage into. And the gilded idiots most responsible for the mess we are in can continue to try fixing it by juggling more of the land mines that caused the current mess.

Wow.... I hadn't meant to write that much. I just really dislike how attention is being diverted from the actual problem. Railing about symptoms is like insisting on Rogaine for part of your cancer therapy.

Honesty, from Moody's!

2009-03-14T12:50:00.002-04:00

When sued for their clearly retarded ratings practices (giving toxic crap securities a AAA rating), Moody's actually told the truth. Well, they tried to use the truth as a defense, and the judge threw it out.

“Generalizations regarding integrity, independence and risk management amount to no more than puffery,” Moody’s said in court papers. As such, alleged “misstatements of this nature are insufficient to sustain a claim under the securities laws.”

If you use the term "puffery" as a normal person, their defense was spot on. However, they're using it to try dodging responsibility for their basically fraudulent ratings business. The judge wasn't having it.

Read more at Bloomberg.

If you can't sell it for money, it probably isn't an asset

2009-02-25T20:32:00.002-05:00

So, I had meant to stop caring so much about the idiocy in the financial sector.

It turns out that while I am quite idiot resistant, I have failed at being idiot proof.

Bernanke Says Mark-to-Market Accounting Rule Should Be Improved

Here's a choice quote from Mr. Bernanke earlier today, Feb 25, 2009:

“Accounting authorities have a great deal of work to do to try to figure out how to deal with some of these assets, which are not traded in liquid markets.”

Actually, they don't have a great deal of work to do. Instead, they simply have to recognize that if you can't sell something, it isn't an asset. That's pretty simple. Oh, and the collarary is that value of something is a function of what a seller and buyer can agree on. This talk of "no market" is a crock. Here's an actual honest translation:

Banks are capitalized with lots of crap that nobody is willing to buy at anything near the price necessary for the banks to not be insolvent by so many hundreds of billions of dollars that your hand cramps writing the zeros. Instead of letting these bankrupt companies fail and wiping out their bondholders, we absolutely must let them claim that a pile of crap that they can't sell to anybody for more than $400 is actually worth $30,000,000 or so -- just as soon as this "illiquid" phase passes and idiots with more money than brains (I'm looking at you Sovereign Wealth Funds) are willing to pay those kinds of prices again.

The solution to this problem is actually pretty simple -- enforce the damn law! Banks have capital requirements -- when they fail to meet these requirements the FDIC comes in, makes the depositors good (up to $250,000 per account), and then does one of two things: if there is anything left over splits it up with the bondholders and preferred shareholders, or sells the remainder of the "assets" to another bank (hopefully one that isn't completely broke).

Instead, the Federal Reserve and Treasury are using us retarded, moronic taxpayers as ablative shielding to protect the personal income of the bankers and the investments of the bondholders.

I'm reminded of the scene from Liar Liar, where Jim Carey provides some of the best legal advice ever offered: "Stop breaking the damn law!"

"Depression Economics" -- Balderdash!

2009-01-12T17:47:00.002-05:00

I had meant to stop reading and writing about the economic situation. So.... Um... Yeah.

I read an excellent article today about the foolish notion of "depression economics", how common sense is exactly wrong when it comes to hard economic times. The rebuttal linked below is something I wish I was competent enough to write. Fortunately for you, I'm competent enough to link to it. :)

Does "Depression Economics" Change the Rules?

Enjoy.

The next time somebody talks to you about the "Paradox of Thrift" you can respond with the "Consequences of Waste" -- which incidentally doesn't even require a paradox!

Efficiency vs. Resiliency

2009-01-04T15:21:00.002-05:00

Last year, the financial sector took a pretty universal beating. In fact, unless you were in bear mutual funds or short-selling stocks, it was pretty dismal year. Over the past decade or so, communication barriers have fallen and that's helped improve the efficiency in the financial systems world wide. Cheap oil in the 80s and 90s helped foster global specialization as high-end products could be produced with cheap labor in developing economies. As a whole, the world became more efficient.

The downside was that all markets became more brittle. The improved efficiency helped to ensure there would be fewer shocks, but that their impact would travel further, faster, with fewer inefficiencies to dampen them or contain their spread.

There is a bright spot though, one that I think is well worth looking at as we head into 2009. Credit Unions. Because credit unions didn't go nearly so crazy during the housing and commodities bubbles, they are on much more solid financial footing than the rest of the financial sector -- and without massive taxpayer bailouts.

I think there is an analogy to the Credit Unions in our larger economy, and that is small towns. Big cities are places of specialization. In fact, that's no small part of why and how they exist. When everything is going well, these big cities will prosper, but their very efficiency has made them brittle. 2009 will see entire states getting hammered as their major cities crumble through over-specialization and lack of resiliency. New York, Michigan, California, New Jersey.

On the other hand, you have small towns (and different fingers). Small towns don't tend to be efficient -- that isn't the point. They're not filled with just a few kinds of specialists. Instead, they're home to generalists, people who can and do a wide variety of things. While very few small towns are actually completely self-sufficient, they are substantially closer than urban areas are.

Those that called the 2008 housing and commodities bubbles are expecting 2009 to be even worse wit 2010 being bad as well. I think that's going to make resiliency even more important going forward.

After several months of reading and writing about the collapse, I think I'm going to switch gears and try to learn about how small towns can improve their self-sufficiency. If nothing else, it should be a more positive experience for me than reading about yet another asinine plan of the US government to reward incompetence and use the taxpayers to absorb losses caused by irresponsible investors, regulators, bankers, and ratings agencies.

Small towns don't ride the crest of the wave in bubbles, but they don't crash upon the shore when the bubble bursts either.

fstab repair

2008-12-08T21:51:00.004-05:00

Sometimes, bad things happen to good people. That's sorta unfortunate.

Sometimes, bad things happen to me, and that's really bad.

Today, I managed to make a typo in an entry in /etc/fstab. So, when I rebooted, the filesystem check failed (since I had spelled the path to the filesystem wrong and apparently the boot scripts aren't smart enough to recognize the difference between a non-existent device and a bad superblock). I needed to fix the typo in /etc/fstab, but the root filesystem was mounted read-only.

So, if you've got a busted /etc/fstab with a root filesystem that is an LVM partition, here's what you do.

First, you're going to need some sort of boot media, I use NimbleX-2008 for helping me through screwups like this. It's a 200 MB download from: NimbleX.net.

Boot to a command prompt or X and open a terminal window. If you don't use LVM for your root partition, you will probably already have your root partition mounted for you under /mnt/something-or-other. However, if you do use LVM, you need to know the name of your volume group. Mine is 'thump'.

Activate the volume group with (this is the step you won't remember if you're me):

lvchange -ay thump

Use lvscan to make sure it's now active:

lvscan

Then create a mount point for it and mount it. For me, that looked like:

mkdir /mnt/thump.root
mount /dev/mapper/thump.root /mnt/thump.root

Next, fix the silly typo in the fstab -- making sure to fix the one on your real disk, not the NimbeX instance's.

vi /mnt/thump.root/etc/fstab

Reboot, and you have your computer back. And now, I don't have to hunt through google to remember to use vgchange -ay to be able to see my root partition the next time I make this goof.

We now return you to your regularly scheduled economics and policy musings. :)

Market Cap -- what it means

2008-11-27T22:02:00.002-05:00

While reading about the Citigroup bailout I saw a rather dumb statement in some of the news coverage.

Okay, okay, I saw a great many dumb statements, but most of those were of the ordinary "this bailout is a sad but necessary step to ensure the stability... blah blah blah variety." What stood out this time was a blatant misunderstanding of how the stock market, and indeed, free exchange, works from somebody who should know better.

Here's the statement that got my attention:

Given that Citigroup's entire market value on Friday was $20.5 billion, "instead of taking that $20 billion in preferred shares we could have bought the company," he says.

On the surface, that sounds pretty reasonable. After all, Anil Kashyap, the Edward Eagle Brown Professor of Economics and Finance at the University of Chicago's Booth School of Business should know what he's talking about.

There's just one problem.

This statement is only correct given circumstances that basically never exist.

So, here's an explanation of what Market Valuation actually means, so the next time somebody smart says something dumb like this you too can be annoyed. As a side note, I've said things like this myself -- without realizing I was just grossly wrong. Live and learn.

What does Market Value or Market Capitalization mean.

From Wikipedia: "Market capitalization represents the public consensus on the value of a company's equity."

Again, this statement is only sort of correct.

The market cap is the based on the price "negotiated" between the most recent buyer and seller of the stock.

Each stockholder has their own perceived valuation for their shares. Each knows the minimum amount they would sell for. Each potential buyer of a stock also has their own perceived valuation for the shares and each knows the maximum they would pay.

At any given time, many shareholders aren't currently interested in selling their shares because their valuation doesn't match a buyer's. If I held Citigroup stock and felt it was worth $60 a share, I'm not going to sell -- not today anyway.

The market cap of a company is based on the price of the last sale -- independent of the size of that sale. As few as 1share may have changed hands, but that still sets the market cap. The only time the price of the last sale is indicative of the actual cost to buy all of the outstanding shares is when all of the existing shareholders would be willing to sell for that price.

That clearly wasn't the case last Friday when only 1billion of the 5.45 billion outstanding shares changed hands.

The current share price is best information about the perceived value of a company, but it most certainly doesn't reflect the price at which all outstanding shares could be purchased.

Thinking of market cap that way is just sloppy thinking.

Bailout blues

2008-11-25T23:43:00.003-05:00

It has been a while since I could stand to write about the economy. I've continued reading and paying attention, but the amount of "stupidity in the system" is just painful.

The US has put the taxpayer on the hook for $7.7 trillion dollars, so far, as part of the bailout. That's half of the estimated 2008 GDP. It's probably a bit over half of the GDP for 2009.

The scary thing is that we've still got a long ways to go. Expect rising unemployment until 2010. With that will come more corporate bankrupcies as the US economy is forced to give up the asinine notion that it can be consumer driven. That only works as long as folks are willing to lend you money. We're coming to the point where nobody is that stupid.

Well, nobody, but the Federal Reserve and the US Government.

The Federal Reserve today put together a $200 billion dollar package of financing for supporting consumer finance (credit cards, student loans, auto loans, and Small Business Admin loans). The Treasury will be backstopping it from the $700 billion TARP bailout. The goal seems to be that if the central bank and the US government can get enough debt off the books of banks, things will be okay.

The problem is that much of that debt is going to default. Who would you rather have holding bag when it does, Citigroup, or your nation's central bank?

That's a trick question. You don't get a choice. haha :(

So, hunker down. At this point, the real question seems to be when the US or the Fed are going to be forced to default or effectively default by firing up the printing presses.

Happy Thanksgiving.
Be glad you don't live in Iceland, or Russia, or Europe, or China. Things will be even worse there.

Crazy times

2008-11-03T01:10:00.002-05:00

It's 1:00AM, that must mean it's time for a new blog post.

I've been watching the Asia/Pacific markets move up today. I so don't get what is happening in their markets today and the U.S. markets last week.

The engine of the world economy for the past two decades has been the American consumer. We buy stuff. Even when times were bad, we kept spending more money, carrying the global economy through a couple of downturns and recessions. We were the unstoppable juggernaut.

We did this by eliminating our savings (from 10% to 0 and occasionally less than 0), tapping into the equity in our homes (by HELOCs and refinancing), and by running up credit card balances.

But the engine has died.

In September, consumer spending fell by .3% in the U.S. That news came out last week, along with the most dismal report on consumer confidence ever.

Any bets on how the October numbers will look? They won't be better.

I'm trying to understand the thinking that has gone into the purchases in the market last week. There has been precisely zero new information indicating that the economy is going to improve anytime in the near future. In fact, every single bit of new information has been negative. Note that I'm not considering more debt (at the corporate level, or cheaper debt to banks a good thing -- that's like using bad tequila to kill a hangover).

I suppose that psychologically, the upturn in the market is driven by hope. A great many people hold out hope that the worst is over, that their 401(k)s and IRAs will start growing in value again. The baby boomers are going to need their money soon enough that they might be all but dependent on a market recovery coming soon. With all the media coverage asking whether or not the market has "found a bottom", perhaps people are expecting a V shaped market recovery.

I suppose that would be a comforting thought.

But, here's the hangup I have.

What exactly is going to drive the business growth that would warrant higher stock prices? Every step of the economic chain is either stressed or broken. I fully expect that after Christmas we will ring in the New Year by watching company after company go bankrupt. While these bankruptcies are necessary, the opacity in our financial markets today mean that it is nearly impossible which third-parties will be injured in any given corporate bankruptcy.

Market growth is supposed to be driven by a reasonable expectation of earnings growth -- not by the near certainty of unexpected negative balance sheet events.

For a graphical view of last weeks economic news, check out:
http://econompicdata.blogspot.com/2008/10/econompics-of-week-103108.html

This has been an interesting week to have a bear-structured portfolio. If it wasn't for my near certainty in the economic mess heading our way, I would probably be pretty worried. Instead, it's been a good time to pickup a bit more "bearish" holdings on the "cheaper." If I'm wrong, I'll be one of those funny guys who lost money as the market got better.

Hooray, more debt!

2008-10-29T01:30:00.005-04:00

Maybe I can't tell good news from bad.

Honda Motor Co. reported a 41% drop in quarterly profit; quite naturally and rationally investors drove the price of their stock up 16%.

On Monday companies sold $232 billion in new debt. This is ten times the normal volume of commercial paper, (a fancy schmancy name for 'corporate debt') issued per day. $67 billion of the debt was longer term issues -- due to be paid back after mid-January.

If you were a thinking person, you might be asking yourself who in their right mind would be interested in buying long term corporate debt given the current state of the economy. You would think long and hard about the odds of getting paid back given that it is really, really hard to tell who is solvent and who isn't these days.

Well, that's what a thinking person would do. As it turns out, YOU bought about $60 billion of that $67 billion in longer-term debt! How is that for irony?

"Wait just a minute here!" you say. You're not a moron, there's no way you would do anything so obviously foolish. Sorry. You see, the Federal Reserve just got their Commercial Paper Funding Facility going, and took on a bunch of debt. Congratulations, now doing your part.

Economists and market strategists are doing all they can to make sure we know that companies going deeper in debt is a good and positive thing -- key to helping the market and economy turn around. I think my favorite quote is from Adolfo Laurenti, a senior economist at Mesirow Financial Inc.:

"That's the very first really good news in quite some time. It's probably something the government can do and the normal investor would not otherwise do."

Do ya think?! At no point could I find anybody asking why this might be the case. Why would a normal investor be uninterested in loaning money to struggling businesses that refuse to fully disclose the condition of their assets and are dependent on loans to survive? I'm sure the reason will come to me.

That wasn't the only good news though. All day long investors were looking forward to the Federal Reserves much anticipated rate cut. Expectations are for the rate to be cut to 1%. This will make credit cheaper. Which, considering we are in the midst of a rather serious credit deleveraging process, is sort of like discounting salt water sales in the Sahara.

I predict that the Fed will announce a rate cut to .75%. I think they'll do this for the psychological impact.

The problem in the market is that somehow or other we have started to go through a period where reason is breaking out in all sectors. Maybe if the Federal Reserve can jolt us enough, we'll be able to get back on the credit-expansion bubble and things will be jolly all-round again.

It wasn't all bad news though. The run-up of markets around the world presents great opportunities for short sellers (through short sales, call options, short ETFs, or bear mutual funds) to pick up even more gains.

The pickings will be even better if this rally can last through the end of the week. I don't think it can, but there's hope. If nothing else, there are literally millions of people who are determined to have a "V" shaped bottom to the market. They're wrong, and they'll pay for their ignorance... Maybe they can pay you.

http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=aKbsT.CRaT1Q

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aYnjVgzH3ADA

The Chin -- It blocks the punches!

2008-10-22T23:39:00.011-04:00

In an email conversation today, the question of when to start buying equities again came up. Warren Buffet's advice to be, "fearful when others are greedy and greedy when others are fearful" was cited and that's good advice. That's what Mr. Buffet had to say October 16 in an op-ed piece in the NY Times: Buy American. I Am.

I start with that because it's a good counterpoint to the rest of this. Mr. Buffet is undoubtedly smarter than me -- so pay attention to his advice. :) In the long term, stocks will rise, especially in the face of the massive inflation of the money supply over the past year.

For the next several months to year though, I think the market is in for a helluva beating.

What does it look like is coming in the next handful of months?

While the market has taken a beating lately, I don't think it is anywhere near bottoming out. As I mentioned in an earlier post, the Dow is still overvalued when compared with the monetary inflation that has happened since February 1995. "If the Dow had increased in line with nominal GDP since February 1995, it would today be trading at 7,829." In February 1995, the economy wasn't in the tank, things weren't amazing, but they weren't horrible either.

That isn't the case today. Instead, we have an economy that is unwinding 24 years of credit excess. So far, we've had only a single shoe drop and there are at least half a dozen others remaining.

Sub-prime mortgages -- $592 billion in write downs
Alt-A mortgages -- big resets starting in 2009 and accelerating through 2011. This market was substantially larger than the sub-prime market, the borrowers involved are getting further and and further underwater, and the borrowers are typically much more wealthy, have higher credit scores, and are the folks that churn through much more money (higher income, and more discretionary spending). Watch Mr. Mortgage comparing sub-primes to the Alt-A mortgages. There are 50% more Alt-A loans than sub-prime and twice the money involved.
Credit card debt -- default rates are rising (up 45% for JP Morgan Chase, Capital One expects their default rates to hit 7% next year). Moody's expects charge-offs at American Express to increase 30% through 4th quarter 2009.
Commercial real estate -- As consumer spending drops, and it is busy dropping, the commerical real estate sector is starting to feel the heat.
Corporate bonds -- There's a fair bit of what I would call whining about the corporate bond sector, but as of yet, the volume of issued bonds hasn't gone off any cliffs. The price (interest rate) has jumped though making this a substantially more expensive way of raising money -- but not a bad investment if the company doesn't tank.
Municipal bonds -- Municipalities have just started to see trouble as they deal with the impact of investment losses (equities and the death of auction rate securities) coupled with the tax-revenue impact of declining property values. Birmingham, Alabama just voted against declaring bankruptcy. The Los Angeles County Metropolitan Transit Authority may be making service cuts because of the AIG collapse. Other metro rail lines may face similar situations in the future.
State Governments -- Serious problems exist right now for California and New York. Florida, Nevada, and New Jersey are likely to be next (can't find the link right now).

The key driving many of these is the increase in unemployment driving US, UK, and Euro consumer spending down, which decreases business revenue, which increases unemployment....

The US has gone well past the point where each new dollar of debt produced more than a dollar of GDP growth. We're now at the point where it takes 5 dollars in debt to produce a one of GDP growth. That rate is getting worse.

The one thing that has barely started to unwind in the current crisis is debt. We are in a solvency crisis created by 20+ years of cheap credit topped off by 4 years of insanely cheap credit.

During the past year, we haven't really seen gobs of price inflation -- at least not to keep pace with the 2 to 3 trillion dollars pumped in by the Fed and Treasury (and the corresponding actions of the European central banks). Perhaps this is because the cash pumped in has been immediately soaked up by the worthless securities so many financial institutions have on their books. Even so, this is another piper that must be paid. And the inflation piper is an indiscriminate killer of wealth.

Until we start to see a wave of bankruptcies, things aren't going to get better. Too many sectors of the nation and world are insolvent today. Until this solvency crisis is dealt with, things aren't going to improve.

So, when is a good time to get serious buying stuff? Probably once we start seeing more than just a scattered handful of bankruptcies.

This is why I think Buffet could make decent judgements about the short term state of the market.

We really haven't gotten started on the "real" economy side of the current crisis. That's coming.

My Kingdom for a Free Market

2008-10-16T01:18:00.006-04:00

It seems you can't turn around on the Internet without running into a headline blaming Capitalism or the "free market" for the nation's current economic woes. I've wanted free markets for so long that this is like a cheese-grater to the face.

As seems to so often be the case, the media and elected officials have it exactly backwards.

Peter Schiff explains in: Don't Blame Capitalism

I wish I could do a decent job of walking through all the different markets that have significant government "involvement" such that the free market is distorted. The problem is, doing so would require better explanations than I can give -- I'm a programmer after all, not an economist. But, I think I can just list a few that come to mind and maybe that will help.

Fractional Reserve lending -- Bank basically creates counterfeit money with the government's approval and regulation.
FDIC -- Government insuring depositors in case banks screw up the loan side of fractional reserve lending too badly.
Federal Reserve -- Not federal (private banks), and these days doesn't have much in the way of reserves unless you're willing to hold your nose and count their "other securities" at face value instead of the 5 to 20 cents on the dollar the market says they're worth (when/if you can find a buyer at all).
Fannie Mae and Freddie Mac -- Massively leveraged purchaser of mortgages, driving demand for mortgages up and reducing or outright eliminating the risk of default for the originating lender (meaning the guy writing the mortgage didn't have to care if it would default anymore).
Community Investment Act -- Pushed/required banks to issue loans to people with worse credit ratings if they were from certain geographic areas (typically urban lower income areas).
Federal Deficit -- The federal government sucks up hundreds of billions of investment dollars each year ($400+ billion for 2009) -- this is money that could otherwise be invested in private investment opportunities. But, the risk associated with Treasury bonds is considered to be substantially low, making them attractive for investors with certain goals.
Treasury Department -- main line money supply manipulation by printing more or fewer dollars -- impacts inflation.
Federal Reserve -- money supply manipulation by controlling interest rates and reserve requirements. Basically, the Federal Reserve can create credit booms.

We're currently witnessing the unwinding of a two decade Federal Reserve credit boom. What free market? If this was a free market, the boom wouldn't have run for 23 years. Booms are a bit like fires, they require fuel. A boom takes a lot of cash to sustain, sort of like a bonfire.

In fact, booms tend to take more fuel to produce the same gain because there aren't enough quality recipients for the money. Think of the stupid business models that got funded in the tech boom, or the moronic No Income No Job (NINJa) loans in the recent real estate boom. Without somebody artificially increasing the supply of money available, the demand for stupid things falls much quicker.

So, instead of a brief flirtation with petrock.com and mydogspics.net, hundreds of billions of dollars were tossed onto the tech bonfire. Then, since money has to go somewhere, we poured hundreds of billions of liquidity kerosene onto the 4-alarm fire that was the real estate bubble. The securitization of mortgages and the loose underwriting standards (encouraged by banks not having to care if a mortgage defaulted since it was off their books) has really gotten the apple cart upset.

The free market response to this is amazingly simple: let the businesses that did stupid things go bankrupt, their productive assets will be purchased by businesses that didn't go under (because they weren't stupid, weren't as stupid, or just got lucky). The plan to bail out the retards that screwed up their companies is just a good way to reward the guilty instead of letting the market punish them. I read a great quote to this regard: "Crime that pays is crime that stays."

So, show me a market that the government hasn't screwed around with, upsetting the normal supply and demand. Odds are, that market isn't in the process of coming unwound.

Inflation -- Bring it On

2008-10-13T23:37:00.007-04:00

Well, that should fix it.

This evening, the Treasury department announced plans to spend about $113 billion of the bailout buying stakes in private banks. The banks are: Citigroup, Wells Fargo, JPMorgan Chase, Goldman Sachs, Morgan Stanley, State Street, Merrill Lynch and Bank of New York Mellon. Apparently, none of these banks were given a choice either.

This, at least, is a better way to bailout banks than buying their junk that nobody else wants. Still, the partial nationalization of the nation's biggest banks is a helluva drastic move in the direction of socialism. By itself, this is just bad -- preventing the liquidation of poorly run businesses so those that weren't poorly run can take their place.

That's just the creeping socialism part of the plan. The part that really stinks is the FDIC's new insurance program.

The FDIC will insure new "senior preferred debt" loaned by one bank to another for a period of three years. The intent and desperate hope is that with this guarantee, banks will start lending to each other again. Bank-to-bank lending had dropped drastically in the past month or so due to solvency fears.

Up to this point, the Fed and Treasury have been treating the current mess as a liquidity problem (i.e., assuming that the problem was that businesses didn't have access to cash or credit). Their actions had been for nought though, because the reason for the liquidity pressure was solvency fears. Banks knew that their own books were full of toxic crap assets, and that any financial institution wanting a loan was likely to be in the same state. Given the massive leverage in use, the odds were too good that the counterparty could go under way too quickly as the leverage unwound (like Bear Sterns, Morgan Stanley, Merrill Lynch, Wachovia, Washington Mutual, AIG -- these aren't unfounded fears).

So now, the FDIC is the guarantor of solvency for at least some lending. The part of me that's cognizant of our nation's $10+ trillion debt, $600 billion deficit for next year (that's before the cost of the current fiasco and it's attendant tax receipt reduction -- new estimates are $2 trillion deficit), and $53 trillion in unfunded liabilities makes me wonder just how solvent the FDIC really is. They've got a bit of money on hand -- somewhere in the neighborhood of $40-50 billion.

$50 billion sounds like a lot, until we remember that we got into this mess because bad loans caused more than $635 billion in writedowns across the financial industry. With a whole passel of Alt-A mortgages resetting in late 2009 through 2012, more pain is coming. Oh, and credit card defaults are up, and Home Equity Line of Credit payments are getting late, commercial real estate is trending down, unemployment is on the rise, and consumer spending is (finally!) slacking off.

It is worth asking why our current financial crisis is a solvency crisis.

Fortunately, the answer is pretty easy to determine: way too much credit was extended and debt became too cheap. When the hangover finally hit, what have the Fed and the Treasury done -- switch from Mad Dog to Jack Daniels.

They've brought out the good stuff, and things will probably be pretty sweet for a little while. I've just got this terrible feeling we're gonna wake up in a dumpster hung over as hell and cuddling a three-day-dead dog.

Inflation can be like that.

Links:
http://www.bloomberg.com/apps/news?pid=20601087&sid=alDuNJQDu5KA&refer=home
http://www.msnbc.msn.com/id/27161138/

Biggest point gain ever

2008-10-13T21:12:00.003-04:00

Zoom!

If you had money in typical stocks or mutuals, today was a good day. But, you knew that already. :)

No doubt many of the purchases were good buys, what with the hammering the market has undergone. Provided the companies in question don't tank.

There are several economic indicators scheduled for the coming week. I expect these will provide a bit more drubbing for the market.

Bad news will probably be exacerbated by the fact that even after the guarantees that helped spark today's buying binge, the TED spread hasn't budged, it is still at 4.57%. That means that short-term business credit is 10x as high as normal since they tend to be set relative to the TED spread.

With the spread this high, businesses have a hard time affording credit from banks. If your business doesn't maintain sufficient cash reserves to handle receivables that are Net 30 or Net 60, that can be a "real bummer." In normal times, when banks are more willing to trust that their customers won't default on loans, the spread has tended to run at .1% to .5%.

The old saying goes that your banker loves to loan you money when you don't need it, but becomes positively stingy when you do. The increase in the cost of short-term credit comes simultaneously with the slowdown in consumer spending. That makes things harder.

The Federal Reserve (which is neither Federal, nor has reserves worth much these days) has stated that they may be willing to start making short-term loans to businesses. I personally find this to be crazy and stupidly risky. But, it may be the only way to help keep many poorly-run large businesses from failing in the coming months.

And hey, keeping poorly-run large businesses going is in the best interest of somebody. Certainly not the long-term interests of the nation. It has to be in somebody's best interest or it wouldn't happen.

It will no doubt continue to be an interesting week.

Might turn around

2008-10-13T09:33:00.002-04:00

With pretty much every nation of relevance in the western world deciding to guarantee interbank loans, the market is probably going to boom today.

This should increase the survivability of those businesses that require rolling credit for their operations, and the price of stocks today makes them a bit of a value.

I'm probably a day late closing out "short positions" via EEV, EFU, FXP, and SZK.

That said, I'm still bearish on the economy. I expect to buy back into SZK and FXP after they get hammered today. The US consumer spent the past decade or so being the driver of the economy, and they're doing lousy. It seems to me that when the US buys less unnecessary junk, the economies that supply it will suffer.

What a week - month - 23 years -- and some good news

2008-10-12T12:27:00.003-04:00

It's been a crazy week.

Scratch that. It's been a crazy month.

In fact, it's been a couple of crazy decades.

In an attempt to figure out where things are heading, I've been trying to wrap my head around how we got here and the nature of our mess. This is hard for quite a lot of reasons:

I'm not an economist
Most of the media is full of retards
Most of the economists chiming in are from the same Keynesian school of thought that got us in this mess.
The economy is huge and complex
I have a job that unreasonably eats up 8+ hours each day

The current economic situation isn't a surprise and didn't happen overnight, or even over the past year or so. Rather, it is a reasonably predictable result of the monetary policy followed by the US Federal Reserve and central banks of other nations (predominately Europe) since ~ 1995. From 1979 - 1995 the Federal Reserve ensured that the broad money supply did not grow significantly faster than the growth of the economy as a whole. This kept inflation in check and allowed money to be a consistent measure of value and the economy from year to year.

Since 1995, the broad supply of money in circulation has increased at almost 9% annually while the nominal GDP increased only 5.3% annually. That 3% gap might not sound like much, but over the long haul it makes a tremendous difference. A simple rule of 72 check shows that the gap between money supply and GDP will double in about 24 years at this rate. Hmm... 1995.... 2008... 23 years... DOH!

The result is effectively twice the amount of cash chasing the same amount of goods. Having the money supply advance this much faster than growth skews purchasing and investment decisions.

Normally, this would have cause inflation to soar here in the US. Why didn't it?

Around the same time, the low price of oil and cheap international communications connectivity, ala the Internet, allowed the US to move much of its manufacturing offshore, to countries with dramatically lower costs. Our inflated dollars weren't spent here, they were spent elsewhere, inflating those countries. With our high costs of labor, these countries couldn't buy much that we build, so where did all those dollars go?

What happened is the dollars drove asset booms. In the late 90s, the dollars flowed into the stock market, especially tech stocks (driving demand and therefore prices up), after 2000, the dollars flowed into real estate (again driving demand and prices up). A funny thing happens when demand rises sharply, supply shows up to meet it.

During the tech bubble of the late 90s, all sorts of stupid businesses ideas showed up to meet the demand for technology companies. Many, many geeks got nice cars and ate good food. As one of those nerds (minus the nice cars bit), it was a great time. When the demand left, it didn't go slowly, it just left and the tech sector tanked hard. Then, in the real estate bubble, houses and entire subdivisions sprung up just as fast as builders could plant them. Again, when the demand collapsed, so did the entire construction sector. This time though things were different in a worse way.

The massive sell off on Wall Street has brought the Dow down nearly to the inflation adjusted level it was at just prior to the 1995 monetary policy change. If instead of being driven by the asset boom caused by all the extra money, the Dow had been driven by GDP growth, it would be trading at 7829 today. Remarkably, that's close to the territory it has been venturing in.

If you can pick companies that won't actually disappear we might be moving into a decent buying season. That could be a tough if. More on that later.

Links:
http://www.moneymorning.com/2008/10/10/high-dividend-yields/

WaMu - about time

2008-09-25T23:35:00.005-04:00

WaMu went bye-bye tonight, and did so in a rather odd way.

Usually, when a bank goes kaput the FDIC takes over, lines up an acquirer, coughs up enough cash to keep the acquiring bank from losing money outright, and by Monday morning all is well.

This time JP Morgan paid the FDIC $1.9 billion. Huh?

JP Morgan bought the assets of WaMu, but not the liabilities (not the debt, preferred stock, or common stock). Who owns those now? I would assume that the FDIC does, but that isn't their role -- they just back deposits. Maybe the WaMu corporations do? It's shares won't buy a candy bar anymore.

The FDIC had been hunting for somebody, anybody, to buy WaMu for the past several weeks. As the largest US bank failure ever, there was substantial concern that WaMu's failure could wipe out the FDIC's fund.

By this time Saturday, people a whole lot more knowledgeable than I will no doubt have addressed some of these questions. To me, though, it's looking like JP Morgan may have gotten a sweetheart deal from the FDIC by being able to more or less acquire all of the potentially valuable parts of WaMu without the liabilities. Sorta like a drive through organ donor shop.

Something is odd here.

More will follow -- no doubt

News of the sale from various sources:
Wall Street Journal
CNN Money
Forbes
Bloomberg

Our representatives should be hearing from us

2008-09-20T22:47:00.003-04:00

Our government is set to bail out dozens of companies that acted with reckless, stupid, and wild abandon. An entire legion of drunken sailors armed with limitless credit cards could not have kept up. Taxpayers are being asked, more like told, to pony up $700 billion to pay for this bender and keep the irresponsible companies afloat. This goes beyond stupid.

I am rarely at a loss for words or a crazy metaphor. Some how, I feel like this is the metaphor that I'll be using to describe some Darwin Award attempt somewhere down the line. "Welding a seat to a JATO rocket and going for a ride with nothing but a Barbie helmet and a leather jacket? That's like the $700 billion dollar bailout of the financial sector, only without the collateral damage."

Here's the letter I'm sending to all of my elected representatives. Write to yours. Copy and past mine if you want. If you're silly enough to want them to vote for this bailout, go get your Barbie helmet.

The Honorable Tom Davis

2348 Rayburn House Office Building

Washington, DC 20515-4611

Dear Mr. Davis:

I am writing you regarding the “LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY TO PURCHASE MORTGAGE-RELATED ASSETS.” I believe this bill is both a serious moral hazard and a fundamentally unfair transfer of wealth from taxpayers to financial institutions. I urge you to vote against it.

Unlike the Savings and Loan bailout, the “assets” this plan proposes to purchase are not tangible property. Rather, taxpayer dollars would be used to purchase securitized debt instruments. The highly dubious value of these “assets” is in no small part to blame for the trouble many financial companies are in today. The taxpayers did not force these companies to buy these, and therefore have precisely zero obligation to take them off the hands of the businesses that foolishly bought them.

Even if our government were not $9.6 trillion dollars in debt, it would have no place using tax dollars to bail out irresponsible businesses. As it stands, you are being asked to spend money you do not have. Just because you have a checkbook doesn’t mean you still have money. I will be watching this vote with great interest.

Thank you for taking the time to read my letter.

Bank of America buys Merrill Lynch

2008-09-14T23:46:00.005-04:00

Wow!

I didn't see this coming. I thought it would take at least a few more weeks for Merrill to "disappear." What I really don't get is the premium BofA is paying. The buyout is for $29 dollars a share, and Merrill closed at $17 Friday.

BofA is buying them for $43.5 billion. That seems like a lot considering the July sale of Merrill's $30.6 billion in CDO assets to Lone Star Funds for 22 cents on the dollar. Merrill put up 17 of those cents in a loan to Lone Star). If Lone Star defaults on that loan, (because those CDOs turn out to mostly be junk), Merrill's only recourse is to take them back. It might be a good move by Lone Star, they bet $1.2 billion, and could make a bunch more, but their loss is limited.

Merrill booked $6.7 billion in income from this transaction. That's making the assumption that the $5.5 billion that was a loan is actually made good.

If that loan defaults, I'm sure BofA will be thrilled to take those lousy CDOs back on it's books. After all, they bought Countrywide, didn't they? They must have quite an appetite for over-valued mortgage paper.

It's good to be Bill Gross

2008-09-13T13:12:00.002-04:00

If your name is Bill Gross, this was a good week. If you live in the US and your name isn't Bill Gross this wasn't your week. Bill Gross is the Chief Investment Officer of Pimco, a fixed-income asset management firm with a portfolio of around $747 billion. So, if you're not that Bill Gross, it wasn't your week either.

Bill bet that the Treasury department would back the debt issued by Fannie and Freddie. So, when Treasury guaranteed that it would back the debt, Bill made a cool $1.7 billion. Oh, and you picked up about $800 in additional debt. It's good to be Bill.

The week before, I read that Bill was saying the US government needed to use more of its money to support these securities. Hmm... I like that, use the US Government's money to replace private investors who either don't have enough money or are tired of being burned by losses investing in US financial stocks.
From: Bloomberg: U.S. Must Buy Assets to Prevent 'Tsunami,' Gross Says

That's a pretty sweet deal if you've got about 70% of your fund's assets in the lousy Mortgage Backed Securities and preferred stocks of Fannie and Freddie.

However, if you're just Joe Taxpayer like me, you're getting screwed.

The phrase I like the most is "The U.S. Government needs to start using more of its money..." I don't know what government Bill is talking about. Clearly he couldn't be talking about the U.S. Government:

$9 Trillion in debt
$400+ billion budget deficit expected for 2009
$260+ billion in debt payments expected for 2009
$53+ Trillion in unfunded obligations

What money is Bill talking about?

Oh, silly me, I remember. There are two options, tax more, or print more dollars and further debase the currency. Either one of these leaves you and and me holding the bag.

We are now getting the worst crossbreed of Socialism and Capitalism. We're privatizing the profits, (the millions and billions of dollars bankers and financial wizards made while creating the mess), and nationalizing the losses, (the bailout of Fannie and Freddie, Bear Stearns, [though the $29 billion for that looks like chump change now]).

Fannie and Freddie were private companies. They operated without Government oversight. They were owned entirely by shareholders who reaped years of nice growth and dividend payments. Now, you're getting stuck cleaning up their mess.

This week, the U.S. Government debt picked up $5 trillion more. Maybe the mortgage portfolio of Fannie and Freddie is worth something. Nobody in the world seems to have believed it was worth the $5 trillion that Fannie and Freddie are on the hook for. So, instead of Fannie and Freddie tanking, and the portfolio being broken up and sold for whatever it is truly worth, the taxpayer is on the hook for the whole thing.

Yes, the whole mess disgusts me. But, I don't know what I can possibly do about it.

Is He a Liar, or Just Stupid?

2008-09-13T12:53:00.004-04:00

I have long said that the housing correction poses the biggest risk to our economy. It is a drag on our economic growth, and at the heart of the turmoil and stress for our financial markets and financial institutions. Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing. Therefore, the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance, including by examining the guaranty fee structure with an eye toward mortgage affordability.
-- Jim Lockhard, Director of Federal Housing Finance Agency

http://www.treasury.gov/press/releases/hp1129.htm

Like the best of lies, this one has lots of truth in it. Broken down, here are the claims of the above paragraph.

Housing correction poses the biggest risk to our economy.

True

Our economy and our markets will not recover until the bulk of this housing correction is behind us.

True

Fannie and Freddie are critical to turning the corner on housing.

True -- they hold or guarantee about half of the US mortgages

Primary mission of Fannie and Freddie will be to increase the availability of mortgage finance.

False and stupid -- that's what got us into this mess in the first place.

The housing bubble was driven by the cheap availability of mortgages. Fannie and Freddie were key enablers of this by artificially inflating the secondary market for mortgages. This increased demand drove housing prices up for half a decade. Even after the recent 15-20% decrease, prices are still ~ 20% up over their long running positions relative to income or equivalent rental.

What makes housing affordable is the cost of the mortgage relative to income. Historically, house prices have tended to run at 3x annual income. At that rate, borrowers tended not to default and lenders made some profit. Whenever prices move too far from this multiple, they get corrected. The further the upswing, the more the correction hurts.

There is really only one way to keep the current housing prices from falling back to normal. Inflation. The boom was driven by asinine lending made profitable by being able to sell Mortgaged Backed Securities to banks and people who maybe should have known better but didn't. They know better now.

Now, the only way you're going to be able to sell a $500,000 house to someone making $100,000 is if they can be making $185,000 this time next year. That's going to take a whole heap of inflation in salaries without a corresponding inflation in home prices. Ain't gonna happen.

The only way out of the current housing mess is for prices to fall. That's going to hurt. The people that paid way too much for houses or Mortgage Backed Securities or companies dependent on consumer spending are all going to hurt.

Maintainable code -- order matters

2008-09-05T00:12:00.002-04:00

It's been a while since I mumbled about writing maintainable code. It's after midnight now so it must be time to start stringing the typos together.

One thing I see fairly often is code that is meant to fetch data from a store that is implementing some sort of caching. An example might be a user ID to username lookup routine, or names to authorization credentials, whatever. It boils down to given some key, find a value based on it -- updating a cache if necessary -- and return the value. There are at least two ways to write this code: the obvious way, and the better way.

The Obvious Way

if key in cache:
      cache.maybe_track_query(key)
      return cache.values(key)
otherwise:
     value = figure_out_the_value_for(key)
     cache.add(key, value)
     cache.maybe_track_query(key)
     return value

Earlier today, I was looking at code where almost 70 lines of C separated the code dealing with tracking the query. Bah, that's not right. This sort of duplication leads to subtle bugs that are hard to find because humans aren't good at detecting small discrepancies. Never create problems humans have a hard time fixing.

When you're writing code that solves this sort of problem, think about whether or not you can restructure your code so each action happens once. The maintainer will thank you. Actually, that's a lie. Maintainers don't really thank people. What will really happen is you will reduce by one the number of times the maintainer wishes to break your ribs.

The Better Way

if key not in cache:
     value = figure_out_the_value_for(key)
     cache.add(key, value)
cache.maybe_track_query(key)
return cache.values(key)

I know that this structure costs an extra cache lookup. If your cache really is slow to look in, then feel free to make the code uglier with a boolean to track the results of the existence check.

Scratch that.

Your cache isn't that slow.

If you think your cache is that slow, you are wrong, wrong, wrong until such point as you've hooked a profiler up and seen in at least 2 common usage scenarios that your cache look ups are slow.

This may seem like a contradiction of my earlier post advocating a fail early approach. On some overly-literal level it may be. However, it is entirely consistent with the goal of helping the maintainer: make the intent clear.

Finally, a script!

2008-06-05T20:27:00.002-04:00

I've done System Adminstratory type things for years now without actually being a system admin. If I was a real sysad I wouldn't spend so much time not quite sure of what I was doing and what I should do next to avoid killing a server at the far end of an 45 mile drive in Washington DC traffic.

I'm not a System Administrator, but I can play one on TV. Normal people probably can't tell the difference. They think it's perfectly reasonable that I'd use command line perl for something any decent sysad would do in less than 10 magical characters of sed or awk. Real sysads though, they can tell, and the notion that I have root anywhere probably makes them shudder. If it doesn't, it should.

Today though, I came across a script! Someone who has no doubt forgotten more system adminy awesomeness than I'll ever know put together a little handbook that covers all sorts of wonderful stuff.

Want to know

how to setup a Subversion server without having to hunt through the manual,
what about reading stuff from the BIOS (I've wanted to know this way too often and been unwilling to reboot the box to find out),
how to disable logins,
mount a Windows share,
make and burn an ISO image,
add a route (without getting an SCIOADDRT error),
setup Network Address Translation,
and literally dozens of other things...

Go to the Unix Toolbox.

My wife says I sound like a paid promoter.

That's ridiculous, of course. I'm throwing in the free Ginzu knives only because I have too many.

They're called "man pages" Red Hat, use them

2008-06-03T11:09:00.006-04:00

I like Linux systems. Given a choice, they're what I use for computers. Sometimes though, I'd like to get to make the rules... Here's the first one I'd probably make (and I'm looking at YOU Red Hat)!

If you install a program in /bin, /sbin, /usr/bin, or /usr/sbin it had better have a man page.

Otherwise, I'm gonna be stuck doing things like this...

man virt-install

rpm -qf `which virt-install`

rpm -qd `python-virtinst` # I sorta doubt anybody ever guessed this one right.

Discover that I should have just gone to google because there is precisely zero useful-to-a-sysad (or a programmer pretending to be a sysad) documentation included with the package.

Even a lousy man page is better than none at all.

I almost don't care if the man page is just a template that lists the usage output the command itself prints out. At least then I don't need to guess at what the option to get the help information is. Is it -h or -H or --help or -help, or -u or -U or --usage or --Usage? Does one of those wipe my boot partition or add an account named 'sage' to my system, or who knows what -- just randomly running commands is stupid.

Grr.

Oh, and one other thing Red Hat... If virtualization is so important, why on earth is it so poorly documented in RHEL5?

There is no closing rant tag since I highly doubt that this will ever be fixed. Maybe if I were to write the man pages myself for all of the gnome-* and system-* utilities then they'd actually exist. I'm pretty sure I'm not that ambitious. *sigh*

Writing Maintainable Code

2008-04-05T12:50:00.004-04:00

I'm not a real programmer. Instead, I'm just some guy that's written lots of code. I've probably spent half of the past 13 years doing software development -- I've spent the rest of the time doing a hodge podge of various stuff -- managing people and projects, writing business plans, making sales calls, figuring out requirements, whatever.

The fact that I'm not a real programmer doesn't mean I haven't gotten to work on real programming problems (fortunately). I've gotten to write device drivers, hack on parts of the Linux kernel, write gobs of report generation and data analysis tools, build dynamic web sites, and a whole host of other things. But still, I'm not really a programmer.

Instead, I'm a problem solver -- some of the problems just happen to be solved with software. And the bulk of the software work I tend to get to do is maintenance work (finding and fixing bugs, and adding features). So I've gotten good at reading code. I suspect I'm a whole lot better at reading code than writing it. Which, is probably a good thing considering that maintenance work is mostly about reading code.

Which brings me to today's random musing: Writing Maintainable Code.

The code you write is only partially a set of instructions for the computer. Your code is also a letter to the maintenance programmer describing the solution to a problem. Clarity about the solution -- and the requisite (but usually missing) clarity about the problem -- goes a long way to making your code more maintainable.

Over time, I'll probably have lots of examples of code that starts out working (in that the computer can figure out what to do with it) but broken (makes things hard for the maintainer which translates into more pain for me).

Here's a simple example drawn from a common class of problems. The original author is setting up a dictionary of handlers for a Django based site.

urlpatterns = patterns('',
 # Account Management
 ('^%s?$'%settings.LOGIN_URL[1:],   login),
 ('^%s?$'%settings.LOGOUT_URL[1:],  logout,
 {'template_name':'registration/logged_out2.html'}),
 ('^%s'%settings.PROFILE_URL[1:],        include('pycon.usermgr.urls')),

 ## Site Applications
 ('^%sproposals/'%settings.ROOT_URL[1:], include('pycon.propmgr.urls')),
 ('^%stalks/'%settings.ROOT_URL[1:],     'pycon.propmgr.views.accepted_talks'),
 ('^%sschedule/'%settings.ROOT_URL[1:],  include('pycon.schedule.urls')),
 ('^%sregistration/'%settings.ROOT_URL[1:],  include('pycon.registration.urls')),

 # Django Admin:
 ('^%s' % settings.ADMIN_URL[1:],    include('django.contrib.admin.urls')),

 # root level site features
 ('^%s$' % settings.OPTIONS_URL[1:], 'pycon.views.set_option'),
)

This isn't an uncommon task -- a set of key to value mappings. It shows up ALL OVER your code. Think variable definitions, hash tables, tuples, lists of lists, nested arrays, function parameters (for some languages), etc.

If you think of this as a table mapping keys to values though, suddenly it becomes obvious what it should look like in code. At least, it should become obvious. Here's a rendition of the above that makes just as much sense to the compiler, but is easier to read and follow. It takes a bit longer to type (adding those extra spaces and alignment), but pays for itself each time somebody has to read it.

urlpatterns = patterns('',
   # Account Management
   ('^%s?$'%settings.LOGIN_URL[1:],            login),
   ('^%s?$'%settings.LOGOUT_URL[1:],           logout, {'template_name': 'registration/logged_out2.html'}),
   ('^%s'%settings.PROFILE_URL[1:],            include('pycon.usermgr.urls')),

   # Site Applications
   ('^%sproposals/'%settings.ROOT_URL[1:],     include('pycon.propmgr.urls')),
   ('^%stalks/'%settings.ROOT_URL[1:],         'pycon.propmgr.views.accepted_talks'),
   ('^%sschedule/'%settings.ROOT_URL[1:],      include('pycon.schedule.urls')),
   ('^%sregistration/'%settings.ROOT_URL[1:],  include('pycon.registration.urls')),

   # Django Admin:
   ('^%s' % settings.ADMIN_URL[1:],            include('django.contrib.admin.urls')),

   # root level site features
   ('^%s$' % settings.OPTIONS_URL[1:],         'pycon.views.set_option'),
)

Wasn't that easier? Yes! Of course it was easier! That was the whole point of the exercise.
What changed? Just the layout. We made the code more consistent in its layout. This happened in two ways. First, since this is a table of data, we made it look like a table by separating the various columns. Secondly, we dropped the extra '#' in the Site Applications line.

Why should we care about consistent layout? It makes the code easier to read. Think about working with code being a two step process, the first is reading (akin to the lexer reading the source) and the second is understanding (sort of akin to the parser doing stuff with the tokens). Every neuron you force the maintainer to spend on lexing is one that isn't getting to focus on parsing.

Make lexing easier for the maintainer. They'll thank you. Or hate you less if nothing else. Sometimes that's all you can hope for.

2008 -- Here comes a wild ride

2008-01-12T18:55:00.001-05:00

I just found this in my drafts. Written January 12, 2008. The writing on the wall then was so clear even I could see it.

2008 is going to be a very interesting year. And probably not in a good way.

Here are some predictions:

We'll see at least one major US bank go away (bankruptcy or acquisition).
The housing market won't get better, not even by the end of the year. In fact, the housing bust is going to continue well into 2009.
Inflation is going to keep going up (driven by energy and food prices).

Banking
Major US banks are hurting for cash in a big way. How bad are they hurting? They've started having to court overseas governments -- there not being anybody else with the proper mix of interest and ability.

Let the Other Guy Sacrifice

2007-10-13T00:00:00.000-04:00

Back in the “olden days”, if you wanted to be taken care of in your dotage you had two options: have lots of money or have lots of kids. You were either going to hire people to take care of you, or have people to take care of you. Neither of these options is particularly easy.

If you ignore inheritance, lotteries, and outright theft, having a lot of money requires hard work and the self-discipline to spend money on assets rather than expenses. If you ignore live-in-nannies and Swiss boarding schools, having lots of kids requires hard work and self-discipline to actually parent your children.

Even though the two options were hard, people historically chose one or the other. Why, because it was pretty obvious that these were the only two choices. Sure there were people who didn’t do either, but they provided pretty visible examples of failure for younger generations to learn from.

Enter social security, retirement benefits, and Medicare.

Now here’s quite a trick. The government will take care of you in your old age, and you won’t have to make these sacrifices! You’ll pay in a relatively small amount of your earnings throughout your career, and when you’re old, you will be able to retire. You might not be able to “put on the Ritz”, but you won’t be destitute either. Best of all, you can enjoy your money your whole life long.

There’s no trick – just a lie. The reality is you’re having other people’s kids take care of you in your dotage. Not directly of course, that would just be awkward! But indirectly, so it isn’t awkward! The social security structure in the US requires more workers than retirees. Clearly, this is only going to work if somebody is having lots of kids. The beautiful thing is it doesn’t have to be you. You don’t have to sacrifice, other people will!

It didn’t take people long to adjust; families got smaller and smaller. After all, there was no longer a direct need to have a big family. Instead, people began to worry about “not being a burden” on their kids.

The fundamental underlying truth didn’t change though. You still need lots of money or lots of kids. It’s just that the social security structure hides this truth. In software, this is described as “adding a layer of indirection.” There’s a saying that goes, “you can solve anything in computers by adding indirection, except performance.”

By hiding the truth, we have changed the nature of things in a handful of ways, none of them good.

At least two, and maybe three, generations of people don’t know that this is the truth.
We encouraged the entire Baby Boom generation toward selfishness and consumerism (since the major reason to have a large family or exercise fiscal responsibility appeared to go away).
We’ve encouraged the Baby Boomers and their kids to think they are entitled to retirement and old-age benefits. After all, they paid in to the system, didn’t they!
We’ve created a demographic bubble that is going to have enormous impact on our economy as the kids the boomers didn’t have don’t show up to work.

Our nation is going to have a tough go of it for the next twenty years or so. We’re certainly not going to be able to dodge or block this particular punch. What remains to be seen is whether or not we’ll learn from it.

Great Have Idea

2006-07-19T23:55:00.000-04:00

“Great!  Have idea.”
“What’s your idea?”
“Brown!”

It seems Ian’s idea has been “Brown” for quite some time now.  We aren’t exactly certain what the meaning of this is.   When pressed about his idea he tells us, “Mine idea.”  And he’s so serious that we refuse to laugh.  Lauren wants to know why Ian’s idea is always brown.  We tell her that we aren’t sure.  For some reason though, her idea is always, “Pink!”  But, that makes perfect sense because, “I like pink.”

Somewhere along the way I got old and forgot there was joy in something as simple as brown.  It’s not sophisticated, complex, or deep.  But, brown has led to hugs and the wonderful sight of Ian with a certain and serious smile in his eyes.

He has an idea.  It is brown.  I think if I could climb into his mind I would find that “brown” is as profound an idea as I’ve had in quite a while.

No More Christmas Presents

2006-02-03T23:33:00.000-05:00

Sometimes Lauren doesn’t want to go to bed at night. Sometimes, she REALLY doesn’t want to go to bed. Two days ago she went to bed madder than a hornet because she had to go to bed only one hour past her bed time. Her threat had Alicia and I cracking up, “I’m not getting you any Christmas presents. Ever!”

It’s February. We’ll have to see if she remembers her threat come December. She’ll be five then, so maybe I should remind her.

Like Olive Shoots Around Your Table

2005-10-23T16:06:00.000-04:00

In the Bible children are commonly considered a blessing from God.  Growing up I never gave that much thought.  I’ve been a dad for a few years now and ever so often am given the opportunity to reflect on it.

Yesterday we made a quick visit to the church:  just a quick drop in a say hello to Jesus.  Why?  Lauren wanted to.  She bugged us for probably half an hour before we agreed.  St. Leo’s was empty save one old man praying the Rosary in a front pew.  We went in and found our own front pew and spent some time in silent prayer.  Ian wandered off so Alicia started after him and Lauren followed.  All alone, I found myself missing the daily Masses I used to make it to.  Here we are, living less than a mile from our church, and my parents have been to more daily masses here than I have.
Thank you, Lauren.

Lauren came back eventually to let me know that she wanted to see the Stations of the Cross.  Last year, this was one of her favorite things.  And it never failed to move Alicia or me.  Lauren would tell Jesus that she would bring him Strawberry Shortcake band-aids for his owies.  Sometimes her tears at Jesus’ pains would leave me with silent tears.  She showed me how to see, really see, Jesus’ sufferings as a child again.
Thank you, Lauren.

Anybody can tell you that kids will teach you to put others first, that as a parent you will live a life of service.  I think that’s only half of the story.  The other half, the bigger, greater, deeper, fuller half is that children will teach you to embrace this selflessness and in doing so develop a greater capacity to love them, your spouse, your self, and your God.  I didn’t see that one coming.
Thank you, Lauren and Ian.

No doubt I will discover more ways I am blessed as the days slip by.  And I don’t doubt that I will learn even more about how little the stone likes the sculptor, as my little family helps me grow into the man that I can and should become.  These are my blessings today, and today they seem enough.

Happy Birthday

2005-10-19T11:51:00.000-04:00

Lauren turns four today.

But, there will be no cake for our little girl who is getting so big so fast.

Instead, there will be children's Tylenol, and cough drops, and Robitussin.

Poor kid.

Faux Pas

2005-10-11T22:58:00.000-04:00

Sometimes being a parent means trying to figure out the right thing to say and do when there isn't a right thing to say or do. At all.

A customer service rep at WalMart had just gotten done directing us to the garbage bags. She was nice and smiled the whole time. All in all, she did a great job.

And then, a sweet little voice piped up, loud and clear:

"Mommy, why does that lady have a huge tummy?"

Boat scissors

2005-10-02T20:42:00.000-04:00

A co-worker of mine used to do some work associated with torpedos. One of the more interesting things I have learned is that modern torpedos don't try to "hit" the ship they are shot at. Instead, they blow up under them.

"Huh?"

Enter the MK 48 ADCAP (ADvanced CAPability) torpedo. It weighs about 3,500 pounds and carries just under 600 pounds of high explosive (roughly equivalent to a half ton of TNT).

It's designed to detonate 30 or so feet directly under the keel of the target ship. This turns out to be much, much worse for ships than you might expect.

The pictures below are of a single MK 48 ADCAP blowing up below the HMAS Torrens (Australian).

Boat scissors

Wow.

This article has all the salacious details.

Moral of the story, don't be on a ship that gets shot with one of these. It'll ruin your whole day.

2005-09-29T22:03:00.000-04:00

Parenting has been a learning process for me. I would like to think that I'm not alone in this -- that it's a learning process for most parents.

Tuesday, for example, I helped Lauren learn the importance of being careful and paying attention.

I smashed my finger in the car door.

After looking stupidly down at my hand and trying to pull it out of the door, I realized that I had to open the door before I could get my finger out.

Needless to say, I'm losing a fingernail. :(

The really amazing thing is that I didn't swear even once. I guess parenting is helping me grow in more ways than I thought.

Random thoughts

2005-09-13T23:46:00.000-04:00

A vacation is a wonderful thing. It's the pre-vacation scramble and the post-vacation recovery that need help.

I went to the DMV last Saturday. These places should have a huge Hienz katsup bottle on the wall -- except they'd probably be smacked with some sort of truth in advertising fine.

30 minutes waiting in line to just get into the DMV and get a number
60 minutes waiting for my number to be called
15 minutes waiting for my name to be called
10 minutes waiting for my name to be called again
5 more minutes waiting for my name to be called a final time.

I should have my head examined for failing to bring a book.

There seems to have been a change in the humidity in NOVA lately. I can tell, because my fingertips have started to dry out and crack. This is fairly annoying for a couple of reasons: 1) there are lots of nerves in your fingertips; 2) I type for a living, 3) leaving little blood spots on the keyboard is probably not too sanitary. So I'm adjusting once again to typing while wearing bandages.

XML 1, happybob 0

2005-09-05T23:35:00.000-04:00

About three weeks ago I read over a specification for an XML policy file. Information was stored as the values of the various tags. I gave it my stamp of blessing and so it was implemented.

Today, I discovered that was a sub-optimal decision. Mel the real programmer might even call it most-pessimum. LibXML provides nice functionality for working with documents where the information tends to be stored as attributes of the various tags. It might be great for working with value oriented data (if that's what it's called.) It sure didn't seem to be today.

After spending 4 or 5 hours working around the results of this particular design decision, I made a new decision: we're changing the design. Either that, or I'm just going to slice and dice the data out with perl.

It's a small world

2005-09-04T22:47:00.001-04:00

We drove to Cheshire Conneticut this weekend. Maps.google.com thinks this is a 6.5 hour journey. Which, it might be in some alternate universe. I learned my lesson two trips back from Cheshire to Fairfax, Va. Mapquest routed us through NYC, specifically to take I-295. Which wouldn't have been so bad had I the foresight to check our road atlas before starting...

So, at 4:30PM on a Monday afternoon, I found myself on a surface street in Queens. Driving a 24 foot U-Haul truck with my wife behind me driving our MPV. Yeah. 2.5 hours. It took two and a half hours just to get out of NYC. That day, the trip from Cheshire to Fairfax took 13 hours.

Friday, though, I was smarter. We routed around NYC on the Garden State Expressway. This adds maybe 30 miles to the trip but subtracts at least an hour.

Anyway, for whatever reason, our kids (3 3/4 and 1 1/2) were excellent going and coming. Thank God for miracles.

At a rest stop in New Jersey, we saw some people that looked familiar. Indeed, upon closer inspection, they looked really familiar. Naturally, they were relatives from my hometown. Who we just happened to meet at a rest stop in New Jersey. It's the fact that my hometown has less than 900 people in it that makes this reallyweird.

The world isn't just small, it's too tiny to turn around in.

New Orleans -- Send luggage

2005-09-01T00:38:00.000-04:00

The good people of New Orleans are screwed.

The city is going to be an impromptu pool party for weeks maybe months. By that time, I would expect nearly every flooded house to be close to a total loss. Commercial buildings might be better off -- since their structural components aren't a buffet line for mold.

Does it make sense to rebuild?

Unless Lake Pontchartrain and the Mississippi are moved, New Orleans is a disaster waiting to happen. Oh, and New Orleans is below sea level, too.

Did I mention that the good people of New Orleans are screwed?

I am reminded of Sam Kinnison's rant about world hunger. The people of New Orleans need clean water, food, and luggage. Because only an idiot would rebuild a flooded house on a plot of land below sea level with not one, not two, but three, count 'em three large bodies of water next door.

I wonder what AAA and Samsonite are doing to help.

3 year old patience

2005-08-29T23:45:00.000-04:00

Our daughter Lauren is three and a half. Today, while we were driving back from Costco, she was on the phone with her aunt. Somehow, the conversation got around to the toy food she uses for tea parties. Specifically the toy cookies. I don't know what her aunt said, but Lauren responded with "No, we buy them from the store." Then, she very slowly explained this in her best explaining-the-simplest-things-to-the-simplest-of-people voice, carefully enunciating each syllable:

"No We Buy Them From The Store."

It was all I could do to keep from cracking up.

Is it warm in here?

2005-08-29T23:17:00.000-04:00

I thought about getting up at 6:00 this morning. Long enough to turn off the alarm. I'm not young enough to function on three hours of sleep anymore.

When I sauntered into work at 10:15 it was hot and muggy. Not outside, in the building. And so the day went. Hot. My arms sweating each time they touched a desk. An hour and a half meeting in a conference room that must have hit at least 85. Small labs working with other sweaty nerds. There were repeated stories of the AC getting turned on "real soon now." Sometimes, a little warm air blew around. Just enough to remind us that, no, the AC wasn't working.

Days like today help me remember just how much I love air conditioning. And just how much anybody that wants to do ANYTHING to get between me and my cool air can shove off. Coal? Oil? LNG? Nuke? So long as I get my soft gentle breeze of 69 degree sweetness, I don't much care.

Gotta start somewhere

2005-08-28T23:19:00.000-04:00

It's been a busy weekend. We're still recovering from our last move. We have managed to give up finding the cable for the camera. Off to WallyWorld to buy a 12-in-1 card reader that groxs xD cards. Somehow I managed to leave it in the cart while loading kids in the MPV. One more trip to WalMart and thirty bucks later, 300MB of "making the grandparents happy" are sitting safely on the file server.

The great thing about moving at least once a year for 6 years is that you never completely unpack. Actually, that isn't great at all. In fact, it sucks almost as much as the hassle and expense of actually moving. We went through kiddo toys Saturday night until about 1:30AM. Future moves will weigh less. GRIN