Freaking Out for Congress

Thanks, idiots, for the carnage.

By “idiots,” I mean those members of the US Government who are unwilling to compromise because of some quasi-religious convictions about taxation and the role of government. I mean those members of the US Government who are using the debt ceiling to create a crisis, thereby scaring the bejeezes out of little old ladies.

Officially, the US debt ceiling “crisis” (which is completely artificial and unnecessary in the first place) is supposed to occur sometime next week. But, it’s already happening.

Little old ladies, sophisticated investors – everyone – are now getting out of US investments. They are selling their US mutual funds, closing their US bank accounts, and selling their US stocks. Today, I had millions of dollars’ worth of accounts cross my desk saying, “Sell all my US holdings and buy Canadian.” This selloff - which has already cost the country billions of dollars - will continue until the matter is resolved.

Of course, not everyone is upset about the situation. Citizen’s militia groups are apparently ecstatic about what they feel is the increased likelihood of finding practical use for their assault rifles and body armor.

Interestingly, tea party members are now calling for the resignation of John Boehner, saying that he is part of the “old guard” and not revolutionary enough.

It is likely that Congress will reach an agreement at the last minute, after scoring enough political points to satisfy their most maniacal constituents. Even so, many investors are not confident enough of this positive outcome to leave their life savings to the whims of fanatics.

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See also:




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“Some men just want to watch the world burn.”

Alfred the Butler, in the movie, The Dark Knight
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Let’s just say what we really think about Barack Obama

An Open Letter from Donnie Drumpf to the American People


Dear Citizens of America,

In recent days, the media have played into my doubts about Barack Obama’s citizenship, his academic abilities, and more. But now I am thinking, “Why all this pussy-footing around? Why not just come out and say what we are all thinking?”

Barack Obama is a negro! Am I the only one who has noticed this? I referenced an anthropology textbook (just to be sure) and it is undeniable: he has big lips, a wide nose, and dark skin. He looks like a heterosexual version of Michael Jackson before he became white. Weren’t these people slaves just a while ago? How did we allow this to happen?

Obama has relatives in Africa, spent part of his life in Malaysia, and yet still speaks English more eloquently than I do. Do you know how annoying that is? Black people aren’t supposed to be good at English. They are supposed to say, “yassah, nossah,” and “You’s disrespectin’ me, Holmes.” Of course, there are other members of the blacks who sound like white people. I forgave Denzel Washington and Laurence Fishburne because they make good movies. But now a President? This is too much.

And that name: Barack Obama. What kind of name is that? “George Washington” is a good American name. “Abraham Lincoln” sounds a bit Jewish, but is still pretty good. “Barack Obama” sounds like the kind of person we look for in caves in Afghanistan.

We’ve tried labeling Obama as the anti-Christ, linking him to communists and racists, challenging his citizenship, and of course the general and sweeping comment that he doesn’t seem American. The whole time, he keeps smiling and saying, “We need to focus on the issues.” He talks about the economy, energy planning and health care - completely ignoring our requests for college transcripts. What is it going to take to get rid of this guy!?

Barack Obama is better educated than I am, obviously smarter, holds the highest position in the world, and even has a better beach body. What’s not to hate?

By the way, did I mention that I have the highest rated show on the Gonzo network? It’s a great show, with a great fan base. We have a great name. People would be impressed if they knew how much money I have. I’m important. Right?

Sincerely,

Donnie J. Drumpf®

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"Don't hate me because I'm beautiful."

Kelly LeBrock, 1980s shampoo commercial

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The Fate of the U.S. Dollar

Fears of a “great fall” in the US dollar are widespread, and with good reason. US Government debt took on ghastly levels during the credit crisis. China has threatened to stop buying US debt, partially because of valuation concerns and partially because of politics. OPEC has threatened to change to an alternate currency for the trade of oil if the US dollar continues to lose its value. The saber rattling is intense, and the statistics look grim. But will the “great fall” occur, and if so, when? To find out, we need to fully explore the facts, and their relationship to the dollar.
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FACTOR 1 - Foreign Ownership and Trade Deficit

A current account deficit (when a country imports more than it exports) is a regular feature of the US economy. As long as the US is paying more to foreign countries than these countries are paying to the US, the US$ will continue to slowly decline. There is talk that because of this uncertainty OPEC and China are both considering moving away from investing in US dollars. The problem with this story is that there is no other currency that will suffice. The Euro has its own share of problems, with member countries having high debt levels. The Canadian $, Australian $ and other currencies cannot support the level of trade necessary. The US$ is, at present, still the only logical choice for International trade.

Direction –Short-term Neutral, Long-term Bearish

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FACTOR 2 – The U.S. Economy

At present, the world is rife with bubbles. Canada, China, and to a lesser extent the U.K. are experiencing housing bubbles. China also has a stock market bubble. Gold is firmly in fear territory. Paradoxically, what is usually the safest of the safe (T-bills and gold) are now amongst the riskiest.

The US economy, on the other hand, is in good shape for the future. Major asset bubbles have already burst. Unemployment is high but stabilizing. Home prices are already low and getting lower, to the point where an average-income family (with good credit) can once again comfortably afford an average home. Citizens are, for the first time in years, paying down their debts and saving. The banks have recapitalized and have greatly reduced their leverage. In short, the U.S. has experienced a great deal of pain, and is now trudging slowly toward recovery. This recovery is likely to firm at the same time as other bubbles in the world begin to burst.

Direction – Short-term Bullish

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FACTOR 3 – Demise of the Carry Trade

For the past two years, financial institutions around the world have taken advantage of low US interest rates, using the US dollar for “the carry trade.” The carry trade is the name given to taking out loans at low interest rates, and using these funds to invest in higher interest investments elsewhere (often in another country). For example, say a hedge fund in Singapore takes out a loan in US dollars. It may then convert the funds to Euros and invest the money in a German bond that pays a higher interest rate than the rate on the US loan. The result is “free money” to generate income.

Because of the carry trade, many US dollars have been sold (converted to other currencies). When the Fed starts raising interest rates, the US$ carry trade will reach a point where it is no longer profitable and hedge funds will have to pay back their US loans. That is, once US interest rates begin to rise, there will be a rush to exchange foreign currencies for US dollars to pay back loans, boosting demand for the US$ and therefore price.

Direction – Short-term Bullish

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FACTOR 4 - US Debt

The US, during the credit crisis, built up a huge amount of debt. Many worry that this will give the US an excuse to print money and debase the currency (since it’s better to pay back debt with dollars that are worth less). This reasoning is faulty for two reasons: the nature of the debt, and relative value.

Although the Government spent a lot of money during the credit crisis (and before it), the amount of money spent is of little relevance. What is relevant is the return on capital. That is, for every dollar spent, how much economic prosperity will that dollar create? Spending on such things as education and infrastructure (roads, communications) is important not only because it creates jobs immediately, but also because it leads to greater economic prosperity later on (rather like spending money on a University education). The recent spending spree may or may not create a good long-term rate of return – the verdict is still out.

Many people believe that the money the US Government leant to banks is “gone.” That is, that it was given to the banks and they spent it, and that it will now take years for them to pay it back. This is nonsense. Money was given to the banks because banks are required to keep a certain level of collateral on their books in order to operate (known as a Tier 1 Ratio). The money given to banks was simply deposited into the bank’s accounts so that they met the requirements to continue banking and giving out loans. Of the 2 trillion dollars given out for liquidity during the credit crisis, all but 100 billion has already been repaid, and the Fed fully expects the rest to be paid back sooner rather than later. The US taxpayer has not lost a dime in this endeavor.

Relative value is the fact that currencies are valued compared to each other. Although the value of the US dollar has dropped relative to, say, gold, it has retained reasonable stability relative to most other currencies. This is helped by the fact that Europe, Dubai, Canada etc. have recently run up their debt levels just like the US has (or worse). So, while US debt may be a matter of concern, it isn’t necessarily a concern for dollar valuation. In this regard, it is notable that whenever bad headlines hit the news, the US dollar rallies: that is, when trouble strikes, investors from all over the world still seek the safety of the US dollar.

Direction – Short-term Neutral, Long-term Unknown

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In conclusion, although US debt levels and trade imbalance are matters of concern, the short- and medium-term case for the US dollar is strong. The US is on the road to recovery, effectively two years ahead of the rest of the world. And, when the Fed begins raising interest rates the carry trade will collapse, urging the US dollar up.

Though the long-term crystal ball remains cloudy, the imminent demise of the US dollar has been greatly exaggerated.

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“The commodity value of the circulating media (paper money) is zero.” Binhammer and Sephton: Money, Banking, and the Canadian financial system.