Monday, April 26, 2010

Looking in the TIPS Jar

TIPS are Treasury Inflation Protected Securities. They are issued by the U.S. Treasury and have the “full faith and credit” of the United States government. Of all bonds issued by the Treasury for any given maturity, TIPS pay the lowest interest rate, because they are “inflation-protected”, which means they pay extra to keep the purchasing power of the bonds roughly equal to inflation. For investors concerned with inflation, this is attractive, because the low interest they receive is AFTER inflation.

Today, the Treasury auctioned off $11 billion of 5-year TIPS. Normally, they receive bids to buy about 2.2 to 2.4 times the amount of TIPS being offered. Today, there was 3.15 times. In other words, the government could have sold 3.15 as much as they had ti sell. It was the best since October of 1997.

This is a huge difference and strongly suggests more people are getting worried about inflation. One of the biggest fears of Fed Head Ben Bernanke is an increase in inflationary expectations, because those inflationary expectations completely become a self-fulfilling prophecy, actually creating inflation and requiring Bernanke to start raising interest rates sooner than he would like.

Friday, April 23, 2010

Disco Diva on Financial Regulation

Today, I watched the President when he visited Wall Street to discuss his pending re-regulation of financial services. Some pundits called it his “closing argument”. Maybe, it was. I don’t know. However, it was certainly not the scolding many of us expected. In his campaign, he said there is no Red America nor Blue America, just America. Today, he said there is no Wall Street nor Main Street, just America, and I have to agree with that.

The nagging problem of derivatives was discussed. While the problem is bad, derivatives are certainly not evil. They serve very valuable purposes. Hopefully, the new bill will not kill them. As always, the details are in the details. If the 1300-page bill does damage to Wall Street, we have brought it upon ourselves and deserve what we get. The worst case is that we drive the “shady” derivatives offshore to another nation. If so, good riddance! With apologies to Gloria Gaynor . . . We will survive!

Saturday, April 17, 2010

Enron Redux?

Years ago, I was lucky not to have been one of the many investors who lost money in the Enron debacle. About a year before their fall, Enron got into trouble with the State of California about electricity rates. It quickly became apparent that the people at Enron enjoyed a very high opinion of their own intelligence. Remembering that “pride goeth before the fall”, I got out. It is no small irony that the best-selling book about Enron was later titled “The Smartest Guys in the Room”.

Last month, I sold Goldman Sachs for largely the same reason. Intelligence becomes over-rated and dangerous when it becomes hubris. Their current legal difficulties are no surprise, and I have no plans to ever buy GS again. Maybe, it is true that justice comes in many guises. I hope so!

Tuesday, April 13, 2010

Beware: Danger

The most dangerous words on Wall Street are “It’s different this time”. Take a look at this chart of the long-term unemployed, which is 27 weeks or more, as a percent of the total unemployed. Almost 45% of the unemployed have been out-of-work over six months, which is the highest percentage since the government began compiling this data. It is not just a little worse! This does not include people just entering the workforce like students, nor part-timers, nor those who have given up, nor the short-term unemployed, all of whom are usually the vast majority of unemployed. Because workers have usually taken on more financial obligations than others, the financial consequences of this graph becomes even more worrisome.

But, is it different this time? Or, is it just an extreme case? I do believe that things can indeed be different, such as the opaque nature of derivatives. I think this is just an extreme case and was probably the same after the Great Depression.