Saturday Is For Art

Today, from The Envelope Collection: Top to Bottom

1. Level Playing Field Out The Window

2. Uncle Fred's Oil & Gas Station

3. Popular Messiah

4. Level Playing Field No. 5

5. Black Flag

All five of these paintings were done on the back of a 9"x12" black envelope. When I was working, I received hundreds of monthly reports about the status of investment portfolios. One company located in New York City sent me their reports in these black envelopes. I liked the texture of their envelopes and started to save them. Because the envelopes were black, I covered the back of the envelopes with white acrylic paint so I could draw on them with a ballpoint pen. The first few pictures I did in ballpoint and one I sent to the company in NYC where it is framed and hangs. Back when I worked in the trust departments with several banks, I would take 9"x12" envelopes, that I had received research reports, into investment meetings to draw on. Some of these investment meetings would last more than an hour, and after one hour of listening to people talk , my brain would switch to screen saver unless I started to draw. Sometimes , I went into these meetings with my pencil moving and I did not stop drawing until the meeting was over. Originally, I worked mostly with bonds. At one trust department, I was the only person working with bonds, so my fixed income meetings were short. I did however enjoy listening to the discussions about the equity market, and at times, I even added my 2 cents. Trying to explain, in those days, how the Fed operated and how monetary policy influenced the stock market, the bond market and inflation was not easy. I tired to explain it, but not everyone was ready to hear it. Well, that is how I got started working with paper envelopes. Later, I started painting on the black envelopes and that is how The Envelope Collection came about.

What About Banks?

The father of a good friend of mine worked his entire career for one local bank. He would say that banks lend people money that do not need it. Back in the old days before credit cards, banks made loans for cars, homes and would if you had decent credit, lend you money on a 90 day note. I remember walking into Central Trust Bank’s main office on the corner of Fourth and Vine Streets to apply for my first mortgage in June 1970. I was buying a 2-family house, in some parts of the country know as a duplex. The mortgage department was all the way to the back and I walked through several sliding glass doors. I remember standing in front of this man’s desk and telling him I would like to apply for a mortgage. The first question he asked me was, “where is the house?” I said, “Clifton.” Clifton is a neighborhood just north of the downtown and near the University of Cincinnati. He then said, “ north or south of Ludlow Avenue?” I answered, “north of Ludlow Avenue.” Then he said, “have a seat.” I got the loan. I also took advantage of being a veteran, buying the house with no money down. That was 38 years ago next month. I still own that house.

Banks can make money from several ways. The oldest way is for people to deposit their money in demand deposit accounts also known as checking accounts. The Fed permits the bank then to loan a large piece of that demand deposit you have created with your deposit. The Fed requires that the bank hold on to a piece of that deposit and it is because of this reserve requirement that the bank does this. The Fed can raise or lower the reserve requirement depending on the economy. If the Fed wants to encourage economic activity they lower the reserve requirement. If they believe economic activity is too hot they can raise the reserve requirement and by doing this slow down the creation of new loans which leads to more demand deposits.

When the bank makes a loan they create a new demand deposit. This new demand deposit can again be loaned to another borrow, but first the bank must hold back a reserve requirement from that new demand deposit. From one demand deposit of say one million dollars the bank can create several million dollars in demand deposits (loans). This is how banks create money, and this is how the money supply grows. The size of the reserve requirement that is set by the Fed influences the expansion of the money supply and the speed that money moves through the economy. By raising and lower this reserve requirement, the Fed can influence the velocity of money.

If you do not borrow money or you can not borrow money, you have lost the use of a major tool in creating wealth. Borrowing money is leverage, and leverage makes people wealth. In emerging countries today there is such a thing as mirco-lending. This started in India and Bangladesh to give poor women an opportunity to build a small business. Sometimes the loan was for no more than buying a sewing machine and some material to make clothes. From this beginning, the women would make a living a pay back their micro-loan. This program has been very successful and has spread to other parts of the world.

Being able to borrow money is a good thing. The problem arises when the growth rate of the money supply leads to inflation. Inflation is when prices go up and our money buys less. Corporations will raise their prices if their costs go up so they can maintain their profit margin. Oil now costs $130 a barrel, so the price of gas, refined from oil, must also go up. If you own stock in an oil company, you would want them to maintain their profit margin because without earnings there are no dividends and pension funds that pay pensions every month depend of dividends as well as interest income.

Banks also make money from charging fees. Fee business is not as risky as making money on the spread. What is the spread? The spread is the difference between what a bank pays (interest rate) for money and the interest rate they charge the borrower to borrow money. Demand deposits pay very little if anything to the depositor. Saving accounts pay a higher interest rate to depositors. The problem with spread banking is that if interest rates rise, the bank has to offer a higher interest rate to attract new deposits. If a bank finds itself paying a higher interest rate for new deposits than it is receiving on old loans, it is then losing money. Banks are not suppose to lose money. This is a problem for banks that borrow short term funds and make long term loans. Banks hire at least one brainy person that watches over the balance between assets and liabilities. This may be also know as risk management. Before risk management banks got themselves into trouble. It is amazing to me that they still do manage to get themselves into trouble.

To match up loans with deposits that are locked in for a while, banks offer CD’s (certificates of deposits). When a bank needs money to cover a large loan, they will offer a large CD for a specific rate of interest. The spread between the interest rate on the CD and the rate of interest the bank charges on the loan is the spread. If the person pulls their money out of the CD they take an interest rate penalty. The bank then may have to borrow money from another bank until they have sold another CD.

The rate of interest banks lend to each other is known as the Federal Funds rate. This rate of interest is influenced by the Fed. So, you can see that the Fed, our central bank, has a lot to do with interest rates and the growth rate of the money supply. The Fed has several responsibilities, but for me the most important responsibility for the Fed is the integrity of the dollar. Changing the size of the ball in the middle of the game just does not get it for me. Lending money is an important function. Borrowing money and the ability to borrow money leads to the creation of wealth. People that can not borrow or do not want to borrow money should not be penalized for their decision. The playing field is angled too much in favor of the borrower. The bigger the borrower the more the field is tilted in their favor.

The Federal Reserve Bank administers to our monetary policy. People that live from pay check to pay check or on a fixed income like a pension can not afford inflation. Inflation eats into purchasing power and leads the elderly and poor to make difficult choices between food and medicine, heat in the winter and freezing. Monetary policy controls all these things, and people need to know this. Stay tuned.

How About A Fine Cuban Cigar?

Last weekend Chairman Ben Bernanke attended a meeting of central bankers from the major economies from around the world in Basel, Switzerland. Japan’s chairman of their central bank was there as was central bankers from Canada, England, France and China. Yet, everyone knows who is the 900 pound gorilla in the room. That title goes to the United States as we are still the world’s biggest economy.

But, being big is not enough, we need to lead by example. Everyone at these BIS meetings (Bank for International Settlements) wants what is best for their economy. But like a league of any kind, while each team is trying to win championships, without a league to play in, there are no championships.

Since the beginning of time, trade among nations has been a way for nations to build their wealth and bring needed commodities and products to their shores. Herodotus discusses the importance of trade in his Histories. Thousands of years later, international trade is bigger than ever. One of the problems is exchange rates, as nearly every nation wants their currency to have a favorable exchange rate so that the products they export are affordable in the countries they export their products to. When a nation feels and believes that another country is dumping too cheap a product or commodity on their nation, they retaliate by placing a tariff on those products. That then leads to trade wars if an agreement is not reached. Trade wars lead to shooting wars if they are not solved. There is no need to discuss shooting wars, as we all know the down side of war. Unfortunately, for some, there is an up side economically.

The United States imports a lot of stuff. Besides all the foreign oil that we import, we import a whole lot of stuff made in China. As a result of all the stuff we Americans buy, we run a huge trade deficit. As a nation, we need to have more balance between our exports and our imports. Without this balance, our dollar is too exposed to the laws of supply and demand. The government of China buys a lot of our US Treasury notes and bonds with their dollars. They hold a lot of our debt. Too much debt in the hands of any foreign nation is not a good thing for the United States. That is why we need more balance in our exports and imports.

When China refuses to raise the value of their currency (Yuan) because they want to continue to have a favorable exchange rate to the dollar, products manufactured in China remain cheap for the American consumer. The American consumer is happy to buy all the cheap goods produced in China because they get more for their dollar. Unfortunately, too many dollars in the market means that there is a greater supply of dollars than there is a demand. As a result, the dollar goes down in value in the foreign currency exchange markets. The weaker dollar then leads to an increase in the price of oil. Remember, oil is priced in US dollars, and if the dollar goes down in value the price of oil (even if demand remains the same for oil) must go up. In the end, the American consumer may buy a cheaper toy made in China, but winds up paying more for gas at the pump.

If you are importing stuff from China and selling it to stores in the United States, you are probably happy that the Chinese continue to produce goods so cheaply for you. The American consumer is happy to be able to buy those cheap goods to satisfy his/her needs. But what are the Chinese buying from us? We import oil from Saudi Arabia and the Saudis buy what? Our friends the Saudis recycle those petrodollars and buy lobbyists, who in turn buy our politicians. What are the Chinese buying with all their dollars? That may be something you might want to think about.

International trade is good. We have the opportunity to buy goods from almost all over the world. However, we do not buy cigars from Cuba. Cuba makes fine cigars, but Cuba is governed by a communist dictator so we do not trade with Cuba. Cuba sells their fine cigars in other countries and cigar smokers enjoy their fine cigars outside the United States. China does not make fine Cuban cigars, but they are a Communist dictatorship too. Evidently the United States has no problem trading with dictatorships or kingdoms regardless of their record on human rights. We just do not like dictatorships that make fine cigars. I would be willing to buy a little less from China so I could buy a few Cuban cigars, and I am waiting for our government to figure that out. In the meantime, I smoke non-Cuban cigars. We need to get our priorities straight when it comes to cigars. Perhaps, if we got the Cuban cigar thing right, we could get the oil thing right and then the dollar would turn the corner and start back up in value.

This currency exchange stuff is not rocket surgery. We need to be looking out for the welfare of all Americans, not just the ones importing oil and stuff made in China. Write your congressman and tell him what you know about international trade and foreign currency exchange. Tell him/her what you think of your falling dollar and its lack of purchasing power. We need to get people thinking about their money and our monetary policy. Stay tuned.

Your Money: Your Monetary Policy

Today I am going to take a step back and talk about money. The prices of gas and food are not going to go anywhere, and the credit crisis and the housing market are not going to go anywhere either.

Have you ever looked at your money? Take out a dollar or any other piece of paper money and look at the front of the bill. Notice up at the top of the bill are the words FEDERAL RESERVE NOTE. If your bill says Silver Certificate take it out of your wallet and hold on to it. It is a different kind of money. It has silver behind it. No, the back of the bill is not made out of silver. Do not be silly. The bill is backed by silver. There is a commodity behind the value of the paper. Most likely, your paper money is the kind that says Federal Reserve Note. What is a Federal Reserve Note? It spends. In fact, on the bill it says “This Note is Legal Tender for All Debts, Public And Private.” So, what is wrong with that?

There is nothing wrong with paper money unless people lose faith in what that paper money represents. Here at home in the good old USA, it is all we have to use for money. (Although I have read recently that shops in New York City are accepting Euros from foreign shoppers.) Those of us who shop locally, by that I mean in the United States, do not see the decline in the value of our money the way an American tourist sees the decline when they exchange their dollars for Euros or any other foreign currency that has appreciated against our dollar. This is part of why the price of oil has risen to the $135 a barrel range. You might remember that oil, the commodity, is priced in US dollars. And, if the value of the US dollar goes down against other world currencies, the price of oil must go up. There is also the added demand for oil from developing countries that as recent as ten years ago were not using as much oil as they are today. But, the oil situation is another story for another time.

Money is a commodity. You can rent money just like you can rent a car or a hotel room. At the end of the rental period you give the room or the car back plus you pay a rental fee. When you rent money, at the end of the period you pay back the money plus the rental fee. We know the rental fee on money as interest. Each month you pay your mortgage, you pay back a piece of the principal you borrowed with some of the rental fee, interest. At the end of the time period, 15 or 30 years, you have paid back all your principal and all of your rental fees. An adjustable rate mortgage is another way of saying an adjustable rental fee. When you buy a house, you want to lock-in the interest rate because if you do not want to have your interest rate (rental fee) raised, then the monthly payments can go up, sometimes way up. If you have locked-in your interest rate, and interest rates go down by at least 150 basis points, you might want to get yourself a new fixed rate mortgage with a lower interest rate. That is one approach.

What if you rented a hotel suite for 30 years. But because the purchasing power of your rental payments were decreasing the hotel gave you a smaller and smaller room each year until you were sleeping in a large closet. How would you feel about that? Remember you are paying your same amount of money, but the size of your hotel room over the years has gone from a suite to a big closet. No one would stand still for that, but our government is doing that with our money and most people do not even know it.

What is it going to take to wake people up to the fact that monetary policy in this country is not a level playing field? I am not a Monetarist nor am I a Keynesian when it comes to economic policy. I believe in trying to maintain a level playing field, and if it must be tilted slightly, that the tilt be in the direction to protect the least able among us. I think that is fair. There are a lot of elderly and poor in this country that are being hurt and will be hurt by the decline in purchasing power of the dollar now and in the years to come. The rich and the educated are not hurt by a more level playing field. They just will not benefit as much by leverage. Leverage is another word for debt.

If you can handle debt (leverage) you can build wealth in a monetary system that expands the monetary base and grows the money supply to the detriment to those that do not have the education or ability to borrow. I could build a case that the present credit crisis is directly related to the monetary policies of our central bank the Fed. That is another story.

My purpose is to cause people to think about monetary policy and the impact monetary policy has on the decline of the dollar, also known as purchasing power. I know full well that fiscal policy has caused the printing of more money, but an independent central bank is not a branch of the administration on Pennsylvania Avenue. The Fed has a responsibility to all Americans for the integrity of the US dollar. Remember at the beginning, I said our paper money said FEDERAL RESERVE NOTE. It did not say White House or Capitol Building on the front. The Fed is responsible for the integrity of the US dollar, and each year your dollar buys you less the Fed is not protecting the integrity of your money. The American public needs to get interested in monetary policy and the direction that monetary policy is tilted. Unless some changes are made in this direction, there is going to be a lot of elderly people hurting in the years to come. I know there are a lot of elderly and poor people hurting now, but the class known as the “baby boomers” will bring about a crisis of gigantic proportions if monetary policy does not take a new direction. Stay tuned.

The Sub-Prime Mortgage Meltdown

The other day I read where Warren Buffett blames the sub-prime mortgage crisis on the banks that made the loans in the first place. Actually, there are quite a few people, organizations and firms that could claim some of the responsibility for the sub-prime mortgage crisis. The banks and the mortgage originators is a good place to start. But, like all good money stories, the way to uncover the whole story is to follow the money (trail). As an amateur historian of sorts, I would just like to point out that there are usually several factors that comprise an historical event involving so many people as the sub-prime mortgage meltdown. So, if we are going to make a serious examination of the facts that lead up to the sub-prime mortgage meltdown, we really should broaden our research beyond the banks and the mortgage originators. Mono-causation when it comes to writing the history of the sub-prime mortgage meltdown will hardly win us any prizes. Let me state at the beginning that I admire and respect Warren Buffett. But on this issue, I feel there are many more players with responsibility than simply the banks and the people that made the mortgages.

But, before we look at all that, let us take a step back and ask a question: who is officiating this game? You think you know where I am going? Yes, let’s take a look at our central bank, the Fed. The Fed, in my humble opinion, should have blown the whistle before the game got out of control. It would have been nice if Congress would have taken some action, but, again in my humble opinion, Congress is usually a day late a dollar short when it comes to regulatory action. The Fed on the other hand, being an independent body, could have taken control of the game from the beginning and blown the whistle when they first saw shoddy play. Unfortunately, the Chairman of the Fed, at the time that the mortgage game got started and really started to heat up, was Alan Greenspan.

Former Chairman Greenspan is of the philosophical point of view that the referee should put his whistle in his pocket and let the players play. Only under extreme situations should the Fed resort to pulling the whistle out of their pocket and calling a foul. So, the mortgage game went on for many years, without anyone officiating and that eventually lead to the game getting out of control. By the time Chairman Bernanke replaced Chairman Greenspan the game was very much out of control and the clock was running down. Within months of his start at the Fed, Chairman Bernanke was to find the sub-prime mortgage game about ready to collapse in on itself.

What I find hard to accept, is the fact that the Fed and the government will be willing to pull solutions to big problems out of you know where, but they will not act when it is the little guy’s butt that is on the line. Everyone with an ounce of brains now says that people were given and encouraged to take mortgages that they had no business getting themselves into in the first place. Where was the oversight?

The number of subprime mortgages that were made was totally out of control and I place some of the blame squarely at the feet of the Federal Reserve Bank. Only when Bear Stearns appears to be going down the tube, and the consequences of such a disaster for Wall Street and the country too big to bear, did the Fed step up to the plate and take control of the situation. My question remains: Why does it take a major brokerage firm to hit the rocks before the Fed moves into action?

So, getting back to Warren Buffett and his assessment of the subprime mortgage debacle, there are plenty of characters at various stages of the process that hold some responsibility for the mortgage meltdown. The question that we all should be asking is: What steps are being taken to prevent another mortgage meltdown from occurring again?

Congress should have provided some oversight as well. The problem with Congress is that they take campaign contribution from Bank PACs. Political Action Committees lobby Congress so Congress will not only not blow the whistle, but will not buy themselves a whistle to blow in the first place. We once had a Glass-Stegal Act, but that disappeared. Well, it did not disappear like a missing person disappears, the act was dismantled by Congress.

Let me make it clear, I am not against mortgaged-backed bonds. Mortgage-backed bonds, like other asset-backed bonds, have a very legitimate place in the world of finance and investing. But like any good car on the road today, besides having safety glass the car has seat belts and airbags. The securities industry needs to redesign asset-backed bonds so that the fatalities are kept to a minimum. And, the redesigning can start with our independent Federal Reserve Bank setting the ground rules. Since the Fed stepped in when the Bear Stearns bankruptcy was about to occur, I think the Fed has earned the right to step in now and redesign the future of mortgage-backed bonds. There are several good ideas floating about that deal with the mortgage originators holding on to a piece of the action so they have their feet to the fire and skin in the game.

If I was going to stop being an amateur historian for a minute, the group that I would gang up on would be the rating agencies. The way I see it, without the rating agencies going along and giving the mortgage bonds their AAA rating, none of this would have ever gotten off the ground. The rating agencies’ AAA rating, in my opinion, was the equivalent of Underwriters Laboratory (UL) approval. Without that approval, no portfolio manager worth his salt was going to plug into unrated mortgage-backed bonds without knowing full well the inherent risk with such a move. Placing the responsibility for the rating disaster at the feet of the rating agencies is only one piece of the puzzle. Ascribing the entire meltdown to the rating agencies, while I think they had a big hand in it, is scapegoating, and that is not good history or a careful analysis of all the facts.

The brokerage firms that brought the bonds to the rating agencies in the first place, knew that they were carrying a corpse. They, the brokerage firms, needed to have more skin in the game from the get go too. Would that have moderated their enthusiasm? Perhaps. The thing to remember about the sub-prime mortgage meltdown is that it was too big to lay at the feet of any one group. This disaster was not an orphan, the sub-prime mortgage crisis had many fathers. Stay Tuned.

Memorial Day 2008

Memorial Day Weekend 2008

Saturday is For Art: Memorial Day Weekend

Here are some flag paintings. Some times the flag is just a flag and other times ... Well you will just have to figure that out. Have a safe and happy Memorial Day weekend.

Memorial Day Weekend 2008

The above photograph is a joint venture. I took pictures and I asked my friend Lou to pick the one he liked the best. The photograph is from the front of my house. In that this is the beginning of the Memorial Day weekend, I thought I would start with this picture this morning.

Next year at this time, we will have a new president and a new congress. It is hard for me to believe that much change will occur in one year. We all know that big changes take time to take place. Government is said to move at a glacial pace, but given the fact the glaciers are disappearing at a faster pace because of global warming, perhaps the pace of government, if we are lucky, may speed up too.

Despite all the good things to be thankful for as we take a moment to remember all the men and women that died serving our country this Memorial Day, we should not lose sight of the fact that their sacrifice is not the end, but the beginning for the rest of us to fight on.

Social justice in society is not the default setting, it must be worked for. The vast majority of Americans want a government that will at the very least not harm them, and at the best prepare the way so that every individual has the opportunity to exercise their right to life, liberty and the pursuit of happiness.

We have a great and good country, but the direction our country takes in the near future must include the welfare of more than the wealthy and well connected. Most of the men and women that gave their live for this country did not come from the wealthy or well connected class of society. There is still much to be done to return government to the people and for the people before our days are done.

I would like to wish all of my friends and readers of MoneyThoughts a safe and happy Memorial Day weekend. Stay Tuned.

One Trillion Dollars

Total return is the combination of yield and capital appreciation. Income derived from interest (fixed income assets)or dividends (equities also known as stocks) and added together will give you the yield of a portfolio. The total income of a portfolio divided by the cost basis (the total cost of the assets) will give you the yield of the portfolio at cost. Take the same total income figure and now divide it by the market value (the present value of the stocks and bonds in the portfolio) and you get the yield at market. Yield at market tracks how well the portfolio is doing. Add total income of the portfolio to the total capital appreciation (the difference between the value of the portfolio at cost and at market) and then divide this number by the market value of the total portfolio. Your answer will give you the total return expressed as a percent. Sometimes referred to as the total rate of return because it is expressed as a percent. So why are these numbers so important? They tell us how well a portfolio is being managed. The higher the total return number the better the portfolio is performing. And, performance is what it is all about.

What is an actuary? An actuary makes actuarial assumptions. (How is that for a definition?) Actuaries work for insurance companies and anyone else who might need to figure beyond simply a gut feeling. When I worked for the State of Ohio, the bureau I worked for hired both in house and out sourced actuaries to tell them what kind of return they needed on the investments for the State Insurance Fund to have enough money in the future to meet its obligations to injured workers. After a very laborious process of crunching a lot of numbers, the actuaries come up with a percent. This percent is the return on investments that they calculate is what is needed for the State Insurance Fund to be able to meet its obligations in the coming years. Public and private pension funds do the same thing to determine how much total return they will need.

Calculated into the return is an assumption about inflation. Not all risk taking in the management of a portfolio is because of greed. When you work for a set salary and there is no bonus, risk taking is strictly limited to meeting the percent return calculated by the actuaries and implemented by an investment strategy.

Investment strategies can get quite complex, but the bottom line remains the same no matter how complex the investment strategy becomes - buy low and sell high. Pretty simple stuff, but the human mind can take that simple piece of philosophy and build a very complex investment portfolio. Today, nearly every billion dollar portfolio that is invested in stocks both domestic and foreign, bonds and notes of every stripe and an assortment of alternative investments.

One of the purposes of alternative investments is to disengage part of the portfolio’s investment performance (total return) from the stock and bond markets. There was a time when buying bonds was thought to be a hedge against a declining stock market. The late 1970’s and early 1980’s saw both the stock market falter and the bond market do even worse. Holding fixed income as a hedge against a faltering stock market turned out to be no hedge at all.

Alternative investments offer the portfolio an opportunity to hedge the portfolio with investments in private equity funds, commodities, real estate and other pieces of real property like perhaps art. Even gold coins, the collectible kind, can be used as an alternative investment if done right. Nothing under the sun, given the necessary study, should be excluded when seeking to hedge an investment portfolio. Marketability may become a question, as some markets can open and close rapidly, but no stone should be left unturned.

Recently a painting by the English artist Lucien Freud sold at auction for more than $33 million, and that is a record for a living artist. Many people think that the art market will be the next bubble to burst. Indeed it might, but hopefully that bubble’s burst will confine itself to the immediate players.

Inflation, in my opinion, makes the need for risk management so extraordinary. Without inflation to calculate into the assumption, investing for so many large state pension funds would be a lot simpler. I know I am setting myself up for a lot of criticism for saying that, but my purpose, my agenda, is to draw attention to the problems caused by a monetary policy that is built around things like cost of living allowances (COLA) and Treasury inflation protected securities (TIPS). What kind of game do we play here? How does the little guy, who works from one pay check to the next, the retiree on a fixed income from Social Security or a pension make it?

If I can be a little silly to make a point, can you imagine the size of the baseball changing with each inning? Or, the distance between bases changing with each inning? What kind of game would that look like? Our monetary policy needs to be examined. It is my uneducated opinion, I hold no PhD in finance or anything else, that our monetary policies need to be implemented with a view towards the least able among us to be able to withstand and survive the effects of inflation. Congress’ behavior has a place in these discussions of a new monetary policy.

Yesterday I heard on the news that the United States will spend one trillion dollars on oil this year. Some of that increase can be laid at the door step of our government's fiscal policies and the monetary policies of the Federal Reserve Bank. It is time for a Level Playing Field. Stay tuned.

Short and Not So Sweet

The day got away from me, and so this is a very short posting.

The number of foreclosures is quite high. This is not where we want to be as a country. Home ownership is no longer going up. The House and the Senate have been working on legislation to help keep more families in their homes. Given the dislocation in family budgets from the sharp rise in the price of gas, it is no wonder that many families are feeling the pressures of $4 a gallon gasoline. There was a mortgage crisis, there were problems in the sub-prime loans, but even without the mortgage meltdown, the price of gas has certainly caused more families to the brink. Let us hope that the bill that the Congress comes up with will over ride the President’s threatened veto. We, as a nation, do not need more people out of their homes, we need less.

Those Recycled Petro-Dollars

The other day, there were several articles about a McCain campaign worker resigning because he and his firm had made $15 million in lobbying fees from Saudi Arabia. Senator McCain has now lost several campaign workers over this issue of lobbyists.

Perhaps, we are all getting a little too paranoid about this lobbying business. For all we know, this former Texas Congressman turned lobbyist was trying to get a traveling company to perform Fiddler On The Roof throughout the Kingdom of Saudi Arabia for the Ministry of Culture and Diversity. We should not jump to conclusions and right away assume that the lobbying had some sinister purpose.

Saudi Arabia does have one of the worst human rights records and that fact may require the services of a lobbyist. The textbooks in the schools in Saudi Arabia teach their children that Jewish people are monkeys and pigs. What they teach them about Christians is not much better. So, with regards to education, the Kingdom can use some help from an experienced lobbyist.

Also, let us not forget that 15 of the 19 men involved in 9-11 (2001) were from Saudi Arabia. And, after 9-11, the United States let a plane load of Saudi nationals fly back to Saudi Arabia without even letting the FBI question them as to their knowledge or involvement in the execution, planning or financing of 9-11. This kind of freedom and mobility almost always requires a certain amount of lobbying. So, while specific work is not apparent, work behind the scenes is no doubt being pursued.

On the other hand, Saudi Arabia is a great trading partner for the United States, and we would not want to do anything to damage that relationship. Saudi Arabia sells us oil and we send them money. Unfortunately, we do not make anything, except military hardware, that the Saudis want to buy from us. The problem, from an economic standpoint, for the Kingdom of Saudi Arabia is how to recycle petrodollars back into the United States. This is accomplished by a process known as recycling petrodollars through K Street. In Washington, D.C. there is a street known as K Street. K Street is the place where the lobbying firms hang their hats and lobby members of our government.

Once the Saudis hire a lobbyist, the recycled petrodollars start to roll-in. But, this is only part of the process. After the recycled petrodollars roll-in in the form of lobbying contracts, the lobbyist make campaign contributions or work for free for people that campaign for elective office like the presidency. Which gets us back to where this story first started, a member of Senator McCain’s campaign staff working for Senator McCain’s campaign for the presidency for free. How can anyone afford to work for free?

Well, if you have received $15 million from Saudi Arabia plus other clients for services as a lobbyist, then you can afford to work for free.

How much money do you think the Kingdom of Saudi Arabia has spent on lobbyists since 1973? Since 9-11-2001? Where do all those recycled petro-dollars go? I am sorry to tell you this, but I do not know. I can assume that with all those recycled petrodollars sloshing around Washington, D.C. that the economy for the lobbying firms must be doing OK. And, as we know from Econ 101, that there is a certain amount of trickle down economic activity in the geographic location of Washington, D.C.

You might ask: what does this have to do with economics and money? My answer to this question goes like this: There is the field of mathematics and then there is the field of applied mathematics. This posting today is about applied economics, not just pure economic theory. Economics is a social science, not a pure science. And, to understand how economics works in the real world, issues such as supply and demand and money must be examined under real life conditions. Washington, D.C. is the best real life laboratory to observe the principles of economics as they are practices in a real life environment.

We should not rush to judgment. What would you do for $1 million dollars a year? What would you do for a few more million dollars added on to that? This is the point where economics (money) enters into the world of politics. We all know that campaigns require large amounts of money to purchase TV time and other things needed to run a national campaign. The problem in our democracy is: how do we get the necessary funds to the presidential campaigns without foreign nations having influence on our president and our congress? When we have figured out how to do this, we will have freed our country from its dependency on foreign oil as well as bringing about a democracy that serves the interest of the majority of the people. If I knew how to bring this about, I would give it free to the American people.

Money, like many things in life, is a double edged sword. Money can bring about so many wonderful things. I remember all the Polio carnivals that people held in the early 1950’s to raise money for Polio research. As a young boy, I even worked as a volunteer in a few in my neighborhood as I am sure many other people my age did. There is nothing wrong with people coming together and working for free to raise money for medical research. This is the good part of the sword. But, then there is also the other cutting edge that does not serve the interests of the majority of the people. That is the edge of the lobbyists and their clients whose story and actions could not stand on their own merit. For these people the path of the recycled petrodollars is established. Stay tuned.

The Fed and The Level Playing Field

I read my Sunday New York Times and now I am more upset than before I read the articles in the Sunday Business Section. I am so upset, I do not even know where to begin. I am unhappy with the way our country carries on monetary policy, though I am always hoping for the best. But, like some one unhappy with his church, but always wanting the church to live up to its potential to do the right thing, I do not want to give up on the Fed. The Fed is our central bank, and the only one we have.

Jesus would not save under this monetary policy. If you invest, chances are you are going to make out OK. Those that have the extra cash to invest can buy stocks or equity mutual funds. If you do not like the stock market, there are bonds and bond mutual funds to buy. If you are worried about inflation eating up your principal, there are TIPS. What are TIPS? They are U.S. Treasuries that adjust for inflation, known as Treasury inflation-adjusted securities (TIPS). If the Consumer Price Index goes up the TIPS adjust to protect the investor from the loss of purchasing power from the effects of inflation. What about the family that can not afford to buy TIPS? What do they do? Well, they can put their cash in an insured savings account at a bank and earn a lower taxable interest rate and the principal is not protected by a Consumer Price Index adjustment. Why would anyone save money under such a scenario? Poor people are stuck with a traditional savings account while the wealthy people can put their money in bonds that adjust for inflation. Now, perhaps you can understand why I ask: whose monetary policy is it anyway?

We know that there is no such thing as a level playing field. The level playing field is the ideal that supposedly we all strive for. Why is our monetary policy so segued in favor of the rich? By definition, such a policy makes the rich get richer and the poor get poorer. It is time for monetary policy in this country to be practiced with an eye to protect the working poor as well as the rich. Inflation hurts people because it reduces their purchasing power. They can not afford to buy as much food, gas, clothing and shelter to meet their needs. The rich can hedge themselves with TIPS and equity investments both public and private funds. The poor takes what is left, a traditional savings account with no Consumer Price Index protection. This is not right. The families that can least afford to take the hit take the hit in their wallets and in their budgets.

So, what is the Fed doing that has got me upset? The Fed has opened a new window for brokerage firms at the Federal Reserve Bank. This window allows brokerage firms to cash in their AAA rated asset-backed bonds for cash, also described as cash for trash. This option for the brokerage firms, in my opinion, makes things a little too easy. Furthermore, the brokerage firms can push off their worst AAA rated paper on the Fed.

What do you mean worst AAA rated paper? Is not all AAA rated paper the same? The short answer is no. The rating agencies gave many of the asset-backed bonds that brokerage firms securitized a AAA rating, but now after the sub-prime mortgage crisis, we come to find out that some of these bonds that were given a AAA rating should not have received a AAA rating.

If an art gallery advertised paintings by Jasper Johns for sale, and you paid a few million for a flag painting by Jasper Johns only to find out later that it was a flag painting by Fred Zigler, you would have been cheated. Such behavior by an art gallery would result in someone going to jail for fraud most likely. But when the rating agencies make “mistakes” and give a AAA rating to a piece of paper like a mortgage bond, there are no consequences. This is a major failing in the rating system. However, no governmental agency wants to take on this problem, not even the Securities & Exchange Commission.

So, what is the bottom line? The Fed is coming to the rescue of these brokerage firms and giving them the opportunity to trade their trash, also know as AAA rated asset-backed bonds, for U.S. Treasuries. Talk about a good deal. They are not asking for a few new cards, they are getting a whole new deck for free. What happens when they go out and repeat the same mistakes? Who pays for their mistakes? Bingo! Yes, you and I the tax payer will pay the price in the end.

So, again I ask: whose monetary policy is it anyway? The central bank, our Federal Reserve Bank, is suppose to help the banking system keep afloat and facilitating the movement of funds from lenders to borrowers and all that good stuff. But, can not this all be done on a more level playing field Mr. Bernanke? Stay tuned.

Saturday is For Art

On Monday, the U.S. Post Office raised the price of a first-class stamp from 41 cents to 42 cents. So, for all of us who have been buying sheets of stamps over the years, and have seen what the dollar will buy, this is nothing new. I am old enough to remember 3 cent stamps, and then 4 cent stamps. 5 cent stamps did not seem that long ago. And now, we are up to 42 cents! Over the weeks, since I started writing this blog, MoneyThoughts, I have discussed inflation, monetary policy, the Fed, currency exchange rates, and finally the most important question: Whose monetary policy is it anyway? If I could get a sizable group of people to start asking and thinking about that single question, perhaps the politicians in Washington would get the message that we are not all a bunch of boobs. For whose benefit is our monetary policy being run when we see prices rise continuously. What about the integrity of the U.S. dollar? Today, I will post some of my stamp paintings. I have not scan them all, so I apologize for the repeats.

One more thing: The President was in Saudi Arabia this week meeting with his boss, the king of Saudi Arabia. He politely asked them to please pump more oil, but they told him to go pound sand. We have troops in Saudi Arabia to protect their oil fields. If you see something wrong with this picture, honk your horn.

The Film Was Better

A film about an incompetent administration is one thing, living with an incompetent administration is another. I am reminded of the Russian humor during the days of the Soviet Union. In one joke, one Russian worker is complaining to a fellow worker that the state does not pay them enough for what they do. The fellow worker replies, what difference does it make, there is nothing to buy with the money they pay us anyway. Here in America, the tables are reversed. There is plenty to buy, just the prices are so high that workers can not afford to buy everything they need. People are being forced to make tough choices. For some, the choices are even painful. Medicine or food for the elderly, gas or food for the family, these are the choices American families are struggling with in 2008.

Gas prices are up for the tenth straight day and the national average is $3.78 a gallon. In ten states, gas prices have reached $4 a gallon or better. The President is unmoved by the sudden rise in prices, nor does he believe that the policies of his administration have anything to do with the situation in which we find ourselves. His latest remarks, which I heard on TV, stated that the problem was because we did not allow more drilling, or that an oil refinery has not been built in the U.S. since 1976. Both of these statements are true. But, unfortunately that is only part of the reason for soaring gas prices.

The Congress has been working on a new bill to keep more families from losing their homes. However, the President said he will veto any bill designed to help borrowers if it does not meet his requirements. Interesting that in the Senate, both political parties are working on the same bill to help families hold onto their homes despite the President’s warning of a veto. A compromise bill will no doubt reach both floors of Congress before too long. I would not be surprised if the bill was passed over the President’s veto. Members of his party must stand for reelection in November, while he is finished with his second term, others are trying to hold onto their seat. The prospects this fall do not look good for the GOP.

People are hurting and the administration stands pat. I think of it more as sitting on their hands. Ronald Reagan once asked Americans if they were better off now than they were four years ago. That was 1980 and the end of the Carter administration. Another incompetent administration in my opinion. Carter never understood that money was a commodity. He too had some good people around him, but did not have enough sense to listen to them. The second President Bush will be remembered for one of the most pitifully run administrations in American History. That is another opinion.

When the campaign for the next president gets under way this fall, perhaps every American should ask themselves, “am I better off now than I was four years ago?” I think that is a fair question people should be asking themselves. Economics alone did not produce the situation that most Americans find themselves in today. Some problems people brought on themselves, but for the vast majority of Americans that made the right choices, only to have poor policies undermine their efforts to be responsible citizens, a change in administration and a change in fiscal policy is long over due. Stay tuned.

Rambling About Private Equity

Today I thought I might ramble on about private equity funds for a short piece.

The first thing to know about private equity and private equity funds, is that they are not that private. Billions of dollars are invested in private equity funds all over the world. The qualifications to participate in a private equity fund are rather simple. You just need to have lots of money to invest. If you represent a large pool of money, say like a state employee pension fund, then the private equity funds come and visit you. But, private equity funds are not just for large pools of money like pension funds. Some wealthy individuals invest in private equity funds and some times their investments in them, make them even richer, but not always.

Some private equity funds are staffed with some really smart people with enough advanced degrees to fill up your arm. Other private equity funds are staffed by people that can not find their rear end with either arm. The challenge for the investor is to be able to sift through all the BS and select those funds with the best track records and the most competent people.

The best private equity funds have no problem raising money for a new fund. Investors, large and larger, are lined up waiting for these funds to take their money. Private equity funds with known track records make news in the financial press. They become like rock stars in their own little universe. Other, less well known or start up private equity funds hire marketing people to introduce them to the large pools of capital here in the United States and around the world. These marketing people can make a very nice living by being able to talk and inform potential investors about the joys of investing in a private equity fund.

Oh, I apologize, I have not even explained what a private equity fund is. I just assumed everyone would know. My experience with private equity funds is not all that old. Private equity funds invest in new ideas and new businesses. There are now many types of private equity funds and some are quite specialized in what kind of businesses they invest in. Silicon Valley was once the hot spot for private equity funds. There might still be a few out there, but private equity funds are now scattered all over the country and the world. Basically, before a corporation goes public, investors put seed money into a small start up company or even an idea for a product or service. These early investors then cash out when the company goes public or is sold to a large company. This process of cashing out is known as an exit strategy.

One thing about private equity funds is that they almost always have an exit strategy. Some private equity funds are better at the exit strategy part than others. Governments do not always have an exit strategy because they never want to cash out. In government work, cashing out ends the process of cashing-in. And, what politician wants to stop his constituents from cashing-in? For some companies, both publicly held and private, wars are a great way to cash-in. As a result, governments do not like to end the party of cashing-in by pulling the plug and cashing out.

Books and articles have been written about private equity funds. Some private equity funds have made huge profits for their investors and their staffs. I have a number of private equity stories about my adventures with the private equity side of the business, but I think I will save them for another time. If you are interested in learning more about private equity and private equity funds and how private equity enables new technologies and services to get the funding to get their start, just look up private equity on the Internet and I am sure you will find more information than you can read in a week. I do not want to leave people with the impression that private equity is bad. Private equity makes many new ideas a reality and helps create jobs and whole new industries. Private equity can be a force for good. Private equity also has another side to it too. Private equity funds have been used to destroy jobs and eliminate corporations. That is the downside of private equity. But, there has been more good to come from the creation of whole new industries as a result of private equity investing. Later.

What Makes a Strong Currency?

What makes a strong currency?

For all of us in the United States, I do not think that question comes up too often as people gather during their day to share a few thoughts about life and the weather. Paying for goods and services with our money is just part of everyday life. We do not think about picking up a fork when we eat, we just use it. For most of us, using our U.S. dollars is just like using a fork, even though the fork keeps getting smaller and picks up less food with each bite.

We all know that the government prints our money. If you look at your paper money closely, you will see that it says for all debts public and private. Anyone else thinking about getting into the printing business of making U.S. paper money is usually very quickly put in prison. Our government has the exclusive rights to print our money and no one else is suppose to give them any competition.

If everyone that wanted to print paper money could print paper money, paper money would become worthless. Money must represent value. We have numbers on our paper money that tells us how much money we hold, and without the numbers 1, 5, 10, 20, 50, and 100, we would be unable to figure out just what we had in our wallet. Could you imagine just for a moment that as you hold your money in your wallet the numbers on the paper money change. It actually is happening every day, you just do not notice it, but the numbers are declining in value.

Unfortunately, the value of money can be changed by government policy. How does the government do that? By printing more and more money, by borrowing more and more money, the government can create an abundance of money in circulation. In fact, the government can create an abundance of U.S. dollars around the world.

Many other countries can not borrow and print money and expect the rest of the world to still regard their money favorably. The United States can borrow and print a lot of money and the world will still accept U.S. dollars as payment. There are other than economic reasons for the U.S. dollar’s wide acceptance around the world. The U.S. government besides having a strong economy, has a very stable political system and has a strong military.

It has been over a 140 years since the United States was engaged in a civil war. The president is not elected for life, but even has a two term limit. The commander-in-chief of the military is the president, a civilian, and the generals from all branches of service report to him. The military of the United States is one of the strongest in the world and there is little chance that our government will be toppled. All of these reasons are factored into why investors and governments outside the United States are willing to hold U.S. dollars despite our government's policies that are detrimental to the dollar.

And yet, with all these factors in our favor, our currency, the U.S. dollar, would not be as widely accepted as it is without the holders of U.S. dollars having confidence in our system. The question is: how much can the U.S. government borrow and print before others, outside the country, stop holding U.S. dollars or simply lose confidence in our ability to manage our own economy. Can we continue to borrow and spend without end?

As I said at the beginning, most of us do not think about the value of the dollar except for our purchases every day. However, perhaps for the first time, the rapid and steep rise in the price of gas and diesel has caused many Americans to think about the value of their dollar and the government policies that have lead to the decline in the purchasing power of the dollar.

There will be a day of reckoning. The world is watching how we manage our money, our government and our priorities. Change will take place, the question is whether it will be forced upon us from the outside, or, whether we will recognize the problem in time to make the changes from within. Stay tuned.

One Word: Perspective

Historically, events move at what we would consider a slow pace. Technology has increased the speed at which information passes from person to person and thus events have increased in speed as well. Trading information about the markets moves around the world in a matter of seconds as traders and investors act on the information in their buying and selling. The speed with which the markets act and react is a long way from where they were only a generation ago. Technology has had an impact on the speed at which markets move.

Newspapers, magazines, TV and the Internet bring information to the investor, but also to the voter. One thing the government has not made an attempt to stop is the flow of information. As long as voters have access to economic information, there is the chance that government economic policy can be changed. TV as we know cost lots of money to advertise for political campaigns. Why else would Senator Clinton loan her own campaign millions of dollars for a job that only pays $400,000 a year?

The Sunday NY Times had an abundance of articles this week that dealt with many of the topics I have been writing about for the last three months. (I started writing my blog on February 13th.) People are interested in the relationships between the dollar and oil, the dollar and interest rates, the mortgage crisis and the way the Fed dealt with the Bear Stearns crisis, the price of food and the story about ethanol, the dollar’s value in the currency exchange market and the list goes on.

I have always said, when enough people are hurting economically, the electorate will sit up and take notice and hopefully they we vote their self interest. The wealthy do it all the time. They know on what side their bread is buttered. They know it so well that they are willing to spend big bucks to keep the status quo.

But now comes that oh so much over used phrase - the perfect storm. Tough economic times and the movement and abundance of information have come together to mark a new era. Yes, there will always be misinformation, but I have confidence that the majority of Americans will see through the smoke and mirrors this time. Change will occur this fall and I can feel it in my bones. As I have said before, I have been hanging around this planet for 65 years, and not since the 1960’s have I seen or felt the change that is coming in the air. It may be slow in the beginning, but as people see the change occur their confidence will build that the American family can be put first. Or as my friend has said, we will use the common wealth for the common good. In philosophy class it was referred to as "the greatest good for the greatest numbers" (ghgn).

The American people see the message every day they drive down the street and look up at the price of gas and diesel on those huge gas station signs that dot our landscape like so many giant metal flowers sticking out of the ground. Those gas prices represent a hieroglyphics that speaks volumes about the state of our economy and the problems facing the American family. In 2008, these gas station signs are the best and most potent political advertising in America, and they are in every state, county, city and neighborhood. The political statement they make can not be any more ubiquitous. Those gas and diesel prices speak to the mismanagement of resources and of wasted opportunities. Fear is a great motivator, but the fear this time is not from those outside, but from the mistakes from within. The perspective of the American voter looking up at those gas station signs that spread from coast to coast, will lead to change come this fall. Stay tuned.

The People Will Decide

The mortgage crisis is still with us, it is just not on the front page any more. Oil and its rapid rise in price per barrel has grabbed the spotlight.

In the Sunday Business section of The New York Times is an article by Peter L. Bernstein titled When Should the Fed Crash the Party? I think it is well worth your time to read this article. Bernstein, who is nearly 90 years old, draws on a lifetime of knowledge and experience. In an early posting, I mention that his book, A Primer on Money, Banking and Gold ,was one of the first books I read when I started on my journey in 1968.

Years ago, the head of the Fed was a man by the name of William McChesney Martin. And, he is supposed to have been the first person to say that the job of the Fed is to take the punch bowl away just as the party is getting started. In other words, raise interest rates before easy money lead to a bubble in the economy. This is when the Fed believed in managing the growth rate of the money supply.

Back in the 1950’s, economics and the role of government in the economy were much different than today. The Great Depression of the 1930’s was less than a generation away. Many older attitudes about the Federal government’s role, like in helping the economy, were still very much a part of people’s attitude that the government should do nothing.

Bernstein starts his article with a quote from Andrew W. Mellon, Treasury Secretary during the 1930’s. I also remember a quote from Secretary Mellon from my days of studying 20th Century American History. Secretary Mellon suggested that men cut wood for a garbage can of left over food. Yes, Secretary Mellon was no Keynesian in his view of the government’s role in aiding the economy. John Maynard Keynes was an economist that reasoned that government had a role to play to minimize the suffering of the people and put forth his ideas that government spending could be used to pull the economy out of the depression. At the time Keynes put forth his views on the government’s role, many people believed that the Federal government should not have a role in helping the economy out of the depression. Some historians would argue that it was the Second World War that brought the American economy out of the depression. But, that is another story.

We are 68 years away from the end of the 1930’s. Society and the attitudes held by society have changed over those 68 years. Philosophies change, as first by newspapers and books give way to TV and then the Internet. New ideas get a hearing in the market place of ideas and with that attitudes change.

Yet, there will always be at least two sides to the argument: how much government help is too much? In the 1950’s, it was Chairman Martin and the punch bowl. In 2008, it was Chairman Bernanke facilitating the sale of Bear Stearns to JP Morgan Chase. Some today think that the Fed should have let Bear Stearns go bankrupt, while others point out the unnecessary pain and suffering of families not responsible for the greed and/or mismanagement that brought the fifth largest investment bank in the U.S. down.

Economics is more science than philosophy, but philosophy, or the attitudes of the people, as seen through the eyes of their elected representatives, is what determines government policy and therefore government action or inaction.

Many people point to Katrina as an example of government inaction. Many, in my opinion, correctly reason that had the same thing happened in Georgetown just a few blocks from the White House, that the Federal government’s response would have been greatly different.

And, so we come back to the Bear Stearns solution on the one hand and the lack of a comprehensive solution for people losing their homes on the other. Has our society evolved into the the privatization of profits and the socialization of losses? Why do we hear that the White House will veto measures designed to help families stay and hold onto their homes?
Is the pendulum swinging back the other way now? Have we reached the end of compassion for the family unit? Are only the large corporations what matters when it comes to the Federal government bringing relief? What would Andrew Mellon say today? Do we want to go back to the days when it is suggested that men out of work can cut wood for a garbage can of food for their families?

Do we believe that the majority of families that are losing their homes are losing their homes because of greed? If that is the case, then I guess we should let them go under. But, I do not believe that. Do we do nothing because a few people may get away with playing the system? I think we can afford to take that risk.

We have workers’ compensation for the injured worker, but even in the best of systems there are individuals that try to take advantage of the system. But, we do not eliminate the whole workers’ compensation system because a few would attempt fraud.

So, we come full circle. Economics can only take us so far. It will be up to the people to decide what kind of society we will have, and November is less than six months away. Stay tuned.

Saturday Is For Art

Several years ago I painted the first level playing field and gave it to a close friend. We grew up together and have remained good friends for over 50 years. Later, using wine box lids I painted Level Playing Fields No.2 & No. 3. When I started doing my Envelope Collection, as I call it, I painted in acrylic on black paper envelopes that were sent to me in my last job by a small cap money management firm in NYC. The concept of the level playing field is that the level playing field does not exist, but rather it represents what we are striving to achieve. Above, I will post today for your viewing pleasure several of my interpretations of the level playing field concept. I hope you enjoy the show.

In order from top down: Level Playing Field (1990); Level Playing Field No. 2 (1994); Level Playing Field No. 3 (1995); Tribute to Jackie Robinson: Leveling The Playing Field 1947-2007 (2007); Level Playing Field Out The Window (2006). Beautiful computer prints are available and for sale of the last two paintings on 19" by 13" paper. Please contact me if you have any interest.

The Oil Equation Revisited

Several factors go into understanding an event, and the oil crisis in the United States is no different. The first thing to be remembered about oil is that it is priced in U.S. dollars. What that means is that the price for oil on the international oil markets is quoted in U.S. dollars. For those of us, living in the United States, buying everything we need to survive using our own U.S. dollars, the price of oil has been going up dramatically. The simple reason for this steady climb in the price of oil and in turn the price of gas and diesel, is that the U.S. dollar has been falling in value in the foreign currency exchange markets. This is often referred to as a weaker dollar. But, that is not the whole story.

The demand for oil around the world has increased. India and China are two countries most commonly sighted for their rapidly growing economies. But, demand is only the second part of the equation.

Supply has been placed under a cloud of uncertainty. The region of the world where most of the oil comes from has been disrupted by several things, but most notably has to be the situation in Iraq. Additionally, OPEC, to my personal disbelief, is saying they are happy with the amounts of oil production. This is where politics and economics meet. We, the United States, is quite simply having the screws put to us. Our “friends” in the middle east have us now at a serious disadvantage. They control the supply of oil production and they are saying that the high prices Americans are paying at the pump for gas and diesel is not their problem. About now you should be asking yourself, “why did we come to the aid of Kuwait?" and, "why do we have troops in Saudi Arabia?” If you take that thought process a little further, you would be asking yourself, “who does our government in Washington represent when it comes to oil?”

Everyone in Washington is sitting on their hands as Americans struggle with the price of gas and diesel at the pump. If you want to read a good book about the influence oil and oil people have on “our” government in Washington, read Sleeping With The Devil: How Washington Sold Our Soul For Saudi Crude by Robert Baer, 2003. This book will give you some important information to consider when you are trying to understand the present energy situation.

The falling value of the dollar can be traced back to our own trade policies, and our own inability to negotiate fair trade policies for the majority of Americans. It is my opinion, that the trade policies that are negotiated on behalf of the American government do not take into account what is best for the majority of the people. We have a republic. We elect people to represent our interests in Congress. However, once the representatives get elected they forget who they represent rather quickly. Our trade policies with several countries is proof of that. Look what has happened to the U.S. dollar. Fair trade policies would have concerned itself with what will happen to the dollar if an unfair trade policy is signed. I don’t think that the future value of the dollar was ever a consideration in the trade policies of the United States. If it had been, we would not see oil priced at over $125 a barrel. Importing so much stuff from China is not good economic planning. There needs to be balance even in a trade agreements. Knowing how much we depend on foreign oil should have been a factor in the kind of trade agreements the U.S. government was signing with countries like China and Mexico. No nation can afford to export their currency in such quantities that it will not have an affect on its purchasing power in the world markets, not even the United States.

And finally, our own government policies and spending has contributed to the fall in the value of the dollar. The “war” in Iraq was a big drain on the U.S. Treasury and continues to be. To put it quite simply, there are too many U.S. dollars out there for the demand for dollars on the foreign currency markets. It is a simply supply and demand situation.

So, here we are at the beginning of the so called "driving season" and demand for gas is expected to rise while the supply is being held constant.

What does that tell you about the direction of price at the pump? Right, the price of gas must continue to go up. But, what if instead of driving more, Americans across the country decided to drive less, much less. What if we got together in our communities and declared a consumer war on OPEC. What if we, the people, came together voluntarily and car pooled and put our cars in the driveway for a day or two each week and did not drive them. What about a consumer revolt against the OPEC nations, nations that we helped with money and blood, and now we simply turn off our engines!!!

If you are waiting for some meaningful help from Washington, I can tell you it is not coming. Read Robert Baer's book, it explains why there will be no help from Washington. We can not throw oil in Boston harbor like the colonists dumped tea a few hundred years ago, but we can start a grassroots movement to turn off our engines and car pool or walk or take a bus. OPEC thinks they know the American consumer pretty well. Now is the time for the American consumer to fight back. We can also fight back in November by voting. This is a republic and you get to vote for who will represents you, so use it. But first, find out where your representative stands on issues that affect you. Stay tuned.

Stamp Painting in oil on gessoed paper painted in 1991. The title is UNITED STATES - HOSTAGE - ENERGY POLICY 1973 - 1991. The new title could be changed to 2008, because we are still being held hostage to our energy policy. The Bush Oil Co. is still the same.

A New Form of Municipal Gambling

This past weekend I had the pleasure to visit with some old friends. Friends that date back to the 1960’s and the days of my first years in the municipal bond business. As a history major, the field of municipal finance was all new to me. My education began with a little paperback titled Money, Banking and Gold by Peter Bernstein and first published in 1965. From there, I spent many years reading books and articles about bonds and the markets.

Of all the purposes for issuing municipal bonds, school bonds are a very common purpose. In some states, like Ohio, the bonds are issued by what are called city school districts. In Ohio, these municipal bonds are general obligation bonds. General obligation bonds are paid from taxes and technically differ from revenues bonds that are paid from revenues. City school districts collect property taxes and pay the principal and interest on the district’s outstanding school bonds. In Kentucky, the set up is a little different. The bonds for schools are called school building revenue bonds. They too are paid by taxes, but because of the way they are set up legally, they are considered revenue school bonds.

For many years, school bonds were given ratings by the rating agencies and paid a net interest cost (NIC) that was the market rate for a school bond of a particular rating quality. Most school bonds probably received an A-rating, but there were some AA-rated and even a few AAA-rated school bonds years ago.

As municipal debt, school bond interest is tax free, and real attractive to fixed income investors in the higher tax brackets. Citizens of a particular state holding school bonds or other municipal bonds from their state received a double bonus as the interest is not only free of Federal income taxes, but state income taxes as well. In areas where there is a city income tax, like New York, New York city municipal bonds were triple tax free. Investors that own these bonds pay no Federal, state or city income taxes on the interest.

But somewhere along the way, this was not good enough for local school districts and their boards. Investment bankers came up with the bright idea of an option for these schools districts to potentially lower their interest costs (NIC) by using derivatives.

Derivatives are a whole new ball game and they open up the school district to lowering their NIC or if the hedge does not work, causing the school district to loss money. Several years ago, school districts like other municipal bond issuers bought bond insurance to get the AAA-rating. The AAA-rating enabled the issuer to receive a lower NIC by virtue of the fact the debt was backed by taxes or revenues, but also if something happened to the issuer's ability to pay, the insurer would pay principal and interest.

I must have been hiding in a cave the last several years because the story about hedging a school bond issue by a school board seemed to my more conservative fiscal instincts as an unnecessary risk.

I never said I was the sharpest knife in the drawer, but this idea of taking on additional risk to perhaps lower the school districts NIC seemed to me like gambling with tax payers’ money.

It took a while before investors accepted the bond insurance idea, as I remember that insured bond issues did not receive the fully advantage, in the form of lower interest costs, immediately. Bond buyers looked at the bond rating agency’s rating as the real worth of that municipal debt. In time, the bond insurance became more acceptable among portfolio managers and individual investors.

Interest rates peaked in the early 1980’s and then proceeded to decline over many years. With portfolio managers and individual investors facing ever declining rates of interest through the 1980’s and 1990’s, buyers would reach for yield, and in reaching for yield, rationalize their reasons for buying lower quality bonds, but with the bond insurance as a back up.

Now with interest rates at what I would consider historically low levels, the need for a school district to hedge their interest cost (NIC) through a side bet of buying a derivative, seems so unnecessary. Some school districts will win and save money, but I am afraid that state legislators do not fully understand the risks these schools districts are taking with their tax payers’ money. Stay tuned.