When you stop and take a step back and look at our domestic economy and see all the things going on that are impacting the lives of so many people and their families, and you listen to our President and other elected officials in Washington, you can not help but wonder, are we all living in the same country?
Yesterday I watched the President’s press conference before watching Chairman Ben Bernanke answer questions before the Senate Banking Committee. A reporter asked the President about the prospect for gas prices reaching $4 a gallon by this summer. The President acted like the reporter was from another planet. He seemed shocked that gasoline may cost $4 a gallon this summer. This morning I was reading an article about the price of crude oil and what OPEC may or may not do, when I noticed a photograph next to the story that showed a gas station in San Mateo, California with gas prices posted at $4.23, $4.33 and $4.43 a gallon. It is February, not summer, and at one gas station in the United States the price of gas is over $4! Now we all realize that the President of the United States doesn’t pump his own gas. (But, on the other hand, perhaps he should.) The leadership in the White House goes about their business without the slightest acknowledgement as to what ordinary people are facing.
At what point will the strain that the high price of gas is causing for so many, grab the attention of those that don’t pump their own gas? The list of problems we are facing in the coming months is long. Housing and the fall off in new home construction is big. The sub-prime mortgage mess and the fallout from the rating agencies’ “errors” is big. The amount of money we are spending around the world helping people with their problems, plus the billions of dollars being spent in Iraq, places a huge tax on our time and resources. How bad do things have to get before our leadership starts paying attention in a consistent and meaningful way. We already have more people in prison than any other nation for our population. There are economic costs to not dealing with our problems. Is this where we will spend our resources? Is prison construction our next big growth industry?
The Economic Stimulus Act of 2008 is a good start, but I haven’t heard a word about what the price of gas is doing to family budgets or the fallout from crude oil now trading over $100 a barrel. I have written about this almost all week. I guess it is time to give it a rest.
Saturday is a good day for art. Stay tuned.
Friday, February 29, 2008
Thursday, February 28, 2008
Don't Blame The Messenger, Day Two
Today Fed Chairman Ben Bernanke spoke and answered questions before the Senate Banking Committee. The Senators, as a whole, realize that the Chairman is not Superman. Many of the Senators know the score with regards to our economy, the global economy, OPEC, other commodity prices like food and ethanol, and most importantly, the limitations of the Federal Reserve Bank. The complexity of their questions indicate this.
I would like to put forth an analogy that I hope with help drive my point about the importance of driving down or at the very least an attempt to drive down the price of oil. The bees pollinate the flowers and from that cross pollination comes fruit. People spending their money at the local level on food, clothing, shelter and gas, works its way through the economy and has a similar effect that the cross pollination of the bees have on the production of fruit. Money changes hands and money is spent and the process continues. The economists have a fancy word for this, they call it the velocity of money. Unfortunately, when we all are paying over $3 a gallon at the pump, money is leaving the system.
We need to be pro-active with regards to the rising price of oil. We can not assume that the price of oil will stabilize over the coming months. The United States must take steps to confront and deal with the rising cost of oil, regardless of what may or may not happen for the demand for oil around the world. The psychological benefits of a decline in the price of oil and gas to the domestic economy, in my opinion, can not be over stated. Yes, I know about the housing crisis, the sub-prime loan mess, the rating agencies mess, and every other economic or financial mess that is out there. But, if our government wants to send a message to every single person that pumps his or her own gas at the gas station every week, that something is being done about inflation, then let that message be reflected in the price of gas that is so prominently displayed on the big sign next to every gas station. Don’t under estimate the psychological effect across the entire nation, in every city, town and village, when the price of a gallon of gas at the pump goes down a dollar. That, my fellow Americans, would put confidence back into the consumer and a few more buck$ back into his pocket. That coupled with the check we are to receive, will get our domestic economy moving, perhaps slowly at first, but back in a positive direction.
Action should be taken to encourage the production of oil, gas and diesel here in the United States. Congress and the President need to concern themselves with our energy policy now. It can not be heavy handed, for we don’t want to discourage foreign investment in the U.S., but measures need to be taken. We are being squeezed by OPEC. That coupled with the demand for oil on a global basis has resulted in the $100 a barrel price that we are paying today.
Economic activity is driven as much by what is in a person’s mind as by what is in his wallet. Markets, like people, (which is what they are made of) operate not in a vacuum, but in real time. The confidence, the psychology, of the consumer drives the markets and the domestic economy. Lowering the price of gas at the pump will improve the confidence of the consumer across the entire country. Stay tuned.
Wednesday, February 27, 2008
Don't Blame The Messenger
Today, Ben Bernanke, Chairman of the Federal Reserve Bank, our central bank, testified before the House Financial Services Committee of Congress. I watched nearly all of the proceedings and into the question and answer period. They were finished with Chairman Bernanke by 1pm.
It is interesting to listen to the questions the members of Congress ask of the Fed chief. Some members of Congress realize that he is chairman of our central bank, while others, by their questions, would feel better if he sat before them in a Superman outfit, cape and all. Chairman Bernanke was asked questions about the US dollar, but he had to defer by saying that he was not the Secretary of the Treasury. I think, if he had a choice in time and place, he might opt to be the chairman of a central bank with a currency not under the pressure the US dollar finds itself under today. But, this is the hand he was dealt, and these are the cards he has to play. I am sure the German mark or the Swiss franc are the kind of cards any central banker in his right mind would have preferred to play. But, since that is not the case, let’s talk about the hand we were dealt.
If you have read any of my earlier pieces, you know my opinion on oil and what the price of oil is doing to our economy. You don’t have to be an Einstein to figure out that we can not pay for oil, gasoline and diesel what we have been paying and still have money left over to go shopping the way we did when gas was one dollar a gallon. Even a buck and a half a gallon looks cheap now. Chairman Bernanke is careful in choosing his words, as he should be. At least he does not talk in riddles like Mr. Greenspan. We will be very lucky if the price of gas at the pump stays where it is today for the rest of the year. I don’t think that is going to happen unless the government takes some action.
What kind of action should the government take? Well that is a good question. There are reserves that could be taped, but that is not a long term solution. What we need is a mechanism, much like the central bank, that influences the growth rate of our money supply, to influence the price of oil. I know, every conservative will want to shoot me along with the oil companies, but I think in our society, oil is the blood that carries nutrition to every facet of our economy. As I have said before, if I was given one lightening bolt from the economic gods to throw at our economy, I would throw that bolt with all my strength at the price of oil. Enough said, I think everyone now knows where I stand. And, by the way, I think the President and the cabinet could do more than they are doing with regards to bringing down the price of oil. Yesterday oil prices broke through a new intra-day high of $102 a barrel.
A few words about our Chairman Ben Bernanke. This is a good man. As they say, he has his heart in the right place, but he is no fool. One member of Congress correctly noted that he was a professor of economics at Princeton and one of the most knowledgeable men in the world on central banking. I like this guy and I encourage everyone in Congress to give him high marks. We may be in for some very tough times for our economy, so, I caution the members of Congress to realize we have the best man for the job right now. Don’t blame the messenger when the boat starts to really rock. The chairman did not get us into these waters by himself.
It is interesting to listen to the questions the members of Congress ask of the Fed chief. Some members of Congress realize that he is chairman of our central bank, while others, by their questions, would feel better if he sat before them in a Superman outfit, cape and all. Chairman Bernanke was asked questions about the US dollar, but he had to defer by saying that he was not the Secretary of the Treasury. I think, if he had a choice in time and place, he might opt to be the chairman of a central bank with a currency not under the pressure the US dollar finds itself under today. But, this is the hand he was dealt, and these are the cards he has to play. I am sure the German mark or the Swiss franc are the kind of cards any central banker in his right mind would have preferred to play. But, since that is not the case, let’s talk about the hand we were dealt.
If you have read any of my earlier pieces, you know my opinion on oil and what the price of oil is doing to our economy. You don’t have to be an Einstein to figure out that we can not pay for oil, gasoline and diesel what we have been paying and still have money left over to go shopping the way we did when gas was one dollar a gallon. Even a buck and a half a gallon looks cheap now. Chairman Bernanke is careful in choosing his words, as he should be. At least he does not talk in riddles like Mr. Greenspan. We will be very lucky if the price of gas at the pump stays where it is today for the rest of the year. I don’t think that is going to happen unless the government takes some action.
What kind of action should the government take? Well that is a good question. There are reserves that could be taped, but that is not a long term solution. What we need is a mechanism, much like the central bank, that influences the growth rate of our money supply, to influence the price of oil. I know, every conservative will want to shoot me along with the oil companies, but I think in our society, oil is the blood that carries nutrition to every facet of our economy. As I have said before, if I was given one lightening bolt from the economic gods to throw at our economy, I would throw that bolt with all my strength at the price of oil. Enough said, I think everyone now knows where I stand. And, by the way, I think the President and the cabinet could do more than they are doing with regards to bringing down the price of oil. Yesterday oil prices broke through a new intra-day high of $102 a barrel.
A few words about our Chairman Ben Bernanke. This is a good man. As they say, he has his heart in the right place, but he is no fool. One member of Congress correctly noted that he was a professor of economics at Princeton and one of the most knowledgeable men in the world on central banking. I like this guy and I encourage everyone in Congress to give him high marks. We may be in for some very tough times for our economy, so, I caution the members of Congress to realize we have the best man for the job right now. Don’t blame the messenger when the boat starts to really rock. The chairman did not get us into these waters by himself.
Tuesday, February 26, 2008
Bond Rating Services and Toxicity
My father-in-law built planes for North American Aviation his whole life. On his desk he had a piece of wood with a message that read “quality must be built into a product, it can not be inspected into it.”
When I got into the municipal bond business in the late 1960's, there were two well known bond rating services that everyone used when discussing the quality of a bond. Now there are three. Bonds receive ratings based on their ability and willingness to pay their interest and principal in a timely fashion. These ratings start at triple-A and run all the way down the alphabet to a single-C.
I remember one day the bells rang out on the munifax wire and everyone ran over to the machine to read the news. As I remember it, and this was over 30 years ago, so my memory may be a little fussy, the general obligation bonds of New York City lost their single-A rating. Everyone knew the situation with regards to the finances of New York City was not good. It was not a closely guarded secret from the investment people on Wall Street, nor for that matter any other street. Even though New York City GO bonds carried an A rating, they sold as much as 175 basis points cheaper than any other piece of A rated paper in the municipal bond market. The next day the bells rang again, only this time the news was that the rating service that lowered the rating the day before had seen the light and was now restoring New York City’s A rating. New York City GO bonds continued to sell at a huge spread to other A rated GO bonds. The rating service change did not influence the muni bond market.
After New York City went into default on their bond obligations a few years later, several of the larger investment securities firms in New York created teams of municipal bond analysts to write reports on new issues of municipal debt. I used to receive these weekly reports and I read them. I will not go into what these reports said, as I figure by now, I have lost half my readers, and I don't want to lose the other half. This practice of producing research reports for municipal debt lasted for a few years and then slowly disappeared. Several firms produced these reports each week in a booklet formate. Each firm used a different color envelope to mail their reports. I would save these envelopes and use them to sketch on. I would take these large envelopes into meetings with me to sketch on so I would not fall asleep. Once a meeting lasted more than 60 minutes at the bank, my brain went on screen saver unless I started moving my left hand.
So, what's the point? The point is this, ratings and research are important, but not many are willing to put the money into it that is necessary to produce a quality product. Young analysts don’t make much money and they want to advance in their careers. The rating services don’t pay the big bucks that the investment banking firms do. As a result, the better analysts move from the rating services to the investment banking firms. Giving debt a AAA rating is a big deal in the credit world, or at least it used to be. US Treasuries are rated AAA, and that means something. When a mortgage credit is given a AAA rating, it better have the ability and willingness to pay at the highest level. A triple-A rating should not be taken lightly, it better stand for something. If ratings are compromised the whole system of credit ratings comes under a cloud.
The Fed can ease credit, lower interest rates and accelerate the growth rate of the money supply. But, the Fed can not wave a magic wand and bring investor confidence back to the credit markets if the credit rating system has been compromised. This type of crisis takes time to heal, and if it is a major part of the mortgage crisis mess, Ben Bernanke and God can not fix it overnight.
For all of you that have hung in there so far, I salute you. Tomorrow is another day. I will try to find something to reward you. Stay tuned.
When I got into the municipal bond business in the late 1960's, there were two well known bond rating services that everyone used when discussing the quality of a bond. Now there are three. Bonds receive ratings based on their ability and willingness to pay their interest and principal in a timely fashion. These ratings start at triple-A and run all the way down the alphabet to a single-C.
I remember one day the bells rang out on the munifax wire and everyone ran over to the machine to read the news. As I remember it, and this was over 30 years ago, so my memory may be a little fussy, the general obligation bonds of New York City lost their single-A rating. Everyone knew the situation with regards to the finances of New York City was not good. It was not a closely guarded secret from the investment people on Wall Street, nor for that matter any other street. Even though New York City GO bonds carried an A rating, they sold as much as 175 basis points cheaper than any other piece of A rated paper in the municipal bond market. The next day the bells rang again, only this time the news was that the rating service that lowered the rating the day before had seen the light and was now restoring New York City’s A rating. New York City GO bonds continued to sell at a huge spread to other A rated GO bonds. The rating service change did not influence the muni bond market.
After New York City went into default on their bond obligations a few years later, several of the larger investment securities firms in New York created teams of municipal bond analysts to write reports on new issues of municipal debt. I used to receive these weekly reports and I read them. I will not go into what these reports said, as I figure by now, I have lost half my readers, and I don't want to lose the other half. This practice of producing research reports for municipal debt lasted for a few years and then slowly disappeared. Several firms produced these reports each week in a booklet formate. Each firm used a different color envelope to mail their reports. I would save these envelopes and use them to sketch on. I would take these large envelopes into meetings with me to sketch on so I would not fall asleep. Once a meeting lasted more than 60 minutes at the bank, my brain went on screen saver unless I started moving my left hand.
So, what's the point? The point is this, ratings and research are important, but not many are willing to put the money into it that is necessary to produce a quality product. Young analysts don’t make much money and they want to advance in their careers. The rating services don’t pay the big bucks that the investment banking firms do. As a result, the better analysts move from the rating services to the investment banking firms. Giving debt a AAA rating is a big deal in the credit world, or at least it used to be. US Treasuries are rated AAA, and that means something. When a mortgage credit is given a AAA rating, it better have the ability and willingness to pay at the highest level. A triple-A rating should not be taken lightly, it better stand for something. If ratings are compromised the whole system of credit ratings comes under a cloud.
The Fed can ease credit, lower interest rates and accelerate the growth rate of the money supply. But, the Fed can not wave a magic wand and bring investor confidence back to the credit markets if the credit rating system has been compromised. This type of crisis takes time to heal, and if it is a major part of the mortgage crisis mess, Ben Bernanke and God can not fix it overnight.
For all of you that have hung in there so far, I salute you. Tomorrow is another day. I will try to find something to reward you. Stay tuned.
Monday, February 25, 2008
For Debt Instruments: Time is Money
We have all heard the expression “time is money.” In the world of debt obligations, bonds , notes and mortgages, this is literally the case as there is a mathematical relationship between time, money and the rate of interest.
In the old days, when I first broke into the bond business, before there were computers and bond calculators on every desk, bond prices were looked up in something called a basis book. These books had pages filled with columns of numbers where you could look up the price of a bond if you knew the stated interest rate, maturity date and the yield to maturity. Back in the late ‘60’s when I first started out, municipal bonds literally had coupons attached to the bond that were cut off, sometimes referred to as clipping off the coupon, and presented every six months for a half year’s interest payment. The municipal bonds in those days were in bearer form and smart people kept them in a safety deposit box. It was years later that book entry replaced bearer bonds. Today with computers, I think almost if not all bonds are in book entry form.
Bonds and notes have a dated date from which the time they start paying interest, at a stated rate, is calculated. This interest rate was referred to as the coupon rate. Every bond has a maturity date, the date at which the principal and final interest payment are paid. When interest rates go up in the market, bonds already in the market come down in value (price) as the principal value must be shaved in order for the bond to be in line with the yields of the newer bonds coming to market. When a bond declines in value from its face amount, usually $1,000, it is said to be selling at a discount. Prices move both ways, up as well as down. When interest rates fall, bond prices move up in value (price) as they come in line with the newer debt offerings. This is known as the inverse relationship that yields have to price.
One percent (1.00%), is made up of 100 basis points. When a bond goes down in value because interest rates are going up, the yield to maturity of the bond goes up. A 5.00% bond, whose price falls from par (100.00), will experience an increase in yield, known as the yield to maturity. An increase in interest rates across the bond market will mathematically reduce the price (value) of bonds in the market. The longer the maturity of the bond the greater the price decline for each basis point that interest rates increase. I will discuss the yield curve and what it means another time.
Several factors can move the price of a bond, or for that matter the market. The movement of interest rates by the Fed is only one of those factors. The Fed can influence interest rates through the use of it tool bag, but other factors like credit worthiness can be beyond its control. There is a whole discussion of credit and debt and their relationship to price that has not been tackled. There is a direct relationship between credit, debt, yield, maturity and price. And, credit worthiness and the credit ratings given debt instruments by the ratings agencies, one of the non-mathematical parts of the equation. This is some of what is behind the present sub prime mortgage mess. Stay tuned.
In the old days, when I first broke into the bond business, before there were computers and bond calculators on every desk, bond prices were looked up in something called a basis book. These books had pages filled with columns of numbers where you could look up the price of a bond if you knew the stated interest rate, maturity date and the yield to maturity. Back in the late ‘60’s when I first started out, municipal bonds literally had coupons attached to the bond that were cut off, sometimes referred to as clipping off the coupon, and presented every six months for a half year’s interest payment. The municipal bonds in those days were in bearer form and smart people kept them in a safety deposit box. It was years later that book entry replaced bearer bonds. Today with computers, I think almost if not all bonds are in book entry form.
Bonds and notes have a dated date from which the time they start paying interest, at a stated rate, is calculated. This interest rate was referred to as the coupon rate. Every bond has a maturity date, the date at which the principal and final interest payment are paid. When interest rates go up in the market, bonds already in the market come down in value (price) as the principal value must be shaved in order for the bond to be in line with the yields of the newer bonds coming to market. When a bond declines in value from its face amount, usually $1,000, it is said to be selling at a discount. Prices move both ways, up as well as down. When interest rates fall, bond prices move up in value (price) as they come in line with the newer debt offerings. This is known as the inverse relationship that yields have to price.
One percent (1.00%), is made up of 100 basis points. When a bond goes down in value because interest rates are going up, the yield to maturity of the bond goes up. A 5.00% bond, whose price falls from par (100.00), will experience an increase in yield, known as the yield to maturity. An increase in interest rates across the bond market will mathematically reduce the price (value) of bonds in the market. The longer the maturity of the bond the greater the price decline for each basis point that interest rates increase. I will discuss the yield curve and what it means another time.
Several factors can move the price of a bond, or for that matter the market. The movement of interest rates by the Fed is only one of those factors. The Fed can influence interest rates through the use of it tool bag, but other factors like credit worthiness can be beyond its control. There is a whole discussion of credit and debt and their relationship to price that has not been tackled. There is a direct relationship between credit, debt, yield, maturity and price. And, credit worthiness and the credit ratings given debt instruments by the ratings agencies, one of the non-mathematical parts of the equation. This is some of what is behind the present sub prime mortgage mess. Stay tuned.
Saturday, February 23, 2008
Level Playing Field, Level Playing Field No. 2 & 3
The 3 paintings I will post for today are related to each other. Level Playing Field is the title of these 3 paintings. Some other time I will discuss the term "level playing field", and how it has been used in political discussions. The first painting is oil on board. The second and third is oil on wood, actually 2 wine box lids. I hope you will find them interesting and be willing to share your thoughts and comments. Saturday is a good day for art.
Friday, February 22, 2008
United States Hostage: Energy Policy
Interest rates, the price of oil, the anticipated rate of inflation, consumer debt, government spending and government borrowing, and consumer confidence in the economy, all play their role as we move through the coming year. And, as I have said before, if there was one piece of the equation I would single out for change, as having an impact that would effect every other segment of our economy, it is the price of oil. Every single person in the United States is effected by the price of oil. Whether you walk or drive, take a bus, a train, a cab or a subway, oil is involved.
In 1973, we experienced the first Oil Embargo from OPEC. At that point, our leaders should have recognized our vulnerability and taken steps to decrease our dependency on foreign oil. If we would had set a modest national goal, to reduce the amount of oil we import by 2% per year cumulatively, how much foreign oil would need to import 34 years later each year? Unfortunately, our leaders are not about leadership and leading. The situation we find ourselves in today with regards to the price of oil, is the result of no national plan towards self sufficiency.
The geopolitical situation in the world today and the uncertainties that we are experiencing today in the Middle East are directly related to the price of a barrel of oil. With so much of the world’s oil supply coming from this region of the world, the tensions and uncertainties in this region, and the problems with the flow and transport of oil from this region, are all factors that get inputted into the price of oil.
More should have been done before we reached this point. Unfortunately, while we all are in the same boat, those least able to pay the price for a gallon of gas at the pump are hurt the most. The nation as a whole, can not continue to spend on consumer durables and non-durables at the same rate as when gas was half the price it is now. The present gas prices are like a tax on the consumer, and it is falling heavily on those least able to pay. My remark yesterday, “you can not take the air out of the ball and expect the game to have the same bounce” is what I was driving at.
The leadership in this country, with regards to our energy policies over the last 34 years, is a blatant failure. Those interested in reading a good book that will shed light on this subject should read Sleeping With The Devil: How Washington Sold Our Soul For Saudi Crude by Robert Baer, 2003. That is enough for today, have a safe weekend. Stay tuned.
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