The Definition of Stimulus

A check the administration writes to itself backed by presumed future tax revenues which it then distributes out to whomever it pleases on terms that suit it.

Banks Hoarding Cash.

It’s reported that banks are hoarding cash.

Whose money are the banks hoarding?

Isn’t the “cash” they are holding really Treasury Bills, on which they collect interest?

And weren’t those Treasuries “loaned” to them by the Fed, to keep them afloat?

And doesn’t that make all that cash taxpayer money?

And aren’t they expected to use those Treasuries as collateral against which to buy more treasuries (“monetizing” and therefore to fund the government) on which they collect interest?

Why are taxpayers loaning banks so much money to banks which banks collect interest on, interest that itself is paid by taxpayers?

Another Landmark Business Devoured by Corporate Titans

...proving for the umpteenth time that, when money is cheap, the big get bigger and the marketplace suffers a loss of competing interests.

From Bloomberg:

Walgreen to Buy New York’s Duane Reade Chain for $618 Million

By Chris Burritt and Carol Wolf

Feb. 17 (Bloomberg) -- Walgreen Co., the biggest U.S. drugstore chain, agreed to buy Duane Reade Holdings Inc. from affiliates of Oak Hill Capital Partners for $618 million to expand in metropolitan New York.

The cash transaction will dilute Walgreen’s profit in the first year after closing and add to earnings the following 12 months and thereafter, Deerfield, Illinois-based Walgreen said today in a statement. Walgreen will also assume $457 million in Duane Reade debt.

It's not that we think Duane Reade was such a great place. Sure it was a congenial atmosphere, but it was notoriously overpriced and its price markings weren't reliable. It's just that there's one less player on the field, and the field is that much less level now, and the elephant just got fatter, and now they can do what they wish with their prices.

The “D” Word

Getting heavy rotation of late are the pronouncements from the Office of the Propaganda Czar that “the stimulus is working. It brought us back from the brink of a depression.” Or, as Vice President Biden was heard to dramatically intone, “it’s WOR-KING!” and to hiss, “it’s brought us back from the brink of depression!”

As rhetoric on the economy goes, this is high-stakes play. No administration with any sense ever touches the “D” word in the context of its own era. And rightly so – the synapse of economic activity is confidence. To use the “D” word is to tweak confidence, to fiddle with the mysterious and fragile wires and knobs on the black box highly of a developed social organization. All the more so, dear reader, when the national unemployment rate is somewhere between 9.8% and 17+% (best guesses), and people are being foreclosed out of their houses at record rates. Etc.

Risk to what remains of national confidence notwithstanding, the obedient “news” shows are echoing the mantra: “the stimulus is working, it’s brought us back from the brink of…DEPRESSION.” A desperate measure if ever there was one. Could it be that the administration has awakened to the desperate times? The Collective of the Smartest Guys in the Room have ruined the economy such that it will take a generation or more to repair (if it is reparable). Running, yet unable to hide from that fact, has it caught a glimpse of something that has scared it out of its arrogant stupor just enough to realize that whatever it was it is doing is failing dismally across the board? Times are desperate, and the administrati has invoked the nuclear rhetoric option.

For us, this turn of events has evoked images of little people shaking their fists and screaming at the gods of the economy, “it’s WOR-KING!” It’s brought us back from the brink of depression!” But we don’t see, in this vision, the gods saying “Amen.” We see them saying, “Oh, yeah?”

We don’t think the gods will be mocked.

What if we pull a Volcker?

Some locker room banter was recently overheard, to the effect that “nothing is made worth a [@#*%&] anymore.” The subject was boxing gloves, which bore an American sounding brand name but which were manufactured in – imagine this – China.

We could not find much ground from which to disagree with that assertion. But the next comment got us thinking: “…they own us, anyway!”

No, they don’t. They own our debt, and that’s not exactly the same thing has having title. We asserted, “lots of things could happen to that debt. We could stop paying on it. Or, we could have 18 percent interest rates again.”

Ever wonder what would happen to the value of China’s US bond holdings if interest rates did what they did in the early 1980’s? We did, and we broke out the old bond calculator and plugged in a few assumptions. Detailed calculations would require data we just don’t have ready access to, nor possess the inclination to estimate with painstaking accuracy. We would be satisfied with a “back-of-the-envelope” estimate.

So, we assumed that the entire Chinese holdings of US debt, all maturities and coupons, averaged to 20 year maturity, with a coupon averaging 3.5%, receiving 12 continuously compounded payments per year. If this were the case, and interest rates here were to spike to 20 percent, as they did in the early 1980’s when Paul Volcker was Chairman of The Federal Reserve, those bonds would be worth, on average, 18 7/8 cents on the dollar (slightly more if the coupon is higher, or if the maturity is shorter). We can’t imagine that a 81.12% haircut on the net worth (how many trillions of dollars?) of their US debt holdings would be a good thing for China. We think, in fact, that in the modern financial world with all its sovereign debt hedges, it might just turn them upside down.

The point is they do not hold all the aces. Our health and prosperity, in fact, should be a vital national concern to China.

This begs other questions, of course. Questions about how much influence that vital national concern of theirs might motivate them to exert on our domestic policies of financial import, such as, say, containing healthcare costs. It might behoove the electorate here to be on guard against healthcare initiatives binding upon all citizens that subordinate the value of a human life to the cost of saving or preserving that life. Such an initiative would have unacceptable potential for conflict of interest and would put the government in an adversarial, monopolistic, and nearly omnipotent relationship with individual citizens. This isn’t the sort of thing that is permitted by the United States Constitution.

An observer, nay a potential victim, can't be faulted for at least speculating that the president’s obsession with his political objectives exposes him (and us) to susceptibility in this regard. After all, this is the man -- Barack Obama -- whose Freudian slips about the value of human life have been characterized as "chilling." It was he, we will recall, who categorized a women's being with child as "punishment." Such an evaluation of the essence of the most innocent and vulnerable human beings among us tells us that human life -- besides his own, of course, and that of those in a position to give service to it -- is absent from his short-list of "things that matter most." A curious situation indeed, for the leader of a nation whose founding documents guarantee the "right to life" for all.

And likewise his Secretary of State, Hillary Clinton, who has declared, on record, that "human rights issues" are not to interfere with more pressing matters like stock and bond market sell-offs. The Secretary is no friend of the unborn, as can be ascertained from her glowing receipt of the "Margaret Sanger Award," Planned Parenthood's highest "honor." Recall that Ms. Sanger was an evangelist for the eugenics movement, whose ideals included killing babies and eliminating "negros." But context is so important in discerning what people really mean by their words and actions. Where on Hillary Clinton's list of priorities does a human life -- besides her own, of course -- lie? That she made this statement of doctrine while visiting with the Chinese Prime Minister (she's beaming in the photo-op) is a helpful aid in understating its ramifications. It perhaps wouldn't be too inaccurate to translate it, "We don't care what you do to your people. We need you to buy our debt." Was there ever a more textbook Faustian bargain in modern times?

Sigh. Probably.

Perhaps it would involve the president's medical advisor, Dr. Ezekiel Emanuel, who is an "authority" on the nasty subject of "allocating medical care." His models on how a totalitarian system should do so are summed up in the "Healthy Lives" concept. Since a picture is worth a thousand words, note the chart below. It shows how his model allocates medical care by age, and how, after the age of 40, the chart is all downhill and after 50, it distinctly recalls an Olympic Ski Jumping slope. While he no doubt subscribes to Darwin's ideas, he allows no reward for being "fit" enough to "survive" that far in life, apparently. We wonder if he's aware of the contradiction.

In light of these realities, and in light of the ruthlessly and remarkably pragmatic and macabre spirit of the age, one can't be ill-advised to at least consider what the risks are -- the risks of really poor leadership and myopic vision in the realms of politics, civil service, scientific inquiry, academia, business and even religion; devoid of a moral that reaches beyond the mean life span of a human being -- a human being that is allowed to be born, that is. If reality were a movie, we imagine it would take the form of Wall Street done by Alfred Hitchcock.

But lets return to practical matters, such as, are we making enough here in the USA to cover what we're spending, and does the answer to this impact discussions of "healthcare for all?" As regards any such sweeping government spending programs, fiscal sanity begs the question, “why is this even on the table when it’s clear we are in too much debt already, and cannot afford it?”

Indeed.

Arguably the most influential blog ever, cont'd.

We also picked the Saints by at least 7, but didn't bother to say so here.

Just keeping you posted.

Good Fashion...

...never really goes out of style. They should have colors coordinated for the seasons, though.

"Arguably the most influential blog ever."

Being vindicated so soundly inside of a couple of days is always cool.
Recall from this recent post:

The trade was to sell the Dow, nominal and buy dollars (sell Euros).

Of course, we all know what happened today, but here's The Wall Street Journal's take:

WORLD FOREX: Euro Plunges As Investors Flock To Safer Assets

NEW YORK (Dow Jones)--The euro plunged Thursday as mounting concerns over sovereign debt problems in Europe piled pressure on the common currency and helped drive a stampede out of stocks, commodities and riskier currencies.

Anatomy of An Arbitrage

Given the recent selloff in the Dow, we thought it might be a good time to update this post.

So here we are. This chart depicts, as of the close of last week, the Dow priced in dollars (nominal) and the Dow priced in dollars that have been normalized to the moves in the Euro. Click on the link for a description of the methodology. It's not rocket science.

The chart:

The trade was to sell the Dow, nominal and buy dollars (sell Euros).

While it was politically useful to attribute the selloff in the nominal Dow to the two-bit circus the president has made of his administration, it was more likely due to an unwinding of dollar shorts as the trade smelled the demise of Obamacare (via the election of Scott Brown in Massachusetts) and the outright destruction of the US economy it portended.