Dear Reader,
Just prior to departing on my recent trip to Croatia, the U.S. Treasury managed to pull a rabbit out of the hat by moving on the order of a quarter of $1 trillion of notes of various relatively short-term durations.
As you may recall, in the week prior to my departure to Croatia, the U.S. government unloaded close to a quarter of a trillion dollars in a series of auctions. You may also recall that the auction of $39 billion worth of 5-year Treasury notes held on the second-to-last day of the auction was considered something of a failure by the market.
It was therefore a surprise when the very next day the government was able to easily sell $28 billion in 7-year notes, earning the Treasury kudos and encouraging expectations that the worst of the credit crisis is over.
While going through the mountain of unanswered e-mails that had piled up in my absence, I came across one from Dan Ferris, editor of the Extreme Value letter, pointing me to an excellent bit of investigative research done by Chris Martenson, a blogger I have quoted here before.
What Chris discovered was that as soon as the primary dealers had snapped up the 7-year paper, they turned around and sold half of it to the Fed. This bit of monetary trickery, which was clearly planned in advance, accomplished two things. First, it created the impression that there was abundant demand even for longer-term Treasuries. And second, it obfuscated the fact that the Fed was being forced to step in to monetize the debt.
You can read Chris’s excellent work by clicking here.
A number of thoughts leaped to mind as I read this revelation, starting with “Those egg-sucking bastards!”, an appropriate thought given that it is proof that the government made a deliberate effort to deceive the market. And, in so doing, it caused investors here and abroad to make poor decisions about their money.
Of course, at least in the government’s minds, the subterfuge was undertaken for all the right reasons. If the auction was to fail, it could lead to a series of failures, and worse, as the world’s increasingly skittish buyers ran for cover, triggering a Zimbabwe-like death spiral for the dollar and the economy.
Faced with the choice between simply calling the whole thing off – which is to say, canceling the many spending programs now on the flight deck – or coming up with new, institutional varieties of Three-card Monte, a game used to fleece rubes in public gathering places, the government has now made it abundantly clear which approach we can expect.
I could leave off there, perhaps with a final wag of the finger in the direction of the fools who rule, but there is a serious and important point to be made here.
The use of this latest stratagem is a clear sign that the U.S. government is now in desperation mode and that, behind the scenes, things are serious. As its subterfuges are uncovered and revealed for all the world to see, in no small part thanks to the miracle of the World Wide Web, the credibility of the U.S. government among those being asked to finance our bone-crushing deficits will quickly dissipate.
This is backroom dealing at its most base level – and confirms why it is that the Fed is so reluctant to have its books audited.
It’s a scam, and a shameful one at that. Like the hired shills of a Monte game, the primary dealers are working with the government to pull off the charade that all is well, but they are doing so only to curry political favor and to pad their own nests at the expense of taxpayers.
There is, I believe, retribution coming. I cannot say with any specificity when it will come, or what form it will take when it does. But it won’t surprise me in the slightest if the American political class and its ardent supporters wake up one fine morning in the near future to find the equivalent of pitchfork-wielding mobs at the gate.
Meanwhile, be skeptical – very skeptical – about anything the government says or does. At this point, you can’t rule out any desperate act. The talented folks at The Onion picked up on that theme with a great spoof piece on the government repudiating its debts by staging a faux coup. Watch it here.
Last night the family and I watched Pink Panther 2, starring Steve Martin. While I know that there will be purists among you who consider any Pink Panther movie without Peter Sellers a sacrilege, you owe it to yourselves to give the new and updated version a try. While I liked the first Pink Panther starring Steve Martin, I think the second is even better.
I mention that because I wanted to recommend the movie, but also because in it Inspector Clouseau, having been knocked across the room by his assistant, congratulates him on his solid kick with a good-natured “Good one!”
That phrase popped to mind as I read a column by Stephen Carter from the Washington Post. While I don’t agree with all his sentiments, I find the author’s stance on the topic of profits refreshing, especially in that it appeared in a mainstream media outlet…
Profits We Should Cheer
By Stephen L. Carter
Thursday, July 30, 2009
A specter is haunting America: the specter of profit. We have become fearful that somewhere, somehow, an evil corporation has found a way to make lots of money.
Flash back three years. In 2006, Exxon Mobil announced the highest profit in the history of American corporate enterprise. Politicians and pundits stumbled over each other to call for an investigation and for some sort of confiscatory tax on the money the company earned. Profit, it seemed, was an evil, but large profit was even worse.
Today, the debate on the overhaul of the health-care system sparks a shiver of deja vu. The leitmotif of the conversation about the coming shape of health insurance is that the villain is the system of private insurance. "For-profit" firms come under constant attack from activists and members of Congress.
Thus, a recent news release from the AFL-CIO began with this evidently alarming fact: "Profits at 10 of the country's largest publicly traded health insurance companies rose 428 percent from 2000 to 2007." Even had the figures been correct -- they weren't -- we are seeing the same circus. Profit is the enemy. America could be made pure, if only profit could be purged.
This attitude was wrong in 2006. It is wrong now. High profits are excellent news. When corporate earnings reach record levels, we should be celebrating. The only way a firm can make money is to sell people what they want at a price they are willing to pay. If a firm makes lots of money, lots of people are getting what they want.
To the country, profit is a benefit. Record profit means record taxes paid. But put that aside. When profits are high, firms are able to reinvest, expand and hire. And profits accrue to the benefit of those who own stocks: overwhelmingly, pension funds and mutual funds. In other words, high corporate profits today signal better retirements tomorrow.
Another reason to celebrate profit is the incentive it creates. When profits can be made, entrepreneurs provide more of needed goods and services. Consider an example common to the first-year contracts course in every law school: Suppose that the state of Quinnipiac suffers a devastating hurricane. Power is out over thousands of square miles. An entrepreneur from another state, seeing the problem, buys a few dozen portable generators at $500 each, rents a truck and drives them to Quinnipiac, where he posts them for sale at $2,000 each -- a 300 percent markup.
Based on recent experience, it is likely the media will respond with fury and the attorney general of Quinnipiac will open an investigation into price-gouging. The result? When the next hurricane arrives, the entrepreneur will stay put, and three dozen homeowners who were willing to pay for power will not have it. There will be fewer portable generators in Quinnipiac than there would have been if the seller were left alone.
When political anger over profit reduces the willingness of investors to take risks, the nation suffers. According to news reports, one reason the Obama administration has had so much trouble finding buyers for the toxic assets it hopes to remove from financial institutions' balance sheets is a concern by financiers that should they go along with the plan and make rather than lose money, they will be hauled before Congress to explain themselves.
And although it is easy to be dismayed by excess, trying to regulate profit makes things worse. Capital flows to places where returns are highest. The more exercised our political leaders become when profits rise, the more investment capital will remain abroad.
The search for profit has dangers. There are few legal ways to enhance profits other than cost-cutting, improving efficiency or innovating. This can lead to wondrous inventions -- the iPod, say -- but it can also create serious dislocations, as when companies close plants and lay off workers. Remedying those human costs is part of what most of us want government to do. What we must avoid, however, is making the remedy so severe that profitability becomes impossible.
Consider the bills in Congress that seek to limit the freedom of federally aided automakers to close dealerships or to build the cars that buyers want. Preserving local jobs and building greener cars are admirable objectives, but a firm that is forced to sacrifice profitability to attain them is unlikely to be competitive over the long haul. Indeed, one reason the "public option" health insurance program under debate may turn out to be more expensive than advocates suggest is that here, unlike in Europe, we are unlikely to put up with government restrictions on what sorts of care will be available, especially for seniors. A board of experts might decide to limit access to hip replacements, for instance, but there is little chance Congress will let them get away with it.
Private insurers, by contrast, will cut whatever they can. This puts them at constant war with regulators and patients, but beneath this tension is a certain useful discipline. We want health care to be cheaper, and the for-profit health-care industry has every incentive to make it so. Supporters of the public option tout Medicare's cost advantages over private insurance, but those are largely obtained by setting below-market reimbursement rates for medical services (meaning that private patients subsidize Medicare patients). Moreover, the costs of compliance with the hundreds of pages of Medicare regulations are also transferred to the providers, and thus, again, to private patients.
I have no problem with a system in which private patients subsidize public patients. I do not even mind calling it a tax. Those who have good jobs should be helping out, and carping about it is uncharitable, especially now. But an expanded public option will be possible only if the for-profit sector remains vibrant and strong -- and profitable. Thus, we should all await, with grateful anticipation, the day when American firms again begin to earn the highest profits in history.
Stephen L. Carter, a Yale law professor, is most recently the author of "Jericho's Fall."
One of the resource company executives we met with during our recent Croatian retreat was Miles Thompson of Reservoir Capital, a company currently in the process of financing a very interesting “run of river” hydroelectricity project in Eastern Europe. Over the course of our visit, Miles commented on the fact that the European governments are beginning to backpedal on financial commitments resulting from adopting “cap and trade” legislation. Those commitments will soon run into the billions of euros each year as the governments are asked to transfer taxpayer funds into the hands of private enterprises and carbon traders who have eagerly participated in the scam. As Miles sees things, the whole cap-and-trade initiative in Europe could come to a bad end in the not-too-distant future.
In much the same way that the U.S. followed the French into Vietnam and the British into Palestine, the Obama administration now wants the U.S. to follow the Europeans into cap and trade, with no real thought as to the consequences.
Writing in the Energy Tribune, Michael Economides and Peter Glover do an excellent job of underscoring Miles’s comments. An excerpt…
It’s a shame that the members of the US Congress who voted for the recent cap and trade bill did not bother to check up on the economic realities which are causing European states to insert all kinds of escape clauses into the EU’s cap and trade plans. Germany’s Angela Merkel is insisting on major exemptions for German heavy industry come December’s global climate summit in Copenhagen. Merkel’s government is also supporting the building of 26 new coal-fired power plants across Germany. Italy has rocked the EU climate boat by insisting on exemptions for its own energy-intensive industries. Most significantly, it is an exemption that requires the EU to renegotiate Europe’s entire climate policy after the UN summit in December – effectively, giving Italy a veto. A veto it will use if, as expected, China and India and others exempt themselves from binding targets. In June, deputy head of Poland’s Solidarity trade union, Jaroslaw Grzesik, estimated that the EU’s climate policy would cost 800,000 European jobs. The think-tank Open Europe has estimated that the same policies will cost the UK $9 billion a year, leaving an extra 1 million in fuel poverty by 2020.
If I can take any comfort in all of this, it is that our dear president will not have the political juice to bring cap and trade into law. But that they even considered it in the first place should tell us something about the intellectual shortcomings of the current leadership. You can read the entire Energy Tribune article by clicking here.
Since we are on the topic of energy, a tip of the hat to Amir Adani of UEC for sending along the following last night. While some people dream of a world of low-cost, clean energy for all, those dreams remain just that for the foreseeable future. Facing reality, the Germans are building more coal-fired plants and the Chinese, as noted below, are going big into nuclear plants, which, despite their bad rep, have performed remarkably well over the decades since first coming on line.
Guangdong aims to lift nuclear capacity sixfold by 2020
Mon Aug 10, 2009 2:16pm IST
BEIJING, Aug 10 (Reuters) - China's southern Guangdong province plans a six fold increase in its nuclear power generating capacity to 24 Gigawatts (GW) by 2020, the official Xinhua News Agency quoted a local government official as saying.
Li Miaojuan, director of the Guangdong Development and Reform Commission, told a forum over the weekend that the development of nuclear power in the energy-intensive province would improve its power-consuming structures.
The target, around 2.6 times China's total nuclear generating capacity of 9.1 GW, is in line with the country's ambition to develop alternative energy resources, including solar, wind and nuclear, and reduce its dependence on coal and lower pollution. China is considering lifting its target for installed nuclear power generating capacity to 86 GW by 2020, double its previous goal of 40 GW.
The second phase of the Ling Ao nuclear station, the second nuclear plant in Guangdong, with a capacity of around 2.16 GW, was expected to start operation in 2010, the report added, citing He Yu, General Manager of Guangdong Nuclear Power Co (CGNPC).
CGNPC, one of China's two key nuclear developers, is also preparing for an initial public offering, Caijing magazine reported on its website (www.caijing.com.cn), citing He.
It did not provide details about the planned share sale. (Reporting by Beijing Newsroom; Editing by Chris Lewis) http://in.reuters.com/article/oilRpt/idINPEK23618320090810
(Ed. Note: The hard facts about the critically important energy sector and where the real money will be made in the months and years ahead are waiting for you at the rapidly approaching Casey Research Energy & Special Situations Summit, this Sept 18 – 20 in Denver.
While we still have a bit over a month to go before the show, our block of rooms at the Westin Tabor Center is close to selling out. Thus, if you are planning on joining us for this special event and want to stay in the headquarters hotel, please don’t put it off. More details on the summit are available here.)
And that is that for today’s edition. As I sign off, I see that the stock market is off pretty hard, though not nearly as hard as it should be, all things considered. Meanwhile, our favorite form of money, gold, is hanging in at $944, and oil continues to hold over $70 a barrel despite the announcement by GM -- or Government Motors, as many now prefer to call it -- that its Volt hybrid is likely to cruise along at 230 miles to the gallon, and in city driving no less. Per above, I’m skeptical.
Until tomorrow, thanks for reading and for subscribing to a Casey Research service.
David Galland
Managing Director
Casey Research