A Negative on Negative?

I bet you don’t know what Convexcatious Economics are, do you?

Done feel bad, Tonto:  I just made it up.  Has do with with an odd state of simultaneous convexity and concavity of formerly partial-workable mathematical hieroglyphics (mined from thin air) used by quants.  Some of which should be starting to seize-up now.

And therein lies this morning’s grief counseling session as the Dow futures point down 135.  (Don’t call it the LONG GRINDER DOWN yet, but we are moving that way a bit.)

One of the big discussion points on the net today is the little matter of Janet’s talk tomorrow with the House banking folks, which will be followed with her talk with the Senate banking types on Thursday.  Re-runs are a pernicious effect of capitalism.

Tomorrow’s Peoplenomics report will be especially interesting.  Not only should we have a look at the pre-game speech around 8:30 tomorrow, 7:30 Central, but if conditions warrant, we may go through and do some analysis. 

Like the days when the Housing data from Case/S&P and whoever hits, it’s possible we will have a two-parter for subscribers.  Though I avoid actual work like the plague.

But that’s not the biggie. 

The biggie is this problem Elaine and I have been struggling with – and I know we are not alone on this – a subscriber asked for a discussion and simple model.

I won’t get into too much detail here but the problem is simply stated this way: 

If you believed that we were going into the summer of 1929 – and remember the market hit its high in September of that year – would you sell everything and go to cash stored in government bonds, and wait out the two to four years for a good bottom to be in, and then move into that dream home which would be for sale at about 17-cents on today’s dollars?

Our problem, out here on the ranch in East Texas, is “Where would we go?” 

We were cruising through a bunch of homes on www.Trulia.com  yesterday asking the same  question as before:  If the world is going to get really, really ugly, do we want to be on 30 paid-off acres with low taxes (road issues aside), or do we want to be in an urban area where there will be gobs of people, some of whom many not be inclined to “play nicely with others” if you follow.

Anyway, it’s a hell of a topic…and we’ll get into the models and thinking on that tomorrow on the www.peoplenomics.com side of things.  Subscription details above and we have an extremely high satisfaction rate because people can ask common sense questions (like this one) and we kick things around and sometimes come up with cool ideas. 

I mean besides being in cash or short with out Aggregate Index models and such since December or early January, depending on how you use the model.

Which circles us back to the problem this morning:  I mean other than going back to bed and just waiting for the Fed boss to chat up Congress tomorrow.

It will be the end of the week before the titans of Asia are back on their usual schedule because of the fire-monkey Lunar New Years (I know, you’re thinking “Aren’t fire-monkeys something that come flying out of the butt after extreme spicy food? “ No…this is a Chinese calendar deal…).  But volatility is in the bag for the rest of the week, seems to me.

The futures are looking to open down a bit. (-135 is now a bit.)  About the only real news items driving today seem to be that the National Federation of Independent Business report is out:

After Modest Gain Last Month, Small Business Optimism Takes a Stumble

NFIB Survey shows small business owners wary of future economic conditions.

A couple of highlights from the report, if I may?

About a quarter of the survey respondents (which are small businesses) were planning to make capital expenditures.  But on the flip side, the percentage that actually expect the economy to improve was down 21%. 

But there were 29% more with job openings.  Offsetting this, though the earning trend was down 18%. 

You see how this goes, right?  Here is something bad, but over here is something good, but wait!  Here is something good  but there is something bad.  Goes back and forth and that’s when sometimes a headline as a thought summary actually does work, unless you happen to be an NFIB member and can compare your company with others…  In the meantime though, details are over here if you need them for a school report or for something to “wow” the peeps in the conference room when you talk about “Gee, how are we going to increase sales when the economy sucks wind?”

See where we are??  Yes, we have finally arrived at the first legit point of this morning’s ramble: Does the Fed really have the legal power to take rates negative?

There’s a marvelous Bloomberg piece over here which is wondering much the same thing.  What they have some to is “Fed May Lack Legal Authority for Negative Rates: 2010 Memo.”

Sorting through the Fed mess right now is almost hopelessly complex unless you know what the hell an IOER is (the Bloomberg story didn’t cover this in detail):  It’s the rate the Fed pays as Interest On Excess Reserves.

What will the Fed do?  I mean come on!  they have had almost six years to study the 11-page memo over here…and someone besides me may be wondering “How do you raise rates on the one hand – the touted Fed hike – while going to negative rates out the back door without everyone seeing what the Fed is doing as a HUGE PONZI  deal?”

Granted, you won’t have six years to figure it out, but the 11 pager is over here.  About the time you grok to what’s hap’nin, the Fed will have danced past the Fools on the Hill with Janet leading and you’ll be late to the party once again.

That’s OK; we’re going to help.

The guts of the 2010 Fed memo is on Page 7 which says (in part, but this is what matters):

“Legal and Practical Obstacles for Setting the IOER Rate Below Zero There are several potentially substantial legal and practical constraints to implementing a negative IOER rate regime, some of which would be binding at any IOER rate below zero, even a rate just slightly below zero.  Most notably, it is not at all clear that the Federal Reserve Act permits negative IOER rates, and more staff analysis would be needed to establish the Federal Reserve’s authority in this area.  In addition, the Federal Reserve computer systems used to calculate and manage interest on reserves do not currently allow for the possibility of a negative IOER rate, although these systems could be modified over time if needed.18  Moreover, if negative IOER rates were to pull Treasury bill yields into negative territory, the Treasury would encounter difficulties because it cannot accept negative rates at its auctions, although presumably it could modify its systems as well.  Finally, as discussed further below, at sufficiently negative IOER rates, DIs might opt to shift a significant quantity of their reserve balances into currency. Present Federal Reserve inventories of currency, at about $200 billion, would not be adequate to cover large-scale conversion of the nearly $1 trillion in reserve balances to banknotes.19  While the operational and legal impediments to a negative IOER rate are likely to be significant, for the remainder of this discussion we will assume that they can be overcome. “

Well, yes, that kinda sucks since that has EVERYTHING to do with what forward-thinking conservative though miniscule players like Ures truly are thinking about these days.

I mean, forget how the Chinese are going to feel with the oodles of paper Tim and company laid on them before Ben and before Janet.  “So sorry…only get part of interest back due to negative rates…”  Yeah, the Chinese and a bunch of M.E. players aren’t going to be too happy with that, are they?

This of it this way:  If the financial system is going to implode, then where would be the right place to put money to preserve it while its purchasing power goes skyward because everyone else in the country is going broke and no one has any purchasing power left?  People will be in something like a negative disposable income position when the next crisis shows up.

The problem is that (and I could be wrong here, so do your own due diligence) the Treasury doesn’t seem to have a negative rate tool.  But that may be the way we driving the Kenworth loaded with Federal Paper in one door  – at the time a dollar has 4.3 cents worth of 1913 purchasing power, and then drive them back out again when the purchasing power is up to 2-bits or so (25 cents) when the crisis has run its course!

We’ll, you can see how slick this is – because gold will hold its value, but it will be depending on a prevailing rate of inflation which is why we are not really expecting gold to head much past about $1,250 but we’d like to be wrong for the sake of that lone gold coin we’ve been hanging onto.

Even this is uncertain as gold used to be related to how much paper was flying around but now it’s limited because there is this drop in disposable income thanks to healthcare and…oh we’ve been over that list.

In the end, we will cover this problem (and what about selling the crumby house now when the purchasing power of Fed paper is low and waiting a while in a rental joint and then rolling back out the $200K from the home sale which would then have the purchasing power of a couple of times that, so you can get that place down at the shore or up on Puget Sound…depending on how much radioactivity you like in your seafood, of course.

But even gold may not be dead.  The reason is that the Fed has been printing up money like crazy (which would drive down rates) but at the same time they are putting on a sideshow on the midway talking about raising rates.  This is when Janet the Barker does things like the December Hike.

The bond market, having more money than brains, has still managed to figure out there is a huge lack of confidence and there’s this train wreck with the federal debt coming so how about we look at the dropping the 10-year rate?

The 10-year was down 6% in price with an implied 1.74% yesterday. 

I have to tell you, the guy you don’t want to be is subscriber Don…because he’s a real-deal fixed income guru.  We pass notes in class now and then. 

Frankly, I don’t know how he can go to work on morning’s like this.  In market conditions like this, it’s like trying to fly an airplane on instruments…and while you’re in the clouds trying to manage that, along comes some SOB and flips the instrument panel upside down and challenges you with “Try flying it now, suckah…”

Next, when the way to fly with backward instruments is worked out, then they are instantly turned at 90-degrees and off we go again.  Making money is a matter of what in flying is called “getting coordinated.”  See this, do that.  But when the inputs get drifty – so you can’t trust your instruments – the word crash wanders by as you grope for ideas…

That’s sort of what the Fed is doing.  The instruments are all wonky at the moment.  And that’s why before I try to make sense of the economy, I pour a glass of Uncle George’s Highland Cure and turn on the mood-setting music (Jimmy Durante’s Did you Ever have the Feeling?”) and now we’re ready for anything.

And I haven’t been disappointed yet.

Tomorrow – to go back to the circus analogy – we see Janet the Rate Barker leave the midway.  She goes into the center ring and does a tightrope act.  Which ought to be a lot of fun to watch…or not.

Be on the lookout for other central bankster around the medic unit parked just outside the tent.

Our Bottom Line:

You may know the Fed has what it calls the Beige Book, right?

And you know they have a Blue Book, too?  And they have a Green Book, to go with that.

And yea, verily, Citizen, they used to have something called the Redbook, too.  But that series was discontinued.

Here is my new Crackpot in the Woods Theory du Jour:

If the people who run a nation’s money have coloring books, the country may have monetary problems ahead.

This is just a guess, mind you.

Taking It In the Shorts

Short takes to take since these will likely not impact Ure life of yours.

Decision day in New Hampshire, but if you’re not in NH…who cares?  The conventions are a jam, anyway.

Trains Collide in Bad Aibling, Germany, Killing Nine and Injuring Scores, but if you weren’t in Germany…

And in the next round of “Let’s Make Up Money” Obama is to release $4 trillion-plus budget for 2017.  Horrible fact:  That pencils out to almost $27-thousand worth of budget for every single American worker….and many don’t even make that much.  Repeat after me:  Excessive debt loads lead to revolutions.  Who are these people who keep importing expenses?

But the worst news of all may come from the report that Indian scientists study chunk that fell from sky, killed man.

Maybe the sky really is starting to fall, after all…

Maybe Janet can talk the sky back up tomorrow, but seems to me, the smart money would be on the sky pretty quick, here…