Market Update — Sep. 13th

Ten Things I Read / Thought on Wednesday

1. On Tuesday, Moody’s said that they would downgrade the U.S. if we didn’t come up with a large-scale deficit reduction plan.  Of course, politicians are great at coming up with plans, as long as the pain will be experienced after they’re out of office.

2. Congress is getting ready to pass a $550 billion bill to allow the government to continue operating through March.  It’s possible that this could reduce the pressure to fix the “fiscal cliff” problem.  Of course, there’s much argument as to whether we should fix the fiscal cliff or if we should just start to take our medicine.

3. From Phil Gramm and John Taylor.  Since September 2008, the Fed has acquired $1.16 trillion of government securities—in fiscal year 2011 (Oct. 1, 2010-Sept. 30, 2011), the central bank bought 77% of all the additional debt issued by the Treasury. Aside from the monetary impact of these debt purchases, the Fed allowed the federal government to borrow a trillion dollars without raising the external debt of the Treasury and without having to pay net interest on that portion of the debt, since the central bank rebated the interest payments to the Treasury.

When the Fed must, in Chairman Ben Bernanke’s words, begin “removing liquidity,” by selling bonds, the external debt of the federal government will rise and the Treasury will then have to pay interest on that debt to the public. Selling a trillion dollars of Treasury bonds on the market—at the same time the government is running trillion-dollar annual deficits—will drive up interest rates, crowd out private-sector borrowers and impede the recovery. Debt-service costs to the Treasury will spiral as every 1% increase in federal borrowing costs add $100 billion to the annual budget deficit.

4. The median U.S. household income—the statistical middle—was to $50,054 in 2011, down 1.5% from 2010, adjusted for inflation, according to the Census bureau’s annual snapshot of U.S. income and living standards.  Last year marked the fourth consecutive decline in median income, and on an inflation-adjusted basis, remains well below the 1999 peak of $54,932.

5. The official U.S. poverty rate—the threshold for which is defined as $23,021 for a family of four—was 15.0% in 2011, down from 15.1% in 2010. That compares with 12.5% in 2007 before the recession started in full force.  (There’s much debate about what we include and don’t include in calculating benefits included in calculating the “income” – because certain government benefits are excluded.)

6. Kemal Dervis (former Economic Minister of Turkey) wrote an interesting piece arguing that France is as important as Germany to the EU.  In effect, France is a bigger player in the world political arena and they serve as a bridge between northern and southern Europe (sharing some characteristics of both).  He also had some interesting statistics: Germany accounts for 28% of EU GDP and 25% of the EU population.  They have a larger account surplus than China.  France accounts for 22% of the EU GDP with 20% of the population.

7. According to Harvard Professor Kenneth Rogoff, the Glass-Steagall Act of 1933 was 37 pages long and helped us to produce financial stability for almost seven decades.  The Dodd-Frank Wall Street Reform and Consumer Protection Act is 848 pages and requires regulatory agencies to produce several hundred additional documents giving even more detailed rules.  Professor Rogoff says that when all of this is combined, the legislation appears to be on track to run 30,000 pages.  Professor Rogoff suggests that we should have simple requirements limiting the amount of debt (requiring more equity financing) and less regulation.  He doesn’t like contingent convertible debt (which I favor).  He says that it “is no more credible than the idea of committing to punish banks severely in the event of a crisis.”  In reality though, it gets banks to the exact same place (more equity) as his idea if they have poor results.

8. You don’t like being poor?  Australian mining tycoon Gina Rinehart, offered some helpful advice to the poor.  She said, “If you’re jealous of those with more money, don’t just sit there and complain.  Do something to make more money yourself — spend less time drinking or smoking and socialising, and more time working.”  Of course, one other alternative would be to inherit a mining company like she did.  In addition, my advice to her is that if she wants to keep her money, she shouldn’t continue litigating with her children.  (Yes, she and her children are in litigation.) She’s a real role model for all of us.

9. I’ve had a lot of careers, but I’ve finally decided what I want to be when I grow up.  I want to be a whistleblower.  Bradley Birkenfeld was the whistleblower who provided information about UBS helping Americans hide billions of dollars in Swiss accounts.  Birkenfeld received $104 million.  That number is not a typo.  And, you’ll really love this…Birkenfeld just finished thirty months in the federal penitentiary for withholding other information.  According to Reuters, he also once confessed to smuggling diamonds in a toothpaste tube.  I always like seeing someone like this have a big payday.  (Before any of you crazies start emailing me about the fine that was recovered from UBS, my simple question is wouldn’t he have snitched for $20 million?)

10. Is it a coincidence that the first three letters of Time Warner Cable are also the first three letters of The Worst Company?

Have a great week.

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