Investing

Among the week’s big headlines is Facebook’s initial public offering. They made a billion dollars last year. Karl Denninger, however, isn’t buying:

Amidst the continued chicken-little bleating about the U.S. Federal debt, I submit this:

Japan’s credit rating was cut for the first time in nine years by Standard & Poor’s as persistent deflation and political gridlock undermine efforts to reduce a 943 trillion yen ($11 trillion) debt burden.

The world’s most indebted nation is now ranked at AA-, the fourth-highest level, putting the country on a par with China, which likely passed Japan last year to become the second-largest economy. The government lacks a “coherent strategy” to address the nation’s debt, the rating company said in a statement.

The problem is more than the sheer sum of debt. It is also the absence of a plan to reduce that debt.

The Sunday night headlines tell me there is no agreement to raise the U.S. government’s debt ceiling. The left end of my radio is convinced that a failure to keep borrowing means defaulting on the debt. They’re wrong:

assuming we have $150 billion (I'm a pessimist) in revenue to spend [for the month of August].

First, there's what we must pay.  That's $29 billion in interest.  We have $121 billion left.  Everything else is, legally, a choice.

[emphasis in the original]

Denninger works through the choices, and somebody—or bodies—will not get what they are expecting. But fully funding the raft of Social Security and VA benefits, plus paying the troops and returning zero-interest loans to the IRS tax refunds leaves more than $12 billion.

Motor fuel prices—gasoline, to the ordinary folk—have risen to a headline-making level. Many people who mock those with doubts about the current President’s birth status are willing believers in some shadowy conspiracy by oil speculators. Scapegoating speculators is an indication of ignorance.

The short version is that speculation may be able to rise prices for a short time. But it cannot keep prices up. That’s because the method speculators use is futures contracts, which are paper agreements to deliver some physical commodity on a given date at a given price.

Speculators can’t take physical delivery. Even if they have the money, there’s nowhere to put the oil. Our storage tanks are full. Which is a product of past speculation; people bought oil and held it thinking the price would rise. It did, and that led to more oil being delivered than was consumed.

Gold is trading at record-high prices, above $1500 per ounce. Oil is trading around $110 per barrel ($2.60 gallon, to put it in terms similar to retail gasoline).

The politicians and pundits and current President have opinions and policy proposals regarding the price of oil. The touts and investment gurus are using the record gold price as reason to suggest buying gold. Buy high, sell higher!

Nobody outside the trading and investing universe seems to realize that the prices of gold and oil are relative. Not to each other, directly. But they’re both priced in terms of dollars, so the trading prices of those commodities are a reflection on the value of the dollar itself.

Oil and gold are fetching high prices due to not just the supply and demand of oil and gold, but also due to the supply and demand for U.S dollars.

It’s Tax Day. Both ends of my radio dial can talk about little else. But I didn’t hear them explain why it was moved back from April 15th. Tax Day was postponed because a District of Columbia holiday (Emancipation Day) fell on the Fifteenth this year.

It’s interesting to me that today is also Passover, but the Jews do not get any official holidays. Even after decades of multiculturalism and diversity worship. Anyhoo…

If I could make only one point about taxes, it would be this:

Every nickel a government spends is a tax.

The spending may be a nickel that was taxed away last year and deducted from the government treasury. Or it may be a nickel borrowed from the private economy which will need to be taxed away at some time in the future to settle the debt.

The headlines appear obsessed with panic about radiaton. That danger has largely passed. Although, there is no such thing as “safe”. There is always risk. And Big Media plays into ignorance and panic.

First, the good news.  The second plant, containing four reactors about a dozen or so kilometers from the one that has been the subject of all the reporting, has reached cold shutdown on all four reactors.  The destroyed pump motors (from the tsunami) were replaced and the plant is stable.  That part of the story, barring some sort of new issue, is over.  Note that a couple of days ago this plant was on the verge of a full-scale disaster.

Vox Day offers a different pathway toward a brief period of violent upheaval in the United States:

The American middle class is on the verge of collapse, at which point it will almost certainly revolt in some manner. It will likely be less spectacular than the burning buildings in Cairo, but there is no way that the confluence of collapsing bubbles in real estate and education are not going to have a significant effect on middle class behavior once it becomes sufficiently obvious to everyone how they have been played for suckers and financially raped by the banks with the full connivance of the state and federal governments. The middle class revolt is going to start with a refusal to continue paying its debts for mortgages, credit cards, and college degrees.

I was chatting with one of my investment pallys yesterday and he sounded skeptical of all the optimism we’re seeing in the economic headlines. It’s always nice to have one’s view echoed.

In particular, this fellow, who had a career as a broker, was wary that so much news seemed to be aimed at convincing the retail investor to get back into the markets. (Retail Investors are the common folk, the small fish, like most of us)

When the big players are nearly out of tricks to make their numbers keep rising, it is a standard tactic to start pumping and touting to draw new money into the game. The big players need somebody to sell to in order to realize the paper profits they’ve built.

Local TV news has a story of economic optimism:

What a difference a year makes. Last year at this time, a trip to Mall of America showed empty stores and struggling businesses. This year, they’re packed with people ready to spend, even after the holidays.

The 2010 holiday season was the best since 2006. Shoppers spent $584 billion in the 50 days leading up to Christmas – up 5.5 percent from 2009. And economists believe the trend will continue into the new year.

Doing what Big Media does so well, the reporter interviews a handful of shoppers and store managers who say they’re seeing more traffic and more spending at the malls. But as I am so often reminded, the plural of “anecdote” is not “data”.