Rebane's Ruminations

Gold plummets, but then why … ?

George Rebane

Has everyone been watching the goings on in gold and other precious metals lately?  Today the price of one ounce plummeted another 9.4%, making the price drop of that barbaric relic in the last few trading days to be the biggest in thirty years.  Astute observers tell us that Big Money (central banks, institutions, ...) even margined retail investors have been selling to deleverage and clear their books.  Cyprus is held up as a sovereign nation poster child in this mad rush to divest.

So you’d think that with everyone acting like the gold rush is over and economic normalcy is returning in the world, that you could waltz into your local gold dealer (hereabouts JH Mint) and walk out with a bag full of the yellow stuff on the cheap.  Not a chance, the shelves are bare and the prices quoted for uncertain future delivery are marked up by 14% or more.  In other words, the retail dealers have effectively not lowered their prices at all, just increased their margins.  JH Mint, along with other dealers across the land, were literally cleaned out last Friday when their establishements looked like the land office in 1893 Oklahoma.

Then why can’t I buy gold on the cheap today?  The simple reason is that Big Money is manipulating the price drop.  Ben and his ilk need to depress prices so that after a little time has passed (days, weeks?), all the big players can buy back in on the cheap.  In the meantime, none of the big guys want to let the physical stuff get into the retail buyers’ hands and boost the price prematurely.  Retail buyers are the people who look at the world and where they live, and ask (as 321gold.com reports) –

“Did gold fall off the cliff because the dollar index ripped higher? NO! Did Uncle Ben Bernanke say they were stopping the $85 billion + QE immediately? NO! Has physical gold become more abundant than any time in the recent past? NO! Are the world's central banks stopping their counterfeiting operations by devaluing their currency by stopping the printing presses? NO! It's quite the opposite,  Japan, U.S., and the EU are increasing the money supply.”

The big secret is that no one can allow interest rates to increase on sovereign debts across the globe.  That interest rates will have to increase in any case at some future time makes no nevermind to today’s big players, they already have their portfolios appropriately stuffed with what the little guy cannot buy on the cheap today.  And all of them are betting that they individually will be out of the public eye and ire before the crapola hits the fan when interest rates skyrocket after no one believes in the brand new funny money being used today to buy sovereign treasuries in the industrialized world.  And when interest rates do rise, then the dominoes will start crashing as every country’s debt service to GDP ratio sky rockets.  And gold will again be in short supply as its price goes to the moon.

In the interval, please fasten your seatbelts.

Productivity – A new perspective

George Rebane

[This piece continues the RR series on the US economy and the factors taking it into new regions - unknown unknowns - during these pre-Singularity years.  As usual, the frail and the young should be spared from these deliberations.]

Productivity of a nation’s workforce is an important metric in understanding its prospects for growth and its ability to compete globally.  The bottom line metric of workforce productivity has been to divide gross national product (GDP) by the number of workers involved in producing it.  But puzzling on it a bit reveals that there’s more to the story.  After all, we are talking about a nation’s ability to output product at some level of unit cost – note that I did not say ‘unit of labor cost’.

Since the GDP of a country includes government spending, and since a big part of what government spends is in transfer payments that don’t directly support production (see figure in endnote), shouldn’t that somehow enter the productivity calculation?  Also, workforce members not participating, due to a number of reasons, are still sustained by the economy (to a large part by transfer payments), should they not be factored in since they remain as a ballast or deadweight in their unemployed condition?

In short, if we were to compute a true productivity index for a nation in the units of productive GDP per each member of the workforce, whether employed or not, then we should compensate that index for these factors since they affect both growth and global competitiveness.  My effort to do that required searching for a lot of data that could be used commensurately.  The result is shown as the ‘Available Workforce Compensated Productivity Index’ (AWCPI) which uses the workforce as consisting of the total of employed and unemployed for any given year.  The GDP is compensated by subtracting out that year’s direct transfer payments, but leaving in any multiplier effect from such payments – i.e. a consumer spending his unemployment check on household expenses, entertainment, etc.

Ruminations – 12jun12 (updated 13jun12)

George Rebane

The situation in Europe is coming to a head, and Angela's got the whole world in her hand.  Now it’s definitely Spain’s and Italy’s turn in the barrel.  The remarkable news is that most likely there will be another €100B thrown at Spain’s banks intended to bail them out of bad sovereign debts that Spain’s government doesn’t have the money to repay.  But this money can serve no other purpose than to delay the inevitable; there is nothing Spain is doing to kick-start its economy and stop its descent.

From the prices of Spain’s government bonds today, the markets are saying that there is one chance in 23 that Spain will default within a year.  For Italy that likelihood is one out of 25 in the same period.  Tomorrow these odds will be less favorable.  What’s in your portfolio?  (Put in other numbers here.)

“It is not clear whether the expanded testing regimen boosted student learning.”  So opines a Reuters journalist reporting on the backlash to standardized testing that appears to be increasing across the country.  Parents of poorly scoring students are chanting that their “kids are not a test score”, and are demanding “more teaching and less testing.”   Apparently all these anti-testing factions – from teachers, unions, parents, … - are not concerned about assessing how their little darlins are doing in school as the test scores are heading south.  The journalist’s wonderment is probably shared by the multitudes who don’t know that learning and testing are necessarily independent efforts.  The clear conclusion is that the best way to address junior’s poor performance in reading and math, and all the subjects that require proficiency in reading and math, is to turn a blind eye to the matter by eliminating or dumbing down standardized tests.  (more here)

Many pundits are telling us that this or that faction will sit out the November election because their candidate is not exactly on the mark with certain facets of ideology or promises made.  Most of the discontents and vexed seem to be on the left side of the aisle.  I think they are flat wrong.

But no one who has been paying attention is going to sit out this election.  We are a nation too vehemently polarized to let others decide which of the two ‘evils’ facing us will prevail.  The only ones who won’t vote are the usual double dummies who don’t recognize the fork in the road and keep running into the road sign.  Unfortunately, too many of them are smug conservatives who tell you that it doesn’t really matter who wins, the whole thing is corrupt and rigged, they’re too busy working to pay taxes for those who don’t, …, or they just mumble ‘smurglemurf’ (for you of appropriate vintage, that’s how you pronounce the Lil’ Abner eternal jinx Joe Btsfplk’s name.)

[update]  Jo Ann forwarded a piece from Senator LaMalfa wherein he alerts us that the Democrats audacity to rape the taxpayer is going up another notch.  Gov Moonbeam has a bill in the state legislature that would penalize you 20% of any tax overpayment refund you would request that the Franchise Tax Board considers “excessive”.  Many of us overpay during the year so as not to incur and underpayment penalty when taxes are due.  Now the sumbich wants to dunn us for giving the state the use of our excess payment until refund time comes around.  I think these people know no shame.  Now they want you to pay them for restocking your wallet with your own money.  If you want to bitch and moan about this one – and you should – then here is some contact info.

Office of the Governor (voice mail): (916) 445–2841
Assembly Member Bob Blumenfield, Chair, Assembly Budget Committee (916) 319–2040
Senator Mark Leno, Chair, Senate Budget and Fiscal Review (916) 651–4003

[13jun12 update]  Now we hear that the total of unfunded pension liabilities across all jurisdictions in the country has exceeded $4,000,000,000,000 - yes, that four TRILLION dollars.  And no one has a clue on how to make good on those obligations.  The only solution still is to stiff the retired public service workers.  I hope everyone has pictures and videos of the celebrations that took place after the unions got the members of NASP (National Association of Scumbag Politicians) to authorize all those contracts.  That's about the most that they'll have to look at besides very tiny retirement checks in their mailboxes.

Mark Meckler of tea party fame reported today that people who track what the media - including the lamestream - cover, now tell us that it was only four days ago that NBC first reported on 'Fast and Furious', the months old gun walking fiasco that the Dept of Justice authorized along the Mexican border.  This aspect of liberal journalism at work goes a long way to explain why progressives have little clue on what's happening in the world, and respond in outrage to presentations of blatant and well-aged facts.  On RR we do what we can.

The Off and On of the Inevitable (Addended)

George Rebane

The Greeks are rioting in the streets again.  They don’t like the new tranche of austerity measures that their parliament was forced to levy on the country.  This was in response to the northern eurozone countries imposing more conditions before giving Greece its next bailout check of approximately $170B in March.  The north, led by Germany, is keeping a wary eye on Greece to see if these austerity measures will be made to stick.

Greece’s big unfunded liability is of the same stripe as ours – entitlements that range from public employee pensions to healthcare.  We recall that in Greece one out of four workers is unproductively employed by the government.  And up until now, the parliament doesn’t even want to put public sector pension cuts on the table.

The markets in Europe and America are acting insanely as they digest the daily dribble of news from Brussels and Athens.  ‘Are the Greeks going to make it?  Well maybe, and then again, today it doesn’t look like it.’  My long held view that Greece will tank is getting more certain by the day.  There is no hint that with the March check, the Greeks will be any closer to financial stability than they are today.  They’ll use that cash to service their national debt, make government payroll and pension payments,  and buy time in dickering with their bond holders to take a 50% haircut.  But none of this will put the country on to a path of fiscal recovery.  After the March check, they’ll start rioting for the August or September check.

As a political and finance junkie, I keep asking myself as to who benefits from this silly dance with the foregone ending.  The only answer I have been able to cobble together is the ruling elites and the rich guys.  They are buying time to get their finances rearranged, relocated, and redoubted (hidden in places their governments can’t get it, see nearby chart).  So when it finally hits the fan, and spreads from Greece around the European shore of the Mediterranean to the northern countries, the remaining visible wealth of the smart people will be small enough to surrender without really affecting the quality of their lives.  The delay also gives the clever people time enough to get out of Dodge, whether that be a political office or country of residence.

Countries like Switzerland have been the monetary redoubt for the smart and wealthy for generations.  But now that security is being breached by developed nations led by the US.  The Swiss are now the prime target of big countries who want to know who of their citizens have how much squirreled away where.  While the Swiss and others are putting up a fuss to the likes of America, they have no intention in getting out of the numbered bank account business for the rich of the less developed and muscular countries.  From these countries it is still easy to pull profits from your nation’s natural resource sales, or even foreign aid from idiots in America, and get it into your secret accounts on some ‘El Dorado shore’.

Employment 2022 (Addended)

George Rebane

Here's a quick back of the envelope look at the employment situation over the next decade when we take into account accelerating technology that increases worker productivity.  GDP growth is taken at the indicated 2.5%/year.  This post is really as a 'memo to file' since people have asked me how I come up with the 70 million un/underemployed in the next decade with unemployment at 35%.  Even with GDP growth at 5%/year, the 2022 unemployment does not come down below 17%.  The blue numbers are inputs.  I have posted the actual Excel spreadsheet here so that readers may play with it and insert their own numbers - Download Employment2022.

 

Pay Gaps and System D

George Rebane

Frankly, it’s a bit eerie how the events long predicted on RR are ticking off as recently having happened, or about to happen.  Here I want to focus on the infamous pay gap of the American worker, and an economic activity that is hard to track, but globally significant.

Income comes in two forms – wages and profits/interest.  As has long been argued here, the pre-Singularity years are illuminated by worker productivity abetted by screaming technology advances.  Using new gizmos and software, today a worker can make more and/or service more per unit time than yesterday, and even more tomorrow.  Given that the size of the markets requiring new stuff and services is not growing as fast as productivity, the result should be predictable for people who think.

A New Corporate Vision – The Constitutional Partnership Corporation

[In the 'Hiroshima+66, Detroit+Welfare' comment stream RR reader Michael Rogers introduced us to the John Lewis Partnership, a unique type of worker owned/controlled corporation that has a ‘constitution’ as its organizing and operating policy document – let’s call it a Constitutional Partnership Corporation (CPC).  MichaelR launched a comment thread that expanded its examination.  RR readers are familiar with my concern about the growth of US un(der)employment which I project to be over 70 million by the end of this decade.  This will call for massive wealth redistribution which I have discussed extensively in these pages and in my Union column (here).  I introduced the Non-Profit Service Corporation (NPSC) as a stake in the ground for starting a discussion about how to accomplish such wealth redistribution.  I have elevated MichaelR’s thoughtful and extended comment into a post of its own to invite development (integration?) of his expanded CPC and the NPSC ideas.  For continuity, please see the 'Hiroshima' comment thread. gjr]

Michael Rogers

Since when has complex design ever stopped us? We flew to the moon, built the Panama Canal, the Transcontinental Railroad, and the modern economy that has brought security to billions worldwide for gosh sakes.

I am not happy with (the John Lewis Partnership) constitution either -- not a tight feedback system as I see it. I also am not sure I see robust checks and balances or separation of powers in their design. However, they do seem to have created a stable management system that has a good deal of accountability built in, and appears to have legitimacy in the eyes of at least the long-term partners.

I think that a system like this applied to Detroit would necessitate the elimination of unions and the imposition of personal responsibility on the individual worker level so that working partners would need to focus on the efficiency of their unit in particular, and the coordination of the entire company in general, in order to get their wage or benefit desires fulfilled. Also, the more self-managing a unit was, the fewer managers are needed and thus more resources are available for higher wages/benefits or shorter work weeks.

There might also be the possibility of passing legislation where Industrial Democratic Incorporations are giving special tax-exempt (or at least tax reduced) status and long-desired deregulation could be achieved with bi-partisan support based on the premise that an Industrial Democratic Corporation would have a self-regulating, tight feedback design and does not need the regulatory oversight that an open loop control, traditional corporate management system does.

This could be extended to a drastic reduction in OSHA and Labor Law interference which were all predicated on an adversarial worker/management dynamic. When workers have the right to redress their grievances within an internal structure then the need of a nanny state to meddle is reduced if not eliminated.

It might also be possible to achieve a privatization of Social Security as the accountable and elected corporate officials in the pension division of the company would act as professional managers of the retirement portfolio of the partners thus reducing the likelihood of waste, graft, or stupidity diminishing the value of the portfolio -- and the portfolio manager who achieved a 55 year retirement age would be carried around the company on gilded litters as if he were a conquering Roman general.

The financing to build these companies could come from tax free government bonds which would create a tax advantages investment vehicle for the "1%" so that, rather than worrying about taxing the rich, the left could be focused on convincing them to invest.

You spoke of the ephemeral nature of our monetary system and the disconnect from anything of tangible value. I have even imagined the possibility of the growth of a stock standard, where the bonds of self-regulating companies become a currency of value. Where the stock of smart, well-run companies with solid markets, low levels of debt, and abundant tangible assets are traded at a premium and the bonds of poorly run companies with speculative markets and highly leveraged are discounted to their true market value -- these bonds would become the currency of trade and the ability of government to reduce or manipulate their value is eliminated.

Investors Playing the Odds

George Rebane

At the risk of boring the bejeezus out of RR’s readership, here’s a bit of quantitative follow-up for all you investors playing the odds on the approaching collapse of socialist Europe.  Well, maybe that’s putting it on a little too strong, but looking at the way sovereign debt is being priced by the bond markets today, you gotta do more than wonder.

My last yawner on this (it got all of 4 reader comments) was ‘Greece and the 100% haircut’ where I showed how to calculate the probability that a borrower (here Greece) would default within a future interval of time, say, in the next year or two years.  The probability would be assessed by the world bond markets.  I gave the formula for computing that probability on your calculator using your own input values.

The piece also had another formula for computing what minimum interest you should demand from a borrower if you thought he’d go belly up with a certain probability within a given time.  Fun stuff if you are an investor playing that great American favorite ‘You Bet Your Ass'.

Anyway, for those who don’t want to mess with their calculator, and still want to keep track of the real shenanigans in Europe (the rest is just BS), I made a plot of default probability as a function of time and the rate difference.  The numerate reader will notice that the probability of default (Q) depends on the interest rate spread (r_B – r_RF) between the current bond rate and the so-called available ‘risk free’ rate – for the faithful, that’s what a 10-year US Treasury pays.  The formula for Q is shown in the figure below, and when you use it remember to convert percents into decimals.


Suppose you hear in the news one morning that some teetering country’s bonds are going for 23% per annum, and US Treasuries are paying 3% - that gives you r_B – r_RF = 23%  - 3% = 20%.  And you want to find out what is the probability that said country will default before two years from now (T = 2).  Then enter the horizontal T-axis at two, go straight up to the 20% curve, and then left to the vertical Q axis to read off about 33%.  The market is saying that there’s a one out of three chance that you’re going to get a haircut if you buy and plan to hold those bonds for two years - that's the real news.  Now is 23% enough of a return for you to take that risk?  If your numbers fall between the values given in the figure, you'll have to remember how to interpolate.  See, you’re having fun already.

Greece and the 100% haircut (updated 5oct2011)

George Rebane

We hear that Greece’s financial situation is so dicey that they now have to pay over 270% yearly interest on their bonds.  The ten-year US Treasury today closed at 4.88% per annum.  Everyone who reads RR knows that Greece is teetering on the edge of default and pulling out of the eurozone.  Being prone to financial engineering, this set me thinking about the chance (probability) that Greece will go belly up during a certain future time interval, say, in the next 12 months.  The interest yields on the two bonds should contain enough information to tease out this number given that the US Treasury is still considered a safe haven or risk-free investment.

So I pulled out my trusty pencil with the big eraser strapped to one end, and set myself down to push a few squigglies.  The question I sought to answer is ‘Given the market interest rate for a risky and a risk-free bond, what probability of default in a specified future interval does the market implicitly assess to a risky borrower?’  Well, it turns out that there is a very definite answer to that question, and the market’s probability of default is given by –

Where Q is the default probability, i_R and i_RF are risky and risk-free annual interest rates, and T is the interval from the present to some future time expressed in years.

Plugging in the above interest rate numbers and looking out one year, we get 0.93 or 93% as today’s market assessment of Greece defaulting some time during the next twelve months.  One can, of course, work the formula backward and answer the question ‘If I believe the probability is X% that Greece will default during the next year, what interest rate should I demand on their bonds?’  The answer to that is computed from –

Where the mathematically astute will recognize 1-Q as the probability that the risky borrower will NOT default.  ln is the natural logarithm (to the base e = 2.7182… ).

You can now put those formulas into a spreadsheet and have all kinds of fun figuring out how solid a certain corporation is, given the interest they have to pay on their bonds.  And you can plot Q, their probability of default, against T, which you would expect to increase over longer periods into the future.  Using the above numbers, I’ve done that for Greece.

Again, technically inclined investors will recognize that these formulas can now be used in allocating assets and designing a portfolio.  If there is qualified interest in their derivation, I’ll write up my scribbles into a readable pdf and attach it as a download to this post.  Enjoy.

[5oct2011 update]  A reader emailed me that the risk-free rate really closed at 2.04% instead of the 4.88% I used above.  My eyes must have been crossed when I looked at that rate to get the example for this post.  Nevertheless, I reran the calcs with the 2.04%, and as expected, the results were essentially the same as they were higher only in the third decimal place.  This is because the two interest rates enter the formula as a difference, which in this case did not change very much at all.  H/T to the attentive reader.

‘Investors sell …’ – What a crock!

George Rebane

Time to vent.  One of today’s financial reporters again comes out with – “U.S. stocks sank in afternoon trading as investors worried about policymakers' ability to contain Europe's debt crisis.” (28sep11 WSJ)  You read this kind of pabulum constantly in the financial press.  ‘Investors believe X, therefore they sell’, ‘Investors look forward to Y, therefore they buy.’

As a long time investor in the stock and bond markets, I and my friends of similar persuasion always smile at the naifs who write such drivel.  If the investors are selling or buying, who the hell are they selling to or buying from? The local public storage facility, United Van Lines, inmates of the nearby mental hospital, who?

No one has informed these ‘journalists’ that when investors sell, guess what?, other investors buy.  And it would probably surprise those same keen observers of the markets that it also works the other way around.

Such pieces point out the uselessness of 95% of financial reporting.  They spout the obvious (i.e. tautologies), or make up stuff when no one knows what’s happening.  When the market goes down and I buy, what am I then?  A potted plant?