Tuesday, February 28, 2012

Charlie Bean Strikes Again - The Impact of Rock-Bottom Interest Rates

England's famous Mr. Bean (not THAT Mr. Bean although sometimes one wonders), Deputy Governor of the Bank of England, has once again, opened his oral orifice and waxed philosophical about the state of the economy. Recently, he gave a speech to the Scottish Council for Development and Industry in which he pontificated about the Bank of England's program of quantitative easing and how what an unmitigated success it has been, in fact, it has been so successful that the Bank has had to implement the third attempt at prodding the United Kingdom economy back to life.

In its most recent meeting, the Bank of England voted to make a further £50 billion purchase of gilts, the sovereign bonds issued by the British government.  Once this purchase is complete, the Bank will own £325 billion worth of gilts, roughly a third of the entire stock of UK government debt of £1033 billion or one fifth of the annual economic output of the United Kingdom.  Basically, the Bank of England is now the major shareholder in the debt owed by the British government; for your information, all overseas gilt holders only held 30.7 percent of all gilts at the end of the third quarter of 2011, less than what is owned by the Bank of England.

After all of this fun and games, this is what has happened to the balance sheet of the Bank since 2007:

Prior to the Great Implosion, the Bank's assets totalled £85.213 billion at the beginning of 2007; this has risen to £313.518 billion in February 2012, an increase of 247 percent over five years.

The Bank of England began its program of QE back in March of 2009 by purchasing £200 billion worth of gilts from pension funds and insurance companies; at that time, the bank rate was as low as it could go as shown on this graph:

On top of that, the country's GDP was shrinking at a record rate as shown here:

Basically, the Bank of England was out of ammunition and was seeking any means that would push consumers back to their spending ways, banks back to loaning to consumers and businesses and corporations back to expanding employment and making capital investments.

By purchasing gilts, the Bank increases the demand for these bonds resulting in a rise in prices and a drop in yield since the two factors work in opposition.  By pushing yields down, the Bank suggests that other investors will sell their stock of gilts because they are paying nothing and purchase corporate bonds and equities as replacements.  This is supposed to boost the value of people's wealth and will result in more spending.

But, did it work?

Charlie goes on to say the following:

"Our analysis of the first phase of quantitative easing suggests bond yields were around one percentage point lower than they would otherwise have been. And UK equity prices rose 50% during the programme, though only a small part of that is likely to be down to quantitative easing. That made it cheaper for companies to access finance through the capital markets and issuance was indeed strong during 2009. But the ultimate aim was to sustain demand. Though we cannot be sure what would have happened in the absence of our asset purchases, our internal work suggests that the first phase of quantitative easing boosted the level of activity by around 11⁄2-2%." (my bold)

Notice Mr. Bean's use of qualifiers including "suggests", "around" and "though we cannot be sure"?  Hardly a ringing endorsement of quantitative easing, is it?  Basically, the increases in the price of equities was likely due to outside factors; the oversold condition of the market as the economy tanked among other factors.  As well, a one percentage point drop in bond yields may also be a statistical blip; there are many market factors outside of central bank policy that impact bond yields, just ask Greece, Portugal, Spain and Italy!

Mr. Bean continues to explain that, although the first round of QE was not exactly a resounding success, the Bank of England has now decided to implement two additional bond purchases, largely because recent economic growth was modest at best as shown here:

Isn't it interesting to see that, even if the effects of the first round of QE were basically unquantifiable, the Bank of England still persists with its experiment?  Certainly, economic growth rose in the first half of 2010 but fell sharply to very low levels by late 2010, indicating that any impact of QE on the United Kingdom economy was very short-lived.

Enough of that.  Let's move on to how all of this impacts U.K. pensioners, a topic that Mr. Bean seems particularly fond of as shown in this speech from September of 2010.

As the Bank's asset purchases pushed interest rates down, the yield on annuities has dropped by about one percentage point.  A pension pot of £100,000 would have yielded about £7000 annually three years ago; this has dropped to about £6000, a decline of 14.3 percent.  Mr. Bean notes that "...that is a rather substantial income loss.".  But the "glass is half full" central banker goes on to note that the pension funds will most likely have invested in a mixture of bonds and equities; the rise in the value of these bonds and equities as a result of QE will have raised the value of the annuity, providing an offset for the loss in income due to lower interest rates.  Magic, right?  That is, as long as the managers of those annuities pick the right equities and bonds and buy and sell them at the right time.  He neglects to add that the risk involved in equity investment in a desperate attempt to increase yield is also far higher and that capital losses are not uncommon. 

What's not so wonderful is the impact of near zero interest rates on senior savers who have invested their life savings in savings accounts or other bank-issued deposits.  Savers like these are now seeing negative real returns (after inflation) on their investments.  Here's what Mr. Bean has to say about that:

"More generally, the current extended period of rock-bottom interest rates has impacted heavily on those holding most of their savings in deposit or short-term savings accounts, who have seen negative real returns. Savers have every right to feel aggrieved at losing out; after all, they did nothing to cause the financial crisis. But neither did most of those in work, who have also seen a substantial squeeze in their real incomes. And unemployment, particularly among the young, has risen as output has fallen. This is all a reflection of the hit to output from the financial crisis. Output is still some 4% below its previous peak and more than 10% below where it would have been if the economy had simply continued growing at its pre-crisis historical trend. There have been few winners over the past few years." (my bold)

Apparently, misery really does love company!  And, apparently, the Bank of England's policy has led to neither a return to reasonable economic growth and employment prospects for young adults.  Way to succeed!  Yes indeed, there have been few winners, despite the Bank's acquisition of £325 billion in bonds.

A study by the American Institute for Economic Research actually shows that this decreased investment income has a rather profound impact on economic growth.  As I posted here, in the United States, every one percentage point decrease in yields results in a $75 billion drop in consumption or 0.51 percent of GDP.  It also results in a loss of 715,000 jobs.  While the U.K. economy is smaller than the United States, the drop in interest rates on investments would likely have a proportional impact on economic growth, a factor that Mr. Bean seems to completely ignore.

Mr. Bean has proven himself to be rather unconcerned about the plight of retirees in the United Kingdom.  His comment that everyone, including the employed who have not seen raises and the young that are experiencing record high levels of unemployment, is suffering through this "soft patch".  That is, everyone excluding those at the top of the heap at the Bank of England as shown here:

Just in case you wondered if Mr. Bean's pension would make it difficult for him to make ends meet once he retires, here is a look at his pension entitlements:

Something tells me that he won't be struggling to make ends meet.

I find Mr. Bean's entire analysis wanting.  He provides little evidence that the third round of QE is going to improve upon the very modest impact that rounds one and two had on the economy, in fact, he admitted that "...there were few winners in the past few years".  As well, his rather dismissive attitude toward the plight of senior savers and retirees is appalling, however, I guess when your personal compensation package is in the top one percent of the wages earned by your fellow citizens and you have a hefty and secure pension, you can afford to be more than a bit smug about the impact of your decisions on your fellow countrymen and women.

Monday, February 27, 2012

WikiLeaks and Stratfor - The 2008 Federal Election and What Might Have Been

I rarely post twice on the same day but, with today's WikiLeaks/Stratfor email release, it is just too tempting.  I found these two emails, the first entitled "Insight - McCain #5" dated November 5, 2008 and the second entitled "Insight - The Dems and Dirty Tricks" dated November 7, 2008 of particular interest.  Both emails were flagged as **Internal Use Only - Do Not Forward**.  You'll see why.

The author of both emails, burton@stratfor.com, could well be Fred Burton, Stratfor's Vice President for Intelligence, a former special agent with the U.S. Diplomatic Security Service among other things. 

Let's start with the second email to put the first one into context.  The second email opens by stating that:

"1.) The black Dems were caught stuffing the ballot boxes in Philly and Ohio as reported the night of hte election and Sen. McCain chose not to fight.  The matter is not dead inside the party.  It now becomes a matter of sequence now as to how and when to "out".

2.) It appears that the Dems "made a donation" to Rev. Jesse...to keep his yap shut after his diatribe about the Jews and Israel.  A little bird told me that it was a "nice six-figure donation".  This also becomes a matter of how and when to out.

3.) The hunt is on for the sleezy Russian money into O-mans coffers.  A smoking gun has already been found.  Will get more on this when the time is right.  My source was too giddy to continue.  Can you say Clinton and ChiCom funny money?..."

For your information, the word "ChiCom" generally refers to Chinese Communist.

The recipient of the email, howerton@stratfor.com, responded by stating that

"...The Dems quit pretending and admitted to themselves that to win it you have to get off your high horse and play dirty when you have to.  And they won."

 Now, let's look at the second email.

"After discussions with his inner circle, which explains the delay in his speech, McCain decided not to pursue the voter fraud in PA and Ohio, despite his staff's desire to make it an issue....Staff felt that they could get a federal injunction to stop the process.  McCain felt the crowds assembled in support of Obama and such would be detrimental to our country and it would do our nation no good for this to drag out like last go around, coupled with the possibility of domestic violence."

"Curiously, there are whispers of McCain being set up by the Cheney/Bush crowd, because McCain was never liked by either...My guy said Rove and company want to bring in someone they can control the next go around.  McCain was not controllable.  Jeb Bush's name is being discussed...".

To summarize, the evening of the 2008 federal election, John McCain was urged by his aides to contest the results of the election by seeking a court injunction to prevent the voting results in both Ohio and Pennsylvania from being certified.  All I can think is thank goodness that John McCain had the strength of character to just say "no" when it counted.  I also found it quite interesting that, according to Mr. Burton, Karl Rove et al did not like John McCain because he was "not controllable".  What does that say about George W. Bush?

For fun, let's look back at the results of the 2008 election to see what might have changed if Senator McCain had succumbed to the wishes of his handlers and contested the vote in both Ohio and Pennsylvania.  First, nationally, Barak Obama received 365 electoral votes and his share of the popular vote was 69,456,897.  John McCain received 173 electoral votes and his share of the popular vote was 59,934,814.  Ohio had 20 electoral votes in 2008 and 52 percent of voters chose the Democrats giving Obama all 20 electoral votes.  Pennsylvania had 21 electoral votes in 2008 and 55 percent of voters chose the Democrats giving Obama all 21 electoral votes.  If John McCain had won all 41 electoral votes from both Ohio and Pennsylvania, his total would have risen to 214 and President Obama's total would have dropped to 324, making the end result exactly the same as it turned out to be with an Obama victory.  If John McCain had elected to contest the election, it would have solved nothing other than perhaps creating unnecessary national chaos, especially in light of the kerfuffle after the 2000 election.

It is interesting to see how Stratfor involves itself domestically by opining on America's political theatre.  It is also fascinating to see that Mr. Burton, a Stratfor Vice President and one of the world's leading experts on international terrorist organizations, has a very strong anti-Obama leaning.  But, I guess when you're a spy, you're able to ferret out a conspiracy around every corner.  It's just one of the benefits of the job.

WikiLeaks and Stratfor - The Email Release

WikiLeaks has done it again.  They have released the first of 5 million emails from Stratfor or Strategic Forecasting, a corporate intelligence company.  Back in December 2011, Anonymous hackers announced that they had gathered more than 200 gigabytes of data from Stratfor's poorly secured database.  Thus far, in typical Wikileaks fashion, only 214 emails have been released, among them, this gem between Reva Bhalla and George Friedman.

Here is the Linkedin profile of Reva Bhalla (as an aside, I do find it interesting that a "spy" would post their resume on Linkedin):

George Friedman just happens to be the founder, Chief Intelligence Officer and CEO of Stratfor.

Back to the email exchange between Ms. Bhalla and her boss.  The thread starts with Ms. Bhalla updating "watchofficer" and George Friedman on the state of Hugo Chavez's health and power struggles in Venezuela.  As a source, she uses a "well-connected VZ source working with Israel" and states that he has a "B" reliability but that: 

"...I've gotten better at reading him over the years to tell when he’s feeding me shit and when he’s giving useful info – his info on the VZ regime has checked out, but i tend to be more skeptical on iran-related info.”

 She goes on to outline the state of Chavez's health (his long-term prognosis is not good), who will replace him (Finance Minister Nicolas Maduro) and that China, Russia, Iran and Cuba are propping up his regime.  She writes the following about the post-Chavez military (spelling errors are hers):

"guess who has been most cooperative with us lately?  The military elite.  These guys have been living the good life.  They love women…lots of women.  THey love booze.  They love bora bora.  They are easy to bribe.  They don’t care about chavez, they care about maintaining their current lifestyles.”

Ms. Bhalla feels that Chavez will invest a lot of time and money in the militia to protect his regime as a measure that will cause the military elite to hesitate before acting against him or his hand-picked successor.

She closes with:

"these were the main points. will update with more..little fuzzy from wine right now.”

Her boss, George Friedman, responds with the following:

The problem with analyst sources is they are unqualified.  This means that we don’t have clarity on their sources and therefore can’t evaluate accuracy.  This could be valuable humint or pure rumint.

One of the reasons I want you to execute missions is to learn how to evaluate sources.  This is a very difficult art but one that you must learn.

The gut is to be trusted only after its well trained."

Yes Grasshopper, you must learn from the Master Spy!

Ms. Bhalla responded, defensively stating that:

"Yes, I have much to learn and I may be just an analyst, but i'm not 100% incapable of evaluating a source i've known for a while. I've listened to waht you've told me about reading a source (the Turk with the twitch).  I figured out what this source's twitch is in reading his eyes."

Other than being a bad speller, Ms. Bhalla is convinced that she is fully capable of evaluating the value of an informant's information, contrary to what her boss may think.

Mr. Friedman responds with the following:

"If this is a source you suspect may have value, you have to take control od (sic) him.  Control means financial, sexual or psychological control to the point where he would reveal his sourcing and be tasked.” (my bold)

It is interesting to see that a private intelligence company that provides data and analysis to large, multinational corporations and government agencies is not above using "financial, sexual or psychological control" to pressure a "source".  To say that this oversteps the bounds of decency would be an understatement.  It will be interesting to see what other techniques Stratfor uses to glean intelligence from its network of informants.  I also found it interesting to note that most of the highly confidential email thread was communicated over the RIM network.  Apparently, its security can be trusted!

In the coming days, it will be interesting to see what else is revealed about Stratfor’s modus operandi in the shady world of intelligence gathering.

Thursday, February 23, 2012

How Much Does John Baird Cost Canadian Taxpayers?

Since the Harper government appears to be all consumed with the very thought of prying into the private lives of Canadians all in the name of protecting our children, I thought that it was time to pry into the political life of "one of them".  I pick the utterly charming John Baird as my target.

I have to open with this quote from his official website:

"In August 2010, recognizing Mr. Baird's ability to reach across the aisle and work with Members of Parliament from all parties, Prime Minister Harper asked Mr. Baird to help make Parliament work by asking him to serve as Leader of the Government in the House of Commons."

This is the face of "reaching across the aisle" and "working with Members of Parliament from all parties" also known as "the face of working together for Canadians":

Let's open with a quote from Mr. Baird regarding the recent kerfuffle over the Bill C-30, the internet snooping bill, referring in particular to the Vikileaks anti-Vic Toews Twitter feed:

"Not only has it stooped to the lowest of the lows, but it has been running this nasty Internet dirty trick campaign with taxpayers’ money..."

Okay, fair is fair.  Let's see what Mr. Baird is doing with taxpayers' money.

Mr. Baird has had a rather diverse career in Ottawa with his most recent posting finding him as Minister of Foreign Affairs.  First, I'd like to take a look at how much he has spent on travel and hospitality since Mr. Harper appointed him to the job on May 18th, 2011 as disclosed here.

Mr. Baird has traveled far and wide in the first six and a half months of his tenure as Minister of Foreign Affairs as shown on this chart:

Please keep in mind that these are his expenses for slightly over a six month long period.  As well, you will note that he used government aircraft for four out of the fifteen trips he took during the six month period and availed himself of supplied accommodation five times.  If the expenses from these trips were added to the total, his total expenses would far exceed the $92,130 claimed.

What I find most interesting is his use of business class tickets.  His October 2011 airfare to Perth, Australia for the Commonwealth and Developing Small States Foreign Ministers' Meeting was a whopping $18,514.  The airfare for his July 2011 Libya Contact Group Meeting in China cost taxpayers another $10,581.  Even both of his airfares from Ottawa to Toronto and return in June 2011 cost taxpayers $753 and $715, the full Air Canada Executive Class Flexible fare.  Why anyone needs an Executive Class seat for a one hour and seven minute flight is beyond me but, when you're not paying for it, I guess it doesn't matter.  I can understand that one needs to be relatively refreshed when arriving for an overseas meeting but if the Harper government is serious about cutting expenses, perhaps this is a place to start.  After all, many publicly traded corporations have eliminated business class travel in an attempt to save money.

Now, let's look at Mr. Baird's Member's Expenditures Report for his MP office expenses for the period from April 1 2010 to March 31, 2011:

Mr. Baird's total office expenses of $324,215 are small compared to some of his counterparts in Ottawa for one reason; he lives in Ottawa so his accommodation and per diem expenses should be near zero (they are, in fact, $3138.34).  Here are the rules for claiming accommodation and per diem expenses:

Mr. Baird also spent $4896.50 on hospitality and events; for your information, here are the rules for the allowable claims:

Now, let's go back one year and see if there is anything different in his expenses from April 1, 2009 to March 31, 2010:

Mr. Baird spent a total of $343,383.02 in 2009 - 2010.  The standout item in this year's expenditures is his massive $68,345.33 bill for ten percenters, those little 8 1/2 by 11 inch sheets of blatantly political propaganda that the Conservatives were so fond of.  It's hard to imagine that one MP could spend more than the average income of a Canadian family on, pardon my French, merde that goes right into the recycle bin.  For completeness sake, here are the rules for ten percenters:

Now let's take a brief look at Mr. Baird's salary for the last fiscal year (and for 2009 and 2010 as well).  His base salary for each year was $157,731 and he raked in an additional $75,516 for his position as a Minister.  He also gets a car allowance of $2122.

The Canadian Taxpayers Federation has compiled a study of MP pensions entitled "CTF Report on MP Pensions: A Taxpayers' Indictment".  In this report, the CTF notes that parliamentary pensions are particularly lucrative because parliamentarians currently receive $10.46 for every $1.00 that they contribute and taxpayers contribute an additional $23.30 for every $1.00 that parliamentarians contribute.  Let's see how much Mr. Baird is due to receive on an annual basis and as a lifetime total:

I don't know about you, but a $96,020 pension strikes me as a pretty sweet deal, especially when it is fully linked to the Consumer Price Index and starts at age 55, 12 years younger than the proposed new pensionable age suggested by Mr. Harper for Canada’s public pension plan.

I certainly hope that you enjoyed this little window into how one of Canada's loudest MPs spends our tax dollars.  Now that the Harper government is expecting Canada's future seniors to live on less, let's hope that Mr. Harper expects the same of his own.   

Monday, February 20, 2012

The Billionaire Republicans Who Will "Restore Our Future" - January Donors

The Romney-leaning Restore Our Future Super PAC released its financial summary for the month of January 2012 to the Federal Election Commission and to say that their numbers are eye-opening would be an understatement.

Here is the summary page for the one month period:

In one month alone, Restore Our Future raised $6,617,550.00 and spent $13,938,397.62.  This single Super PAC raised an per day average of $213,469  and spent a per day average of $449.626 over the 31 day period.  The $6.617 million was raised from 138 individuals for an average donation of $47,953.26 per donor. When all of the revenues and expenditures are accounted for, Restore Our Future is left with $16,301,262.01 in cash.

Here is a chart showing the donors who have donated more than $100,000 to Restore Our Future in this reporting period with confirmed billionaire donors highlighted in bold:

Of the $6.617 million raised in the month of January 2012, $4.925 million or 74 percent of the total came from only 25 big donors who gave an average of $197,000 each.  One thing that you will notice right away is the large number of either CEO, Presidents or Chairmen on the list; of the 25 big donors, a total of 10 or 40 percent of the total are at the top of the executive heap according to their declaration.  Of the 25 big donors, 8 or 32 percent of the total are billionaires, far, far outweighing their representation in society as a whole. 

Some of the names are recognizable but don't necessarily have an executive position.  For example, Alice Walton is the daughter of Sam Walton, the founder of Walmart, and is one of the heirs to the Walton fortune, worth an estimated $20.9 billion and lists herself as a "rancher".  Jim Walton is her youngest brother and he just happens to be ranked as the 20th richest person in the world with an estimated fortune of $21 billion. 

Joseph W. Craft is a name that you will not likely recognize.  He is the President and CEO of Alliance Holdings, a major American coal mining company.  Here is a look at his compensation package for 2010:

Here is a look at his share holdings in 2010:

His 47,536,123 Alliance Holdings GP common units are worth a cool $2.377 billion at the current market price of $50 and his 15,902,620 Alliance Resources Partners LP common units are worth an additional $1.113 billion at the current market price of $70.  I guess that puts him in the billionaires club, doesn’t it?

A name that you may recognize is J.W. Marriott, Jr.  Mr. John Marriott is the President and CEO of Marriott International, an American operator and franchiser of hotels.  He just happens to be a fellow member of the Church of Latter Day Saints along with one, Mitt Romney.  According to Forbes, Mr. Marriott's net worth in 2010 was $1.3 billion.  Richard Marriott, John's brother, controls Host Hotels and Resorts and also hits Forbes billionaire list with a net worth of $1.3 billion in 2010. 

Another name that you may not be familiar with is Bruce Kovner.  This gentleman was the founder of Caxton Associates, a New York-based trading and investment firm (or hedge fund by another name).  According to Forbes, he is worth $4.3 billion.   
Last but not least there's Meg Whitman.  Ms. Whitman was named Hewlett-Packard’s CEO in September of 2011 after a rather lucrative career as the President and CEO of eBay.  She is has political experience from her run against Jerry Brown for Governor of California in 2010.  She spent $144 million of her own money in the lost cause.  According to Forbes, her net worth is $1.3 billion.

Despite all of the big names among the donors, it is interesting to see that there are still a few small donors among the lot, keeping the populist political movement alive.  Several donors gave $25 to the cause and one donor, a self-employed manager from Florida donated $5.  I think in the Holy Bible they referred to a small offering as the "widow's mite"; a donation that meant far more than its nominal value to the giver.

I wonder if the Presidential candidates see it that way?

Rick Santorum - He's Eighteen of "Us"

Recently, Rick Santorum released his Form 1040 U.S. Individual Income Tax Returns for the years 2007 to 2010 inclusive.  I realize that this information has been covered by the mainstream media with a slant on how much tax Mr. Santorum paid, particularly in comparison to the size of Mr. Romney's tax bill.  I'd like to put a slightly different slant on the data, comparing Mr. Santorum to average American families.

Let's open by looking at a graph of data that I gleaned from the U.S. Census Bureau website showing the median household income for American families from 1990 to 2010:

That should help us put the financial data that we are about to see into context.

Here are screen captures showing the first two pages of the Santorum family Form 1040 for 2007:

Here are screen captures showing the first two pages of the Santorum family Form 1040 for 2008:

Here are screen captures showing the first two pages of the Santorum family Form 1040 for 2009:

Here are screen captures showing the first two pages of the Santorum family Form 1040 for 2010:

Now, here's all of the pertinent data summarized on a chart:

Notice that over the four years from 2007 to 2010, the Santorum family gross income was $3,644,884.  Admirable, don't you think?  In those same four years, the median household income for an American family was $199,758 or just under 5.5 percent of the Santorum family total gross income.  To put that another way, the Santorums made as much as 18.2 median American households.  

As well, over the four year period, the Santorum's donated a total of $81,484 to charity, roughly 2.2 percent of their gross income.  Over the four year time frame, they paid a total of $1,003,495 in taxes for an average tax bill of 27.5 percent.

Here is another interesting bit of trivia from the 2008 return:

Just in case you wondered what the retail of an Audi A6 was in 2008, here's the pertinent data:

I have absolutely no problem with someone making good money.  What I object to is candidates of all political stripes using the "working class background" mantra to attract voters.  Yes, Mr. Santorum's  grandfather worked in a coal mine.  My grandfather was a farmer but that doesn't mean that I have  any right to consider myself part of the farming community.  Unfortunately, his "two-generations removed" connection with blue collar America has absolutely nothing to do with whether or not he understands what it's like to struggle to feed and family, pay a mortgage and other debts on a working-class, median American income.  I'd certainly say that a four year gross income of $3.6 million means that his reality is so far removed from ours.

Mr. Santorum, a few words of advice.  Now that we've actually seen your tax returns, stop pretending that you are one of us.  We’ll vote for you (or not) based on the quality of your character and your platform, not because of who you tell us that you are.  You don't seem to mind being candid with America about your stand on birth control and homosexuality.  Now, be just as candid with Americans about your standing as a very high income earner.