The Fed


So I’m perusing the FDIC.gov website and I happen to come across this interestingly entitled link, “FDIC Board of Directors Approves Extension of Transaction Account Guarantee Programand I think to myself, “my what’s all this about in our new full economic recovery!”

So I click on the link and read, “FDIC Chairman Sheila Bair said, “It’s necessary to extend the TAG program because the lingering effects of the financial crisis that emerged in 2008 in large systemically important banks have now spread to institutions of all sizes, particularly in regions suffering from ongoing economic weakness. Allowing the TAG program to expire in this environment could cause a number of community banks—already under stress—to experience deposit withdrawals from their large transaction accounts and would risk needless liquidity failures. This reflects the continuing legacy of too big to fail and the different liquidity pressures our community banks experience as a result.”

But wait, I thought the banking crisis was over?  I thought the economy was in full recovery since it is an election year it MUST be true!   Lingering effects?  Community banks insolvent?  I doubled checked to make sure this wasn’t an April Fools joke (although belated) but it wasn’t.   Could there still be the possibility of bank failures through 2011?  My oh my I am dismayed….

Whether you want to call it a recovery or just exuberant optimism about the economy improving, the one question that’s been begging in my mind is what’s going to happen with oil if and when the economy booms?  If oil is currently at $85 during a recession then what will it be during a real recovery?   The more I run through the scenarios the more I don’t like the outcome:

Scenario 1:  Assume the economy picks up steam, oil rises from $85 to $120 which quickly begins to take the steam out of any recovery and plunges us back into recession.

Scenario 2: Assume the economy remains stagnant, oil rises from $85 to $110 because of the Fed’s $2 trillion dollar inflationary pumping into the economy.

Scenario 3: Assume the economy dips back into recession, oil rises from $85 to $115 because the US will incur more deficit spending and the US dollar loses value against other currencies thus raising the price of oil.

Scenario 4: Assume Greece defaults and sends cascading domino shocks across Europe, oil rises from $85 to $100 because Opec cuts production in their October 2010 meeting.

There are more scenarios but you get the picture and I find very little scenarios in which oil will drop but ironically the biggest scenario that will drop oil is the mass adaptation of electric vehicles like the Nissan Leaf or Chevy Volt and the push toward natural gas for power generation.

I’ve positioned myself with natural gas ETFs and energy ETF plays because its the only thing that makes sense in this current economic climate.  I hope my bets pay off!

So I’m having lunch with a co-worker and we start talking about this Obama health care deal.    The one thing I can’t wrap my head around is why the thing doesn’t start until 2014.   Seriously, why wait nearly 4 years to get started but then my co-worker mentions that the taxation goes into effect immediately in order to “pre-pay” for the coverage in the future.

I’m not sure if that’s true or not but it did bring up a couple of interesting scenarios.   According to this Asia Times article, by 2014 all of the G7 countries will have a debt to gross domestic product of 100% of above.

By 2014, International Monetary Fund official John Lipsky remarked March 21, the debt-to-gross domestic product (GDP) ratio of the Group of Seven countries will reach 100%, and the governments of the industrial world will carry the highest debt burden since shortly after the end of World War II.

So while perhaps many people are cheering that only rich “evil” people are being taxed because the large tax bite comes from people earning 200k to 250k or more then it may be that a large portion of the population will be earning above the 200k mark in 4 years.   Does that sound implausible?   If the median salary today is around 53k then it would only take four consecutive raises of 30% to get that up to 150k by 2014.   I know everyone’s thinking that a 30% raise for the next four years is pretty silly but don’t forget that the Federal Reserve has pumped trillions of dollars into the economy and they’re floating out there.  I’ve written about spotting 20% energy inflation priced into markets a few times already just into 2012 and energy inflation always seems to grow exponentially too!

In another scenario and discussion, we discussed that perhaps the delay till 2014 is to make sure a few thousand sick boomers die off before this thing goes into effect to save money.   It seems that insurance companies are perfectly within their rights to deny or limit coverage now till 2014 so that will definitely kill some people that have serious medical problems.

Speaking of boomers, it seems that every day 10,000 new boomers hit the retirement dole so since there are 1,380 days till January 1, 2014 then I guess 13.8 million boomers won’t pull the trigger early and retire early knowing that they won’t have health care until 2014 now.

No matter which way you look at it, there is huge critical mass building toward the 2012-2015 years and something is going to make a huge “crunch” sound when it happens and it’s beginning to sound a lot like hyperinflation

Wow!  For the first time in a very long time, I’m actually getting a REFUND from Uncle Sam to the tune of over $4,000.   And all it took was for me to lose my job for six months and the government to lose about 75k in income tax revenue from me.   I feel like Uncle Sam is saying, “Sorry we gouged you for so long for so much, here’s $4,000!”

Actually this is the first year I didn’t exercise options, cash out stock, or rake in huge bonuses during the past year.   The only “earned income” I had was unemployment insurance from the state.    What really helped were all the freaking tax deductions:  my entire MBA tuition saved me a cool $2200,  student loan interest saved me some money, etc.   The only regret is that I didn’t wait a little longer to buy a car.  I purchased a new car in 2008 and if I had waited another year, I could have saved another a few k in taxes.  Wow, what a great tax return that would have been!   If I had bought a new house that might have been another 8k.  Sometimes, timing is everything!

Oh well, I’m expecting to be back in the higher tax bracket this year so I’m sure I’ll owe Uncle Sam a few thousand this time next year but at least I can buy a new LCD TV finally 😉

The financial world is a buzz with the Fed raising the discount rate a quarter point stealthily right before options expiry and it is just the start of a very dangerous careening job.

If you’re not familiar with careening, here’s a quick primer:

As is well known, as ships cruise the ocean, their bottoms quickly become covered with barnacles. These barnacles affected the ships speed and mobility. These two characteristics were highly respected among pirate captains, for they knew above everything else that if they were to be pursued in would be speed and mobility that would save them above any amount of firepower they might possess.

Barnacles posed another problem. If they were not removed, periodically, they would also cause irreparable damage to the hull by eating away the wood or weakening the seems between planks. This meant that if the ship were at sea, far from land, it could go down. The threat of barnacles was taken very seriously.

Often ships are dry docked after a long ocean voyage, in order that the hull can be scraped free of barnacles and repaired.

Pirate rarely had the opportunity to dry dock. When a ship could not be dry docked, sailors had to devise other ways to clean the bottom. It was practically impossible to clean the bottom of a ship while in the water. The best alternative was careening.

Careening involved finding a suitable shallow bay where the ship could safely be run aground, thus exposing as much of the hull above the water line as possible. Then the ship would be unloaded as much as possible. The crew would then need to careen or turn the ship over on one side using block and tackle, and manpower.

The crew would try to pull the ship over enough to expose the keel or bottom of the ship. Then they would commence scraping that side of the ship, free of any barnacles. Then any damaged planks would be replaced or repaired. Following this step, if possible the bottom of the ship would be covered with paint, pitch or some kind of proctectant.

Once the one side was done, the crew would careen the ship to the other side and repeat the process.

The task was labor intensive and time consuming. Pirates were sitting ducks while careening their ship. They were often not armed well enough to stand a major ground assault and with their ship run aground they could not take on another ship.

So Barnacle Ben is careening the Federal Reserve (a.k.a Titanic) and this pirate is going to make himself vulnerable on multiple fronts:  the economy, banks, Goldman Sachs traders, grand standing politicians, and perhaps the world.    In the meantime, I’m hoping to cash in on my UUP call options 😉

Aarrrrrr matees!

Here’s some food for thought, I looked at the USO and UNG call options for January 2012 (in the money) and I was surprised to see over 20% premiums on these two ETFs two years out.   I checked on UGA and this is showing 11% premium just SIX months into the future!  This bothered me quite a bit so I did some further research using my utility company.  I am fortunate enough to live in a state that offers competitive electric utility companies and all of them are pricing in electricity 20% higher than I have today for two years into the future.   My current rate is about $0.10 per kilowatt and signing a two year deal today would cost me $0.12 to $0.13 per kilowatt.

The utility companies are pricing in inflation at 20% two years into the future on electricity rates!   For reference (and control), Microsoft call options TWO years into the future barely show 10% premiums.  Verizon and AT&T are also at 10% or less two years into the future!

This is extremely concerning on one level and extremely profitable potentially if I can figure out what the reason behind this is that people aren’t seeing.  When I check the futures market on WTI Crude it only shows a 10% premium for January 2012.   Somethings out of whack.

Check out the sample charts and calculations.

On one level, I’m tempted to buy UNG or USO or even UGA and sell those options and book my profits for the year.   A 20% return on two years is about 10% per year and way much better than any bank is paying.   The risk?  Who the hell knows what will happen to energy prices two years from now but a 20% return over two years ain’t bad!

There should be a show on TV called “Banking Makover” along the lines of the Home Makeover show.   The premise of the show should be normal everyday struggling Americans being freed from the shackles of big banks and being moved to small community banks and credit unions.   Personally, I’ve begun my own bank make over journey.   Unfortunately it’s going to take at least 30 days if not more to move all of my accounts.   I’ve already sent letters to Bank of American and HSBC advising them of my displeasure with their little cartel and my intention to shut down all my accounts.

I’m in the process of slashing and burning my accounts at Chase but I’ve got so much money and things tethered to those accounts that it is going to take a while to undo but once done, I won’t be going back.   Hopefully, I’ll post an update by the end of the month but to give you a taste, it takes two payroll cycles to move from one bank to another and although I only had a small amount of my paycheck going to Chase, it’s going to take a whole month to unravel that process!

If you’re angry about the bank bailouts, bank bonuses, and the fleecing of the American taxpayer, I would encourage you to move your money to a credit union or community bank.   So far, my credit union has given me a credit card with a low 7% interest rate compared to the ridiculous rates at the big banks.  It’s not a bad deal altogether.    As an added bonus, my credit union offered to move my remaining auto loan over to the credit card.  This will create two bonuses for me:

1. The title to my car will be released to me – I’ve switched from a secured loan to an unsecured loan.

2. I ended a business relationship with a big bank and will not be paying them any more interest.

Before you fret about paying the credit card interest rate, I don’t plan on paying interest on more than a month or two since I’ll pay that off once all my money has settled after all the moves.

httpv://www.youtube.com/watch?v=Icqrx0OimSs

I was just amazed when I saw this article about the city of Phoenix implementing a sales tax on groceries!   If any astute readers can tell me what they see wrong with the logic, you’ll win a coveted RichSlick kudos!   I’ve given you a hint (see bold words).

Desperate to save police, fire and other city jobs, a divided Phoenix City Council on Tuesday approved a sales tax on grocery items that will generate tens of millions of dollars a year.

The 2 percent food tax will take effect April 1 and expire after five years, though Mayor Phil Gordon said the council has the option of reversing its decision after it hears from the public during 15 budget hearings planned for this month.

The tax on milk, meat, vegetables and other food purchased by shoppers will generate an estimated $12.5 million for the fiscal year that ends June 30. It will raise another $50 million for fiscal 2011. Food purchased with food stamps will not be taxed.

Uh, excuse me here but where is really the desperation in this scenario?   So the city’s brilliant plan is to make it difficult for people to buy food that they need to survive so they can have bureaucrats and other “essential” services survive?  Is this the worlds greatest oxymoron or what?

Long before we had police, fire or city officials, we had land and labor that meant food but somehow we’ve now inverted that logic where people must starve in order for police, fire and city officials survive.    I can tell you what is going to happen, the people of Phoenix are simply going to drive to Mesa or any other nearby town that doesn’t have this silly tax and the city of Phoenix will end up losing revenue.

Change you can believe in?  Well it’s turned out to be chump change and if that nincompoop Bernanke is re-confirmed I will close ALL of my big bank accounts which currently include Chase, Bank of America and HSBC.   I’ve already opened a new credit union account and plan on moving my money there as soon as this foolishness continues.  I’ve also applied for credit card through the credit union so I can dump my big bank accounts as well.    The only way we’re going to get any real reform here is to suffocate the system and I’m doing my part.

I’m still totally disgusted that Geithner hasn’t been fired for his role in the whole AIG 100% payout and everyday new revelations show the ridiculous activity of these idiots.

httpv://www.youtube.com/watch?v=Icqrx0OimSs&feature=player_embedded

Well I honestly hoped that I would never have to write this post but I can’t hold back anymore.  I am seriously disappointed in Obama’s administration…seriously disappointed.   I was willing to suspend certain inalienable views in exchange for a single thing:  serious health care reform.   But what team Obama has created is a Frankenstein bill no different than Bush’ Bernankestein during the start of the banking crisis a while ago.

It’s become clear to me that Obama is a one term President and I won’t be surprised to see him as a lame duck President after the 2010 elections.  If it’s any consolation for Democrats, I have no plans on voting Republican as that earth has been scorched as well.   At next years election I will either vote completely 3rd party (libertarian, green, whatever) or not bother voting at all.

Oh well, all I want for Christmas is what I wanted last year, a stable monetary policy with a competent central bank.   Perhaps this is the year….

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