Wednesday, April 30, 2008

Getting stuffed

When Guambat first became a Yank in Oz about 20 years ago, he was surprised to learn that his grasp of the English language had so much slippage in it. Well, his American English, that is, just wasn't up to snuff in Aussie terms.

For instances: Back on Guam, Mrs. Guambat had paid almost all accounts by check/cheque. When she went to buy groceries, she'd first stop in at the business counter in the front of the store and get her check/cheque approved. The common parlance: "can I get my check OK'd?"

So off she goes on her first grocery buy Down Under. There was no obvious place to get check/cheque approvals in the grocery story, so, seeing something a fair facsimile, she goes up to the counter and asks, "is this where I get my check/cheque OK'd?". Of course, the very idea was a bit foreign since most Aussies then used cash and not cheques. Cheques tended to be used, if at all, for bigger purchases. So they had no check/cheque approval station. And the lady just stared at her blankly.

So she tried again: "Is this where I get my check/cheque OK'd?"

And the lady said, "Is this where you get your chocolate cake??"

Second instance. When lost, it is not uncommon for a Yank to ask someone, "can you tell me the best route" to such and such? Route pronounced in the American "root" way, not in the baseball umpire way of "you-rout". That inevitably leads to peals of laughter at a Yank's expense, because "root" is the vernacular for sexual intercourse, shall we say. And blokes just love to talk about good root.

Third instance. Americans like to eat beyond capacity and then kick back from the table and satisfactorily say, "Boy, I'm stuffed!" It's also a compliment to the chef (usually Mom/Mum or other lady of the house).

So, Guambat tried that Down There: "Boy, I'm stuffed!" And all and sundry looked shocked and amused/amazed. Seems "stuffed", like many other words, is the vernacular for sexual intercourse, shall we say. Blokes just love to talk about getting stuffed, or to advise you to "get stuffed".

All of which puts us on a train of thought that derailed Guambat's reading of a Floyd Norris post in the NYT. But before we get to that, one more item that helps piece this linguistic puzzle together.

Guambat has an old friend who long ago made this observation: "There are two sorts of people: fu@kers and fu@kees." Guambat can't recall the context, but the message has stuck with him over the years.

OK, so now on to Floyd. He writes about being at a talk given by David Rubenstein of the Carlyle Group. In the black humor/humour of those in the knows, Rubenstein scoffed at the banks in their toadiness to the likes of Carlyle.

As Floyd Norris relates the tale,
he said that there were a thousand smaller institutions that needed to raise capital, and that some big ones kept finding out they needed to raise more.

Carlyle has done its part to create those holes. Mr. Rubenstein delivered a hilarious recollection of the credit markets at the top of the market, in which Citigroup and J.P. Morgan competed to lend, offering low interest rates, no covenants (covenant-light in the jargon) and toggle-PIK, meaning the company could pay in kind, with more securities, if it did not have the cash.

As he told it, with a hypothetical billion dollar acquisition, Carlyle funds put up $350 million and borrowed $650 million.

When the music stopped in the credit market last year, the bank was unable to sell such loans in the securitization market — to investors Mr. Rubenstein called the “stuffees.”

Then a new dance began. The loan was no longer worth $650 million — even if nothing had happened to the underlying company that borrowed the money — because such terms were so unattractive. So the bank might write the loan down to $500 million, and see if anyone would buy it for that price. Then Carlyle could start to negotiate to buy the loan, and maybe get it for $450 million.

And where would it get that money? Much of it would be lent by banks, albeit at harsher terms than the original loan.

Stuffees. Good one. Gotta remember that.


Friday, April 25, 2008

The fractious electoral college count that determines the president

Carl Bialik, the WSJ's Numbers Guy, has a fascinating maths tutorial on the way some numbers count and others don't, or haven't at various times in US history, when it comes to sorting out the Electoral College count for President. And he wasn't talking about hanging chads.
It seems like a straightforward calculation: First, divide seats in the House of Representatives among the states according to population. Then, add the state's two senators and you get its electoral-vote count.

But since the country's infancy, politicians and the courts haven't been able to make the math add up. Some methods are prone to selling states short, some to paradoxes. As elections of late have proved, bad math -- even the most rudimentary kind, counting -- can have big consequences.

Unfortunately, the Constitution didn't say what to do about fractions....
You'll need to read the rest yourself.

Holy Rice-a-Roni Guambatman!

So much for "the San Francisco Treat", which, according to Wikipedia, is a Registered Trademark.

Rice Shortage Roils San Francisco Stores, Markets, Food Banks By Ryan Flinn (Bloomberg).
A group of shoppers came into Farmer Joe's Marketplace in Oakland one morning this week and bought all the 50-pound bags of rice. A few miles away at Berkeley Bowl Marketplace, long-grain rice is sold out.

A global rice shortage that has forced China and Vietnam to curb overseas sales of the food staple has reached the San Francisco Bay Area, home of one of the largest concentrations of Asian-Americans in the U.S. Stores, restaurants and food banks report dwindling supplies, and retail prices are rising.

To combat hoarding, Wal-Mart Stores Inc.'s Sam's Club has limited purchases of jasmine, basmati and long-grain white rice to four bags a visit in all U.S. stores.

A Costco Wholesale Corp. store in San Francisco this week limited rice purchases to five bags per customer. Later in the week, on April 23, the outlet reduced that number to two.

A distinction without a difference?

What is the effective difference between a rogue trader, a hedge fund, some Sovereign Wealth Funds and organized crime?

No, really. Guambat can't articulate a coherent answer and is seeking your help after reading Gangsters Manipulating Oil Price! at FT Alphaville.
On the gangsters-running-commodity-markets theme, the US Department of Justice cites the example of one Semion Mogilevich who, with several members of his criminal organisation who were charged in 2003 in the Eastern District of Pennsylvania in a 45-count racketeering indictment for their involvement in a sophisticated securities fraud and money laundering scheme.
Published reports state that since that indictment and being placed on the FBI most-wanted list, Mogilevich has continued to expand his criminal empire, to the point where he is said to exert influence over large portions of the natural gas industry in parts of the former Soviet Union. Many commentators have noted the significant role that area of the world plays in global energy markets. Mogilevich was arrested by Russian police on tax charges in January 2008. Other members of his organization remain at large.

Even CNN has the story:
Attorney General Michael Mukasey warned Wednesday that organized criminal networks have penetrated portions of the international energy market and tried to control energy resources.

In a speech at the Center for Strategic and International Studies in Washington, he said similar efforts have targeted the international financial system by injecting billions of illicit funds to try to corrupt financial service providers.

The only slightly more sober LA Times says,
Michael B. Mukasey renews the war on what he calls a growing threat that touches 'all sectors of our economy.'

saying that a new breed of mobsters around the world was infiltrating strategic industries, providing logistical support to terrorists and becoming capable of "creating havoc in our economic infrastructure."

"They are more sophisticated, they are richer, they have greater influence over government and political institutions worldwide, and they are savvier about using the latest technology, first to perpetrate and then cover up their crimes.

"This new group of organized criminals are far more involved in our everyday lives than many people appreciate," he said. "They touch all sectors of our economy, dealing in everything from cigarettes to oil; clothing to pharmaceuticals."

Mukasey said international organized crime groups controlled "significant positions" in global energy and strategic materials and were expanding holdings in the U.S. materials sector.

A strategic plan on fighting organized crime released by the department also said such groups manipulated securities exchanges and laundered billions of dollars through legitimate financial institutions. "They are expanding their holdings in these sectors, which corrupts the normal functioning of markets and may have a destabilizing effect on U.S. geopolitical interests," Mukasey said.

Crikey, no wonder Wall Street is so nervous these days.


When galaxies collide

A little perspective on our own little woes du jour:

Credit: NASA, ESA, the Hubble Heritage (STScI/AURA)-ESA/Hubble Collaboration, and A. Evans (University of Virginia, Charlottesville/NRAO/Stony Brook University)

And more here.

But most likely our own little woes and clashes of civilisations will get us before one of these big buggers does, according to this news release:
Astronomers observe only one out of a million galaxies in the nearby universe in the act of colliding. However, galaxy mergers were much more common long ago when they were closer together, because the expanding universe was smaller.

For all their violence, galactic smash-ups take place at a glacial rate by human standards - timescales on the order of several hundred million years.

So, you just keep hanging on, Little Tomato.

Thursday, April 24, 2008

There've been some disappointments ....

You really need to put a plum in your mouth and put on your best (worst) British accent before you subvocalise this quote, from Bloomberg's Bondholders Lucky to Get 10 Cents in Looming Defaults:
"There've been some disappointments," Paul Scanlon, team leader for U.S. high yield and bank debt at Putnam Investments, said in a telephone interview from his Boston office. Putnam manages $66 billion in fixed-income, including bonds of Univision. "As people look back over the last 24 months, there are many transactions in portfolios that people have hoped the outcome might have proceeded differently than it has."

Rather than receiving the historical average recovery of 42 cents on the dollar in a default, owners of a third of high- yield, high-risk bonds rated B+ or lower may get no more than 10 cents, according to New York-based Fitch Ratings. About 22 percent are likely to get 11 cents to 30 cents.

The amount of debt in Merrill Lynch & Co.'s U.S. High Yield Distressed Index has swelled to $206 billion from $4.8 billion a year ago. The index contains non-defaulted bonds with yields of 10 percentage points or more above Treasuries.

Moody's anticipates defaults will quadruple to 5.9 percent in 12 months. That assumes a "mild" recession.

Along with the surge in bank loans came covenant-lite loans, which typically don't limit the amount of debt a company can have relative to earnings. A record $141 billion of covenant-lite loans was made last year, according to S&P.

The value of companies with those loans is likely to be 25 percent less when they ultimately default than if they'd been forced to restructure earlier, Fitch estimates.

"Whereas in the last recession it was more common perhaps to see the inter-creditor fights between subordinated unsecured creditors and the senior unsecured creditors, it may very well be that in this cycle that will have moved up a level in the priority chain," Andrew Rahl, a partner in commercial restructuring and bankruptcy at Reed Smith LLP in New York, said.

Other commentators didn't have so much of the stiff upper lip:

International financial system was close to the brink
The international financial system was close to the brink in March when joint action by the U.S. Federal Reserve and JP Morgan Chase & Co. avoided the collapse of investment bank Bear Stearns, Credit Suisse Group's ex-CEO Oswald Gruebel said.

'We've narrowly escaped a system collapse. This has never happened before,' Gruebel said.

The breakdown of the comparatively small investment bank would have triggered a global run on other financial institutions around the world and the situation would have spiraled out of control, he said in an interview with Swiss Sunday newspaper SonntagsBlick.

Wednesday, April 23, 2008

The day the recession started

Guambat just got back from a couple of days on Saipan, a gem of the Marianas islands. It has been disorienting to get back to the Big Smoke of Guam. To help the process, he checked in on the hits to the Stew (and YaHarr there to Cap'n Jack) and that led to looking back to a post in December 2006.

From there, he was directed to this contemporary post from Calculated Risk. Calculated Risk was having a go at Dr. Christine Chmura, president and chief economist at Chmura Economics & Analytics, who was having a go at "pessimists [who] point toward a soon-to-occur recession".

Calculated Risk made this assessment of Chmura's nonchalance over the state of over-indebtedness:
"she could have written this piece in mid-1990 - just as the early '90s recession started.

Chmura notes that the mortgage portion of the homeowners financial obligation ratio (FOR) was a record 11.6% in Q2 2006. In Q2 1990, the ratio was a then record 10.9%. The Q2 2006 debt service ratio (DSR) was a record 14.4%; in Q2 1990 it was a near record 11.96%. And in Q2 1990, pessimists were also concerned about "a significant slowdown in home-price acceleration".

But if someone just looked at the household balance sheet in Q2 1990, everything looked great (Fed: Flow of Funds). Assets were a record $23.7 Trillion and net worth hit a record $20.1 Trillion in Q2 1990.

And then the recession started ..."

It was in this same time frame that Bill Gross was instructing us on "The Limits of Leverage". Oops. Did Guambat say "instructing"?

PS: Another Pimco head, Mohamed El-Erian, has today (April 24, 2008) instructed us, Why this crisis is still far from finished.
The dynamics driving the disruptions are morphing and may again move ahead of both the market and policy responses.

the dislocations are entering a new phase.

Persistent financial dislocations have now caused the real economy to become, in itself, a source of potential disruption. During the next few months there will be a reversal in the direction of causality: the unusual adverse contamination by the financial sector of the real economy is now morphing into the more common phenomenon of recessionary forces threatening to undermine the financial system.

Monday, April 21, 2008

Not since 1929 ...

That was, of course a long time ago.

(Click to enlarge image, or take link below to WSJ story.)

For many young people today, the Great Depression started when Daddy told them they weren't going to get a Mercedes for graduation from high school.

But the Crash of '29 and the Great Depression that followed remains salient for some of us. That is why, perhaps, this phrase stuck out when Guambat read the WSJ front page story, Trapped in the Middle By Justin LaHart and Kelly Evans:

The well-heeled keep doing better, with the wealthiest 1% of U.S. families garnering the largest share of income since 1929.
It seems that the Great Middle of the American body economic is going, like Guambat, pear-shaped.
Nationally, median household pre-tax income in 2006, though slightly higher than in 2004, fell to $48,223 from an inflation-adjusted $49,477 in 2000, according to the Census Bureau. Weekly wage figures from 2007 suggest the decline persists.

Recessions often depress middle-class incomes and moods. What's unusual about these declines is that they occurred during the economic expansion that began in 2001 -- the first time that's happened during a prolonged expansion in at least 40 years. The main reason: The benefits of prosperity have gone disproportionately to the families at the very top.

Adjusted for inflation, income of the top 1% of earners grew at an annual rate of 11% from 2002 to 2006, according to an analysis of Internal Revenue Service data by economists Thomas Piketty of the Paris School of Economics and Emmanuel Saez of the University of California at Berkeley. Incomes of the bottom 99% grew at less than 1% annually.
This is not to say that things are as stinkingly bad as in the Great Depression, with its Dust Bowl and 25% unemployment.
In some ways, the American middle class is better off than it was eight years ago. It is paying less taxes, thanks to President Bush's tax cuts. The effective federal tax rate for the middle fifth of households declined to 14.2% in 2005 from 16.6% in 2000, according to the Congressional Budget Office. The rate of violent crime in 2006 was lower than in 2000. Death rates for heart disease and stroke have declined by about 25%.
Perhaps John Mauldin is correct is saying Guambat is Stuck in the Muddle With You.

Guambat is prepared to withhold judgment ... but is preparing a draft.

Wednesday, April 16, 2008

Head in the sand inflation

There are those who continue to believe in the days of low volatility and interest rates and easy money, and who wouldn't after all the fun some folks had with that?

For instance, after PPI figures came out today, this chap said,
We all understand the effect of higher food and energy prices not only on the United States but all over the world, so I think what we should really look at is the core prices, which according to the Fed's minutes should be anchored with slowing economic growth and it wont be a problem for the economy giving the fed a freehand to cut rates with no worries that inflation will create a hitch in the future.
But as Barry Ritholtz, who has been banging the table over the fallacy of core inflation for yonks, noted, there is growing realization that commodity price push inflation is a serious economic and political issue to be dealt with, not swept aside or ignored.

Channelnewsasia puts it this way:
While the world has been focusing on the credit crunch at the international investment banks, the fall out from sub-prime mortgage lending crisis and the turmoil in the international markets, another threat to world's economic stability has been gathering pace.

Inflation is the latest genie to escape from the global economic bottle.
The PPI scorecard today was, as reported by Forbes:
Core inflation rose 0.2 pct for the month, after rising 0.5 pct in February. That left core inflation up 2.7 pct in the past twelve months, the fastest unadjusted annual pace since July 2005. Overall inflation has risen an unadjusted 6.9 pct for the year.
In times past that "overall" rate would have been a headline screamer, but the head in the sand crowd continues to crow about the core, even as that is beginning to become "uncomfortable".

And as uncomfortable as the US inflation picture is, the Channelnewsasia story adds an emerging market and wider world-view perspective:
Compared to price rises in Asia, US inflation is quite tame.

Rice prices rose 50 per cent in two weeks at the beginning of April....

Curbing inflation is usually the central bank's biggest task and the best way to do this is to slow the economy by raising interest rates. But with the slowdown in housing and credit crunch in central banks, notably in the US, it has been cutting rates to encourage the banks to lend again.

Lower interest rates are also having a knock on effect of commodity prices.

Cheaper money that is not going into the US housing market or stocks or bonds is going into tradeable commodities.
Actually, that perspective is not so foreign as it may seem. It tracks precisely the arguments made by Ronald Reagan's main Econ Man and Harvard professor, Martin Feldstein, in the WSJ today:
Many factors have contributed to the recent rise in the prices of oil and food, especially the increased demand from China, India and other rapidly growing countries. Lower interest rates also add to the upward pressure on these commodity prices – by making it less costly for commodity investors and commodity speculators to hold larger inventories of oil and food grains.
Feldstein's remedy is: enough with the interest cuts, already.
It's time for the Federal Reserve to stop reducing the federal funds rate, because the likely benefit is small compared to the potential damage.

Lower interest rates could raise the already high prices of energy and food, which are already triggering riots in developing countries.

The impact of low interest rates on commodity-price inflation is different from the traditional inflationary effect of easy money.

Lower interest rates induce investors to add commodities to their portfolios. When rates are low, portfolio investors will bid up the prices of oil and other commodities to levels at which the expected future returns are in line with the lower rates.

An interest rate-induced rise in the price of oil also contributes indirectly to higher prices of food grains. It does so by making it profitable for farmers to devote more farm land to growing corn for ethanol. The resulting reduction in acreage devoted to producing food crops causes the supply of those commodities to decline and their prices to rise.

Rising food and energy prices can contribute significantly to the inflation rate and the cost of living in the U.S. The 25% weight of food and energy in the U.S. consumer price index means that a 10% rise in the prices of food and energy adds 2.5% to the overall price level. Commodity price inflation is of particular concern now that the CPI has increased 4% in the past 12 months.

The rise in the U.S. inflation rate, and the adverse effects in emerging market countries, might be defensible if lower interest rates could significantly stimulate demand and reduce the risk of a deep recession. But under current conditions, reducing the federal funds interest rate from the current 2.25% by 50 or 75 basis points is not likely to do much to stimulate demand.

The current conditions in the housing industry and in credit markets mean that a further lowering of interest rates will have a smaller impact on demand than in previous recessions.

Moreover, lowering the fed funds rate has not brought down mortgage interest rates. While the fed funds rate is down three percentage points from this time last year, mortgage interest rates are down by less than 0.5 percentage points.

The dysfunctional state of the credit market means that many individuals and businesses are unable to get credit. Lowering interest rates will not stimulate demand for those who cannot get credit.

Economic recovery will require resolving the difficult problems of the credit markets, dealing with the millions of homeowners who may now be tempted to default on mortgages that exceed the value of their homes, and reducing the risk that the ongoing decline in house prices will push millions of additional homeowners into a vulnerable, negative equity condition. A lower fed funds rate will not solve any of those problems.

Down Under, Australian Treasure Wayne Swan discussed the inflation implications for his economy, as reported in the SMH:
"The other thing that has jumped out of the box is inflation, not just in developed world but in the developing world, in the years ahead," he said.

Until now, cheap imports from countries such as China have had a deflationary impact on the Australian economy, he explained. But with inflation on the rise in the economies of our major trading partners, there would be a new external source of pressure on inflation - rising import prices.

"We have a high inflation environment and a high interest rate environment in a context where both growth is slowing and inflation rising, so it is a much more complex international environment than we have seen in a long time."
The Australian Murdoch press, though, is barracking for no more interest rate rises in Oz, which may be fair cop given that the Australian Reserve Bank has been raising rates lately even whilst the US Fed has been slashing. The Australian's mouthpiece, Peter Switzer's take is: "The next move should be down."

But he doesn't say when.


The Fed's inflation gauge isn't realistic, critics say

Foreclosure foreplay?

Bloomberg is ringing the bell:
U.S. Foreclosures Jump 57% as Homeowners Walk Away (Update3)By Dan Levy

and bank repossessions more than doubled in March from a year earlier as adjustable mortgages increased and more owners lost their homes to lenders.

More than 234,000 properties were in some stage of foreclosure

Auction notices rose 32 percent from a year ago, a sign that more defaulting homeowners are "simply walking away...."

U.S. home price declines will probably double to a national average of 20 percent by next year, with lower values most likely in metropolitan areas in California, Florida, Arizona and Nevada, mortgage insurer PMI Group Inc. said last week in a report.

Bank seizures climbed 129 percent from a year earlier, according to RealtyTrac, which has a database of more than 1 million properties and monitors foreclosure filings including defaults notices, auction sale notices and bank repossessions. March was the 27th consecutive month of year-on-year monthly foreclosure increases. In February, foreclosure filings rose 60 percent.

Is this as bad as it gets?

Not according to John Hussman:
Among the latest topics of opinion is how far the mortgage crisis has to go. Evidently, the idea is that the recession that these analysts didn't forecast is already over, so it is time to “look across the valley” on the belief that most of the writedowns are behind us.

A good way to estimate where we are in the process of writedowns and foreclosures is to revisit the schedule of resets for adjustable rate mortgages.

it is important to recognize the foreclosure timeline. Once a reset occurs, it takes up to 30 days for the first payment to be missed. After 90 days of attempts to catch up on missed payments, the homeowner is served with a “Notice of Default.” It then takes another 90 days with the homeowner in default for a “Notice of Trustee Sale” to be delivered, shortly after which the property is sold in a foreclosure. In short, there is generally a span of about 6 months from reset to foreclosure, which means that we have to lag the data to get the profile of anticipated loan losses.

That produces the following profile for the cumulative losses that can be expected. Again, these are not dollar amounts, since only a portion of even sub-prime mortgages will default. While we will also undoubtedly observe losses from credit cards, commerical real estate, and home equity loans, the point here is only about the general shape of the cumulative loss curve [View his chart below].

Clearly, as we enter April 2008, we appear to be quite early in the mortgage crisis, with only about a quarter of the cumulative resets having occurred.

Moreover, because of the bundling, securitization*, and slicing and dicing of mortgage obligations, financial companies have little ability to take the required writedowns in advance, because they don't know yet which ones will go into default. To opine that we are in some late “inning” of the mortgage problem, without reference to the reset data, is just naïve. If anything, the probable rate of foreclosure on later resets will be higher, not lower, than the earlier resets, because those later resets represent the mortgages initiated at the peak of home prices and the trough of lending standards.

Restless leg-up syndrome

Do you suffer from hypochondria? Of course you do, and Big Pharma is here to help.

Whether your favourite CEO suffers from Leg-up Syndrome or your favourite jazz musician has a bad case of Deeply Vain Trombonesis, Big Pharma is here to help.

And Justin Rohrlich, at Minyanville, shows us how.
Big Pharma’s latest innovations aren’t new drugs, they’re new syndromes and disorders.... the pharmaceutical industry currently spends more on advertising than they do on research and development.

pharmaceutical companies are “fostering the creation of a condition and aligning it with a product.” Like Restless Legs Syndrome (RLS). GlaxoSmithKline’s (GSK) Requip was a drug used to treat Parkinson’s disease – and the infinitesimal number of people who suffered from RLS, an extremely rare condition discovered in 1945 by Swedish doctor Karl Ekbom.

Consumers hear a roll call of symptoms and become convinced they’ve got them, whatever they are. That’s why, these days, RLS “affects” nearly 12 million people in the United States alone.

Does feeling sleepy mean you’re ill? According to Cephalon (CEPH) it does. It’s helping people combat Excessive Sleepiness (ES) with a drug called Provigil, prescribed to “improve wakefulness.” Seriously.

[And then there's] Intermittent Explosive Disorder, sometimes called Road Rage Syndrome, characterized by recurring outbursts of extreme anger and violence. Luckily, Dr. Daniel Deutschmann, a psychiatrist and clinical professor at Case Western Reserve University, found success medicating IED patients with existing anti-epileptic drugs....

[And] Oppositional Defiance Disorder (ODD) [, sometimes called Rebellious Youth]. ODD is described as an ongoing pattern of disobedient, hostile and defiant behavior by children toward authority figures. Joe Biederman, M.D., a leading pediatric psychopharmacologist at Massachusetts General Hospital and Harvard Medical School, recommends “atypical antipsychotics,” like Risperdal, Clozaril, Abilify and Seroquel.

Steven Woloshin and Lisa M. Schwartz of the Dartmouth Medical School had this to say: “Helping sick people get treatment is a good thing. Convincing healthy people that they are sick is not. Sick people stand to benefit from treatment, but healthy people may only get hurt: they get labeled “sick,” may become anxious about their condition, and, if they are treated, may experience side effects that overwhelm any potential benefit.”


Guambat received this Legal Alert of date 24 April from a large-ish law firm:

Welcome to the April edition of Pharma Insights. In this edition, we consider tips and tricks for sponsors of prescription medicines when designing educational campaigns for the general public, bearing in mind Medicines Australia's Code of Conduct.

Educator or promoter - Are you at risk of an identity crisis?

The US and New Zealand are currently the only industrialised countries that allow Direct to Consumer advertising ("DTC"). As most of you will be aware, DTC advertising of prescription-only products is prohibited in Australia. The prohibition is achieved via the Therapeutic Goods Act 1989 ("TG Act") and Medicines Australia's ("MA") Code of Conduct.

Critically however, there is a distinction between "promotion" and "education" as the latter is permitted by the Code provided it meets certain requirements, for example, the need for educational material to be "current, accurate and balanced". Issues also exist in relation to "ask your doctor" advertising which fall outside of the scope of this article.

It is obviously within a company’s best interests to rigorously pursue its marketing interests within the scope of the "educational material" allowance under the Code. The business advantages of active marketing must however be balanced against compliance with the Code and general legal risk. Code compliance is important because breaches can have significant ramifications: fines of up to $200 000 apply for severe breaches, and the reputational risk is also significant.

Etc., etc.

Tuesday, April 15, 2008

The $20 Billion a month dilution

The banks have been suffering from an overdose of cheap credit and easy money and are in need of a quick fix. The needle of choice: dilute shareholder interest with capital raisings. Quite an about-face from the old buy-back racket of the last few years.

David Gaffen, at the WSJ blog MarketBeat, is spreading the news from Dealogic that major US financial companies have been diluting shareholder values at the average rate of roughly $20 Billion per month for the last seven months. Citigroup has had the largest such capital raising and Wachovia the latest.

Saturday, April 12, 2008

What are the Fed's facilities facilitating?

Guambat, in his usual Guambatian way, is again wading in way over his head in things economic in order to try as he might to begin to understand in the most simplistic of ways another of the big events of the day.

Being mathematically and philosophically challenged, Guambat tends to trust, and thrust, his nose in these things. Some things, such as the alphabet soup of financial derivatives, did not just quite smell right to him, so growing unsatisfied in trying to follow their inception and purpose, he turned up his nose at them, for instance.

Surely the big event of these days is the Fed's attempt at reverse alchemy: its attempt to "rescue" the big financial institutions from their very own folly and thereby paint a rainbow over every homeowner, and put a chicken in every pot for the rest of us whilst they are at it.

These are some of the pieces that Guambat is trying to synthesize and sense-thesize; they smell like they ought to lead to some understanding of the topic but Guambat confesses to not at all yet realise how.

Let's start with Mike Mish Shedlock's piece in Minyanville, "Risky business for Fed", though we could as easily start anywhere; once you tug on any of these threads the whole thing seems to wind up on the floor in a spaghetti of loose wool.

In an attempt to increase market liquidity, and promote bank to bank lending, the Fed has created three new lending facilities. Let's do a quick recap:

* In the Term Auction Facility (TAF), the Fed (via auction) swaps cash for questionable securities. This facility is for banks.
* In the Term Securities Lending Facility (TSLF), the Fed swaps treasuries for questionable securities. This facility is for banks.
* In the Primary Dealer Credit Facility (PDCF), the Fed swaps treasuries for questionable securities. This facility is for broker dealers.

In Failures of the Term Auction Facility, I showed how and why the facilities were failing to accomplish their mission. Simply put, banks don't trust each other, so they're unwilling to lend to each other except at an unusually wide premium. Instead of encouraging more bank to bank lending, the Fed has simply become a dumping ground for all the garbage mortgage backed securities no one wants to hold.

A paper from the Federal Reserve Bank of San Francisco, "A Black Swan in the Money Market", by John B. Taylor and John C. Williams also took issue with the Term Auction Facility. Their conclusion is:
We show that increased counterparty risk between banks contributed to the rise in spreads and find no empirical evidence that the TAF has reduced spreads. The results have implications for monetary policy and financial economics.

In his usually helpful way, Sam Jones, writing in FT Alphaville, tries to put that paper's thesis in a form that, if not digestible, is at least of a fragrance that Guambat can experience. He says,
the most interesting thing is a corollary of the research, rather incidental to its main findings about the TAF.

Statistically speaking, a six-sigma event should occur every 2,500,000 days - or once every 6849 years. Notwithstanding the fact that markets have experienced six six-sigma events in the past 20 years (what’s the probability of that?) they note that the OIS-Libor spread puts the current financial crisis as a sixteen sigma event.

Such perhaps, is the folly of stochastics. Even so, it’s the accepted line: statistically the credit crisis was shocking, sudden, and unexpected. Viz. there was a massive jump in market risk in August 2007.

Which is why taking a longer view is so arresting. Taylor and Williams also provide a graph going back to 1991 of 3 month Libor (unsecured) against 3 month treasury-backed interbank repos (secured). Although it’s more “fuzzy”, the authors do say it’s probably an even better measure of “pure risk” than the OIS-Libor proxy.

Over the full sixteen year period, there are several spikes corresponding to past financial blips, of which the current is far and away the largest. What’s clear though, is that by any standard-deviation or measure of volatility over the longer period, the current crisis is nowhere near a six-sigma event.

So - extrapolating in lay terms here - while the current crisis was unlikely, it was historically predictable.

Which, to some extent, seems to validate the oldest risk rule of them all: it wasn’t different this time.

Greg Ip, in his WSJ Economics Blog, adds more pieces to the puzzle in his post "What could the Fed do?".
Since the Federal Reserve began rolling out ever more creative steps to unfreeze credit markets, it has sold or pledged a growing portion of its portfolio of Treasurys in order to put loans on its balance sheet to banks and securities dealers backed by mortgage-backed securities and other shunned collateral.

First, here’s what the Fed has done (as of April 3):
1. Lent banks $10.3 billion through the discount window.
2. Lent banks $100 billion in term auction credit.
3. Lent securities dealers $76 billion through standard repurchase agreements.
4. Lent securities dealers $34.4 billion through the discount window.
5. Lent securities dealers $75 billion of its Treasurys in return for other collateral through its new Term Securities Lending Facility.
6. Lent up to $36 billion to the European and Swiss central banks.
Ip then discusses the how all this lending is beginning to dip deeply into the Fed's nest egg of Treasury securities, and offers "some ways it could expand its lending capacity while maintaining control of the fed funds rate" even though "these steps only address the magnitude of the Fed’s lending capacity, not what it does with that capacity".

One of his suggestions is
"The Fed could try to do the mirror image of the Term Securities Lending Facility. In other words, take the mortgage backed securities pledged to it by dealers in return for Treasurys, and re-pledge them to other dealers, taking Treasurys back."
In ways legal that Guambat has not the time or inclination to explore, this option evidently skirts some legal issues and obstacles, as explained by Lou Crandall, who evidently thinks its a "cool" idea, in a post in the Real Time Economics WSJ blog.

But, for Guambat it comes back to the smell test, and fails. Steve Waldman extracts the aroma better than the best sommelier:
These so called "reverse MBS swaps", under which the Fed would refill their stock of Treasuries by swapping back iffy securities wrapped with a Fed guarantee, would have no direct balance-sheet impact whatsoever, and if repeated would provide the Fed with a potentially infinite supply of Treasury securities to swap! Of course, the proposal is simply a scheme to create off-balance-sheet liabilities in order to evade what might be on-balance-sheet limits. Wow.

I frequently marvel about how, in order to respond to the credit crisis, the Fed as well FHLB, Fannie, and Freddie, are doing precisely what got private actors into their messes in the first place. Off-balance-sheet liabilities are a logical next step.

Back to Mike Shedlock, where we started, and he is not smelling roses, either.
This is not cool, it's absurd. It's scary that anyone could think this could possibly work. Let's chart this out mathematically.

Case #1

* Citigroup swaps garbage with the Fed for treasuries.
* The Fed swaps the same garbage with Citigroup for its treasuries back.
* This is supposed to accomplish something?

Case #2

* Citigroup swaps garbage with the Fed for treasuries.
* Lehman swaps garbage with the Fed for treasuries.
* The Fed swaps Lehman's garbage with Citigroup to get treasuries back.
* The Fed swaps Citigroup's garbage with Lehman to get treasuries back.
* Lehman holds Citigroup's garbage.
* Citigroup holds Lehman's garbage.
* This is supposed to accomplish something?

Wouldn't it be much simpler to have the Fed guarantee the debt and forget all this swapping madness? No I don't want that to happen, I am just stating the insanity of all this swapping if the only purpose is to get the "Midas Touch" from the Fed.

Logically speaking, this proposal would have the Fed guarantee all bank and broker dealer debt simply by touching it. However, the Fed is not Midas. And this is not a "cool idea", it's insanity.

Friday, April 11, 2008

Bending over and kissing the housing bottom goodbye

Hattip to Barry Ritholtz and his friends for this link to the past.

It's October 2006 and the housing foundations are only just beginning to quake after too many months of rumbling.

But the true believers, or those who would have you truly believe the improbable, are saying it's all over now, Baby Blue.

Market may be stabilizing, realtors group says

Pending sales of U.S. existing homes rose by 4.3% in August, indicating the housing market may be stabilizing, the National Association of Realtors said Monday.

"Our sense is that home sales may have reached a low in August," said David Lereah, chief economist for the NAR in a statement.

"With fewer new listings coming on the market, we should be able to draw down the inventory supply early next year to the point where home prices will rise, but at a slower pace than historic norms," Lereah said.

A week ago, the real estate group reported that existing-home sales fell 0.5% in August to a seasonally adjusted annual rate of 6.30 million, the lowest since January 2004. Meanwhile, median sales prices fell 1.7% on a year-on-year basis, the first decline in 11 years. The inventory of unsold homes rose to a 7.5-month supply, the most in 13 years.
Following a couple of days later, Alan Greenspan was joining the cheering squad.
Greenspan sounds optimistic note on housing: report

Former Federal Reserve Chairman Alan Greenspan said that last week's rise in weekly mortgage applications could signal that the "worst may well be over" for the U.S. housing industry, according to a report of a speech Greenspan gave in Canada on Friday.

Greenspan was referring to an Oc.t 4 report from the Mortgage Bankers Association which showed that mortgage applications rose a seasonally-adjusted 11.9% for the week ending Sept. 29, the largest increase in more than a year.

Refinancing applications were up 17.5% from the week before and accounted for almost 47% of all U.S. mortgage applications, their highest share since February 2005.

Greenspan, speaking at a conference in Calgary, saw this "flattening out" of mortgage activity compared to the steep declines seen in recent months as a good sign, according to a story published Friday by Bloomberg News.

Greenspan's remarks come as current Fed bankers and other economists try to figure out how much the current housing slowdown will hurt the economy.
As Barry's post pointed out, the fuller Greenspan quote was,
"I suspect that we are coming to the end of this downtrend, as applications for new mortgages, the most important series, have flattened out. I don't know, but I think the worst of this may well be over."

Guambat smirked on reading Barry's summation:
The only thing he got right in that sentence was the phrase "I don't know."

The WSJ had this to report about the current condition of the housing market today:
The increases in mortgage delinquencies and foreclosures were the biggest since at least 2000, when the firms began collecting these data. A report released Wednesday by UBS AG suggests that foreclosures won't peak until the middle of next year.

The latest increases in delinquencies are being driven in part by falling home prices and rising unemployment. The U.S. economy lost 80,000 jobs last month, according to the Labor Department, the biggest drop in five years. Meanwhile, some 8.8 million borrowers had mortgages that exceeded the value of their homes in the first quarter, with the number expected to increase to 10.6 million in the second quarter, according to Moody's

The problems are also spilling over into other sectors, with delinquencies rising for credit cards, autos and student loans. A record $715 billion of consumer debt is now in delinquency or default, according to Equifax and Moody's, up from nearly $300 billion three years ago.

But on a brighter (contrarian) note suggesting things are soon to turn to the better, the WSJ is also reporting, "The weakening U.S. economy has further to fall, according to the majority of economists in the latest Wall Street Journal forecasting survey."

Thursday, April 10, 2008

Private equity and experience

Guambat recalls roughly an old saw that goes something like, "when a man with experience meets a man with money, the man with experience ends up with the money and the man with the money ends up with an experience."

Steven Schwartzman is and was the head of Blackstone, at one time a big private equity house with loads of experience making bootles of money, mainly taking public companies private and looting them of their savings, although this characterisation is likely "unremittingly hostile and frankly devoid of factual support".

Now, showing just how experienced a man he is, he has turned around that private equity "business model" and taken money away from other suckers, the "public".

He did that by selling his private equity Blackstone partnership to the public in an IPO ("initial public offering"). Along with others, he saw (first hand and from a front row seat) that the credit markets were getting more than a bit frothy and shaking all other markets, thanks to the likes of himself, but he went one further and acted on his experience to "reposition" himself and his insiders.

Guambat has had several occasions to mention the Blackstone and its private equity cronies in posts past, and this is a sort of reminiscence of those posts, boosted along by a bit of rearviewing by Roger Ehrenberg in his Information Arbitrage blog:
Considering Blackstone, One Year Later

Amidst the detritus of today's broken markets, I felt compelled to look back and review some of my thoughts around the Blackstone IPO. Why? Because I had thought their filing had pretty much signaled a frothy equity market, and certainly a top for the private equity business, due both to the "perfect" environment for raising debt capital (e.g., savvy, opportunistic issuers coupled with liquidity-rich, brain-dead investors) and that some of the smartest money in the business wanted to take chips off the table and raise permanent capital. And were willing to take this step even in the face of much criticism and consternation from their LPs and others. Cries of hypocrisy came from every direction. But still Mr. Schwartzman pressed on.


Let's take a quick look at the data:

GSPC S&P 500 Index

3/17/2007 (date of my first post):1386.95

6/22/2007 (date of BX IPO): 1502.56
(+8.3% from 3/17 post)

3/28/2008 (last close): 1315.22
(-5.2% from post, -12.5% since BX IPO)


IPO price: $31.00

6/22/2007 close: $35.06 (+13.1% from IPO price)

3/28/2008 close: $15.28 (-56.4% from first day close)

I think we can all look back at the Blackstone IPO as one of the definitive signs of the troubles yet to come. Mr. Schwartzman and his PE colleagues all saw the same thing, the possibility of a sea change in the debt and equity markets, but only he had the guts and the intestinal fortitude to get a deal done - fast. And his decisiveness certainly paid off in spades - for Blackstone insiders, that is. In the future we should be more aware of the signs the top tier of "Money People" are sending us. Because it was all right there for us to consider. But few people wanted to believe the end was near. Sadly, this is a fixture of the human condition, particularly as it relates to investing.

Guambat's take is that, when looking for guidance, don't become enamored with what all the folks with all the money are talking about and follow their crowd; pay attention to what the guys with the experience are doing, but not talking about.

Tuesday, April 08, 2008

Of rice bowls and dust bowls

So far, it appears all the bad news in the economy has been "purely" financial. It has been a credit crunch, a housing bust, a borderline recession, but not the conflagration that was the Great Depression.

In the US, the Great Depression coincided with the Dust Bowl, a financial melt-down hammered down some more by coincident drought and hunger and unemployment and more hunger. In Europe it was aggravated by the social strife resulting from the pay-back demands of the victors of WWI and the ensuing hyper-inflation and political turmoil that WWI failed to settle. And across the world trade barriers were erected to "protect" local markets, leading to trade wars and then real ones.

Maybe we're lucky this time and the subprime mortgage meltdown, which was not contained to a small corner of the mortgage markets as we were told it would do, would nevertheless manage to contain itself to the financial markets and get bailed out by the likes of Hank Paulson and Uncle Ben.

But suppose the credit boom coincidentally occurred together with a commodity boom? Would that begin to look more like the events of the Great Depression? Would the addition of hunger and political turmoil overlay a complexity to this "merely" financial mess with a resultant wider and more serious social default?

Guambat is beginning to feel deep down in his not insubstantial gut that there is something brewing and it ain't at Starbucks. And Guambat feels that if we fall into the trap of those whose thinking goes along the lines of "if you ignore the price of food and energy there is no inflation", we will get blindsided by our own myopia.

Deep Throat goaded the journalists to "follow the money" to unveil the little story of the Nixon administration's shenanigans that led to his downfall in the Watergate Tale.

In this tale, we need to begin to follow the grains, as in the grains of rice in the rice bowls and the grains of sand in the hour glass.

Guambat begins the context for this tale by referencing a children's book, One Grain Of Rice: A Mathematical Folktale, by Demi.

Guambat hasn't read the book, but did notice this "analysis" of the book by some rather Austrian-schooled economist type economist at Kids Econ Books dot com. This analysis has provided a happy ending to the following stories by instructing us that the happy rice farmers will simply produce more rice and Uncle Ben can rest easily on the sidelines (whilst ignoring their own summary, which Guambat reckons is the real moral of the story: "Luckily, a young maiden develops a plan to get the rice back from the raja.")

Guambat wanted to give you the theoretical happy ending before presenting the not-so-happy news items appearing in the last few days, weeks and months, such as:

High Rice Cost Creating Fears of Asia Unrest by Keith Bradsher (NYT March 29):
The price of rice, a staple in the diets of nearly half the world’s population, has almost doubled on international markets in the last three months. That has pinched the budgets of millions of poor Asians and raised fears of civil unrest.

Rice is unusual among major agricultural commodities in that most of the major rice-consuming countries are self-sufficient or nearly so. Only 7 percent of the world’s rice production is traded across international borders each year, according to figures from the United Nations Food and Agriculture Organization in Rome. [Nevertehless,] “The market has pretty much ground to a halt for the past few weeks,” said Ben Savage, the managing director for rice at Jackson Son & Company, a commodities trading firm in London.

Shortages and high prices for all kinds of food have caused tensions and even violence around the world in recent months. Since January, thousands of troops have been deployed in Pakistan to guard trucks carrying wheat and flour. Protests have erupted in Indonesia over soybean shortages, and China has put price controls on cooking oil, grain, meat, milk and eggs.

Food riots have erupted in recent months in Guinea, Mauritania, Mexico, Morocco, Senegal, Uzbekistan and Yemen. But the moves by rice-exporting nations over the last two days — meant to ensure scarce supplies will meet domestic needs — drove prices on the world market even higher this week.

This has fed the insecurity of rice-importing nations, already increasingly desperate to secure supplies. On Tuesday, President Gloria Macapagal Arroyo of the Philippines, afraid of increasing rice scarcity, ordered government investigators to track down hoarders.

Vietnam’s government announced here on Friday that it would cut rice exports by nearly a quarter this year. The government hoped that keeping more rice inside the country would hold down prices.

The same day, India effectively banned the export of all but the most expensive grades of rice. Egypt announced on Thursday that it would impose a six-month ban on rice exports, starting April 1, and on Wednesday, Cambodia banned all rice exports except by government agencies.

Governments across Asia and in many rice-consuming countries in Africa have long worried that a steep increase in prices could set off an angry reaction among low-income city dwellers.

“There is definitely the potential for unrest, particularly as the people most affected are the urban poor and they’re concentrated, so it’s easier for them to organize than it would be for farmers, for example, to organize to protest lower prices,” said Nicholas W. Minot, a senior research fellow at the International Food Policy Research Institute in Washington.

Several factors are contributing to the steep rice in prices. Rising affluence in India and China has increased demand. At the same time, drought and other bad weather have reduced output in Australia and elsewhere. Many rice farmers are turning to more lucrative cash crops, reducing the amount of land devoted to the grain. And urbanization and industrialization have cut into the land devoted to rice cultivation.

In Vietnam, an obscure plant virus has caused annual output to start leveling off; it had increased significantly each year until the last three years.

Until the last few years, the potential for rapid price swings was damped by the tendency of many governments to hold very large rice stockpiles to ensure food security, said Sushil Pandey, an agricultural economist at the International Rice Research Institute in Manila.

But those stockpiles were costly to maintain. So governments have been drawing them down as world rice consumption has outstripped production for most of the last decade.

Together with rising prices for other foods, like wheat, soybeans, pork and cooking oil, higher rice prices are also contributing to inflation in many developing countries. Retail rice prices have already jumped by as much as 60 percent in recent months in Vietnam, trailing increases in wholesale prices but leading a broader acceleration in inflation. Prime Minister Nguyen Tan Dung of Vietnam announced Wednesday that the government’s top priority now was fighting inflation. Overall consumer prices are more than 19 percent higher this month than last March. The inflation rate has nearly tripled in the last year.

The government of Thailand, the world’s largest rice exporter followed by Vietnam, has not yet limited exports. But a national debate has started in Thailand over whether to do so ,and Thai exporters have already practically stopped signing delivery contracts, Mr. Savage said.

Even before Friday’s export restrictions by Vietnam and India, bids for commonly traded grades of Thai medium-grain rice had doubled this year to $735 a metric ton. Vietnamese medium-grain rice had almost doubled to more than $700 a ton, with most of the increase coming in the last four weeks. Bids jumped as much as $50 a ton on Friday.

Governments have been reluctant to tell farmers to sell their rice at low fixed prices, for fear that farmers would hoard rice or not bother to grow as much as they could. On Friday, China, which is virtually self-sufficient in rice, raised the minimum prices for rice and wheat that it guarantees to farmers.

Egyptian Workers Riot Over Rising Prices by AP (NYT April 6)
Thousands of demonstrators angry about rising prices and stagnant salaries torched buildings, looted shops and hurled bricks at police who responded with tear gas Sunday in a northern industrial town as Egyptians staged a nationwide strike.

About 150 people were arrested and 80 were wounded in the gritty Nile Delta town of Mahalla el-Kobra, where riots broke out among residents and disgruntled workers at the largest textile factory in Egypt.

Protesters stormed city hall, burned tires in the streets, smashed chairs through shop windows and ran off with computers. At least two schools were set ablaze and facades of banks were vandalized, police said.

Nearly 100 others were arrested elsewhere across Egypt, officials said, as thousands skipped work and school and hundreds protested over the rising cost of food and deteriorating working conditions.

A call for a nationwide strike Sunday was the first major attempt by opposition groups to turn the past year's labor unrest into a wider political protest against the government of President Hosni Mubarak.

The strike and riots in the north came two days before key elections for local councils, causing jitters in the government, which last week lifted import duties on some food items in an effort to soften economic discontent.

Nearly 40 percent Egypt's 76 million people live below or near the poverty line of $2 a day. The prices of staples such as cooking oil and rice have nearly doubled in recent months, amid widespread shortages of government-subsidized bread.

Inflation Is Real Risk, So Forget Bear Stearns by William Pesek (Bloomberg April 7)
Forget Bear Stearns. Ignore what Ben Bernanke and Henry Paulson are up to. Take your attention away from which hedge fund is about to blow up. Think about rice.

How Federal Reserve Chairman Bernanke and U.S. Treasury Secretary Paulson tend to the credit crisis may pale in comparison with surging costs of vital foods. The price increase of rice, the staple food for about 3 billion people, to a record last week, is the real crisis in the fastest-growing region.

That's not all. "Food is just the tip of the iceberg," says Ifzal Ali, chief economist at the Asian Development Bank in Manila. "We see signs of overheating emerging everywhere in Asia."

There are two other forces behind Asia's inflation surge, both of which have been building for years. One is asset-price gains that have their roots in low-interest-rate policies from Washington to Tokyo. The other is wages as Asians command higher pay and companies encounter skilled-labor shortages.

It's a kind of horror scenario. Yet what's most noteworthy about it is how surprised many investors and economists are.

What may surprise many is how rising food prices are less of a cyclical phenomenon than a secular one. For economists like Ali, who have been warning about this for years, it's disheartening to see so little focus on increasing investments in agriculture techniques and technologies.

And yet today's bout with inflation could markedly set back a region that has spent 10 years recovering from the Asian crisis. Central banks will have little choice but to raise interest rates, a dynamic that would slow growth and hurt equity markets.

The rise in commodities since the start of the decade has been largely masked by subsidies and export controls. That's becoming too expensive now as prices soar and leaders have a grim choice to make: vastly increase debt levels or let the public bear the brunt.

Food costs alone are a clear and present danger. In many Asian countries, Ali says, food and edible oils account for 60 percent of the consumer-price index. Even before recent increases, Asian families on average shelled out 50 percent of income on food. That portion is rising at this very moment.

Economists in the U.S. and Europe often focus on "core" inflation, which excludes food and energy. That's impossible in developing Asian economies. Looking at core CPI only masks what Ali calls a "pauperizing effect" knocking back hard-won gains in living standards.

For most people in the world, filling a gas tank is a choice. If speculators drive oil prices higher, you find a way around it as best you can. If gold prices surge, you buy silver. When it comes to the costs of food that can't easily be substituted, like rice, wheat, corn, soybeans, pork and palm oil, Asia has a problem.

"This inflation issue has a direct impact on basic well- being," Ali says. "That's why it is so politically and socially explosive."

Grains Gone Wild by the not-Austrian-school economist Paul Krugman (NYT April 7)
Over the past few years the prices of wheat, corn, rice and other basic foodstuffs have doubled or tripled, with much of the increase taking place just in the last few months. High food prices dismay even relatively well-off Americans — but they’re truly devastating in poor countries, where food often accounts for more than half a family’s spending.

There have already been food riots around the world. Food-supplying countries, from Ukraine to Argentina, have been limiting exports in an attempt to protect domestic consumers, leading to angry protests from farmers — and making things even worse in countries that need to import food.

How did this happen? The answer is a combination of long-term trends, bad luck — and bad policy.

Let’s start with the things that aren’t anyone’s fault.

First, there’s the march of the meat-eating Chinese — that is, the growing number of people in emerging economies who are, for the first time, rich enough to start eating like Westerners. Since it takes about 700 calories’ worth of animal feed to produce a 100-calorie piece of beef, this change in diet increases the overall demand for grains.

Second, there’s the price of oil. Modern farming is highly energy-intensive: a lot of B.T.U.’s go into producing fertilizer, running tractors and, not least, transporting farm products to consumers. With oil persistently above $100 per barrel, energy costs have become a major factor driving up agricultural costs.

O.K., I said that these factors behind the food crisis aren’t anyone’s fault, but that’s not quite true. The rise of China and other emerging economies is the main force driving oil prices, but the invasion of Iraq — which proponents promised would lead to cheap oil — has also reduced oil supplies below what they would have been otherwise.

And bad weather, especially the Australian drought, is probably related to climate change. So politicians and governments that have stood in the way of action on greenhouse gases bear some responsibility for food shortages.

Where the effects of bad policy are clearest, however, is in the rise of demon ethanol and other biofuels.

The subsidized conversion of crops into fuel was supposed to promote energy independence and help limit global warming. But this promise was, as Time magazine bluntly put it, a “scam.”

This is especially true of corn ethanol: even on optimistic estimates, producing a gallon of ethanol from corn uses most of the energy the gallon contains. But it turns out that even seemingly “good” biofuel policies, like Brazil’s use of ethanol from sugar cane, accelerate the pace of climate change by promoting deforestation.

And meanwhile, land used to grow biofuel feedstock is land not available to grow food, so subsidies to biofuels are a major factor in the food crisis. You might put it this way: people are starving in Africa so that American politicians can court votes in farm states.

Oh, and in case you’re wondering: all the remaining presidential contenders are terrible on this issue.

So is there anything YOU can do about it? Probably not much.

But if you're feeling both erudite and possessed of a
caring externality (see definition here), you may benefit from a trip to the Free Rice project's website, and by playing their wordsmithy game. Guambat reckons Guambat's Mom, should she happen upon this post and get this far down into it, will go mad until she bests the "rare" 48 level.

Better yet, maybe become one of those "anonymous donors" who sponsor the site, perhaps even a non-anonymous one.

For every word definition you get right, those worthy sponsors donate
20 grains of rice to the world's hungry. And like as not drive up the price ever higher, but the bulk of the world's economists will be none the Ludwig von Miser.

Friday, April 04, 2008

By the (Deal) Book

A fantastic collection of quick reads from the NYT DealBook. Guambat will have to get a computer screen piped into the "library".