Financial Sarcasm Roundup for 02/10/16

Today is Ash Wednesday in the Roman Catholic Church. I am no longer a member of any religion so I don't need to attend church services. My sarcasm never went over well during prayers anyway.

Europe wants the G20 to target growth. Got it. One continent's finance people want the world's leading finance people to decouple global growth from China as quickly as possible. Panic is not yet in the air. The real panic comes when the world's bifurcated economies - one for financial flows, one for real goods - trend down together. The rest of the world (ROW, in money manager parlance) can't get China off its balance sheet fast enough.

Coal power plant cleanliness gets a breather, so to speak. The charred, hard carbon miners have taken a beating for years thanks to the world's zeal for lower emissions. I don't see how the world can substitute for metallurgical coal and coke in making steel. China's crashing demand has put the lid on steel demand anyway, so even coal's industrial use faces dark days. It would take a lot more backyard barbecues for charcoal demand to make up for declining coal power.

Gold prices respond positively to the Federal Reserve's interest rate hints. Gold traders and retail investors view the Fed's experiment as a mistake, proving they are a reactive audience. The Fed's "layer cake" message tastes bitter to gold bugs stuck in old views of monetary tightening. The new era of a ginormous Fed balance sheet that constricts traditional stimulus means gold traders missed the news about what normal interest rates now mean. A normal situation is where the FOMC makes any change, in any direction other to zero.

Tesla Motors lost money again but its shares kept rising. The more cars they sell, the more money they lose. Investors are really stupid to think that a money-losing car company will be worth more. There is something very wrong with Tesla's inability to control both its fixed costs and variable costs. Software entrepreneurs need a whole new set of skills before jumping over to hardware.

I would like to start a religion that celebrates Cash Wednesday. It would be an opportunity for me to stand up and wave cash around to the applause of my congregation.

Listicle of Financial Inclusion Institutions

Financial inclusion is an emerging topic in both the traditional finance sector and the social capital arena.  Here's a rundown of the major institutions facilitating and tracking this phenomenon.

The Center for Financial Inclusion (CFI) has a target date of 2020 for full inclusion.  That's ambitious, so five years from now we can expect to see inclusive programs all over the developed world.  If the subject is ever going to catch fire, it must cover both the developed world and emerging markets.

The G20's Global Partnership for Financial Inclusion (GPFI) is a serious effort to integrate several multilateral initiatives.  It matters if it keeps the developed world's sub-ministerial task forces on track.  The risk is that the G20's recent endorsement of coordinated monetary stimulus will disrupt the capital account flows the developed world needs to meet inclusion targets.

The World Bank's Consultative Group to Assist the Poor (CGAP) develops a policy architecture for implementing inclusive plans.  That's a fancy way of saying the group has sample rules that any country can implement.  Check out their discussions of microcredit.  The World Bank also maintains GPFI's G20 Financial Inclusion Indicators, along with its own Financial Inclusion data and Global Findex.

The Alliance for Financial Inclusion (AFI) is probably the most inclusive policymaking body.  The difference with AFI is the participation of experts from the developing world to ensure the other coordinating bodies aren't making policy in a vacuum.

Billions of formerly marginalized people are crossing the chasm between the non-integrated gap and the functioning core.  Keeping up with the times means knowing how they will all grow wealthy.  Financial inclusiveness is the developed world's welcome mat laid out for the world economy's brand new members.

Body Language Hints Greece Is Not For Turning After G-20 Meeting

Tonight's NPR Marketplace broadcast repeated a Margaret Thatcher quote relevant to Greece's negotiating position:  "The lady's not for turning."  It is a very pithy assessment of the Greek approach to the eurogroup.  The two sides met today and all public reports indicate that they have not agreed to resolve Greece's pending debt crisis.  Body language can tell the story.

I have not located any real-time photos or videos of Jeroen Dijsselbloem, the Dutch finance minister who chaired the talks, after he held the post-meeting press conference.  The talks achieved little of substance.  I am certain that hedge funds on both sides of the Atlantic are frantically analyzing the facial expressions and body language of the eurogroup participants as they emerged from the meeting.  Confident posture would indicate a strong negotiating position, while slouching and slinking away from the cameras indicates the euro folks fear Greek demands.  Greek finance minister Yanis Varoufakis appears remarkably confident in his most recent public appearances, perhaps even flippant.

The NPR broadcast I referenced above offered comments from  economist James Galbraith, a former colleague of Mr. Varoufakis and the son of famed economist John Kenneth Galbraith.  His comments emphasized Mr. Varoufakis' rationality and knowledge of game theory.  I described the two parties' likely game theory boundaries in a previous article.  The Greeks are playing a weak hand the only way they can . . . with an immovable negotiating position that will force Europe's hand.

Europe thus has two choices if Greece will not tolerate any form of debt restructuring that requires another political upheaval in Athens.  I now consider an ECB-driven quantitative easing bailout to be slightly more likely than a Greek exit from the eurozone.  The reason for my shift is the changing atmosphere among the developed world's finance leaders.  A consensus emerged at the latest G-20 finance ministerial meeting favoring concurrent monetary stimulus and tolerating multiple currency devaluations.  Group photos of that meeting speak volumes.  The expressions on the faces of Christine Lagarde and Janet Yellen were priceless.  Mme. Lagarde of the IMF looked she was having the time of her life, entertaining several finance ministers as if she were fending off romantic suitors.  Ms. Yellen, on the other hand, looked like someone had just handed her a multi-trillion dollar bill for a party she knows the Federal Reserve cannot afford.

Portfolio managers should study financial statements, but when data is unavailable they must seek anecdotal indicators of human intentions.  They need financial analysts who can detect anomalies in human psychology.  Anomalies manifest in speech, facial expression, posture, and gait.  The US intelligence community produces trained human intelligence (HUMINT) analysts who notice these details.  These highly motivated people need something to do when they leave the military.  They might as well move to Wall Street and work in business intelligence.  Figuring out how hard the Greeks are riding Europe is right up their alley.

The Limerick of Finance for 09/21/14

G20 says growth is ahead
While Europe's stagnation they dread
A black swan awaits
That collection of states
Contagion can easily spread

Treasury Secretary Jack Lew In California And Australia

I attended US Treasury Secretary Jack Lew's talk last week at the World Affairs Council.  I like hearing from top public officials firsthand.  They're going to hear from me eventually once my reputation achieves critical mass, so they might as well get used to seeing me at their public appearances.  I held back from publishing my comments on Secretary Lew's remarks because I wanted to compare his San Francisco talk to comments at the G20 ministerial summit in Australia.  He stopped in San Francisco on his way to that summit and I assumed he would stay on message.

I agree with Secretary Lew that resolving the debt limit conflict in Congress is a positive development.  The long history of the debt limit proves that it has never actually limited the growth of the national debt.  Eliminating it completely will end the hypocrisy of pretending to be serious about reducing the national debt.  His comments on international relations were more circumscribed, endorsing Iran's oil and financial sanctions and advocating IMF-style reforms in Ukraine.  Most Americans probably don't know that the US Department of the Treasury has a significant international portfolio.  Treasury has extensive guidelines for implementing the sanctions against Iran.

Secretary Lew addressed Bitcoin obliquely, leaving open the possibility that existing regulation and settlement systems could adapt to digital currencies.  He did not say whether Bitcoin would satisfy any legal tender requirement, which in the eyes of common law is really the most important test for settling transactions.  The IRS has not yet ruled on how gains realized in Bitcoin transactions may be taxed.  I'm guessing they'll be taxed as capital gains because Bitcoin acts like an asset when investors take positions.  If it quacks like a duck . . . it's probably not a swan.

I do not agree with the Secretary's belief that raising the minimum wage will raise significant numbers of Americans out of poverty.  His office should read the CBO's report from last week that projects large job losses from an increase in the minimum wage.  The Treasury's own data shows that most minimum wage earners are young and not heads of households.  They have the rest of their careers to seek wage gains.

I was very shocked to hear the Secretary refer to the cash reserves many large US corporations maintain as "retained earnings."  Oh wow, that is just so wrong.  Retained earnings is an accounting classification for the excess shareholder's equity built up from many profitable reporting periods.  It is not at all the same thing as holding cash!  The retained earnings accumulated in a year may not precisely match the cash committed to capex or other functions.  I can't believe this guy was COO of Citigroup's wealth management unit.  He learned nothing about corporate reporting if he thinks cash on hand equals retained earnings.  I couldn't forgive that misstatement after he said he wanted corporations to spend that cash pursuing growth.  I assess corporate America's huge cash hoard as a hedge against another financial market crisis.  The hoarding reflects the rational belief that Washington has not resolved the underlying causes of the 2008 crisis.  The US Treasury Secretary has a role to play in doing the right thing.  It's nice that he's listening to corporate executives talk about workforce skills training, infrastructure, and immigration reform.  Here are some other things he needs to hear, straight from the CEO of Alfidi Capital.  Bring us real stress tests for banks, the resurrection of Glass-Steagall, and the prosecution of fraudster financial executives if you want us all to get serious about risking cash on growth.

I would have preferred to hear Secretary Lew discuss the financial condition of the US government in more detail.  The evidence of mounting problems has been in the public domain for years.  The Federal Reserve's balance sheet is larger than ever and is extremely sensitive to rising interest rates.  Any potential losses would end its remittances to the Treasury.  The Foreign Credit Reporting System tables reveal the US government's small exposure to foreign debtors.  That is a huge change from much of the 20th Century when the US was the world's largest creditor, and US development aid opened new markets for American exports.  The annual trustees' report for Social Security and Medicare made it clear in 2013 that some of the funds' programs were facing imminent depletion.  Secretary Lew's signature is on those reports.

Here's the postscript from the G20 meeting.  The assembled finance ministers agreed on a two percent GDP growth target for this year.  They do not seem to know how to meet that target.  No one wants to talk about austerity anymore after riots in Greece and Spain spooked the European troika away from policy reforms.  Secretary Lew's advocacy of IMF-type monetary reforms was reserved for the home audience at the World Affairs Council.  The IMF prepared a report for this G20 meeting with notable changes in rhetoric.  The old advocacy of shock therapy through free market reforms is less visible now.  The new tone embraces indefinite monetary stimulus and infrastructure investment.  The Keynesian revolution is complete among the world's policy elite.

Secretary Lew talks a good game.  I like the guy.  His staff needs to prep him some more on financial terminology so that he doesn't appear to be a fish out of water with offhand references to "retained earnings."  This year's G20 action items will be judged by their success or failure in any future crisis.  The Secretary upheld his office's traditional reluctance to comment on the Federal Reserve's monetary policy.  That's a wise choice.  The hard part today is that so much of the G20's agenda is hostage to continued central bank monetary stimulus.  Specifics on just how the Secretary and his counterparts intend to realize two percent global growth are extremely relevant.  The Secretary's case for recovery so far rests on ARRA and Dodd-Frank.  He owes America a stronger case.