A follow-up to the “real” Trade of the Decade: 140,000% in April, another 1,900% now
The “Goldilocks economy” redefined by Fed economists… who say this economics stuff is hard
Checking real-world economic stats — rail traffic, state tax receipts
As we prepare for Vancouver conference, media mogul advises we don’t come back
The ghost of George Steinbrenner looks down upon 5 readers debating estate tax
“Goldman, those bastards.”
That’s how we began these 5 Minutes on April 19, in the wake of the SEC’s civil complaint against Goldman Sachs. As we put it then, “The SEC is either stupid or corrupt for announcing their suit on options expiration Friday, the most volatile day of the month.”
That’s because if you’d been lucky enough to hold April 170 Goldman put options that day, you could have made 140,000%… as we showed in this chart.
Notice the unusual volume in these out-of-the-money puts in the days leading up to the announcement.
“Who in their right mind would bet on such a large fall for such a typically stable company?” we asked. “Someone who knew what was coming.”
Which brings us to the present moment…
Here we sit today… on options expiration Friday.
After the close yesterday, the SEC announced Goldman was settling the case. And if you’d been lucky enough to hold April 150 Goldman call options, you’d be sitting mighty pretty this morning.
No, you wouldn’t have made 140,000%. But 20 times your money is nothing to shake a stick at.
Once again, we see some curious volume spikes in the run-up to the announcement… to say nothing of the nearly 100,000 call contracts traded just yesterday for expiration today.
So now we ask… Who in their right mind would bet on such a sharp rise? Maybe someone in the SEC should look into that, too.
We weren’t exactly going out on a limb when we forecast Goldman would settle the SEC complaint by admitting no wrongdoing and forking over a sum of money that sounds impressive to the lumpen.
But the truth is $550 million amounts to about 14 days worth of Goldman’s first-quarter profits. $300 million of that goes straight into the Treasury. The other $250 million goes to the folks who bought securities from Goldman without disclosure that the only reason those securities existed is that John Paulson wanted to short them.
A criminal case against Goldman is still pending.
After an hour of trading, the Dow was down 150 points.
Earnings from Google and Bank of America disappointed. So did consumer confidence as measured by Reuters and the University of Michigan. The gauge plunged from 76 late last month to 66.5 now — just a hair off the consensus guess of 74.3.
Poring over the minutes from the Federal Reserve’s June meeting, something jumped out at us. In this new decade, Goldilocks has been redefined.
You remember the Goldilocks economy, right? That’s what conventional wisdom told us we had during much of the previous decade… right up to the moment everything fell apart. Growth was strong enough to avoid the need for stimulus, but not so strong that inflation was in danger of getting out of control. Not too cold, not too hot.
Now the Fed has spawned a whole new conception of the little girl, as if she’s grown up a bit and been disabused of her youthful delusions. The Fed minutes released this week say growth will be too slow to return to full employment in the next two years… but it’ll still be strong enough that “policy stimulus” in the form of asset purchases won’t be needed, at least in the near term.
In other words, the economy, instead of being “just right,” is lukewarm, in the Fed’s estimation. In time, we’re sure Goldilocks will become a surly teenager, apt to run away and live on the streets.
For whatever our opinion is worth. But hey, why should you listen to us? We don’t have a Ph.D. in economics. And the Ph.D.s we associate with are clearly not up to the standards of one Kartik Athreya.
“I argue,” says Mr. Athreya, “that neither noneconomist bloggers, nor economists who portray economics — especially macroeconomic policy — as a simple enterprise with clear conclusions, are likely to contribute any insight to discussion of economics and, as a result, should be ignored by an open-minded lay public.”
Mr. Athreya is an economist at the Richmond Fed who recently penned an essay titled “Economics Is Hard: Don’t Let Bloggers Tell You Otherwise.”
To make it plain, he says, “Writers who have not taken a year of Ph.D. coursework in a decent economics department (and passed their Ph.D. qualifying exams), cannot meaningfully advance the discussion on economic policy.
“The main problem,” he writes, “is that economics, and certainly macroeconomics is not, by any reasonable measure, simple. Macroeconomics is most narrowly concerned with the tracing of individual actions into aggregate outcomes, and most fatally attractive to bloggers: vice versa. What makes macroeconomics very complicated is that economic actors… act.
“Even if one wanted to think of all economic actors as foolish and purposeless organisms making utterly random choices, one must accept that their decisions will still affect, and be affected by, what others do.”
Wow… So the economy is like a complex ecology with a nearly infinite number of variables. Actually, we’d agree. The only difference is Mr. Athreya believes those variables can be modeled, planned, and tweaked by Ph.D.s at the Federal Reserve to achieve optimal outcomes. We think those variables are beyond anyone’s capability to manipulate successfully and we’d all be better off the Ph.D.s would get the hell out of the way.
Mr. Athreya suffers from what Thomas Sowell titled one of his many books — The Vision of the Anointed. And if Mr. Athreya is hung up on credentials, Sowell has an econ Ph.D. from Chicago. Mr. Athreya got his at Iowa. (No offense to the Hawkeyes among our readership.)
We think it’s more like Mr. Athreya can’t stand the fact that in humor there is truth. As is evidenced by this satirical screenshot of Treasury Secretary Tim Geithner’s computer desktop, as created by the evil bloggers at Zero Hedge:
You’ll note how prominently Goldman figures into Mr. Geithner’s day.
Consumer prices as measured by the Commerce Department fell 0.1% in June, mostly because of lower gasoline prices. It’s the third straight monthly decline. If you take the statisticians at their word, the cost of living has increased 1.1% in the last 12 months.
It’s at times like these we like to examine some of our favorite real-world economic indicators, the kind that can’t be massaged by government therapists. Like rail traffic…
That’s quite a drop in the latest four-week rolling average as calculated by Atlantic Systems. Too soon to say it’s a trend, but it’s worth noting that the drop would be worse if you took metals and autos out of the equation… and auto sales are starting to fall off.
How about tax receipts? That’s another number the statisticians can’t fudge. As we mentioned Tuesday, The Rockefeller Institute of Government says state governments took in 2.5% more revenue in the first quarter than they did in Q1 2009. Unfortunately, the bulk of that increase can be attributed to income and sales tax increases in New York and California. Factor those out and the number fell 1.5%.
Our own random survey of individual states is likewise grim…
• Overall revenue in Georgia fell 9.1% in fiscal year 2010, which ended June 30
• Kentucky just ended its fiscal year with 2.4% less revenue than the year before
• Total revenues in Hawaii were up 4% — but only because the state is delaying income tax refunds. Take those away, and the drop is 1%.
We head up to Vancouver this weekend for the Agora Financial Investment Symposium. Perhaps given these remarks by media magnate John Malone, we shouldn’t come back.
“My wife, who is very concerned about these things,” Malone told Denver Business Journal yesterday, “moved all her personal cash to Australia and Canada. She wants to have a place to go if things blow up here,” says the man who built the old TCI cable TV empire and now owns DirecTV, among other ventures.
“Canada has a lot more fiscal and bank responsibility than most places in the world and lots of natural resources. We have a retreat that's right on the Quebec border. We own 18 miles on the border, so we can cross. Anytime we want to, we can get away. It would probably be illegal, but we could go. Actually, our snowmobile trail goes right on the border."
Even if it doesn’t hit the fan, Malone says the U.S. economy has hit the wall. "The U.S. has the highest corporate tax rate in the world. Big companies are sitting on their cash because they are not sure what they should do, but small businesses can't get cash. The economy is stalled."
Malone is free to retreat. We’re not all there yet. But we do plan to discuss the coming Assault on Enterprise at this year’s get-together. Check your inbox for regular reports from Vancouver all next week.
“As to why we are eager to dispose of Steinbrenner's money,” writes a reader eager to fire back in our discussion of the estate tax, “the rationale (at least to me) is not so much to give it to the government (which in all likelihood will waste or misuse it), but rather to limit what passes to the heirs to give them a free ride in the lap of luxury.
“In my opinion, it is wonderful for someone to make a great deal of money and spend it as they see fit. However, I think it is reasonable for the government to take a large portion at death, as I don't consider it appropriate to make succeeding generations extraordinarily wealthy/quasi-royalty simply because one of their ancestors happened to be fortunate and skillful enough to amass a couple of billion dollars.
“I happen to be a Republican, but I don't see long-term concentration of wealth in the hands of those who didn't earn it as a desirable result in a society that still has some semblance of democracy and meritocracy, however debatable and questionable that may be these days. 🙂 Instead of calling it the death tax, perhaps we could call it a partial equalizing tax.”
The 5: Okay, Warren. Why would we want to turn such a grave responsibility over to the government? The Constitution provides for equality before the law. But to ‘equalize’ after a lifetime of financial transactions?
“To those who complain about the impact of the tax on the politically favored family farm or business,” the reader continues, “I say it is a good problem to have”.
The 5: Except it’s not about politically favored family farms or businesses. It’s about family farms and businesses falling into the hands of the politically favored.
As an example: Whatever happened to locally owned family newspapers? According to Harvard’s Business History Review, there were 1,300 of them in the early 1950s. By 1980, only around 700. Why? Heirs didn’t have the money to pay the tax bills. Under IRS rules, it was far more desirable for an aging owner to sell to an out-of-town buyer and get paid in stock of the acquiring firm. This is exactly how Gannett built an empire of cookie-cutter crappy newspapers stretching from Poughkeepsie to Palm Springs.
Look in just about any industry and the story’s the same. The estate tax has the effect of concentrating wealth in fewer and fewer hands… yet its biggest champions are people who believe it’s a just redistribution of wealth. Amazing…
“I wholeheartedly agree with your position on the ‘death tax,’” fires back another. “The State does not deserve one penny of Steinbrenner's leftover wealth.
“The fundamental problem with those CPAs who wrote in advocating the death tax, or any tax for that matter, are self-serving schmoes trying to shore up their own employment security. CPAs that practice tax accounting are the IRS' biggest advocate; the more complex the tax code, the better for them, for those tax accountants are acutely aware of just how afraid most people are of the IRS.
“If it is relevant to you, I am CPA, I've done tax work for individuals — I was amazed at how many people are afraid of the IRS, particularly the boomer generation. I used to believe that CPAs were valued business partners, but after nine years, I've come to understand that a CPA is really just someone who solves a problem you didn't know you had in a way you don't understand.”
“My parents (father a member of the NYSE) bought high-end antique furniture in the 1920s,” writes a third. “When Father died, the IRS appraised the furniture far above fair market value and the estate had to pay the taxes in cash. When Mother died, the IRS came in again and did the same. The furniture passed to my sisters who owned the furniture jointly. When one sister died, the IRS came in again and the same furniture was taxed a third time, again based on appraisals well above market.
”There was also antique silver in the series of windfalls for the IRS. A family lawyer has advised us to hide the silver services so they won't be taxed again when my sister dies.
”Keep up the good work, but don't give my name to the IRS!”
The 5: Your secret’s safe with us.
Have a good weekend,
The 5 Min. Forecast
P.S. One of our leading analysts is just out with his “secret retirement blueprint.” You can see his audio/video presentation right here.