National Pulse Index - October 28th

Modest comeback for Dems.

House model still at +71 for Repubs.

Bond Bubble Redux - the "Quality Bubble"

Two years ago, we watched a credit bubble burst. The bubble centered around low quality borrowers, primarily in the sub-prime mortgage area. Now, we have a different kind of bubble: a quality bubble.

Ask yourself, what happens when the government issues, say, a ten-year note? Investors buy it and collect interest for ten years and then get their principal back. Simple enough. 

But where does the government get the money to pay investors back? Well, if the government starts to run surpluses between now and then, it can use cash to pay investors back.

What’s that, Sparky? You’re laughing, so I can’t quite understand you…oh, you think I was joking about the surpluses? Okay, gotta agree with you there. Seems we’re careening in the other direction, actually.

Option two is we get more investors to invest in new debt in order to pay the old investors back. That should be easy, right? It’s never been a problem before.

A what? A Ponzi, you say? Well, that sounds extreme, Sparky. New investors will simply be lured in to pay off the early investors before everyone figures out that…hey wait, that sounds just like…okay, you got me again. In fact, now that I think of it, the government will have to borrow money not just to pay off bondholders, but also to finance all the new deficit spending between now and then…eventually, we run out of “greater fools.”

But wait, there’s still one more option! The government can always print money to pay people back. The Fed can just buy our debt from us! Good to know that’s always an option of last resort. Wouldn’t want the U.S. to drop to junk bond status.

The Fed is already doing that, you say? C’mon, be serious. You are? $1.5 trillion worth in 2009 alone? Holy Quantitative Easing, Batman!

Gosh, no wonder government bond rates are so low. The Fed is eating its own cooking. Plus, banks have been incentivized to be heavy buyers to repair their balance sheets. So 10-year rates are down around 2.6%. 2-year rates are – get this – at 0.38%. Just curious, Sparky, who do suppose finds this an acceptable return over two years? Give a hundred bucks and get back $100 plus 76 cents. Nice!

Actually, this is basically happening all around the world. Here are some sample 10-year bond rates.

UK             3.14%
France        2.96
Germany    2.56
Italy           3.92
Japan         0.90

Japanese debt is almost 200% of GDP, exceeding all countries of the world other than Zimbabwe, and yet people loan them money at close to zero. They, and others, will run out of greater fools soon.

Which leads me back to the notion of the quality bubble. There are systemic reasons – the government and bank buying I mentioned – why the yields on debt of highly profligate nations (including our own, alas), are being driven to record lows. These systemic forces are completely at odds with the fundamentals. Which do you think prevails? 

Sparky asks if this is a trick question. No, Sparky.

The trigger will be inflation. 

Hey, that reminds me, where the heck is it, anyway? It’s there, hiding in the weeds, waiting. Inflation hasn’t come back because there’s no “velocity” of money, which is to say the trillions of dollars of cash out there is hiding in our nation’s mattresses, both personal and corporate. It starts moving again when there’s loan demand, and that doesn’t happen until employment comes back. There is a tight correlation between employment and money velocity:

The correlation here is 0.75, which is really high for anything in economics land.

When people start getting jobs, inflation comes back. This time it will be nasty.

Vote or Die - I Think Not

Every other year around this time we are lectured by celebutards and dissolute rock stars on the importance of voting. Never mind that they often don’t bother to vote themselves. What’s important is projecting a hip, sophisticated public image...dude.

But I applaud the fact they don’t vote. If you can’t name the vice president, how is voting going to help you or society? Please, stay home. Don’t vote. Voting is not a responsibility, informed voting is. If you’re not up to the task, don’t inflict yourselves on the rest of us.

In college, I had political science professors who would constantly bemoan low voter turnout, which they viewed as a manifestly bad thing. Naturally, when a bunch of poli sci profs all agreed, it was my instinct to take the opposing view. But first, I needed facts. 


So, off to the musty stacks (this was pre-internet, of course), where I examined voter turnout ratios around the world. It turns out it was very high (90% plus) in places like the Soviet Union and Cuba, while being low in the U.S. (presidential election turnouts were around 50% then, and only slightly higher now). If you’re wondering about the existence of elections in communist countries, they did indeed have them, but they were just a show for the West so they could call themselves “democratic.” Even though there would only be one candidate, you would vote because you feared retribution if you didn’t. Ergo, high turnout.

The next group of countries I would describe as distressed third world democracies, all of which had high turnouts (70-80%). Were these countries somehow better than ours, since they obviously had such good citizens?

The pattern that emerged, as I spent an all-too-rare late night in the stacks, was that really miserable countries have high turnouts while developed and prosperous countries have low turnouts. I correlated turnout with GDP, and it turned out to be a pretty good negative correlation.

The explanation? In countries like the U.S., with well-developed laws protecting one's liberties and property rights, it doesn’t always matter much which candidate wins. One might help you marginally, the other hurt you marginally, but the difference isn’t perceived by most as enough to justify paying attention. There is a “cost” associated with the time it takes to become engaged and informed, and for most people the perceived benefit of voting must overcome the cost in order to vote.

In a distressed country, the landscape is quite different. Who wins can determine whether there will be food on your table next year. You damn well vote.

My professor gave me a C. I was miffed at the time, but today I view it as a merit badge.

As an aside, the election next Tuesday represents probably the clearest ideological choice we have been presented in decades. There are two vastly different paths being presented for our country’s future. With more at stake than is typical, if my long-ago theory holds true we should see an uptick in turnout. The last few midterms have very consistently averaged about 37%. Let’s see where this one ends up.

October 29th Inex Update

Short term momentum still appears to favor Republicans.

For an explanation, go here: National Pulse Index

House model is at +71 seats for the Republicans.

October 27th Index Update

For an explanation of this, go here:

National Pulse Index

At this point we can say we've seen a momentum shift for the Republicans over the last week. Pennsylvania's senate race, much hyped when it appeared the Democrat Sestak was closing, now looks more solid for the Republicans. California and Connecticut are problematic, but Boxer's still not a lock. Here's the drill on the Senate: the Republicans will likely pick up nine seats and maybe a tenth, the tenth being Washington which is tight but with a slight edge to the Democrats. The 10th seat shifts Senate power.

Lots more house polls flooding in. My model now has the Republicans picking up 71 seats, which is considerably more than the conventional wisdom (which, itself, has been heading north rapidly - I'd say it's around 50 now). The way the model is constructed, it's almost impossible that it will change by more than three or four seats by Tuesday. this is a new one for me, so we'll see how I do.

Index Update

Scads of polls today. Yesterday, it took a big one day reading (+41) for the Dems to swing the Index in their favor. Today, the Republicans fought back with the biggest one day move yet recorded (a whopping +93) which swung the index well back to their advantage. Remember, the index uses a 3-day moving average.

For an explanation, click here: http://thenakeddollar.blogspot.com/2010/10/introducing-national-pulse-index.html.

House model stands at +69 for the Republicans.

Index Update - a Good Day for Dems

See here for explanation:

http://thenakeddollar.blogspot.com/2010/10/introducing-national-pulse-index.html

Commercial Shoot

Had an interesting experience the other day. My wife and I allowed some folks to come into our home to shoot a print ad for an Alzheimer's medicine. It was their third day of shooting in three different homes. How many people do you think it takes to do this? Keep in mind, the end product was a grand total of three images that will appear in magazines.

Answer: more than fifteen. There were directors, producers, photographers, make up people, wardrobe, technology, and lighting specialists, caterers, models, of course, and Lord knows what else. There were six or seven vehicles including a huge Winnebago. How much could this all cost? I don't know, but they paid us quite well and, boy, do they eat well. No sandwiches for this group.

One of the images was a shot of a mother and daughter baking together. I went on the the internet and found this:

in about 15 seconds. Do they know about the internet? What am I missing here?

Having said that, they were very nice people and I sure hope they come back.

National Pulse Index Update

The Republicans continue to enjoy a good few days, but overall the index has been treading water for a couple of weeks. Democrats do not have momentum, but they have succeeded, at least, in stopping Republican momentum.

Incidentally, my source for polling data is realclearpolitics.com, which is an excellent poll clearinghouse.

My house model now has Republicans picking up 72 seats.