Topic: Finance, Banking & Monetary Policy

Investors Bet against the Stimulus Plan and/or Tim Geithner

I rarely give investment advice unless asked.  But I’ve found that most people are unduly shy about using short sales to hedge and, yes, “speculate.”

If you were invested in, say, an S&P 500 index fund over the past two years, you were actually speculating that stocks of banks and homebuilders would go up.  Index funds are weighted by the value of shares, so financial firms in particular were much too heavily weighted (the market has fixed that).

Exchange-traded funds (ETFs) make it easy to hedge that sort of unwanted long position with shorts.  You buy them like stocks and they have similar trading symbols like SKF or TBT.   Since 2007 (but not lately), I was invested in SRS which shorts real estate, and SKF which shorts financial stocks.  Those are ultra-short funds, which means the rise about twice as fast as those stocks fall in a day (though not over time).  The gains from SKF sometimes topped 150%.

In a May 1 2008 blog, I revealed that “I am shorting oil through an exchange-traded fund (DUG), and shorting precious metals through a mutual fund (SPPIX). I’m also slightly long the dollar (UUP).”  Shorting energy stocks and going long the dollar were contrarian positions, but profitable.  Shorting precious metals (then, not now) was partly because platinum and silver have industrial uses; gold held up fairly well.

If you still hold any mutual fund or 401(k) that is invested in long-term Treasury bonds that shows admirable patriotism and courage but not much caution.

Two old friends, one at a hedge fund the other a California economist, told me they think the government will be borrowing too much, and that the Treasury and Fed are trying too hard to expand money and credit.  That sounds like an easy bet to me.  I suggested another Pro Shares Ultra Short fund called TBT.  It makes a strong, leveraged bet that the price of 30-year Treasury bonds will fall and long-term interest rates will rise.

Since the end of 2008, this bet that government borrowing will cease being so cheap has risen by 36% – from about $36 to $49.

And that happened even though the Fed has threatened to buy long-term Treasuries.

If the Obama team’s “stimulus” plans and “rescues” keep making it this lucrative to bet that long-term long-term interest rates are heading up, what sort of “stimulus” is that?

Stop the Madness!!

According to Bloomberg.com:

U.S. Taxpayers Risk $9.7 Trillion on Bailouts as Senate Votes

The stimulus package the U.S. Congress is completing would raise the government’s commitment to solving the financial crisis to $9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages…

Only the stimulus package to be approved this week, the $700 billion Troubled Asset Relief Program passed four months ago and $168 billion in tax cuts and rebates approved in 2008 have been voted on by lawmakers. The remaining $8 trillion in commitments are lending programs and guarantees, almost all under the authority of the Fed and the FDIC. The recipients’ names have not been disclosed.

“We’ve seen money go out the back door of this government unlike any time in the history of our country,” Senator Byron Dorgan, a North Dakota Democrat, said on the Senate floor Feb. 3. “Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. How much from the FDIC? How much from TARP? When? Why?”

The pledges, amounting to almost two-thirds of the value of everything produced in the U.S. last year, are intended to rescue the financial system after the credit markets seized up about 18 months ago. The promises are composed of about $1 trillion in stimulus packages, around $3 trillion in lending and spending and $5.7 trillion in agreements to provide aid….

The $9.7 trillion in pledges would be enough to send a $1,430 check to every man, woman and child alive in the world. It’s 13 times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office data, and is almost enough to pay off every home mortgage loan in the U.S., calculated at $10.5 trillion by the Federal Reserve…

Commitments may expand again soon. Treasury Secretary Timothy Geithner postponed an announcement scheduled for today that was to focus on new guarantees for illiquid assets to insure against losses without taking them off banks’ balance sheets. The Treasury said it would delay the announcement until after the Senate votes on the stimulus package…

When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and then Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. The Federal Reserve so far is refusing to disclose loan recipients or reveal the collateral they are taking in return…

Week in Review

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Cato Leads Opposition to Fiscal Stimulus

In reaction to statements from Obama administration officials who say “all economists agree” that the only way to fight the economic recession is to go on a massive government spending spree, the Cato Institute took out a full page ad in the nation’s largest newspapers that showed that those words were not true. Signed by more than 200 economists, including Nobel laureates and other highly respected scholars, the statement was published this week in The New York Times, The Washington Post and many other publications.

On the day the ad ran in The New York Times, Cato executive vice president David Boaz added more names to the list of economists who are skeptical of the spending bill.

Commenting on the principles behind the stimulus, Cato adjunct scholar Lawrence H. White and fellow economist David C. Rose discuss why we can’t spend our way out of this mess:

You can’t solve an excessive spending problem by spending more. We are making the crisis worse.

In The Wall Street Journal, Cato senior fellow Alan Reynolds examines the numbers and discovers that each government job created  will cost taxpayers a staggering $646,214 per hire.

The stimulus package now moving through Congress will spend nearly $1 trillion that the government does not have. With the nation already $1.2 trillion in the hole, Cato director of Tax Policy Studies Chris Edwards discusses the sheer illogic behind pushing for stimulus at a time like this:

If I get up in the morning and drink five cups of coffee and that doesn’t stimulate me, I don’t go and drink another five. I’d recognize my addiction problem and start reforming my bad habits. Federal policymakers should do the same.

For more on the stimulus plan, read Edwards’s Tax and Budget Bulletin, “The Troubling Return of Keynes,” (PDF) co-authored by Ike Brannon, former senior adviser to the U.S. Treasury.

During the House vote on the stimulus bill, just 11 Democrats voted against it, leaving Boaz to ask, “What Happened to the Blue Dog Democrats?

“Blue Dogs supported fiscal responsibility at some vague point in the misty past, and they will strongly support fiscal responsibility at some vague point in the future,” writes Boaz. “But right now they’re going to vote to put their constituents another $825 billion in debt.”

Obama Promises to Close Guantanamo Bay Detention Center

Cato legal policy analyst David H. Rittgers explains why he approves of Obama’s choice to shut down the prison at Guantanamo Bay and offers advice on how to proceed with the plan:

The Founders wrote the Bill of Rights after a violent insurgency brought on by government oppression, and the principles contained therein are no weaker while countering today’s terrorists. Using national security courts to try the detainees in Guantanamo opens the door to closed and classified trials of domestic terror suspects. This degradation of essential liberties is unwise and avoids the social function of trials.

Listen to a Cato Daily Podcast interview with Rittgers to learn more about the future of the Gitmo detainees.

In the forthcoming Cato Handbook for Policymakers, Timothy Lynch, director of Cato’s Project on Criminal Justice, lays out a plan for the future of our government’s strategy for dealing with terrorism. (PDF)

Gore Global Warming Hearing Goes on Despite Snowstorm

Undeterred by a snowstorm that shut down schools and gave federal workers “liberal leave,” the Senate Foreign Relations Committee held a hearing on global warming this week with star witness Al Gore. Gore promoted ways to end climate change through cap-and-trade legislation and investment in renewable energy, reported U.S. News and World Report.

In a Cato Policy Analysis, author Indur Goklany offers his commentary on how government should handle climate change.

Cato senior fellow in environmental studies Patrick J. Michaels offers his analysis on climate change, and how the international community should react.

Appearing on Fox News, Michaels, who is a former Virginia state climatologist, asserts that when it comes to climate change, there is no immediate emergency. For more, don’t miss Michaels’s new book, Climate of Extremes: Global Warming Science They Don’t Want You to Know, co-authored with Robert C. Balling Jr.

Who’s Blogging about Cato

A special thanks to all bloggers who wrote about Cato’s letter showing that there is not a unanimous agreement among economists about President Obama’s stimulus package.

Although we can’t name everyone who linked to the page, some of the bloggers include Michelle Malkin, Don Boudreaux, Damon W. Root, Alex Singleton, Cord Blomquist, , Jason Pye, Jason Talley, Andy Roth, Gerrit Lansing, J.D. Tuccille, , Frank Ahrens, ahrensf [at] washpost [dot] com ( )Rodger Thomas, Amber Gunn, Colin Grabow, Russ Johnson, Michael Patterson, Robert Huberty, David Adams and Mitch Berg.

Also blogging about Cato:

If you’re writing about Cato on your blog, let us know by emailing cmoody [at] cato [dot] org or reply on Twitter using @catoinstitute.

What Did the New Deal Do?

There has been much recent debate about whether or not President Franklin Roosevelt’s New Deal policies increased the nation’s economic pain during the Great Depression or led to its end. In today’s Cato Daily Podcast, Regulation Magazine managing editor Thomas A. Firey reveals why erroneous stories about the effects of the New Deal survive despite decades of economic research that tell a different, more nuanced story:

Listening to the fight today among commentators on the left and the right talking about the New Deal and making various claims about it, as far as a stimulus—they’re almost all wrong, and what’s most disturbing to me as an economic historian is this is actually pretty well-plowed ground, so I don’t know how they can be wrong and how no one’s calling them out on it….

…The two stylized stories, the one that nothing got better and the other that the New Deal miraculously fixed everything—both are very clearly wrong when you look at the numbers. But no one wants to tell the real story, because, first of all, it doesn’t fall nicely in an ideological story on either side, and, second of all, it requires work. You have to read stuff and do research and care about the facts, and, let’s be honest, in this political environment, very few people do those things or care about the facts.

More from Firey on the effects of the New Deal.

Add the Cato Daily Podcast to your RSS Feed.

New on YouTube: Daniel J. Mitchell on ABC’s 20/20

Ever wonder why CEOs of major companies make so much money? And when the company goes bust, why does the CEO leave with millions? In this Cato Weekly Video, John Stossel interviews senior fellow Daniel J. Mitchell and others to find out.

“A contract is a contract, and one of the differences between a civilized country and a banana republic is that the rule of law is enforced,” says Mitchell.

Subscribe to Cato’s YouTube channel.

Regulatory Competition between States and Feds Should Be Expanded, not Curtailed

The Washington Post has a fairly lengthy report on the the competing system of bank charters. But rather than analyze how this system of federal and state charters forces regulators to be less onerous, the story presupposes that there somehow is a gap in the regulatory structure that requires attention. This would be a mistake. Indeed, rather than force banks into one national system, the same model should be extended to insurance. Governments — including regulators — are much more likely to act in a responsible fashion when they know their “clients” have a choice:

At least 30 banks since 2000 have escaped federal regulatory action by walking away from their federal regulators and moving under state supervision, taking advantage of a long-standing system that allows banks to choose between federal and state oversight, according to a Washington Post review of government records. The moves, known as charter conversions, highlight the tremendous leverage that banks hold in their relationships with government supervisors. …Some regulatory experts say that eliminating the opportunity to switch regulators is critical to strengthening oversight. …Since 2000, about 240 banks have converted from federal to state charters. Regulators and bank executives say many of those institutions simply wanted to save money. …But the pursuit of leniency is an important undercurrent. …The roughly 1,550 banks with national charters are regulated by the Office of the Comptroller of the Currency. The 5,600 state-chartered banks are regulated under 50 sets of state rules. In a parallel system, the federal Office of Thrift Supervision competes with state regulators to charter savings-and-loans. While every bank and thrift requires a charter to operate, they all have at least two choices. …Critics have long complained that the system allows banks to play regulators against one another, creating what former Federal Reserve Chairman Arthur Burns memorably described as a “competition in laxity.” …A smaller number of banks, about 90, have converted from state to federal charters since 2000.