FX Coverage on CNBC

Sad to say, I was spot-on in this recent post regarding CNBC's plans for covering foreign exchange trading. In it, I wrote,

"Within the past week, I was asked to complete a CNBC survey on the topic. The network's surveys are typically pretty obvious in their focus. This one probed my unaided recall of advertising by various FX trading vendors, then segued into how I felt about the companies and the concept of CNBC airing an FX trading program.



You can see what's coming here. One or more retail FX platform vendors approach CNBC about sponsoring a program focusing on their instruments. With all the cross-currency plays available, plus various forces- interest rates, trade, intervention, etc.- driving FX valuations and expectations, there would be a lot to discuss."


Sure enough, for the past few weeks, CNBC has been advertising it's new program, Money in Motion, which debuted yesterday in the 5:30PM time slot.

So, once again, we see the network bow to its entertainment nature, and tout trading behavior that few, if any, retail viewers should ever venture near.

It would be fitting if Vanguard founder John Bogle boycotted appearances on the network in protest of this latest move that is diametrically opposed to his message to retail investors.

I haven't seen the details of the program's staffing, and I didn't watch its inaugural appearance, though I may have elected to record it. However, at half an hour one day a week, it's reasonable to assume that the network, to start, is borrowing resources to staff it. At least until it knows whether it can expand it sufficiently to merit its own staff and budget.

That won't change my feelings about the program, which I wrote in that prior linked post,


"I continue to feel that CNBC knowingly entices retail investors to believe they can and should engage in investing activities for which they are unsuited. Most retail investors should stick to managed equity and fixed income funds. Few really have the time, knowledge and skill to add unique value by selecting individual equities or bonds, let alone derivatives thereon. For CNBC to devote so much air time- as much as 2 1/2 hours now, including two Fast Money programs and Cramer's Mad Money- is, in my opinion, irresponsible. To add FX to this brew is even worse."

More Questionable Financial Coverage on CNBC

I've never really liked CNBC's equity options programs. The original, Fast Money, once hosted by now-departed Dylan Ratigan, airs after the market's close, with a 12:30PM spinoff, as well. It's not because of Melissa Lee, Ratigan's replacement, for whom I actually have great respect as a reporter and anchor. Nor several of the program's continuing contributors, including John Najarian.

It's just the fact that the network airs two programs on the topic of short-term options trading. As I've written elsewhere in a few prior posts, I don't believe many, if any, retail investors have any business dabbling in equity options. Beyond relatively safe strategies, such as covered calls, it is mostly likely an expensive waste of time and money for most retail investors. Something like 90% or more of all equity options expire without gains.

To me, the Fast Money programs aim for a rather odd segment. Few retail investors are probably interested or sufficiently confident to try to follow any of the advice emanating from the program's personalities. Institutional investors would be unlikely to need such advice- they either already have their own professional opinions as options pros, or don't go near the instruments.

Now, an even more troubling asset class is looming on CNBC's horizon- foreign exchange.

Within the past week, I was asked to complete a CNBC survey on the topic. The network's surveys are typically pretty obvious in their focus. This one probed my unaided recall of advertising by various FX trading vendors, then segued into how I felt about the companies and the concept of CNBC airing an FX trading program.

You can see what's coming here. One or more retail FX platform vendors approach CNBC about sponsoring a program focusing on their instruments. With all the cross-currency plays available, plus various forces- interest rates, trade, intervention, etc.- driving FX valuations and expectations, there would be a lot to discuss.

That's also the downside- for retail would-be investors. FX is a dicey area for professionals. Never mind allowing retail investors loose in this toxic candy store.

I continue to feel that CNBC knowingly entices retail investors to believe they can and should engage in investing activities for which they are unsuited. Most retail investors should stick to managed equity and fixed income funds. Few really have the time, knowledge and skill to add unique value by selecting individual equities or bonds, let alone derivatives thereon. For CNBC to devote so much air time- as much as 2 1/2 hours now, including two Fast Money programs and Cramer's Mad Money- is, in my opinion, irresponsible. To add FX to this brew is even worse.

On Global Central Economic Planning & Currency Management

University of Chicago finance professor John Cochrane wrote a rather scorching editorial this past Tuesday in the Wall Street Journal entitled Geithner's Global Central Planning. He begins with a simple, scathing assessment of the recent G-20 finance ministers' conference,

"Economists are full of bad ideas. Terrible ideas seem to emerge when the gurus get together to talk about coordinating their bad ideas. Last week's public letter from Treasury Secretary Tim Geithner to the G-20 finance ministers is a great example."

To begin to provide detail, he refers to language in a Geithner proposal emanating from the conference,

"Mr. Geithner starts with a dramatic proposal: "G-20 countries should commit to undertake policies consistent with reducing external imbalances below a specified share of GDP [later reported to be 4%] over the next few years." "

For some perspective as to ill-informed Geithner's idea is, Cochrane provides this classic example,




"Since when is every trade surplus or deficit an "external imbalance" in need of correction? It makes sense for a country that has good investment prospects to import a lot of goods, run trade deficits, and borrow money. Years later, the country puts the resulting products on boats to pay the lenders back. The U.S. borrowed abroad to finance our railroads in the 19th century and ran surpluses when Europe was rebuilding after World War II. Were these "imbalances"?"



Cochrane makes a very good point. How is it that Geithner is so skilled at judging what's an imbalance needing correction, versus a natural trade flow of capital and goods?

Then he considers the very real current situation of the US and China,

"Or consider a country (say, China) with a lot of middle-aged workers who need to save for retirement. It makes perfect sense for them to put stuff on boats and send it to a second country (say, the United States) whose people want to consume the goods. The people in the first country invest their earnings, say, by buying the bonds issued by the second country. And as they retire, they cash in the bonds and buy goods flowing the other way.



Do these and similar stories exactly account for current trade patterns? I don't know. But nobody else does, either. In particular, the army of economists in the basements of the International Monetary Fund (IMF) has no clue exactly how much each country should be saving, or where the best untapped global investment opportunities are around the world—including whether trade patterns are "normal" or "imbalanced." "

Just so. Cochrane continues by turning to Geithner's new idea,

"So what policies would Mr. Geithner have countries undertake to bring economies around the world into his idea of better balance? He says that G-20 "countries running persistent deficits"—that's the U.S.—"should boost national savings by adopting credible medium-term fiscal targets consistent with sustainable debt levels."



So Mr. Geithner knows that trade surpluses in the end come down to saving and investment. And he knows that in the U.S. people are trying to save right now. Our government is undoing their efforts with massive fiscal deficits. Mr. Geithner recognizes that most of the trade "imbalance" comes down to a big fat fiscal imbalance centered in Washington, D.C. But there's the catch. "Medium term" means "not now" and "not long-run entitlements." "Target" means "promises." Even if a target would make a difference, who believes in targets from our government? We don't know what the rate of taxation will be in three months!


Mr. Geithner goes on to say that "countries running persistent deficits" should "strengthen export performance," but he doesn't say how, or what other "performance" we should weaken to get it. Is this a code word for export subsidies, devaluation and industrial policy, and a plea that the rest of the world should let us get away with it?


His advice to the other G-20 countries, those "with persistent surpluses," is that they "should undertake structural, fiscal, and exchange rate policies to boost domestic sources of growth and support global demand." In particular, "G-20 emerging market countries with significantly undervalued currencies and adequate precautionary reserves''—have you figured out this means China?—"need to allow their exchange rates to adjust fully over time to levels consistent with economic fundamentals."


He argues for a brave new system, coordinated by the IMF, of international discretionary currency interventions: "G-20 advanced countries will work to ensure against excessive volatility and disorderly movements in exchange rates.""

You can see the problems already, can't you? None of this is reducible to practical, believable policies. And, even if it were, it's economic central planning on a grand, i.e., international scale. Anybody remember how that idea worked out for Russia during the last century?

Without a doubt the funniest passage in Cochrane's piece is also the most sobering in terms of the prospect of economic conflict between the US and China,

"What's the right policy toward China? They put a few trillion dollars worth of stuff on boats and sent it to us in exchange for U.S. government bonds. Those bonds lost a lot of value when the dollar fell relative to the euro and other currencies. Then they put more stuff on boats and took in ever more dubious debt in exchange. We're in the process of devaluing again. The Chinese government's accumulation of U.S. debt represents a tragic investment decision, not a currency-manipulation effort. The right policy is flowers and chocolates, or at least a polite thank-you note."

And we wonder why the Chinese are exploring more diversified baskets of assets into which to trade their depreciating US dollars?

Cochrane sums up Geithner's loopy idea with this concluding passage,



"This is all as fuzzy as it seems. Markets and exchange rates are not always right. But it is a pipe dream that busybodies at the IMF can find "imbalances," properly diagnose "overvalued" exchange rates, then "coordinate" structural, fiscal and exchange rate policies to "facilitate an orderly rebalancing of global demand," especially using "medium-term targets" rather than concrete actions. The German economics minister, Rainer Brüderle, called this "planned economy thinking." He was being generous. Planners have a clearer idea of what they are doing. "



The scary part for me is that this isn't some private economic white paper circulated among Geithner's staff. This crazy idea is out in public, proposed to the G-20, as if it's actually workable, or even desirable.

The Long Term Consequences of Unending US Bailouts of Private Sector Companies

This is the first part of a loosely-envisioned two part series of posts.


The larger topic, which will be the subject of the second post, concerns the long sweep of US economic and business experience from post-WWII to now. How our larger corporations and senior business executives have had incomplete, sheltered and misleading experience such that, in times of challenging circumstances, few of them are qualified and experienced to manage through this environment. And, most importantly, since the days of FDR's Social Security program and the Truman-led wage and price controls during WWII, our society has engaged in deferred promise-making on a scale never before seen in recorded history.


What happens when those two themes collide, and our society cannot possibly fulfill economic promises made by various groups to each other, and, sometimes to ourselves? When promises made in anticipation of straight-line GDP growth and naive hopes of everlasting corporations meet realities of economic cycles, coincident capital market panics and economic recessions, bankruptcies, and temporary value destruction in both real and financial assets?


But, to today's topic,

What might be the global implications and consequences of the ongoing, large-scale US Federal government's Federal Reserve and Treasury outpouring of US dollars, through both borrowing and printing?

I've been pondering this since the TARP bill was conceived and fought over in Congress.

If one were viewing the global financial implosion of the past year from outside of the environment, like some sort of Einsteinian 'thought experiment', what would one have seen, and what conclusions might you draw?

On a broad scale, the US financial markets would have begun to dramatically lose value, beginning with the 'mark to market' impacts on and of the two failed Bear Stearns mutual funds in the summer of last year. As trading ceased in various structured financial instruments composed of mortgages, the most recent of which were increasingly lower-quality 'alt-a' and subprime in nature, the market value of many financial assets plunged, as financial institutions began to sell better assets in order to either raise cash for redemptions or take gains to offset 'mark to market' losses in the structured financial instruments.

Having started, globally, with above-average leverage, financial institutions bearing these losses had comparatively less equity capital with which to absorb the now-outsized losses on exotic securities and, increasingly, more mainstream equities.

As confidence lost in structured finance instruments spread to those institutions operating outside of the Federally-supported banking system, i.e., investment banks, brokerages and hedge funds, their equity values plummeted, counterparty risk rose, and leverage across the entire global financial system effectively began its inexorable shrinkage.

Since leverage, a function of debt, implies confidence in the future returns of loans placed with various enterprises, its unwinding corresponds to a loss of such confidence. The forced reduction in this leverage began, understandably, with the short-term borrowing instruments of both financial and non-financial instruments- commercial paper, most notably.

As this massive de-leveraging of fixed income instruments occurred, the simultaneous drop in real estate values and equity market values caused several consequences.

First, large-scale losses in US, and other nation's market, i.e., societal capital stocks, valued notionally, plunged. Those who previously owned the capital suffered large losses. In the US, the Treasury and Fed moved to support the Federally-registered banks via direct preferred equity purchases and, separately, takeovers of Fannie Mae, Freddie Mac and AIG.

From our external perspective, then, it was as if, following the observance of massive equity and debt capital losses in US society, and others holding US instruments, the US government, choosing to believe that earlier, higher values, were justified, to some extent, simply printed more money and issued liability instruments in order to reflate the financial sector and, indirectly, the business economy.

Whether those choosing to hold US government debt would feel this was purely inflationary, or merely a transfer of wealth from those whose capital value had evaporated, to the US government, is, to some extent, still to be determined.

Yesterday's plunging T-bill yields suggest that, for the moment, the market seeks safety in notes issued by the government of the globe's largest, most free economy, more than it cares about the debauching of the value of the dollar.

The second major consequence of the calamitous drop in price of many stores of value- real property, equity, debt- coupled with the deleveraging, was the cessation of bank lending. Thus, a financial crisis, partially unleashed by a narrowly-defined 'mark to market' rule in a single US law, Sarbanes-Oxley, led to the real effects on non-financial sectors of the US economy. As banks struggled to deleverage their assets in order to both conserve remaining equity from further losses, and abide by regulatory capital requirements, lending suffered. This became a self-fulfilling act, as, starved of normal, short-term operating liquidity, more and more businesses began to reduce operations and cut staff.

The third unforeseen consequence, then, to complete the circle, was the rising joblessness as the economy was already softening, of its own accord, by early 2008.

This last link in the circle of economic causes and effects has now driven a dramatic drop in consumer spending, due to: rising unemployment, lower home values as a source of personal household net worths, and lower financial asset portfolios as a source of personal household net worths.

Viewed again from a perspective outside the global financial and business system, the effect of the market and economic events of the past 18 months has been to dramatically reduce overall investor and consumer confidence in near-term investing and employment conditions, leading to rapid deleveraging and, thus, a reduction in effective money supply.

Since, by Fisher's equation, MV=PO, the fall in the effective quantity of M, assuming, at best, a stable V, must drive a reduction in physical output, price levels, or both. It is now becoming both.

To reverse this effect, as any economics student, Treasury Secretary or central bank chairman knows, assuming velocity has fallen, as has been observed via the freezing of bank lending, M must rise at the rate which one desires PO, or global nominal GDP, to rise.

And that is why central banks are flooding the globe with liquidity, heedless now of later inflation. And, given the notional destruction of so much original capital value, as of early 2007 levels, it is not clear that there will be a consequent inflation. There's simply less market-valued capital and current production available to drive said inflation.

Thus, having fleshed out this thought experiment thus far, to our current situation, what might be the most likely answer to my initial question?

For now, it seems that the flood of US-government-printed dollars will not lead to near-term inflation. And, absent another country of with a democratically-elected government, reasonably-stable protection of property and other rights, the economic size and diversity of the United States, it seems global investors have little choice but to buy and hold the dollar for the foreseeable future. What are their other options, the Euro or Yuan? Hardly.

If there had remained an investor or consumer group totally outside of the now-globally-interdependent economic and financial services web, the US might soon experience a rapid decline in the dollar's value, skyrocketing interest rates, and a loss of appetite for US debt- publicly and privately issued. In short, a severe comeuppance for the largest single economy on the globe.

But that doesn't actually appear to be in the cards, thanks to such tight, fast global interdependencies.

How the US government conducts its retreat, assuming it makes one, from the various large-scale intrusions into the financial and banking sectors, and exchanges its investments for cash which is returned to the Federal Treasury, will govern how the longer term effects of its massive funding efforts have an impact on US and global inflation.