Saturday, April 21, 2012

Your 80,000 Hours - Do You Know What You're Working For?

Most people get up and go to some form of work for at least 8 hours a day, 5 days a week, 50 weeks per year. Most people will do this for at least 40 years, which can be about 75% or more of one's entire life time.

They will do this for something called money. During this entire process of 80,000 hours worked, 99.9% of people will never take even 15 minutes to try and understand what money is - the very thing they have given their life to. I find this beyond fascinating, and it is why the basics of modern money mechanics, the simple structure of how our current monetary system works, is something I repeatedly come back to on this site.

The following video provides an in depth look at this process told through cartoon story form making it easier to understand for someone new to the topic. 

Friday, April 20, 2012

Same Men: Just Pick Your Favorite Color - Red Or Blue?

Unless the real crisis arrives in America (2008 was the warm up) forcing the politician's hands, the following graphic shows why it will be at least 4 years and 7 months before the largest banks, currently choking the life out of our economy, are restructured. Click for larger image:

Apple: Building Insanely Loyal Customers

I was at the mall last weekend and had the pleasure of walking by an Apple store to see it, as always, completely mobbed with customers and employees. It looks like a circus every second it is open for business. While I have never been in an Apple store, the following slide show helped provide me with some of reasons why everyone else in America has.

Finding Some Humor In It All

Hunger Games:

Health Insurance:

Stock Momentum:

Jailed Bankers:

Jon Corzine:

Obamacare Costs:

Irrational Exuberance:

Special Delivery:

Thursday, April 19, 2012

Spanish Banks Running Out Of Money

This morning Spain had another much anticipated bond auction. The first offering was 1.1 billion euros ($1.43 billion) in bonds that mature in October 2014.  What does that mean?

Let's say, as a simple example, that you went online with some cash to bid on buying these bonds. The price you pay is determined by the interest rate you are willing to accept in order to lend the Spanish government your money through October 2014.

The actual rate that was bid/accepted was for 3.46% per year. So let's say, for simplicity sake, one investor purchased all the bonds. He will receive 3.46% per year, and in October 2014 he will receive the total 1.1 billion in euros back from the Spanish government. His risk, of course, is that the Spanish government cannot pay back the money because they may be bankrupt (they are, don't tell anyone).

Next up we had an auction for 1.4 billion euros ($1.82 billion) in bonds that will mature in January 2022. The bid/accepted price on these bonds sold this morning ended up at 5.74%. This ten year auction was more important than the shorter dated auction for reasons I will discuss in a moment.

Over the past 6 months there have been two programs called LTRO 1 and LTRO 2.  In these programs the ECB created over 1 trillion euros in new money (they have a printing press similar to the Federal Reserve) and lent it to European banks in exchange for some form of collateral (collateral, for example, could be a bond the bank held on their balance sheet that they would like to replace with liquid cash).

Let's look specifically at what took place with Spanish banks during the LTRO using the excellent graphic the Wall Street Journal had in the lead article this morning:

The left green column shows that Spanish banks borrowed 200 billion euros from the ECB. The have also increased their capital/cash with a reduction of their loan portfolio (54 billion euros). This has given them 254 billion in fresh cash to go out and spend. Where has the money gone? This is seen with the red bar to the right.

As I discussed earlier in the week, the major buyer of Spanish bonds this year has been Spanish banks using the ECB's loans. The chart above shows 76 billion euros of the total was used to enter the market, sometimes at bond auctions just described, to purchase debt. This has eased the burden of Spanish debt sales creating the artificial impression that the crisis was over. We'll get back to that in a second.

You can also see in the red line above that 41 billion euros were used to refinance existing debt. The banks themselves, just like the Spanish government, run their business through debt financing. They need to continuously roll over bonds to stay alive. The following graph shows the huge rollover needed in April, May, and June for the Spanish banking system this year.

The third huge chunk of the red bar is deposits that have left the banking system. Intelligent Spanish citizens, usually the wealthy and educated, have been slowly and steadily every month removing their deposits at Spanish banks and moving them into banks in France, Germany, and Switzerland.  This is also happening in  Italy, Portugal, Greece, and Ireland. The following graph shows money leaving the PIIGS banks and moving into France and Germany.

Banks require a minimum level of deposits in order to keep their doors open. When customers show up and demand the money (also known as a bank run which is happening electronically every day in Europe) the banks must find a way to replace that cash. This has (temporarily) been eased by LTRO cash the ECB has dumped into the banking system (seen in the 116 billion euros portion of the red bar).

However, as noted in the graphic above, by looking at Spain as a case study you can see this money is now running out. Spanish banks, in order to continue to raise the needed cash as depositors flee, are going to have to start selling Spanish bonds to raise cash instead of being a major buyer as they have the past few months.

With this buyer gone it is going to cause tremendous strain on future Spanish government bond auctions, which will have to be sold at higher and higher interest rates. Remember that higher interest rates only compound the problem because it creates an additional expense on the annual deficit.

As I mentioned at the top, the ten year auction was important today because the LTRO loans were only provided for 3 years. That means bonds that mature outside this time frame must come from real capital that believes in Spain's ability to pay the money back in the future. The 5.74% yield this morning was the 3rd worst ever and is rapidly moving back to the peak crisis levels seen last fall.

So where do we go from here?

Spain will need to run auctions throughout the year to finance and rollover close to 190 billion euros of debt. The Spanish banking system is underfunded by close to 80 billion euros, and the Spanish government will be forced to backstop the banks if they run into trouble. Regional governments are deeply underwater and teetering on the brink of bankruptcy. The Spanish government announced last week that they will most likely have to nationalize a large portion of this debt.

The economy as a whole, the GDP, is expected to shrink this year meaning that the tax base (income to pay this debt burden) is falling.

Look for the ECB to step back in (with more printed money) with force if rates cross back over 6% and begin to move toward 7%, a point that many analysts feel is the death toll for Spain's finances.

This same process (bank deposit flight, toxic bank loans, local and national government debt financing strain) is taking place simultaneously in Italy. The market has just decided to focus the spotlight for the moment on Spain, although Italy could erupt at any moment and may do so alongside its Spanish neighbor.

Wednesday, April 18, 2012

Nigel Farage Providing A New Message To Europe: Common Sense

Nigel Farage, once again the lone voice of reason in the ridiculous and broken European political charade, drives economic facts and common sense into a crowd dumbfounded by his comments. No commentary necessary, just enjoy his most recent tirade against stupidity.

For more on Europe see Spanish Banks Running Out Of Money.

The Story Of Entrepreneurship: Caine's Arcade

I imagine a large portion of the readers that come to this site are either already entrepreneurs or have a strong desire to be one. The short video below is the story of a 9 year old named Caine who decided to create a business out of what he was passionate about: Arcade Games.

What I took away from the video is that when you are creating your own business, as anyone that has attempted to do so in the past knows, there is a long period of time when you are getting out of bed in the morning and putting in long work days with absolutely nothing to show for it (This is the exact opposite of what occurs if someone decides to get a job). Then there is a "moment", which looks like a lucky break for those that did not see the endless hours that led up to that moment.

When I was about Caine's age I would take extra cash that I received for doing chores around the house and I would walk to Wal-Mart to purchase chewing gum. Every day before school I would load my bag with books and gum and try to sell it throughout the day to other students. For a long period of time I sold 1 or 2 packs a day, and then one day a line began to approach me at the back of the bus and I had "the moment" when the business took off. Soon there was a line every day, and I added candy bars to the store. The story ended when my business spiraled out of  control in size and an enormous bag was confiscated by a teacher (chewing gum was not allowed during school hours). I guess it sounds corny now, but I still remember the first day the huge lined formed on the bus.

I am at the point now in a current business project I am working on where I wake up every day and work very long hours that show very little monetary result. In fact I still have to watch money go out every month, a terrifying process that every entrepreneur has felt at some point.

The first year I was writing here on this website I was spending just as much time studying the markets and writing as I do today (a ton) and many days back then only 10 to 20 people would visit per day. Today there are days when I get thousands of views on a single day from people all over the world. Articles now get re-posted on major sites, chat rooms, and discussion boards. The site has progressed through the process where there was a tremendous amount of work with no page views (though that was never my original goal) to the point today where it has hit the "moment" of exponential growth that can take place with the interconnected world we live in.

It is obviously never certain that a gum business, arcade, website, or any new start up will ever get itself off the ground. Most do not because they don't have someone like Caine who will work on the business with no result day after day. I wake up in the morning extremely excited to see what is taking place in the financial markets and to discuss it here on this site, and I get goosebumps thinking about making sales for my company. It is not "work" for me. I understand now why some business people who have years of proven success and endless amounts of money (I am not one of them) would much rather wake up and work on building a company than taking a vacation.

This mindset is what is needed to get anything to that "moment." My business may never get to that point. So I will start another. And if that business do not get there, I will start another. I was told leaving college that starting a business is stupid because 9 out of 10 fail. My psychology going in was that I needed to be ready to start 10 companies, so I better get to work.

Everyone will take something different away from the following story, and I wanted to discuss the thoughts it triggered for me. If any of the projects I work on tirelessly every day hit the point worth discussing I will tell you the story here. After all, no one likes to hear or watch videos of a kid sitting alone in a gym shooting jump shots, they just want to see the final shot of the game go in and talk about how he got his lucky "moment."

Tuesday, April 17, 2012

Bill Gross On Spanish Bond Auctions

Bill Gross, CIO of PIMCO the world's largest bond fund, spoke with CNBC today regarding Spain which he calls a "tumor" on the Eurozone. He feels that it is tough to get a real read on bond auctions because so much debt is being purchased by Spanish banks. The banks in Spain that are purchasing the government debt (with money given to them from the European Central Bank "ECB") are bankrupt and will need a bailout from the Spanish government. The money to fund this bailout will come from government bond auctions sold to.......Spanish banks. Sounds a little fishy you say? Just wait until the ponzi scheme unravels.