Wednesday, June 25, 2008

Follow-Up #2: Power

We live in a disposable society, thanks to American ingenuity and Asian efficiency of production.

Even with nuclear reactors apparently.

Toshiba has recently announced the "4S" micro reactor which you "set and forget" literally. They seal them at the factory. You can put them wherever you want: in a building, underground, in space. Assuming no water gets into their liquid sodium (eek .... ka-BOOOM?), they merrily run for a few decades. When they peter out, you simply throw them away.

Check it out:

Not so fast, right? They'd be full of a thousand years of radioactive waste. My favorite solution to that one has always been to blast the garbage off to the sun. It's an expert at dealing with radioactive waste - it hosts countless nuclear reactions every day.

Tuesday, June 24, 2008

Lesser of Two Evils

Morgan Tsvangirai is no stranger to jails, nor threats. Perhaps he had finally got in over his head. Perhaps he couldn't take anymore. Without question, he did not choose his calling. Did not want it. No one would. He was chosen by fate. He was carried on a tide of a million unanticipated events into a position as the only viable alternative to Zimbabwe's current monster. To carry that torch for this long, only to extinguish it at the last moment nearly smacks of conspiracy. What better way for Mugabe to ensure victory than to stage a tight, energetic race only to have his only opponent step down at the last moment, too late for anyone else to step in and challenge his tyranical rule?

Mugabe should rot slowly and painfully in hell for what he has done to the country and people of Zimbabwe.

I recognize that most of the Starbucks-sipping world has been numbed to the human tragedy of violence by Hollywood and distracted from true crises by CNN (they should be ashamed of devoting even a second of airtime to the ridiculous "pregnancy pact"!) I know most prefer enemy-less wars and pain-less struggles. Africa is not for those people. Zimbabwe is a truly inconvenient truth. They should not look at what happens when the verneer of civilization is chipped away and raw, desperate, animalistic instinct takes over.

To become a hero in Africa requires that people fight on that level. I don't mean civil war. I don't mean humanitarian atrocities. Nor childish Israel/Gaza-style tit-for-tat. I mean that the fight is going to be ugly. I mean that temporary pain must be endured to find long-term salvation. I mean that when opportunities come, they must be taken. I, unfortunately, mean that the means must be justified by their ends alone. People must be inspired. Courage must be found.

It appears Morgan Tsvangirai is no Benazir Bhutto.

Video credit: Times Online /

Thursday, June 19, 2008

What's the value of a Dollar? A business-valuation approach

I recall a witty line in Wired magazine at the climax of the dot-com lather. They were discussing e-biz models where products were being sold below cost under the premise that the difference could be made up in advertizing revenues. Their quip was that the next big idea will be to sell dollar bills for 95 cents and make up the difference in advertizing. Ha. lol. tee-hee. And all that jazz.

I recently gave my take on how a rate change impacts inflation. One voice among a million but I hope it was a more down-to-earth and yet logically linear explanation than most you've read in slick paper, and the broadsheets. If you only get your news from the tube ... what the heck are you doing on there? Today's objective is to take a similarly common-sensical trip down a related tangent: what is causing our currency's current depreciation. Let's dive right in:

Pretend the whole US is a big company. The exchange rate of the Dollar (vs. all other world currencies) would be it's stock price Just like any other stock, the drivers would be:

#1 - Consensus expectations of Credit-worthiness (=ability to pay back the national debt). If US Inc. is on solid financial ground, the stock price goes up.
#2 - Consensus expectations of Earnings (=GDP). Back-to-basics stock valuation says a stock should reflect the discounted sum of all future cash flows.
#3 - Consensus expectations of Growth (=GDP growth rate). A growth stock carries a higher multiple (of price to earnings) under the premise that earnings tomorrow will be much higher and thus #2 above will mathematically have to increase. Investment is the best way to drive this factor.

As simplistic as it sounds, I'd argue that those are the drivers of the exchange rate. There are nuances and other factors to be sure. Allow me to put some oft-overlooked meat on those bones with a more complete story. As the biggest debtor on the planet, the US is constantly refinancing itself. This is done by the US Treasury which sells billions of dollars in IOUs every day. They promise to pay some back in less than a year (called T-bills). Others don't come due for 1 to 30 years (T-notes and T-bonds). Depending on the due date (aka maturity) they pay a different interest rate.

Most of the IOUs are issued to refinance the old ones maturing today, but there is a net increase every day of $1.5 billion. Anyone purchasing these debts would have to ask themselves: What's the chance the US Treasury would go broke and fail to pay me back? Currently, the chance is pretty low, but the more we borrow, the more worried people get ... and down goes the stock price of US Inc.

As people get nervous about the total debt, they refuse to buy the IOUs at the current interest rate. This forces the Treasury to (in effect) increase the interest rate they'll pay for the same amount of debt. Thus, the second factor of concern is the average interest rate on that debt. In our US Inc. analogy, this is the weighted average cost of capital (WACC). As the cost of borrowing goes up, so does the percentage of earnings eaten by interest payments. This means less money is left over to invest in the future. US Inc. currently spends nearly 10% of revenues just on interest.

But wait, there's more! As a rule of thumb in finance, you should match the maturity of your debt with the underlying asset or project. If you're gonna buy a car that will last 5 years, it would be dumb to take out a 10 year loan to pay for it, right? It would suck to still pay on a car that's long gone, especially since you'd have to start paying for the new car loan on top of the old one. It would be equally dumb to start building a million-dollar house if you were only able to borrow $500k. You'd run out of money and have to crawl back to the bank to beg for more. The same should apply to US Inc. Say the Federal government wants to install new Air Traffic Control systems which will last 10 years. This should be fully financed at the outset and the debt should mature in 10 years. It would be nice to pay off the loan on that project in 5 and just have a bunch of "free" cash sitting in the bank to finish the project ...

But #1 - that's unnecessarily expensive since you paid interest and fees to borrow money which then just sits and collects dust. Better to borrow the money in little pieces as you need it. #2 - you can only pay back early if you have the money. The Treasury doesn't. This is why the total debt keeps increasing. These days most of the Treasury's debt has a 10-year maturity, but if you average out the dollars borrowed at each maturity, you find out that the average maturity on US debt is under 3 years. And this brings us to our third factor of concern: decreasing average maturity of debt means decreasing likelihood of repayment. If you wanna understand why, look at Bear Stearns, whose average maturity dropped from over a year to under a week just before they imploded. In other words, no one would lend to them for more than a few days, and it was too hard for them to repay and re-borrow every night just to make ends meet. Let's hope the US Treasury learned a lesson from this.

Decreasing debt maturity also means that politics can have a stronger influence on the finances of the country. Re-financings are opportunities for politicians to either a) do the right thing and invest in tomorrow. For example by decreasing spending so we can pay down the debt and decrease the percentage of future budgets dedicated to interest. Or they can do b) which is the politically-expedient thing: and hawk tomorrow's revenue at a deep discount and spend Spend SPEND! today. The longer the maturity, the less their ability to mess up the country's finances before they're back out on the relatively harmless lecture and lobby circuit.

Enough for today ... but I promise to sharpen my pencil and add to this concept in upcoming blogs!

Friday, June 06, 2008

East is the new West (not what you think!)

... or "If Sarkoszy was my man, then Merkel is my gal! ... And Tusk is my bro for life!"

During the recent French presidential election, I took time to back Nicolas Sarkozy. What a neat guy: pro-capitalism, particularly pro-business (vs. the typical french reliance on government) and willing to stick his neck out like the pro-American cowboy-wannabe that he is. Finally, a president of France who embodies the word suave!

Then there's Angela Merkel quietly but bravely trodding the same trail that Nick-o is on. Pro-american (or at least less anti- than most continental politicians); pro-business and willing to fight some hard fights vs. the traditionally german paralyzing social-protectionism. I have to apologize to her for neglecting to give her an equal shout-out.

While I'm in the mood to genuflect, I should also give a belated nod to Donald Tusk, Polish PM. This guys is strong-like-bear enough to get elected even (sarcastic gasp!) with straight talk and a pro-growth, low-tax, pro-privatization, pro-decentralization (or even lessened state intervention), increased civil liberties platform.

Sarkozy's parents fled communist dictatorship in Hungary in 1944. Merkel, herself, grew up in the oppression of East Germany. Tusk braved the secret police for decades as a member of the (at the time illegal) Solidarity party, personally fighting for the freedoms he now can protect.

Lesson for today: It's no coincidence to me that those who have seen the evils which accompany collectivism are some of the most staunch supporters of the individual's right to act without government intervention. At least somebody understands. East is the new West. Once bit, twice shy.

Thursday, June 05, 2008

Follow Up: Yo Burma ... I mean China ... Err Russia ...

An artcle in the NY Times yesterday called attention to yet more evidence of Putin's paranoia/control psychosis. In fact, they have a whole series dedicated to it. Robert Amsterdam's blog is another good source. At the risk of having his occipital-lobe-less goons poison me in London ... I think it's safe to say Sun Tzu would call him STUPID.

Dr. Evil and Mini-me would be proud of the cast of clinically (crimnally?) insane characters who have weaseled their way into positions of worldly power in a sad attempt to assuage their freakishly large inferiority complexes. I'd list 'em out for you, but I have a better idea... and, no, I'm not being paid for this celebrity endorsement.

If Survivor is not sensational enough for you, I highly recommend tuning into the reality competition blog Evil Leaders League which pits these nuts against each other weekly in head-to-head cage fight style tests of evilness. The genius of the blog is in the judges' color commentary (I like "An opposition boycott to an election is the evil leader's version of an orgasm" and "Tehran-i-saurus Rex"). Weekly winners get points, which are tallied throughout the season. Competition gets hot-and-heavy in the playoffs and then there is the scintillating final cage fight death match.

We're currently in the off-season, which is the perfect time to catch up ADHD-style on seasons 1 through 3. They have a Highlights page ... but their most priceless work is in their photo galleries (check out "sexy Putin").

Sunday, June 01, 2008

Yo Burma ... I mean China ... Err Russia ...

"One who is at first excessively brutal and then fears the masses is the pinnacle of stupidity." Sun Tzu, The Art of War, Ch. 9