Geithner Nixed Dodd-Frank

Tim Geithner made a big choice Friday afternoon. He excluded FX spot and forwards from the Central Clearing requirements of Dodd-Frank ("D-F"). Tim’s words:

Treasury is today issuing a Notice of Proposed Determination providing that central clearing and exchange trading requirements would not apply to FX swaps and forwards.

The basis for Tim’s big decision was made clear in the Treasury announcement:

In contrast to other derivatives, FX swaps and forwards always require both parties to physically exchange the full amount of currency on fixed terms that are set at the outset of the contract.

Okay! Got that? Interbank FX is excluded from D-F because it requires a settlement. Unlike FX futures that have zero expectation of actual cash settlement (AKA: A bet) the FX spot and forward market requires that the parties exchange the currencies.

I think many people will like this distinction. The thinking is that if actually delivery of a commodity or currency is required, then it is a commercial transaction and not a bet speculation. But actually those folks don’t understand how the system works. 

Tim Geithner knows how it works inside and out. He worked on the Fed desk in NY. Therefore he knows that the basis for his decision is flawed. The simple answer is that only a small fraction of interbank FX spot and forward transactions are actually settled for cash. They are netted out and settled by an outfit called CLS.

What’s CLS? A good description comes from Tim’s former employer, the Fed:

Is CLS a big deal? Does this outfit settle the lion’s share of all interbank spot and forward settlements? You bet it does. The Feb. numbers were a Multi-Trillion dollar blow out:

As a result of  CLS 98% of all FX spot and forward transactions are netted out and settled with no delivery of the underlying currencies. So the argument that Tim has put forward in defense of his big choice is actually bogus. And he knows it.

*********************************

Let me take you in a different direction on this. A guess on how the D-F FX market carve-out will be exploited. Follows are three slides of the spot/forward swap/Euro deposit rates for the AUDUSD. There are a bunch of numbers (sorry). I circle the numbers to focus on. I’ll try to make this easy. (Note: all  currency pairs have similar swap rates)

 

Take the mid point of each of the swaps/rates for one year AUDUSD. Those numbers are:

Swaps = .0505

AUD Euro deposit = 5.43%

USD Euro Deposit = 0.83%

Spot AUDUSD = 1.0970.

Put this together.
The interest differential is 4.60% (5.43 - .83).
The swap differential is .0505, divide that by the spot rate of 1.0970 and you get 4.60%. Bingo!

Some observations on this:

-All forward swaps are = to interest differentials.

-All forward swaps are interest rate derivatives.

-All forward FX swaps have just been carved out of Dodd-Frank.

-One can make a bet on interest rate changes through the swaps market.

-The swaps markets are highly liquid. Forward swaps are available for virtually all currency  pairs.

-If a financial institution wanted to make a derivative bet on interest rates AND avoid the central clearing requirements of Dodd-Frank they could do it with no problem.

-Sharpies will figure this out. (they already have)

Ergo: Dodd-Frank has no teeth.
Ergo: We’re living in Joke Town.

 "Joke Town"

Sen. Kohl to Geithner - "I want a Sweet deal"

Senator “Herb” Kohl is the senior senator from the state of Wisconsin. He’s a democrat. He was first elected to office way back in 1988. Twenty-two years in the senate comes with some important responsibilities. The good senator is on the Appropriations, Judiciary, and Banking Committees. He is the Chairman of both the Special Committee on Aging and the Agricultural Appropriations Committee.


Bottom line; Herb Kohl has clout in D.C. He is one of America’s elder statesmen. So when he asks for a favor it’s very hard to say “no”. I wonder what Tim Geithner is going to do with Herb’s recent letter asking for a change in the rules for retirement ages for cops and fireman from the great state of Wisconsin and every other state in the Union. Here’s what Senator Kohl is asking for:

I ask that you amend the regulations to make clear that the public safety employees safe harbor apply to WRS protective occupation participants. These participants put their lives on the line every day to protect our citizens and they deserve to retire with full benefits at the ages of 53 and 54.

I’ve got nothing against cops and I’ve always liked fireman. It’s not that I don’t think this group of people shouldn’t get a leg up. But at whose expense? What about those nurses, EMT folks, and ER Docs? What about everyone else?

The country is about to increase the Social Security retirement age and push back eligibility for Medicare to 67. And Kohl wants to cut the cops a sweetheart deal where they can retire with full benefits 12 years before anyone else.

We have two classes of workers in the USA; those that work for government and those in the private sector. There are two different sets of rules. The differences are in the number of holidays, benefits (far superior health care), job security and retirement benefits. Senator Kohl’s proposal makes the gap even larger.

Senator Kohl needs to understand that America is not the rich country that it once was. Our states, cities and municipalities simply can no longer afford the largess proposed by Kohl. The rules that he suggests are fair and reasonable actually aren’t fair or reasonable at all.

Senator Kohl is not blind. Nor is he uninformed. He must know that a suggestion like this is going to be received very badly by the folks who have to pay for it. That said, watch out for this one. Kohl’s clout makes even this proposal a possibility.

It’s an even money bet that this will happen. Special interest politics is the way of the land these days. But here’s my bet for the Senator: Those cops and fireman who will get this benefit will never see those checks. The government promises they are relying on will be broken at some point in the future. America does not have the resources to make these promises anymore. We will go broke because so many of these special interest promises have been made.

We can hope and even expect that our political leaders will do the “right thing” in these difficult times. There is a broad awareness that everyone is going to have to do a bit more and get a bit less in the New America. But that does not seem to be the case with this Senator. He is working against the best interests of the country. In the end, those that he is trying to curry favor from will be the losers. I suspect the Senator knows this. He doesn’t care.

The full letter from Senator Kohl to Tim Geithner:

United States Senate
Special Committee on Aging
Washington, DC 20510-6400
(202) 224-5364

April 21, 2011

Honorable Timothy J. Geithner
Secretary
United States Department of Treasury
1500 Pennsylvania Avenue
Washington, DC 20220

Dear Secretary Geithner:

The purpose of this letter is to express my concern regarding the impact of certain Treasury regulations on the normal retirement age (“NRA”) of protective occupation participants, including police officers and fire fighters, in the Wisconsin Retirement System (“WRS”). I ask that you modify your regulations to ensure that these public safety employees can maintain their current NRA under the WRS.

Background

In 2007, the Treasury Department issued final regulations on NRA in pension plans (the “NRA Regulations”)(1.401(a)-1(b)). NRA is a term referring to the earliest age at which a pension plan participant can retire with an unreduced benefit from their plan.

In general, the NRA Regulations provide that, “normal retirement age under a plan must be an age that is not earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed.” The regulations go on to provide that a NRA of 62 or older would meet this requirement. However, whether an NRA of ages 55 to 62 meets the general rule would be based on all of the relevant facts and circumstances - and an NRA that is less than 55 years is presumed to be unreasonable (unless determined otherwise by the IRS Commissioner).

The NRA Regulations are not effective for governmental plans until plan years beginning on or after January 1, 2013.

Wisconsin Retirement System (WES)

Under the WRS, all state employees are in the same plan. General employees constitute about 90.7 percent of the plan's active participants - and protective occupation participants make up about 8.7 percent. Protective occupation participants under the WRS include those employees whose principal duties involve active law enforcement or active fire suppression or prevention, frequent exposure to a high degree of danger or peril and a high degree of physical conditioning. Protective occupation participants include police officers and fire fighters.

NRA for WRS Protective Occupation Participants

The NRA for general employees under the WRS is age 65. However, the NRA age for protective occupation participants in the WRS is age 53 with 25 years of service or age 54 with less than 25 years of service.

Because the NRA for WRS protective occupation participants is less than 55 years, under the NRA Regulations, there would be a negative presumption that the age is unreasonable. And if the NRA is deemed unreasonable, the age may need to be raised to comply with the regulations.

Most public safety employees in other state pension plans avoid this result through the public safety employees safe harbor in the NRA Regulations. Under the safe harbor, a NRA under a plan that is age 50 or later would meet the requirements of the regulations if substantially all of the participants in the plan are qualified public safety employees. However, even though WRS protected occupation participants are qualified public safety employees, this safe harbor may not apply to them. This is because they participate in the same plan as general employees and do not constitute a majority of the total active membership. Therefore, protective occupation participants within WRS may not meet the “substantially all” requirement of the safe harbor.

I ask that you amend the regulations to make clear that the public safety employees safe harbor apply to WRS protective occupation participants. These participants put their lives on the line every day to protect our citizens and they deserve to retire with full benefits at the ages of 53 and 54. Furthermore, these participants were promised these benefits and relied on these promises. Therefore, it's unjust to cut their benefits after the fact.

I look forward to working with you to address this problem. Should you have any questions, please contact Ashley Carson at 202-224-5364 or Kristen Kreple at 202-224-3406.

Sincerely,

Herb Kohl
Chairman

cc: J. Mark Iwry, Senior Adviser to the Secretary, Deputy Assistant Secretary for Retirement and Health Policy, United States Department of Treasury

George H. Bostick, Benefits Tax Counsel, United States Department of Treasury

Ben B at the Q&A

Sixty minutes cut down to eleven. Only the "good" stuff. If you didn't suffer through it this is your chance to Liesman make an ass of himself.

Shipping News – Pirate Update – Thoughts on a Greek Restructuring

I have a friend who is a player in the shipping industry. He happens to be Greek. I got an update from him on two important stories. First a thought on a Greek restructuring:

In this man’s opinion the announcement for a Greek restructuring is imminent. Like in the next two weeks. Does this fellow actually know the timing? No, but trust me, they guy is connected. Something is about to break in Greek sovereign debt. Now Pirates:

Back on 2/11 I reported that a Greek flagged super tanker containing 1mm barrels of crude was hijacked by the Somali Pirates. The boat was released by the pirates recently. The ransom paid was $13,500,000. It was paid in cash. Used hundred dollar bills.

Of significance to my friend was that most of the tanker crew released unharmed. There was an important exception. Seven crew members from India were retained. The unlucky seven are continuing to be held as hostages by the pirates. There are ongoing negotiations regarding a prisoner exchange. Apparently India has captured a hundred or so pirates over the past few years. They are currently in Indian custody. The pirates want to swap those bad boys for the Indian crew. This represents a significant ratcheting up of things. Apparently the Indians are very pissed. It is unlikely that the prisoner exchange will happen. At some point in the not to distant future some Indians are going to be killed as a result. The only alternative is for India to kill some pirates first. Look for that to happen pretty soon. Speaking of killing pirates this is  a video from last year that I thought was disturbing. (link)


The story is that Russia forces captured a pirate ship. They chained the pirates to the hull, and then blew up the ship. I can’t confirm that from published sources. But that is the word that I got from one ship owner. The following is an edited (shorter) version of the video. You decide what is going on here:

A question for Bernanke from the WSJ??

We’re all sitting on the edge of the chair waiting for word from the Fed and then waiting a bit more to hear from Bernanke. I’m of the opinion that this is all being orchestrated. The questions to be asked at the press conference have been sanitized, Bernanke has seen what questions that will be posed in advance.

The hardest questions for Bernanke to answer will be on the issues of Fed Policy and it’s implications to core inflation. The Fed has said repeatedly that they don’t care about headline price increase. But the problem is that the headlines are about to kill the economy (again). How much more do gas prices have to rise before it triggers another downward leg? My answer to that is, "not very far at all".

The WSJ had an article this morning by my favorite guy, Jon Hilsenrath. Jon teed up the question of headline versus core inflation in this piece (link).

Jon looks at inflation expectations based on the five-year TIPS spread and five-year coupon bonds. This is his conclusion based on the information presented:

It’s not an alarming rise and the latest downward drift should comfort some officials. Over a longer stretch of time, it doesn’t like much of a big move.

Jon does his best to minimize the inflation debate with these quotes from Janet Yellen:

Information derived from the Treasury inflation-protected securities (TIPS) market also suggests that financial market participants’ longer-term inflation expectations remain well anchored.

Much of the increase in five-year inflation compensation….. appears consistent with a normal cyclical recovery after adjusting for those effects.

Both the Fed and the WSJ are using market-based data to make a point. Inflationary expectations are tame in their view. But what numbers do they use to draw this important conclusion? The answer is they chose the most favorable comparison. Looking only at the five-year implied inflation give the most favorable outcome. Consider this chart:

I’m nit-picking here. But I think this is an indication of what we will hear from the Chairman later today. I’m betting that he attempts to blunt the inflation story. He will use the same analysis that the WSJ used this AM.

I call this a “double spin”. The Fed and the WSJ are teaming up to manage the news and to frame the debate. Look for Jon Hilsenrath to ask Bernanke a question on inflation expectations and expect Bernanke to answer using only the five-year data. If that should happen, it will be the confirmation of the collusion between the Fed and the WSJ.

Ben and Jon - BKTV

TV Talking Heads

Note: I've been trying to teach myself how to use videos as part of the blog. The following is a rough attempt. I have much to learn on the editing/formatting side of this. Something different:

As always, I'm open for criticism.

Prez to AG – “Get Krasting”

So the president of the United States has ordered the Attorney General to go after the speculators who have been drive up the price of oil and therefore gas. What can I say about this? Does the President think the American people are stupid? No one is going to fall for this line of crap.


Up front, let me acknowledge my guilt in this matter. I’m a speculator. I try my best at it. Some of my best friends are speculators. Many of my readers are speculators. In one-way or the other we are all speculators. Those that don’t think they speculate are actually speculators.

My local oil delivery company let’s me play in the big casino. I bought an option at a fixed price for 5,000 gallons of heating oil. The premium for the option was 20 cents a gallon. So I paid them $1,000 cash. That was sort of gambling money. If the cash price were to fall I’d get the lower price. If it rises, my cost is locked in. Last I looked I was 70 cents in the money. My option cost was 20 cents so I’m “up” 50 cents on 5,000. That’s $2,500 so I’m feeling good on this spec.

It’s not hard to find ways to make money in a rising energy market. I don’t have the balls to trade Brent futures. I overweight energy names in the global stock market. It’s worked pretty well.

I have some investments with funds that do trade energy futures (a “macro” directional fund). They’ve been doing great. I have nothing to do with their market bets, but since I (and many others) provide the equity I have to take some responsibility for their actions.

So if the AG is looking for someone who’s hands are “dirty”, well, I guess I’m on the list. If he did look me up, I would tell him that it was the Ben Bernanke that told me to do it. If the Justice Department wants to lean on me they also have to lean on the Fed.

If the AG, Eric Holder, bothered to look it wouldn’t be too hard for him to see that the blame for all this speculating can be laid at the feet of the Fed. Mr. Holder will not need a PhD in Economics to make this conclusion. All he has to do is read the FAQ’s on the home page of the Federal Reserve. From the FAQ (link):

Monetary policy also has an important influence on inflation. When the federal funds rate is reduced, the resulting stronger demand tends to push wages and other costs higher.

Ah! This is easy. When the Federal Funds rate is low, inflation rises. The price of goods rise! So what is the policy on Federal Funds? Also easy. It has been ZERO for the past two and a half years! What’s the outlook for ZERO interest rates being maintained? That’s easy too!! The Fed tells us every six weeks or so:

Interest rates will be kept exceptionally low for an extended period of time.

So the Fed is telling us in its FAQ that they want goods to go up in price. Now all they have to do is push me into action as a speculator. More from the FAQ:

policy actions can influence expectations about how the economy will perform in the future, including expectations for prices

To me, this is pretty clear, hopefully Holder will agree. The Fed has succeeded in its effort to change my expectations of the future of my energy costs. With my expectations being influenced, it is only natural that I would react. When I pay $1,000 to lock in a price to heat my home it is exactly what Bernanke would want me to do. I’m the best evidence that he has that his policy is “working”.

I think most Americans understand that we import half our oil and that the value of the dollar is a big factor in the price we pay for crude. A weak dollar causes the price of oil to rise. So what's the Fed’s policy on the dollar? Once more from the FAQ:

movements in the exchange value of the dollar represent an important consideration for monetary policy--such movements exert influence on U.S. economic activity and prices

Bingo! The desired consequence of the Fed’s monetary policy is to devalue the dollar in order to increase economic activity. But that same action also results in higher imported prices for crude. The only conclusion that I can come to is that higher oil prices are the desired consequence of Fed policy. Bernanke has brought me to the water and strongly suggested I should drink some. It's all spelled out in the FAQs. Its not hidden in some obscure language. Shame on me (and the President) if I had ignored such an obvious outcome.

The President and the AG need to determine why folks like me are speculating rather than just blaming me for high prices. When they look at the facts they can’t help but see that it is Bernanke that’s behind all that high priced gas. The speculators like me are just the mechanism that Bernanke uses to achieve his ends.

Two Questions

IRS Bounty Hunters

I saw this article in a leading Swiss Newspaper. Understandably, this story has the bankers in Zurich on edge, again. The banner (Google translation):

Back in 2007 the IRS refined its program to pay for information leading to a conviction for a tax fraud. The new rules allow for a payment of as high as 30% of the taxes collect. The story in this paper is about one case announced recently where an individual was paid $4.5mm after the IRS collected $20mm from the tax cheater. Of interest to me is that the guy doing the ratting was also the tax accountant for the cheat.

I pay a bunch in taxes and I hate it. It pisses me off when I (we) end up paying more because there are folks cheating the system. I’m not at all sure how much anyone should be paying in taxes. My answer is that it’s not zero. If you put those two thoughts together the notion that the IRS is now paying big bucks for “tips” is probably not such a bad thing.


That said, I’m troubled by this. The IRS has turned the civilian population into its enforcement division. Yes, some good may come from this, but some bad will too. This has a whiff of vigilante-ism to it.

The IRS bounty rules only apply for settlements in excess of $2mm. So your average, cabdriver, part-time tutor, waiter/bartender etc. need not worry. I don’t think that will stop people from ratting out some small fry (friends and neighbors included) who are dipping a bit with the IRS. It certainly will create a cottage industry of PI’s, accountants, lawyers who are going to start snooping. A $4 million payday brings lots of slugs into the open.

I’m interested to read your thoughts. Like I suggested above; I go both ways on this one.

On that Tax Hike for the rich folks

I was looking at some IRS numbers on who pays taxes to the federal government. This data is from 2008. That was a bad year to look at incomes/taxes. There was a big drop in income due to the recession and market crash. But it’s still useful to look at.

If we’re going to raise any significant amount of new revenue it will have to come from the top 5% of earners. Note that in 2008 the top 5% was anyone who made over $159k. That number has crept up in the last few years. For 2012 the top 5% will be any household income that is in excess of ~$170k. Depending on where you live and how big your family is that is really not so much these days. But it is greater than the rest of the 95%, so that is where the new taxes will have to fall.

Note in 2008 the top 5% (a) earned 35% of all income, (b) paid $600 billion in taxes, (c) paid 59% of all taxes, and (d) the average tax rate was 21%.

I think the AGI revenue numbers are currently running at  ~$9.2T (up 10% since 2008). Assume that the effective tax rate is about the same. Now let’s raise the taxes on this group of rich people. How much more should they pay? How does a 50% increase strike you? Changes in the tax code to limit deduction AND increase the top bracket that resulted in an increase from 20% to 30% it would raise an additional $325billion. With a 1.6 trillion deficit that extra money would come in handy, but it only covers 20% of that shortfall.

If the tax rate(s) were to be adjusted so that the poor bastards who are making over $170k get their taxes doubled from 2008 levels it would still only raise $625b, leaving us with a hole of $1 trillion.

The effective tax rate would have to be raised on the entire top 5% to 75% in order to balance the budget. Put another way; if you were lucky enough to earn $200k, your take home would only be $50k. And that number does not include state taxes, property taxes or sales taxes. Basically, you have nothing left.

If you think that the solution is to raise taxes BIG TIME on the uber-rich, think again. The top 1% should have about $1.85T in income in 2012. IF we really sock it to them and nailed them at a 90% effective rate we could cover 1.3T of the 1.6 shortfall. This would imply that the top 1% would be paying 75% of all taxes collected.

I hope that this shows that raising taxes on wealthy Americans does not work very well. Yes, we could technically go the route of Sweden and tax income over $500k at 70% or so. But what might be the consequences?

Question: What should the federal rate on high-income earners be? What rate would you apply to those making ¼ mil a year or more? ½ mil? A cool mil?

Tim G’s Bank – A few Questions

UPDATE: Shortly after I posted this piece I did hear from the FFB. They sent me a link to the letter I make reference to below. The letter is not a smoking gun. It deals with minor security issues. Rather than "fix" the following I'll leave it the way it is.  The matter of the side letter is resolved. The other points I make are still valid. The FFB borrows money from the Civil Service retirement fund. This is unusual  in comparison to other federal Trust Funds. Some of this money is on lent with the benefit of a "guaranty" from the federal Agency making the loan. A "spread" is paid to the Agency.  The original piece, warts included:

I’ve had a number of articles on the topic of the Federal Financing Bank (“FFB”). This is the doghouse lender run by our good friend Tim Geithner. I check the reports on a monthly basis, there is always something that makes me laugh/cry.

-FFB is the lender of last resort for the good old Post Office. They have $12 billion outstanding to the PO. Interest rates? Don’t ask. The FFB is lending at 0.25%

-FFB has $600mm outstanding to various Universities. Once again the rates are dirt-cheap. The maturities? Some go out to 2028

-FFB is also the lender to Ford, Tesla, Fisker, Solyndra, Arizona Solar and Kukuku Wind. The amounts outstanding to private sector names now totals $4 billion.

-Even the military is involved. The FFB has $370mm outstanding under the dubious heading of “Military Sales”. I wonder just whose military are we financing with that loot.

The FFB came out with its annual report recently. An outside auditor, KPMG, performed the audit. I poured through all 24 pages. The second to last paragraph caught my eye:

We noted certain matters that we have reported to Bank management in a separate letter dated November 10, 2010.

A separate letter? What’s that about? My read of this is that the nice folks at the KPMG had something they wanted to say to the management of FFB, and they did not want the contents of that letter to be public. By the way, Tim Geithner is the Chairman of the FFB. So he is the “management” that got the letter that we can’t see.

I love side letters. You have to assume that a dozen or so lawyers and accountants looked at the final draft of the report and argued about the necessity to put in the language that is confusing me. After all, if the side letter is a secret why make it known that there is a side letter to begin with? Possibly a bit of CYA on the part of good old KPMG.

So I contacted the FFB and asked them what this was about and haven’t heard a word. The fact is that I don’t know what might be in that letter. But because I don’t have the answer from Treasury I think I am allowed to speculate on just what this might be about. If I’m wrong, then Treasury can let me know and I’ll publish a correction.


There are some things going on at FFB that don’t quite pass my smell test. Consider this from the Annual Report:

FEDERAL FINANCING BANK

Notes to Financial Statements September 30, 2010 and 2009 (Dollars in thousands)

Additionally, at September 30, 2010 and 2009, the Bank had borrowings of $10,238,990 and $11,921,240 and an associated unamortized premium of $180,007 and $228,927, respectively, from the Civil Service Retirement and Disability Fund (CSR&DF), which is administered by the Office of Personnel Management (OPM).

Why would the Civil Service Retirement fund lend money to FFB? $22 billion is not chump change. It’s a third of FFB’s total liabilities.

CSR&DF has a surplus and invests that money in Special Issue Treasury securities in its normal operations. This is exactly the same for the other federal trust funds. Social Security is a perfect example. SS holds $2.6 trillion in Special Issue Treasuries. But it does not hold a penny of paper issued by the FFB. Why is the CSR&DF lending FFB 22b? The answer is not that the FFB is having any difficulty in raising money directly from its parent (Treasury). The rules are pretty clear; FFB has a blank check:

The Bank is authorized to issue obligations in unlimited amounts to the Secretary and, at the discretion of the Secretary, may agree to purchase any such obligations. (BK note: Secretary = Geithner)

I wonder if the unusual funding arrangement between FFB and CSR&DF is in anyway connected to this sentence from the KPMG report:

While the Bank is permitted to charge a spread on new lending arrangements with government-guaranteed borrowers, the margin is not retained by the Bank, but rather is retained by the loan guarantor.

Ah!! Spread income is diverted out of FFB back to some Agency. How much? What Agency? Why is any Agency in the credit business?

I can’t answer any of these questions. I wish I could. I think the answer on “How much” is in the line item marked: Legislatively mandated interest credit. It only comes to $270 million. Chump change, right?

Greek Bonds - What's Next?

It’s been my observation over many years that when the external debt cost for a country hits 10% it is just a matter of time before the wheels come completely off and a restructuring is the next step. I saw this in Latin America many years ago. For sure, the status quo can be maintained for a bit, but the inevitable result is that the situation is unsustainable and not fixable short of a major restructuring of the country's debt. These are the conditions that brought us the Brady Plan of the Mid 80’s. The same conditions exist today for the PIGs:

A close up of the Greek 5-year. This bond is screaming for a restructuring.

So what's going to happen next? What might a restructuring of Greek debt look like? Things that are likely to result:

-There will be a range of options for holders of Greek debt.

-Principal forgiveness of at least 30% will be one option. In this case there would have to be enhancement of both principal and interest on the new debt. The exchanged bonds would be “money good” but they will still trade at a discount from other AAAs because they will be “story bonds” with limited demand and liquidity.

-Another option will be for no principal reduction (Par Swap) but an extension of maturities at a sub market interest rate.

-To have the slightest chance at acceptance and success the Par Swapped restructured obligations MUST have credit enhancement on the principal of the debt that is exchanged. The end result will be that either the IMF or the ECB (or some new Euro guaranty mechanism) will be on the hook for Greece’s future performance.

Let me make some guesses on how these new instruments would trade.

Assume that one held Greek Debt and was willing to exchange it for a new 20-year obligation. Assume the principal ‘haircut’ is 30%. The new obligation is credit enhanced so that if Greece fails to pay interest and/or principal on a timely basis the restructured creditor gets payment from a Guarantor that is equivalent to a sovereign AAA. The interest set (floater or fixed) on the new Obligation would be similar to that of the Sovereign Guarantor (AKA: ECB). The new bond will trade at a discount to its new par value, but it will trade above 90% of par (@90 = AAA+80; that should find bids).

This means that if an old Greek bond is exchanged for a new enhanced Greek bond it is worth a minimum of 63 cents. (.70 * .90). If the new enhanced bond traded at 95% the equivalent would be ~67% cents.

Now the par swap option. Assume that one is willing to exchange an existing Greek bond for a new one that has a 20-year maturity and a fixed coupon of 3%. Assume further that the interest payment will have no credit enhancement. The payment of interest will continue to be 100% Greek risk. The payment of principal in 20-years would be guaranteed by an acceptable Guarantor.

This creates a hybrid security that will trade as the sum of its parts. The principal portion has a Net Present Value of ~44 (discounted at 4.0%; Germany +75).

The interest portion will also have an NPV value. A fixed Greek obligation to pay interest at 3% would be discounted by the market by (my estimate) at 10%. The current value of the discounted interest flows is ~23.0. The sum of the two (Principal + Interest) is ~67.0.


The approaches I have used to evaluate post-restructured Greek debt are hybrids of cookie cutters. There is a long road map of what happens when a country goes bankrupt. I just apply the same rules. The guarantee feature I use is both undesirable, and necessary. The “solution” that will soon be forthcoming from the likes of the IMF will incorporate these features.

If you use my numbers/analysis you come up with a range of future values for Greek bonds of 63-67% of par. Of course one should not take these estimate too seriously. I would discount them a bit further to be on the ‘safe’ side. Another 10% over my numbers and you get the mid 50’s as a level where Greek bonds get interesting.

Guess what? We’re there already.

Am I recommending that one should jump into Greek bonds with both feet at this point? Hardly. I am suggesting that the market blowout in Greek bonds today has created the opportunity and the necessity for a restructuring. I think it will come by the end of the month.

If and when it does come, Greek bonds that are bought around 50% of par could be a money maker. What concerns me is that as soon as this restructuring is announced the ‘market’ will push Ireland and Portugal to the same end.

Those that have been advocating debt destruction as the only possible endgame of too much debt are about to see their thinking become a reality. Where the process starts is now clear. Where it will end is anything but.

Insurance, Weather, Goldie and the SNB

I Hate United Healthcare

I posted an early version of this letter last year. I’m pissed enough and I think this is relevant enough from me to put up the latest version.

This letter and the pricing structure contained in it has been approved by the NYS Insurance Commissioner. These rates are not inconsistent with what a different insurance provider would charge. For a family of four in NY it now costs $67,634 per year to buy health insurance.

If you live in NY you have to pay an extra 8% tax on income. This hit coupled with the IRS gets one easily over the 40% mark. To make an after tax income of $67k one has to earn $113K. And that is just to cover an insurance bill. Forget about what everything else in life costs. For what it is worth the average income in NYS is $47k

The brave folks in D.C. are working on plans of how to fix this problem. We have to wait another three years for any benefits from Obamacare, and in all likelihood that plan is going out the door. I have to wonder how many people are going to die as a result of this mess.

Question: Have others gotten similar letters to this in the past month or so?

 

Weather is Changing – Hang on Gulf Coast

The super La Nina we have been struggling through has broken. From NOAA:

La Niña weakened for the third consecutive month, as reflected by increasing surface and subsurface ocean temperatures across the equatorial Pacific Ocean.

What are the computers telling us what will come next?

Nearly all of the ENSO models predict La Niña to continue weakening in the coming months, and the majority of models indicate a return to ENSO-neutral by May-June-July 2011.

Here is the chart of the computer forecasts. The ones that worry me are those that are projecting an ENSO of +1 by the summer's end. This condition has brought us active hurricane seasons in the past.

What might the weather patterns be if we do get back to La Nina conditions? History says it will be dry in the West, hot in the South and wet in the North East.


Take a look at the pacific jet stream during La Nina. Does it appear to blow directly from Fukushima to the United States? Looks that way to me.

The Goldie Call

Many observers of the markets have already commented on the Goldman call(s) this week for a break in commodities pricing trends. (Zero Hedge link) I'll toss in my two cents.

I guess there is a possibility that GS is putting out this word as a public service message. But I highly doubt that. Three times in one week is manipulation in my book.

Buy the dip on this one. Goldman is setting up a bear trap. They should just shut up. They can trade their book all they want. But they are taking their book and that is quite another matter.

Who’s losing in FX?

Did you notice that the USDCHF solidly broke 90 last week? The Swiss can blame Bernanke for this. The CHF is not so strong against the Euro these days. This is a dollar move.

The Swiss economy is not very dependent on the dollar exchange rate. The Euro link is a much bigger headache for them. But the drop in the dollar is hurting the Swiss people in a different way. The Swiss National Bank is getting killed (again) on their reserve holdings. This is a recent breakdown of their portfolio:

How bad are those losses? From the end of 2010 till the close on Friday it comes to $4 billion. It’s even worse when you go back to June of last year. In a little over nine months their USD book has cost them a very lumpy $15 billion. That comes to a tidy $2,000 for every citizen. That may not seem like a big bundle for all those rich folks in Switzerland. But consider the magnitude of this error. If each American took an FX hit of $2,000 it would come to $600b. Heads would role if that happened.

The SNB has dug themselves a hole. They can’t get out of it. This hole will have to get bigger. Keep in mind that every dollar of these losses is a dollar is spec hands. The SNB is making hedge funds/bankers rich. What a silly system we have.

Krugman – “I’ll spin it my way”

Paul Krugman has been pounding away on the need to increase taxes. What Paul really wants is big government. To do that you need big taxes. Today PK used the following chart to make his point. He uses it as proof that US citizens pay a low tax rate.  Krugman wants us to believe that because we rank so low on this list we should be more than willing to accept higher taxes to support that big government "we" all want.

It’s hard to argue with this list and the conclusions that PK draws from it. Let me try. This is the raw data that the chart Krugman used was based on:

First let me point out that the 2009 data for the USA (30.1%) was the lowest in the 13 years of information presented. This is because the US was in a recession in 08 and that always means lower tax receipts. To make a statement, Krugman uses the most opportune data to support his position. When you look at the past and projected numbers you see that the US average of ~34% is right in line with Japan, Korea, Australia and Switzerland.

For me, the most significant error by Mr. Krugman and his chart is that he deliberately chooses to exclude exactly how high those tax rates are in the countries he holds up as shining examples. Yes it is true, Norway Sweden, Denmark, Finland, and France have higher taxes than does America. But look what they are paying to get to the top of the list. Respectively 56%, 56%, 54%, 53% and 49% of GDP. Who wants to be on the top of that list? I doubt the folks in Sweden or Denmark are so proud to have made it to the top.

What Mr. Krugman shows up as an example of “what we should do” is actually a disaster. Mr. Krugman should get his head out of, well, academia and start talking to Americans of all stripes. Liberals, conservatives and all the folks in between. He won’t find one that will stand up and support 50+% taxes on GDP. What may be acceptable in Sweden is simply not going to sell in America.

If he bothered to ask a few economists what they thought 50%/GDP taxes would do for America he would also get an earful. That is just stupid bad policy.

It shouldn’t surprise us a bit when politicians like Ryan and Obama talk about numbers and budgets and spin every chart to suit their agenda. It quite another matter when Nobel economists do it.

FHFA on RE Market - "No Upside"

Patrick Lawler, Chief Economist at the Federal Housing and Finance Agency spoke to the House Sub-Committee on Capital Markets the other day (pdf Link). He said some interesting things. My conclusions after reading it are:

-If you own a home, you are screwed. Values are not going to recover anytime soon.


-If you are trying to sell a home, you are screwed. The number of qualified buyers and the availability of mortgage money are going to fall.


-If you are trying to buy a home, you are screwed. To get a mortgage you can afford is going to get  harder to find in the near future.

Part of the Dodd Frank FinReg Bill was to require mortgage originators/syndicates to retain 5% of the risk. This is the “skin in the game” concept. It makes perfect sense. It is designed to minimize the amount of stinky mortgages that can be originated. It’s hard to argue with the intent of this rule. But there will be consequences.

Dodd-Frank defined what a good mortgage should look like. They call it Qualified Residential Mortgage (“QRM”). There are stiff hurdles to this definition. EVERY other mortgage (None-QRM) are subject to the risk retention rules. QRM loans are not subject to the new rules.

So what constitutes a QRM? Like I said, its stiff:

*Minimum 20% down.

*Mortgage Insurance can’t be used to make up for the shortfall of real equity by the buyer.

*Owner occupied only.

*Mortgage debt service to income no greater than 28%.

*No prior defaults, judgments or BKs need apply. You have to have a long-term clean financial record.

*Only straight 30-year mortgages meet the QRM definition. No balloon payments, no interest only, no negative amortization.

In my opinion, if these standards were in existence starting around 2000 we would never have had the blowup in real estate that nearly killed us. There would have been no funny money mortgages. There would not have been the insane run-up in prices. Therefore the proposed new rules would significantly reduce the risk of another blowout in mortgage land. But talk about taking the punchbowl away. How many legitimate (qualified) buyers are left standing when the new rules are applied? The answer is very few.

This chart shows the percentage of loans that were originated in the past that met the new standards of QRM.

Note in this chart that the average number of loans that met the QRM standards from 1997-2003 was only 20%. When you look at the number for 2007 (11%!!) you understand why we had a crisis. Fully 89% of all mortgage written were, well, junk. For me, the most significant number is the 35% for 2009. There was a substantial tightening of mortgage standards, but the amount of “bad” versus “good” was still 2 to 1. As the new retention rules take hold the availability of Non QRM will dry up.

What are the prospects for a potential buyer to get a Non QRM loan? In my opinion it will be slim. If it's available at all, it will be expensive. Mr. Lawler points to the fact that Jumbo mortgages (loans that are too large for Fannie or Freddie to purchase) are today available at a cost of about 60 basis points over Non Jumbos. But Jumbos are high quality loans. There is significant equity and stable borrowers behind them. Therefore the pricing for a Non QRM that is smaller than a Jumbo has to be greater than the Jumbo by a significant margin.

If the cost of a new QRM is X% then the Non-QRM pricing will be at least 100bp over QRM levels. This suggests that Non-QRM will have a yield 150 – 200 over ten-year treasuries. I will leave it to the reader to plug in an estimate for the 10-year over time. Today it is only 4.4%, meaning that mortgage costs for the vast majority of borrowers would be 6.4%. Get the 10-year to a more reasonable 5% and mortgages will cost 7% for the average borrower.

Does it matter if the borrowing cost for 60-70% of all potential buyers is 1% higher? Is that a big deal? You bet it is. Does this mean that residential real estate has to collapse? No, but you would also have to conclude that there is very little upside to home ownership. There goes the American dream.

Note:

Dodd-Frank defines QRM and also Non QRM. It also establishes “None Qualified”. These are true junk mortgages. No Docs, Liars, No equity etc. These types of loans would not be eligible for syndication or Agency purchase, period. This, of course, would be a very good thing. There should be no tolerance for these types of loans. Right? Well this chart shows just how many loans would have been deemed Non-Qualified (junk) from 1997 through 2009. This chart staggers me. In 2006 38% of all mortgages were just junk. What were those lenders thinking of? Greed comes to mind.

Expectations on the wide – A challenge to Yellen

I wanted to puke this morning reading Janet Yellen’s speech (Zero Hedge link). I’m going to come right out and say what I think. Janet Yellen lied to her audience and lied to the American people today. Her words:

I will make the case that recent developments in commodity prices can be explained largely by rising global demand and disruptions to global supply rather than by Federal Reserve policy.

This is an insane position for Ms. Yellen to take. There at least a dozen separate public statements by Bernanke that the goal of QE is to raise asset prices. Are commodities not assets? They are. And Yellen knows it.

When the Fed has ZIRP, cash seeks out higher risk investments to retain some return. Again, Bernanke and all the other Fed governors have used this line in defense of QE. Ben’s words from just six weeks ago in his “QE is working” speech to the National Press Club:

“Since August, when we announced our policy of reinvesting maturing securities and signaled we were considering more purchases, equity prices have risen significantly.”

Does Ms. Yellen think Americans are stupid? That we don’t understand that monetary policy is a major driver in the economy? That cheap money does create bubbles in things like commodities and equities alike?

If Ms. Yellen is in doubt of that she should sit down with someone who understands the connection full well. I think she should have a tea with former Fed head Paul Volker. He would tell her the same as me. What she is trying to sell is just drivel.

With that off my chest let’s focus on the Fed’s credibility. I want them to be more precise with their definitions of inflation. The Fed is looking at Personal Consumption Expenditures as their definition of a benchmark for  inflation. I maintain that this is a bad matrix as it is backward looking. Inflation is clearly rising. The Fed can’t just look into the rear-view mirror to measure what is going on. They have to be pragmatic and look to the future of inflation as well. There is one measure of future inflationary expectations that is worth noting. The spread between 10-year TIPS and coupons is on the wide. Here’s the graph:

The Fed folks aren’t stupid and they know that inflation expectations drive reality. Yellen said so today:

Critically, so long as longer-run inflation expectations remain stable, the increases seen thus far in commodity prices and headline consumer inflation are not likely to…..warrant any substantial shift in the stance of monetary policy.

Okay. We have her on her word. It is critical that inflationary expectations don’t get out of hand.

So here is my challenge to Ms. Yellen. Give us some firm guidance on expectations of inflation. Use the 10-year TIPS/Coupon spread. When do you get concerned? What ranges do you want? The Chairman has given us firm targets on core (“ a little below 2%”). Give us reasonable ranges on what inflationary expectations the Fed is shooting for.


Ms. Yellen teed this up today. She was the one that said that it was critical to contain expectations. There has been a lot of talk about the Fed communicating its intentions better. This would be a good opportunity. I will send this off to her. I doubt I/we will hear a word. This Fed does not want to look forward. They’re making a mistake. They should all ask Volker his thoughts on this as well.

Note:
In the current environment where we have massive monetary stimulus I think that a 3% spread is coming. At that point the water is already boiling. If the Fed fails to react when markets are ringing alarm bells; they will have made their next historical mistake.

Dean Baker - "let's Just Default"

An interesting article by Dean Baker today. "Defaulting on debt is not the end of the world". Dean has gone over the top and is now advocating a debt default by the USA as a way of “fixing” our problems. Dean thinks that the existing obligations of Social Security and Medicare are much more important to maintain that our credit rating. His words:

Compared to these outcomes, (cuts in SS and Medicare) a financial crisis and the subsequent slump that follows may seem like a relatively small cost.

Baker thinks this would be an easy matter. He points to Argentina as an example. This just proves that Dean has no clue what he is talking about. Yes Argentina defaulted and recovered after a few years. But Argentina is not a reserve currency that has a linchpin role in the global financial system. Argentina is a fraction of global GDP (Argentina = 0.5%; US = 25.0%). Their default was painful to all. Both citizens and creditors suffered. Savers lost everything. Pensioners got worthless script versus the payments they were promised. Dean thinks following Argentina is the right thing to do:

The experience of Argentina may be instructive in this respect. Argentina defaulted on its debt at the end of 2001. By the end of 2003 it had recovered its lost output.


it is also likely the case that the United States would rebound and possible rebound quickly from a default.

I don’t know how to handicap the possibility for a debt default by the USA. In 2007 I would have said it was a near zero possibility. Today it's no longer zero and the odds rise by the month. The scary thing for me is that no one is doing a damn thing about it. The budget silliness of last week is a case in point. The idiots in D.C. damn near shut the government down over a few billion bucks. Lunacy. And now ‘important’ voices like Baker are suggesting default is a viable option.


It’s hard to imagine what a debt default for the world’s biggest creditor would be like. Some of the things that I think could happen:

-Mr. Baker must come to grip with the facts of default. As he and many other defenders of Social Security have said repeatedly; the assets of the Social Security Trust Fund are equal in legal status to the debt issued to the public by Treasury. This means that it isn’t possible for the US to default on its public debt without also defaulting on the Special Issue bonds in the SS Trust Fund. As SS is running a cash deficit on a monthly basis it would only take 30 days for all checks to stop. Period, full stop. Social Security would cease to exist.

-The Medicare Trust Fund, Military Pension Trust Fund, Federal Workers Trust Fund would also default. They too would stop issuing checks. Medicare would no longer function. Some level of medical care would be maintained. But older people who needed lifesaving treatment wouldn’t get it. Hundreds of thousands would die. The number could easily go into the millions.

-Surely we would see a collapse of the dollar. The cost of everything we import would triple++ in a very short period of time. The price of gas would be $10? 50? 100?

-Equity markets in the US would collapse. A loss of 50% would be a good outcome. It could be much worse than that. We know that the wealth affect drives the economy, so this result would insure a collapse of US GDP. How long would the depression/recession last if this were to happen? At least a decade. It would be worse than what happened in the US during the 30’s.

-Unemployment? A minimum of 25% would be the result.

Interest rates? Who knows? There would be no debt market left in the event of a default by the US. There would be no credit available.

-If Treasury were to default, every mortgage borrower would follow suit. If the banks were not wiped out by the federal ‘no pay’ they certainly would be wiped out by the mortgage defaults. Almost all banks would shut. This would cascade back to the FDIC. The withdrawals from account holders would force the FDIC to honor its obligations. As they have no reserves this would force Treasury to issue coinage ($100 bills) to satisfy the run on the bank. This is the hyper inflationary environment. The price of basics (food) would explode. Shelves would empty. People would go hungry. In the years that followed a default many would starve, many of those would die.

-All municipalities would be forced to default. All muni savers would be wiped out. The business of local government would shut down. They would be unable to make payroll, so no one would work. Garbage collection would stop. There would be no police. Crime would be rampant. Armed robbery, rape and murder would be common. Vigilantism would rise. Open conflict on a regional basis would be the result. There would be no fire departments. Cities would burn.

-All infrastructure repairs and investments would stop. In a very short period of time roads, bridges, ports, airports would become dysfunctional. It would not really matter that much. There will be no gas or diesel to power vehicles, so the broken roads would be empty.

-Most public education would end.

-There would be no real estate market. There would be no Fannie, Freddie or FHA. There would be no lenders to finance a home. There would be no liquidity. Prices would collapse. A house would sell for a few months of food.

-It’s difficult to image the consequences outside of our borders. Neighboring countries like Mexico and Canada would implode. The decline of the US economy would ripple around the world. Other countries would be forced to repudiate their debt. It’s possible that a default in the US would force all big debtor countries to follow suit. At that point all seven billion people would suffer.

-Functionally there would be no US military. Regional warriors and pirates would rule. Major nations could start wars over natural resources.

I suspect that a number of readers will agree with Dean. Pull the plug on the whole system. Let the chips fall, let the shit fly. That may happen. We are most certainly headed in that direction. The probability of this happening just increased a notch or two. Dean Baker has a big audience and a fair bit of support. Big shots like Paul Krugman quote him all the time. Now that Dean has put his reputation (and CEPR) on the line by calling for a debt repudiation he will be forced to push his agenda. Like I said, this is a “popular” option.


Dean Baker is the champion of Social Security and Medicare. His many supporters should understand that he is advocating policies that insure that their savings, benefits and medical protection would be wiped out. He would destroy exactly the group that he thinks he is trying to protect. They should at least see him for what he is. A fool that will ruin them.

On those Inflation Numbers

Inflation is a thorny topic for those who try to write about it. Everyone has a different gripe, and they are all right. The numbers bandied around from CPI to Core and non-core and whether crazy things like hedontics (that IPad thing) should be even considered in the equation make mush of any discussion. No one really trusts the numbers. Not even Fed officials. (TV anchors do, however)

The next issue is that everyone lies about the numbers. From Bernanke to, well, me. The numbers are easily skewed to make whatever case you want.

I can’t help that the measuring sticks that we use are flawed. To my knowledge there is no better set of numbers to use. So I will use COLA as a benchmark to make a few points. A look at America’s long-term track record on inflation:

The most notable part of this graph is the tremendous blowup that we had with inflation in 2008-2009. We raced higher, then it collapsed. A closer look at monthly changes in COLA since 2007.

Some observations about this very unusual period in history.

-From July of 2008 through February 2011 inflation rose by just ½ of one percent (about ¼% per annum). If you want QE to go on for another few years you will point to this as the evidence that inflation is “worrisomely” low. This is what Bernanke is looking at. There is no inflation at all over this time period.

-I’m not sure of the economic relevance, but I do think it is worth noting that as of February 2011 inflation has fully recovered from the 08-09 recession. We will be making new all time highs for the next six months at least.

-The peak to trough drop in inflation came from July to December of 2008. What we call inflation fell by a real 5% (11% annual). You wonder why guys like Bernanke and Paulson were freaking out? This is the number that scared them the most. In the fourth quarter of 2008 inflation fell at an annual rate of 19%. That’s pant-shitting time. This is the panic that brought us TARP and QE and all that other stuff they did back then.

-From the trough the COLA measure of inflation has risen from 204.8 to 217.4 today. Over this 26 month period we have seen a real rise of 5.8%. (2.3% annual). This number is quite a bit hotter than Bernanke’s test for inflation of, “a little under 2% per annum”.

-In the past nine months CPI-W has risen by an annual 2.2%.

-In the past six months CPI-W has risen by an annual 2.9%.

In the past two months the CPI-W has risen by an annual 5.1%

It is these last three data points that has put inflation back on the front page. Not only are we experiencing measurable inflation on a daily basis, we are also seeing the change in pricing accelerate on a very rapid basis.

-A point not from the chart. The CPI-W will make significant gains for April, May and June. That inflation is now baked in the cake. Bernanke knows this quite well.

This chart shows historical annual COLA increases. This data smoothes out all of those monthly gyrations.

There are only two years where this measure of inflation exceeds 5%. We know what happened in 2008; that was ugly. In 1991 we had a mild recession (7.8% unemployment, peak to trough GDP –1.4%, duration 9 months). This recession was brought on by a blowup in the oil market. We were headed off to Gulf War #1.

In 2001 we had another mild recession (8 months). That one was caused by the Dot.com blow out. CPI-W was on the high side at 3.5% that year. But the stock market was racing at 20% per annum. Easy money caused that speculative boom. Everyone paid a price.

A synopsis:

After a tremendous hiccup inflation is today at an all time high. CPI-W has grown rapidly over the past half year. It is growing very rapidly (dangerously?) so far in 2011. It is near certain that the rate of inflation over the next few months will be significantly above trend. Historically, periods of rapid (5+%) inflation are met with periods of recession. The related conditions that bring economic crisis are excessive monetary policy, war and or an energy shock.

All four of these conditions are met today. In other words, we are asking for trouble. How Mr. Bernanke can avoid seeing how all these stars are lining up is a mystery to me.



Note:
My oil contract ran out. I got a 1,000 gallons spot delivery at $4.40/gal. The spot price a year ago? $3.17. That comes to a tidy 36% increase. In that corner of my expenses I’m experiencing hyperinflation. Bernanke can exclude food and energy from his calculations at his and our collective peril.

Corn and Crude Convergence

Good article on corn this morning by Smart Money Europe (Zero Hedge link).

The bottom line is that corn is sitting at a two year high. Reading SME you have to conclude there is more on the upside. I’m lifting this chart from the piece to make a point:

I was looking at this (ugly) chart and realized this was the same chart for crude. Now look at this chart that compares the two. (Note: I use Brent as I think WTI is irrelevant)

This chart is truly ugly. Looking at this it hard not to conclude that Corn = Crude as far as directional price moves go. Which is the dog and which is the tail? I think crude drives corn. It takes a bunch of energy to grow corn (diesel and fertilizer). There is also the ethanol connection. The higher the price of gas, the greater the price for ethanol, the greater the price for corn.

The conclusion is that the dog (crude) is wagging the tail (corn). But that is not what the chart says. Over the past four months corn has outpaced oil. In the past quarter the tail has been wagging that dog.

One of two things will happen. Either corn corrects or crude corrects. My bet? The dog will catch up with the tail. This chart is telling me that $140 Brent is on the way.