A Canadian explanation of global monetary policy

One of my kitties decided to stay out all night, and consequently I had trouble sleeping and found myself wide awake in the wee hours of the AM.  So I turned to Market Watch and Bloomberg News to see the latest.  First I turn to John Markman of Market Watch who claims that Timothy (I-forgot-that-I-had-to-pay-taxes) Geitner has cooked up a scheme that will save Europe (Geithner’s plus-sized euro bailout is stealth QE3).  :

The plan, cooked up by U.S. Treasury Secretary Tim Geithner, is to persuade European leaders to vastly expand the size of the emergency bailout fund known as the EFSF, or European Financial Stability Facility. His proposal, and I’m not making this up, would use leverage — i.e., borrowing — to increase the size of the already borrowed money in the fund by up to 10x. … snip

This is a little hard to believe, but it’s the truth. The funds from euro-zone countries in the EFSF have already been borrowed. And now the plan espoused by Geithner is to use that money as collateral to borrow as much as ten times more. The guy does not get enough credit for his evil genius.

Where is Geitner going to get this money?  Apparently, if I understand correctly, from the Federal Reserve Bank.  So Bloomberg says (Euro Crisis Makes Fed Lender of Only Resort),

The ECB said Sept. 15 it will coordinate with the Fed and other central banks to provide three-month dollar loans to banks to ensure they have enough of the currency through the end of the year. The Fed bears no foreign-exchange or credit risk on the swap lines because the Frankfurt-based ECB is its counterparty.

So let’s get this straight:  The Federal Reserve will lend money to the Europeans.  This money will come from where?  It will become a new line on Fed balance sheet and will thus increase the adjusted money base.  This has become known as quantitative easing.  The money won’t be printed, and so nobody will see wheel barrows cash in the market places of Europe as they did in the Weimar Republic.  No, it will just be line in a balance book, electronically created from nothing at all (see Niall Ferguson, The Ascent of Money, 30-31, quoted in this post).

Now the best explanation of global monetary policy is in Corner Gas, season 3, episode 1, which is actually an allegory of banking in our times:  Oscar has made some bad bets in his stock picking game with Hank, who is beating him hands down.  They each started with $10,000 of fictional money, but Oscar’s picks have gone South.  But he’s seen the news about Ark Research’s insider trading, and he believes that knowledge will help him defeat Hank.  He decides to bet big on Ark Research, but he is in desperate need of liquidity.  So Oscar (a.k.a., the European banks) goes to his son Brent (i.e., the Federal Reserve Bank) and asks for $10,000 from his fictional money tree.  Brent says, Why can’t you do it yourself?  Did a fictional hooligan steal your make-believe ladder?  No, Oscar says, that would be against the rules.  Without rules nothing makes sense, he claims.  With rules, this makes no sense, Brent responds.  The monetary policy part of the clip begins at 0:39.  (@7:08 Oscar explains that he lost all the money and he can’t pay Brent back, and that is exactly how the loan to Europe is gonna go down).

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Bernanke the almighty and What are oil stocks worth anyway?

Andrew at City of God has posted that the Watcher called into question Sue Richard’s calling the Silver Surfer all powerful:  “‘all-powerful? There is only one who deserves that name! And his only weapon… is love’ (Fantastic Four #72; Mar. 1968).”  Well for us investors, we worship at the feet of one and only one, his high and mightiness, Benjamin Bernanke, the chairman of the Federal Reserve Bank.  He is the one who determines what our assets are worth and he wields a weapon called “QE” and another called interest rates  with which he increases our power, our net worth, and we become mighty warriors of investing–but when he refrains from wielding them, suddenly we are all grovelling in the dirt like worms eating skubala (a.k.a., the margin call).

So I wrote to my good friend Mich at Beating the Index, who is fretting about running out of powder for his battle on the investment front:

Bernanke is the first cause of everything in the market today. He is exercising his omnipotent power as head of the Federal chair to influence risk appetite. Well, there will be either more monetization soon or watch hundreds of thousands of government workers in Washington not get their pay cheques and be sent home crying. My Schadenfreude would be so high at that point, it would almost be worth a 50% cut in my portfolio to see it. But it ain’t never gonna happen! Believe me, by August or September, the pols in Washington are going to lose nerve and there will be new debt ceiling (and QE3), based upon a compromise between the left-wing republicans and the democrats in the House.

Meanwhile, fear is palpable.  The companies  in which I am invested have increased their asset values through the development of oil fields but their share prices are way down because the lack of QE3 has diminished risk appetite.  People are rightly afraid to be caught with their margin pants down, like what happened to silver investors when the margin requirements were magically increased.

Devon Shire chides Petrobank (last $14.30)/Petrobakken (last $13.63) for not having a share buyback at these low prices, which puts their market capital at serious multiples below the Net Present Value.  Shire wants them to reward shareholders with a buyback of shares, but of course the management spent that cash on PBN shares starting at $21 and who knew that the price would plummet to these levels? These prices  are not only at multiples below NPV but well below book value (=shareholder’s equity).  I wrote to Mr. Shire the following response:

Net Present Value for other junior and intermediate companies is also currently at extremely high ratios to market value. Midway Energy is reporting NPV10 of 1.7 billion while its market capital is 274.9 million.

Some are angry with Petrobakken for continuing what they consider to be an ill-advised dividend program. Evidently, the buy back of shares is an equivalent use of cash as a dividend–I suppose that the real need is to spend money on developing their resources in order to deliver growth. The sad part is that PBN started the repurchase program at $21 while the price was so high vis-a-vis the current price.

At some point either you and I are going to be considered really stupid for thinking we had found value in the Canadian oil sector, or there is going to be a major correction drastically decreasing the NPV/market capital ratio.

Yet Mich warned me about taking the NPV10 that Midway had presented as a serious indicator of their value and I reproduce here our dialogue:

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