-- Posted Monday, 26 May 2008 | Digg This Article
| Source: GoldSeek.com
One of the ominous signs that sends me running to the safety of the closet under the stairs and slamming the door shut, where I hide in the dark sobbing and wailing about the inflationary horror that is descending upon us, is contained in the Bloomberg.com headline, "Auction-Rate Collapse Costs Taxpayers $1.65 Billion".
This looks like bad news for underwriters of auction-rate bonds, whatever in the hell they are, as evidenced by Bloomberg reporting that "By mid-February, Citigroup Inc., the largest underwriter of auction-rate bonds, held $11 billion of them, up from $8.1 billion at the end of 2007."
As a result, the bank's "investment professionals" were able to report "a $5.1 billion loss for the quarter ended March 31."
Even worse, "Thousands of auctions failed, forcing issuers such as the Port Authority of New York & New Jersey to pay interest rates as high as 20 percent. The investors were left with securities they couldn't sell."
And if you want a quick course in "determination of market value", plug the phrase "securities they couldn't sell" into the famous supply/demand dynamic and see what happens to the price of the securities.
But this is not about any of that fundamental stuff or how prices are falling or how losses are being booked or how tax revenues to governments are falling, but about how I laughed and spilled coffee into my lap when the article said, "Holders with no immediate need to unload their auction debt have benefited from the rise in yields." What? Hahahaha!
Naturally, I jump up and say, "This embarrassing wet stain on the front of my pants notwithstanding, you are wrong! Hahaha! You Bloomberg guys have made a mistake, and yet when you tell people that you work for the famous Bloomberg, everybody goes 'Oooh!' and 'Ahhh!' and you get a table right away, but when I say that I work for Mogambo Inter-Galactic News Service, they all go 'What? Who? Go away, irritating little man!', and I have to go around to the back door of the restaurant and eat in the alley, mostly with dogs like in the movie Lady and the Tramp, which brings up the point that, in real life, those dogs are a lot uglier and meaner, and for some reason you always end up with spaghetti sauce and greasy crap all over your clothes!"
Instead of applauding and saying, "Well, said, Mogambo!" or, "Hooray for The Mogambo!", they all ignored me, like they ignore me whenever I go to the bank and I have to stand in line, and while I am there I helpfully try to educate all the other people in line about what idiots they are for trusting this bank, or any bank, because all bankers all greedy, crooked, lying, thieving little rats who are part of the Federal Reserve System that is stealing us blind and ruining our economy with their stupid, and wrong, constant-Keynesian econometric theory crap.
But I seem to have strayed from the subject because I enjoy insulting banks and bankers (which I will gratuitously note sounds like "banks and wankers", which is so much more descriptive), in that the point is that an increase in a bond's yield means, mathematically, a decrease in the bond's market value, as the two move inversely to each other.
So lower prices for bonds is only good if you are buying them, because if you are, indeed, holding them, you will not only suffer a paper capital loss as you helplessly watch the prices of the securities go down as interest rates go up, but you will also suffer the humiliation and career-ending poor performance of investing your money at a yield lower than the guys who bought later than you! Hahahaha! Nice job, investment professionals!
And, in the worst-case scenario, if the holders had margined the purchase of the bonds (putting up a small amount of capital and borrowing the rest), then whoever is so unlucky as to have these "investment professionals" managing their money are Really Getting Screwed (RGS); locking in a low rate, suffering a capital loss and having to pay more money to meet the margin call, too! Hahahaha!
But maybe bondholders are so used to being screwed out of buying power that they don't even notice anymore. Or they are all taking drugs and don't realize that they are being screwed out of buying power. Or they are masochists who enjoyed being screwed out of buying power. Or they are, as I have said so many times, just childishly-trusting morons who are so busy trying to raise a family in such a wildly inflationary environment that they don't notice, but will one day wish they had.
Or maybe they are just stupid, as these are probably the same guys who are buying the stocks of the Dow Jones Industrial Average, which is now sporting the eye-popping, totally unbelievable, totally unprecedented price-to-earnings ratio of 87, which shows real stupidity! Hahahaha!
Now you see the mistake of letting the SAT scores of America's high school graduates fall. And they are fat, too, so they tell me. Fat and stupid. How wonderful for us.
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Editor's Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it.
The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications. Click here to visit the Mogambo archive page.
-- Posted Monday, 26 May 2008 | Digg This Article | Source: GoldSeek.com
