Welcome to the Blue Money Report

Fed watchers will be looking for any change in lingo coming from the meeting but don't expect it. Alan Greenspan, the Fed chairman is seemingly comfortable with the current low inflation rate and the so-called jobless recovery and has no apparent intentions to rock that boat anytime soon. Granted, the intentions are not to keep unemployment high but instead to foster new job growth in a low interest environment. Problem is, companies have not risen to the bait.

Many major corporations remain skittish when it comes to hiring largely because without all of those working people filling the factory floor (in this country), profits have risen significantly. Greenspan understands that the current administration is going to push hard for a permanent tax cut, continue to spend as if there is no tomorrow, and that the weak dollar policy, while understated, is exactly what Mr. Bush and Mr. Snow want.

If that happens as many bond traders believe will, there will be little margin for error in bonds if they are not protected against rising inflation. Two things point directly at this possibility: The 5 year Treasury note is yielding 3% and the CPI is hovering around the 2% mark. This will leave what is referred to as a "real yield" of only 1.1%, at best.

Pointing at the attractiveness of TIPS in this environment is truly the work of a worried fore-thinker. But the argument follows the logic. With a traditional bond, the semiannual coupon rate is set when the bond is auctioned. With a TIPS (Treasury Inflation Protected Security), the same coupon is set but with the principal adjusted to take into account inflation. This protects the underlying purchasing power of the investment and actually creates a better yield.

Those yields are greatly effected by the maturity date. Before we go too far into that, it is important to understand duration. Duration has a direct relation to volatility. The longer the duration, the higher the risk. A TIPS bought with a 2009 maturity date will net a third more than a TIPS with a 2008 date and is considered, if purchased by January, a four year bond. That means, if the market stays the same, a capital gain of 1% could be had on as little as that .30% point decline. Bond prices move in the opposite direction of yields and any price appreciation on this four year security would result in a lower yield, hence the gain.

The dollar is seeing pressure on the upside this time and that creates a convexity problem for new Treasuries being issued. Any strength in the dollar against foreign currencies at this particular moment would make foreign investors less interested in snatching up more of our debt. This convexity problem will only complicate matters.

Convexity comes into play when mortgage owners decide that refinancing is once again an attractive option as rates continue to fall. When that happens, investors in securities backed by mortgages get their money handed back to them at a date much earlier than expected. This means that they will need to go out and find some other place to reinvest. The lower yield forces them into non-callable Treasuries driving prices up and, you guessed it, yields down.

This is, at best, a very risky environment for the dollar, the ever-increasing debt offered to foreign buyers, and the plain vanilla Treasury note.

Today's Commentary: 01.26.04
While You Were Out: Messages from Last Week
The messages never seem to stop, gathering steadily on the desk in my office. The economy is calling and the best I could do was sit back and watch. I apologize for that but there was some unavoidable business at hand (read: book deadline) that needed my immediate and prompt attention. Suppose we go through some of these messages together.

The winning streak is over it seems. While only taking a modest downturn last week, the markets took a breather even with the huge inflows into mutual funds, a rebalancing of sorts spurred on by pension funds seeking to regain lost monies. This is a very risky way to build market momentum.

Many companies have taken the lead provided in cryptic detail by the Pension Benefit Guaranty Corporation to adjust their investment activities. PBGC has decided that bonds and stock-like instruments are not the way to go when trying to cover not only the growing number of future retirees but also the growing deficit in the plans of the companies they insure. Once thought to be a shortfall of $3.6 billion has now grown to a worrisome $11.2 billion. The problem falls squarely on the ability of PBGC managers to find a predictable investment to match their predictable pension payouts. Looking to the stock market, they found out this year, was not the way to go.

PBGC basically guarantees the pensions of many companies and unions using the premiums paid to invest in fixed income securities to cover future payouts. Current payouts are doing just fine as the corporation has taken over more than $35 billion in assets from defaulted pension plans, the lion's share invested in the stock market and used their modest 10% return on those investments to make good on the promises made by these companies. And therein lies the rub. Promises made by these companies and now some unions to their employees and members will not meet at the same place come retirement.

Aside from the market problems, companies have used pension plans as a sort of nest egg, writing IOUs to pay for revitalizing their businesses. This kind of dipping will result in some sort of government intervention and that we have found over the last three years will not be good for any of the players, from PBGC on down to those counting on those pensions. Citing a need for reform, Congress will squabble over the best way to accomplish this and we will, I fear, be the losers while the corporations will receive some sort of relief for their plans poor management.

The State of the Union address, an exercise better read than witnessed, was a disappointment. We will attack a few salient points because overall the speech was a mundane exercise in side stepping.

Mr. Bush did get two things correct though. The first was the fact that "Americans are proving once again to be the hardest-working people in the world." Without a doubt, the jobs that many have been forced to take recently to provide for themselves and their families have paid almost a third less on average than the jobs many of those same Americans have lost. Add to that the productivity numbers, a gauge of how hard these folks have to work for this money and you have what looks to be , at least on the surface, a success for the economic stimulus provided by the White House.

It is nice to be acknowledged by the White House in a nationally televised speech but the understanding of the everyday American's plight in this new order economy is not as good as the special interest groups is plain to see in spite of the rhetoric suggesting otherwise. The belief that by giving big business a break they have created an atmosphere of growth that can only be good for the average worker assumes that we are like a blind horse standing knee deep in corn.

He reiterated his wish to continue cutting those taxes in the face of ever increasing deficits. The appearance of evenhandedness stopped right there as he told Congress on one side on the aisle that the budgetary illusion of a balanced budget in the future requires the permanency of his $1.7 trillion tax cut. If this should happen and he is not re-elected in November, the new president will have their work cut out for them. They will inherit deficits as far as the eye can see. They will find an economy with false notions of grandeur built on the quagmire of increased spending. And that doesn't even take into account our current place on the world stage, another economic house of cards built by the deficit.

We should all be aware by now that there is little money left to do even the small things that need to be done. Acknowledging the increased role that community colleges are playing in the job retraining of so many workers and the promise to funnel money in their direction would be the second thing he got correct. Almost. Even the community colleges, whose hands have been repeatedly slapped by the states that support them, will tell you that the promised money will not be enough to cover California's problem let alone the whole nation.

He threw Social Security on the table at a time when there is no plan in place nor any funding available for its overhaul. The plan to privatize this program has a price tag that would stagger even a government whose fiscal responsibility to its people was a cornerstone of their policies. But Mr. Bush has never been a fiscally responsible president and he doesn't see any reason to start now.

Mr. Bush has created a militarized America with a sort of high handed approach to international politics. This tactic has not worked here at home either as we have found little economic solace in the tax cuts which haven't panned out as promised. Instead, the State of the Union seemed to be dividing the country further into a throw back from years past. There will be the "haves" who favor the tax cuts, the increased spending, and the deficit and the "have-nots", the ones left with the bill.

As I sort through this stack on "while you were out" notes, I want to leave you with one final thought. What kind of a President offers no moment of silence for the young men and women who have died for our country while following orders during his folly in Iraq?