Do you believe in the polls? What about the tooth fairy?

One of the hot topics today is the polls. Most have Obama pulling away in the toss up states and ahead nationally. The conservative talking heads are expressing disbelief claiming that the polls are run by democrats and are trying to determine the outcome of the election. However, I find it hard to believe that the Wall Street Journal pollsters are a bunch of libs. Nevertheless, from a purely scientific viewpoint, one can call the polls into question. For whatever reason, most of the polls oversample democrats. The polls that don't actually have Romney ahead. Nonetheless, for the polls to be accurate, those who actually vote must reflect the composition of the polls. Thus, if the polls oversample democrats say 40 percent democrat, 30 percent republican and 30 percent independent, then the poll is only accurate if the actual voters keep the same percentages. While this may be likely, the likelihood that oversampling democrats is accurate is dubious at best. Consider the following: since the election in 2008, democrat registration has fallen dramatically. In the swing states consider the following: democrats are down over 400,000 in Ohio, 5 percent in Florida, 9.5 percent in Iowa and 19.7 percent in New Hampshire ( http://www.foxnews.com/politics/2012/09/27/drop-in-ohio-voter-registration-especially-in-dem-strongholds-mirrors/#ixzz27mDHMdtX). The pollsters admit that their models are largely unchanged from 2008 and reflect voting patterns from that election. Consider this, first the fall in democrat registrations should call for a revision of the samples. Second, common sense tells you that Obama will not do as well among any voting bloc save the progressive wing of the democrat party. He has to do worse among Catholics for the administration's stand regarding mandated birth control for employers. He has to do worse among Jews for his anti-Isreal stance and the anti-semitism in the Occupy Wall Street crowd - a democratic favorite. He may still get 95 percent of the black vote but the number of black voters will be significantly less. All this is common sense. For the polls to ignore all of this lessens their value and leads me to conclude that this election won't even be close. Romney in a landslide.

If the Fed wants more growth then why is it still paying interest on bank reserves?

One thing has puzzled me about current Fed monetary policy so perhaps you, kind reader, might have the answer. Fed policy has been expansionary. Ben Bernanke has solid support on his Open Market Committee for loose monetary policy. Just read the speeches of the Fed governors. Atlanta Fed president Dennis Lockhart has said "For me," Lockhart told the Atlanta Institute of Internal Auditors, "the policy question was what tools in combination have the greatest chance of producing real results in terms of faster growth and employment gains while preserving price stability." (http://www.frbatlanta.org/pubs/financialupdate/12q3_lockhart_monetary_policy.cfm?d=1&s=email). Well Lockhart and his Fed buddies have me confused because the one obvious change that they could have made but haven't is the rate the Fed pays on bank reserves. For years, the Fed paid zero interest on bank excess reserves - the amount that banks hold over the amount that they are required to hold on transactions deposits (10%). Currently, the Fed is paying 0.25 percent on excess reserve holdings. To put that in perspective, the 3-month, 6-month, one year and two year Treasury all yield less than 0.25 percent. That means that banks could simply hold excess reserves than buy Treasurys and earn higher rates! No wonder the Fed instituted QE1 and QE2 which purchased Treasurys. Wouldn't it have been simpler just to lower the rate paid on excess reserves? That way the banks would be induced to purchase the Treasurys and the Fed would not have bloated its balance sheet. Now that the Fed (re: Lockhart) states that its objective is to promoted faster economic growth, then wouldn't eliminating the rate on reserves push banks into lending more? Sure this is a tough environment but the world on the street is that the banks' lending standards have become unreasonable even in these difficult times. Perhaps the reason is that they do not have to make as many loans due to the Fed paying them interest on reserves.

Negative Treasury yields?

Finance professors teach that markets are rational. That thinking is probably dated because in large part market movements may not be rational. First, there is a herd mentality in markets that lead to irrational movements. Second, markets are affected by actions initiated by computer driven models which may be contrary to what an individual investor might do. Rationality is an interesting topic in today's markets. Now the nominal yield on Treasurys is close to zero which means that for long term bonds, the yields are likely to be negative when adjusted for inflation. Meanwhile, in Europe, many core bond markets are already have negative short-term yields and with the turmoil in the eurozone, inflows from Europe to Treasurys could push US rates negative. Why would a rational investor buy an instrument whose return is practically guaranteed to be zero? The textbook answer is "safety". The Treasury is a safe haven in a turbulent market fraught with uncertainty. Well that makes sense but who says the Treasury is safe? Sure it may be safe against default but it certainly is not safe from loss. Another strike against the rational market argument is that junk bonds are currently trading at record low rates. Of course this is because those rates of around 6 percent seem lofty compared to Treasurys. However, remember these are junk bonds we are talking about. Even in the best of times, junk bonds pose a risky bet for investors. Now in this economic climate we would expect the yields on these bonds to go up not down. But going down they are because of the miniscule return from Treasurys yet the risk has gone up not down. Who says markets are rational?

QE3? More like QE Infinity

The Fed just announced QE3. However unlike the first two iterations, this one has no expiration date or amount. Call it QE infinity. The action was taken at the last Open Market Committee - although Bernanke had hinted at it in his Jackson Hole speech earlier. The vote for the FOMC was 11-1. On the committee sit all 7 governors of the Fed, the president of the New York Fed and four of the other reserve bank presidents. I presume the one "no" vote was from the president of the Richmond Fed who has consistently opposed quantitative easing. On the other side of the spectrum is the president of the Chicago fed who wants even more easing than was agreed upon. The amount the fed will buy is $40 billion per month in mortgage-backed securities. This is an important departure from the other QEs in that the Fed is not buying Treasurys. Thank goodness for small favors. The purchasing of Treasurys is called monetizing the national debt and essentially has the Fed supporting increased government spending by purchasing Treasurys directly from the US Treasury. I have long advocated that this be made illegal except in a declared national emergency. When the Fed buys mortgage-backs it is purchasing bonds that are collateralized by mortgages. It is not clear if it is only buying the bonds from Fannie Mae and Freddie Mac or from the private sector or both. The issuer of the bonds buys the mortgages from originators, pools the mortgages and issues bonds against the pools. The purchaser of the bond (now the Fed) does not own the mortgages - they remain on the balance sheet of the issuer of the bond (say Fannie Mae). The issuer typically guarantees the timely payment of the principal and interest of the mortgages to the bond holder. In the case of default of a mortgage, the holder of the mortgage - not the bond - bears the risk. Generally, the mortgage pools are diversified so that unless there is a general mortgage meltdown, the risk that the bond will default are minimal. Historically, the purchaser of the mortgages has policed risk by evaluating defaults among the originators. Thus, if an originator is making too many "bad" mortgages, the purchaser will either buy subsequent mortgages at a haircut or not at all. As a consequence, the risk to the bond holder should also be minimal. Of course, when times are not usual, like in the mortgage market meltdown, then the bonds themselves default because the bond issuer defaults by not being able to cover the defaults of the homeowners. By announcing that it is only purchasing mortgage-backs, the Fed has announced that it is no longer supported the deficit spending of the congress and the White House. Rather, it has announced that it is supporting the mortgage market instead. This is because when the bond issuer sells the bonds, it then uses the funds to purchase more mortgages. So if I had my druthers, I prefer this QE to the others.

Libya and Egypt on 9/11: Why hasn't someone resigned?

I am outraged over the murder of four Americans including the ambassador to Libya yesterday on 9/11. I was earlier outraged over Egyptians going inside the embassy compound and trashing the American flag and flying a black al-qaeda flag in its stead. The question that needs answering is where were the marines? I had thought that each embassy had a detachment of marines to provide security. If that is so, then how did the protestors get insider the embassy compounds? Why aren't there dozens of dead radical muslims in Egypt and Beghanzi? Where were the marines? This shocking lack of security to me is an impeachable offense. No not of the president but of the secretary of state who continues to exhibit incompetency. These episodes mean that Hillary Clinton must go. If she does not resign then the senate should immediately move to impeach her. Yes I know poor old pitiful Harry Reid won't do it but at least the republicans should have the testosterone to recommend it. Impeach Hillary!

Random Thoughts

• The democratic convention presented us with a continuing contradiction. Among their most reliable supporters are Jews, blacks and Mexican-Americans (most of the media would say “Hispanics” but Cuban-Americans are reliably republican). But what was on parade should have been offensive to these groups. It was in your face abortion, gay rights and the anti-God fiasco. Blacks and Hispanics are notably against abortion, against gay marriage and pro-God. If the republicans were smart (remember George Will calling them the Stupid Party) they would blanket black and Hispanic markets with snippets from the democratic convention. They should also hold meetings with ministers and priests who serve these communities as well. As to the Jews, Obama has poorly veiled enmity toward Israel and many of the democratic leadership are openly anti-Semitic. I encourage the republicans to go after black, Hispanic and Jewish democrats in congress to force them to explain their allegiance to the democratic party. The congressional black caucus – excepting Allen West and Tim Scott – and especially Debbie Wasserman Schultz look like useful idiots. • My father was a proud alumnus of Savannah State University. I only knew him to be bitter about one thing. His diploma said “Georgia State College”. Back in the old days, some southern states attached “university of” to an all-white school and “college” to an all-black school. Thus Tennessee State University (black) and the University of Tennessee (white), Alabama State University (black) and University of Alabama (white) and of course there was Georgia State College (black) and the University of Georgia – ironically my alma mater. So when the state decided to put convert a two year college to a four year (white) university in Atlanta, they took away my Dad’s school’s name and gave it to the white school and renamed Dad’s as Savannah State. • But speaking of Savannah State, Dad would not have been embarrassed by their losing to Oklahoma State 84-0 and then the next week to Florida State. As a matter of fact he would have been proud of his Tigers. He knew they moved from Division II to D-I mainly to play basketball with the big boys to get the revenue to support their athletic programs but he would have never dreamed that they would do the same in football. If he were still here, I would have taken him to Stillwater and to Tallahassee. He would have worn his Tiger gear with pride. • By the way, this was a historic two weeks with Savannah State playing Oklahoma State and Florida State, Howard playing Rutgers, Florida A&M playing Oklahoma, Delaware State playing Delaware, Southern playing New Mexico, Grambling playing TCU, Jackson State versus Mississippi State, and Fort Valley State (my mother is an alumna) playing Valdosta State. • Today I saw an old beat up wreak of a Chevrolet pickup with a bumper sticker that said “Made in America by Americans”. I was laughing so hard I almost had to pull over.

Are the democrats racists?

While at the family farm awaiting the beginning of bow season I head a public service announcement pertaining to renewing a Georgia’s driver license. In order to renew the applicant is required to have the following documents: • You must be a Georgia citizen • You must be a US citizen and you must prove it. How? • You must have at least one (1) original or certified document to prove your Primary Identity; and • At least one (1) document to prove your Social Security Number; and • At least two (2) documents to prove your Residential Address; and • Appropriate Name Change documents, if needed Excuse me? The Georgia law is in accordance to the Real ID Act enacted by the congress in 2005. What does Eric Holder and the Obama Administration has to say about this. If they are suing states over voter ID why haven’t they sought repeal?. And by the way, didn’t you need a valid photo ID to be admitted to the democratic convention? Does this mean that the democrats are racists?