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On Student Loans, Accounting Gimmicks, Electric Cars, FX and a note on SS

Bruce Krasting's picture




 
 
 
 
Student Loan Battle

 

There was a big fight in D.C. this past week over student loans.

The issue is a scheduled increase in interest on new student loans from 3.4% to 6.4% set for July 1. Clearly this is a dumb plan. I don’t see any political opposition to the idea that the summer of 2012 is a horrible time to double the cost of student loans. It will shock no one that the ‘solutions’ being put forward by the politicos are the same ones they propose for every other problem.

The House Republicans have put forward a Bill to extend the 3.4% rate for a year. The cost (increased deficit) of the twelve month extension is $6B. The Republicans want to offset the $6B with (surprise) $12B in reduced spending for the Affordable Care-Act. The Republicans love to trade marbles for reduced Obamacare. They want a 2-1 reduction in medical spending versus education costs. Maybe the “Reds” have the chips to push this outcome. They might settle for a 1-1 deal, but the White House will hate this outcome.

The Senate Democrats want to raise taxes on those making over $250K to offset the cost of the one-year deferral. Their argument is similar to the Buffett tax plan they tried a few weeks ago. Lacking support, it was so clear it wouldn't pass that it was never voted on. I would give the Senate legislation on student loans a zero chance in the House. It is D.O.A.

There will be the same ideological pissing match and the same result. We will get a one-year extension “paid” for with “promised” reductions in expenses starting in 2017. Another kick of the can, and another big problem in 2013.

This is what happens over a crummy $6B. On January 1, 2013, there are cutbacks and higher taxes totaling $500B scheduled. The coming “Tax Armageddon” is supposed to be resolved in a lame duck session of Congress after the November election. There is a “zero” chance of that working out.

 

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One in a Hundred
 

I have been following the evolution of new global lease accounting standards. At the heart of this issue is the recognition that a lease is just another form of debt, and that the debt should be put on the balance sheet of the lessor. The big hitters in the US leasing business (and their accountants) have opposed the new standards. At this point 100 countries have signed on to the new accounting rules, but the adoption has been delayed by the good old USA.

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At the G-20 meeting last week, finance ministers extended the deadline for the our rule makers to adopt the new rules till June, 2013. That date is already 30 months late. My guess is that there will be another delay, and the source of the delay will be the powerful companies, (think GE) that have a lot to lose if a lease is treated as debt (as it should be).

The Foxes are the cops in this hen house. When it comes to accounting and full disclosure, nothing has changed.

 
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On Electric Cars

 

GE has dug itself deeper into the electric car business:

It’s all well and good if GE wants to put its shareholders at risk on the future of electric cars. My concerns are that a great deal of money is being spent by D.C. on this effort, and that GE's, Jeff Immelt, is the President’s policy adviser. Jeff blows smoke in Obama’s face and the government doles out billions to support  GE, Ford, Fisker, Tesla and others.

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If I were running the show, I would have invested in the infrastructure for delivering natural gas as a fuel for vehicles. The US has an abundance of cheap natural gas. A fair bit of that energy is just being flared into the air these days.

It’s not as if Natgas cars are some untested concept. Brazil has been using them for thirty years. Globally, there are about 15m Natgas powered vehicles. Of that amount only 300,000 (2%) are in the US.

So why is the government, the car manufactures and the energy companies avoiding this opportunity? The answer is that it is much more profitable to sell expensive gasoline to consumers than it is to sell cheap Natgas.

Note: Honda makes a Natgas powered car. This vehicle was named Green Car of the year in 2011 as it gets 31 miles to the gallon with much lower emissions than gas powered cars. If there were a distribution system available, these cars would be more popular than electric cars.  The cost of running cars on Natgas is about half of the cost of a gas car.

Why is the government supporting one technology over another? Why is it supporting the expensive alternative versus the cheaper one? Another example of the foxes being the cops.

 

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On FX
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There was very little net movement in the major currencies last week. I was surprised that the Euro did not weaken. The news is terrible. There is a very good chance that the French and Greek elections on May 6 will bring about political changes that will undermine the stability of the EU.

If the French kick out Sarkozy (I think they will) then the chances of Spain getting a desperately needed rescue package will fall to zero. Without France standing shoulder to shoulder with Germany in support of the Euro, the whole experiment may fall into the crapper. Yet the Euro managed to eek out a small weekly gain against the buck.

Some are attributing the relative strength of the Euro to ongoing capital repatriation by the EU banks as they reduce their non-Euro assets. (Zero Hedge) Others are suggesting that large existing EURUSD short positions are the problem.

Maybe, but I’m catching a whiff of dollar weakness. I don’t pay that much attention to the hourly trading action in FX, but I do watch how the USD trades when news comes out. When there has been “good news” the dollar has not traded higher. When there is “bad news” (the weak GDP report) the dollar has traded lower.

I believe that the US is currently in 3rd place in the race to the bottom. The EU and Japan are leading this race. So this makes me (reluctantly) a dollar bull. I’m not getting fat on this position, I’m not even getting fed, so I cut some positions on Friday. I took a small loss on some recently acquired USDYEN and took a nice profit on an older (smaller) position on USDYEN that I picked up under 79.00. I took the net gains and bought one month puts on the EURUSD.

Note: The EURCHF has been trading at less than 1/8th percent away from the intervention level of 1.2000 for over a month. This is an accident waiting to happen. It looks very quiet on the charts, but there is a steam kettle with a hot fire underneath this chart. If the French election goes against Sarkozy, I have to believe the kettle is going to blow a few rivets.

I have no exposure in the CHF crosses, but I’m watching the action. If the Swiss National Bank is forced to support its peg over the next few weeks, it will send a bunch of other lighting bolts flying.

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On Social Security
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I’ve been trying to stir the pot on Social Security this week after the release of the annual report (Link). I thought the report was ample evidence to stimulate a discussion of what changes are needed at SS, and by when. I was wrong. The terrible report and its terrible conclusions have been ignored. The typical response I get from the Defenders of SS is,

“The Trust Fund behind SS was always scheduled to run out some day; that it's happening ahead of schedule does not matter at all.”

To those who do not see the fire burning here I point to the following slides from the 2008 and 2012 reports to Congress:

 
 

The base case assumption on the timing of the peak in the TF balance has changed dramatically over the past four years:

 

Social Security is going to eat our lunch much faster than the public thinks. Those who think that this does not matter and that nothing should be done are dead wrong.

Note: I get a lot of flack about my focus on the Trust Fund (TF). I agree with those who say, “There is no Trust Fund”. The accounting on this is just a sham. But TF accounting is the reality in D.C., and that is not going to change. So I push on the deteriorating status of the Trust Fund (that doesn’t exist) in an effort to raise a red flag.

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Mon, 04/30/2012 - 17:24 | 2386506 ebworthen
ebworthen's picture

Imagine, ten years from now, that all those millions and millions of cars and trucks are running on natural gas.

The price could easily be ten times higher than it is now because there is a huge increase in demand, regardless of the current supply.  Market forces would readily ramp the price up to equilibrium with demand.

Conversion will put huge pressure on demand, price increases, and be in competition with all other uses.

Mon, 04/30/2012 - 05:29 | 2384494 Seer
Seer's picture

"Natural gas will not go up 10x"

"Production of it will go up by at least 50% in 2012."

And I thought I was the "seer!"

Do you have a play on this bet?

Anyway... "strength through exhaustion," the hubris of it all never ceases to amaze me.  (Need to remind myself that nature is all about deception.)

 

 

Mon, 04/30/2012 - 11:39 | 2385160 alex_g
alex_g's picture

"Production of it will go up by at least 50% in 2012."

 

Maybe I should have been more clear for the hard of reading...the statement pertained to ASSOCIATED GAS, which was discussed in the sentence before.  Thought it was obvious...

Sun, 04/29/2012 - 17:07 | 2383900 bankruptcylawyer
bankruptcylawyer's picture

STUDENT LOAN INTEREST SHOULD BE MARKET RATES AND NOT GOVERNMENT SUBSIDIZED. 

 

EDUCATION COSTS SHOULD BE SUBSIDIZED OUTRIGHT OR NOT AT ALL ----THE INTEREST ON DEBT SHOULD NEVER BE SUBSIDIZED. IT CREATES WALL STREET LENDER BUBBLES. 

THE ONLY THING TO BE DONE IS TO MAKE STUDENT LOANS DISCHARGEABLE IN BANKRUPTCY. THAT IS ALL. 

Sun, 04/29/2012 - 21:47 | 2384166 WmMcK
WmMcK's picture

PLEASE!
function toProperCase(s)
{return s.toLowerCase().replace(/^(.)|\s(.)/g,
function($1) { return $1.toUpperCase(); });}

Sun, 04/29/2012 - 17:11 | 2383904 ebworthen
ebworthen's picture

Besides all caps you have a point.

Problem is, the entire society is now government subsidized.

Sun, 04/29/2012 - 19:05 | 2384025 Cpl Hicks
Cpl Hicks's picture

How are you government subsidized?

Sun, 04/29/2012 - 19:57 | 2384069 StychoKiller
StychoKiller's picture

The Mongol hordes (figuratively speaking), are being blown up by CIA drones on the other side of the world...

Sun, 04/29/2012 - 16:51 | 2383880 onlooker
onlooker's picture

+  for nat gas cars

cleaner burn output for air quality. good cheap supply. engine oil stays clean--- fewer engine oil changes, saving oil

Mon, 04/30/2012 - 02:05 | 2384408 Seer
Seer's picture

Beware Jevons Paradox!

Sun, 04/29/2012 - 16:43 | 2383870 I am Jobe
I am Jobe's picture

Is there an APP for this? Kidding. Yikes , and thank you Bruce. There are only a few are truly awake.

Sun, 04/29/2012 - 16:38 | 2383866 patb
patb's picture

There is one thing, that the Financial types miss, in looking at Electric cars.

The arguments for NatGas Vehicles are strong, Boone Pickens and the like make a strong argument for why NatGas is good, and 

he has a point, if you ignore fracking issues (Accelerated depletion, seismic instability and GW contamination).

But what's missed is that Internal combustion is peaked out, perhaps, there is some more growth but the best cars of the 70's got 40+ MPG and the Best cars of today get 40+MPG. There may be some more tech improvements in IC Engines, but i'm not sure what. Perhaps higher wall temps with better materials, but that's about it.

Battery and Motor technology are steadily improving. Power Density, Energy Density, $/KW, $/Joule, all these are nicely improving.

By Investing public dollars to accelerate this curve, we make the same bets that integrated circuits, and optical fibers did for America.

Sun, 04/29/2012 - 21:44 | 2384162 alex_g
alex_g's picture

patb, the cars today that get the same mileage as the cars of the 70's are 50% larger.  Not apples to apples...

Mon, 04/30/2012 - 02:09 | 2384410 Seer
Seer's picture

Does "larger" mean dimensions or mass?

Lots more plastic and lightweight components in today's vehicles.

Anyway, Jevons Paradox tosses a wrench into the "efficiency will save us" meme.

Conservation of energy, it's not just a good idea, it's the LAW!

Mon, 04/30/2012 - 13:17 | 2385424 alex_g
alex_g's picture

1977 honda civc = 1495lbs

1982 honda civc = 1730lbs

2012 honda civic = 2600lbs

Sun, 04/29/2012 - 15:10 | 2383809 alex_g
alex_g's picture

Bruce, love your stuff, keep up the good work.

My brother and I have had many conversations (mostly over beers) about the absurd allocation of federal money to electric cars and solar power. He's a mechanical engineer by training (ran an internal combustion lab in grad school) and I'm a finance/investment guy.

We just can't figure out why, with the numbers so blatantly obvious, NGV's aren't the top priority of this administration.

Engineering wise, it's already done. Costs are lower. It provides American jobs. The money spent on NG transportation mostly stays in the USA, providing a GDP multiplier, as opposed to sending money overseas for oil, which is a dollar for dollar reduction to GDP. No jobs produced.

I realize the green lobby is electric or nothing, the oil lobby is protecting their investments, and that corps like GE are pushing for the fat margins that gov contracts provide, but you'd think that numbers so obvious would win the day.

Sun, 04/29/2012 - 18:23 | 2383982 lotsoffun
lotsoffun's picture

electric cars are a hoax.  unless you have a solar panel.  try that in brooklyn.

hoax.  you're still burning fossil fuels to generate the electric.  unless of course, you want to go nuclear.

 

Sun, 04/29/2012 - 17:46 | 2383945 taxpayer102
taxpayer102's picture

 

@alex_g

GE and other companies backing electric vehicles realize more money, government subsidies, can be made from R&D and support infrastructure for electric vehicles.  You point out rightly how the USA would benefit from NGVs.  GE exported offshore as many manufacturing jobs of its electiric light bulbs as possible and it will do the same for electric vehicle/parts manufacturing.  GE has no interest in creating jobs in the USA if it can manufacture offshore and import to the US for higher profit.

Remember how the auto industry worked to remove electric trolleys from cities to make everyone dependent on gas powered transportation.  The Feds right now are backing trucking for transporation of goods instead of highly fuel efficient railroads.  The government generates more revenue and regulations from 200 trucks than one train that can transport 200 trucks.   If something is obvious to us then the Feds will fight against it.

Mon, 04/30/2012 - 02:17 | 2384415 Seer
Seer's picture

I think that it's kind of a coin-flip when it comes to which is superior, trucks or trains.  Rail is restrictive*, and is more readily subject to disruption (wash out a road and you take another one): rail is also being backed by Uncle Warren (and I so distrust this fucker).

* You're limited by grade.

We're going to revert.  Since trains predated trucks we'll get there.  But there was plenty of transportation that predated trains: Hi Ho Silver! (maybe even a pun in there somewhere)

Sun, 04/29/2012 - 18:43 | 2384007 alex_g
alex_g's picture

Railroads would be even more efficient if they were allowed to build small scale LNG facilities in rail yards.  Almost all locomotives are a series hybrid, a generator powering electric drive.  There is no problem allocating the space on a train to house the LNG tanks.  Huge win.  These LNG facilities could be shared w/ trucking and shipping.  Makes too much sense.

Sun, 04/29/2012 - 20:21 | 2384091 Jim_Rockford
Jim_Rockford's picture

Almost all locomotives are a series hybrid, a generator powering electric drive.

Yes, and almost all (if not all) of the generator engines are diesel engines.  They cannot be easily converted to operate on LNG, unlike gasoline engines.

These LNG facilities could be shared w/ trucking and shipping.

Trucks also have diesel engines.  Ships usually burn bunker oil.  Neither will operate on LNG and unlikely that they could be converted to do so, cost efficiently.  Locomotives, trucks, ships would all have to have new engines installed, which still might be a "Huge win".... I don't know.

Sun, 04/29/2012 - 21:04 | 2384134 alex_g
alex_g's picture

J-R, tell that to WestportHD, Cummins and PacCar.  Do some reading.

Washington State Ferry system is converting 5 large ferries to LNG, and ordering new ones powered by LNG.  Where will this LNG come from?  Why California, of course!  Too smart to share with railroad and trucking.

Tue, 05/01/2012 - 23:24 | 2390169 Jim_Rockford
Jim_Rockford's picture

A-G, I did as you suggested.  From the Cummins Westport site:

Cummins Westport manufactures and markets factory built dedicated natural gas and liquid propane gas engines that meet or exceed current EPA (Environmental Protection Agency) emissions standards. Our engines are based on the proven line of Cummins engine products, built to provide power, reliability and performance. We do not offer conversions.

http://www.cumminswestport.com/customer/faq.php

Converting a ferry does not necessarily mean that the existing powerplant is being converted to run off of Nat Gas.  It could mean that the ferry is being re-powered.  As I said, a diesel engine can not be easily converted to run off of LNG (or CNG).  Perhaps you missed the word "easily", as in comparison to a gasoline engine.

A diesel engine consists of high compression, fuel injection, and no ignition.  It is the opposite for an engine fueled by Nat Gas.  Hence, not easily converted.

Sun, 04/29/2012 - 22:07 | 2384190 johansen
johansen's picture

yes they are but the ferries can accept the horsepower reduction associated with natgas.

many other applications cannot.

Sun, 04/29/2012 - 22:32 | 2384217 alex_g
alex_g's picture

Which applications?  Properly converted or built new, horsepower loss is negligible. 

This might interest you... http://www.vikingline.fi/onboard/newbuilding/

Sun, 04/29/2012 - 20:45 | 2384121 FeralSerf
FeralSerf's picture

Diesel engines can and are being converted to natgas.

http://www.omnitekcorp.com/altfuel.htm

Sun, 04/29/2012 - 23:52 | 2384312 malek
malek's picture

From your link:

Diesel engines converted to natural gas generally require added components as well as some mechanical changes to the engine. Basically the diesel engine undergoes a complete rebuilt and is in the process transformed from a diesel engine to a gas engine.

Sounds like a very cheap approach - NOT.

Mon, 04/30/2012 - 02:28 | 2384420 Seer
Seer's picture

Hey, we can get Government Motors to handle this!  They did such a great job converting gasoline engines to diesel I figure that they could do the reverse!

Sun, 04/29/2012 - 20:24 | 2384096 HungrySeagull
HungrySeagull's picture

You aint gonna stuff a 600 CAT weighing 2000+ pounds into a green can.

If the trucks stop, America Stops.

Consider that.

Mon, 04/30/2012 - 02:30 | 2384421 Seer
Seer's picture

If tractors stop all stops!

Not looking forward to the day when I can't afford diesel for my tractor...

Sun, 04/29/2012 - 17:14 | 2383908 GeezerGeek
GeezerGeek's picture

You ask why "NGV's aren't the top priority of this administration. " You are assuming, it seems, that the administration has the best interests of We the People as priority number 1. I see no evidence of that being on Obama's priority list. He seems, to me, to be more intent on crippling the US.

Mon, 04/30/2012 - 04:04 | 2384465 Seer
Seer's picture

The "US" is ALL about corporations.  Take a look around, seems that corporations are doing just fine.

And, "We the people" was, from the beginning, about the few, rich land owners, not the general masses.

The "founders" took this up because it was a great marketing tool to get the masses on their side, so that they could skip on any repayment of debt to the British (for funding their travels to exploit NA).

Like all the puppets before him, Obama is ensuing that the puppet masters continue to hold the strings.

Still think that Obama is somehow different? (only Party Pussies and or xenophobes sign up to that kind of fucked up thinking)

Sun, 04/29/2012 - 08:39 | 2383447 Rusty_Shackleford
Rusty_Shackleford's picture

There is no spoon.

Mon, 04/30/2012 - 02:35 | 2384422 Seer
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