In school we all learn that there are three parts of the Government; legislative, judicial, and executive.  So, just check the Fed, and determine if it belongs to one of the parts, if not, it is not Governmental.  It belongs to none, answer found.

Not so fast, the Government is always making things complex, this included.  The Fed was started in 1913 by the federal reserve act, from the legislative and approved by executive.   The Board of Governors are appointed by the president.  Sounds pretty governmental to me.  But, if that is not enough for you, they are in charge of the money supply.  That’s right, they make US dollars!!!!!!!!

Although the Fed is not clearly governmental, I think it is safe to say they are the government.

So, now that you know how the Treasuries are bought, what is the effect?  Well, now there are 300 MUSD more dollars out there.  This money trickless down to people and given the great consumers we are, it will be spent.  With more people spending, sellers of goods can raise price.  BAM, inflation.  Will 300 MUSD alone cause inflation, no, but coupled with a lot of other factors, we could be in for some trouble.

What really gets to me is how I interpret this response to help the economy…spend our way out of it.  This can work in the short term, if not abused, but when you do it over and over and over, people are going to smarten up and stop selling, because in the end they are never going to actually get their return.  The easiest way for this to happen is a depreciation in the dollar vs other countries, which keeping Dollar output constant will result in losing ground vs others.

Of course, other countries are doing the same stuff, so relative we may be better off, none the less I would like to take the pain now, adjust consumption to what we really value, a shift the economy to improve this type of production.  The market is amazing efficient at this, especially compared to the government.

It is amazing how this is factored in perfectly, so the true gain or lose are shown.  Basically, to ensure arbitrage is not present, a stock should drop by the same amount of its dividend, if not, you could buy right before the dividend, then sale right after, and pocket the dividend.  This also has to do with the term fair value used in pre-market figures.  It takes the previous day’s closing price and makes adjustment to show the actual change.

So, if you ever wonder why the stock price is down, but Google or Yahoo are showing an up, look at the dividend.

If you look at the numbers, most of the cash generation is from the industrial side, which will probably tighten up mid way through this year.  Addtionally, you have to wonder how the current loans made by GE are…since many of them are through credit cards.  They do have a reserve for losses, but if it is large enough is a good question. If there is some unexpected weakness in the loan portfolio, along with a slowing industrial side, mixed with additional costs to renew debt…you are talking major trouble.

In looking at the actions of management, it looks like they are trying to build confidence, which could be a last grab at keeping the AAA and stoping the downward spirl.  Not cutting the dividend and raising money from Warren are two examples of management trying to get in the publics eye to prove everything is okay.  Although, I did see the recent debt having to pay 7%…a little high for how much debt is out there.  Lets see when it gets a little worse if we hit the slippery slope.

Did they enter into more contracts that their future business can support, maybe.  If they do not use hedge accounting, they have to show the loss on the financial instruments right now, even if they have future cash flows that are the opposite of the hedge.  Even if they use hedge accounting, they can only do it for so far in the future, while the exposure to the Dollar to Reais still there.  Basically, what I am getting at is they had these hedges, which with the depreciation of the Real lost a lot of money, but on the business side, this will lead to higher profits.  So, if you have some time, for the short term problems to clear, there could be a ton of upside.

On a side not ARA owns a ton of land, which usually is not fully valued within the Balance Sheet.   There could be a lot more value than people think, and a lot of earning potential in the future.

I am not sure about others, but the majority of this financial crisis, I have seen on TV, and not in real life.  Is there a slow down?  I don’t doubt, but if you look at the facts there are three reasons why it does not have such a strong affect:

1.  The GDP has just begun to dip and the dip is not so large, so really this year’s consumption is not so different than last year’s.

2.  The cut back that we do have is on discretionary funds.  The point I am trying to make here is that in the past a larger portion of our income went to things we really needed, food, shelter, etc.  Now, we have to buy the 25 KUSD instead of the 35 KUSD…this is much different than having to skip meals due to a lack of food.

3.  Unemployment is still low.  It is true that we are not at full employment, but we are not much over it.  If you need a job, you can get one.  It may be at a grocery store, or flipping burgers, but something is out there.  If you are worried about finding work to feed your family, no need to worry, those jobs are there.  The unemployment now, keeps us from getting our dream jobs, but not from putting food on the table.

Here are a few reasons why I do not think the “crisis” is so bad.  It may get worse, but I think we have a ways to go before people really feel pain.  In my opinion, I do not think this will happen, the economy should turn early in 2009, and we will be back on the upward path.  Lets hope I am right!!!

If you have followed the Yen lately, you might have heard the reason for its appreciation is the unwinding of the carry trade.  The main idea for the carry trade on currencies is to borrow in one currency, transfer to another, invest, then in the future, transfer the funds back to pay off the loan, and you will have some left over.  The reason for the leftover is the higher interest rates in the currency you invest in over the one you borrow in.  This was popular with the Yen and Dollar because the Yen rates were so low, and the risk of default for the Dollar are so low.  This works, and is very profitable as long as the currency you borrow in does not appreciate vs the one you invest.  Since Japan wanted to keep their currency weak to help exporters, investors could get a big paycheck.

This has since changed a little since the Yen has appreciated greatly vs the Dollar.  This means that investors started to lose money, which resulted into them closing their position…ie sell Dollars to buy Yen, which resulted in more appreciation.  In the end, a plan that seemed safe and highly profitable turns into a big money loser.

The key to a good carry trade is to find a safe currency which should keep its strength and pays a good rate, and a currency which has a government who wishes to keep it from appreciating, and has a very low interest rate for borrowers.

What came first, the chicken or the egg?  The difference between Keynes and Say is about what same, what drive the economy supply or demand.  If you do not know these two guys, I recommend looking them up real quick, it will shed some light on what the government is trying to do now.

For the last few decades the Keynes argument has been followed, increase money supplier, increase demand, speed up the economy.  Or do the opposite to slow down the economy.  This is what the government does when it lowers or raises the interest rates (a certain interest rate).  It is also the goal of the increase in infustructure speeding which is being talked about now.  In the past this has worked pretty well to control changes in the business cycle.  Hopefully since it is clear that this is what the government will use now, lets hope it works in the future too.

The other way of thinking is from Say, which thinks that supply is the more important factor.  When the economy slows down, it is not due to a lack of demand, but a shift in what is supplied.  In other words, the wrong items are being supplied, and a shift is taking place to stop producing the current items, and produce the other items.  If this is true, we are pretty much at full employeement at all times, only have structural unemployement which involves moving to different jobs, with different skill sets.  It this correct, could be, there are lots of places hiring for the people with the right skills, even as unemployement grows.  You will end up getting in the descussion what is full-employement.  We all know it should not be 0%, there will always be some unemployeement, but I think it is agreed that it is not 10%.  Also, I would say the number is moving, at some times, the shift in production is low, at others, it is high, I think between 3 and 8 is a reasonable range.  If this is true, the government is doing the wrong thing, instead of working to increase demand in certain areas, let production shift naturally, and move towards equalibrium.  Shift production artificially will only result in additional production of goods where they market does not think they should be produced, which is really the will of the people in a free market.  This will result in a decrease in long-term prosperity, with prosperity being people having the maximum amount of utility.

Not to get to deep, it is important to know these two ways of thinking to better understand what the government is trying to do currently.  We many never know for sure if demand drives supply or if supply drives demand, but it is something good to think about so we can try to limit our impact on long-term productivity as much as possible.  By the way, I would also speculate that sometimes demand drives, and other times supply drives…it is a social science.

If you want to make a lot of money in the short term, bet against the Argentinian Peso.

Here is why….

• The country is pretty much socialistic in spite of the mass privatization wave recently.

• One of the main drivers of government revenue, tax on agriculture is going to get hurt very badly with the reduction in grain prices.

• The last default is hanging over their heads, so getting financing for the government is pretty much impossible.

• The government has been spending some of its accumulated reserves defending the currency so far.

All these added up show signs that something will have to happen over the medium term.  In the short, you can see the action to try to take over pension funds as a sign the government is getting desperate for funds.  If this does not work, when revenue from agriculture taxes do not come in, the government will have no choice but to default.  I hate this happens, but if you spend more than you make, eventually you will have to face up to the consequences.

The wildcard for me right now is Venezuela…they are closely aligned, but my guess is will falling oil prices, Venezuela has its own problems, and will have to let its friend fight for itself.

Also, will the IMF step in.  Many South American countries are not the happiest with the IMF, Argentina in particular after the privatization wave, but if they do not come in to help, I have no idea what will happen.

There has already been depreciation in the currency vs the dollar, although not as bad a Brazil, which leads me to think without government support, it would be much worse.  Once the government is not able to support the currency, get ready for a quick and far fall!!!

If you have looked at the currency markets lately, it looks like the Dollar and Yen are really kicking butt.  In all honesty, the actions the US Government are taking to help the economy is nothing more than printing money, and putting it in business’s pockets.  That being said, why is the dollar not getting slammed.  I guess it all comes down to relativity.  Although the US is in the dumps, Europe is worse off.  You do not know how happy I am to see this after the last few years of an appreciating Euro.

All that being said, who is doing even better is the Yen.  For years, the government has been keeping it artificially low, which reduces consumption and helps increase production (imports cost more exports are cheaper).  It is almost as if the company has been saving in some roundabout way.  If the government lets the Yen keep appreciating, it will be interesting to see how strong it gets.  Once that happens, there could be some major purchases coming for foreign companies.

Additionally, I keep wondering where China is in all of this.  The Yuan has been pretty steady for a while, after appreciating after the government let it float (somewhat float).  We hear so much about the dollar reserves and the government messing around in the markets…I wonder if they truely let it float, what it would do.  My guess is appreciate like crazy.  Even if they don’t let it appreciate vs the dollar, we are bound to see it stay the same.

All this being said, if you can figure out how to play it you could make a lot of money.  For me, I am looking for cash heavy businesses, trading at low valuations, which will not be majorly impacts if the world economy gets hurt.  This may seem like difficult criteria, but from what I see Chinese online gaming stocks fit this.