The Modern Day Financial Story of Passover

Jewish readers will already be familiar with the Passover Story - that of the Israelites' exodus from Egypt.  For those unfamiliar, here's a super brief summary:  Ramses II, the Pharaoh of Egypt, enslaved the Israelites.  Moses demanded that Pharaoh release his people (you know: "Let my People Go!") but Pharaoh refused.    Moses warned Pharaoh that he would incur God's wrath if he refused to release the Isrealites, but Pharaoh still refused, which brought on the ten plagues: blood, frogs, vermin, flies, cattle disease, boils, hail, locusts and darkness.  Before the final plague, God instructed the Israelites to mark their doors with the blood of a sacrificial lamb.   The Angel of Death passed over (hence: Passover) these marked houses as he carried out the tenth and final plague - the slaying of the first born - in which every first born male in Egypt was slaughtered. 

Pharaoh finally relented after this plague, and the Israelites fled Egypt in such haste that they didn't have time to let the bread rise as they evacuated Egypt and hustled through the desert - which is where the unleavened Passover "bread" Matzoh comes from.  Pharaoh had a change of heart and sent his army after the Israelites, who eventually came upon the Red Sea, which Moses "parted" with God's help.  The Israelites crossed the sea, and the sea closed in upon Pharaoh's army, killing the entire army.

Now, it has occurred to me that we can retell the Passover story in modern times, with new casting.  Some of the roles seem fairly obvious:  Obama is God, Ben Bernanke is Moses, and the banks are the Israelites.  Pharaoh is Nassim Taleb.    The plagues are the Government's interventions:  TARP, TLGP, TALF, ZIRP, Quantitative Easing, Ban on Short Selling,  Cash for Clunkers, Homebuyer Tax Credit, Extended Unemployment Benefits,  and the final coup de grace:  subsidizing mortgage principal writedowns.

The evil Taleb (Pharaoh) wanted to see the banks enslaved - nationalized -  but Bernanke (Moses) refused to let it happen, and, with Obama's (God's) will, set out to crush the will of the bank bears and free the banks to remain independent.    First he tried TARP - the troubled asset relief program, but Taleb was unimpressed, knowing that the banks wouldn't take the full level of writedowns needed to allow them to recover and thrive.

Bernanke went back to Obama, explaining, "Obama, my banks are still oppressed, we need more aid,"  and Obama's will enacted a ban on short selling, which of course did absolutely nothing to address the problem.  Bernanke then instituted quantitative easing, the TLGP, and the TALF, which allowed the banks to issue more debt, guaranteed by God - Obama - but still Taleb was unswayed, knowing that these debts would still need to be paid back, and that the Ponzi scheme could not continue forever.

So Bernanke again went back to Obama, who attempted to remedy the demand side by bringing the wrath of Cash for Clunkers, and the Homebuyer Tax Credit down upon Taleb's bearish view.  Taleb still refused to relent - accusing Obama of trying to pull demand forward, and recognizing that the policies resulted in paying people who would have bought homes anyway, and would ensure a temporary increase in car sales at the expense of future sales.

Taleb seemed to have the upper hand, as the economy sputtered, but Bernanke had Obama's will behind him, and unemployment benefits were extended from their original 26 weeks up to 99 weeks, in an attempt to maintain a level of demand in the economy.  Taleb was undeterred - knowing that extending the benefits did nothing to address the real problem - a lack of jobs.

Bernanke looked to have a chance at redemption with ZIRP - zero interest rate policy - but the banks were tired and weary from fighting Taleb's constant attempts to enslave them, and used the policy to refuel themselves (rebuild their balance sheets), rather than to make more risky loans to the populace that needed the credit most. 

As Taleb sat back on his throne and laughed heartily, Obama proved the strength of his will, telling the banks to mark their balance sheets with massive amounts of red ink to indicate that they were too big to fail.  These marked banks were passed over when the Angel of Death - Sheila Bair - came to seize the weakest banks, and enacted the policy of mortgage principal writedown subsidies for the surviving banks.  Taleb's will was broken by this brazen display of moral hazard which was a pure unnecessary gift to the banks, and finally relented, giving up any attempt to make sense out of the financial state of the country.

The banks desperately tried to recapitalize their balance sheets, but Taleb returned and declared that they were still insolvent and had many more writedowns yet to be realized.  As the banks frantically tried to escape from the wrath of the Black Swan of home mortgage defaults, Obama provided a crucial escape route, parting the seas of mark-to-market accounting and allowing the banks to liberally value the assets on their books with discretion.  Taleb and the other bank bears were crushed by the lack of real asset value markings, and puked out of their short positions, disappearing back into the shadows where they were never heard from again.

-KD

note:  This is a satire, and is not meant to reflect the exact views of Nassim Taleb.  He was a figurehead, as the story worked better with an actual person, rather than "The Evil Short Sellers" as Pharaoh.  I have no idea what Taleb's actual positions are, and they likely are nothing like I characterize them.  There are also timing incongruities with my story, which I am aware of, and have ignored for the sake of the analogy. 

also, I am short XLF. 

Home Improvement - KD Tackles Masonry

So our basement has an old chimney base that's perfect for a wine cellar.  The base is a series of brick walls which are basically 1 course of bricks thick.  The problem is that the bricks are probably original to the house (more than 200 years old) and the mortar had literally crumbled to dust.  To make matters even worse, someone had done a horrendous job trying to fix the problem at some point in the past - getting mortar all over the faces of the bricks on several of the wall faces.  In the picture below you can see all the white mortar/plaster on the faces of the bricks.  I didn't even try to fix that - it would be a major project to grind and chip all of that out.  Instead, I focused on the "eroded to dust" faces, which you can also see in this picture below.

A closeup of the bricks looks like this:

You can see how the mortar between the bricks is almost completely gone.  You can probably even make out the dust texture of the mortar.  On one face of the wall, I could have actually taken apart the entire wall if I wanted to - but most of the faces were still stable enough that the bricks were attatched.

So, I got myself a mask, some safety goggles, a dustpan brush and a wire brush, and I set to work dusting/scrubbing out the old mortar.  It was part archeology project - as if I were excavating - dusting with the dustpan brush, and then part elbow grease, where I actually had to scrape out remaining crumbling mortar using the stiff wire brush.  When the mortar was removed, it looked like this:

Note the deep, clean grooves between the bricks.  But there were other problems - some bricks themselves were largely eroded:

One more before picture for good measure:

Now came the hard part - the masonry.  I went to Lowes and picked up some Quickcrete mortar mix.  A ten pound bag.  Now, in the hands of an experienced mason, this ten pound bag might get a full face section of my wall done.  I am not an experienced mason.  The first challenge is getting the mortar to the right consistency - it's just mix + water, and it's supposed to be like wet sand - or so I thought.  I think my mortar was probably a little too dry.  Although professionals make it look super easy, I found it nearly impossible to get the mortar into those cracks.  I was using a trowel, a spade, and rubber gloves.  I quickly realized that it was much easier to just take the mortar in my hands like clay and mash it into the grooves. My father in-law later told me that the mortar is supposed to be "creamy"  - but that made it even harder to work with, so I went back to the more "clay-like" water ratio.

Now, it's quite likely that I wasn't getting the mortar all the way into the grooves, and that my mortar was too thick - but this project wasn't structural - it was visual.  Anyway - I would smear the mortar on, grab another handful, and smear some more.  Then, after 10 minutes, I'd take my wire brush and scrape all the mortar off the brick faces, leaving it in the cracks.  It worked like a charm.  Of course, this also meant that I wasted probably 2/3rd of my mortar - as it ended up on the ground.  I tried re-using some of it, but most of it had too much brick dust and floor dust in it to be of use.

So my 10lb bag of mortar mix quickly disappeared, and I picked up the 50lb bag the next time I was at Lowes.  I mixed up another batch of mortar, trying to make it wetter, but had similarly no luck getting it into the cracks with the intended tools, and I quickly resorted to the patented Kid Dynamite Grab and Smear school of masonry.   The wire brush was my best friend, and cleaned up the bricks nicely.

The project took me several hours on each of several different days, and I think I did 6 or 7 wall faces in total.  I think I used a total of 130lbs of mortar!  I don't know how far that much mortar would usually go, but I'm guessing it is supposed to cover a lot more than the 150 or so square feet I did.  I had another issue with cleanup each time:  I have a septic system, and certainly don't want to be washing cement down my drains, so I'd have to carefully clean up using a bucket of water outside and throw it in the driveway.  Here's an "after" picture:

You can still see how old the bricks are, and in the second row from the top you can see a brick that was almost entirely rebuild from mortar.  The edges of most of the bricks don't look "crisp" because they aren't - they are 200+ years old!  Many of the bricks (the reddish ones near the bottom) that look like they have mortar on their faces are actually patched with mortar.  I was trying to avoid covering the entire brick face, but needed to fill in parts of it.

So here's a video of the "finished" product.  You will notice that there are many wall faces I didn't touch - those were the ones I referred to earlier that had been previously brutalized with mortar/plaster all over the brick faces.   The wall faces I rehabbed are on the left on the outside of the room (:02 seconds), and just inside the room to the left (:13 seconds) and straight/left (:17 seconds).  You can see a wall I didn't touch in between those two wall faces (it's more white, instead of gray), and I didn't touch any of the walls to the right, above where most of the wine on the floor is. There are also a few more faces on the outside of the room that aren't visible in the video:

Now - here's where you, the reader, come in. You can see some of the wooden wine crates I have on the ground.  My goal is to make them my storage medium for my wine, and to get them off the ground.  I don't really want to mount them into the walls - which are still fragile - but I do want to build some sort of shelving system that will be able to hold the wine crates (with the wine bottles in them).  Note, that I am not a superstar when it comes to projects like this.  In our house, Mrs. Dynamite is the tool wizard  - she just finished installing some cabinets in our laundry room (and patching and painting the laundry room too) while I spend my time working on the garden or cooking.  Yeah - role reversal, I know.

So if anyone has any good, easy to implement ideas about how to create some sort of shelving system for the wooden wine boxes, I'm all ears.

blog update:  I will be out of town for the next several days.  make sure you read my prior post "It's not a homeowner bailout - it's a bank bailout" if you haven't already, and sign up to follow me on twitter:  kiddynamiteblog

-KD

Tweet Tweet! KidDynamiteBlog is Now on Twitter

Ok - so a bunch of people have asked me why I'm not on Twitter.  Well, here you go - KidDynamiteBlog is now on Twitter (I don't know who Twitter's "KidDynamite" is, but he's an impostor - follow KidDynamiteBlog instead)

I'm already trying to get a hang of bit.ly, which doesn't seem very hard, and will likely add to my volume of tweets.  

Often times, I've thought to myself, "If I were on Twitter I'd tweet: "I just took a ten pound crap,"  right now.  So bit.ly is good for readers, as it simplifies the production of actual valuable content.

Of course, stay tuned to this blog for more expansive thoughts.

-KD

Homeowner Bailouts? Look Again - It's a Bank Bailout

Louise Story has an article in the NY Times today about pending "homeowner bailouts."

"Arizona is one of five states that, with money from Washington, hopes to help at least some of these people hold on to their homes. Under a new, federally financed pilot program for the hardest-hit housing markets, state officials will decide who will get a homeowner bailout, and who will not.

The idea is as controversial in Washington as it is here. Do the neighbors next door who lived beyond their means — the ones who, say, bought that house they could not afford, or who binged on home equity loans to buy new cars and flat-panel TVs — really deserve to be bailed out with taxpayer dollars? Do they deserve to have some of their debts forgiven? And is that fair to the cautious ones who paid their mortgages?"

Well, my position is clear on that question:  the answer is NO.  But let's not get bogged down in an idealogical battle:  if you believe that homeowners who borrowed and spent beyond their means should be bailed out, we really have nothing to discuss - I strenuously disagree.  I do, however, ask those who are pro-bailout to refrain from using the "hey - banks were bailed out, why shouldn't we be bailed out too?" argument.  After all, we all learned by age 5 the old adage:  two wrongs don't make a right.

There is also a key point that lots of people seem to gloss over when talking about homeowners who are having trouble paying their mortgages:  there are millions of others on the sideline waiting, saving, and hoping to prudently buy houses of their own!  For every imprudent borrower we aid, we are impeding a prudent saver from buying a home they can afford - because we are keeping home prices inflated, and preventing house prices from falling to affordable levels where new savers can finally purchase them.

Since the NY Times gives us some actual data, let's look at one of the troubled homeowners who had to throw in the towel before this bailout program:

"Ms. Carter, at 4344, arrived in 2005, as the bubble was inflating. She took out tens of thousands of dollars in home equity for repairs and other items, and by this year, she was underwater on her mortgage by $86,000. A single mother, she moved out this month, days before her home was sold in a short sale, which meant her mortgage lender allowed her to sell for less than the value of her mortgage and the lender took the loss."

I'm a compassionate guy, but if you expect me to sympathize, I don't (and to her credit, I don't think she's asking for sympathy - as we'll get to in a minute).  The Times, in the attached graphic, gives us some more data on Ms. Carter: 

original mortgage: $207,920

current mortgage: $307,000

purchase price: $259,000

current value: $221,000

It seems that the "tens of thousands of dollars in home equity" that Ms Carter withdrew from her home is closer to $100,000.  Her current mortgage is $86,000 underwater.  If she hadn't spent her paper profits (perhaps on the Mercedes and the expensive lawn we'll encounter in a moment?), she wouldn't be underwater!

Now, I don't mean to pick on Ms. Carter, in fact, she is honest about her situation:

"Years ago, she considered filing for bankruptcy but then changed her mind. She said she was accountable for her actions and was making what amounted to a business decision to leave her home.


“I had to take emotion out of it,” said Ms. Carter, 36. “If I had a business, and every single month I was losing money, would I keep on paying? No, I wouldn’t.”

Sitting at her dining room table, before a large tank of fish, she recalled how she had made this a perfect home. It is one of the few on East Montgomery Road with grass in the yard, an expensive proposition in the desert. A Mercedes sits in the driveway.

She said she did not feel she deserved to have her debts forgiven, but added that if her mortgage had been lowered, she would have tried harder to stay."

This "homeowner bailout" program will certainly be difficult to implement morally.  The director of the program is quoted in the article as saying:

"he was reluctant to help homeowners with “self-inflicted wounds,” like those who overspent or cashed out the equity in their homes during the bubble years. He wants the banks to match the public money being used for debt forgiveness, and he is focusing on people whose incomes have fallen but who still hold jobs." 

And here is the key epiphany that I've been marching toward:   guess what - this isn't really a homeowner bailout at all.  It's ANOTHER bank bailout!  Remember - just like Ms. Carter made the "business decision" to leave her home, banks can make the business decision to adjust the outstanding mortgage balance (lower) on borrowers who cannot pay and will otherwise default and induce foreclosure.  There's one huge problem with that, though: I've written at length about the deadly game of extend and pretend we're playing with our debts.  The banks are carrying so many of these mortgages at the full loan value, even though they know that in reality they will not be getting the full mortgage value back.  If they do a mortgage principal writedown (reduce the amount the homeowner owes), however, they have to write down the value of the loan too - and take a loss.

What's the solution?  Extend and pretend... close your eyes and pretend the losses don't exist by refusing to acknowledge them.  That's why you see articles like this from Calculated Risk, describing home "owners" who haven't made a payment for three years and still haven't been foreclosed on!

Think about it - the banks know that the real estate market sucks. They don't want to take your house from you and have to sell it themselves - that is expensive, AND it requires them to take the actual loss on their books.  On the other hand, they don't want to lower the mortgage balance to an amount the borrower can actually pay, because that ALSO requires them to take the loss on their books.  So, they just delay and pray.

 

Which brings us back to the "homeowner bailout."  Do you see, now, who the end beneficiary is?  Homeowners don't need a government subsidy  - what they really need is for banks to make sensible business decisions and write down mortgages to levels where homeowners are willing to pay (side note:  of course, the banks could also foreclose, but that's more expensive for the bank.  Despite biases individual bystanders may have on homeowner responsibility, it's probably a better business decision for the banks to do a principal writedown than a foreclosure).  As we've just established, if banks do these principal writedowns, they have to recognize losses which further decimate their already fragile (insolvent??) balance sheets - so they avoid the writedowns. 

Solution?  The government comes in and essentially subsidizes the writedown!  The government could send the money to the bank on behalf of the homeowner and get the mortgage balance reduced accordingly, which would be a wash for the bank, or it could allow the bank to keep the mortgage balance as is (also a wash for the bank), and aid the homeowner directly.  Either way, banks avoid the reality of marking their bad assets (mortgage loans) to market.  

Mr. Traylor, the director of the Arizona housing department, said that he wants banks to match the public money.   We will have to wait and see how the program actually plays out, but either way, the banks are getting a subsidy here.

-KD

disclosure:  short XLF

Greece: Oh the Irony

Via Zerohedge: 

"We have officially moved from a Greek tragedy to a Greek surreal comedy. After nearly a month-long scapegoating campaign in which Greek PM G-Pap said he would spit in the faces and skullf#@* all those who dared to buy Greek CDS (because as we have all been lied to by everyone who doesn't know the first thing about CDS, it is CDS buying not bond selling that drives spreads), with the stupidity reaching as far and wide as the Spanish and German secret services, which said they would spy on CDS traders in London and New York, Greek daily Kathimerini has just uncovered that the biggest speculator, holding 15%, or $1.2 billion of the total $8 billion in Greek notional CDS, has been a firm that operates about 2 blocks away from the parliament building in Athens - the state-owned Hellenic Post Bank (TT)!"

Mrs. Dynamite says it's getting old when I mention in every other post how I look at my calendar to see if it's April Fool's Day... but guess what - it's still not April Fool's Day - this is a real story.  In case you missed it  in the ZH rant above - the largest holder of CDS on Greece was Greece's state owned bank. 

From the Greek paper: 

"The bank’s position in CDS protected the lender from its exposure in Greek bonds but also provided it with an opportunity to play a part in the global CDS market worth some 8 billion dollars last year.

With a position totaling 950 million euros, or 1.2 billion dollars, TT had the ability to shape momentum in the speculative derivatives market which the Greek government wants to be controlled."

It almost sounds like they may be suggesting that Hellenic Post Bank was acting in a market maker  (or: manipulator!) capacity - they bought CDS so that they could sell it back into the market, and perhaps hope to manipulate prices of CDS protection lower ?!?!?  Isn't that what "shape momentum in the speculative derivatives market which the Greek government wants to be controlled" means?    Hellenic Post bought the CDS in August of 2009, and sold them in December of 2009 after new management took over, for a EUR35mm profit.  I guess they should have held the position for a little longer - to stuff in the face of the "evil speculators."

-KD

Project Maple II

Readers responded positively to my first Maple Report, so here's an update:

We boiled off another two batches of sap - last Tuesday, and Sunday.  It's been too warm here, which is bad for the sap run, but there is potential for some below freezing temps at the end of this week, and hopefully one more batch of sap.   The problem is that weather isn't the only factor - as the season progresses and the trees mature, the sap's flavor changes, and eventually gets "buddy" as the trees begin to bloom.   Our second and third batches of sap were definitely darker than our first batch, but still probably in the "fancy" grade of syrup.  We managed to solve our sugar sand problem in batch #2 by taking our time with the filtering process - repeatedly stopping to wash off the filter.  Strangely, though, we repeated the same process for batch #3, and the sugar sand somehow ended up in our bottles again.

Of course, I've kept detailed records of our sap collection and syrup production.  Check these numbers:


Boil Date       Sap Collected       Syrup Produced       Ratio
3/7/10            37.5 gallons         1.1 gallons                 2.93%
3/16/10          41 gallons            1.1 gallons                 2.68%
3/20/10          14 gallons            1/4 gallon                  1.79%


Notice how fast the syrup ratio is dropping - that's because the sugar content in the sap is dropping.

Here's a picture of Oscar guarding the sap buckets:

He needs a haircut badly, as do I.  We're having a contest to see who can go longer without a haircut.

For good measure, here's a bonus picture of Oscar hunting his nemesis:  chipmunks

-KD

Bajungi Tilt - NYC Seat Hoggery

This is absurd.

One recent night, Ryan David LaMont settled into the wary peace of a post-midnight journey on the No. 2 train. He was not quite alone, since a few other people were on board, but he had rows and rows of seats to choose from. 

Mr. LaMont, 24, an actor, dancer, singer and — yes — waiter was coming home from work. He was eager to close his eyes but was kept awake by his companion: the novel “Veronika Decides to Die” by Paulo Coelho. It was 1:30 a.m.

Riding from the West Side of Manhattan to Crown Heights, he scarcely noticed the stations, but the rhythm of stop-start-lurch-roll-stop, the Morse code of the subways, registered like a G.P.S. device. 14th Street. Chambers. Borough Hall.

At Atlantic Avenue in Brooklyn, the doors opened, and the pace changed.

“An N.Y.P.D. officer stepped into the car, pointed at me and another guy who was sitting on the other end of the train,” Mr. LaMont said. “He told us, ‘Get off the train.’ ”

Both men were being issued summonses for seat hoggery, a violation of part of Section 1050.7 of the Rules of Conduct, which says that no one shall “occupy more than one seat on a station, platform or conveyance when to do so would interfere or tend to interfere with the operation of the Authority’s transit system or the comfort of other passengers.” 

Note that it was 1:30am and the train was nearly empty.

After that, I'd definitely need THIS.

-KD

The Real Ben Folds on ChatRoulette

Last week I posted the video of "Merton" doing piano improv on ChatRoulette. Merton looks suspiciously like Ben Folds, but Merton has emphatically denied being Ben Folds.

This weekend, at a live concert in North Carolina, Ben Folds did a "tribute" to Merton live on stage.  My, how far technology has come, when artists can improv during a show with people on the internet.  I'm still not sure if Merton is Ben Folds, but I urge readers to keep me posted on any more of these videos.  Enjoy:

-KD

Live Free or Die!

When I moved to New Hampshire, my friends made comments like "let me know when you put a gun rack on your truck,"  and "don't start sleeping with your cousins."  I had to correct them - that's Vermont - not NH (zzzzzing!  SUCK IT Vermont!).   Generally, although there are certainly some Country people here, it's certainly not a bunch of racist redneck farmer hippies.  But...

So I am walking down my street with Oscar today - Sunday afternoon.   A truck came down the street with a small trailer attached.  The truck looked like a small GMC Jimmy - like a pickup with an enclosed bed.

As the truck passed, I noticed a message scrawled on the tailgate, in large, relatively neatly painted letters:

"Please help the U.S.A. by boycotting products made by the slanted eyed dog eating devils"

Then there was what looked like a variation of some sort of pentagram!  I guess writing "BUY AMERICAN" is just so 1992!

Somehow, I don't think that this driver was commenting on Paul Krugman's views on world trade, which I mentioned in my last post with a comment by John Mauldin...   I guess there is one logical segue here:

-KD

Weekend Links

This NY Times piece from Robert Frank again had me checking my calendar to see if April Fool's Day had snuck up on me:

"What I have in mind is a surtax on extremely high levels of consumption. It would be enacted right away, but not take effect until unemployment again fell below 6 percent...."

"A progressive consumption surtax would produce immediate, off-budget economic stimulus by giving wealthy families powerful incentives to accelerate future spending. For example, a family that had been planning to build a new wing onto its mansion, or buy a yacht, would want to make those purchases now rather than be taxed on them later."

This, of course, is the opposite of "Extend and pretend."  Like the homebuyer tax credit and cash for clunkers, this tax would pull future demand forward.  Alternatively, we could tell the wealthy people who would be subject to Frank's consumption tax that their money will become worthless in a few years! That should get them to spend it now! (/SARCASM) 

Barry Ritholtz took Alan Greenspan to school:

"As noted last night, Alan Greenspan has blamed the crisis on a lack of regulation rather than ultra-low rates. (You can find his Brookings institute paper The Crisis here).

While the lack of regulatory enforcement — ironically, mostly notably by the Greenspan Fed — was no doubt a large part of the problem, his exoneration of ultra low rates is belied by history.

I detail all of this elsewhere; but perhaps the impact of low rates would be more easily understandable to the Maestro if we put it into numerical bullet point form"

click through to Barry's page for the bullet point list, which is a doozy.

Dealbreaker's Bess Levin is inimitable.  And she's also going to hell, but she'll make us laugh on the way.  Regarding Pope Benedict's recent comments regarding "defeating the individualistic and materialistic mentality," Bess quips:

"So…I have no idea what he’s getting at. Is he saying that one should not invest in financials? Not invest in the stock market at all? That if you’ve got some extra seed (capital) lying around to inject it in a “community of persons,” like a Little League or all-boys JV soccer team whose locker room doesn’t skimp on the peepholes?"

Michael Panzner highlights the dramatic reversal of fortunes seen by FedEx:

one week: 

"The nascent US recovery could falter because businesses are still reluctant to invest in new equipment and technology, the head of global delivery and logistics company FedEx has warned.

“Business investment went up somewhat in the fourth quarter but is far below what it ought to be in a cyclical recovery like this,” Fred Smith, chairman and chief executive of FedEx, told the Financial Times.

He added that companies were being held back by continuing “uncertainty” over the outlook."

and then the next week:

"FedEx says the global economic recovery is broadening, as Asia continues to show strong growth and the U.S. economy gains steam.

Fred Smith, CEO of the world's second-largest package delivery company, predicted a "relatively strong" first half as major economies emerge from the recession with steady economic growth in the last six months of the year."

This could be as simple as an illustration of the inherent bias reporters can put on their articles by cherry picking quotes, it could mean that FedEx's view of the economy changed over the course of one week, or it could be evidence of something more nefarious...

John Mauldin takes on Paul Krugman's China comments:

"The Chinese could raise the value of the yuan by 25% over the next year and they would still run a surplus, because like the Japanese, they make good stuff we want at prices we like. Would their surplus still be as high? No. Because a 25% increase in prices would mean that we could afford less of what they sell. But of course it would also give them wider profit margins, which would help hold their trade surplus up."

"What Krugman argues is that we should pay more for Chinese goods, so that we will buy less of their goods. As if we wouldn’t buy the same goods from Vietnam or Brazil or Pakistan, if those goods were cheaper than Chinese goods. For the life of me, I can’t see how substituting goods from foreign countries other than China helps our trade deficit.

Are we going to start targeting the currencies of every nation that runs a surplus with us? What about Europe? And Great Britain? Their currencies are dropping against the dollar, in the case of England rather precipitously. Are they pursuing mercantilist policies, Senator Schumer [in reference to his recent scandalous press conference]? What happens when the euro goes to parity against the dollar (and it will!) because the Europeans are having trouble getting their act together? Are we going to demand they force the euro to rise? Tell the ECB to raise rates and shove the whole euro area into an even worse recession?"

-KD

Banking Mechanics - Take 3

Believe me - it's not that I really enjoy talking about the mundane theoretical mechanics of the banking system -it's just that it's driving me crazy.  So I'll try to get my questions answered here.  Let's put aside reserves for a second - for the purposes of the questions in this post, let's simplify and pretend that reserve requirements do not exist - they are zero.

There are frequently repeated mantras from "those who understand."  The first of these mantras is "banks don't need deposits to make loans."  What I still haven't been able to get a good answer to, is, "If I open up the Bank of Kid Dynamite, how do I give my loan customers the money that I loan them if I don't have any deposits?"

I still have to give them (the borrower) the money.  So, does it come out of my equity - my startup capital?  OR, do I borrow (the loan amount - not reserves, remember) it from the Fed, using my equity as collateral? {my guess would be that it comes out of my equity} In essence, the Fed would become a depositor at my bank?  {my guess would be NO, but it seems like this is certainly possible at some point - WHEN is that point? I think the whole cycle is actually easier to understand if I DO borrow the money from the Fed, who lends to me based on my equity as collateral - I hope that's how it works!}  

If I find $100MM in the street and open up a bank, refusing to take in any customer deposits at first - how many loans can I make?  $100MM?   Some amount slightly less, like $90MM, due to regulatory capital requirements (NOT due to reserve requirements!)? {My guess would be $90MM, assuming RegCap requirements of 10%.  But wait - maybe it's $1,000,000,000 - the Fed will lend me $1billion, and my $100MM would be collateral - RegCap requirements?}. Would I be borrowing any money from the Fed or the interbank market in this scenario? {my guess would be NO, but it's quite clear that I don't know the answer!}   

Expanding the question, what if I had $100MM in equity, and I also took in $100MM in deposits?  How many loans can I make now, and would I be borrowing any money from the Fed/interbank market? {my guess would be that I can loan out the $100MM in deposits - remember, we have no reserve requirements - and I can also loan out $90MM of my equity capital - but I'm not super confident in that answer.}

The second mantra is "loans create deposits."  HOW?  Someone please explain this to me. Look - I certainly understand the theory that if the Bank of Kid Dynamite lends $100k to MikeMortgage so that MM can buy a house, and MM takes that $100k and buys a house from HarryHomeseller, then HH will hopefully deposit that money in the bank.  BUT - HH doesn't need to deposit that money at the Bank of Kid Dynamite - he might bring it to another bank.    So, how does making loans at the Bank of Kid Dynamite create deposits at the Bank of Kid Dynamite?

EDIT:  I think I may have just had a "loans create deposits" epiphany:  When the Bank of KD loans money to someone, like MikeMortgage, even if that money doesn't end up getting deposited back in my bank, it hopefully (theoretically) gets deposited SOMEWHERE, say Bank of Anonymous.  Then, Bank of Anon lends it's excess deposits back to me, Bank of KD... right?  Essentially, I get a deposit (aka: I borrow) from the Bank of Anon.

In an effort to keep it simple, I'll leave it there...

-KD

More on Bank Reserves, and their Potential Meaninglessness

My post about bank reserves generated a lot of discussion. Well, I guess it was really more of an anonymous commenter trying to explain it to me than a discussion, but anyway, the comment thread is worth a read.  I also have two more reserves related links today (one of which is from David, another commenter in that thread).  I think it's important for people to realize that 99% of Americans, me included, really have no idea how the banking system works.  We (we the ones who don't understand) think that when we master the concept of fractional reserve lending (which, in itself, 90%+ of Americans probably don't understand) that we have it figured out.  There's a big problem though, in that fractional reserve lending really doesn't illustrate how the system actually works anymore.  

You can check out a piece from John Hussman that's a few years old for some more thoughts:

"Yes, during periods of crisis, the Fed has an important role to play in providing day-to-day liquidity so banks can meet depositor withdrawals. But aside from this short-term variation in the monetary base (which we saw, for example, around the “year 2000” turn), there is not even a slight relationship between bank reserves and total bank lending. Indeed, any remnant of that relationship was wiped out in the early 1990's, when reserve requirements were removed on all bank deposits other than checking accounts."

Note that the piece is from 2007.  

Billy Blog also took issue with people panicking about the potential removal of reserve requirements.

"At the individual bank level, certainly the “price of reserves” will play some role in the credit department’s decision to loan funds. But the reserve position per se will not matter. So as long as the margin between the return on the loan and the rate they would have to borrow from the central bank through the discount window is sufficient, the bank will lend.

So the idea that reserve balances are required initially to “finance” bank balance sheet expansion via rising excess reserves is inapplicable. A bank’s ability to expand its balance sheet is not constrained by the quantity of reserves it holds or any fractional reserve requirements. The bank expands its balance sheet by lending. Loans create deposits which are then backed by reserves after the fact. The process of extending loans (credit) which creates new bank liabilities is unrelated to the reserve position of the bank.

The major insight is that any balance sheet expansion which leaves a bank short of the required reserves may affect the return it can expect on the loan as a consequence of the “penalty” rate the central bank might exact through the discount window. But it will never impede the bank’s capacity to effect the loan in the first place."

What's probably most frustrating for readers, myself included, is the epiphany that banking doesn't work like we think it does - it doesn't work like the textbook fractional reserve banking example I gave in my prior post (where, with 10% reserves, a $100 deposit becomes a $90 loan, which is then re-deposited and becomes a new $81 loan, etc).  In our system, in reality, you don't need deposits to lend.  I think that fact troubles and confuses a lot of readers.

-KD

Enron... This HAS to Be a Sign

Enron - the play - is coming to Broadway in April.  Apparantly it's been killing it in London for a while now, but judging from this montage, I can't figure out why:

"A true story of false profits!!!"  Great tagline.

Ken Lay will be played by Gregory Itzin, who played President Logan on 24 a few years ago.

I'm just saying... this might be yet another sign of the apocalypse... 

-KD

Reserves? We Don't Need No Stinkin' Reserves

EconomicDisconnect pointed me toward a story last night from the Economic Collapse Blog regarding Ben Bernanke's comments on the need (or lack thereof) for reserves in the fractional reserve banking system.

Fractional reserve banking mean that when you deposit $100 in the bank, the bank can lend out, say, roughly 90% of that money - they may keep 10% as reserves.  MikeyMortgage takes a loan from the bank ($90 of your $100) and buys a house with it.  The home seller, HarryHomeseller, receives MikeyMortgage's $90, and deposits it in the bank, who then lends out roughly 90% of it again, this time to CarlCarbuyer, who borrows $81 of HarryHomeseller's $90, etc etc etc. 

Some people scream and yell about how fractional reserve banking is a scam because if everyone wants their money back at once, the bank doesn't have it.  That's not quite true, at least in theory - if you want your initial $100 back, the bank doesn't have it in the above example - they've lent it out, but they do theoretically have assets that they can sell that are WORTH $100.  Assuming the bank has made good loans, they can sell MikeyMortgage's mortgage note and get the money to pay you back.

This brings us to the next point - it makes perfect sense to have some reserves.  First, as we've proven over the past few years, the value of this collateral (the loans) can drop - we need some cushion.  Second, if you have reserves on hand, you have cash to pay back to depositors who want their money back without necessitating that you liquidate assets.   Which brings us to the Economic Collapse Blog:

"Up until now, the United States has operated under a "fractional reserve" banking system.  Banks have always been required to keep a small fraction of the money deposited with them for a reserve, but were allowed to loan out the rest.  But now it turns out that Federal Reserve Chairman Ben Bernanke wants to completely eliminate minimum reserve requirements, which he says "impose costs and distortions on the banking system". At least that is what a footnote to his testimony before the U.S. House of Representatives Committee on Financial Services on February 10th says. So is Bernanke actually proposing that banks should be allowed to have no reserves at all?

That simply does not make any sense. But it is right there in black and white on the Federal Reserve's own website....

The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system."

Now, it's been brought to my attention that there are several countries who currently operate banking systems without reserve requirements.  The real question is, is Bernanke suggesting that we don't need reserve requirements because in a rational free markets world, banks would hold adequate reserves anyway, and thus don't need more expensive restrictions imposed on them?  I think that claim can be easily refuted by saying "See:  U.S. Banking System 2007-2009."   The alternative, then, is that Bernanke really believes that banks don't need to hold reserves at all.  

Ben Bernanke's expertise in banking is greater than mine.  That much is given - although I wasn't riding shotgun next to Alan Greenspan as the metaphorical car that is the U.S. Financial System was driven off a cliff.  However, I literally do not understand how zero-reserve fractional reserve banking can work.  If, in reality, banks lend out every dollar of deposits, with no allowance for depositor redemptions or decline in collateral (read: LOAN) value, isn't the system guaranteed to fail?

Anyone care to explain this?  Anyone?  I'm looking for someone who can explain to me the rationale, even in theory, for how banks could operate with no reserves.  My specific questions:  most importantly:  if you have no reserves, and the price of your assets (loans you have made) declines, aren't you instantly insolvent?  Also, if you have no reserves, how do you handle depositor requests for redemptions?  Is the answer simply that the Federal Reserve is there to backstop insolvencies arising from these two situations?  That's not really an answer.  Maybe the answer is that the Fed backstops "temporary" insolvencies until they can recover and right themselves - until the value of the assets "comes back."  Extend and pretend!  What if the value doesn't come back though? 

-KD

Ponzi Never Dies: SLM

This Bloomberg article about Sallie Mae is a gem:

"SLM Corp., the largest U.S. student-loan company, raised $1.5 billion in the bond market, paying more than it charges some borrowers to begin addressing $11 billion of bonds maturing through next year. 

Sallie Mae, as the company is known, sold $1.5 billion of 8 percent notes due in 2020 at a yield of 8.25 percent, according to data compiled by Bloomberg. Stafford federal loans disbursed between July 1, 2009, and June 30, 2010, have a fixed interest rate of 5.6 percent, according to the company’s Web site."

Ok, so they are paying a higher interest rate than they receive.  They'll make up for it in VOLUME!  I kid, I kid - Sallie Mae has to do this because they need money.  In a way, it's understandable.  But the next few paragraphs are even better:

"With $4.51 billion of bonds maturing this year and $6.44 billion in 2011, Sallie Mae is reestablishing access to unsecured debt markets. The offering may bolster investor confidence, lowering borrowing costs as the company will likely need to tap debt markets again, said Matthew Eagan, a money manager at the Loomis Sayles Bond Fund in Boston. 

“They’re in a virtuous cycle now,” said Eagan, who helps oversee $18.9 billion, including Sallie Mae debt. “People will see they can raise money in the market and they’re going to have no problem refinancing all these near-term maturities, pushing their cost of borrowing down.”"

A "virtuous cycle"!!!!!   That sounds like the Greater Fool Theory to me!  Monkey number two sees monkey number 1 buy SLM debt, and concludes, "Hey - that other monkey bought the debt - that must mean things are ok - there are clearly plenty of other monkeys out there who are likely to be willing to buy SLM debt, and as long as there are other monkeys always willing to buy this debt, I will get paid back on my debt.   It doesn't matter that the company would be hopelessly bankrupt if all the monkeys wised up and didn't want to buy this debt - as long as we don't run out of monkeys in the PONZI SCHEME, it won't fail!"

And so it continues...

-KD

 disclosures: no positions in the equity or debt of SLM or any related companies

Sign of the Apocalypse - Dick Fuld - Say WHATTTT?

Again, when I read this story from Dealbreaker, the first thing I did was click through to make sure it wasn't an Onion article.  Nope - NY Post.  Then, I checked my calendar to see if it was an April Fool's prank... Nope again...

"He may be one of the most vilified men coming out of the financial crisis, but ex-Lehman Brothers boss Dick Fuld is feeling vindicated in the wake of last week's 2,200-page report by a court-appointed bank examiner, sources tell The Post.

Fuld privately believes that the report by examiner Anton Valukas provides proof that he did nothing illegal as he steered Lehman through a financial mess that ultimately led the firm to file the largest bankruptcy in US history, according to sources familiar with the matter.

Among Valukas' findings is that Lehman used an esoteric accounting practice known as "Repo 105," which allowed the firm to move toxic mortgage assets off its books in order to make it seem healthier.

But while Valukas in the report said that the Lehman estate has "colorable" claims against Fuld, former CFO Erin Callan, and other members of the financial team for not disclosing its use of the Repo 105 transactions, people in Fuld's camp think differently.

They say that if after poring over reams of documents and sifting through millions of e-mails, Repo 105 is the strongest example of Lehman's supposed shenanigans, Fuld & Co. are in good shape."

Here's me after reading that:  Hmmm.... shaking head... tongue tied... not sure what to write... can't believe he's actually going this route...

To recap, Fuld's view now seems to be, "Hey mofo's - if the best you could do after tens of thousands of man hours of investigation is discover massive financial fraud on the part of my company, then SUCK IT! I Win!"

-KD

Chat Roulette Piano Improv

This guy "Merton" is great - he looks and sounds a lot like Ben Folds, but they swear it's not Ben Folds.



-KD

More Census Tidbits

There are a few more interesting tidbits (which address some of the questions from my last post) on the Census home page, from a sort of FAQ subsection:

Q: Why is the Census Bureau spending money on advertising during these tough economic times?

A: Our experience in Census 2000 proved that paid advertising is a wise investment that reduces the overall cost of the census. For every one percent increase in mail response in 2010, the census will save $85 million that would otherwise have to be spent on door-to-door follow-up with households that didn’t respond. Census 2000 was the first census to use paid advertising rather than rely solely on donated public service announcements. It helped reverse a three-decade-long decline in mail response rates.

Q: I know the census is coming, so why are you sending me multiple mailings?

A:Years of research have shown that higher percentages of people receiving the mailed census questionnaire return a completed form after they receive the advance letter compared with those who receive merely the census form with a simultaneous request to return it. Every 1 percent of the U.S. households that return a completed questionnaire will save $85 million in taxpayer money that would have to be spent sending people out to interview households in person. The research is clear that the advance letter can save money for all of us. The advance letter is also a way for us to protect the American public from any scams that use the census to exploit people. The scam artists don’t take the time, nor do they exercise the courtesy that we do, to alert the households of an upcoming request. This feature of the 2010 Census is a cost-saver in the long run.

Q: What is the cost per household to conduct the census, and how much is the Census Bureau spending per household on advertising on TV, radio, etc.?

A: To ensure that the public is aware of importance of mailing back the 2010 Census questionnaire when they receive it, and the millions of dollars in taxpayers’ money saved by doing so, the Census Bureau is spending about $1 per person on our combined promotion and outreach efforts. It costs just $.42 cents to mail back the census form in a postage paid envelop. It costs taxpayers $25 per person to send a census taker door-to-door to collect the same information if they didn’t mail it back. Promotional and outreach efforts are heavily focused on increasing the number of households to mail back their form when they receive it this March. For every one percentage point increase in the national participation rate by mail, taxpayers can help the Census Bureau save about $85 million in operational costs.” 

So for goodness sakes folks - if you want to avoid even more wasting of taxpayer money, PLEASE send back yours census forms!  Just so we're clear, though, the cost of the census is well over ten billion dollars.   Even though the FAQ asked this question, it failed to answer it.

Q:In this day and age, why is the word “Negro” included as part of the race question on the 2010 Census form?

A: The wording of the race category labeled “Black, African Am., or Negro” is based on Office of Management and Budget standards and Census Bureau research that showed a segment of the population still identifies itself as “Negro.” The Census Bureau has a research team dedicated to investigating issues and analyzing data on the nation’s diverse racial and ethnic groups. The Census Bureau is testing the removal of the term “Negro” from the question on race, and results of this research will inform design changes for future surveys and the 2020 Census. We are sorry if some are offended by the use of this word in the 2010 Census and hope that it will not stop them from returning their forms and being fully counted by the census.

-KD

If a Tree Falls in the Forest, and No One Is Around To Hear it, Does it Make A Sound?

More importantly: if a lender doesn't foreclose on a delinquent borrower, and thus the non-forclosure isn't counted in official foreclosure numbers, does it mean things are better?

From HousingWire, via Calculated Risk:

"Using LPS data, for all loans more than 90 days in arrears, the average days delinquent is now at 272 days—up from 204 days in early 2008. For loans in foreclosure, the aging numbers are even more staggering: loans in this bucket average 410 days delinquent, up from 260 days delinquent in early 2008.

Ponder those numbers for just a second. On average, severely delinquent borrowers have gone more than 9 months without making a mortgage payment—and yet foreclosure has not yet started for them. For those borrowers who are in the foreclosure process, it’s been an average of 13.6 months—more than one full year—since they last made any payment on their mortgage."

We can ask the same question about employment data:  if an unemployed worker stops looking for work and is no longer counted as unemployed, have we fixed the problem?

Green shoots! (/sarcasm)

-KD

Census Tilt

We just got our Census form in the mail.  I was slightly tilted by the warning on the front of the envelope: "YOUR RESPONSE IS REQUIRE BY LAW,"  but Mrs. Dynamite was on bajungi tilt because she couldn't fill the form out online.  I tried explaining to her the argument that a part of the census was intentional stimulus - they (the government) pay to get it printed, they pay to get it mailed, tabulated, counted etc.  That money goes to people.   She understands that, but is furious at the blatant "waste" of money here - the money clearly doesn't need to be spent like this.  The government should be paying people to get the Census web-ready instead.   It always comes back to make-work projects... Dig holes and fill them in - print forms, mail them, and count them.  It's completely unnecessary.  Of course, they also spend tons of money advertising for the census - and sending out pre-notices like the one last week that said we'd be receiving the census the following week. 

Here's what's interesting about the actual census questions:  question 5 asks "Is this person of Hispanic, Latino, or Spanish origin?" choices are:

- NO - not of Hispanic, Latino or Spanish Origin

- Yes, Mexican, Mexican American, Chicano

- Yes, Puerto Rican

- Yes, Cuban

-Yes, another Hispanic, Latino or Spanish origin - print origin (Argentinian, Colombian, Dominican, etc)

Then, question 6 asks:  What is this person's race?  Options include:

White, Black, American Indian, Asian Indian, Chinese, Filipino, Japanese, Korean, Vietnamese, Native Hawaiian, Guamanian/Chamorro, Samoan, Other Pacific Islander or Other Asian.  Then there's a write-in option  "some other race."

Now, Hispanics may be surprised to find the preamble to these two questions, which states, "NOTE: Please answer BOTH question 5 about Hispanic origin and question 6 about race.  For this census, Hispanic origins are not races." !!!

I wonder how many Hispanic respondents will choose not to classify themselves in one of the racial buckets in question 6, and instead will write in "Hispanic" in the write-in box...  Thinking of my Hispanic friends, I have no idea what they'd respond - White?  Maybe... who knows... it's kinda a bizarre question in my opinion.  I always thought of Hispanic as a race - do Hispanics disagree?  Any Hispanic readers please let me know how you answer question 6 about your race, if "Hispanic" isn't a possible answer.

And guess what - that's pretty much all the census asks!  Name, age, sex, the two questions about race and Hispanic origin, and how the person is related to the primary respondent.  

I expected questions about education, income, work, hobbies and other useful stuff.    Pretty disappointing.  You can see the actual form here, but of course, you can't fill it out online...

-KD

I Fought The Law, and The Law Won

I went to Concord on Friday to pick up some new enhancements at Lowes for the folding door of our maple syrup evaporator, and smoke a cigar at Castros.  I parked my car at a meter right in front of the cigar shop and popped in two quarters - good for an hour.

I was sitting on a couch inside and could actually see my car when I looked up from the magazine I was reading.   I noticed that my time was almost up, pondered putting another quarter in the meter, but figured I'd be done in 10 minutes anyway.  I looked down to read an interview about Ernesto Padilla, and when I looked up some sort of ninja meter maid had placed a ticket on my windshield and disappeared without me even noticing.  

My meter had been expired for about 4 minutes, and I was peeved.  I walked out, opened the envelope, and saw the fine:  $5 if paid within a week, otherwise it goes up to $15.  Now I was actually happy - genuinely happy.  It made my day.  NYC expired meter fees of $65 are a lot more annoying that these $5 tickets.  Then I started wondering what the optimal balance of meter fares and ticket penalties would be.  In other words, I was happy to pay the $5 - so happy, in fact, that next time, if I'm a few blocks away or something, I won't run over and feed the meter.  The city wins if they catch me - they get a $5 ticket instead of another 25c in the meter.  Of course, they won't catch me every time, etc etc etc...  However, in NYC, I'll do my best to avoid the $65 tickets - they will get the extra quarters (worth only 15 minutes there, though!) but they won't get the $65 windfalls - hopefully.  Anyway, parking meter game theory is somewhat interesting.

-KD

Sunday Links

This Lehman story is remarkable.  I mean, Lehman is basically another Enron - only bigger and much more entangled in the global financial system.  I'm pretty surprised that the market didn't seem to care about the massive fraud detailed in the bankruptcy examiner's report.  

Barry Ritholtz gives us a page with a whole mess of Lehman stories on it - a good starting place if you're reading this post and saying "What Lehman story?"

When you're done with the Lehman reading, if you haven't thrown up on your computer yet, you can check out Bruce Krasting's piece on the similarities between CDS, which are being vilified, and mortgage insurance - which is probably a far bigger issue.

If you still haven't thrown up: realize that your bank account's yield, which you probably knew was approaching zero percent, may actually have reached zero percent. 

EDIT:  late edition to the links:  It's not from The Onion (well, it's KINDA from the Russian Onion) - Panic in Georgia After a Mock News Broadcast.  Oy Vey.

Beware the Ides of March

-KD

Project Maple

When you buy an antique house in New Hampshire and discover that the previous owners left you a bunch of maple sugaring equipment in the barn, there's only one thing to do:  get out there and try to make some syrup.

After taking inventory of what we had (buckets, taps, evaporator pans, evaporator cinder blocks, sap storage tank, skimmer, glass bottles) and what we needed (filters, caps, hydrometer, hydrometer cup, supplies to enhance the evaporator), we moved on to the key task:  identifying sugar maple trees during the winter when they lack leaves.  My father-in-law, a lifelong woodsman, helped us identify a bunch of prime sugar maples, which we tapped on March 1st.  My "alternate branching" identifying criteria worked well also, but nearly led to me tapping a few ash trees which I swore were maples.

We have a trophy maple next to our driveway - it's probably over 100 years old - but it's in somewhat rough shape. A visiting arborist advised not tapping it, since it's our centerpiece tree, and it didn't need anymore stress.  This put a dent in my plans - the big tree could easily accomodate 4 taps, and in fact we found an old label that the prior homeowners had used for their syrup called "one tree syrup," indicating that it was the linchpin of their sap production too.    Still, I found room for 15 taps on my other trees, and we eagerly anticipated our first sap run.  It usually takes roughly 30-35 gallons of sap to boil down into one gallon of syrup.  After tapping on Monday, we collected the sap daily, lugging a 3.5 gallon bucket with a cheesecloth filter I'd fabricated into the lid back and forth between the trees and our storage bucket. 

To get a good sap run, you need cold nights.  It makes a big difference if it gets down to 30 degrees or 25 degrees - 25 degrees is much better - and we had a few days like that.  You know your lifestyle has changed when you take the lid off of a galvanized steel sap bucket on a tree, see it mostly full, and unconsciously coo "Atta girl," to your tree.   I now eagerly check the long term weather forecast each day, cursing when the nights won't be cold enough.  Yes - this is my life.  We had 37 gallons of sap by Sunday, and set to work boiling it.

After we laid out the cinder block foundation, Mrs. Dynamite and my dad constructed a great "square hole with a round peg" solution to seal up the exhaust pipe which I'd ingeniously designed.  Mrs. Dynamite then used her pop-riveter to construct a hinged door that partially covered the front of the evaporator, while still allowing air to flow in.  We had a grate elevated slightly by bricks which kept the fire off the ground and burning hot.  The pans go on top of the cinderblocks in the picture below.

We also had plenty of home-harvested firewood, cut up by yours truly with the chainsaw my father-in-law gave us.

Once it's all fueled up and the pans are loaded with sap, it looks like this:

The wood boards are to keep us from sinking into the swamp that was our yard.  Notice the sweet draft below the hinged door, and the elevated grate that the wood is on.

Now, there is a delicate dance going on here:  there are two evaporating pans: the back pan (nearest the fire opening)  is roughly 2 feet by 4 feet - maximizing surface area for maximum evaporation of water (sap is roughly 97% water - once you boil off the water, you get syrup!).   The front pan is smaller - maybe 1 feet by 2 feet.   So, you can't just take one pan off the evaporator - because then the smoke comes pouring up and out.  Thus, you have to keep enough sap in both pans so that neither pan burns. 

The evaporator looks like this when it's running:

What we did was ladle sap from the back pan into the front pan as needed, while adding fresh sap to the back pan, until all of our sap was in the two pans (this took a few hours).   At one point the front pan was at risk of over-cooking, as indicated by a furious and rapid foaming of the sap in that pan.  Fortunately, we had the antidote ready - a piece of raw bacon waved at the top of the foam, which causes it to retreat.  We added more sap and continued.   Then, as the back pan boiled down to a level that would allow us to fit all the remaining sap into the front pan, we carefully dumped the contents into the front pan.  Then, to keep the back pan from scorching, we put water in the back pan.

Mrs. Dynamite went inside to boil the bottles (sterilize them), while my dad and I manned the evaporator as the sunset.  We had headlamps to guide us, and I wanted to boil for as long as possible on the evaporator.  "Don't be a hero,"  Mrs. Dynamite warned me, not wanting me to scorch the almost-syrup after 6 hours of work.  We pulled it off the evaporator, filtered it into a lobster pot, and brought it inside to finish on the stovetop where the temperature was easier to control.

What may have taken another 45 minutes on the evaporator took nearly 4 hours on the stovetop, but eventually, after repeated testing with our hydrometer, we got the proper reading of sugar content that indicated we'd finally attained SYRUP!  We lined our funnel with filter felt, and ladled  the syrup in.  The filter quickly backed up and stopped dripping, which confused us immensely.  We didn't think the filter could be clogged already, as we'd barely filtered 1/2 pint of syrup, and the filter was brand new.  Unable to remedy the situation, we switched to a multi-layer cheese cloth filter instead, and were able to bottle all of our syrup.  The drawback to this filter change was that our bottles have "sugar sand" in them - tiny particles of nutrients that are a byproduct of the boiling process.   Our goal is to get these filtered out next time, but we're still working on how to do that.  The addicts over at MapleTrader.com suggested wetting the filters, which we hadn't done, using pre-filters, and keeping the syrup piping hot during the filtering process.

In the end, it was extremely satisfying to even get any syrup out of the deal, considering the ample opportunities to screw it up.  Mrs. Dynamite printed out labels, and the final product looked like this:

Of course, we made Oscar pose with his branded syrup, but he looked none too happy:

We ended up with about 1.1 gallons of syrup, and proceeded to eat pancakes for the next three days.  We were also extremely lucky with the weather on Sunday when we boiled off our sap - it was sunny and 50 degrees.  This week poses multiple problems, as the sap production hasn't been as bountiful, and there is forecast for rain all weekend.  I'm not sure how to construct a tent over my evaporator that would keep the rain out, yet not melt from the heat of the stovepipe chimney... These are the dilemmas you have to face if you want to be a playa in the maple sugarin' world, though....

-KD