Weekend Roundup - Blame Canada!

So I watched the opening ceremonies for the Winter Olympics last night.  I can't believe they didn't have Wayne Gretzky slap a flaming hockey puck into the cauldron to light it.  What actually happened is that one of the four pillars ascending from the floor to form the cauldron pedestal malfunctioned, and Gretzky and the other 3 torchbearers stood there looking confused for a few minutes before the program proceeded with just the three pillars - and no flaming hockey pucks.  Mohammed Ali, it was not (6:00 mark in the video - awesome).

I have never been to Canada, but it seems pretty awesome.  I'm not just saying that because my blog is absolutely huge in Canada - it's because they have so many cities which just seem to rock:  Montreal, Calgary, Vancouver.  I guess I'll have to go there someday.  Watching the Olympics over the next few weeks, I don't think I'll be able to get the immortal South Park song "Blame Canada,"  out of my head at all, even if they don't do anything wrong:

One more Winter Olympics question?   WTF is the deal with biathalon?  Cross country skiing and guns?  That's the best they could come up with?  If you're going to combine a winter sport with rifelry, I think either Alpine Downhill Skeet Shooting or Nordic Ski Jump Riflery would be much more interesting than watching guys cross country ski around a big loop while periodically stopping to shoot targets.  Who came up with this idea?  Blame Canada, I guess.   

Ok - one more question - did you know that Jaromir Jagr is still playing hockey in Europe?  He's captaining the Czech Republic team!  Olympic hockey is absolutely awesome - fast paced and wide open - and I"m looking forward to watching as many of those games as I can.  

Last question - I promise:  Which country has won more Winter Olympics medals:  Denmark or Kazakhstan?   I can't be the only one surprised to find out that Denmark has only won 1 Winter medal all time, while Kazakhstan has 5...

Some links for the weekend:

David Merkel @ Aleph Blog: "Ignore Anyone Who Tells You Debt Levels Don't Matter"

"Debt levels in an economy matter.  They matter a lot.  An economy that is financed primarily by debt can be like a chain of dominoes.  If one fixed claim fails, and it is large enough, many other fixed claims that rely on the first claim could fail as well, triggering a chain of failures.  This is a reason why a fiat-money credit-based economy must limit leverage particularly in financial institutions."

Contrasted with:

Via NakedCapitalism: Prof. L. Randall Wray: "The Federal Budget is Not Like a Household Budget"

"I realize that distinguishing between a sovereign government and a household does not put to rest all deficit fears. But since this analogy is invoked so often, I hope that the next time you hear it used you will challenge the speaker to explain exactly why a government’s budget is like a household’s budget. If the speaker claims that government budget deficits are unsustainable, that government must eventually pay back all that debt, ask him or her why we have managed to avoid retiring debt since 1837-is 173 years long enough to establish a “sustainable” pattern?"

Via Tyler Cowen:  "Gay Men and Lesbians"  Poll Better than "Homosexuals."  

Barry Ritholtz:  Mathematical Proof That Companies Manage Earnings

"The WSJ reports today on a study that confirms what everyone has known for years: That many firms manage their earnings, pulling all manner of shenanigans to beat the street. 

The way this form of fraud was detected was rather ingenious: The lower than mathematically expected incidences of the digit “4″ in corporate earnings releases. (“X.4″ to be precise) This simple statistical insight was due to an analysis of normal random distribution. “When the authors ran the earnings-per-share numbers down to a 10th of a cent, they found that the number “4″ appeared less often in the 10ths place than any other digit, and significantly less often than would be expected by chance.”

Why? 

By finagling the 0.4 to a 0.5, accountants then get to round up to the next higher number. Hence, 12.4 cents is “managed” to 12.5, which then becomes rounded to 13 cents per share."

-KD

There is No Change In Value - The Value is The Same

In light of the discussion in my prior two posts, "Partisan Economics" and "Partisan Economics Revisited,"  I thought this would be a good time to post the Dynamite-In-Law favorite video  "The New Ghana Cedi."






-KD

Debt and Partisan Economics Revisited

My last post, Partisan Economics, generated a lot of discussion and debate, although much of it was a back and forth between me and a textbook Keynsian.   

Before continuing, I want to address a point that Barry Ritholtz mentioned to me, stating that there are indeed a lot of deficit partisans out there who are acting with extreme hypocrisy.  This is indubitably true - and they should be held accountable as hypocrites.  However, this doesn't mean that their newfound deficit concerns are unfounded, which is what I was trying to show in my post.

I already linked to Krugman and Reich on the subject, and Dean Baker weighed in yesterday as well.   On the other side, the Pragmatic Capitalist wrote a piece similar in tone to mine, and made some important clarifications about Keynsian Economics:

"The truth is – Keynesianism works – in the right environment.  It works well when debt is fairly low and organic economic growth is relatively strong, but exponential debt growth becomes an increasing concern every time you print your way out of an economic downturn.  The larger the downturn, the larger the response.  So on and so forth.  If you happen to enter a period of severe irrationality and spending the problems multiply.  If the recovery period is not used to pay down debts the problems become exponentially worse.  The tipping point comes when the debt burden hinders future economic growth and destroys your ability to spend your way out of any future recessions.  It effectively turns into one great pyramid scheme if it you let it get out of hand."

 and then:

"In sum, the idea that you can turn on the debt spigot every time your economy gets into trouble is deeply flawed.  The major flaw in the Keynesian approach is that it ignores  exponential growth in debts.  As a government continually spends and prints to get themselves out of one recession the debt they incur slowly hinders their ability to overcome any impending economic woes.   Should they continue to attempt to print and spend their way out of each subsequent recession it becomes a negative feedback loop.  The debt hinders future economic growth, the potential for subsequent downturns actually increases and the ability to handle those downturns is severely reduced.  If fiscal imprudence continues in times of recovery you end up right where we are today."

Dean Baker's piece was the most surprising to me.  It echoes Krugman's points, and generated some very intelligent replies in his comments section rebutting his claims.  One commenter rebuts Baker point by point, accurately, in my opinion:  it's a must read here.  Here's just a little taste, the first paragraph of eight:

"{Baker wrote:}“The country faces a serious crisis in the form of a manufactured crisis over the budget deficit”. {commenter responds:}The world is in the grips of the first truly global DEBT crisis of unprecedented proportions. Period. Public sector debt, corporate debt, personal debt: not even in the great wars of centuries past have we seen such extreme debt levels, when expressed as a percentage of GDP. It is one thing to say, “The ratio of (public) debt to GDP was over 110 percent after WWII”, suggesting that, therefore today’s numbers needn’t concern us. It is quite another to observe that, in fact, “total credit market debt as a % of GDP” at its WWII peak was less than 170%, whereas today it is more than double, at about 350%. In other words, WWII was financed with “public sector” debt; when the war ended, so did the expenditures, and the US enjoyed a financially solvent private sector with a suddenly expanded, hard working labour force with which to pay off the debt. Now we have comparable levels of public sector debt AND unprecedented levels of private sector debt; and anyone who ignores that inconvenient fact is a fool."

Clusterstock republished a segment of Baker's piece, and commenter Mike C clarified another nice, simple point:

Baker wrote: "The problem is that, as a society, we are not spending enough to keep the economy running at capacity." 

Commenter Mike C responds:

"The problem is, for too many years we've had a seriously inflated idea of what our 'capacity' really is. Our economy running at 'capacity' is something more akin to 1985 levels than 2005 levels. The rest of that was a flood of easy credit and overleveraging...not actual capacity."

Finally, Ron Paul weighs in.  Do with that one what you will...

-KD

Partisan Economics

This is not a political post.

I think partisan politics is one of the worst traits of our country.   Now, however, as we continue to see the line between political policy and economic policy blurred, we're encountering the absurdity of partisan economics.  For me, there is an essential truth we must acknowledge before even beginning this conversation:  debt is not partisan.  Debt doesn't care if you're liberal or conservative, democrat or republican.  Debt is mathematics.

I don't agree with everything Karl Denninger writes, nor with his ceaselessly hyperbolic delivery, yet he has been adamant (and correct, in my opinion) about one thing for the last 2 years in his blogging - debt is exponential, and you can't borrow your way out of a debt problem.  The concept that you cannot borrow your way out of a debt problem is an important one (one that I've touched on many times before, and I would have thought, a simple one), but it's even more important in today's fiscal/economic landcscape - we'll get to that in a minute.  Denninger takes issue with two widely read authors this week. First, Nobel Laureate Paul Krugman's NY Times piece titled "Fiscal Scare Tactics."    Krugman writes:

"Let’s talk for a moment about budget reality. Contrary to what you often hear, the large deficit the federal government is running right now isn’t the result of runaway spending growth."

Denninger responds with a graph:

as well as some choice words for Krugman.

I take issue with Krugman's "partisanization" of economics - if I could coin a new word.    Krugman writes:

"True, there is a longer-term budget problem. Even a full economic recovery wouldn’t balance the budget, and it probably wouldn’t even reduce the deficit to a permanently sustainable level. So once the economic crisis is past, the U.S. government will have to increase its revenue and control its costs. And in the long run there’s no way to make the budget math work unless something is done about health care costs.

But there’s no reason to panic about budget prospects for the next few years, or even for the next decade. Consider, for example, what the latest budget proposal from the Obama administration says about interest payments on federal debt; according to the projections, a decade from now they’ll have risen to 3.5 percent of G.D.P. How scary is that? It’s about the same as interest costs under the first President Bush.

Why, then, all the hysteria? The answer is politics."

No, No, No, No, NO Dr. Krugman - the answer is MATHEMATICS.   By politicizing the issue, Krugman is the one who is shirking the truth.  I would think that a Nobel Prize winner in economics would understand the concept of max-debt, yet Krugman cavalierly compares the current situation to one twenty years ago, under the first President Bush.   Let's go to some more charts!

That's government debt as a percent of GDP.  Again, you don't have to be a Nobel Laureate to see how debt has become a larger portion of our financial world in the last twenty years (the chart shows that the current ratio is DOUBLE what it was under the first President Bush).  Krugman wasn't referring to the Debt/GDP ratio - he was talking about the interest/GDP ratio - but you can't look at the latter without taking into account how much the former has grown - you have to pay back principal too!  I don't know when we will reach "max debt" but I do know what we're closer to that point than we've ever been before, and to simply write off concerns as partisan politicians trying to stonewall Obama's agenda is naive, not accurate (although Conservative critics may indeed be trying to stonewall the Administration),  and partisan in its response.

Robert Reich wrote the other piece which I found mind boggling.    I"ll give you Denninger's take first.  Reich inquires:

"Alright class, here's your assignment: Look at President Obama's budget proposal, spending freeze, jobs bill, stimulus, tax hikes on upper-income individuals, and proposed deficit commission. Also take a look at the fees he wants to impose on the biggest banks, and his proposed regulations of Wall Street. Look at his stalled trade agenda. Now, explain the big picture."

Denninger responds:

"Ok, I'll take a shot:

$500 billion in newly-embedded STRUCTURAL deficits in concert with rapidly-falling tax revenues = ultimate insolvency of the US Treasury.

Oh wait, you didn't like that answer.  Here's what Reich said:

If you're about to write "more taxes and more spending," you're either not thinking hard enough or you're a Republican running for office this November.
To see the big picture you need to keep your eye on three big things. The first is the extent of government spending needed to offset the continued reluctance of consumers and businesses to spend."

And then Denninger gets to the first of his two essential points:

"It's not reluctance.  It's inability.  That's usually what happens when your general mantra is "I can't be out of money - I still have checks left!" and then try the same trick with your credit card only to have it come back "REALLY DECLINED.""

Reich continues:

"You don't have to be an orthodox Keynesian to understand that as long as the private sector is deleveraging the public sector has to borrow and spend in order to keep the economy moving forward."

Which Denninger sharply and accurately refutes in a few simple sentences which are the key to the entire economy for me:

"I don't have to have an IQ larger than my shoe size to understand that when the private sector has reached it's leverage limit it is not possible to "spur" it to take on more leverage - that is, to borrow and spend that which isn't earned in the present tense. 

All government borrowing and spending does in that case is make the ultimate deleveraging (across the entire economy) WORSE."

Again, I don't think you have to have a PhD in economics to understand that we're in a relatively unfamiliar spot in our economic landscape.  We're out of (or running out of) borrowing power.  Ned Davis Research publishes a chart of consumer debt to GDP:

Yes - I believe consumers have reached their debt limit - but the problem, as the chart I posted further above shows, is that the Government is also closer to reaching ITS debt limit than ever before.  No one knows if or when China will stop financing our economy, but to bet our entire stack on the fact that China has no choice but to continue to buy our debt - since they face a prisoner's dilemma otherwise because they already own massive amounts of it - is the equivalent of fiscal Russian roulette.

A final chart I'll reference is total credit market debt to GDP - it's a combination of the federal and household charts above, along with all other corporate debt (courtesy of Barry Ritholtz).

One more gem from Robert Reich:

"The federal budget deficit is a huge problem, to be sure. But if you want an A in this course you need to distinguish between deficits occurring this year and next when the economy is still trying to climb out of a hole, and deficits five to 10 years from now. If government doesn't spend enough in the short term to get jobs back, those out-year deficits will be even larger because tax revenues will be lower then, and government will be spending more on unemployment benefits."

Reich is actually claiming that if we don't spend more now to "get jobs back,"  then we'll have to spend more later on unemployment benefits.  He's ignoring the fact that the spending we're doing now is much more than the spending we'd be doing on unemployment benefits!  Otherwise, we'd just magically spend to create jobs instead of paying unemployment.  Of course, he's also using the classic Ponzi logic that a debt to be faced in the future is not as big a concern as a debt to be faced today.  I wholly agree with Denninger's comment on this that attempts to spend our way out of this crisis inevitably make the eventual reckoning (deleveraging) worse.

Which brings us back to politics.  One key realization I got from my sit down at the Treasury several months ago was that, although they didn't say this explicitly, the officials at the Treasury had realized how political economic policy was.  They were smart enough to understand that you can't make debt go away by borrowing more, yet they lacked the political will/ability to attempt any other option.    In my opinion, President Obama's biggest failure was his refusal to make the tough choices (which to me means recognizing bad debts, insolvent banks, etc, instead of trying to pretend they don't exist) early on in his presidency .  Obama's gift is his incredible eloquence, and the mandate he had (which would give him a very wide berth in any policy decisions) from the people who were starting to realize just how "up a creek without a paddle" our country's economic direction was heading.  I think he was one of the few presidents in recent memory who had the ability to recognize the bad debts, take the pain, talk the nation through it, and begin the road to recovery.  Instead, he did what almost any other President would have done - tried to avoid the inevitable - but we're quickly realizing that it's unavoidable.  Now, however, it may be too late to change course and make the really hard choices, as the pain involved will be worse, and some support for him has waned.

I can't help but think of the lyrics to the Grateful Dead's Touch of Grey:

"I know the rent is in arrears

The dog has not been fed in years

It's even worse than it appears

but it's all right.

The cow giving kerosene

Kid can't read at seventeen

The words he knows are all obscene

but it's all right"

I don't think we can talk our way out of this recession - I think the remedy calls for drastic, painful action that will result in a lot of losses for a lot of people and corporations.  However, such action would avoid the state we're in now: where our nation, our corporations, and our consumers are virtual debt-zombies, unable to borrow more, and unable to pay back the debts we currently have.  After taking the pain, the spending done by the government would have real "oomph" behind it - and could potentially fuel a legitimate recovery, but it won't be easy.

note: please think carefully before leaving off topic partisan political comments blaming Bush, Obama, Democrats,  Republicans, or Tickle Me Elmo for the current economic problems.   The point is how we FIX the problems, not placing blame for causing them.

-KD

Super Bowl

Bodog is offering the following prop:

"Super Bowl XLIV - What Color will the Gatorade be that is dumped on the Head Coach of the Winning Super Bowl Team? " 

Lime Green: 8/1

Yellow:  4/5

Orange:  11/2

Red 10/1

Blue 25/2

Clear/Water:  9/5

For those not gambling inclined, this means that if you bet on "Red" and win, you get paid $10 for every $1 wagered, and if you bet the favorite, "Yellow,"  you win $4 for every $5 wagered.  Yellow is a heavy favorite.

Maybe I'm old school, but Green is still my color of Gatorade, and I love the value there at 8/1!

Of course, there's the old favorite "Length of the National Anthem" prop:

" Super Bowl XLIV - How long will it take Carrie Underwood to sing the National Anthem? Clock starts as soon as Underwood sings first Note and Stops when she sings her last note."

Over 1 minute 42 seconds:  +115

Under 1 minute 42 seconds:  -145

If you want to bet the under, you have to bet $145 to win $100.

Big Show astutely notes "Take the under and lay the wood - It's right in her name! UNDERWOOD!"

-Kid Dynamite

Goldman Sachs's Lloyd Blankfein's Bonus: $9mm in Stock

Well, as predicted,  Blankfein's bonus was nowhere near $100mm.   He ended up getting $9mm in Goldman Sachs stock.

-KD

Unemployment: Birth/Death Adjustments Overstated Jobs by 902,000

Leading up to the release of today's BLS Employment report, there was a lot of talk about the birth/death adjustment.  The b/d model can be a bit tricky to explain - I think Barry Ritholtz's old piece here does a good job of summarizing what happens.  Basically, the BLS estimates job creation or destruction based on the filings of new company incorporations - because companies which are too new or too small don't get counted in the CES (current employment statistics) survey. In Ritholtz's words:

"Previously, BLS tended to under report new jobs in the beginning of a a cycle turn. What the new B/D Adjustment series did was take new incorporation filings per state, and deduce from them that new jobs were being created. (That took effect around 2003).  This improved somewhat the ability to capture new jobs at the start of the cycle. But the flaw in the adjustment was that the model radically overstated job creation at the end of the cycle. Say a firm goes out of business, or lays off 100s of workers. They form new shops, incorporating these start ups.  According to the BLS, that is job creation.  But in reality, a steady paycheck with benefits has now been transformed into a start up with none of the above. And as we know, 90% of all new businesses eventually fail.  How misleading is the BD adjustment at the end of the cycle? Consider that in 2007, 75% of the BLS newly created jobs were due to the B/D adjustment. That did a nice job masking the actual problems beneath the surface."

Today, when the number came out, the results were even worse than most expected.  From the BLS report:

"The total nonfarm employment level for March 2009 was revised down-ward by 902,000 (930,000 on a seasonally adjusted basis), or 0.7 percent. The previously published level for December 2009 was revised downward 1,390,000 (1,363,000 on a seasonally adjusted basis)."

In plain English, all the employment data that was reported up thru March 2009 understated the number of jobs lost by 902k.    How big a variance is this?  Is it normal?  The CES tells us:

"The March 2009 total nonfarm payroll employment estimate was revised downward by 902,000 or -0.7 percent. Over the past decade, absolute benchmark revisions have averaged 0.3 percent, with a range from 0.1 percent to 0.7 percent.  Benchmark revisions are a standard part of the payroll survey estimation process. The benchmark adjustment represents a once-a-year re-anchoring, based on March data, of sample-based employment estimates to full population counts available through UI tax records filed by nearly all employers with State Employment Security agencies."

In other words, this revision was the largest (at -.7%) since the modern adjustments began 10 years ago.  The interactive Bloomberg graphic I linked to above also highlights this dispersion. 

-KD

More on the Volcker Rule

I'm not against the Volcker Rule - I don't think it will increase risk or make things worse, but I think it's woefully insufficient at best if the goal is to curb systematic risk.  I think the goal of the proposed Volcker Rule is to allow the Administration to say to the people "Look - we hear your anger - we understand that nobody wants banking institutions involved in proprietary trading activities with government backstops."  There's nothing wrong with that - except that it will do little to nothing to prevent future crisis.

Long Term Capital Management was not a bank.  Lehman Brothers was not a bank.  Merrill Lynch was not a bank.  AIG was not a bank.  Bear Stearns was not a bank.   As I commented on Barry Ritholtz's thread on the subject: "isn’t there a very very easy way to explain why the Volcker rule is, at the very least, woefully inadequate to limit systematic risk: Lehman… Merrill… Bear Stearns… AIG… LTCM… not one of those were banks – and not one of them would have been effected/reigned in by the Volcker rule."

Barry responded that the Volcker Rule would not have prevented the current crisis, but it would be "prophylactic against the next crisis."   On the contrary - the Volcker Rule will be prophylactic against the next crisis from originating AT A BANK.   The Volcker Rule, however, does nothing to address leverage at non-bank institutions.  Now, one catch-all is that broker-dealers don't exist anymore - so now all the big players are banking institutions!  Merrill Lynch was acquired by BankAmerica, Lehman went bankrupt, Bear was acquired by JPM, and MS/GS changed their charters so that they are now "banks."  

The systematic risk to our financial world is not "banks blowing as a result of proprietary trading"- it's any financial firm blowing up because of being over-levered.  LEVERAGE is the key.    Every non-bank firm should be free to trade in such a way that allows them to lose their own money - but not to lose everyone else's money, imperil the system, and require taxpayer bailouts to quells the fallout from failure.

There is one real risk in the Volcker Rule as a populist solution, and it's this:  if the administration/regulators/powers that be think that by instituting the Volcker Rule they've quelled the public outrage over banks' proprietary trading, and they relax their guard on the real systematic risks to the system - then the rule will have done the exact opposite of what it was designed to do.

-KD

MidWeek Catchup

In case you missed it, I wrote a four part recap of my recent trip to Vegas:  You can find them here:

Part I:  The Arrival

Part II - March of the Penguins

Part III - Real Time Wagering and Off Strip Dining

Part IV - Downtown

In other reading:  Barry Ritholtz has consistently been harsh on people who place the majority of blame for the housing bubble on Fannie and Freddie.  He has another good piece today explaining why he thinks that view is misguided.

MISH's: "In Defense of Drunken Sailors,"  contains a letter from a friend of his, taking offense (humorously) to the constant description of politicians spending like "drunken sailors."

"When pulling into a foreign port after many weeks or months at sea with the world’s finest navy, I always looked forward to sampling the native’s libations. Yes, I got hammered.

However, when I ran out of money I STOPPED DRINKING! I didn’t club the patron on the bar stool next to me over the head and rob him so I could continue drinking. I didn’t call me wife and ask her to cash in the kids college funds so I could continue drinking. I didn’t write my unborn grandkids an IOU so I could continue drinking. I just stopped and stumbled back to the liberty launch for a cheeseburger. I knew I’d have some cash next payday and I could hit the bars and clubs in the next liberty port.

So please, no more comparisons of deficit spending politicians to harmless drunken sailors. Drunken sailors have feelings too."

Michael Panzner: "A Growing Share of Americans' Income Comes From the Federal Government."

Finally, The Generic News Report:

-KD

Volcker, SIGTARP, Wells Fargo and $100MM Bonuses

Paul Volcker wrote a lengthy Op-Ed in the NY Times this weekend without really saying anything.  He didn't lay out rules for how he wants to reform the banks, rather, he reiterated obvious statements that we in the blogosphere have been railing about for 18 months, like "To help facilitate that process, the concept of a “living will” has been set forth by a number of governments. Stockholders and management would not be protected. Creditors would be at risk, and would suffer to the extent that the ultimate liquidation value of the firm would fall short of its debts."   I mean, I agree with that concept, but it's a "no shit sherlock" kind of reform.  Volcker also made some comments about eliminating "too big to fail" so that we can afford one of capitalism's necessary features:  FAILURE.

The quarterly SIGTARP (Special Inspector General to the TARP) report is out.    Calculated Risk points out how SIGTARP noted that "the Federal Government’s concerted efforts to support home prices risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market."  The charts showing the extent to which the government has taken over the housing market are STAGGERING - check them at Calculated Risk or in the SIGTARP report.

There is also mention of the PPIP in the SIGTARP report:

"Section 5 also provides an update on the issue of imposing conflict-of-interest walls in PPIP, including a discussion of a series of suspect trades that has already occurred within one of the Public-Private Investment Funds (“PPIFs”) in which a portfolio manager directed the sale of a security from a non-PPIF fund under his management to a dealer after the security had been downgraded and then, minutes later, purchased from that dealer the same security at a slightly higher price for the PPIF. SIGTARP is reviewing these trades."

Well, what can I say other than "I told you so."  It seemed obvious from the start that the only way the PPIP could work is if it were scammed.  Aside from that, it's exactly the kind of transfer of risk everyone is now up in arms about - transferring risk from the banks to the taxpayer.

A story I found especially interesting this morning was Bloomberg's "Wells Fargo Shuns Carry Trade, Braces for Risk of Higher Rates."  Now, banks borrow money and re-invest it at a higher rate.  One problem is that the time frame for the borrowing and the lending (the investment is lending) is not usually matched.  So if banks can borrow at very low short term rates right now, they might NOT want to re-invest those proceeds at low locked in long term rates.  Even if your funding and investment terms are matched, you STILL might not want to get locked into low long term rates. In fact, it seems many banks are investing at relatively low long term rates in an effort to earn easy income and rebuild their balance sheets.  WFC, however, is facing the same dilemma I face in my bank account - I don't want to get locked into a 10 year CD at 5%, because I think there might be better opportunities for investing my money in the next few years.  Thus, I sit here in cash earning nearly 0%, and am liquid as a result.  Wells Fargo, as explained in the article, is doing the same thing -

WFC "reduced investments in mostly fixed-income securities by $34 billion in 2009’s second half, company filings show. JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. boosted their holdings by an average of $35.5 billion.  By scaling back on the so-called carry trade, in which banks borrow in overnight lending markets at rates near zero and invest in higher-yielding securities, San Francisco-based Wells Fargo aims to protect against losses when rates rise. The three other lenders increased investments on the theory that profit will outpace any future losses.  “The bias is for higher rates,” Chief Executive Officer John Stumpf, 56, said on the company’s fourth-quarter earnings call. “We’re willing to wait for that to happen. We think that’s the better trade.” 

Finally,  the Times Online posted a story anticipating that Goldman Sachs's CEO, Lloyd Blankfein, will receive a bonus of $100mm this year.  Sadly, the internet quickly accepted this as fact, and began ranting about it (Felix Salmon excepted).  Look - if Blankfein gets paid $100mm this year, it's rantable - but I don't believe there's any chance that happens.  I think GS has shown that they are at least aware of public perception when they actually shrunk their bonus pool after a bountiful fourth quarter.  There is simply no way that Blankfein is crazy/ignorant enough to have a number like $100mm associated with his name this year. 

What is really going on here is tabloid journalism from Times Online, worded so that their statement will be accurate no matter what happens: "Goldman Sachs, the world’s richest investment bank, could be about to pay its chief executive a bumper bonus of up to $100 million in defiance of moves by President Obama to take action against such payouts."   I'm surprised they stopped at $100 million - the article would have been just as accurate had they written "up to $500 million."  Note the use of the words "up to."

-KD

Vegas MLK 2K10 Part IV - Downtown

In case you need to get caught up, read Parts I, II, and III.

Sunday we woke up early to place our bets for the Dallas - Minnesota NFC Divisional Game.  Big Show was down in the sports book checking the lines, as the rest of us stirred and rallied.  The line was DAL + 3, and Dirty Dave and I wanted to get down on Dallas. Matty piped in from the adjacent room "I like Minny- cross it upstairs - cancel off the floor!"    Dirty Dave quickly told Big Show that we had a natural cross, and he placed no bet for us in the sports book.  Five minutes later, Big Show called back to say that the line had moved to DAL + 3.5 -120:  Dallas bettors were getting another 1/2 point, but had to lay extra vig.  We quickly tried to renegotiate with Matty to strike this new deal with him - which was actually probably a good deal for him, since we weren't paying him vig on the DAL+3 bet, but were willing to lay 120 for the extra half point.  Matty emphatically refused, and I'd spend the rest of the day taunting him mercilessly about how he negotiated himself out of an extra 20% when Minnesota blew the Cowboys out.  That's how you turn a losing bet into a win - remind your buddy who has the other side that you tried to make an even WORSE bet but he refused to take it!

We made it down to the Grand Luxe at the Palazzo - the less crowded version compared to the Venetian's branch - where we spotted the uber-rare pack of White Tigers.  I'd spent the weekend formulating the theory to explain why the only women remaining in Vegas were barely legal first time visitors skanked to the max, but here we encountered a large group of mid-thirties women with babies in tow!  It's extremely rare to see a pack of White Tigers, but to see them with their young is akin to seeing Haley's Comet.  I was in awe.

Sigmas would continue to abound, however, as we hit the craps table.  Mrs. Big Show had a big roll and got us headed the right way, and then Big Show took the dice.  Everyone placed their "pass line" bets, rooting for Big Show to make his number, and I triumphantly and loudly placed a "don't pass" bet.  Craps isn't as hard a game as it sounds like.  On the initial roll, if you roll a 2,3, or 12 you (the pass line)  lose. If you roll a 7 or 11 you win.  Any other number becomes the "point," and if you roll that number again before you roll a 7, the pass line wins.  The rest is just more internal iterations of the same cycle, with opportunities to bet all sorts of different numbers at slightly worse than true-odds payouts.   Normally, everyone bets the pass line - and is cheering for the shooter.  Every once in a while, someone bets the "don't" - which means they lose when everyone else wins, and vice versa.  The Don't bettor is never popular, but I relished the chance to emphatically place a "don't" bet against the Big Show to induce bajungi tilt, and when he sevened out promptly after a handful of rolls, wiping out everyone at the table but me, I loudly fist pumped and shouted "YEAH!  THAT'S what you get for wakin' up in Vegas!"  Which of course prompted him to slug me in the shoulder, and made the box men (the casino guys running the table)  roll their eyes and shake their heads as they chuckled.

Dirty Dave, connoisseur of the unusual and massively negative EV special craps props bets, threw out a red chip and announced "snake eyes high horn!"  The stick man was puzzled for a moment, before realizing, "you meant Horn High Aces,"  correcting Dave - the horn bet is a one roll bet that either 2,3,11 or 12 will come on the next roll.  Horn High Aces just meant that the extra dollar was supposed to double up on the A-A, 1-1, aka "2", "aces" or "snake eyes."  Dirty Dave lost the bet, as expected, but Junior was curious.  "What's that?" He inquired.  "It's bad," I intervened, as I was standing between him and Dirty Dave.  "no no - it's very good - just do it," Dave countered, joking, yet prescient, and Junior threw out his own Horn High Aces bet, with The Professor controlling the dice.  The Professor promptly rolled snake eyes, earning Junior a 30-1 payout.  Junior didn't even realize that his bet had been pressed and was still live until the next roll - when The Professor repeated the snake eyes, earning Junior a nice return, and eliciting an eruption of high fives from our end of the table.  Professor's roll ended with a large profit for all of us, and we decided to bail.

We retreated from the craps table to get situated for the Jets-Chargers game, snagging seats in the Venetian sports book.  I'd had the realization (which turned out to be wrong, of course) that this game looked a lot like the Indy-Baltimore game from the previous day - the Ravens and Jets were both big defense running teams who had QB's tasked with not losing the game for them.  The Colts and Chargers were highly tuned offensive machines, both heavily favored at home.  I was prepared to make a large wager on Chargers - 7, where the line had closed the previous night, but by the time I got there, it had moved to Chargers -8.5.   This actually ended up saving me, because I made a little bet instead, which went down in flames.  Fortunately, I had resisted the urge to bet my bankroll on the Chargers money line, laying 4-1, which would have been an unmitigated disaster when the Jets won outright.

After the game, Dirty Dave, Junior, Matty and the Professor prepared to head home, while Big Show, his wife and I hit the food court.    I abandoned my standby - Panda Express, in favor of the Panda knockoff - Wasabi Jane's, but that didn't stop us from debating if Panda Express was taking a bit too liberal definition of the term "gourmet" when they made the claim "gourmet Chinese food"  on their signage.  At the minimum, it's a vast stretch.

In all my Vegas trips, I'd never been downtown, and the three of us decided to make the pilgrimage.  Our cab dropped us off in front of the legendary Binions, and I sauntered inside to look at the poker wall of fame.  I laughed at the fact that Binions still has an inscription below Johnny Chan's picture that reads "Oriental Express,"  when the knickname is now "Orient Express," as the term "oriental" is reserved for rugs, not people.  Of course, I'm guessing Binions doesn't give two craps about political correctness, and the "oriental express" label was probably more authentic in a joint like this.   I collected a one dollar chip from each of the Fremont Street casinos, with the exception of the LV Club and Golden Gate - who both refused to sell me one, on the grounds that  under gaming regulations,  they need to keep cash on hand to cover all outstanding chips. (why it's harder for them to hold my dollar bill in the safe instead of a chip, I don't understand, but anyway...)  I could have gone to buy chips at the table, pocket one, and then redeem them, but I really didn't care that much.  Two German tourists in front of me were trying to do the same thing though, and were on BAJUNGI tilt, yelling at the cashier at the Golden Gate.   "Fuckin' Germans," he said, as I stepped up and politely asked to buy a chip, even though I had an inkling that this was what caused the strife in front of me.  He laughed and explained that he couldn't sell me one, and I nodded and walked away, as the Germans bought chips at the table, and slammed them down in front of the cashier after pocketing one of them. 

After collecting 6 different chips, I pulled them from my pocket, and taunted Big Show - "six dollars... MY WAY!"  He instantly corrected me: "THEIR WAY!" and I was left frowning and nodding.

Downtown was crowded - we were looking for a juicy double deck BJ game or Pai Gow seat, but couldn't find 3 open anywhere.  After watching the "Fremont Street Experience" light show,  we were mezmerized by the Glitter Gulch "Gentlemen's Club" marquee sign. It's a true classic:

As you can see, the sign features a rotating parade of women whose tops come off and are edited with exclamations such as WHAT?  SHAZAM!  YIKES!  INDEED!  HUMPH!  ADZOOKS!  ZOUNDS! and REALLY??

Big Show adopted "ADZOOKS!" as his exclamation, while I chose "HUMPH!" to repeatedly shout at the blackjack table whenever something bad happened.  We found a nice table at the Golden Nugget - Steve Wynn's original project - and sat down for several hours.

We were hanging out, having a good time, when the relief dealer, Lucy, on her second time around seemed a little on edge.  I took advantage of the opportunity and tucked a blackjack on her instead of turning it face up.   As she turned it over, I yelled "ZOUNDS!" and Lucy got pissed and started telling me that she could pay me even money if she wanted to.  "HUMPH!  you canNOT!" I replied, as Big Show choked on his beer.  Lucy was muttering under her breath about how I didn't even seem to care that I got a blackjack - oh man - BIG mistake.  I had been just chilling out, playing $10 blackjack, but after that each time I got a blackjack or she busted, the Golden Nugget casino floor was treated to a very loud "THAT'S what I get for waking up in Vegas!"  At one point, Big Show and I turned to each other on opposite sides of the table, and made a simultaneous fist pump while yelling "BOOM!"  totally spontaneously.  The young kid between us was absolutely dying laughing in his chair, as were we, and even Lucy had to laugh.  Before leaving, she painted one of those vicious 6 card 21's for herself, sweeping the table of bets, and eliciting a Scooby Doo-esque "ZOINKS!"  from me.

We picked up and headed to the Four Queens to play some Pai Gow, where I proceeded to get pounded on by the cards, in a bad way.  I did manage to tilt the whole table by mostly refusing to play the horrendous side bet "Fortune Bonus," except for on occasion when I'd confuse them greatly by betting it for the dealer instead of for myself.    A dude came running by our table and up into the restaurant, with a barrage of security and police following him.  He was promptly tackled and dragged out. Oh man - you don't do that stuff downtown!  They will take you in the back and beat you with a ball peen hammer!!!

We retreated to the safety of the strip, and headed off to bed, preparing for one final assault on the Palazzo's gaming tables on Monday morning.

Monday, I woke up and beat the Big Show down to the blackjack pit.  I was drinking the patented deconstructed-Mimosa:  a glass of orange juice and a glass of champagne, separately.  A southern guy from Florida at my table was gently ribbing the Asian dealer - asking her how long she'd been dealing there.  When she said "one week,"  he followed up with "Where were you before that - the Stratosphere?"  And I nearly spit my drink on the table.   Big Show and his wife made it downstairs, and we had brunch at First in the Palazzo shops - decent if overpriced food, before returning to the blackjack tables to burn a few more bets before I had to head out to the airport.  I told the cabbie "do NOT take the highway," and settled back to anticipate the shitstorm waiting for me at Manchester Airport on the other end of my journey.

Mrs. Dynamite had texted me the day before "expecting 5-8 inches tonight - oh - and it's gonna snow too!"  BOOM!   But I had an issue with the foot of snow we ended up getting.  See, in my never ending quest for EV, I'd carefully monitored the weather before making the decision to park my car in the outdoor lot at Manchester Aiport on my way to Vegas, thus saving 50% off the cost of parking in the indoor garage. Since it wasn't going to snow, it wouldn't matter. Except it did snow.  Twelve inches. And I had no jacket, no gloves, no boots, and only a little teeny ice scraper in my car.    My flight was delayed, and when I finally made it to my car at 1:30am, all I could do was laugh, as I wiped the heavy slush from my windshield.  

When I paid the parking attendant on the way out, saving $30, I made a sarcastic "whoop" out loud in my car, shouting to no-one in particular:   "Thirty dollars... MY WAY!"

Until next time...

-KD

Need to Boost Returns? Lever Up!

I've been saying for a while now that if we want to reduce the risk of future crisis, the key is to reduce the leverage in the financial system.  The State of Wisconsin, however, clearly didn't get the memo.  MISH points to a WSJ article today about how the State of Wisconsin Investment board, which manages $78Billion, "clears plans to borrow to juice returns."  Oy vey... (pause.. shaking my head)...

So, pension funds plan on roughly 8% annualized returns to meet their funding objectives.  The return to reality with the popping of the credit bubble makes that sort of long term low risk return look nearly impossible to obtain. Solution?  LEVER UP!  From the WSJ article:

"Public pension funds needing to boost their returns but frustrated with hedge funds and private-equity investments are turning to one of the oldest investment strategies—using borrowed money to boost performance. The strategy calls for leveraging pension funds' safest asset—government or other high-grade bonds—while reducing exposure to stocks."

Now - one cannot do this risklessly. You can't borrow money at rates cheaper than Treasuries of a corresponding maturity and invest the proceeds in matching government debt to lock in a profit.   You have to take risk - either by varying your maturities (like borrowing short term and investing long term - which works with low current short term rates as long as you don't 1) run into short term funding rate variances or increased costs of funding (See CIT!) and 2) have to take a mark to market loss (due to loss of short term funding) on your long term debt that you bought!) - or by trying to get a little extra yield by buying not-quite-government-debt-but-still-super-safe-highly-rated-paper.  If you're wondering how that can turn out, see the debt disaster of the last 24 months.  One of the major causes of the crisis was that funds did EXACTLY this - they tried to pick up a little extra yield by buying instruments that were supposed to be nearly as safe as treasuries, but weren't quite treasuries, and offered a little more yield.  How'd that work out? (hint: "poorly" is an understatement)

The bottom line is that Wisconsin's plan to lever up is equivalent to them saying they're going to take more risk.  MISH points out, via a series of charts of bond yields and price charts, that perhaps they have missed the boat on this idea already - as corporate bond yields are hovering near 30 year lows.  Back to the WSJ:

"The fund will borrow an amount equivalent to 4% of assets this year, and as much as 20% of its assets over the next three years. Fund officials say that use of leverage could eventually go higher—in theory, at least, up to 100% of assets, according to the staff analysis."

Perfect! Since they're only starting with 4%, they'll have plenty of room to Marty Up if things don't go well at first!  Bond yields rally (prices fall)?  BUY MORE!  Increase the leverage!  Trade moves against you? Double down!

"But Chief Investment Officer David Villa says that level (100%) wouldn't be palatable for the Wisconsin fund"

Phew - it seems that CIO Villa isn't pulling out all the stops yet.  We can only hope that Mr. Villa's little leverage experiment stays a LITTLE leverage experiment.

-KD

Life Imitates Art?

Via Dealbreaker:  MadTV Ad spoof - the iPad

Now, here's the kicker - that video is YEARS old... In case you've been living under a rock, Apple announced its new tablet product today, called the iPad.  It's essentially a bigger Ipod Touch, which is kinda interesting - Apple reached the limits of making Ipods smaller, so now they are making them bigger!

-KD

The Geithner - AIG Hearings

I spent all morning watching Treasury Secretary Tim Geithner's testimony before the House Committee on Oversight and Government Reform.  Fortunately, I can summarize it for you briefly:  a string of representatives repeatedly questioned Geithner on why AIG's counterparties were paid off at par - 100c on the dollar - and Geithner repeatedly answered (not a direct quote now, ) "As I said previously, that was the best option available at the time for the American Taxpayers."   Geithner insisted that there was no intermediate option, like 90c on the dollar, because such a restructuring of the contracts would have constituted a default, which would have resulted in all financial hell breaking loose in the United States (as a result of AIG ratings downgrades which would trigger all sorts of increased collateral requirements, and thus MORE taxpayer funds)..   Later, Hank Paulson repeated this claim.

In addition, Geithner testified that he had recused himself from decisions related to the disclosure of the payouts, and that it was not his decision to keep the payouts under wraps.  A string of Congressmen then told Geithner that they didn't believe him.

A few Congressmen noted that perhaps there could have been other ways to isolate AIG Financial Products, since it was separate from AIG's life and health insurance businesses, so that AIGFP could declare bankruptcy.  Both Geithner and later Hank Paulson testified that AIGFP was too big and entwined with the rest of AIG, and could not be isolated.  Geithner also offered the response "if there was a better option, we would have taken it,"  on this, and a few other issues as well.

When Geithner was asked late in the hearing if he had any regrets or would have done anything differently, he again repeated that he'd spent many many hours looking back on the decisions, and couldn't think of how things could have been done better from the perspective of minimizing risk and damage to the Taxpayer.

Overall, the hearing produced little in terms of new insights or information regarding the AIG counterparty payouts.  It did, however, highlight the absurdity of the whole hearing process - it was disheartening to watch the Congressmen ask their questions, some of which were grandstanding, as to be expected, but then leave the room after they'd asked their questions!  If this is so important, shouldn't they take the time to listen to the answers the "witness" gives to all the other questions?  In addition, several Congressmen were skipped over due to a lack of time.

I'm not a bankruptcy lawyer.  I don't know what the effects would have been had the NY Fed asked the counterparties to take 85c, 90c or 95c on the dollar for their contracts with AIG - but the line from those questioned (Geithner, Paulson, and I believe Bernanke previously) has consistently been that this haircut simply wouldn't have been possible and would have made things much worse.  It seemed clear that the Congressmen asking questions today were less than convinced that this was completely true.

-KD

Ponzi Of the Day - ADBE

From the NY Times Dealbook:

"Adobe Systems, the company best known for its Adobe Reader and Photoshop software, said Monday it priced $1.5 billion in new notes, and that most of the proceeds would go to repaying its existing debt.

The notes are to be issued in two batches: $600 million with a 3.25 percent interest rate maturing in February 2015, and $900 million with a 4.75 percent interest rate maturing in February 2020, The Associated Press said.

Adobe said it intended to use the net proceeds of the sale to repay $1 billion outstanding on its credit facility and use the rest for general corporate purposes.

The offering is expected to close Feb. 1."

Relevant portion: "most of the proceeds would go to repaying its existing debt."  And now, courtesy of Wikipedia, the definition of a Ponzi Scheme:

"A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned."

Kinda like paying off old investors by issuing new debt to new investors...

EDIT -  a commenter points out that refinancing debt into a lower interest rate is perfectly reasonable, and not a ponzi scheme, which is absolutely correct.  Said differently, it definitely matters if the old debt ADBE is paying off is 8% debt due in 2020 (which would imply refinancing), or if it's debt due in 2010 or 2011 - which would imply ROLLING (ponzi).  When I read "proceeds go to repaying existing debt" I interpreted it as the latter - using proceeds from new debt sales to pay off debt that will be due imminently, as opposed to "proceeds go to refinancing existing debt," which would imply the former.

-KD

Link Hodge Podge

You should read these things this week:

Must read - Cliff Asness is exceedingly coherent in this tome on the causes of the crisis and his displeasure with the Administration's reaction.   I will probably devote a full post to this letter in the near future.

Say something stupid and hurtful, but simple and with a compelling villain, long enough and I guess it becomes our society’s version of truth (again, the “narrative”). Bankers (and by this I mean Wall Street in general) are certainly guilty of acting irresponsibly and aiding and abetting the bubble, but assigning them sole blame is ridiculous. This is an Agatha Christie novel where everyone is the murderer.

David Brooks: "The Populist Addiction"

"It’s easy to see why politicians would be drawn to the populist pose. First, it makes everything so simple. The economic crisis was caused by a complex web of factors, including global imbalances caused by the rise of China. But with the populist narrative, you can just blame Goldman Sachs.

Second, it absolves voters of responsibility for their problems. Over the past few years, many investment bankers behaved like idiots, but so did average Americans, racking up unprecedented levels of personal debt. With the populist narrative, you can accuse the former and absolve the latter."

The FED certainly tried to cover up details of the AIG bailout. via Barry Ritholtz.

"FRBNY staff member James Bergin e-mailed several other FRBNY staff:

“I have to think this train is probably going to leave the station soon and we need to focus our efforts on explaining the story as best we can. There were too many people involved in the deals – too many counterparties, too many lawyers and advisors, too many people from AIG – to keep a determined Congress from the information.”

Marginal Revolution brings us a terrific quote from Scott Sumner

"But then I read that the FHA is about to set much tougher standards for FHA mortgages—they plan to require borrowers with a 590 credit score to put down at least 3.5% downpayments.  As Tyler Cowen recently argued, you knew Congress wasn’t serious about global warming when they refused to make Americans pay more for gasoline.  And I would add that you can be sure that the populists who want to “re-regulate the banking system” aren’t serious when all they can do is talk about 3.5% downpayments for bad credit risks.  It is so much more fun to bash big banks."

Via Barry Ritholtz:  On the phenomenon of investment professionals watching CNBC

“Isn’t it funny when you walk into a investment firm, and you see all of the financial advisors watching CNBC — that gives me the same feeling of confidence I would have if I walked into the Mayo-clinic or Sloan Kettering and all the medical doctors were watching General Hospital…”

MISH revisiting an old concept - you can't spend your way out of a popped credit bubble

"Mistakes of 1937" did not sink the US back into depression. The plain fact of the matter is: It is virtually impossible to spend ones way out of a popped credit bubble.

Do not mistake Federal spending for a recovery. Indeed this "recovery" is a mirage. There can never be a "clear recovery" financed by debt when the problem is excess debt in the first place. Logically the idea is nonsense.

In 2003, Greenspan had a choice:

1 - Take a hard recession now
2 - Take a depression later

Greenspan chose the latter.

All stimulus did back then was create housing and debt bubbles. Then it crashed anyway. Now supposedly the cure is more spending?"

MISH:  Chicago accelerates tax collections in an effort to stay solvent.

Dubai Debt Crisis Halts Building of World's Largest Indoor Mountain Range.  Yep - that one IS from The Onion.

-KD

Vegas MLK 2K10 Part III - Real Time Wagering and Off Strip Dining

So where was I... oh yeah - I'd just finished describing the greatest human evolutionary theory of the 21st century - the March of the Penguins, in Part II.  Part I is here too, if you missed that one.

So, after lunch on Saturday, Big Show and his wife left to go get massages, while the other metro-sexuals went to the spa to enjoy a steam and sauna.  I know - that's funny - hahaha Kid Dynamite, good one - but I'm serious - they did, while the football game was starting, no less!  This left me alone to venture to Lagasse's Stadium at the Palazzo, aka "Kitchen Stadium" to watch the Arizona - New Orleans playoff game.  Kitchen Stadium used to be Jay Z's 40-40 club, but they redid it into a big time luxury sports bar.  There are hundreds of tv's and you can reserve a seating area, which range from outdoor cabana types to tiered sofa seating to private rooms.  Of course, for Divisional Weekend, these reservations have to be made well in advance, and I managed to find a place to stand and watch the game, where I'd bet UNDER 56 points for the total score.  When Arizona took the first play from scrimmage more than 70 yards for a touchdown, it didn't bode well for my bet, which ended up going down in flames, yet somehow coming so close with a final score of 45-14.  It was never really that close, however, as the two teams almost put up my number by halftime.

Big Show joined me, freshly massaged, and he was toting the Venetian's latest technological development - a handheld device slightly larger than an Iphone which enables one to make real time proposition bets on the outcome of the game.  Big Show had pre-loaded his account with money, and we checked out the constantly changing props offered by the Venetian.  For example, the total for the game was 56, but after the first play touchdown, we could now wager on a new total of 62.  Similarly, the game line moved throughout the game, from Saints - 7, to Saints - 3, to Saints - 11 and so on.  In addition, we could wager on things like "will there be another first down on the current drive:  Yes - 280, No + 220"  For those unfamiliar with gambling parlance, you'd have to bet $280 to win $100 if you took "yes" and $100 to win $220 if you took "no."  The lines would move depending on down and distance, depending on which team had the ball, and depending on where the drive started.  We could also wager on "this drive will end in a : TD: +180  FG Attempt:  +120  Punt: -190  Turnover: +450" - with those odds constantly changing.  There were tons of prop bets, always changing rapidly, and always with a massive vig built in for the house.  Big Show asked me "how much of the money that customers deposit on these accounts do you think the Venetian ends up keeping?"  "80%," I answered quickly.  "I think it's more like 100%,"  he theorized, and he could well be right.  You're guaranteed to lose when facing these vigs if you bet long enough.   In case anyone had doubts as to the legitimacy of my previous analogies to Wall Street Trading as a casino, look no further than the company that runs the software for the Venetian's handhelds:  Cantor Gaming:  from their website: "Cantor Gaming is an affiliate of the pre-eminent global financial services firm Cantor Fitzgerald.  Cantor and its affiliates conduct over $140 trillion in financial transactions worldwide per year. Founded over 60 years ago, Cantor is one of 18 Primary Dealers authorized to trade US government securities with the Federal Reserve.  Known globally for superior financial technology and real-time and secure execution of financial transactions, Cantor’s clients include the world’s leading banks and trading firms. Cantor’s technology drives over $500 billion in transactions for the world’s capital markets every day.  At Cantor Gaming, we have built upon Cantor’s legacy of integrity and excellence and its unmatched financial technology to create an innovative and unique gaming system that we believe will revolutionize the gaming experience in Las Vegas."

Making bets on the handheld device was, quite literally, no different from trading.

Knowing the UNDER bet was dead, I headed to the Venetian to grind out some 2-5NL while waiting for the Indy-Baltimore game to start.  I played one noteworthy hand (sorry for actual poker content, but this blog was once about poker!) where I found KK in late position.  An early position player who seemed solid made it $15 to go, and I made a little raise to $40.  The small blind woke up and cold called, as did the initial raiser.   On a rainbow flop of Q-8-4 they both checked to me. I had about $450 left, and bet $105.  The small blind called.  The turn brought a 2 and a flush draw, and he checked to me again.  I was deciding if I should bet my remaining stack, which was roughly a pot sized bet, or make a smaller bet, when suddenly the small blind said something to me.  "What's that?"  I asked him - I'd only taken 15 seconds to think.  "Check-CALL - I said, Check, CALL."  He exclaimed confidently.  I pursed my lips, took a second and a half, and said "Ok, I'm all in."  He snap called me.  I began counting down my chips, and a king peeled off on the river.  My opponent triumphantly slammed his KQ two pair on the felt, as I was simultaneously turning over the nuts, explaining "no good."  Ship it.

Big Show and I snagged seats in the Venetian sports book and watched the first 3 quarters of the Colts-Ravens game, where I was on the right side for what would prove to be the only time that weekend - I had the Colts, and also bet the second half under, both of which worked.  Big Show got bored and left to go play some double deck blackjack, spotting Phil Ivey playing Baccarat in the Salon in the meantime.  By the time I found Big Show, Ivey was gone, but our poker sightings were not finished - we'd later spot Antonio "The Magician" Esfandiari walking between the Palazzo and Venetian (to which Big Show reacted with "ROCKS-N-RINGS BAYBEE!" a bit too late, and Paul X-22 Magriel at Aria.  (sorry - the Rocks and Rings webpage appears to be gone, so I can't link it up)

Junior and The Professor had set up the rare off-strip dinner at Raku, which they claimed had the best Japanese food in the country.  It wasn't a sushi joint, but the journey to Vegas Chinatown/KoreaTown/JapanTown (our cabbie actually had to plug the address into his GPS!) was well worth the trip, as we feasted on a multi-course meal of small plates including salmon steamed rice, chicken skewers, kobe beef tendon, pork cheek, spinach salad, tofu with tomato, grilled steak and warm tofu. 

After dinner, we sojourned to CityCenter, to check out the crown jewel of the real estate bubble.  The flagship Aria is a beautiful place - there's no doubt about that - but it reminds one of an airport, with massive ceilings, modern shapes, and polished floors.  In contrast to the brightness found in casinos like Palazzo or Paris, Aria is very dark, like Planet Hollywood right across the street.  It seemed to want to convey a Saturday night buzzing vibe at all times with its decor - which was fine for us on Saturday night, but it's not the kind of place I'd want to hang out and play blackjack at on Sunday morning.  It's a beautiful building, but I couldn't help but hear Vegas Rex's analogy ringing in my ears.  Aria's casino floor is mammouth  - MGM-esque, and we walked around in circles until we found our way to the shopping mall, Crystals.  Right inside Crystals there is a club called Eve, where we were offered free entry, which we declined.  The club is Eva Longoria Parker's project.  Yeah - I don't get it either.  I am guessing it will go down in flames faster than Jay Z's 40-40 club.  Aria has its own top tier club, Haze, managed by LightGroup - why do they need another club in the shopping mall with Eva Longoria Parker's name on it?  Bubblelicious!

Crystals is, of course, another beautiful building, but as we walked through the mall, Big Show had an epiphany as we stared at the vast expanses of white walls.  "WHERE ARE ALL THE STORES?"  I just smiled and said, "I think I'm gonna short more stock on Tuesday" (I'm short LVS and WYNN, but not MGM)    To say that Crystals is under-represented on the retail front is a massive understatement. 

Big Show, Mrs. Big Show, and I walked across the street, stopping so I could drop a deuce at Planet Hollywood, before wandering through Paris and grabbing a cab back to Palazzo to attack some double deck action.  It was 1:30 on Saturday night, and our favorite pit at Palazzo had 5 empty blackjack tables with dealers standing there twiddling their thumbs and $200 or $300 table minimums.  We asked a pit boss to roll one of the tables back to $50 for us, and she said sure, but when she asked the head guy, he said no!  I know it's prime time on Saturday, but the place was deserted, and we were surprised that they didn't want to take our money.  "Fine - I'll exercise my rights as a consumer and go give to to the VENETIAN!"  I hissed under my breath to Big Show, joking, as the Venetian and Palazzo are owned by the same company, of course.   Perhaps now I know why the pit boss on Friday night had told me that business at Palazzo was "slow."  "Slow except on weekends, and slow after the big convention week?" I probed. "No - slow from holiday to holiday!"  She elaborated.  Yikes!

We found a suitable blackjack game at Venetian, and took our usual positions with Big Show in first base, and me at third base.  Mrs. Big Show and a random guy were in between us.  There was a guy at a table across the pit who would occasionally go absolutely ballistic, screaming "YEAH!!!! ONE HUNDRED AND FIFTY DOLLARS!"  which resulted in Big Show implementing the exact same chant when he successfully won a $75 double down bet and yelled loud enough to get me to jump in my chair.   All weekend, I was implementing another Vegas Rex invention, shouting "THAT"s what you get for waking up in Vegas," at all sorts of times at the blackjack table.  It proved to be extremely funny  - in a slol kind of way (that's SELF lol - when you do something that makes YOU laugh, even if others don't).

At one point, after painting a smooth 7 on a 14 against a dealer 9, I stood up, fist pumped, and shouted "THAT'S what I get for waking up in Vegas,"  which prompted the mysterious man between Big Show and me to inquire as to what I did for a living. "I'm an ice fisherman," I told him, and made a motion of drilling through the ice with a hand crank drill.  "No kidding - that's a crazy coincidence - I'm the captain of the U.S. National Fly Fishing Team!" He retorted, but this guy wasn't kidding!  Of course, this prompted a barrage of questions from me, and lengthy explanations from him about the travel and skills his position entailed, and how he was trying to raise awareness of their mere existence.

"Come on man, you're bullshitting me - that's the kind of made up job you tell a stripper when she asks you what you do!" I pleaded, which made Big Show spit out his beer, but this guy was serious.  He was a great guy, and a skilled blackjack player as well.

At 3am I stepped into a black hole and blew up in short order, crushing a few buy-ins in a matter of minutes, which prompted me to steam off and go to bed on bajungi tilt.

next up - Part IV - KD goes downtown for the first time!

-KD

Championship Weekend

Quick thoughts while I write Part III of the Vegas Trip report:

It's not up on Youtube, but Jordin Sparks' rendition of the National Anthem  before yesterday's AFC Championship game was superb.  Not just Sparks' voice - I thought the sound system kinda sucked and was distorting her a little bit - but the gigundous flag that covered the entire field, and the eagle that flew over the field, and looked like it flew around in several extra loops afterward, refusing to land.   It make me think of this:

America - FUCK YEAH!   Suck it Osama - we have a huge huge flag and a friggin EAGLE!

Regarding the NFC Championship Game - man, Brett Favre is tough.  I sent a text to Big Show and Dirty Dave right before Minny took a 14-7 lead that said "OMG - they are KILLING Brett Favre. He looks like he just pooped himself."   And they were - Favre took a beating - but two hours later in the 4th quarter it was even worse.  The Saints absolutely CRUSHED him repeatedly, and with malice.  It almost looked like Favre would have the storybook ending - bruised and battered, limping like he had a dump in his pants, leading the Vikes on a game winning drive and to the Super Bowl.  But then they had an absolutely shocking too many men in the huddle penalty which pushed them to the outer reaches of feasible field goal range, forced Favre to throw the ball, and resulted in an interception.  How on Earth does Minnesota get a penalty like that (too many men in the huddle?!?!?!) in a spot where they have a kicker who is just waiting for a free roll to win the game!!!  Insane. 

For some reason, I also repeatedly got a kick out of the way Drew Brees crouches down in the huddle - real low, like a ninja.  Love it.

I hope to have Vegas Part III up later today.

-KD