Bubbling Up...8/18/12

1) What’s The Holdup With QE3? by James Bianco @ The Big Picture

As the chart below shows, the Federal Reserve has never initiated more accommodation when the TIPS inflation breakeven rate was above 2.0%.  This level is important because the Federal Reserve adopted 2.0% as an inflation target last January.

When expected inflation is above 2.0%, it does not mean the FOMC has to tighten.  But it can mean there is too much inflation to add more accommodation.  Of course the Federal Reserve can decide to ignore this target, but since they adopted it less than a year ago, they risk their own credibility in doing so.

This might be the big stumbling block to QE3.

Click to enlarge:

Source: Bianco Research

Woj’s Thoughts - Maybe this time will be different, but recent economic data has been generally supportive of moderate growth and US stocks are approaching post-recession highs. I stand by my previous statement: “With a Presidential election approaching, the Fed will likely err on the side of caution to avoid the perception of taking sides. Therefore, if the Fed doesn’t act in June, absent a collapse, it may not act at all in 2012.”

2) Nicholas Kaldor On The Common Market by Ramanan @ The Case for Concerted Action

"… Some day the nations of Europe may be ready to merge their national identities and create a new European Union – the United States of Europe. If and when they do, a European Government will take over all the functions which the Federal government now provides in the U.S., or in Canada or Australia. This will involve the creation  of a “full economic and monetary union”. But it is a dangerous error to believe that monetary and economic union can precede a political union or that it will act (in the words of the Werner report) “as a leaven for the evolvement of a political union which in the long run it will in any case be unable to do without”. For if the creation of a monetary union and Community control over national budgets generates pressures which lead to a breakdown of the whole system it will prevent the development of a political union, not promote it."

[italics in original]

That was written in 1971! In The Dynamic Effects Of The Common Market first published in the New Statesman, 12 March 1971 and also reprinted (as Chapter 12, pp 187-220) in Further Essays On Applied Economics - volume 6 of the Collected Economic Essays series of Nicholas Kaldor.

Woj’s Thoughts - Talk about being prescient! This “dangerous error” is playing out in real-time as Europe attempts to push through a full economic union in hopes that it will lead to political union. I remain highly skeptical of this course of action, which I believe is making a political union increasingly improbable (and I was already a Euro-pessimist). An eventual break-up of the EMU remains the most likely outcome, in my opinion, although it may still be a few years away. If hopes of a future political and economic union are to persist, it will be necessary for the EU to maintain free trade and labor mobility.

3) Enron, Lehman Brothers, and… Netflix? by microfundy @ Microfundy

Either way (enough of these SEC filings), what this means is that NFLX really has ANOTHER $869.53M of “current” (due within one year) liabilities that wasn’t included on their balance sheet.

They also have ANOTHER $2.97B (B, as in Billion!) of long term liabilities.

…

Although NFLX Book Value stays constant because a corresponding line gets added into their asset part of the balance sheet, THOSE ASSETS don’t produce any ADDITIONAL cash flows/earnings. THEY ARE ALREADY ASSUMED IN NFLX MODELS!

Also, all of the metrics that an investor would look at when analyzing the health of the balance sheet, involve debt. Whether looking at debt/equity, debt/assets, debt coverage ratios etc. Those are all tremendously understated!

Woj’s Thoughts - Anyone who thinks that corporate accounting is becoming more comprehensive or clean should carefully read through the notes sections of various SEC filings. Netflix is a highly visible, US company, that managed to obscure nearly $5 billion in liabilities from its balance sheet. Odds are that Netflix is not alone in this respect.