Sunday, August 27, 2006

Using Blogger's built-in support for Google AdSense ads

I have been using Google AdSense ads in my blogs for quite some time, but I had implemented them via custom template scripting.

Now, when I just created my new blog entitled I Say - Jack Krupansky, I used Blogger's more recent built-in support for enabling Google AdSense ads.

Check them out and let me know (on this blog) what you think. I still need to tweak the settings a bit. Eventually I will retrofit the ads to my other blogs, once I figure out the optimal settings.

-- Jack Krupansky

My new personal opinion blog - I Say

As I strive to return the focus of this blog to blogging itself, I have just created another new blog entitled I Say - Jack Krupansky which is dedicated to expressing my opinions and commentary on random topics which do not naturally fit in with the mission of my other blogs.

-- Jack Krupansky

Saturday, August 26, 2006

My finance blog - Finaxyz

Lately I have been posting my finance-related posts to both this blog and my finance blog, but I am now going to stop doing that and post finance-related posts only on my Finaxyz finance blog. I had been double posting to get extra distribution since this blog has a wider distribution, but it's time for the finance stuff to stand on its own.

My intention is to refocus this blog on blogging about blogging.

-- Jack Krupansky

My political desk is open for business

As I stated last week, my intention is to publish my political commentary on my new Political Desk blog. I just posted some new material (on Iran) and more is coming, but at least it won't be cluttering up this blog.

PayPal money market yield rises to 5.04%

Here are some recent money market mutual fund yields:

  • iMoneyNet average taxable money market fund 7-day yield rose from 4.71% to 4.72%
  • PayPal money market fund 7-day yield rose from 5.01% to 5.04%
  • ShareBuilder money market fund (BDMXX) 7-day yield fell from 4.51% to 4.49%
  • Fidelity Money Market Fund (SPRXX) 7-day yield at 5.02%
  • Fidelity Cash Reserves money market fund (FDRXX) 7-day yield was unchanged at 4.98%
  • Fidelity Prime Reserves money market fund (FPRXX) 7-day yield rose from 4.46% to 4.47%
  • Fidelity Federal Municipal Money Market Fund (FTEXX) 7-day yield at 3.28% or tax equivalent yield of 5.05% for the 35% marginal tax bracket and 4.56% for the 28% marginal tax bracket
  • 28-day (1-month) T-bill investment rate was unchanged at 5.17%
  • 91-day (3-month) T-bill investment rate was unchanged at 5.11%
  • 182-day (6-month) T-bill investment rate fell from 5.23% to 5.17%

I need to look into what is going on at Fidelity. I hadn't noticed SPRXX before and they used to talk about FCASH, which I no longer see. Maybe they've seen the light and done the right thing, or maybe they've simply confused matters even worse. I'll have to investigate further how they are handling "core" cash these days for a taxable account (which I do not have, yet). Next year, when I have an extra $2,500 in free cash I will consider using a Fidelity account for payroll direct deposit and checks and bills. Since I pay most of my bills (including back taxes) through direct debit from my bank account, I'll have to check into whether Fidelity can handle that. They do have "BillPay", but that's different and not what I need.

PayPal is looking like a fairly interesting place to store cash for both relatively quick access and a well above average yield. There is no minimum for a PayPal account, no fee for a basic account, and it can be linked to your bank checking acccount for easy access. Unfortunately, there are limits to how much money you can "receive" in your PayPal money market account each month. For example, I would not be able to move all of the cash in my Siebert taxable account to PayPal in one month. Update: I'm not sure if this is really true since my limit remained unchanged even after I made a deposit for the full limit amount. I'll have to investigate further.

Right now, 28-day T-bills feel more attractive for cash that you won't need for a month, but there is no guarantee that the interest rate on the next weekly Treasury T-bill auction will be as attractive. The other catch on the T-bills (besides being locked up for 28 days) is that the unit of investment is $1,000, so you have to find some other place to put any fraction of $1,000, including any interest you might accrue.

As always, please note that cash placed in money market mutual funds is subject the the disclaimer that:

An investment in the Fund is not insured or guaranteed by the Federal Insurance Deposit Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

In practice, that is not a problem at all, but it does incline me to spread my money arround a bit.

T-bills and the cash in your bank checking account or bank CD are of course "protected", either by "the full faith and credit of the U.S. Treasury" or the FDIC.

-- Jack Krupansky

Sunday, August 20, 2006

Welcome to my political desk

As I have found myself increasingly publishing political commentary on this blog, I finally got around to creating a separate blog for my political commentary, called Political Desk.

I may still continue to publich some political commentary on this blog as an additional distribution channel, but hopefully over time my new blog will be able to stand on its own.

-- Jack Krupansky

Extended periods of forced sloth

I was amused by that phrase "extended periods of forced sloth" which appeared in a NY Times article entitled "The Rise of Shrinking-Vacation Syndrome" about fewer people being able to take long summer vacations.

I myself cannot take a long vacation this summer since I just started a new job in May and only have four days of vacation time accrued. I do indeed get three weeks a year which I have to take ("use it or lose it"), but I'll probably use up two or those three weeks to attend an event held twice a year in Washington, DC with two or three days for side trips, leaving me only one week for a "real" vacation. Right now, I'll need my currently accrued days for my Fall trip to DC.

I don't have an immediate family to take on vacation, so it's not a big deal for me, but I can sympathize with the view that it is simply too expensive and risky to your career to take a long vacation. People who are secure can get away with it, but how many people have that luxury these days?

"Extended periods of forced sloth"? Sounds like a fantasy to me. Although the idea of living in Europe and taking the entire month of August off sounds like an appealing idea.

-- Jack Krupansky

Is Bush an Idiot?

Someone sent me an email with the subject line "Is Bush an Idiot?" and noted:

For a long time I¬íve argued that intelligence is the most important quality for a president to have.  Now, at least, the pundits are starting to get on board with that.

http://www.washingtonpost.com/wp-dyn/content/article/2006/08/19/AR2006081900568_2.html

Here is my reply...

---

Speaking of intelligence, have you seen Talladega Nights ("The Ballad of Ricky Bobby") with Will Ferrell? I couldn't help but feel that it was a great satire of President Bush and his NASCAR-mentality supporters. The *only* reason some of the right-wing pundits are grumbling about Bush's intelligence level is that he's not "Going fast, going faster!" If we were invading (oops, I mean "liberating") Iran, Syria, Lebanon, and Cuba, they surely would be touting what a "genius" Bush is.

The bottom line is that Bush is simply a front man, a puppet, and all of the intelligence or lack thereof is in the minds of the policy wonks (both within the administration and outside) who are whispering in his ear or scripting his speeches.

I am curious what plan you would propose for convincing NASCAR fans that whatever you think of as "intelligence" or "smart" is something they should care about. Yes, diplomacy and working more closely with a broader spectrum of allies is quite advisable, but how are you going to appeal to someone who has the NASCAR racing mentality with "I wanna go slow, I wanna go slower!" or the anti-war approach  of "I want to quit now, I want to quit faster!" I assure you that a higher body count won't phase these NASCAR fans.

As long as we're going to use general elections to pick leaders, we're going to have this "intelligence gap". Maybe you'd be happier if "we" (you and all of those millions of NASCAR fans) didn't pick the President, but had an elite nomination and confirmation process, not unlike picking a new chairman for the Federal Reserve. Try selling that to all of those NASCAR fans.

BTW, part of the reason that some right-wing pundits are questioning Bush's "intelligence" is that we hasn't been more aggressive in Iraq with things like de-baathification and putting non-diplomatic pressure on Iran (e.g., trying to topple "the mullahs" with covert action) and Syria. I'm not sure that their motivation would fit you definition for "intelligence". But I suppose you could use "The enemy of my enemy is my friend" model for welcoming "support" from "The Right" for your quest for "intelligence".

The good news is that the mid-term election will be over in a couple of months and the anti-war movement will dissipate, again. Sure, it will be back again and again, but never with enough energy to make much of a difference. Most people have more important things to do than fight "The War".

What is your short list of candidates who are intelligent enough to be president? One problem I see is that anybody who really is "intelligent" enough to be president is probably intelligent enough to not *want* to be president.

BTW, I suspect that most people are far more interested in the latest tidbits of news on JonBenet than *anything* related to "The War". JonBenet was the *top* story on Google News when I checked a minute ago! In fact, there was only *one* story that mentioned Iraq in its headline on the entire front page of Google news, a story from the Boston Globe entitled "Pilgrimages in Iraq made on foot". Maybe you should write a letter to Google and complain that their AI algorithm for story selection doesn't use enough of the right kind of "intelligence".

Yeah, intelligence is important, but somehow there's a lit bit more to politics than intelligence.

How would you rate the intelligence of Mr. Flat World (Thomas L. Friedman of the NY Times)?

To answer your title question ("Is Bush an Idiot?"), the answer is clearly "Yes", but also "So what?" After all, this is America, and I'm sure there's an important NASCAR race going on as we speak, not to mention progress on JonBenet. It's all about priorities.

-- Jack Krupansky

Saturday, August 19, 2006

Fed still likely to remain paused at 5.25% for the rest of the year and next

As of Friday, Fed funds futures were predicting that the Fed will remain paused at their September20, 2006 meeting. October Fed funds futures predict a rate of 5.2850%, or about a 14% chance of a hike and an 86% chance of no hike.

Further out, Fed funds futures predict a rate of 5.330% in December, suggesting less than a 1 in 3 chance of a hike to 5.50% in December. Even in January futures predict a rate of 5.340%, or only a 36% chance of a hike. Note that futures less than 45 days out tend to have some chance of accuracy, but further out futures are susceptible to very wild swings and changes in market sentiment and frequently reflect insurance hedges rather than outight bets.

My estimates are very rough calculations based on Fed funds futures prices. More accurate modeling of fed funds rate predictions based on options on federal funds futures can be found on the the Cleveland Federal Reserve Bank's web page for Fed Funds Rate Predictions. Based on their calculations from Thursday, there is a 84% probability of 5.25% after the September meeting, and a 72% probability of a 5.25% rate after the October meeting. I'm sure that their sophisticated modeling and math is far more rigorous than mine, but the final number is still in the same ballpark and still has the same overall message: no hike at either the September or October FOMC meetings.

My unchanged view is that although the Fed has a strong preference for inflation in the 1% to 2% range, even the 3% range is somewhat tolerable, at least for a a relatively short span of months or maybe even a year. Even with the most recent spike, oil prices still haven't advanced significantly beyond their peak for the year to date. Ditto for gasoline. Speculators are still bullish on commodities, but overall, commodities prices have lost much of their upward momentum.

It may take a number of months or even an entire year for inflation to pull back into even the 2% to 3% range, but the Fed has in fact done all of the heavy lifting and now has the luxury of sitting back and watching the fruits of its labors gradually take root.

General points:

  • The economy has slowed enough that additional hikes are not clearly needed.
  • The economy is still strong enough that another hike won't kill it or send it "spiraling" into recession.
  • The economy is also strong enough that some further hikes could be needed a few more months down the road.

Although there are so many factors at work, it may be that we can simply use the price of crude oil as a "crude" surrogate for both the state of the economy and inflationary pressure. I would suggest that if crude oil pops up above $80 and stays there going into the September 20 FOMC meeting, a hike will be a done deal. On the other hand, if crude oil retreats closer to $70, a continued pause will be a no-brainer. Crude oil at $76 to $78 will suggest a higher probability of a rate hike. Crude at $72 to $74 would suggest a higher probability of staying paused. The $74 to $76 range is outright "coin flip" territory. Certainly the decision process is nowhere near that simple, but I suspect that my simplistic model won't be too far from being accurate. There are nits such as whether to use "spot" price or front-month futures, or to use the short-term peak futures price, but "headline" or front-month futures (September) are probably close enough.

Where does that leave us today? On Friday, the NYMEX crude oil futures contract for September delivery closed at $71.14 (versus $74.35 a week ago), which is clearly in the "no-brainer pause" range. October crude closed at $72.10 and becomes front month on Tuesday, but it also is in the "no-brainer pause" range. The peak short-term futures contract, August 2007 and September 2007, closed at $76.00 (versus $78.86 last week). Absent significant change over the coming weeks, crude oil suggests that the Fed will stand pat with a pause at 5.25%. As long as front-month crude stays below $76, the Fed can remain paused without too much criticism, but at $76 or higher, the Fed would be feeling the heat and opt to gain more "inflating-fighting" credibility with a hike to 5.50%.

The hurricane season has been very mild this year to date, but I said that last year at this time and then Katrina and Wilma came along. You can be sure that traders and speculators and planners will be hyper-alert for storm-related news, so we might not see crude oil futures pull back significantly until we get well into October. We could also see one or more "technical" pullbacks based of technical analysis by traders and speculators, but they tend to be following by matching rallies, until we finally see an economically-based decline.

Although much has been made about a presumed 1% to 2% "inflation target" for the Fed, the reality is that 2% to 3% is about "as good as it gets" for the kind of economy and financial system we currently have in America. Sub-2% inflation does in fact occur on occasion, but only in a fleeting manner. Bernanke also made clear during his confirmation hearings that he was inclined to stick with the status quo for now and move towards specific inflation targets only over time. So, don't worry about such a target this year and probably even next year.

My impression is that once the Fed pauses for several meetinsg and considers monetary policy to be "stable", it will be prepared to "hold its fire" if monetary policy is roughly "neutral" (i.e., in the 4.5% to 5.75% range) and one-year inflation doesn't pop too far above 3%. That begs the question of which measure of inflation to use, but in truth it doesn't matter a whole lot. If you want to use headline inflation rather than core inflation, then you simply need to expand the range moderately (say, from 3% to 4.5%) to reflect the nature of volatility due to short-term pricing spikes (e.g., gasoline) that occur no matter what the state of the economy.

Before the August FOMC meeting it was not clear whether Bernanke would lean more heavily in the hawkish inflation-fighting direction or in the more dovish growth-promotion direction. The pause at the August FOMC meeting made it abundantly clear that despite being serious about fighting inflation, he prefers to protect growth. Put another way, he probably despises inflation a little less than he despises deflation.

Another factor that cannot be overlooked is that this is an election year, and there is a tendency (but not a hard rule) that the Fed should "lighten up" going into a politically-charged election season and avoid appearing to be helping one party or the other. I personally don't think that this was a major factor in the Fed's thinking or will be in the next two months, but this factor is out there.

My view is that the Fed will keep their fed funds target rate paused at 5.25% for at least the rest of the year, and probably for the entire coming year.

-- Jack Krupansky

PayPal money market yield unchanged at 5.01%

Here are some recent money market mutual fund yields:

  • iMoneyNet average taxable money market fund 7-day yield at 4.71%
  • PayPal money market fund 7-day yield was unchanged at 5.01%
  • ShareBuilder money market fund (BDMXX) 7-day yield was unchanged at 4.51%
  • Fidelity Cash Reserves money market fund (FDRXX) 7-day yield rose from 4.97% to 4.98%
  • Fidelity Prime Reserves money market fund (FPRXX) 7-day yield rose from 4.45% to 4.46%
  • 28-day (1-month) T-bill investment rate fell from 5.23% to 5.17%
  • 91-day (3-month) T-bill investment rate fell from 5.12% to 5.11%
  • 182-day (6-month) T-bill investment rate rose from 5.19% to 5.23%

PayPal is looking like a fairly interesting place to store cash for both relatively quick access and a well above average yield. There is no minimum for a PayPal account, no fee for a basic account, and it can be linked to your bank checking acccount for easy access. Unfortunately, there are limits to how much money you can "receive" in your PayPal money market account each month. For example, I would not be able to move all of the cash in my Siebert taxable account to PayPal in one month.

Right now, 28-day T-bills feel more attractive for cash that you won't need for a month, but there is no guarantee that the interest rate on the next weekly Treasury T-bill auction will be as attractive. The other catch on the T-bills (besides being locked up for 28 days) is that the unit of investment is $1,000, so you have to find some other place to put any fraction of $1,000, including any interest you might accrue.

As always, please note that cash placed in money market mutual funds is subject the the disclaimer that:

An investment in the Fund is not insured or guaranteed by the Federal Insurance Deposit Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

In practice, that is not a problem at all, but it does incline me to spread my money arround a bit.

T-bills and the cash in your bank checking account or bank CD are of course "protected", either by "the full faith and credit of the U.S. Treasury" or the FDIC.

-- Jack Krupansky

Sunday, August 13, 2006

ECRI Weekly Leading Index indicator for future growth continues to weaken, turns negative

The six-month smoothed growth rate of the Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) has weakened significantly over the past  twelve weeks (from +3.5% to -0.4%), although the actual level of the index is unchanged since last week and at the same level as the third week in June. A WLI of zero (0.0) would indicate an economy that is running at a steady growth rate, neither accelerating nor decelerating. A WLI fluctuating in a range from +1.5% to -1.5% would seem to be a relatively stable "Goldilocks" economy. Although the WLI smoothed growth rate is rather weak, it isn't showing any signs of the kind of persistent weakness (values more negative than -1.5% over a period of time) that would be seen in an economy that was slowing on its way into recession, but does look a lot like an economy moderating on its way to a relatively stable growth rate. If I were looking at this one indicator alone, I'd say that the Fed is succeeding at its goal of moderating the economy to a sustainable growth rate.

-- Jack Krupansky

Parking more cash in PayPal money market account

After reviewing my budget for August, I realized that I had a little extra cash which I won't need until the Fall sometime. I contemplated where to park this cash and settled on using my PayPal account which currently has a 5.01% 7-day yield.

I still haven't decided how to budget a trip to Washington, D.C. in the Fall. I may simply put it on my credit card to help build up a credit payment history, or I may accumulate the cash in an account such as my PayPal account and then transfer it back to my bank checking account to actually pay expenses as they are incurred. Another scenario is to park the cash in my taxable Siebert account since I have a debit card that can be used to charge actual expenses while I earn a semi-decent interest rate in the interim. I may also simply put all the charges on my credit card and then pay them at the end of the float period. In fact, I might simply put the cash into another 28-day T-bill that matures shortly before my credit card balance is due. The latter would probably give me the best rate of return. In the end, I may simply go with whichever method is both easiest and still pays a semi-decent rate of interest. The downside of my Siebert account is that it presently has n method for easily electronically transferring between my bank checking account.

Incidentally, this transfer to my PayPal account is for the maximum amount that PayPal will allow me to transfer in a single month unless I wanted to establish a non-basic account. Still, this works out nicely as a convenient place to park small amounts of cash.

-- Jack Krupansky

I am still opposed to Net Neutrality

I keep stumbling across commentary on the annoying issue of "Net Neutrality". I want to make completely clear: I am opposed to so-called Net Neutrality. My primary reason is that I am a strong proponent of economic signals, and the "campaign" for Net Neutrality is essentially a campaign against the free flow of economic signals. Without the free flow of economic signals, investment (money) will not flow to where it will have the best long-term return for society.

Some proponents of Net Neutrality seem to want "The Net" to be run by a benevolent government and to remove the profit motive from the equation. My view is that we want to eliminate investment barriers whereever possible so that sufficient investment can flow into communications infrastructure so that we have both a wealth of supply of bandwidth and a wealth of competition to keep prices down. Adding additional government regulation is not going to drive prices down and instead would be likely to drive investment down and result in a lack of supply of bandwidth.

There is a role that government can legitimately play in this debate: as a major user of communications services. As demand for broadband services increases within government agencies, spurred by issues such as a desire to cut costs and to reduce expensive business travel, government agencies themselves will be demanding more and better service and at a lower price. The goal should be to have sufficient incentives (or lack of disincentives) in place to spur the level of investment and competition that will enable greater bandwidth, greater competition, and lower cost.

As a consumer, I want quality service at a fair price. I have no interest in pricing gimmicks, subsidies, introductory offers, and certainly no interest in any service that may deteriorate over time due to economic disincentives for investment, maintenance, and service. I simply do not want to pay a lower price today if the risk is a higher price tomorrow (next year or 10 or 20 years hence). I am also opposed to having to subsidize frivolus uses of bandwidh such as the infamous YouTube.com and various misguided videoblogging efforts. If any of these bandwidth hogs have commercial value, let them or their users pay full freight for their cost. Do not ask me or any other consumer or taxpayer to subsidize such senseless efforts. There are plenty of completely legitimate uses for broadband banwidth, including business videoconferencing, medical diagnosis, movies on demand, event webcasting, etc., but if the value proposition is really there, let us please assign costs where they are incurred. That's one problem with the disintermediation of the net: nobody is quite sure who has what responsibility for what cost. The obvious answer is that entities making investment in infrastructure do know how much they invested, their marketing costs, their maintenance costs, their incremental investment costs, the projected lifetime of their infrastructure investments, their cost of capital, their overhead, and a "reasonable" level of profit that compensates them for the risks that they have taken. As a consumer, any short-term benefit of artificially-lowered prices due to lack of a free flow of economic signals means that there is a longer-term risk that the supply of such services may be constrained due to lack of sufficient investment.

I would much prefer to see a multi-tiered Internet. I am not now, have never been, nor ever will be a fan of "one size fits all" thinking. Separating the tiers allows economic signals to propogate faster on individual tiers where change is occurring most rapidly without unnecessarily disrupting service on more stable tiers. Then, gradually, over time, economic signals can "leak" between the tiers as it makes economic sense.

I do very much want to see lower prices for communications services, but I want some assurance that these prices are economically viable over the long run.

I am a proponent of subsidizing the "have nots" of society, whether it is by having public access in places like schools and libraries, or income-tested grants for homes and small businesses. And if some charity has a legitimate need for offering broadband-level content from their web site, of course there should be plenty of grant money available to subsidize such legitimate needs. In fact, I would expect that the boradband carriers would offer some amount of subsidy directly, simply as a normal gesture of community-oriented corporate goodwill.

Some discussion of Net Neutrality can be found in the Wikipedia article on "Network Neutrality."

As an opponent of so-called "Net Neutrality", I'm on the other side of the fence from my employer (Microsoft). All views expressed in this blog post are my own.

-- Jack Krupansky

Fed likely to remain paused at 5.25% for the rest of the year

My view is that the Fed will keep their fed funds target rate paused at 5.25% for at least the rest of the year, and probably for the entire coming year.

As of Friday, Fed funds futures were predicting that the Fed will remain paused at their September20, 2006 meeting. October Fed funds futures predict a rate of 5.315%, or about a 26% chance of a hike and a 74% chance of no hike.

Further out, Fed funds futures predict a rate of 5.365% in December, suggesting less than a 50% chance of a hike to 5.50% in December. But, futures for January predict a rate of 5.380%, suggesting a little more than a 50% chance of a hike. Note that futures less than 45 days out tend to have some chance of accuracy, but further out futures are susceptible to very wild swings and changes in market sentiment and frequently reflect insurance hedges rather than outight bets.

My estimates are very rough calculations based on Fed funds futures prices. More accurate modeling of fed funds rate predictions based on options on federal funds futures can be found on the the Cleveland Federal Reserve Bank's web page for Fed Funds Rate Predictions. Based on their calculations from Thursday, there is a 77% probability of 5.25% after the September meeting, and a 73% probability of a 5.25% rate after the October meeting. I'm sure that their sophisticated modeling and math is far more rigorous than mine, but the final number is still in the same ballpark and still has the same overall message: no hike at either the September or October FOMC meetings.

My unchanged view is that although the Fed has a strong preference for inflation in the 1% to 2% range, even the 3% range is somewhat tolerable, at least for a a relatively short span of months or maybe even a year. Even with the most recent spike, oil prices still haven't advanced significantly beyond their peak for the year to date. Ditto for gasoline. Speculators are still bullish on commodities, but overall, commodities prices have lost much of their upward momentum.

It may take a number of months or even an entire year for inflation to pull back into even the 2% to 3% range, but the Fed has in fact done all of the heavy lifting and now has the luxury of sitting back and watching the fruits of its labors gradually take root.

General points:

  • The economy has slowed enough that additional hikes are not clearly needed.
  • The economy is still strong enough that another hike won't kill it or send it "spiraling" into recession.
  • The economy is also strong enough that some further hikes could be needed a few more months down the road.

Although there are so many factors at work, it may be that we can simply use the price of crude oil as a "crude" surrogate for both the state of the economy and inflationary pressure. I would suggest that if crude oil pops up above $80 and stays there going into the September 20 FOMC meeting, a hike will be a done deal. On the other hand, if crude oil retreats closer to $70, a continued pause will be a no-brainer. Crude oil at $76 to $78 will suggest a higher probability of a rate hike. Crude at $72 to $74 would suggest a higher probability of staying paused. The $74 to $76 range is outright "coin flip" territory. Certainly the decision process is nowhere near that simple, but I suspect that my simplistic model won't be too far from being accurate. There are nits such as whether to use "spot" price or front-month futures, or to use the short-term peak futures price, but "headline" or front-month futures (September) are probably close enough.

Where does that leave us today? On Friday, the NYMEX crude oil futures contract for September delivery closed at $74.35 (versus $74.76 a week ago), which is only very modestly above the $72-74 "no-brainer pause" range. The peak short-term futures contract, June 2007, closed at $78.86 (versus $79.04 last week). Absent significant change over the coming weeks, crude oil suggests that the Fed will lean towards standing pat with a pause at 5.25%. As long as front-month crude stays below $76, the Fed can remain paused without too much criticism, but at $76 or higher, the Fed would be feeling the heat and opt to gain more "inflating-fighting" credibility with a hike to 5.50%.

The hurricane season has been very mild this year to date, but I said that last year at this time and then Katrina and Wilma came along. You can be sure that traders and speculators and planners will be hyper-alert for storm-related news, so we might not see crude oil futures pull back significantly until we get well into October. We could also see one or more "technical" pullbacks based of technical analysis by traders and speculators, but they tend to be following by matching rallies, until we finally see an economically-based decline.

Although much has been made about a presumed 1% to 2% "inflation target" for the Fed, the reality is that 2% to 3% is about "as good as it gets" for the kind of economy and financial system we currently have in America. Sub-2% inflation does in fact occur on occasion, but only in a fleeting manner. Bernanke also made clear during his confirmation hearings that he was inclined to stick with the status quo for now and move towards specific inflation targets only over time. So, don't worry about such a target this year and probably even next year.

My impression is that once the Fed pauses for several meetinsg and considers monetary policy to be "stable", it will be prepared to "hold its fire" if monetary policy is roughly "neutral" (i.e., in the 4.5% to 5.75% range) and one-year inflation doesn't pop too far above 3%. That begs the question of which measure of inflation to use, but in truth it doesn't matter a whole lot. If you want to use headline inflation rather than core inflation, then you simply need to expand the range moderately (say, from 3% to 4.5%) to reflect the nature of volatility due to short-term pricing spikes (e.g., gasoline) that occur no matter what the state of the economy.

Before the August FOMC meeting it was not clear whether Bernanke would lean more heavily in the hawkish inflation-fighting direction or in the more dovish growth-promotion direction. The pause at the August FOMC meeting made it abundantly clear that despite being serious about fighting inflation, he prefers to protect growth. Put another way, he probably despises inflation a little less than he despises deflation.

Another factor that cannot be overlooked is that this is an election year, and there is a tendency (but not a hard rule) that the Fed should "lighten up" going into a politically-charged election season and avoid appearing to be helping one party or the other. I personally don't think that this was a major factor in the Fed's thinking or will be in the next two months, but this factor is out there.

-- Jack Krupansky

Saturday, August 12, 2006

Mini-stagflation

I see headlines with wording such as "Economists Contemplate Use of the Dreaded S-word", referring to a worry that we may be headed for a period of stagflation. According to Campbell R. Harvey's Hypertextual Finance Glossary, stagflation is "A period of slow economic growth and high unemployment with rising prices (inflation)." Technically, it doesn't look like we're even close to headed there since unemployment is still rather low, but some people believe inflation is headed much higher and growth is headed much lower.

Typcially, stagflation is associated with very slow growth (say, below 2% or even a recession) and very high inflation (say, above 5%). We aren't even close to being there.

Instead, may be approaching what could be called (by me, at least) a period of mini-stagflation, where growth is somewhat weaker than potential (say, below 2.5%), inflation is modedrately higher than expected (say, above 3%), and employment growth is weak but unemployment isn't yet considered a problem (say, fewer than 150K new jobs created each month or unemployment above 5.5%). We need to be careful to look at annual rates, over several quarters.

The worst we can say for sure at this point is that a mini-stagflation may be emerging. We won't know for sure for another six months, but right now we're actually in okay, but not great shape. Inflation is noteworthy, but not accelerating, jobs are still being created, and 2.5% growth isn't that bad.

You could also say that we are getting a whiff of mini-stagflation since the numbers have leaned in the that direction. The coming six months will give us greater clarity.

-- Jack Krupansky

PayPal money market yield down to 5.01%

Here are some recent money market mutual fund yields:

  • PayPal money market fund 7-day yield fell from 5.02% to 5.01%
  • 28-day T-bill investment rate rose from 5.21% to 5.23%
  • 3-month T-bill investment rate rose from 5.11% to 5.12%
  • 6-month T-bill investment rate rose from 5.17% to 5.19%
  • ShareBuilder money market fund (BDMXX) 7-day yield rose from 4.49% to 4.51%
  • Fidelity Cash Reserves money market fund (FDRXX) 7-day yield rose from 4.93% to 4.97%
  • Fidelity Prime Reserves money market fund (FPRXX) 7-day yield rose from 4.44% to 4.45%

PayPal is looking like a fairly interesting place to store cash for both relatively quick access and a well above average yield. There is no minimum for a PayPal account, no fee for a basic account, and it can be linked to your bank checking acccount for easy access. Unfortunately, there are limits to how much money you can "receive" in your PayPal money market account each month. For example, I would not be able to move all of the cash in my Siebert taxable account to PayPal in one month.

Right now, 28-day T-bills feel more attractive for cash that you won't need for a month, but there is no guarantee that the interest rate on the next weekly Treasury T-bill auction will be as attractive. The other catch on the T-bills (besides being locked up for 28 days) is that the unit of investment is $1,000, so you have to find some other place to put any fraction of $1,000, including any interest you might accrue.

As always, please note that cash placed in money market mutual funds is subject the the disclaimer that:

An investment in the Fund is not insured or guaranteed by the Federal Insurance Deposit Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

In practice, that is not a problem at all, but it does incline me to spread my money arround a bit.

T-bills and the cash in your bank checking account or bank CD are of course "protected", either by "the full faith and credit of the U.S. Treasury" or the FDIC.

-- Jack Krupansky

Wednesday, August 09, 2006

Good luck Senator Lieberman (version 2.0)

Dear Joe,

Sorry you lost the primary, but I'm sure you will be more successful in the general election as an Independent in the Fall.

Maybe we're all better off this way. Maybe it is getting to be the right time to consider a third, "middle" party, consisting of those committed to centrism. The really cool thing is that we don't actually need to form a formal third party at all. Just label yourself an "Independent", vote with whichever party suits your interests and passions at the moment, and then gradually over time there will be enough Independents so that they are in fact a de facto party.

Now we need to talk McCain into switching to Independent.

The motto: If you're not Independent, then you're dependent.

Good luck in the general election, Joe.

BTW, I myself an an Independent, never having voted in a primary election in my entire life. I mailed in my Washington state voter registration today.

-- Jack Krupansky

Fed likely to remain paused for at least the next year

As I expected, the Fed did in fact pause at the FOMC meeting today, but note that inflationary pressures are still a risk. Now, attention will focus on how much additional inflationary pressure might be needed to force the Fed back into hike mode.

My unchanged view is that although the Fed has a strong preference for inflation in the 1% to 2% range, even the 3% range is somewhat tolerable, at least for a span of months. Even with the latest spike, oil prices still haven't advanced significantly beyond their peak for the year to date. Ditto for gasoline. Speculators are still bullish on commodities, but overall, commodities prices have lost much of their upward momentum.

It may take a number of months or even an entire year for inflation to pull back into even the 2% to 3% range, but the Fed has in fact done all of the heavy lifting and now has the luxury of sitting back and watching the fruits of its labors gradually take root.

-- Jack Krupansky

Tuesday, August 08, 2006

Despite the spike in the price of oil Fed still likely to pause at 5.25% the FOMC meeting on Tuesday

[I posted this Monday evening, but Blogger delayed it for some unknown reason. I post it now simply for archival purposes.]

Despite the spike in the price of oil on Monday which was caused by intense speculative buying of crude oil futures in response to news of a supply disruption in Alaska, the Fed is still likely to pause at 5.25% at the FOMC meeting on Tuesday.

Speculators in crude oil futures frequently choose to cast any news in precisely the light that helps their momentum plays, and conveniently disregard the truth. They ignore the Strategic Petroleum Reserve, acting as if it didn't even exist. The simple fact is that the world is presently awash in crude oil inventories.

Some of the rise on Monday was probably due to short-covering by bearish speculators who simply didn't like the news and exited their short positions, at least for Monday, but they'll be back soon enough.

Oil could rise a little further, but eventually the speculators will run out of steam, reverse, and then push the price back down. Ditto with gasoline futures.

As far as the Fed, the FOMC guys are smart enough not to pay too much attention to transient spikes in prices. Their focus is on forecasting demand and supply for longer periods of time. The key thing about Monday's spike was that it was driven by news of a supply disruption, and not any actual shortage, and certainly not any upwards spike in demand. In short, there was nothing that happened that the FOMC needs to worry about.

It may still come down to whether the Fed feels that it needs to establish "hawkish" inflation-fighting credentials by going for one more hike, especially in light of persistently elevated crude oil and gasoline prices. I think not, but it is certainly possible.

In short, my position remains that the Fed will hold its Fed funds target interest rate at 5.25% at the FOMC meeting on Tuesday, but will include wording that argues for vigilance and may even caution that further action may be needed if any additional inflationary pressures emerge in the coming months.

-- Jack Krupansky

Monday, August 07, 2006

Good luck Senator Lieberman

[I posted this Sunday, but Blogger delayed it fir some unknown reason. I post it now simply for archival purposes.]

As I've written before, I have mixed feelings about U.S. Senator Joe Lieberman (D-CT), but overall, I think he is the best candidate in his primary race. I wish he would moderate some of his positions and distance himself from the Pro-Bush, Pro-Israel Lobby, but nonetheless, I do support him as a solid centrist liberal.

Furthermore, I would very much like to distance myself from the ugly mob scene that the blogosphere has orchestrated to attack Lieberman in such an unfair manner. If this is the best that bloggers can do, then their best ain't worth... anything at all.

I wish Senator Lierberman good luck in the primary.

And if he loses, he should run an an independent and then "switch" back to Democrat after the election.

-- Jack Krupansky

Sunday, August 06, 2006

Fed likely to pause at 5.25% the FOMC meeting on Tuesday

A lot of people are now believing that the pace of the economy has slowed sufficiently that the Fed can safely pause at 5.25% at the FOMC meeting on Tuesday.

Fed funds futures contracts for September suggest a target interest rate of 5.31%, which is much closer to 5.25% than to 5.50%. In fact, September futures suggest only a 24% chance of a hike to 5.50% on Tuesday.

The economy has slowed enough that additional hikes are not clearly needed.

The economy is still strong enough that another hike won't kill it or send it "spiraling" into recession.

The economy is also strong enough that even if the Fed "stands pat" and pauses, some further hikes could be needed a few more months down the road.

Although there are so many factors at work, it may be that we can simply use the price of crude oil as a "crude" surrogate for both the state of the economy and inflationary pressure. I would suggest that if crude oil pops up above $80 and stays there going into the August 8 FOMC meeting, a hike will be a done deal. On the other hand, if crude oil retreats closer to $70, a pause will be a no-brainer. Crude oil at $76 to $78 will suggest a higher probability of a rate hike. Crude at $72 to $74 would suggest a higher probability of a pause. The $74 to $76 range is outright "coin flip" territory. Certainly the decision process is nowhere near that simple, but I suspect that my simplistic model won't be too far from being accurate. There are nits such as whether to use "spot" price or front-month futures, or to use the short-term peak futures price, but "headline" or front-month futures (September) are probably close enough.

Where does that leave us today? On Friday, the NYMEX crude oil futures contract for September delivery closed at $74.76 (versus $73.24 a week ago), which is modestly above the $72-74 "no-brainer pause" range. The peak short-term futures contract, July 2007, closed at $79.04 (versus $77.06 last week). Absent significant change this week, crude oil suggests that the Fed will lean towards standing pat with a pause at 5.25%, but might well go for the eqtra quarter-point hike as a form of inflation insurance. As long as crude stays below $76, the Fed can pause without too much criticism, but at $76 or higher, the Fed would be feeling the heat and opt to gain more "inflating-fighting" credibility with a hike to 5.50%. There was an extra "hurricane" premium in the price of crude oil due to Tropical Storm Chris. Much of that premium reversed, but not all of it since we have a couple more months of hurricane season in front of us.

My personal forecast is still for a pause at 5.25%. Absent any change in the economy (or oil futures), a pause at 5.25% will be the likely scenario.

The real "action" in the August 8 FOMC announcement is the tone that the Fed will take on inflation going forward. Hike or pause, I expect the Fed to strike a strong stance on being "vigilant" and ready to pounce with great vigor if they see inflation begin to take flight.

Although much has been made about a presumed 1% to 2% "inflation target" for the Fed, the reality is that 2% to 3% is about "as good as it gets" for the kind of economy and financial system we currently have in America. Sub-2% inflation does in fact occur on occasion, but only in a fleeting manner.

My impression is that once the Fed pauses and considers monetary policy to be "stable", it will be prepared to "hold its fire" if monetary policy is roughly "neutral" (i.e., in the 4.5% to 5.75% range) and one-year inflation doesn't pop too far above 3%. That begs the question of which measure of inflation to use, but in truth it doesn't matter a whole lot. If you want to use headline inflation rather than core inflation, then you simply need to expand the range moderately (say, from 3% to 4.5%) to reflect the nature of volatility due to short-term pricing spikes (e.g., gasoline) that occur no matter what the state of the economy.

Fed Chairman Bernanke hinted at his last congressional appearance that the Fed may have gone far enough, that the economy has slowed somewhat, and that the effects of previous hikes have not completely propagated through the economy. The market has since adapted that view. Most importantly, no officials have disputed that view. Pausing at 5.25% seems consistent with the Fed's pronouncements and the market's actions.

On the other hand, it might come down to whether the Fed feels that it needs to establish "hawkish" inflation-fighting credentials by going for one more hike, especially in light of persistently elevated crude oil and gasoline prices. I think not, but it is certainly possible.

In short, my position remains that the Fed will hold its Fed funds target interest rate at 5.25% at the FOMC meeting on Tuesday, but will include wording that argues for vigilance and may even caution that further action may be needed if any additional inflationary pressure emerges in the coming months.

-- Jack Krupansky

My net worth is creeping back up: my asset to debt ratio is now above 50%

My plan to dig myself out of debt and get my net worth on a positive track is making good progress. My asset to debt ratio is now above 50% and I am on track to achieve breakeven by the end of the year. The asset/debt ratio moved from 49% to 55% over the past two weeks.

My debt consists exclusively of back taxes. My current financial plans emphasize savings and retirement plans over incremental installment plans to pay down those taxes. I will probably keep that bias towards savings for at least another year until I have a significant nestegg of assets and a substantial rainy-day fund. Only then will I shift and pay off those taxes more aggressively.

On the other hand, I might decide to pay off my New York State taxes before the end of the year since I do have the cash on hand to do it and it is a cash flow drag each month. I might even do it this month or in September just to get it out of the way.

Meanwhile I do try to pay a little extra each month to the IRS to make a dent in that larger portion of my debt.

-- Jack Krupansky

My next monthly ShareBuilder automatic investment (August 2006) is on Tuesday

My next monthly automatic investment through ShareBuilder will occur on Tuesday, August 8, 2006. The cash will automatically be debited from my bank checking account on Monday and the purchase (Microsoft (MSFT) stock) will occur "sometime" on Tuesday. There is a fixed $4 commission on each monthly purchase. This is the third monthly purchase for this new dollar-cost averaging investment plan.

The debit to my bank checking account doesn't seem to actually hit until Tuesday.

This investment plan is actually a very small plan, but when you're trying to rebuild your finances after a bankruptcy, every little bit helps.

I still haven't decided whether to switch this plan so that it contributes to a Roth IRA account.

-- Jack Krupansky

PayPal money market yield up to 5.02%

The 7-day yield for cash kept in the PayPal money market fund is now up to 5.02% as of August 1, 2006, versus 5.00% last week. That doesn't compare as favorably with the 28-day Treasury T-bill "effective rate" of 5.19% from the latest Treasury Bill auction (versus 4.99% last week), but is comparable to the 5.04% effective rate for a 3-month T-bill (versus 5.04% last week) and the 5.04% effective rate for a six-month T-bill (versus 5.13% last week). It is significantly better than the 4.49% 7-day yield in ShareBuilder (versus 4.46% last week), modestly better than the 4.93% 7-day yield in Fidelity Cash Reserves (FDRXX, versus 4.88% last week), and significantly better than the 4.44% 7-day yield in Fidelity Prime Reserves which Muriel Siebert uses for core cash in taxable accounts (versus 4.43% last week. And PayPal does not have any minimums or crazy restrictions even for relatively small amounts of money.

PayPal is looking like a fairly interesting place to store cash for both relatively quick access and a well above average yield. Unfortunately, there are limits to how much money you can "receive" in your PayPal money market account each month. For example, I would be unable to move all of the cash in my Siebert taxable account to PayPal in one month. Right now, 28-day T-bills feel more attractive for cash that you won't need for a month, but there is no guarantee that the interest rate on the next weekly Treasury T-bill auction will be as attractive. The other catch on the T-bills (besides being locked up for 28 days) is that the unit of investment is $1,000, so you have to find some other place to put any fraction of $1,000, including any interest you might accrue.

For T-bills I quoted an "effective rate", which is a calculation of my own based on the discounted auction price for T-bills in the most recent weekly auction. Teasury gives a "discount rate" and an "investment rate" which don't seem to make a lot of sense. My "effective rate" (or what I call the "annualized effective interest rate") calculation is as follows:

  1. Take the auction price, or "discounted price". This is the amount that the investor actually pays to Treasury to buy the T-bill. In exchange, Treasury will return $100 to the investor when the T-bill matures.
  2. Subtract the discounted price from the $100 "par price" and round to two decimal places since Treasury cannot actually return money to you in fractions of a penny. That is the "return" that you will receive upon maturity.
  3. Divide that return by the discounted price. That is the return as a percentage or "percentage return" over the life of the T-bill.
  4. Divide that percentage return by the number of days of "duration" of the T-bill's life, 28 or 91 or 182 days. That is the daily rate of return.
  5. Multiply that daily rate of return by 365. That is the (simple) annual rate of return, which I am calling the "effective rate" or "annualized effective interest rate". Whether the multiplier should be 365.25 or 366 or 366 if February 29 occurs in the coming 12 months is unclear, but I simply use 365.

As always, please note that cash placed in money market mutual funds is subject the the disclaimer that:

An investment in the Fund is not insured or guaranteed by the Federal Insurance Deposit Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

In practice, that is not a problem at all, but it does incline me to spread my money arround a bit.

T-bills and the cash in your bank checking account or bank CD are of course "protected", either by "the full faith and credit of the U.S. Treasury" or the FDIC.

-- Jack Krupansky

Rolling over my 28-day T-bills for August

I only started investing in T-bills via TreasuryDirect in early July with an initial purchase of 28-day (4-week) T-bills on July 6, 2006. My plan was to roll these T-bills over every 28 days as they mature, but a number of details remained up in the air.

Last Thursday was the maturity date for my initial batch of T-bills and it was also was the issuance date for the roll-over into the second batch.

Everything went off without a hitch and it even looks like the roll-over occurs exactly as I would like it to occur, with the "payment" for the maturing bills hitting my bank checking account the same day as the debit for the new purchase of T-bills. In fact, the payment was sequenced first so that my bank checking account received the funds from the maturing T-bills before the debit hit to claim those same funds, minus the accrued interest, of course. Late Thursday evening my online bank checking account statement showed that the payment had hit, but the debit wasn't there yet. By Friday evening both the payment and debit could be seen in the online bank checking account statement, with the same date.

Unfortunately, there isn't any guarantee that such a sequencing of payment and debit will always occur in precisely the same manner, so I'll have to watch it carefully in coming months and try to make sure that I always keep sufficient funds in that bank checking account to cover the T-bills.

The good news is that the effective interest rate for the new T-bills is even better than I had expected. The discount price was $99.601778 per $100 par value. The annualized effective interest rate came to 5.19%. For my maturing T-bills from July, the annualized effective interest rate came out to 4.82%.

The issue date for this new batch of T-bills was Thursday, August 3, 2006. They will mature in 28 days, on Thursday, August 31, 2006. The auction was on Tuesday, August 1, 2006. There is an auction every Tuesday, but the next auction for me to roll over these T-bills will be Tuesday, August 29, 2006.

According to the official U.S. Treasury recent auction results, the investment interest rate on a 91-day (3-month) T-bill for Thursday, August 3, 2006 issance was 5.108% versus a rate of 5.212% for the 28-day T-bill and 5.174% on the 182-day (6-month) T-bill. It is atypical to see such a front-end T-bill inversion. I suspect that it is simply a matter of raw supply and demand, with the 3-month T-bill being the most popular T-bill, and higher demand leads to higher price which in turn leads to lower yield. It is also interesting that even the 6-month T-bill yields less than the 1-month T-bill. From a perspective of economic fundamentals, that would suggst a bet or belief that interest rates will fall over the coming month, but once again I suspect that the inversion is simply due to people needing to fill in the 6-month "rung" in their ladder, no matter what the return might be on the very short T-bill. In fact, the yield on the new-issue 6-month T-bill has fallen on each the the past three weekly auctions, suggesting rising demand. This might also be due to some people investing more money in bond funds as the stock market was looking rather dicey.

BTW, don't ask me why Treasury says that the investment interest rate for the 28-day T-bill was 5.212 which my calculation of "effective annualized interest rate" came out to 5.19%. I'll figure that out one of these days.

-- Jack Krupansky

Tuesday, August 01, 2006

Fed still likely to pause at the August 8, 2006 FOMC meeting

The weak Q2 GDP report led a lot of people to switch camps and argue for the Fed to pause rather than hike at the FOMC meeting next week. I didn't think the GDP number was that weak, but I retain my position that the Fed is more likely to pause than hike.

The economy has slowed enough that additional hikes are not clearly needed.

The economy is still strong enough that another hike won't kill it or send it "spiraling" into recession.

The economy is also strong enough that even if the Fed "stands pat" and pauses, some further hikes could be needed a few more months down the road.

Although there are so many factors at work, it may be that we can simply use the price of crude oil as a "crude" surrogate for both the state of the economy and inflationary pressure. I would suggest that if crude oil pops up above $80 and stays there going into the August 8 FOMC meeting, a hike will be a done deal. On the other hand, if crude oil retreats closer to $70, a pause will be a no-brainer. Crude oil at $76 to $78 will suggest a higher probability of a rate hike. Crude at $72 to $74 would suggest a higher probability of a pause. The $74 to $76 range is outright "coin flip" territory. Certainly the decision process is nowhere near that simple, but I suspect that my simplistic model won't be too far from being accurate. There are nits such as whether to use "spot" price or front-month futures, or to use the short-term peak futures price, but "headline" or front-month futures (September) are probably close enough.

Where does that leave us today? On Friday, the NYMEX crude oil futures contract for September delivery closed at $73.24 (versus $74.43 a week ago), which is in the $72-74 "no-brainer pause" range. The peak short-term futures contract, June 2007, closed at $77.06 (versus $77.14 last week). Absent significant change this week, crude oil suggests that the Fed will feel reasonably comfortable standing pat with a pause at 5.25%. As long as crude stays below $76, the Fed can pause without too much criticism, but at $76 or higher, the Fed would be feeling the heat and opt to gain more "inflating-fighting" credibility with a hike to 5.50%.

My personal forecast is still for a pause at 5.25%, but that's with an expectation that we could still see some weakening of inflationary pressures (e.g., the price of crude oil) over the coming week. Absent any change in the economy (or oil futures), a pause at 5.25% will evolve into the likely scenario.

I would also note that Fed funds futures are also a decent indicator of what the Fed will do once we're within a few weeks of an FOMC meeting. The September Fed funds futures contract closed at 94.6700, which roughly indicates a Fed funds rate of 5.3300% ($100 minus $94.6700 divided by $100), or closer to 5.25% than to 5.50%. A pause is twice as likely as a hike. I would note that there is a lot of daily and weekly volatility in the trading of Fed funds futures, so it is possibly for the outlook to change over the coming week.

The real "action" in the August 8 FOMC announcement is the tone that the Fed will take on inflation going forward. Hike or pause, I expect the Fed to strike a strong stance on being "vigilant" and ready to pounce with great vigor if they see inflation begin to take flight.

Although much has been made about a presumed 1% to 2% "inflation target" for the Fed, the reality is that 2% to 3% is about "as good as it gets" for the kind of economy and financial system we currently have in America. Sub-2% inflation does in fact occur on occasion, but only in a fleeting manner.

My impression is that once the Fed pauses and considers monetary policy to be "stable", it will be prepared to "hold its fire" if monetary policy is roughly "neutral" (i.e., in the 4.5% to 5.75% range) and one-year inflation doesn't pop too far above 3%. That begs the question of which measure of inflation to use, but in truth it doesn't matter a whole lot. If you want to use headline inflation rather than core inflation, then you simply need to expand the range moderately (say, from 3% to 4.5%) to reflect the nature of volatility due to short-term pricing spikes (e.g., gasoline) that occur no matter what the state of the economy.

-- Jack Krupansky

Rolling over my T-bills

I purchased a small quantity of U.S. Treasury 28-day T-bills using the TreasuryDirect online system early in July. Four weeks later, they have matured and now I'll roll them over into the next month.

Actually, T-bills are issued every week, so I will really be participating in the fourth auction since my prior purchase.

I placed my first order on Monday, July 3, 2006 for the auction on Wednesday, July 5, 2006 for issuance on Thursday, July 6, 2006, and maturity on Thursday, August 3, 2006. Normally the Auction is on Tuesday, but July 4 was of course a holiday.

The next auction is on Tuesday, August 1, 2006 for issuance on Thursday, August 3, 2006.

The proceeds from my maturing T-bills will be credited to my bank checking account sometime on Thursday or Friday, or whenever. I've never done this before, so I simply do not know the precise timing.

The discount payment for the new T-bills (the face amount minus the interest that will accrue over the term of the T-bill) will be due on Thursday, August 3, 2006 and debited from my bank checking account sometime on Thursday.

The open question is whether the credit and debit will hit on the same day and balance each other out (netting a small balance to my bank checking account), or whether I might have to eat the debit for a day or two while my bank clears the credit. Luckily I have enough cash on hand so that I can "swing the gap", but it would be comforting to know if the standard procedure is for the credit and debit to "cross" on the same day so that I don't need the extra cash.

The alternative would be to tell TreasuryDirect to credit the maturing T-bill proceeds to the "C of I" account associated with my TreasuryDirect account where it is immediately available to pay for the new purchase, and then manually transfer the net gain (accrued interest) back to my bank checking account for final disposition, but that's extra effort. C of I is short for Certificate of Indebtedness, which is short for Zero Percent Certificate of Indebtedness, which means that the U.S. Treasury keeps your money and agrees to pay it back to you any time you want, but pays you Zero percent interest on it. It's only value is as a convenience and to act as a staging area for purchasing new Treasuries and holding the proceeds of maturing Treasuries.

The other unknown is the exact interest rate that my new T-bills will return. It will probably be around 5.07%, but depend on supply and demand. Note that the Fed FOMC meets next week, so the Fed funds target interest rate will be going up, but the interest rate on 28-day and 3-month T-bills is lagging behind. Last week the new 28-day T-bill had an effective interest rate of 5.01% and the week before it was 4.95%.

-- Jack Krupansky