Taking it a step further, we live in Howard County, which arguably has the best school district in the State.  Most of our homeschooling friends are not evangelical Christians like us (homeschooling grew among evangelicals, after it being a province of the diplomatic corps, child actors, and the loony left); they are as secular as can be, and have left Howard County public schools for reasons of perceived quality.  Our estimate is that homeschooling in Maryland is predominantly secular.

But, we have nothing but praise for our interactions with the local school district.  They are unfailingly friendly and helpful with the standardized tests, etc.  Our oldest still at home may run on the Track team.

So, when my wife asked me where one of our kids could submit his poem, I said, “We could look into a bunch of kids magazines.  But I could post it at my blog, and it would probably be read by more people.”

So she asked me to post it.  The following was written by my son Matthew, who is a native tinkerer and experimenter.  One more thing to commend homeschooling: boys who learn slowly initially get labeled “learning disabled” in the public schools.  Matthew would have been one of those, but in seventh grade at age 13, he is at grade level on average for all subjects.  Tutoring (homeschooling) has overcome a native disadvantage, and he presses on.

So, it is with pleasure that I present his poem about the 54th Massachusetts Volunteer Infantry.  Recently my wife read a book aloud to the children about them, and Matthew found it inspiring.  With no further ado or comment, here it is:

The 54^th

Charge, ye men, charge!
Blood and death all around.
Everything fell, but not the 54^th.

Honor and bravery
Gun and cannons roared.
All fell.
But not the 54^th.

Into the halls of Fort Sumter.
Into the halls of Fort Wagner.
Many fall.
But not the 54^th.

Who is so brave?
Why do they fight?
They fight for freedom.
Who does?
The 54^th.

-Matthew C. Merkel

That said, I can look at the past and be a critic.  That’s easy, there have been real jerks that have milked our society, and retained a good name, though they robbed the future to pay the past.  It is criminal what municipal politicians have done, hiding behind high assumed investment assumptions, supported by brain-dead consultants who assumed markets are magic, and always provide high returns.

But there are enough targets in the present.  The evil party, the Democrats, ignore the long run effects of their deficits, and ignore the entitlements crisis that will engulf the nation.  The stupid party, the Republicans, rolled over for the idiocies of Bush II, and ignored the long term effects of debts and entitlements.

But there is a new force of anger, the t-party.  And that is about all they have, is anger.  They want their taxes reduced, but don’t want large entitlement programs reduced, or defense.  They represent small-minded libertarianism.  I am an economic libertarian, but I recognize that my views mean real pain for many in the short run, though I think those policies will be best for all in the long run.

There was a real loss in our nation when we abandoned the idea that national budgets needed to be balanced.  It brings out the worst in politicians when they think money is free, and they can engage in the basest demagoguery with no cost.  As it is today, we would probably be better off electing our politicians via random selection.

I have no sympathy for the t-party.  If you only have economic interests, and aren’t willing to take stands on broader ethical questions, you do not deserve to be our rulers.  Government is ethical as a rule, and the most important questions are what behaviors we encourage and discourage in our society.

I have a further concerns.  Leaders should not be merely facile rhetoricians, but should be genuinely mature.  I cringe listening to the t-party endorsed politicians, because they aren’t mature enough to rule.  If you can’t control what you say, and how you say it, you don’t have enough control over yourself to be one who promotes order in society.

-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-

I wrote the above three weeks ago and sat on it.  After writing it, I said to myself, “This is not one of your better works, are you going to say that?”  After review, I am saying this with full conviction.  Most t-party candidates are not ready for prime time.

Take Sarah Palin as an example. Sarah Palin is a bad joke.  If she is such a good Evangelical Christian woman, why is she not at home taking care of her young children, particularly the one with Down Syndrome.  Or, why was she occupied with Alaska politics at a time when she should have been there for her daughter Bristol, who was about to make some very bad decisions.

Feminism has no place in Christianity.  Men are to lead, not women.  Go home, Sarah.  Homeschool your children, if you can. I would not say this to a woman outside the Church, but since you claim to be one of the disciples of Christ, I say it to you.

I say this as a leader in the Church, ordained by the elders of my presbytery, in a Bible-believing church.  There is no good that comes from neglecting your own home to address the problems of the nation.  Sarah Palin is no Deborah.  Deborah was wise, and Sarah Palin is not.

I fear God more than I care about the political direction of this country.  As the Apostle Paul said, “Shall we do evil, that good may come?”  Paul spoke rhetorically, saying that we should do what is right, regardless of the results.  There is no good that comes from trying to save society, when our own house is not in order.

=-=-=–==-=-=–==-=–==-=-=-=-=-=–==-=-=-

I could talk about the other t-party candidates and their idiocies.  Time would fail me.  I am in favor of a brainy libertarianism and Biblical morality, rather than a brain-dead libertarianism, and appeals to general morality.

The most pressing and immediate economic problem is this: we are facing a funding crisis for all of the promises made by governments and corporations regarding retiree employee benefits.  Every day I see more articles about the pain municipalities are going through over funding pensions, with occasional pension strengthening from corporations.

The sins of past governments, making promises that could not easily be fulfilled, or, at least fairly funded in the short run, are coming home to roost.  Funding issues for all levels of government are rising.  It doesn’t matter if you have met the budget this year, however you have done it.  Next year will be worse, because the assets will not throw off enough income to satisfy the liabilities over the intermediate-term, across the whole nation.

-==-=-=–=-=-=-=-=-==–=-==-=-=-=-=-=-

We go to the polls in the US today, but no one dares talk about the funding crisis.  They talk of tax cuts or protecting benefits, while at the same time the economic decay continues, where debt grows, and ability to repay it declines.

It is a sad state of affairs, and indeed, I despair over it.  I love my nation, though I do not support its wars or its economic foolishness.  Unlike what Reagan said, America is not the last best hope of man on Earth, rather it is the God-man Jesus Christ, to whom we must all eventually answer.

-===–==–=-=-=-=-==-=-=-==-=-=-=-=-=-=-

If I have a fault economically, it is that I look to the long-term.  For me, it is Heaven, though on Earth it is what will happen to my great-grandchildren and beyond.  Our policies are slanted to the present, and will force those who are younger to pay far more than they ought to pay, because they will be carrying the profligacy of the Baby Boomers.

No party is seriously looking at the future funding crisis.  There are little hints among the municipalities that are the worst running into problems now.  Those problems will only grow, and spread.  The problems in the unfunded Federal plans will be a plague in their time.

-==-=-=-=-=-=-=-=–==-=-=–=-=-==–=-==-=–==-

This is an unusual post for me, prompted partly by the elections, because I don’t think anyone from an economic standpoint is addressing the real problems that we are facing.  Mere politics prevails for now, with fine-sounding but empty words telling the electorate that they will be restored to prosperity.

There are bigger forces in play here.  Consider my old piece, Rethinking Comparable Worth; as it stands, less skilled labor in the US should see wage declines as the rest of the world becomes more competitive.  Unskilled labor is not scarce. Skilled labor is somewhat scarce. Good ideas are scarce.  Real capital is scarce, but financial capital is not scarce.  Commodities vary in scarcity.

=-=–===-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-

I see this as a time for the US to “grow up,” and see that there are no easy solutions, but that it will take shared sacrifice to preserve our nation.  Taxes will have to rise while benefits are cut.  Keynesians will scream, but the average person in the US will see it as fair, because they know that everything must be paid for; there is no free lunch.

Quick question in case you find yourself with time to spare on your blog (ha!! ) :
You have a large family. What do you teach your children?  How do you prepare them using the economic back drop? What are the hopes, the fears that a parent has for their youngsters ?

It is the real-life application that so often is skipped over in financial blogs.  Maybe that’s as it should be – not every reader might find it of interest.  But isn’t that where the rubber meets the road?

So, I’ll send this off and maybe one of these days, the question ties in with something you were going to write.

Thanks a lot for your insights.

Regards,

A.S.

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As the snow starts to fall, and Baltimore is in the eye of the storm (18-24 inches of snow predicted), I think it is a good time to sit back and think about the bigger things of life.  I’ll be spending all day tomorrow with my family.  Now, that’s normally true.  I work from home, and my wife and I homeschool.  We have two graduates, one drop-out (a sad tale, and what made me start working from home to protect my family until we told him he had to leave), an eleventh grader, ninth grader, two sixth graders, and a second grader.  Five of the eight are adopted, and are African-American to varying degrees.  All of them have very different ability levels, and different levels of being willing to work hard.  The one that left was bright, but lazy, and that was part of his undoing.

I’m not a natural parent, but I have learned to control my temper better as the years have gone by.  I never realized how much I like things quiet until I had a lot of kids.   My wife and I work as a team.  She does most of the teaching, and I do most of the discipline, but each of us does both.  My wife is bright, but I can still do Algebra 2 through Calculus.  I pick up the slack there.

My kids do get some economic training from me in a variety of ways:

1) Informally at dinner, I explain what is going on in the world.  The eleventh grader gets a lot of it, while the college students can’t be bothered.  The ninth grader and sixth graders get a decent amount of it.  But it is precious when one of the kids comes and says “Dad, can you explain to me what happened during the Great Depression?”  That said, it was even more precious when I tried to explain what I did as a corporate bond manager to my kids seven years ago (100 phone call per day), and the then eight-year-old said, “It’s like ordering pizza all day, right?”

2) There is the “Bank of Dad.”  This is not original to me, but I tell the children that they can deposit their money with me, and I will pay them 5% interest (annual equivalent yield).  Oh, and to get started, they must amass $100.  That is psychologically important, because it is a barrier to getting into an exclusive club.  The rate has been 5% for the last 10 years — the rate is subsidized to encourage children to save.

My children are not all natural savers.  Half are and half aren’t.  The ability to earn interest makes them all more inclined to save.  What we try to put forth to those that are not natural savers is to spend less than all that they earn, and save the rest.  If all Americans did that our economy would be much better off.

3) Work hard.  That applies to schoolwork and chores.  Basic chores get no pay but there is an allowance if those normal chores are done.    Then there are other tasks that are available for pay, and those have varied over the years:

• Cutting the yard.
• Yard work.
• Analyzing documents, and shredding the useless ones.
• Sorting financial documents.
• Shredding documents.
• Checking derivative confirms.
• Entering ABS cashflows for delivery to Bloomberg.
• Entering industry rank data into spreadsheets.
• Washing/waxing the cars.
• Fixing the cheap Ikea furniture around the home.
• Killing crickets and other vermin in the home.
• Teaching math, or other subjects to younger children.
• And more… if their schooling is done, neighbors often employ them for tasks, because the children are very reliable.

4) I spend time regularly explaining to my children what careers are in demand, and which are not.  I also explain the basic ideas of how companies make money, or not.  Then they follow what is happening in my career, with the media appearances, talks and other things that go on with me.  In any case, I try to explain to them to be practical, which is not generally taught in the schools.  Yes, do what you love, but don’t be dumb… no one will pay for useless bits of knowledge, and there are few teachers needed in such areas.

5) I do drop in on the homeschooling to provide greater background on history, economics, theology, and science.  I see my wife smile as I give greater depth to topics as I motivate them.

6) We have dinner together every night, and the discussion helps the children grasp on to what is going on in the world, as does subscribing to The Economist, and The Wall Street Journal.  I have subscribed to both for the last 20+ years.

7) Hopes and fears?  Ugh.  My third child made my life a mess.  I loved him so, but he gained a bunch of evil friends and turned against us.  But that is just one child.  My goal is not to create clones of me, but to create people who can be productive in the world, and faithful to Jesus Christ.

I have fears that the future won’t be as good for my children as it was for me, but I also know that my children are better prepared than most.  I can’t control the external macroeconomy; even my predictions are only a vague help.  My goal is to turn out children that are better prepared than most, and willing to work.  Beyond that, I pray to Jesus, but that is the best that anyone can do.

In the end I know that my efforts are valuable but not determinative.  I can’t make anything happen.  I can only teach my children, and trust in God for the rest.

• Growth of a clever enterprise, AIGFP.
• Expansion into default swaps.
• Death of AIG as it gets downgraded and has to post collateral, leading to insolvency.

What fascinated me the most was the willingness of managers at AIGFP to think that writing default protection was “free money.”  There is no free money, but the lure of “free money” brings out the worst in mankind.  This is not just true of businessmen, but of politicians, as I will point out later.

My own take on the topic involved my dealings with some guys at AIGFP while I was at AIG.  Boy, were they arrogant!  It’s one thing to look down on competitors; it’s another thing to look down on another division of your own company that is not competing with you, though doing something similar.

As I sold GICs for Provident Mutual, when I went to conferences, AIGFP people were far more numerous than AIG people selling GICs.  The AIG GIC sellers may have been competitors of mine, but they were honest, and I cooperated with them on industry projects.  Again, the AIGFP people were arrogant — but what was I to say?  They were more successful, seemingly.

The last era, as AIG got downgraded, was while I wrote for RealMoney.  After AIG was added to the Dow, I was consistently negative on the stock.  I had several worries:

• Was AIGFP properly hedged?
• Were reserves for the long-tail commercial lines conservative?
• Why had leverage quadrupled over the last 15 years?  ROA had fallen as ROE stayed the same.  The AIG religion of 15% after-tax ROE had been maintained, but at a cost of increasing leverage.
• Was AIG such a bespoke behemoth that even Greenberg could not manage it?
• My own experiences inside AIG, upon more mature reflection, made me wonder whether there might not be significant accounting chicanery.  (I was privy to a number of significant reserving errors 1989-1992).

In general, opaqueness, and high debt (even if it’s rated AAA), is usually a recipe for disaster.  AIG fit that mold well.

Now AIG recently sold one of their core P&C subsidiaries for what looks like a bargain price.  This is only an opinion, but I think AIG stock is an eventual zero.  Granted, all insurance valuations are crunched now, but even with that, if selling the relatively transparent operations such as Hartford Steam Boiler brings so little, then unless the whole sector turns, AIG has no chance.  Along the same lines, I don’t expect the “rescue” to be over soon, and I expect the US govenment to take a significant loss on this one.

The second article is from Bethany McLean of Vanity Fair.  I remember reading her writings during the accounting scandals at Fannie Mae.  She was sharp then, and sharp now.  There were a loose group of analysts that went under the moniker “Fannie Fraud Patrol.”:  I still have a t-shirt from that endeavor, from my writings at RealMoney, and my proving that the fair value balance sheets of Fannie were unlikely to be right back in 2002.

Again, there is a growing bubble, as with AIG.  The need to grow income leads Fannie and Freddie to buy in mortgages that they have guaranteed, to earn spread income.  It also leads them to buy the loans made by their competitors.  It leads them to lever up even more.  It leads them to dilute underwriting standards.  Franklin Raines’ goals lead to accounting fraud as his earning targets can’t be reached fairly.

One lack in the article is that the guarantees that Fannie had written would render Fannie insolvent at the time the Treasury took them over.  On a cash flow basis, that might not happen for a long time, but it would happen.  Defaults would be well above what was their worst case scenario, and too much for their thin capital base.

The last article is another three part series from the Washington Post that is about the failure of our financial markets.  (Here are the parts — one, two, three.)  What are the main points of the article?

• Bailing out LTCM gave regulators a false sense of confidence.  They relished the micro-level success, but did not consider the macro implications of how speculation would affect the investment banks.
• Because of turf and philosophy conflicts, derivatives were left unregulated.  (My view is that anything the goverment guarantees must be regulated.  Other financial institutions can be unregulated, but they can have no ties to the government, or regulated financial entities.
• The banking regulators failed to fulfill their proper roles regarding loan underwriting, consumer protection and bank leverage.  The Office of Thrift Supervision was particularly egregious in not doing their duty, and also the the SEC who loosened investment bank capital requirements in 2004.
• Proper risk-based capital became impossible to enforce for Investment banks, because regulators could not understand what was going on; perhaps that is one reason why they gave up.
• The regulators, relying on the rating agencies, could not account for credit risk in any proper manner, because the products were too new.  Corporate bonds are one thing — ABS is another, and we don’t know the risk properties of any asset class that has not been through a failure cycle.  Regulators should problably not let regulated entities use any financial instrument that has not been through systemic failure to any high degree.
• Standards fell everywhere as the party went on, and the bad debts built up.  It was a “Devil take the hindmost” situation.  But as the music played, and party went on, more chairs would be removed, leaving a scramble when the music stopped.  Cash, cash, who’s got cash?!
• In the aftermath, regulation will rise.  Some will be smart, some will be irrelevant, some will be dumb.  But it will rise, simply because the American people demand action from their legislators, who will push oin the Executive and regulators.

A few final notes:

• Accounting rules and regulatory rules were in my opinion flawed, because they allowed for gain on sale in securitizations, rather than off of release from risk, which means much more capital would need to be held, and profits deferred till deals near their completion.
• This could never happened as badly without the misapplication of monetary policy.  Greenspan enver let the recessions do their work and clear away bad debts.
• Also, the neomercantilistic nations facilitated the US taking on all this debt as they overbuilt their export industries, and bought our debt in exchange.
• The investment banks relied too heavily on risk models that assumed continuous markets.  Oddly, their poorer cousin, the life insurers don’t rely on that to the same degree (Leaving aside various option-like products… and no, the regulators don’t know what is going on there in my opinion.)
• The insurance parts of AIG are seemingly fine; what did the company in was their unregulated entities, and an overleveraged holding company, aided by a management that pushed for returns and accounting results that could not be safely achieved.
• The GSEs were a part of the crisis, but they weren’t the core of the crisis — conservative ideologues pushing that theory aren’t right.  But the liberals (including Bush Jr) pushing the view that there was no need for reform were wrong too.  We did not need to push housing so hard on people that were ill-equipped to survive a small- much less a moderate-to-large downturn.
• With the GSEs, it is difficult to please too many masters: Congress, regulators, stockholders, the executive — all of which had different agendas, and all of which enoyed the ease that a boom in real estate prices provided.  Now that the leverage is coming down, the fights are there, but with new venom — arguing over scarcity is usually less pleasant than arguing over plenty.
• As in my blame game series — there is a lot of blame to go around here, and personally, it would be good if there were a little bit more humility and willingness to say “Yes, I have a bit of blame here too.”  And here is part of my blame-taking: I should have warned louder, and made it clearer to people reading me that my stock investing is required because of the business that I was building.  I played at the edge of the crisis in my investing, and anyone investing alongside me got whacked with me.  For that, I apologize.  It is what I hate most about investment writing — people losing because they listened to me.

(graphic obtained here, by enrevanche)

I’ve subscribed to The Economist for 22 years.  IN my opinion, it is the best English language newsweekly in the world.  Every now and then they toss a game into the magazine.  This time, the Internet aids the game, in that you can download cards, money, pieces, and rules.

This evening, three of my eight children said they wanted to play the game with me.  How it happened: I had printed out the money, cards, pieces and rules, and I had The Economist open to its centerfold, and the one who recently scored well on the National FInancial Literacy challenge saw it and asked what it was.  I told him it was a game from The Economist, and that if he made the effort to cut the pieces of paper and get the pieces together, we would play the game.  Two other children joined in, and we started the game.

Now, ay my house, you learn about the markets atmospherically.  As one of my kids said, who is not markets-oriented, “Yeah, in school neither the teacher nor the students understood what was going on in the economy, but I was able to explain it.”  (That floored me.)  As for the children that played with me this evening, it was filled with “Dad, what does it mean by…?” and laughter over the concept of naked short selling, especially given the graphic on the board.  There were a lot of “teachable moments” from a home schooler’s point of view.

The board and cards are filled with the clever humor of KAL, The Economist’s main cartoonist.  The kids picked up the copious easy humor, while I smiled at the nuances that they missed.  We have not finished the game yet, and two of my other children have said they want to play the next game.  One more aspect of the game: it starts in an intensifying boom cycle, and moves to an intensifying bust cycle.  The business cycle concept is definitely taught.

The length of the game seems to be an hour at minimum, and I’m not sure what the maximum could be.  Already the children are learning aspects of negotiation.  After one child went bankrupt for the second time, she received a buyout offer, a contingent debt offer in exchange for a “Get out of Chapter 11 free” card, and a free offer of money with the condition that if she went bankrupt again, she would sell out for a price fixed now.  She chose the contingent debt offer, and we all said she made the right move.

It may not be Monopoly, but it’s a fun game, and it is free.  Give The Economist and KAL credit for a clever game that sheds some light on the current crisis in a fun way.

I am a strong believer that there are few free lunches.  If there are simple policies that will easily produce prosperity, they would likely have been done by now.

As I have commented before, what we are seeing now is a shift in debt from the banks to the government.  Banks get capital, the government gets debt, and the money for the debt comes from three places: taxpayers, foreign lenders (central banks, probably) and perhaps at some point, the Federal Reserve could buy it (whether they monetize it or not is another question).  As jck noted yesterday, this has led to a selloff in Treasuries.  (Interesting that it happened on a day when the cash markets were closed, but the futures markets were open.  The reaction of cash bond market today is similar to that which the futures market exprerienced yesterday.)

Which brings me to my first point.  Today, when the rally in the fixed income markets gets reported (the markets again, were closed yesterday, you will likely hear that spreads rallied sharply.  But watch for the discussion of yields and prices (if there is any).  It’s quite possible that yields rise from Friday to the close of business today.

Second point, today $250 billion of the $700 billion got used on nine big/critical banks.  Now, this may have been somewhat coercive to some of the nine banks; as was said at Bloomberg:

None of banks getting government money was given a choice about it, said one of the people familiar with the plans. All of the banks involved will have to submit to compensation restrictions, said the person.

The government will also guarantee the banks’ newly issued senior unsecured debt, making it easier for them to refinance their liabilities, the person said.

Possibly the following message was delivered, “Be a good boy and get in line.  This is good for the nation, and we won’t be around for a decade.  You want to be a survivor, right?  You want friendly regulators when we review the levels at which you are marking your illiquid assets?  We thought so.  Sign here.”  (No surprise that Goldman then applies for a NY State, rather than Federal bank charter.  State regulation, particularly when you are a local champion, is much more flexible.  Just ask AIG. )

Though this leads to a short-term bounce in bank share prices, the long term effects are less clear, which brings me to my third point.  It’s one thing to bolster their balance sheets.  It is another to get them to lend, particularly in the bear phase of the credit cycle.  Also, as leverage comes down, and it will come down, so will profitability at the investment banks, and probably other banks as well.  Securitization will be less common, eliminating hidden leverage that allowed for less capital.

The same thing is going on in Europe, though they actually think about how they might pay for the bailouts.  In the UK, it pushes the national debt to GDP ratio to 100%.  As it gets closer to 150%, the international debt markets usually start to choke.  We have traded bank credit risk for national solvency risk at the margin.  Maybe that will be different here, if only government creditworthiness is perceived to be safe.  It is a “new era,” right?

I find it interesting that Barclays is refusing help.  Either the UK regulators aren’t so coercive as those in the US, or Barclays is not as levered as I thought.  Or, it could be hubris on the part of Barclays’ management team.

Even Japan is getting into the act, though these measures seem so weak that I wonder why they would bother.  The government and Bank of Japan stop selling bank shares, and allow companies to buy shares back more aggressively.  That may push share prices up in the short run, but it substitutes debt for equity, which shouldn’t have much of a long-term impact.

On the Central Banking Front

Now, with the seemingly limitless amount of US liquidity being to the short end of the US money markets, you would think that we would get a bigger move than we have gotten so far. This will take time, but watch the yield as well as the spread.  Also remember that LIBOR has become somewhat of a fiction at present.  There many quotes, but not so many loans to validate the quotes.

What is being done that is new?

• TAF expanded to $900 billion.
• New commerical paper program where the Fed backstops the A-1/P-1/F1 CP market, including ABCP.  Terms here.  FAQ here.  This is big, and it is much easier to start such a program than to end it.  It is difficult to end any program where credit is granted on less than commercial terms.  My guess is that it will be extended past its April 30th, 2009 planned expiry date.
• Swap agreements allowing unlimited dollar liquidity to foreign entities through agreements with their central banks.
• The Fed can now pay interest on reserve balances held at the Fed, which allows them to increase their balance sheet significantly.  In one sense, they become the Fed funds market.

What is not new is the idea that all we have to do is restore confidence, and everything will be fine.  No, we have to delever, and the US Gowernment is included in the list of those that need to delever.  There is no national reform going on here, but merely a shifting of obligations from private to public hands.

For investors:

For those that are investors, the biggest bounces tend to occur during depressionary conditions.  I would not get overly excited about the rally yesterday.  As John Authers at the FT points out, given the extreme changes being made, there should have been a bounce.  The question is whether it will persist.  I was a net seller into the rally toward the end of the day.  I think we have more troubles ahead.  Two things to watch:

• LIBOR, CP yields and the TED spread. (The short end)
• Overall yields of medium-to-long Treasuries and other long-dated debt.  (The long end.)

I expect yields to rise, even if some spread relationships fall.  The added financing needed by the US government is large.  Let us see where Treasury buyers have interest.

There are elements of this that remind me of my The US Dollar and the Five Stages of Grieving piece. This is for two reasons: first, we are asking foreign entities to hold more dollar claims at a time when they are stuffed full of them.  Second, this phase of the credit crisis reminds me of the “bargaining” phase of the five stages of grieving.  We are past a long denial phase, and the anger continues, but now we bargain that these proposals will allow us to escape the pain that comes from delevering.

I’m skeptical, but I hope that I am wrong, lest we get to the fourth stage “depression,” before we finally reach “acceptance.”  As it is, I am looking for companies with blaance sheets strong enough to survive the worst.  That is my task for the next few days.

When I was a kid, I was kind of a prodigy with math (I am not so now), and when we went through it in school, I remember tutoring my classmates on the two topics. I always thought the two concepts were related, but I never understood how, until it struck me last week.

Consider the numbers 60 and 144. What are their Greatest Common Factors and Least Common Multiples? To start, let’s factor the two numbers:

Then, let’s place the common factors in the intersection set.

The greatest common factor is the product in the intersection set, in this case, 3x2x2 = 12. The product of the union set (just multiply across) is the least common multiple — 5x3x2x2x3x2x2 = 720.

When I realized this, I drew it out for Ruth and Jonathan, and told them “Look at the ravings of a madman.” But later that evening, Ruth came to me and thanked me for it, because it worked with Jon, and clarified it to her.

As a mathematician, I am nothing great, but my intuition has been a great help to me at many points. This was one of them.

Update Saturday Afternoon

As F comments, “Which has the consequence that LCM*GCM = number1*number2.”

I should have written that myself, but didn’t.  Thanks for pointing that out.  It is an application of the rule that:

set A + set B = union of A&B + intersection of A&B

Some of my children have an interest in the market, some don’t. Personalities differ, but you want to give them some core knowledge that everyone can use. There have been people in our home school get-togethers who when they find out I am an investor, they ask “Do you know of any good books on the stock market for kids?” Lamely, I suggest the out-of-print book by Ken Fisher’s son, Clayton, which is pretty good, but I didn’t think it was definitive.  One has complained to me about the Stock Market Game, which seems to teach speculation, not investment.

That’s true of most stock market contests — the only exception I can think of was the Value Line contest back in 1984 . I managed to place in the top 1%, but not high enough to win. That contest forced you to pick 10 stocks from ten different groups for six months. The stocks were sorted by price volatility deciles, so you had to pick some volatile stocks and tame stocks. The stocks were equal weighted, and there was no trading. Great contest — I would love to run something like that. I have suggested it to The Street.com, but no dice. Hey, maybe Seeking Alpha would like to try it! Nominal prize money, but there would be bragging rights!  (Abnormal Returns, this could work for you as well…)

My wife tells me to think about it. Well, today, as I’m going through my personal e-mail, I run across a note from the Home School Legal Defense Association promoting the National Financial Literacy Challenge. Timely, I think. They are having a competition based off of the national standards published in 2007 by the Jump$tart Coalition for Personal Finance.

So I look at the standards, and I think, “These are pretty detailed… how can you turn this into a usable curriculum?”  I print them out and read a little bit of them to my wife Ruth, who says, “Typical for those that set standards, and aren’t teachers; you can’t work with that stuff.”  My wife was a high school teacher, and despite that hindrance, she still homeschools well.  But she knows the troubles that come to public school teachers as mandates come down from on high.

She asked me, “What would you recommend, then?”  I thought about it and said that the personal finance book that I reviewed recently, Easy Money, would be a good book for high school seniors to read.  It’s not a complex book at all.  Afterward I would discuss it with them.  She asked me why I hadn’t done that for our older two children and I said, “It was published after they went to college.  I’ll ask them to read it this summer.”

For investing, I still think that Buffett’s Annual Reports are understandable to most teens.  Marty Whitman is easy to read as well.  But I always liked Ben Graham, and I think The Intelligent Investor is accessible to the average teenager.  Good investing is not complex… but often we make it so.

Full disclosure: if you enter Amazon from my links and buy anything, I get a small commission.  It is my substitute for the tip jar, and it doesn’t increase your costs at all.

They’re special people. Margie has homeschooled all of their children (so far), and Bill has built a thriving enterprise, Wright Manufacturing, which makes the best commercial lawn mowers in the world. (Full disclosure: I own a little less than one percent of his private firm.)

Wright Manufacturing is unusual because it is a very innovative firm. They manage the business well with a series of principles borrowed from some of the best Japanese manufacturers, but then marry that to the exceptional innovative engineering talent of Bill Wright and his staff. Many of his competitors license his patented technologies.

Oh, the person on the far right of the picture is, yes, President Bush. He came to visit Bill’s factory today, and gave a brief talk on the economy, and the proposed stimulus package. Here’s what he said:

1:55 P.M. EST

THE PRESIDENT: Let me tell you why I’m here. This man started his own business. He’s a manufacturer, he employs over a hundred people, and he represents the backbone of the American economy. And today I talked about our economy, and the fundamentals are strong, but there’s uncertainty. And there’s an opportunity to work with Congress to pass a pro-growth package that will deal with the uncertainty.

Any package has got to remember that jobs are created by small businesses. A good package will have incentives for investment. The package we passed early in my administration helped him. He bought some equipment and made his firm more productive, kept him in business. And that’s the same spirit that needs to be in this next growth package.

The other thing is, is that we got to make sure that we benefit consumers. We want our consumers out there spending, and the best way to do that is broad-based tax relief. Now, this plan ought to be broad-based, it ought to be simple, and it ought to be temporary.

I had a conversation, Congressman, with the leadership on both sides of the aisle yesterday, and I was encouraged by what I heard. And I believe we can come together on a growth package very quickly. We need to. We need to get this deal done and get it out and get money in the hands of our consumers and our small business owners to help this economy.

I’m optimistic, I truly am. One reason I’m optimistic is because I understand we got all kinds of Americans just like this man here, working hard to provide a living for folks and to make a product people want.

And so, while there’s some uncertainty right now, if we act quickly and in a smart way that helps growth, we’re going to be just fine.

Anyway, thanks for letting me come by. I’m proud to be — I love the entrepreneurial class in — I love people who have a dream and work hard to achieve the dream.

And so — a fine-looking machine you got here.

MR. WRIGHT: Thank you. It’s a team effort. We thank you, thank you for all your work, too.

THE PRESIDENT: Do you wonder where they got the name “Wright?” That’s his name. And his wife is the co-founder of the company. And this is — it’s really great to be with you.

And, Congressman [DM -- Roscoe Bartlett, another good guy with a big family], thank you for being here. I’m proud to be with your workers. You’ve got some fine workers.

MR. WRIGHT: We’ve got a great team here, don’t we?

THE PRESIDENT: Yes, you do. And if they get a little more money in their pocket as a result of the growth package, it will help make sure this economy continues to grow.

Anyway, thank you all very much.

END 1:59 P.M. EST

Bill, for all of his accomplishments, is a humble guy. He and Margie went through many lean times during the early years, and they bore with it well. The business began as a lawn mowing business, and then broadened out to software for managing lawn mowing businesses, together with grass catching attachments. That started the manufacturing. Bill developed a wide number of innovations, from zero-turning radius mowers, to sulkies, and more.

In my opinion, President Bush could not have picked a better place to visit. It is an example of American manufacturing at its best, and Bill Wright is a great example of American entrepreneurship. I am proud to be a part owner of the firm, and to have been able to help Bill at times on financial issues.

Now, for further coverage of the visit of President Bush:

Bush Wants Fast Tax Aid to Boost Economy

Frederick Residents Voice Concerns About Economy

Frederick Officials Hope They Are Recession-Proof (Video)

As far as I am concerned, the stimulus package is hooey; what stimulus occurs now will be funded by debt and a cheaper dollar later. There is nothing wonderful there. There is something wonderful about the Wrights though, and I am happy to be a small part of that.

The spreadsheet generates seven unique random letters in uppercase on the left, and scrambles them in lowercase on the right.  Print a sheet, and the child draws lines to match the letters.  Hit the recalc [F9] button, and you have a new sheet.  With a little bit of coaching, the child gets the concept in a week or so.  The sheets are easy to use, and the limited matching doesn’t overload their ability to remember, particularly because a few letters on each page will be easy.

If it works well for you, let me know.