Tuesday, June 30, 2015

F-35 cannot outfly a 25 year old CF18c...a $180 million disaster?

Years ago I wrote about the debacle that has become the F35 strike fighter aircraft, and its failure as a replacement for the F18-C that the Canadian Air Forces uses today (a very very old fighter aircraft).

I wrote a blog here about the problems and shortfall that the F35 represented for the Canadian Royal Air Force that said all that needed to be said in terms of mission capability, single engine design and weapons load.

The "killer" was last week when the F35 went head-to-head against a American F18C -- the "last" and most modern variant of the type.  In a nutshell the overall comment about the F35 was:  can’t turn, can’t climb, can’t run.  Bottom line the aircraft is underpowered and easily outmanoeuvred which is really bad.  There's a National Post article here.

Now, lets be honest the days of manned fighter aircraft are coming to  a close.  Not that the "drone wars" are a cake walk either.  There have been many reports how poorly designed the flight controls systems on the majority of drones, requiring serious multi tasking with many different systems.  It takes upward of 5 people to operate a drone...

However, at $5/10 million each its substantially cheaper than the F35, which is now apparently a $180 million/per aircraft machine -- inflation and well you know it was more expensive than anticipated.  The question is will Canada still buy the aircraft, which is still at least 24 months from available for deployment?

BTW the aircraft does few of the necessary "Canadian" missions, but hell get a dozen to keep the air force going and replace the rest with drones... 



Monday, June 29, 2015

So you want to start an airline (part 3)

Funny enough when I talk to future airline CEOs I always ask them what is their business; rarely is it carrying people from point A to point B. The first thing they say is that they are operating an airline with aircraft and expensive pilots and mechanics.

(7)  Philosophy:  This is the boring bit to many airline executives, it is also tremendously important, because your philosophy as a company has a huge impact on your competitive positioning, and while you are the only game in town when you start up, you can bet serious money that if it works out , you will have some company, and competition.  How you react, and deal with these competitive pressures will have an marked impact on your bottom line.

The first thing you have to realise is that in this business there is always going to be competition, how you deal with it will determine how well you do as a company.  You have to know who you are and what you want to do, and under what terms.  Like google's "Do no harm" statement an airline has to decide what it wants to be, who it wants as its customers -- and gear itself to meet that demand.  It may sound silly, but having a mission, and objectives empowers your employees; they understand what you are trying to do, as do your customers.  When Southwest started they wanted to be a no frills hyper efficient high frequency bus service of the sky.  Believe it or not Southwest remains true to its origins!  I remember, years ago, watching a Singapore airline senior pilot inspect his aircraft -- after inspecting some elements he pick-up debris (actually garbage) from around the aircraft.  On the flight line, near "his" aircraft the rubbish was his problem.  

As a further example, years ago Singapore Airline suffered a tragedy -- the loss of an aircraft!  A grieving relative somehow got into one of the first press conference and started screaming at the SQ press officer.  Instantly, a bunch of security guys converged on that person.  The spokesperson for SQ told the security guys to step way, and allowed this relative "her peace"  in fact, that act alone gave SQ tremendous power -- the were ready to listen, to acknowledge and apologies for the losses in this tragedy.  SQ suffered with their customers -- a tremendous loss, they acknowledged their "failure" (the loss of Silk Air 109 was never resolved), and were able to move as one.  

What I am trying to convey here is that there are ways of behaving that imprint on an organisation, whether its the Indian airline's CEO that insisted that all his employee cease all activities when he walks into a room (I kid you not), to the pilot picking up debris on the ramp or in the aircraft.  These are born from the company's philosophy...enough said!

(8) Landing slots & Other fun bits:  One of the most arcane segment of the airline business relates to purchase (or granting) of landing slots at airports.  Its hard to believe how slots are allocated, and if the domestic scene is complex the international slot allocation business is simply byzantine. Obviously landing and operating rights in underserved airports are a breeze to obtain, but as an operator you will have to negotiate all kinds of agreements especially since you may want to expand. The first slots of a grateful airport are given away, but once there are two or three players...watch out. Bottom line is that slots, although they have an economic value, are not sold/given in a rational basis. 

(9) Consignment, spare parts and manufacturer's depot:  Across the planet, aircraft , engine and avionics manufacturers have spare parts depot, conveniently placed at large airport so that parts can be shipped immediately.  These need to be within 3 hours flight from your main maintenance airport, so that part can quickly and easily be sent over (and sometime the spare part is an engine...).  Your access to these depot changes from manufacturer to manufacturer, in fact they all want to promote their aircraft reliability and this is often an afterthought for the airline. 

Operating an airline is a ballet where each part sings the same tune but with slightly different rhythm. Pilots/ground crew/maintenance are the human factors.  Aircraft/fuelling/spare parts are the physical aspect.  The regulatory/airport/services -- the third wheel of a landing gear, all these have to function together so that you meet your customers' expectations.  It is a complex system.  Thankfully many of these systems are now run via software (off the shelf) that allows management to ensure a seamless product delivery.

No new business is easy to run, they require commitment to perfection, strong leaders that delegate and employees that understand their role within the organisation and can deliver the service to the customer.  Airlines are particular because of the high capital and human cost of the operations. Barriers to entry are low, and can created tremendous strain on even a well run operation.

(10)  How much capital:  is required is a complicated question.  There is a tendency for airlines to operate with a lot of leverage.  Its a historical thing.  Most airlines were sovereign owned and as such had almost unlimited borrowing capacity.  Looking at successful (financially) airlines and you will immediately see relatively low leverage (high by certain standard, but low within the context of the airline industry).  Leverage is great when aircrafts are full, but its a massive burden when times are difficult.

There's no fast and easy rule, and the rules can change from jurisdiction to jurisdiction, but it remains that an airline needs to be able to survive a downturn, it has to have sufficient capital.  


Sunday, June 28, 2015

Greece is it too late?

First, its never too late to walk back from the precipice!  Granted time is now really short, and no one seems to be really interested in solving the problem.  Those like DSK (ex-head of IMF) are able to say the truth, reschedule all Greeks sovereign loans by extending the maturity (to 25 years) reduce the total amount of debt by "forgiving" some of the money.  

Of course this also means that Greece can not borrow a penny without ECB approval -- that maximum debt/GDP is set out in a new Greek constitution... oh look, a "squadron of flying pigs", that's never going to happen.  The Greeks, if Europe forgives the debt will be looking to borrow the next morning, and GS or MS will be more than happy to camouflage these loans into something else.

The true disaster is that Europe's leader seem to believe that contagion will not happen!  These are the same guys who seem to have never noticed that Greece was getting in trouble.

Fundamentally, we are seeing a tragedy enfold in Greece today.  Banks are closed, so if you have no cash, you resort to barter...Of course the world will not see the Greek desintegration, because you can bet you ass that reporters are about to go on strike.

Sad to say, Virginie you are about to loose your bet!


Friday, June 26, 2015

So you want to start an airline (Part 2)

Lets say that you found your ideal hub, you have a good front office team lined-up and a bunch of maintenance guys who seem to know what's what.  What else will need to be done?

(4) Business Plan:  This is the hardest and the easiest, because the revenue analysis is easy -- manufacturers will do that for you!  No kidding, its a service they are happy to render, they will calculate all the routes you want to operate, give you estimates of operating costs (fixed and floating) analysis of maintenance reserves.  In a nutshell they will do the top line.  What they will not do is the rest -- the hard bit.  You have to select your destinations, you have to select your repositioning flights, you have to find airports that want you services (usually smaller airport are very very happy to see you arrive), but try getting a landing slot at a major airport, it could take a while.

In a sense, the best thing to do is start operating in regional and secondary airports (you may even provide a bus shuttle to the main airport -- its cheap and customers [including business people] like that).  The benefit is that slots are usually easily available -- Southwest started that way, could not get LA so then used San Diego (that was small at the time).  At any rate, if you are looking for premium fares its worth working from secondary airport, because they are quicker to get in and out (both for passengers and aircraft) and since your value added is not a hub and spoke model but a single route model business people like to get in and out fast, that has additional value to your premium clientele.

Lenders (and there will be lenders) will want a 7/10 year business plan, but really focus on the next 24/36 months -- the business plan of a start up has to be flexible because YOU WILL MAKE MISTAKES, its a given in this business, errors are common, even among the larger carriers.  You may get a route wrong, because the demand is just not there.  Assume an average range of 450km, that means some flights are shorter, but with a turboprop aircraft that's not an issue (and we assume you are not Middle Easter or Asian that starts-up with A380s or B787), the attractive features of turboprop is that on short flights (less then 60 minutes) they are actually faster than jet aircraft -- because the jets have to climb so much higher.   Over two hours (that's 1,000km) turboprop lose their allure quickly (its the vibrations that get to you).  Anyway, on the 350-450km range you "kill" the car/bus/rail options.  So you find a number of routes that match the density (based on your aircraft selection) and the range -- so that business and occasional travellers will want to use your services, and you start building your route model (that will drive your revenue model, that will drive your cost model).  

The first order of business is determining your break even point.  How many seats need to be filled at what fare to make the operations cash flow neutral (optimise for cash flow not profits -- a private company doesn't "care" about profits, it cares about cash flow).   Airlines used to play ridiculous games with their fares -- until they figured out that it didn't work, in fact it generated worse revenues because passengers quickly figured out how to optimize their ticket purchases.  Now their are two or three fares, depending on the class of travel, or the ability to change date or time of flight.

Once the break even point is determined, a bit of game theory comes in on moving along the fare estimates.  Is there a good (VIP) bus service that is available, what are its frequency -- generally VIP buses are attractive to certain class of business travellers that always go to the same destination on fixed scheduled.  CEO and senior management that fly in and out take a different view.

Getting competitive with other modes of transport require additional analysis, this blog is not the right place to discuss optimisation, but when looking at the competitive environment you have to take all travel time  in consideration (including taxi to airport and security, wait time between flights and overall flight time), its details are simple but the overall modelling is...something else.

There is no doubt that the heavy lifting occurs here.

(5)  Facilities & Costs:  Years ago dealing with a small operator I was having a sane(ish) conversation on the cost of running a particular type of aircraft in a specific jurisdiction (his) and told him that although the aircraft was slightly less expensive to acquire, the fact that the manufacturer had not committed to spare parts depot in the region meant that he would have to hold much larger inventory of spare parts.   This guy had been the CEO for a few years, and when I told him that the "normal" level of spare parts was around 10% of the aircraft cost, but that because of his situation the number would be closer to 20%.  He doubted my impartiality -- that is until the COO got into the conversation and indicated to the CEO that their current spare parts inventory was around 25% of aircraft costs (BTW lots of useless spare parts -- among them 40 seats... who sold them that idea?).  

Although the heavy maintenance is undertaken at one spot, at every airport at which the aircraft lands there has to be some minimal maintenance support -- if for example a flight data computer craps out! These are unavoidable costs. New ultra modern aircraft now have maintenance designated messaging systems where the aircraft is 100% monitored and can tell the maintenance group ahead of time that certain issues will need to be dealt with, but older types don't have that sophistication and really on pilots log (e.g. wipers don't work -- maintenance must fix wipers!).

One issue rarely discussed is the cost of starting a new station; everything from ground crew, airport services, operating fees and maintenance operations (sometimes these can be contracted out), but also advertising, promotions.  People have to know you exists!  Now the internet is great, but it has its limitations (if you are operating via a secondary airport you may not pop on Expedia!).  So, there is a requirement for real PR work, either with HR departments of companies in which you see potential customers or in local publications.  People need to know you exist, tickets are now exclusively purchased online, you need cutting edge web presence (from day one) you need an app that allows frequent fliers to purchase tickets, get boarding passes without even speaking to anyone at the airport, 10 years ago these were nice if we can afford, today they are essential components, and they are not cheap by any measure (if they are to work well).  airlines web sites are not cheap to build... they are actually expensive since they have to be linked to credit card providers, your route network and your booking system, of course there are now standard systems available, still its an expense!

Anyway, these are the low hanging fruits -- lots more is required.

(6)  Aircraft acquisition and leasing:  Believe it or not this is the easiest of the lot.  The first thing to know is that you will acquire, for a time, used aircraft.  Because rarely are new aircraft available. What type of aircraft, how large, these decisions are all part of the planning process, so lets assume you have already decided what size, then you have to negotiate with the manufacturer(s).  Buying aircrafts is like buying cars, the seller does it all day long and you do it once or twice in a lifetime (no jokes) there are things that can be negotiated and others that cannot -- its good to know ahead.  If you lease temporary aircraft from the manufacturer they will provide HUGE amount of support -- this is very valuable, because they want you to stay with the type, they will provide (for a period) a technical representative -- usually a guy that is a "super maintenance professional", they are an invaluable resource.  Manufacturers will provide training for both flight crew and flight attendants (yes they serve drinks 99% of the time, but when trouble arise its always amazing how focused they are -- if properly trained).

Older leased aircraft have many issues, they've had many owners and as many maintenance programs.  Years ago a small start up (actually it was a sub of a very very large airline) insisted that every aircraft be delivered with its copy of the maintenance manual.  The maintenance manual of a typical commercial aircraft had in those days maybe 200 volumes -- each thick binders that needed to be updated on a weekly basis.  These days are gone with ebooks, most manual now are electronic, but not the maintenance log, so what do you do when your leased aircraft has been in Canada, Mexico, India, France, Germany.... the log will be in so many languages with each jurisdiction having its own maintenance rules.  That's an issue (sometime the manufacturer will have translated the maintenance logs or required that the logs be exclusively in English -- something that your own maintenance crew will have to address).

Crew training is also important, each pilot will require type check and recurrent training, the cost of a simulator is $600/h.  If you have 10 pilots, it adds up.

Bottom line the manufacturers will be more than happy to lease you a temporary aircraft, and will support you tremendously during that time.  Fundamentally there is no real different between leasing and owning an aircraft (aside from depreciation), the days of tax leases are over (in 90% of jurisdictions) so leasing is just a tool -- as is owning.  Fleet management can be done either by leasing or owning, and the terms of these lease will very from lessor to lessors.  Obviously owning you aircraft can be fun, but it has to work within the fleet management objectives.

Financing new aircraft is relatively easy:  Export credit agencies and the manufacturer will do 90% of the work.  Only in the US are aircraft financed in the commercial market (and even there...).  Bottom line the cash required to purchase a $10 million aircraft will be about $1.5 MM, the balance will be financed by loans.  Spare part will have to purchased -- manufacturer may agree to some consignments if its convenient for their other business, but the parts may go to other operators when you need them -- that usually another 10/12% of aircraft cost.  

So you need substantial equity if you are going to purchase an aircraft, if its leased the $1.5MM goes away (not the rest) there are other issues as maintenance reserves... anyway details (important). The attractiveness of leasing (for a new airline) is that absence of profits (and even operating losses) reduces the attractiveness of depreciation allowance.  

However, its undeniable that starting an airline (and not just a mom-and-pop one aircraft operation) is challenging and require a substantial amount of capital...all that can be figured out during the planning stage.  

There's another option, buying old used aircraft.  Like old cars there's a reason for the discount! Aircrafts are not like cars, they've got to be in good shape the national aviation administration will have their own rules and requirements.  Older aircraft have a tendency to breakdown more often than newer aircraft.  Some are indeed "one careful owner" but not always.  The upfront capital costs and the fixed leasing or repayments are lower -- but maintenance can really kill you.  Several years ago I worked with a small Canadian airline that acquire a number of F100 at US$1.9MM each (comparable 100 seat aircraft sell new -- like the B737/A319 at around $35 MM each).  These F100s bankrupted the company, because once the engine/avionics were upgraded (total cost of $13 MM per aircraft), they still operated 25 year old aircraft.  That broke down regularly standing passengers...that was a very bad move.

Old used aircraft can be part of your fleet, they just cannot be the core.

Anyway, this is it for now.  There will be a part 3 on Financing & fleet planning in a few days...




Thursday, June 25, 2015

What happens when interest rates rise?

First off, I don't know the answer!

The problem lies with what economic theory predicts and what actually happens.  In a Keynesian system printing additional money will lead to one inexorable outcome:  inflation.  Granted we often think of inflation as the consumer price index -- which has gravitated around the 1-2% mark for the past 10 years.  We have unprecedented low interest rates -- inflation (CPI) is either slightly higher or equal to the interest rates.

On the other hand cars appear to be much much more expensive than they were 10 years ago (granted they all have bluetooth now...).  Computers seem to be cheaper (or at least the price of a MacBook air has not changed in 7 years -- its still around $1,200), but the box is better -- I guess!

So what is the long term impact of ultra low interest rates, of massive money printing?  Where is the hyper inflation, where is the social breakdown?  I don't see it.  I know that pension funds are finding things harder when they have a target return of 7.25% (In Canada is statutory for PV calculations), but when the Canadian government borrows at 2.5% for 10 years, its hard to see how they achieve their stated return target.  But the stock market and their real estate holdings have been doing well.

Granted a few markets have been on fire:  House prices (in almost the entire G7) are at historical high, stock market are considered "fairly priced" by insiders (that's typical double speak for -- wow that's expensive) so what we have seen is massive asset inflation. but relatively stable purchasing power for consumers.

What happens when interest rates start rising again?  Will the asset prices start falling (Bond prices will fall that's for sure -- its mathematical) but what about the market, real estate?

How will all this after pension funds, financial institutions, the "real economy"?  Just don't know, but after nearly 10 years of historically low interest rates one wonders.

Greece a deal is done... not really

It is strange to consider that little has changed over the past 4 months (May is so far away).  The latest (Sunday, ok Monday afternoon) Greek proposal is still far far away from what the IMF/ECB and Germany want.  In fact, the offer from Greece falls short of a certain "line in the sand".  But more importantly nothing here (and I mean NOTHING) looks like negotiations, in so far that there is give an take from both parties.  All the give so far has been from Greece to get "more money" which by the way helps nothing in the long run.  Greece's problem is that it has too much debt that it cannot service.  Moreover, the Euro8/9 billion on offer will be used to pay interest refinance outstanding debt.

In effect, an accord between Greece and the rest of Europe will only "kick the bucket down the road a little more".  Now don't think for one minute I am not aware that Germany sees a more serious game, if they give in to Greece than Portugal/Spain/Italy will be next -- after all who doesn't want some debt relief?


So you want to start-up an airline! (Part 1)

A solid 20 year chunk of my working life has centred around the airline industry.  I've seen my share of crazy proposals and also some brilliant moves.  When investors made a bundle and real economic value was created.  One of the best was South African Express -- management was changed in the late 90s and the airline faced harder time over the past few years, but it remains an example of what a good airline does:  It provides a service and generated economic growth (and profits for the owners). Today the airline is owned by the South African Government, but it was started by a Canadian in 1994, who having travelled to South Africa realised that the national carrier was not providing for the needs of the country's travelling pubic.  

There's an old joke:  "How do you make a small fortune in the airline business, start with a large one".  The business has been cruel, there are no way of securing route rights that can stop competitors from encroaching on the markets you developed -- in fact more town/airport are happy to see more competition.  

Over the past few months I've seen a number of "new airline" proposals.  Some have been good ideas some have been terrible ideas, but I wanted to take this opportunity to give would-be airline magnates a "how to" list that they should consider (before they call)

The basics:  Generally, a good airline manager is one that cares little for the equipment; he's not in love with aircrafts, he has not decided that his airline can only operate one specific aircraft type rather he looks at the optimal aircraft both for today's operations and for expansion.  In the mid 90s, Naresh Goyal returned to India, his homeland, and decided to start a new airline (like many others did at the time) call Jet Airways.  His business model was revolutionary for India:  Aircraft always left the gate on-time, and aircraft landed on-time.  On the other hand most other Indian start-ups worked a different model -- suck-up to government ministers for lucrative contracts and route allocations, and generally ignore the paying public.  Today only Jet Airways and Sahara Air India survived, unsurprisingly both of these two start-ups used the same concept, good aircraft, ignore the politicians as much as possible, provide good on-time service and have excellent maintenance operations.

The grand daddy of the airline start-up is SouthWest Airline that was masterfully run by Herb Kellerher, a lawyer that had little interest in aircraft and the business but was very focused on one concept -- profitability.  We also have Southwest to thank to introduce the concept of frequency as a source of additional traffic (something that was later studied by economists the world over).  As an airline operator his model is the best, always focus on the bottom line -- because independently of how good your service is if you don't make money you don't survive.

What does it take:

(1)  Start small but find quality teams:  My experience of start ups is that the front office is loaded with smart guys but they often will not pay for good maintenance personnel -- because they are "all the same" (not true).  A good maintenance team knows when to ground an aircraft and when to let it fly, they understand maintenance log and they know what it takes to keep commercial aircrafts in the air.

It amazed me while working with small start-ups how many times the advice of the Tech Rep was ignored (industry jargon), that they guys who were sent to be trained were not the guys doing the maintenance.  This was almost painful in India where nearly $100,000 of damage was done to an aircraft because no one bothered to read the maintenance manual on how to remove a fuel pump, and instead of unscrewing it with a special tool decided that brute force was preferable:  the result the aircraft spend two weeks on the ramp.  Bottom line you cannot have incompetent engineers taking care of your flight systems, avionics or other other crucial systems.  

The team that meets the customers on a daily basis need to feel part of the process and need to be able to call someone if there are problems.  The most frustrating thing in dealing with U.S. carriers is that the desk team have no room to manoeuvre and no information.  Leaving customers pissed off when problems arise.  This would never happen on WestJet or SouthWest Airline.  There's always a number to call and often there are solutions, but always there's information.

Bottom line get a quality team and empower them.

(2) Find a good hub:  That's nothing to do with traffic it has to do with maintenance.  Aircraft need lots of TLC -- they are prone to breaking and need to be continually maintained.  As a start up rarely will you have access to new aircraft and therefore these lease aircraft have a more "checkered history". In fact, the maintenance requirements of a 20 year old aircraft are substantially higher than a 10 year old aircraft.  It's not as such a problem, but its something that has to be taken into account -- especially when looking at turn around time (another industry jargon).  Old aircraft appear cheap, but require lots of TLC.  The reality is that small commercial aircraft, such as a Dash8/Q100, have substantial maintenance reserves, and indication of the cost/time required to keep them in top shape. It is also very important to have direct links to the closest manufacturer's parts depot.  If it takes 24 hours to get a critical part, these are 24 hours where an aircraft is grounded

(3) Route selection:  Is challenging because if you are a new operator on new routes you may wrongly estimate demand.  Business travellers want to be able to book within 24 hours, but if you have insufficient spare capacity -- or worse yet leave passengers on the ground, your business model will breakdown.  You need sufficient capacity to meet demand, but need to limit capacity so that your flights are profitable.  You have to be route agnostic; you have to decided not only which route to pick what fare to offer but also what routes you may cover because it allows you to reposition an aircraft for the next day (or maintenance requirements).  This is sufficiently complicated that its almost impossible to use computer to achieve the best results.

On aspect of the start-up business is that there has to be a sense of what business you are trying to attract; is it the occasional traveler, the business person or the tourist?  Each will have different requirements and your airline operations will be dictated by the type of clients you are trying to attract.  In order of importance (revenue wise) are Business travellers, occasional travellers and Tourists.  The latest category is important but fickle and are extremely price sensitive.   Manufacturers are very helpful in creating your business model (in fact their help is essential).

(4) Equipment Selection:  There are many choices available to the start-up carrier.  Obviously, price wise older equipment is attractive -- but there are many pitfalls associated with older aircraft.  The first, and more complex is inconsistency of maintenance (not only doing but also writing-up) there can be many languages than add to the difficulty.

How large an aircraft do you take -- many occasional or tourists have an huge fear of propeller aircraft -- doesn't matter that a turboprop aircraft is essentially a "jet engine" the perception is that these aircraft are less safe.  How small do you go, a Cessna Caravan (14) , Dash 8/100 (37), King Air (12).  What do you do once you get bigger?  Each of these aircraft have their advantages (first they are all still in production), but some are a one class aircraft (Cessna and King) insofar as if you want bigger you have to change your fleet (that means new training for maintenance and pilots and new spare parts depot).  These are all questions that need to be (eventually) resolved or at least discussed.

More next week! 



Friday, June 19, 2015

Update: GRLD -- The orange Grill Cheese Truck $100 million valuation

Several weeks ago I wrote about GRLD -- Grill cheese Truck Inc, that on January 30th 2015 had a market cap of US$ 100 million.  It fell a bit since then... actually it's dropped considerably.  Proof that sometimes the market wakes up.

The new price $1.07 down from an issue price of $6.00 -- so a slight market underperformance.


Turns out the market can see a stupid deal

Thursday, June 18, 2015

IMF says Greek banks may not open on Monday -- and that's OK

Getting ready to collect on my bet -- 1 year and 8 months ahead of schedule!

Texas Building its own gold depository because it doesn't trust Yankee Federal Reserve...except for one small detail

Ok this is a short one, Texas has decided to "repatriate" its gold from the Federal Reserve.  Anyway that's the headline, now the truth:

Texas has no gold at the Federal Reseve
Texas University Pension fund (about 4 years ago) acquired some gold (nearly $3 billion) about half are in real gold the balance are in futures average purchase price about $1,100/oz
Texas University's gold is held by HSBC (in New York) and not with the Federal Reserve.

Now this is the funny bit, Texas University COULD have kept its gold with the Feds, at an annual cost of about $20,000.  Instead it trusted HSBC that charged it....wait for it "1 million dollars" per annum.

Now the funny bit is of course that Texas is making, a "you stinking feds" statement when in fact the Federal Reserve's Texas gold balance is ZERO.  It gets even better, they trusted a "Chinese Bank" more than they trusted the U.S. Federal Reserve.  They paid 50x what it would have cost if they had deposited the gold with the federal reserves -- who said that the private sector was more efficient?  Plus, and this is the best bit, they've now got to build a relatively serious building to house Texas's "gold", which doesn't exist.  As one would say priceless!

Just funny, that all

Wednesday, June 17, 2015

Could this be it? Greece the end of the end game

Well its been a ride, the on-again off-again negotiations seem to be off for good with Germany taking a very hard and uncompromising position vis-a-vis Greece.  This coming weekend has been dubbed by some as a Lehman Weekend -- where in 2008 Lehman went from being a solvent (ish) investment bank on Friday to "get your stuff out of the office before Monday, because liquidators are at the door.

Like Paul Krugman I believe that a deal is possible -- its not likely, but its possible.  The issues are geo-political as the actions on Greece will determine how things will proceed in Spain (looking at elections soon), Portugal and to a lesser extent Italy.  It is possible that the calculations in Berlin is making is that its not a question of saving Greece but to avoid an expensive end game in Southern Europe. Greece has given plenty of ammunition to Germany from intransigence on reforms to an absolute belief in their righteousness of their cause -- the Greeks have elected a slightly delusional (its not our fault, its the other guys) that grattes in Berlin -- it grates because, in part, its true.

Some say that a Greek exit would be good for the economy, except Greece is not a big manufacturer, 80% of Greece's economy is services -- mostly tourists I would guess.  So, Greece is a country that imports everything from fuel to machinery (mostly German by the way), a devaluation of a new national currency would not help them, except it would reduce wages, which maybe a necessary pre-condition to rebuilding an economy -- the Euro makes downward wages adjustment almost impossible, without huge labor strife.

There is no doubt that a Greek exit from the Euro (and maybe from the entire Eurozone system) would be catastrophic; a calamity to Greeks and to their country.  It doesn't mean that an exit will not occur.  It is evident that the conversation has grown stale between the parties -- they grow no closer in the past few weeks, and the strident level of rhetoric is not promising.  The Americans tried to "get involved" but got smacked down for their efforts -- Berlin even when as far as to say that American foreign policy was making things harder for Europe -- that, of course, referred to sanctions imposed on Russia after they invaded the Ukraine.  Since then, the Americans have backed down, let Europe deal with its problem -- of course if Greece exits everybody will pay...

On a side note has anyone noticed fuel prices and stockpiles -- its rather strange OPEC announces "no cuts in production for the foresable future" with inventories near all time high and prices, well prices they keep rising on the spot market.  It now seems that bad new is good in the oil sector -- it was the same in the stock market a few years ago, because more bad news meant more quantitative easing, which means more liquidity, which translates into higher stock prices...

Monday, June 1, 2015

Greece: Now the Americans are worried of an accident

U.S. officials are generally cautious about intervening in European policy debates. The European Union is, after all, an economic superpower in its own right — far too big and rich for America to have much direct influence — led by sophisticated people who should be able to manage their own affairs. So it’s startling to learn that Jacob Lew, the Treasury secretary, recently warned Europeans that they had better settle the Greek situation soon, lest there be a destructive “accident.”
Paul Krugman, New York Times, June 1, 2015

Things are getting serious.  Over the past few days other (many many others) things have been on my mind, and Greece has been off my radar.  Now, it appears that the negotiations are heading towards a breakdown.  For American policymakers the problem is the consequences of a Greek exits are unknown.

Turns out that Greece's hand on "Russian negotiations" is a lot weaker than I had thought -- there are too many governments that are weary of "pissing off" Putin to get all Gung Ho about the renewal of sanctions against Russia -- if other countries are against the renewal, Greece becomes a side player.

It would seem that a deal is now nearly impossible unless Merkel and friends make a political decision.  Till then the odds on my now three month old bet are looking, unfortunately, better and better!