Bull and bear: The one trillion dollar coin - The Share Centre Blog

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Michael Baxter

Bull and bear: The one trillion dollar coin

Written by: Michael Baxter on January 8th 2013

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: The one trillion dollar coin. Samsung and the $200 billion gamble. Bank of America sees quarterly profits wiped out by bill for past excess. Companies in the News:  Interserve, EasyJet.

The one trillion dollar coin

Can you imagine Barack and the boys in the White House feeling a bit peckish during one of those late night meetings. So they send Michele out to grab some pizzas. “Pick up some money from petty cash darling,” says Barack. So the first lady arrives at the pizza restaurant, and says to the cashier: “I hope you you’ve got lots of change by the way, I only have a trillion dollar coin.”

Okay that scenario is not very realistic. For one thing, the pizzas would be delivered.  And anyway it is unlikely the delivery person would have enough change to accept a one trillion dollar coin.

Maybe an alternative would be to drop the coin from a helicopter. That may make a bit more sense. After all, Milton Friedman once said that if we see a re-run of the Great Depression, and all other measures failed, the US government could always scatter money across the land from a helicopter. As you probably know, before he was Chairman of the Fed and merely a lowly academic, Ben Bernanke once said he thought the Friedman money drop idea made sense.

The snag with one trillion dollar coins is that they are not very fungible – there is very little out there that is worth one trillion dollars.

The idea then is to deposit the coin with the Fed, and then the US government can withdraw money against it. So, by doing this, the US government would have created one trillion dollars to fund its spending, quite literally out of nothing. Well maybe not entirely nothing – it would need a bit of platinum, and that’s not cheap, but surely the value of the platinum that goes into such a coin would be worth no more than a few hundred dollars.

Here is some background. Under US law the US government cannot normally print money. Only the supposedly independent Fed can do that. But 12 years ago legislation was passed affording the government the right to print platinum coins in any denomination it chose. The purpose of such coins was purely ceremonial. So people might buy a platinum coin to commemorate say the first men landing on Mars, or the 250 year anniversary of US independence.

But then, the spat over fiscal cliffs and ceilings began. We all know that unless something odd happens, US congressman will be at each other throats, voting down each other’s proposals. Democrats will say that Republicans are putting politics before the interests of the US. Republicans will say they are saving the US from Obama’s madness.

The rest of the world, on the other hand, will look on in horror, and the Chinese will no doubt say: “I don’t think we ever want democracy.”

So here is the idea, why not use that right conferred on the US government to print platinum coins? That way Obama can quite legally fund his plans without approval from Congress.

And now Paul Krugman – the Nobel Laureate, supporter of Keynes, and sort of supporter of Obama (although he doesn’t think Barack is radical enough), and writer of a very influential blog for the ‘New York Times’ – has suggested that he may be in favour of such a move.

It’s Freidman’s money drop in all but name.

But actually, it does seem as though Krugman is not really in favour of the idea; rather he sees it as a bluff to ensure support from Congress for Obama’s plans. So Obama effectively says, you support me, or I will do something straight from your Republican nightmares.

The disadvantage of such a move is that it can’t be reversed – unlike QE, which can. And therefore, in the long run it may be inflationary. But then look at this idea in the context of yesterday’s thought for the day.  See: Conspiracy theories, free lunches, and the theory that banks are destroying wealth

Samsung and the $200 billion gamble

Profits at Samsung in the latest quarter were $8.27 billion. It was the fifth quarter in succession to see profits rise. The year on year comparison is very impressive: profits up 88.8 per cent and for the last quarter profits were up 9.2 per cent.

Not bad at all. Back in December, the company’s market cap passed $200 billion, almost double its value from 12 months before. The South Korean company is the world largest tech by revenue, and the world’s 20th largest company by market cap.

Yet investors were concerned this morning. The company may be giving Apple a run for its money in the smart phone sphere, and arguably achieved a score draw with Apple in the law courts last year, but where does it go next?

Sure sales of smart phones are enormous, but surely growth prospects are limited. The company is already the world’s number one in the world in the business of making memory chips, smartphone application processors and televisions. But when you are number one, growth potential is limited. And in any case these businesses are small fry compared to smart phones sales.

Critics say the company needs more strings, as it were, to its bow. It needs to sell more tablets, more PCs, they say.

But then the critics may be over egging it. Samsung is experimenting, and trying lots of ideas. It’s a key player in the Tizen project, a massive collaboration involving Intel, and NTT DoCoMo, which is trying to create the definitive operating system  for multiple device categories including smart phones, tablets, in-vehicle infotainment devices, and smart TVs. See Tizen – Wikipedia.

At the CES show in Las Vegas, the company has been making noises about new TVs, including those with very high resolution. But the real interest has been the company’s move into combining internet access with TVs.

Internet TV may well prove to be The product in 2013. Apple is supposedly working on its next big product in this field. But unlike smart phone makers of a few years ago, which appeared to sit back and watch Apple, Samsung is no bystander in the field of Internet TV.

The revolution in bringing the Internet into our pockets, cars, bedrooms and living rooms is only just underway. The growth potential remains great. And Samsung is surely a company that stands a good chance of being one of the main beneficiaries.

Bank of America sees quarterly profits wiped out by bill for past excess

Some might say that $20 billion is not a lot. But for the banks and those who wish to borrow from them, it just adds to their woes. However, it has to be seen in the scheme of things.

Bank of America has agreed to pick up a $11.6 billion tab for its dispute with Fannie Mae over mortgages sold to the mortgage company, back in the heady days when subprime mortgage securitisation still seemed like a good idea. Actually, the loans at the centre of the dispute were sold to Fannie Mae by Countrywide, which was acquired by Bank of America during that mad period of 2008, when Merrill Lynch was also acquired and Lehman Brothers went bust. So actually, Bank of America may be able to occupy some moral high ground. It was pressurised into buying Countrywide as part of the overall package designed to stop a meltdown in capitalism. So it very kindly bought Countrywide and now it is paying the price – at least that’s one take on the story.

Meanwhile, Bank of America – along with Wells Fargo, JP Morgan Chase and Citigroup – have agreed to pay a fine of around $8.5 billion to settle allegations that they abused the mortgage foreclosure system.

So in all, that’s $20 billion. Some might say given the unholy mess created by banks in the first place, that such a fine is a little on the light side.

Intriguingly, the banks are arguing that they do not accept any wrongdoing in the first place, but they just want to try to forget the whole sorry saga. So they would rather pay the money, and start over, rather than furrow over the same old ground.

Companies in the News

Bull:       Tempus in the ‘Times’ was about as bullish as you can get on Interserve, this morning. The company is one of the best places for investors to put their money, it suggested. Tempus says it focuses on areas such as schools, hospitals and water, which are non-discretionary.

Bull and bear: Questor in the ‘Telegraph’, on the other hand, was positive indeed about EasyJet, with one snag, which is why it only said “hold”. The snag is the share price.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Tags: Bank of America Fannie Mae, Easyjet, fiscal cliff, Interserve, one trillion dollar coin, Profits at Samsung, Tizen project, trillion coin inflation

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