May 2011 - Page 2 of 9 - Money Morning - Only the News You Can Profit From
Dominique Strauss-Kahn's forced resignation from the International Monetary Fund – and the search for an IMF successor – is a blessing in disguise. Strauss-Kahn's term in office saw a vast expansion of the IMF's activities, a fact often used to praise his tenure.
But a close examination yields a very different picture. Under Strauss-Kahn, who took over as the IMF managing director in September 2007, nearly every intervention has resulted in failure: The IMF allocated capital to places it shouldn't have allocated capital to, and propped up governments that shouldn't have been propped up.
The ideal IMF successor to Strauss-Kahn would be Ebenezer Scrooge – as a prelude to closing the institution down altogether.
That's because the IMF is a waste of money … your money.
To understand why, let's take a look at what the IMF is, and see how it works.
The IMF is an international financial institution that's based in the U.S. capital. It operates a bit like a credit union, but on a global scale. Like a credit union, the IMF's member countries – all 187 of them – provide the funding. And the IMF board then lends that money out.
Each member country has a financial stake in the IMF – a funding "quota" that's expressed as a percentage – and contributes accordingly. Because the United States is the single-biggest stakeholder in the IMF, it also has the single biggest quota (17.75%).
The United States is followed by Japan (6.58%), Germany (6.14%), and then France and the United Kingdom (at 4.52% each).
But that doesn't necessarily mean that this country (meaning U.S. taxpayers) is responsible for 17.75% of the money the IMF doles out as its share of the global bailout packages that have been issued during the past few years.
Indeed, the U.S. stake is actually higher. That's because some IMF-member countries have currencies that potential borrowers just cannot use. The IMF refers to this as "non-usable resources." As of January 2010, about 21% of the IMF quota contributions fell into this category.
Because the United States, Japan and their European counterparts have "usable" currencies, the IMF relies on them for funding contributions that are actually greater than their official quota.
And that means the burden on U.S. taxpayers is higher than most realize.
There are monopolies.
And then there's Microsoft Corp. (Nasdaq: MSFT).
With its Windows operating system installed on virtually all of the world's PCs – the market share peaked at about 95% – Microsoft became synonymous with the personal computer revolution.
And it didn't stop there. After locking up the operating-system market, Microsoft did nearly the same thing in the applications market with its Office suite of productivity software.
Fresh signs of a possible default in Greece have revived a contentious debate between politicians and major banks in the European Union over what to do about the Greek debt crisis.
Yesterday (Wednesday) Greek Prime Minister George Papandreou had no success convincing opposition party leaders to support new austerity measures needed to comply with bailout terms set by the International Monetary Fund (IMF) and other European Union countries.
Without those measures, Greece will not receive the bailout money it needs to avert default. Default would destroy the country's credit for a decade, maybe longer.
The volatility in the oil market has notched up this week, courtesy of another bout with debt jitters in Europe. Oil and gasoline futures are moving down – and most of the energy sector along with them.
In a situation like the current European debt mess – where maximum uncertainty is channeled into a very focused concern – oil futures will generally overcompensate, exaggerating the downside.
Of course, that is of little consolation to the traders who in the past few days have seen about $3.00 cut from the near-month futures (July).
The U.S. job market's sluggish pace of recovery has kept many workers jobless and discouraged, and now many feel advancements in technology and globalization will hurt U.S. job growth.
The U.S. Department of Labor reported earlier this month that the country's unemployment rate in April rose to 9.0% from 8.8%. Employment in more than a dozen sectors hit four-year lows in April, and another 10 have gained little since hitting lows in the beginning of this year.
But it's not just a slow economic recovery that is leaving people unemployed. The U.S. job market is changing, as companies find ways to function with fewer workers and some shift operations overseas.
More than 13 million people are searching for work, and even though U.S. companies have collected about $940 billion since the credit crisis, many aren't hiring.
At the height of the 1990s Internet boom, Cisco Systems Inc. (Nasdaq: CSCO) wasn't merely the ultimate tech titan.
It was the most valuable company on earth.
Cisco – the maker of the switchers and routers that form the backbone of the Internet – saw its shares zoom 66,000% during that decade, thanks to booming PC sales, the exploding popularity of the Internet, and the widespread realization of the value of networking.
That mesmerizing surge gave the San Jose-based company a peak market value of $555.4 billion, a total that's never been approached again – by Cisco or any other firm.
In 2000, however, the Internet bubble burst – derailing the Cisco Express. Now one of the world's biggest tech firms, the growth rates of 40% to 50% that had propelled Cisco throughout the 1990s became impossible to sustain – and even fell to the single digits by the end of the 2000s.
I just spotted the next global "black swan."
But I think it actually looks like a giant Pteranodon.
I'm talking about so-called "death derivatives."
The Lowdown on "Death Derivatives"
After betting trillions on everything from liar loans to mortgages that never should have been issued in the first place, the big banks are back and they're betting on death – yours and mine.
It seems that Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM), Deutsche Bank AG (NYSE: DB) and others now want to help securitize "longevity risk" through a newly created derivatives market.
I don't know whether to laugh or cry.
Here's the deal. The banks want to collect billions in fees from pension funds and other institutions by issuing insurance that will manage the risks associated with living longer than the financial planners planned.
What Wall Street is proposing is to package up the fees from these instruments into bonds that are then securitized and sold to investors via a secondary marketplace the banks themselves will effectively create – a "death derivatives" market.
You might think this is farfetched, but the idea is actually far enough along that several financial institutions have already created mortality -rate indices that will be used to price and trade these death instruments.
Start the conversation
Almost all U.S. households create a financial game plan to ensure that ends meet during inevitable struggles with money.
Yet, as anyone who makes a game plan knows, even the most detailed, thorough outlines can fail when real life circumstances intervene.
Just ask the thousands of Americans suffering while tornadoes and flooding continue hammering the U.S. South and Midwest regions, leaving whole towns of people homeless and jobless.
From 1990 to 1999, Intel Corp. (Nasdaq: INTC) shares soared 10,000%, making the chipmaking half of the so-called "Wintel" duo a stock that almost every investor wanted to own.
And why not: Intel's processors served as the brains of 90% of the world's personal computers. And the PC market was booming.
It's been a much different story over the last 10 years, however.