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If the recent up-tick in global optimism about the economy persists and Europe makes some headway toward fiscal responsibility then it is likely that the risk aversion for European financial assets will subside. The best example of this risk aversion for European financial assets is the historically low interest rate on 10 Year Treasury bonds. Currently the real interest rate on 10 Year Treasury bonds is -0.10%. Over the last five years the average real interest rate has gone from 2.29% in 2007 to 0.55% in 2011. It is reasonable to assume that the real interest rate will go back to 2011 levels regardless of the resolution of the European financial crisis. Negative real interest rates only make sense when there is high probability of massive defaults. At the minimum we are looking at an increase in the nominal interest rate on 10 Year Treasury Bond from 1.89% to somewhere around 2.54% assuming no significant change in the inflation rate. The worst case scenario is if the resolution to the European crisis results in lower risk and the real interest rates trend closer to the 2007 levels. The 10 Year Treasury Bond would increase from 1.89% to by 4.28%. Ouch! This could blow up the mortgage market.

If we follow the logic of portfolio managers the situation gets worse. To take advantage of the attractive interest rate to risk differential, portfolio managers will re-balance their portfolio quickly by selling Treasury bonds. This will put pressure on both Treasury interest rates and the Euro to dollar conversion rate. The United States could get hit with a double whammy in an election year. Here is a chart of the real interest rates from the Treasury Department.

A couple of weeks ago I decided that the muddle through economy was the most likely scenario for the United States in 2012. Having made that decision the next course of action was to investigate how the muddle through economy scenario will impact my personal finances and the place I work. Today I read a nice summary of the likely impacts of a muddle through economy in a newsletter from John Mauldin. This summary is a much better explanation of my beliefs concerning the economy than anything I have written. In the newsletter he quotes Gary Shilling who says,

Gary identifies 9 causes of slow global growth in the years ahead:

1. U.S. consumers will shift from a 25-year borrowing-and-spending binge to a saving spree. This will spread abroad as American consumers curtail the imports of the goods and services many foreign nations depend on for economic growth.

2. Financial deleveraging will reverse the trend that financed much global growth in recent years.

3. Increased government regulation and involvement in major economies will stifle innovation and reduce efficiency.

4. Low commodity prices will limit spending by commodity-producing lands.

5. Developed countries are moving toward fiscal restraint.

6. Rising protectionism will slow—even eliminate—global growth.

7. The housing market will be weak due to excess inventories and loss of investment appeal.

8. Deflation will curtail spending as buyers anticipate lower prices.

9. State and local governments will contract.

My first concern is that we may be embarking on a downward spiral in international trade. Although several people I have spoken to are in favor of protectionism for a variety of reasons, the economic impact on certain industries in the United States could be higher costs and lower sales volumes. So we may even greater economic dysfunctionality in 2012 than in 2011. What I mean is that some sectors of the economy might find themselves facing rampant inflation while other sectors are facing stagnant growth or even rampant deflation. Hmmm… maybe I should start working on the other implications of the summary.

I prepared this recipe for New Year’s Day with fresh black-eyed peas. It was good. Leftovers were excellent, too!

Serves 8

Small boneless hams are available in the meat case at most supermarkets. An equal weight of ham steak can be used. To ensure that the rice cooks evenly, cover the surface with aluminum foil when cooking. Use low-sodium chicken broth or the dish will be too salty. Serve with hot sauce.

Ingredients

• 6 slices bacon, chopped
• 1 (1- to 1 1/2-pound) boneless ham, cut into 3/4-inch-thick planks (see note)
• 1 onion, chopped fine
• 2 celery ribs, chopped fine
• 4 garlic cloves, minced
• 1/2 teaspoon dried thyme
• 4 cups low-sodium chicken broth (see note)
• 2 (16-ounce) bags frozen black-eyed peas
• 2 bay leaves
• 1 1/2 cups long-grain rice
• 3 scallions, sliced thin

Instructions

• 1. BROWN PORK Cook bacon in Dutch oven over medium heat until crisp, about 8 minutes. Using slotted spoon, transfer bacon to paper towel-lined plate. Pour off all but 1 tablespoon fat from pot and brown ham, about 3 minutes per side. Transfer to plate with bacon.

• 2. COOK VEGETABLES Add onion and celery to pot and cook until softened, about 5 minutes. Stir in garlic and thyme and cook until fragrant, about 30 seconds. Add broth, peas, bay leaves, and browned ham and bring to boil. Reduce heat to low and simmer, covered, until beans are just tender, about 20 minutes. Transfer ham to cutting board and cut into ½-inch pieces.

• 3. SIMMER RICE Place rice in fine-mesh strainer set over large bowl. Rinse under running water until water runs clear, about 1 minute. Drain rice well and stir into pot. Place square of aluminum foil directly on surface of simmering liquid. Simmer covered until liquid is absorbed and rice is tender, about 20 minutes, stirring and repositioning foil twice during cooking. Remove from heat and let stand, covered, for 10 minutes. Fluff rice with fork. Stir in scallions, bacon, and ham. Serve.

Hoppin’ John – Recipe | Cook’s Country – Recipes That Work

As a fan of the Dave Ramsey show, I think that Dave will help consumers more. As a resident of Ohio, I am familiar with Richard Cordray and respect his past accomplishments. However, it is very likely that the Consumer Financial Protection Bureau will spend far more money than their benefit to society. I don’t think you do not need to go too much farther than to listen to the priorities. Leveling the playing field between the banks and non-banks is a priority for “consumer financial protection”? I think a smarter financial consumer is the right answer.

Consumer Financial Protection Bureau director Richard Cordray just did a quick spot on CNBC, and the anchors threw him a few hardballs.

But he threw them right back, after the anchors mentioned JP Morgan CEO Jamie Dimon’s "Dodd-Frankenstein" line, Cordray said that he had just spoken to Dimon on the phone yesterday, and that Dimon was "very interested in our effort to level the playing field between banks and non-banks."

Richard Cordray Was Just On CNBC, Mentioning Jamie Dimon And Staying Totally On Message

A few weeks ago I wrote a post about installing additional insulation in the ceiliing, Green Technology that pays for itself. Recently I was pleasantly surprised when I received my December electric bill. It was down 38.8% compared to last year. The drop was larger than I expected so I decided to update my spreadsheet with the heating degree days, kilowatt hours, and cost. The largest contributor to the drop comes from a 25.7% drop in heating degree days. This year has been warmer than last year. When we adjust the numbers for the lower number of heating degree days, we can see the effect of the insulation in a lower amount of kilowatt hours used per heating degree day. This year I estimated that the additional insulation resulted in 10.2% drop in kilowatt hours and a $29.78 drop in the total bill. Here is my updated chart.

I was curious how much mercury comes out of compact fluorescent lights since the EPA was so concerned about electrical power plants and my power company was so insistent that I take some free compact fluorescent lights. It sure sounded strange to have my power company begging me to take the lights. The logic being used by the EPA to justify shutting down power plants is particularly perplexing. They seem to believe that I am at a greater exposure risk to mercury coming out of an electrical power plant thirty miles away from me than a broken compact fluorescent light in my living room. It actually gets worse. It is reasonable to assume that most of the non-functioning compact fluorescent lights are ending up in nearby garbage dumps and eventually being carried into our water supply. My inner engineer says this “science” does not pass the laugh test. I did find the AEI-Brookings article referenced in the quote below on the internet, http://www.joelschwartz.com/pdfs/AEI_Brookings_Mercury.pdf.

In a pamphlet extolling the virtues of the looming federal ban on traditional incandescent light bulbs, the EPA says it’s a "myth" that the mercury used in compact fluorescent lights is "dangerous in your home."

"There’s no evidence," the brochure says, that "brief exposure to the mercury in a broken bulb presents a health risk to you or your family." Just air out the room, sweep up the debris into a jar and you’re fine.

Truth is there’s no meaningful health risk from either the bulbs or the power plants. As a 2004 paper published by the American Enterprise Institute and the Brookings Institution noted, "mercury exposure at current levels is unlikely to be causing harm."

The EPA’s Mercury Madness – Investors.com

I have been reading This Time is Different: Eight Centuries of Financial Folly for the last month. It has been slow going since it reads like a text book and I have read my fair share of text books in my life. I would have given up except that the authors have some collected some important historical data about financial crises. The authors have methodically compiled approximately 800 years historical data base on financial crises and their causes. There are lots of tables, charts, and professorial comments about the causes of the crises.

A few days ago I was surprised when Henry Blodget wrote an article advocating more government spending in the article, Well, It Sure Seems Like Keynes Was Right, and based it partly on Reinhart and Rogoff’s analysis of prior financial crises. I was surprised since the authors did not comment directly about stimulus spending in the chapters I read but here is what Henry wrote:

And I’ve also looked back at history–namely, Reinhart and Rogoff’s analysis of prior financial crises, the Great Depression, Japan, Germany after Weimar, and so forth.

So I skipped to the end of the book and read the last two chapters. The closest I came to a comment on Keynesian stimulus spending is:

Debt sustainability exercises must be based on plausible scenarios for economic performance, because the evidence offers little support for the view that countries simply “grow out” of their debts. This observation may limit the options for governments that have inherited high levels of debt. Simply put, they must factor in the possibility of “sudden stops” in capital flow, for these are a recurrent phenomenon for all but the very largest economies in the world.

and

Our extensive coverage of banking crises, however, says little about the much debated issue of the efficacy of stimulus packages as a way of shortening the duration of the crisis and cushioning the downside of the economy as a banking crisis unfolds.

So although the authors are concerned about plausible debt sustainability scenarios since it may lead to “sudden stops” in capital inflow in smaller economies, their data has shown that large economies like the United States have been immune from these “sudden stops”. This leaves open the question of what would happen to capital inflows if the United States undertook another stimulus like Henry Blodgett is recommending.   At what level of debt does the rest of the world decide that the United States debt is not sustainable and they should invest their capital elsewhere. If that scenario occurs we can safely say this time is different.

As a back-handed complement I would like to thank Henry for making the “This Time is Different” book much more interesting than it would be otherwise.

This week an American Lung Association ad, Red Carriage Advertisement III, caught my attention. This ad associates childhood asthma and to the pollution generated by power plants. In my life I have never seen an asthma attack triggered by pollution from a power plant so I am skeptical. Today I decided to check on their allegation. I found that the EPA site has a page on asthma triggers, http://www.epa.gov/asthma/triggers.html, and power plant pollution is not one of nine major sources listed on that page. The closet source I could find to power plant pollution was Outdoor Air Pollution so I followed that link. This category includes car exhaust, smoke, road dust, factory emissions, and pollen from plants, crops and weeds. From my limited experience around asthma sufferers, I suspect that power plant pollution would rank third or lower in this category at causing asthma attacks.

To put a face on the problem with pollution politics here is a power plant we go by every time we go to Virginia Tech. Across from the plant is a gas station I have stopped at on several of my trips. This part of my trip is one of the most scenic parts of my trip. The air is clean, the nearby forests are lush, and the water in the New River is cold and fast.  It is no surprise that the gas station is full of hunting and fishing supplies. So where do we draw the line when you cannot see, smell, or taste pollution? Are we trying to fix a problem that does not affect this community? In this rural area there are probably only two sources of good paying jobs, this plant and the chemical plant a few miles away at the Narrows.  I suspect that the closing of this plant will be catastrophic for the community. I doubt that these employees will find jobs nearby. Although this plant is 92 years old, requires updated scrubber technology, and is probably getting their butts kicked by gas powered generators, it is probably still making money for its parent company, AEP. Despite its money making prowess AEP did not find it to be cost effective to install scrubbers or convert the facility over to gas. To make up for the lost generating capacity AEP appears to have decided to install gas powered generators in some place that is not close to Glen Lyn or its employees. The really big problem I have with pollution politics is that closing this plant will increase rates by 15% and the community will not see, smell, or taste any benefits. The air will still be clear, the forests will still be lush, and the New River will still be cold and fast. For these “improvements” they get dramatically higher unemployment. As a country with a variety of complex business and environmental problems, you would think we would be getting better at balancing the needs of the business, environment, and community. At the very least we should be trying to avoid lose-lose decisions like this. Instead it appears that AEP and the folks around Glen Lyn did not have a say in the matter. We seem to have constructed a political system that is particularly adept at making “good” environmental decisions that appear to be lose-lose decisions for businesses and communities. We seem to have lost our way on how to make decisions that balances the needs of most of the people. We may not be able to satisfy everyone but we not even trying to balance the needs of these different groups. The sad part is that when this plant is closed, asthma sufferers will still be suffering from the same old triggers of asthma attacks. Nothing has changed for them!

Appalachian Power customers could see up to a 15 percent increase in monthly bills as a result.

By Laurence Hammack | The Roanoke Times

The Roanoke Times | File 2003

American Electric Power announced today that the Glen Lyn Plant along the New River in Giles County will be closed by Dec. 31, 2014. The plant is one of 11 in seven states to be retired or modified by AEP to meet new regulations from the U.S. Environmental Protection Agency.

A coal-burning power plant in Giles County that has spewed carbon emissions for years faces a shutdown to comply with clean-air requirements — and consumers are facing the possibility of higher electric bills

AEP announces plan to close coal-burning Giles County power plant – Roanoke.com

I read the article, Tainted EPA Report on Fracking Blasted by Gas Co., and just had to confirm the details. Could the EPA have been this incompetent? Here is an excerpt from the Encana web site discussing the EPA report. I thought Encana’s discussion of the two deep monitoring wells the EPA drilled to be particularly funny.

Numerous discrepancies exist in the EPA’s approach, data and analysis. A few of these discrepancies are:

• The EPA report ignores well-known historical realities with respect to the Pavillion field’s unique geology and hydrology. (See BACKGROUNDER below)
• The EPA drilled two deep monitoring wells (depth range: 783 – 981 feet) into a natural gas reservoir and found components of natural gas, which is an entirely expected result. The results in the EPA deep wells are radically different than those in the domestic water wells (typically less than 300 feet deep), thereby showing no connection. Natural gas developers didn’t put the natural gas at the bottom of the EPA’s deep monitoring wells, nature did.
• There is unacceptable inconsistency between EPA labs’ analysis for numerous organic compounds reported to have been found in the EPA deep monitoring wells. Data is not repeatable and the sample sets used to develop these preliminary opinions are inadequate.
• Several of the man-made chemicals detected in the EPA deep wells have never been detected in any of the other wells sampled. They were, however, detected in many of the quality control (blank) samples – which are ultra purified water samples commonly used in testing to ensure no contamination from field sampling procedures. These two observations suggest a more likely connection to what it found is due to the problems associated with EPA methodology in the drilling and sampling of these two wells.
• The EPA’s reported results of all four phases of its domestic water well tests do not exceed federal or state drinking water quality standards for any constituent related to oil and gas development.

Encana – 2011 News Releases – Why Encana refutes U.S. EPA Pavillion groundwater report

My sympathies go out to the family and friends of Deriek  Crouse. It appears to be another senseless killing as investigators struggle to identify a motive. However as an alumni and parent of a current student at Virginia Tech I was very concerned how the University handled this emergency. Our son told us that the University locked down the campus shortly after the incident. Although the details on the incident were still sketchy at the time I received several emails that night which appeared to convey as much information as they could publicly disclose about an ongoing investigation. Although parents’ expectations can never be met in incidents like this, the University had kept our kids safe and they were now trying to help everyone deal with the tragic event.

AP – A gunman killed a Virginia Tech police officer Thursday at a campus parking lot and then apparently shot himself to death nearby in an attack that shook the school nearly five years after it was the scene of the deadliest shooting rampage in modern U.S. history.

Police: Va. Tech officer, suspect shot by same gun (AP)
Fri, 09 Dec 2011 07:10:06 GMT