Many people viewed some of the games of the 2010 World Cup, including the championship in which Spain defeated the Netherlands 1-0. And, just as many people who were not at the stadium wondered what was generating the continual humming, bumble-bee sound. Well, it was the vuvuzela horn, and fans took liberty to explore the entire stadium space.

From an economics perspective, the World Cup created a noticeable trickle-down effect. As you review the accompanying infographic (click image to enlarge), you will notice the large number of horns sold, which caused a large number of - you guessed it - ear plugs to be sold.

Not all have been enthusiastic about the vuvuzela horns. Already, the horns have been banned at Yankee Stadium and throughout the Southeastern Conference (SEC) of U.S. college sports, among other worldwide venues.

Given the positive economic impact attributable to vuvuzela horns, where’s the vuvuzelove?

Nevertheless, some investors got a wake-up call after reading MCO’s 10-Q filed May 7, or by reading more recent posts by Zero Hedge, published May 8 and May 11, and EconomicPolicyJournal.com that the SEC is investigating MCO.  Here is an extract from its 10-Q (bottom of page 20):


“On March 18, 2010, MIS received a ‘Wells Notice’ from the Staff of the SEC stating that the Staff is considering recommending that the Commission institute administrative and cease-and-desist proceedings against MIS…”


Why MCO waited nearly two months to share this material information while Buffett was dumping shares is worthy of another blog post. Incidentally, didn’t another of Buffett’s investees, Goldman Sachs, also delay revealing its own ‘Wells Notice’ and other material information?

The opinion at Coventry League and elsewhere is Moody’s may have difficulties as a going concern if the SEC enforces a cease-and-desist from being a ratings agency. In that case, some might want to paraphrase Friedrich Nietzsche: “Moody’s is Dead.”

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Note: MIS is an acronym for Moody’s Investors Service, a reportable segment of MCO.

Lastly, it may be worth the effort to conduct due diligence on Moody’s (NYSE: MCO).  Buffett has been dumping shares, while Einhorn has been increasing his short position...

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Note: Einhorn’s interest rate thesis does not contradict our belief presented earlier this year regarding near-term deflation.

For a different perspective, National Geographic Magazine presented a linear graphic of health care expenditures and life expectancy (below):

And, lastly, the Organization of Economic Co-Operation and Development (OECD) presents an overview and offers an interactive visual related to health care expenditures and effectiveness, and Wikipedia includes several charts and resources for further research, including a revealing chart of U.S. health care expenditures as a percentage of GDP (below).

There is disagreement among economic observers regarding whether the economy is more likely to experience troubling inflation or deflation in the next couple of years.

Some who expect increased inflation reference current fiscal and monetary policies that, alone, are inflationary. Examples include recent government stimulus packages, historically low discount and federal funds rates, issuance of massive amounts of government and municipal debt, and expansion of the currency base, among other factors. Essentially, the more currency being created from nothing other than one’s good faith results in higher prices for goods and services (and a correspondingly lower value to said currency), ceteris paribus, to paraphrase my former economics professor. 

As is the case with most theories I’ve been taught while sitting in an ivory tower, ceteris paribus is noteworthy concerning whether theories are useful practically.

According to many who expect deflation, the rationale references value of assets and social psychology.  Regarding the former, we’ve experienced the effects of decoupling the price of an asset and its underlying secured cash value.  There are many thought experiments.  Think of houses: if everybody had to pay cash for a house, home prices would likely be a fraction of what they are today.  If municipalities could not issue bonds at reasonable interest rates or assess taxes beyond a moderate amount, then their cost structure (compensation, pensions, contracts) and prices would be lower.  These are just two of many examples, albeit presented in a simplistic manner.

What we have experienced in the past two years regarding some banks, companies and municipalities is that the price they paid for their assets exceeded the current and ongoing value of those assets: residential and commercial mortgages, stocks, credit default swaps, and tax receipt streams, for instance. 

As such, by printing more money and issuing more debt, inflation can be expected.  But, if debt of all kinds must be written down, some by 50% or even 100% (bankruptcy), then deflation is most likely to occur (prices of many goods and services decrease*).

So, the question to ask yourselves, Dear Loyal Readers, is “do you believe the current stated value of debt instruments and future obligations (on-and-off the balance sheets of companies and banks; derivatives; social security and pension funds; mortgages; credit card balances; sovereign and municipal bonds) accurately reflect reality?” 

If your answer is yes, then expect inflation.  Otherwise, expect near-term deflation.

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* In this scenario, falling prices are likely attributable to reduced spending and money supply contraction (e.g., reduced value of debt/liabilities more than offsets FED monetary expansion policies).  See The Anatomy of Deflation by Professor George Reisman for an expanded explanation of deflation.

The federal estate tax, also dubbed the “death tax” by some, will be repealed for 2010, at least as of this writing.  This means that wealth transferred upon death, regardless of amount, will incur zero federal taxes.  Or, expressed differently, wealth transfers won’t incur egregious double federal taxation (once when the wealth is earned and once when it is transferred).

In contrast, the applicable exclusion to a taxable estate tax was $2.0 million for 2006-2008 and $3.5 million in 2009.  Amounts above these values had a maximum tax rate of 45% to 46%.  Nevertheless, to paraphrase Ben Franklin, there’s nothing certain except death and taxes.  In this case, there is a lot of uncertainty regarding the permanence of the 2010 federal estate tax repeal.  

The primary concern is that Congress might revisit the topic early 2010 and reinstate the tax retroactively to Jan. 1.  Regardless, under current legislation, the estate tax will reappear in 2011 with a 55% rate and $1.0 million exclusion.

There are many blogs about this topic: Die Broke Blog discusses estate taxes in a broader context; Mish’s Global Economic Trend Analysis addresses some personal unintended consequences; and, Wallet Pop highlights historical changes since 2001.

A hat tip to the Immobilienblasen blog for the cartoon and observations:

"So this remains the Houdini rally — no jobs; no pricing power; no broad participation; and no volume."

Two reports about strategic M&A and private equity were released recently.  

Paul Weiss, a well-known corporate law firm, prepared a concise survey of the top 25 non-financial M&A transactions, highlighted at Research Recap here.  The report focuses on terms and characteristics.  However, a notable data-point is financial sponsors were nearly nonexistent (accounting for less than 3% of total value in the twelve-months ending July 2009).

The private equity summary was prepared by PitchBook, an independent private equity-focused research firm.  The report is updated quarterly and includes value, number, most active firms and sectors, among other criteria.

There were fewer and smaller transactions in comparison to peak 2006-2007 levels, with a reversion to activity during the last recession of 2001-2002.  For example, total number and value were down about 55% and 70%, respectively, from twelve-months ending June 2007 to same period of 2009.  Also, the median value for buyouts during 1H 2009 was $37 million, down from a 2007 high of $104 million.   

Still, private equity firms are originating and closing transactions, but some assert a competitive advantage has shifted to acquirers such as holding companies, strategic buyers, individual investor groups and fundless sponsors. 

The argument seems to reference smaller deal-sizes, less, if any, dependence on debt financing, longer-term investment horizons (some prefer to hold indefinitely), a focus on cultivating one or a few investments, and even a more personal approach with family-owned companies.

The implicit point to note about the ebb-and-flow of leveraged transaction volume is all that debt used to finance the record number of deals of yore (at premium valuations) comes due in the next 3-5 years. 

Ouch…