The Big Picture

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• Radiation Experts: Radiation Standards Are Up to 1,000 Higher Than Is Safe for the Human Body
• Open Thread: Rally Pause or Reversal
• Understanding Today’s Housing Market, 1Q11
• The Buggy Whip Conundrum
• Governor of Fukushima and Mayor of Town Near Nuclear Reactors Slam Government Response to Nuclear Crisis
• QE3: Bank of Japan Current Account Balances
• 10 Things to Emulate from Japan
• Uh-Oh: Traveling This Week
• Attention WSJ OpEd: Correction Needed
• Perigee Moon, US Stocks, Muniland News, FDIC-FOMC-hmmm?

Radiation Experts: Radiation Standards Are Up to 1,000 Higher Than Is Safe for the Human Body Posted: 04 Apr 2011 10:30 PM PDT Washington's Blog strives to provide real-time, well-researched and actionable information.  George – the head writer at Washington's Blog – is a busy professional and a former adjunct professor. ~~~ The U.S. federal drinking water standard for radioactive Iodine-131 is 3 picocuries per liter, but levels exceeding that by as much as 181 times have been detected in rainwater sampled in California, Idaho, Minnesota, Ohio, Pennsylvania and Massachusetts. Radioactivity has also been found in milk from Spokane, Washington. Safe Levels of Radiation? The government says there is no danger, as these levels (even levels in rainwater above drinking water standards) are “safe”. Specifically, they explain that the exposure is only short-term, while federal drinking water standards assume a constant level of radiation over the course of a year. In addition, not all of the radiation from the rainwater will end up in the drinking water supply. So – say federal and state governments – there is no danger from short-term exposure to such levels of radiation. But as I pointed out recently: Physicians for Social Responsibility notes: According to the National Academy of Sciences, there are no safe doses of radiation. Decades of research show clearly that any dose of radiation increases an individual's risk for the development of cancer. "There is no safe level of radionuclide exposure, whether from food, water or other sources. Period," said Jeff Patterson, DO, immediate past president of Physicians for Social Responsibility. "Exposure to radionuclides, such as iodine-131 and cesium-137, increases the incidence of cancer. For this reason, every effort must be taken to minimize the radionuclide content in food and water." "Consuming food containing radionuclides is particularly dangerous. If an individual ingests or inhales a radioactive particle, it continues to irradiate the body as long as it remains radioactive and stays in the body,"said Alan H. Lockwood, MD, a member of the Board of Physicians for Social Responsibility. *** Radiation can be concentrated many times in the food chain and any consumption adds to the cumulative risk of cancer and other diseases. John LaForge notes: The National Council on Radiation Protection says, "… every increment of radiation exposure produces an incremen­tal increase in the risk of cancer." The Environmental Protection Agency says, "… any exposure to radiation poses some risk, i.e. there is no level below which we can say an exposure poses no risk." The Department of Energy says about "low levels of radiation" that "… the major effect is a very slight increase in cancer risk." The Nuclear Regulatory Commission says, "any amount of radiation may pose some risk for causing cancer … any increase in dose, no matter how small, results in an incremental increase in risk." The National Academy of Sciences, in its "Biological Effects of Ionizing Radiation VII," says, "… it is unlikely that a threshold exists for the induction of cancers …." Long story short, "One can no longer speak of a 'safe' dose level," as Dr. Ian Fairlie and Dr. Marvin Resnikoff said in their report "No dose too low," in the Bulletin of the Atomic Scientists. And Brian Moench, MD, writes: Administration spokespeople continuously claim “no threat” from the radiation reaching the US from Japan, just as they did with oil hemorrhaging into the Gulf. Perhaps we should all whistle “Don’t worry, be happy” in unison. A thorough review of the science, however, begs a second opinion. That the radiation is being released 5,000 miles away isn’t as comforting as it seems…. Every day, the jet stream carries pollution from Asian smoke stacks and dust from the Gobi Desert to our West Coast, contributing 10 to 60 percent of the total pollution breathed by Californians, depending on the time of year. Mercury is probably the second most toxic substance known after plutonium. Half the mercury in the atmosphere over the entire US originates in China. It, too, is 5,000 miles away. A week after a nuclear weapons test in China, iodine 131 could be detected in the thyroid glands of deer in Colorado, although it could not be detected in the air or in nearby vegetation. The idea that a threshold exists or there is a safe level of radiation for human exposure began unraveling in the 1950s when research showed one pelvic x-ray in a pregnant woman could double the rate of childhood leukemia in an exposed baby. Furthermore, the risk was ten times higher if it occurred in the first three months of pregnancy than near the end. This became the stepping-stone to the understanding that the timing of exposure was even more critical than the dose. The earlier in embryonic development it occurred, the greater the risk. A new medical concept has emerged, increasingly supported by the latest research, called “fetal origins of disease,” that centers on the evidence that a multitude of chronic diseases, including cancer, often have their origins in the first few weeks after conception by environmental insults disturbing normal embryonic development. It is now established medical advice that pregnant women should avoid any exposure to x-rays, medicines or chemicals when not absolutely necessary, no matter how small the dose, especially in the first three months. “Epigenetics” is a term integral to fetal origins of disease, referring to chemical attachments to genes that turn them on or off inappropriately and have impacts functionally similar to broken genetic bonds. Epigenetic changes can be caused by unimaginably small doses – parts per trillion – be it chemicals, air pollution, cigarette smoke or radiation. Furthermore, these epigenetic changes can occur within minutes after exposure and may be passed on to subsequent generations. The Endocrine Society, 14,000 researchers and medical specialists in more than 100 countries, warned that “even infinitesimally low levels of exposure to endocrine-disrupting chemicals, indeed, any level of exposure at all, may cause endocrine or reproductive abnormalities, particularly if exposure occurs during a critical developmental window. Surprisingly, low doses may even exert more potent effects than higher doses.” If hormone-mimicking chemicals at any level are not safe for a fetus, then the concept is likely to be equally true of the even more intensely toxic radioactive elements drifting over from Japan, some of which may also act as endocrine disruptors. Many epidemiologic studies show that extremely low doses of radiation increase the incidence of childhood cancers, low birth-weight babies, premature births, infant mortality, birth defects and even diminished intelligence. Just two abdominal x-rays delivered to a male can slightly increase the chance of his future children developing leukemia. By damaging proteins anywhere in a living cell, radiation can accelerate the aging process and diminish the function of any organ. Cells can repair themselves, but the rapidly growing cells in a fetus may divide before repair can occur, negating the body’s defense mechanism and replicating the damage. Comforting statements about the safety of low radiation are not even accurate for adults. Small increases in risk per individual have immense consequences in the aggregate. When low risk is accepted for billions of people, there will still be millions of victims. New research on risks of x-rays illustrate the point. Radiation from CT coronary scans is considered low, but, statistically, it causes cancer in one of every 270 40-year-old women who receive the scan. Twenty year olds will have double that rate. Annually, 29,000 cancers are caused by the 70 million CT scans done in the US. Common, low-dose dental x-rays more than double the rate of thyroid cancer. Those exposed to repeated dental x-rays have an even higher risk of thyroid cancer. *** Beginning with Madam Curie, the story of nuclear power is one where key players have consistently miscalculated or misrepresented the risks of radiation. The victims include many of those who worked on the original Manhattan Project, the 200,000 soldiers who were assigned to eye witness our nuclear tests, the residents of the Western US who absorbed the lion’s share of fallout from our nuclear testing in Nevada, the thousands of forgotten victims of Three Mile Island or the likely hundreds of thousands of casualties of Chernobyl. This could be the latest chapter in that long and tragic story when, once again, we were told not to worry. Internal Emitters Proponents of nuclear energy and nuclear weapons argue that we can’t eliminate all man-made radioactivity, that nuclear power and weapons are good, and that we need standards to promote a logical cost-benefit analysis. But as I noted last week, the current standards are misleading: There are, of course, naturally occurring radioactive materials. But lumping all types of radiation together is misleading … and is comparing apples to oranges. As the National Research Council’s Committee to Assess the Scientific Information for the Radiation Exposure Screening and Education Program explains: Radioactivity generates radiation by emitting particles. Radioactive materials outside the the body are called external emitters, and radioactive materials located within the body are called internal emitters. Internal emitters are much more dangerous than external emitters. Specifically, one is only exposed to radiation as long as he or she is near the external emitter. For example, when you get an x-ray, an external emitter is turned on for an instant, and then switched back off. But internal emitters steadily and continuously emit radiation for as long as the particle remains radioactive, or until the person dies – whichever occurs first. As such, they are much more dangerous. Dr. Helen Caldicott and many other medical doctors and scientists have confirmed this. See this and this. *** It is important to note that each individual internal emitters behaves differently. They each accumulate in different places in the body, target different organs, mimic different vitamins and minerals, and are excreted differently (or not at all). Therefore, comparing radioactive cesium or iodine with naturally occurring radioactive substances – even those which can become internal emitters – is incorrect and misleading. As radiation expert Dr. Chris Busby writes: Since the Fukushima accident we have seen a stream of experts on radiation telling us not to worry, that the doses are too low, that the accident is nothing like Chernobyl and so forth. They appear on television and we read their articles in the newspapers and online. Fortunately the majority of the public don’t believe them. *** Patients receiving a course of radiotherapy usually get a dose of more than 20,000 mSv to vital healthy tissue close to the treated tumour. This tissue survives only because the treatment is spread over many days giving healthy cells time for repair or replacement. A sea-change is needed in our attitude to radiation, starting with education and public information. *** External irradiation is not the problem. The problem is internal irradiation. The Iodine-131 is not in the whole body, it is in the thyroid gland and attached to the blood cells: hence the thyroid cancer and the leukaemia. And there is a whole list of internal radioactive elements that bind chemically to DNA, from Strontium-90 to Uranium. These give massive local doses to the DNA and to the tissues where they end up. The human body is not a piece of wire that you can apply physics to. The concept of dose which [Pollyannas use] cannot be used for internal exposures. This has been conceded by the ICRP itself in its publications. And in an interview with me in Stockholm in 2009, Dr Jack Valentin, the ex-Scientific Secretary of the ICRP conceded this, and also made the statement that the ICRP risk model, the one used by all governments to assess the outcome of accidents like Fukushima, was unsafe and could not be used. You can see this interview on the internet, on www.vimeo.com.Why is the ICRP model unsafe? Because it is based on “absorbed dose”. This is average radiation energy in Joules divided by the mass of living tissue into which it is diluted. A milliSievert is one milliJoule of energy diluted into one kilogram of tissue. As such it would not distinguish between warming yourself in front of a fire and eating a red hot coal. It is the local distribution of energy that is the problem. The dose from a singly internal alpha particle track to a single cell is 500mSv! The dose to the whole body from the same alpha track is 5 x 10-11 mSv. That is 0.000000000005mSv. But it is the dose to the cell that causes the genetic damage and the ultimate cancer. The cancer yield per unit dose employed by ICRP is based entirely on external acute high dose radiation at Hiroshima, where the average dose to a cell was the same for all cells. *** The last thing [proponents of nuclear weapons and nuclear energy] wanted was the doctors and epidemiologists stopping their fun. The IAEA and the World Health Organisation (WHO) signed an agreement in 1959 to remove all research into the issue from the doctors of the WHO, to the atom scientists, the physicists of the IAEA: this agreement is still in force. The UN organisations do not refer to, or cite any scientific study, which shows their statements on Chernobyl to be false. There is a huge gap between the picture painted by the UN, the IAEA, the ICRP and the real world. And the real world is increasingly being studied and reports are being published in the scientific literature: but none of the authorities responsible for looking after the public take any notice of this evidence. The Politics Behind the “Science” I wrote to professor Busby and asked him if the faulty standards – based on external emitters – applied to radiation standards for drinking water, milk and food as well. Specifically, I asked: Are the current “safe levels” of radioactivity set by governments for drinking water, milk and food based upon external emitters? Or upon internal emitters? I know that the Committee Examining Radiation Risks of Internal Emitters (CERRIE) [an independent Committee established by the UK Government in 2001, in which Dr. Busby participated] looked at this issue, but I can’t figure out whether governments ever changed their “safe” levels for food and beverages based on internal emitter science. I mentioned the radioactive iodine found in rainwater in the U.S. and pointed out that the Canadian government is refusing to test milk for radiation – which is guaranteed to create internal emitters of any radiation when we drink it – based on the statement that radiation levels in the air are not all that high: Dr. Busby responded: The current risk model is based upon external acute radiation at high dose rate, the Japanese A-Bomb [i.e. from measurements of the effect of uniform, external radiation on the residents of Hiroshima and Nagasaki]. It is incorrect for internal and this was discussed at CERRIE but the implications were so alarming that the government sacked the Environment minister Michael Meacher who set up the committee and shut it down before it had finished (or even started) the research it was doing and also brought legal threats to bear on members so the final report is a whitewash, even though it concedes the problem exists and that the error may be as high at 10-fold. In fact, there is plenty of data and studies that show the error is from 500 to upwards of 1000. But this is not for all radionuclides, only some. The ECRR (www.euradcom.org) has studied this issue and provided risk model for internal emitters. Dr. Busby explained that the standards for radioiodine are about 20 times higher than they should be when it will be taken inside the body, and for certain radioactive particulates, up to 1,000 times higher than is safe. Note: Even though current standards are way too high, the EPA is trying to raise the current standards much higher. Just as with the Gulf oil spill and other environmental (and economic) problems, governments are fudging the “science” (and suppressing basic information) to fit a political agenda.

Open Thread: Rally Pause or Reversal Posted: 04 Apr 2011 06:27 PM PDT Let’s open her up to the crowd — is this merely a little back and filling, or is the market getting tired? How about this $6B National Semi bid — at an 80% premium? Will that invoke some animal spirits, or is that a redonkulous premium? What say ye?

Understanding Today’s Housing Market, 1Q11 Posted: 04 Apr 2011 01:30 PM PDT I am speaking at Jonathan Miller’s group of RE people tonight at 4:00. If you are in the audience, be sure to say hello . . .

The Buggy Whip Conundrum Posted: 04 Apr 2011 11:31 AM PDT > Dave Wilson of Bloomberg notes that the improvement in Unemployment is bypassing those who have been unemployed the longest. This is what I call the “Buggy Whip Conundrum” — those folks who have been looking for work the longest are most likely to have been in sectors that have imploded. The jobs are no longer there. In other words, it is not that many of these people have lost their jobs — they have lost their industries as well . In some cases, these jobs might return eventually. That would be things like Construction, Financial, Real Estate. In other areas — fabric/clothes, autos, etc. — those jobs are not coming back. Hence, they need more than a job — they need a new set of skills and a new career . . . Here’s Wilson: Americans out of work more than six months have barely benefited from the longest decline in the country's unemployment rate since 1994. The CHART OF THE DAY compares the percentage of the U.S. labor force in this situation with the comparable figure for those unemployed fewer than six months, according to data compiled by the Labor Department. While the jobless rate dropped for the fourth consecutive month in March, the number of people going more than six months without work rose to 6.12 million. That's more than four times the average since 1970, the period covered in the chart. Those who exceeded the six-month threshold account for only 13 percent of the drop in unemployment since December, when the rate started shrinking. Their number fell by 206,000 as people out of work for shorter periods tumbled by 1.36 million.

Governor of Fukushima and Mayor of Town Near Nuclear Reactors Slam Government Response to Nuclear Crisis Posted: 04 Apr 2011 10:30 AM PDT Washington's Blog strives to provide real-time, well-researched and actionable information.  George – the head writer at Washington's Blog – is a busy professional and a former adjunct professor. ~~~ The governor of Fukushima slammed Japan’s nuclear agency for failing to provide timely radiation data. As Japan Today notes: Fukushima Gov Yuhei Sato expressed anger at the central government's nuclear safety agency on Sunday for its late release of radioactivity data related to local farm produce, shipments of which have been partly restricted amid the ongoing nuclear crisis. *** It takes a few days for the results of each test to be released, according to Sato. ''Can't you increase the number of examiners? The lives of farmers are at stake. It's a matter of whether they can live tomorrow,'' the governor said during a meeting of the prefectural disaster relief task force attended by an official of the Nuclear and Industrial Safety Agency. Sato said the results should be released in about a day and criticized the central government for being late in lifting restrictions, saying, ''I wonder if our sense of urgency is being conveyed to the government…It is irritating.'' And the mayor of Minami Soma – a city 25 kilometers from the stricken Fukushima nuclear complex – is appealing to the world community to help provide food and other essentials, as the Japanese government isn’t doing much to help, other than telling people to stay indoors, and is providing insufficient information on the nuclear crisis. The mayor says that – since the government has told people to stay indoors – the stores supermarkets and banks are all closed, and people are “as if under starvation tactics”. There is not enough gas, and so it is difficult to evacuate.

QE3: Bank of Japan Current Account Balances Posted: 04 Apr 2011 08:45 AM PDT From Bianco Research, comes this chart of the Bank of Japan Current Account Balances;  This is consistent with our prior discussion that QE3 is already here . . . > click for larger graphic Bianco Research > Previously: Is QE3 Already Here? (March 30th, 2011)

10 Things to Emulate from Japan Posted: 04 Apr 2011 08:17 AM PDT 10 Things to Emulate from Japan View more presentations from Effect Works

Uh-Oh: Traveling This Week Posted: 04 Apr 2011 07:36 AM PDT Just a quick heads up — I will be in California most of this week, and Charlotte for a day or so next week. By now, y’all know what this means to markets . . .

Attention WSJ OpEd: Correction Needed Posted: 04 Apr 2011 06:15 AM PDT Invictus here, requesting a correction from the WSJ. In an editorial on Saturday, the WSJ made the following demonstrably false claim, using a slightly modified Calculated Risk (Bill McBride) employment graph (emphasis mine): The nearby chart compares the recovery rate in jobs after each of the last four recessions, and so far this one has been by far the weakest. Unfortunately for the Journal, Bill’s chart does not represent what they say it represents, and they know it, or at least they should — Bill is a meticulous chart keeper.  Bill’s chart indexes employment to peaks, not troughs, which is to say recessions’ inceptions, not their ends.  Note Bill’s legend:  “Number of Months After Peak Employment”: A chart that does represent what the Journal claims they’re showing (i.e. “the recovery rate in jobs after each of the last four recessions”)  is immediately below.  I’m using private payrolls only because we all know — and surely the Journal agrees — that the only good government employee is an unemployed government employee. So let’s use the St. Louis Fed’s USPRIV — private payrolls only. [BR: That also will remove census noise]   And let’s look what has actually transpired “after” — Journal’s word, not mine — “each of the last four recessions”: > (Click through for larger) Source:  St. Louis Fed Expansion Charts So, in fact, the previous two jobs recoveries were actually weaker.  (Using total nonfarm payrolls — FRED’s PAYEMS series, which includes those useless government workers — puts this recovery’s current level (100.4186) a smidge behind the ’91 recovery (100.6164) and still ahead of the 2001 recovery.) I wrote previously — in September 2010 — about this exact issue, asking in that post: If the economy is in recovery — a new cycle –  for the the past 13 (or so) months — "technical" or not — should we perhaps be looking at the employment situation relative to the trough now, and not to the last peak? Now, to be crystal clear — if folks want to continue to look at metrics from the December 2007 economic peak, it is their prerogative to do so.  However, it is not their prerogative to claim they are presenting data comparing a metric “after” recessions when they are, in fact, doing nothing of the sort.  Of course, it must be pointed out that using the peaks portrays Obama in the worst possible light, while using the troughs — as I pointed out in September — demonstrates that this recovery is actually stronger than the last two.  But that is clearly not a message the Journal would ever care to convey. I will not hold my breath waiting on their correction — you know, one in which they actually state that this jobs recovery is better than the previous two. > Previously: Employment Indexed to Beginning/End of Recession (April 1st, 2011)

Perigee Moon, US Stocks, Muniland News, FDIC-FOMC-hmmm? Posted: 04 Apr 2011 05:30 AM PDT Perigee Moon, US Stocks, Muniland News, FDIC-FOMC-hmmm? Also: GIC-Rome & Speedy Recovery to Paul Horne April 3, 2011 David Kotok www.cumber.com > In case you were under clouds, here is a picture collection of the recent perigean moon (Saturday, March 19) see: http://www.buzzfeed.com/mjs538/beautiful-pictures-of-the-supermoon-from-around-th. Hat tip to Cynthia Heard. Now to markets. US stocks celebrated a terrific quarter. Within it, there was an Egypt-MENA-Libya-Tsunami event-induced and much needed 7%-10% correction. The world did not end and the bull market resumed. Energy, industrials and materials were among the leaders. Cumberland's US ETF accounts were and are overweight all three sectors and had a good quarter. Ed Yardeni notes how record US corporate profits persist. Dr. Ed wrote, "After-tax corporate profits from current production rose to a record $1,250.2 billion. It is up 61.4% from the most recent cyclical low during Q4-2008. It is 7.9% above the previous cyclical peak during Q3-2006, and undoubtedly heading higher this year." We agree completely with Dr. Ed. Cumberland's US ETF accounts remain fully invested. We note that the rate-of-change of year-over-year quarterly profits is peaking. It is still strongly positive, just not in as powerful an uptrend as during the last two years of recovery. Peaking of our NIPA profit-based, rate-of-change indicator is not a sell signal, it is a warning signal. The current level of our rate-of-change indicator means we could have a few more months of a bull market for US stocks, or we could have a couple more years. This indicator's history tells us that, today, we cannot know which will occur. The same indicator has a perfect record at calling stock market bottoms. The most recent confirmation of this was in the quarter that included the March 2009 low. So we note that the timing efficacy of this indicator is asymmetric. Muniland saw its 20th week of tax-free Muni mutual fund redemptions. The total five-month's redemptions now exceed $40 billion (Ned Davis Research). Last week's redemption total was down to $404 million. We expect the redemption-based, forced selling to continue to "dry up." When it has run its course, a strong muni rally could restore the Muni-Treasury spreads to more normalcy. Cumberland remains favorable toward longer-term, tax-free Munis and to taxable BABs, although Muniland headline risk remains a factor with which we must contend. The spread of the "Whitney virus" continues, although some abatement seems to be occurring. Peak weekly withdrawals were over $4 billion and followed on the heels of the famous (infamous?) 60 Minutes TV interview of Ms. Whitney. Some readers challenged my assertion that Whitney predicted "50 to 100 large defaults in 2011." The TV tape tells all. She was asked that question in December of 2010. She specifically said, in the next twelve months. That sure looks like 2011 to me. We thank readers for their many emails regarding our piece entitled "Muni Defaults: Whitney and Roubini." If you missed it, the link is: http://www.cumber.com/commentary.aspx?file=032611.asp. Cumberland's website has it posted; see www.cumber.com. Headline risk remains high in Muniland. The latest story originates from DeKalb County, Georgia where the market witnessed credit rating downgrades. Natalie Cohen (Wells Fargo) tells the story well: "The current fiscal stress discussion focuses on the trickle-down of state cuts to local government; however, spats between governments occasionally, in our view, produce negative fiscal events. In the case of DeKalb County, Georgia, the city of Dunwoody began the process of incorporating in 2006: the incorporation was initially rejected but was later approved after a regime change in the state legislature, and Dunwoody became a city in 2008. The city represents about 5% of the population but 11.8% of the property tax base for the county. About $18 million in excise and business taxes also left the county for the new city in 2009—a permanent loss. More important, the Perimeter Mall, a super-regional mall that is anchored by Macy's, Bloomingdale's, Dillard's and Nordstrom is located in the new city now out of reach from county taxation. Add to this the soft economy and the unwillingness of county officials to raise taxes or substantially reduce expenses and the county has put itself into deep financial trouble. The county was a member of S&P's AAA-rated club as recently as the beginning of January 2011. The rating agency lowered the county's rating to AA- then BBB and then suspended it for lack of information (2009 was its most recent audit). When S&P compared the county with its AAA peers, the county was alone with a negative 3.5% fund balance (as a percentage of spending) and a negative 5.4% unrestricted fund balance. Between 2008 and 2009, the county's net assets fell by nearly $40 million—not a fatal amount, but S&P indicated further decline in 2010 and insufficient action to manage its finances." Readers may note that Cumberland's internal rating system tracks late filings as one of its negative indicators and uses them as a warning sign. Cumberland does not hold any DeKalb County bonds. We do not hold Jefferson County, Alabama either. They have lost a court case and may file Chapter 9. That would make them a record-setting local government bankruptcy, and would certainly make the national news and exacerbate "headline risk." It could cause the uninformed retail mutual fund investor to force more selling by redeeming mutual funds. We would view such an event as a buying opportunity. Remember: Munis are idiosyncratic. There are nearly 90,000 separate jurisdictions and they are quite different in their structures. Painting this asset class with one broad brush is an error, in our view. Lastly, we must get to a bizarre new development in the financial system; it impacts American banks. Did the FDIC usurp the FOMC? Maybe. Starting April 1, the FDIC asset-based premium assessed on US banks will include the $1.4 trillion of excess reserves that those banks have deposited with the Federal Reserve. The banks have been buying cash in the Federal Funds market, lending that cash to the Fed, and earning a spread on those funds. This was a riskless arbitrage for the banks: pay 10 to 15 basis points for overnight money and lend it to the riskless Fed at 25 basis points. Note that the Fed Funds target rate is set by the FOMC at 0-25 basis points, while the Board of Governors of the Fed sets the interest on reserves (IOR). The FDIC is an agency that operates independently of the Federal Reserve. The FDIC assessment is a different rate, depending on the size of the bank. Valerie Miles (Southwest Securities) summed it up well: "There have been a lot of questions today as to why overnight financing is so low and why short term assets have disappeared. Although quarter end restrictions have been an issue, the real culprit has been the FDIC implementation of an expanded assessment base that begins today. The base now includes all tier 1 assets and applies to all domestic banks. The reason this is so significant is that some banks borrow cash in the open market and leave that cash at the Fed. The Fed is currently paying .25 bps on excess reserves. So if a bank borrows cash at .15 bps and leaves that cash at the Fed, it will earn .25 bps creating a positive .10 bps in carry on a risk free arbitrage. The new FDIC regulation will include cash in its assessment, which will cause the bank to pay a "fee” for that cash it has borrowed. If that fee is say .10 bps, then the carry is gone and there is no arbitrage trading opportunity. So now domestic banks will no longer leave their cash at the Fed and invest it in the marketplace via Fed Funds. This extra cash will cause financing levels to drop, the Fed Funds effective to collapse and the demand for short-term assets such as Treasury bills to increase. Today’s market reaction gives credence to this argument. Banks have flooded the funds market with cash causing overnight financing to drop to zero. Treasury bills have dropped in yield significantly as 3 month bills traded from .10 to .05 and year bills from .28 to .23." Barclays noted how "repo rates" plunged and how repo collateral traded to a negative interest rate. Barclays explained their view: "The expanded assessment base lowers the effective return that banks receive for holding cash at the Fed – by the amount of the assessment rate. Assuming that banks want to preserve the spread they make from arbitraging the effective funds rate and the IOER rate, they are likely to lower the rate at which they purchase liquidity from the GSEs – by the assessment rate. With few alternatives, the GSEs have little choice but to accept the now lower return on their liquidity. As a result, the effective funds rate should decline. "Estimating the effect on the effective funds rate is difficult, because it depends on the size of the assessment and the ability of the GSEs to find alternatives for placing their extra cash. The FDIC notes that the new assessment rate on 'large and complex institutions' will be 2.5-45bp – which leaves a wide scope for estimates of the decline in the effective funds rate. Keep in mind that non-US banks, which currently hold sizeable balances at the Fed (exceeding $300bn), are not subject to the FDIC assessment. Our sense is that they will lower the rate that they bid for overnight cash in the Fed funds market to match what their US competitors are willing to pay – thereby increasing their arbitrage returns." The FDIC has forced the Fed Funds rate lower by imposing a fee on US banks. The GSEs are the ones who pay the price of this decision, by earning less. The foreign banks benefit the most since they can receive the higher reserve deposit rate but do not pay the FDIC fee. And everyone but the FOMC, which is supposed to set it, currently manipulates the Fed Funds rate. As Yakov Smirnoff says, "America, what a country!" Yes, Yakov, America is some great country! Where else would you find a subsidy handed to foreign banks while the domestic banking system is trying to recover? Rome is the destination of our Tuesday-night flight. GIC events begin Wednesday. We extend best wishes for a speedy recovery to our personal friend and GIC colleague Paul Horne. He spent months of effort working on this superb meeting and now cannot attend. Paul, we will cover for you as best as we can, but we must publicly acknowledge that you, and your organizing partner, GIC member Vincenzo Sciarretta, deserve the credit for our stellar lineup. Readers in Europe who can get to Rome Wednesday are welcome. There are still about 7 empty spots in the GIC delegation. Details are found at www.interdependence.org. Ciao, buon giorno, Roma. David R. Kotok, Chairman and Chief Investment Officer

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