Quantitative Easing and Inflation in Japan

Apropos of a recent post ("Are Inflation Fears Overdone"), a lucid article by Owen F. Humpage and Michael Shenk of the Cleveland Fed last December on Japan's quantitative easing policy (straight forwardly titled, "Japan’s Quantitative Easing Policy") included the chart above, drawn from IMF data.

Penny Ante Arbitrage Update IV

Cash-Out of Fractional Shares Foiled:

In previous posts (e.g., "Penny Ante Arbitrage" and "Penny Ante Arbitrage Update") I mentioned that I bought 749 shares of Asure Software (Nasdaq Capital Market: ASUR) at between 17 and 18 cents per share in several different accounts, in the hopes of getting them cashed out at 36 cents each after the company's proposed 750-1 reverse split (the first step in the company's plan to go private). Asure Software announced today that its shareholders rejected its go-private plan, so it has canceled its special shareholders meeting that was scheduled for tomorrow. So, my initial hopes of getting my shares cashed out at 36 cents have been dashed.

Mistakes Made, Lessons Learned:

In hindsight, when considering what might prevent this plan from going through, my focus was on the company's balance sheet and its burn rate: whether it would have enough cash to cash out the fractional shares. Given that most of the company's shareholders stood to benefit from the cash out, I didn't consider it a major risk that they wouldn't vote for it. A commenter on the company's Yahoo message board, whom I quoted here in March presciently did consider this a risk:

In any event, the risk isn't whether they will have enough cash, it's whether they can muster the required number of votes.

Just make sure you cast yours, ok?

At the time, I also didn't expect activist institutional investors to get involved in a $5 million market cap stock (though after activist investors came out against the plan, I still figured there was still a good chance of the go-private plan passing despite their involvement, considering that most of the company's shareholders were small holders who would benefit from the plan. Of course, most of those small shareholders probably never voted their proxies). There may be a useful lesson in this though: if companies with such tiny market caps can be the target of activist investors, it might be profitable to consider investing in more tiny companies with negative enterprise values, in anticipation of activist shareholders targeting the companies.

ASUR Going Forward:

In its press release today, the company said it had scheduled an annual meeting for July 30th. Given the rejection of its go-private plan, I would expect the company's current board to be ousted by activist investors. As I mentioned in my previous post on this, one of the activist investors, David Sandberg of Red Oak Partners, told me he felt he could unlock significant value from the company by getting more effective management in place,

[Sandberg] noted the cash on the company's balance sheet, that both of the company's businesses are high-margin ones, and said he thought a 70 cent price target was reasonable for the stock, given more effective management.

I don't know if Sandberg's 70 cent per share target is reasonable, but considering that ASUR had, at last count, 39 cents in net cash per share, it ought to have some upside from here based on that net cash, and the likelihood that, if the current management gets deposed, the company's cost structure should drop significantly, perhaps the point where it could become profitable from its existing business lines.

Better Late than Never

In the Chronicle of Higher Education, Joseph Cronin and Howard Horton ask, "Will Higher Education Be the Next Bubble to Burst?" (Hat Tip: Dr. Paul Price). Readers of this blog may recall that we raised this question in a post on October 1^st of last year, and later noted two subsequent Forbes articles on this question.

Are Inflation Fears Overdone?

So say (separately) the editors of the Financial Times and New York Times columnist/Princeton economist Paul Krugman.

In an editorial yesterday ("US not in bondage") the FT editors wrote,

Shock, horror: US government bond rates are jumping. Soon, goes the story, long-term interest rates will leap, the Federal Reserve will monetise, inflation will soar and civilisation will end. Actually, no. What is happening is precisely the normalisation the Fed has sought. The government is not off the fiscal hook. But it does have at least some time.

[...]

What has happened, quite simply, is normalisation of inflation expectations

[...]

Does this mean nobody needs to worry? Certainly not. Desirable normalisation could yet become a panic over the massive prospective bond issuance. Now that the worst of the panic has passed, the administration and Congress need to agree a credible plan for elimination of the huge structural fiscal deficits. As the Congressional Budget Office’s forecasts demonstrate, President Barack Obama’s budget proposal is not such a plan: it leaves deficits of between 4 and 6 per cent of gross domestic product as far as the eye can see. This will need to change soon. But, right now, everybody needs to keep calm. Normalisation is a big success, not a danger.

In his New York Times column yesterday ("The Big Inflation Scare"), Dr. Krugman made a similar point: Inflation isn't a near-term concern, but we do

[H]ave a long-run budget problem, and we need to start laying the groundwork for a long-run solution.

Krugman also brought up the example of Japan, which has borrowed massively in recent years without driving up its interest rates or inflation. What many Americans fear -- our country losing its triple-A credit rating and having its government debt exceed 100% of its GDP -- has already happened in Japan (The CIA World Factbook says Japan's public debt exceeds 170% of its GDP). And yet, Japan's borrowing costs are significantly lower than ours. For example, according to Bloomberg, the current yield on 10-year U.S. Treasuries is 3.46%, versus 1.49% on the 10-year Japanese government bond.

I've wondered for some time about why Japan has so much lower borrowing costs than the U.S., despite having a lower sovereign debt rating and a much higher ratio of debt to GDP, but I haven't heard a convincing explanation yet. When I asked The Atlantic's Megan McCardle about this, she said the answer was Japan's Postal Savings System, but according to Wikipedia, prior to the beginning of its privatization in 2007, that system only held about 20% of Japan's government debt. Perhaps someone will leave a more convincing answer in the comment thread below.

The Credit Crisis and Courtney Love

Reuters reports that American Express is suing Courtney Love for $352,059.67 in unpaid balance, damages, attorney's fees, and late charges. So there's at least one deadbeat with enough assets for it to be worth American Express's while to sue. Among those assets might be any royalties from Love's best song, "Celebrity Skin", the video of which appears below. Listen for Love's surprisingly literate allusion to Dante Gabriel Rossetti's poem A Superscription.

Bright Lights, Peak Oil

Hat tip to Aaron Edelheit (with a second assist to Paul Kedrosky) for this article by Chris Turner in the Walrus magazine (which looks like a Canadian version of the Atlantic magazine before the Atlantic's recent, garish redesign): "An Inconvenient Talk: Dave Hughes's guide to the end of the fossil fuel age".

From this article, Dave Hughes, a geologist/doomsayer, appears to be Canada's answer to Matt Simmons. For some reason (perhaps in tribute to the upcoming 25^th anniversary of Jay McInerney's novel Bright Lights, Big City) Chris Turner refers to himself in this article in the second person. Here's a taste:

Dave had to start out fifteen minutes earlier than the requisite ungodly hour so he could pick you up at your house. So you wouldn’t drive yourself. Save a few hydrocarbons, he’d joked. He’s a coal man, a geologist, and he always refers to the holy trinity of fossil fuels whose flames have stoked the past 200 years of industrial growth — coal, natural gas, and especially oil — in that same semi-technical way: hydrocarbons. Dave Hughes has a lot to say about hydrocarbons, mainly how there’s no possible way to keep running the engine of a modern global economy for much longer at the pace we’re burning them. Which is why you felt compelled to join him in the black chill of this late-autumn morning. Because that seems like a pretty big deal.

The uninspired photo above of Dave Hughes (that's the best backdrop they could come up with in Calgary and its environs?) accompanies the article and is credited to "Wilkosz + Way".

Warren Buffett can Breathe a Sigh of Relief

Whitney Tilson, lead manager of the Tilson Focus Fund, says "Buffett hasn't lost it".