Suitcase With $134 Billion Puts Dollar on Edge: William Pesek

Commentary by William Pesek

June 17 (Bloomberg) -- It’s a plot better suited for a John Le Carre novel.

Two Japanese men are detained in Italy after allegedly attempting to take $134 billion worth of U.S. bonds over the border into Switzerland. Details are maddeningly sketchy, so naturally the global rumor mill is kicking into high gear.

Are these would-be smugglers agents of Kim Jong Il stashing North Korea’s cash in a Swiss vault? Bagmen for Nigerian Internet scammers? Was the money meant for terrorists looking to buy nuclear warheads? Is Japan dumping its dollars secretly? Are the bonds real or counterfeit?

The implications of the securities being legitimate would be bigger than investors may realize. At a minimum, it would suggest that the U.S. risks losing control over its monetary supply on a massive scale.

The trillions of dollars of debt the U.S. will issue in the next couple of years needs buyers. Attracting them will require making sure that existing ones aren’t losing faith in the U.S.’s ability to control the dollar.

The dollar is, for better or worse, the core of our world economy and it’s best to keep it stable. News that’s more fitting for international spy novels than the financial pages won’t help that effort. It is incumbent upon the U.S. Treasury to get to the bottom of this tale and keep markets informed.

GDP Carriers

Think about it: These two guys were carrying the gross domestic product of New Zealand or enough for three Beijing Olympics. If economies were for sale, the men could buy Slovakia and Croatia and have plenty left over for Mongolia or Cambodia. Yes, they could have built vacation homes amidst Genghis Khan’s Gobi Desert or the famed Temples of Angkor. Bernard Madoff who?

These men carrying bonds concealed in the bottom of their luggage also would be the fourth-largest U.S. creditors. It makes you wonder if some of the time Treasury Secretary Timothy Geithner spends keeping the Chinese and Japanese invested in dollars should be devoted to well-financed men crossing the Italian-Swiss border.

This tale has gotten little attention in markets, perhaps because of the absurdity of our times. The last year has been a decidedly disorienting one for capitalists who once knew up from down, red from black and risk from reward. It almost fits with the surreal nature of today that a couple of travelers have more U.S. debt than Brazil in a suitcase and, well, that’s life.

Clancy Bestseller

You can almost picture Tom Clancy sitting in his study thinking: “Damn! Why didn’t I think of this yarn and novelize it years ago?” He could have sprinkled in a Chinese angle, a pinch of Russian intrigue, a dose of Pyongyang and a bit of Taiwan-Strait tension into the mix. Presto, a sure bestseller.

Daniel Craig may be thinking this is a great story on which to base the next James Bond flick. Perhaps Don Johnson could buy the rights to this tale. In 2002, the “Miami Vice” star was stopped by German customs officers as he was traveling in a car carrying credit notes and other securities worth as much as $8 billion. Now he could claim it was all, uh, research.

When I first heard of the $134 billion story, I was tempted to glance at my calendar to make sure it didn’t read April 1.

Let’s assume for a moment that these U.S. bonds are real. That would make a mockery of Japanese Finance Minister Kaoru Yosano’s “absolutely unshakable” confidence in the credibility of the U.S. dollar. Yosano would have some explaining to do about Japan’s $686 billion of U.S. debt if more of these suitcase capers come to light.

‘Kennedy Bonds’

Counterfeit $100 bills are one thing; two guys with undeclared bonds including 249 certificates worth $500 million and 10 “Kennedy bonds” of $1 billion each is quite another.

The bust could be a boon for Italy. If the securities are found to be genuine, the smugglers could be fined 40 percent of the total value for attempting to take them out of the country. Not a bad payday for a government grappling with a widening budget deficit and rebuilding the town of L’Aquila, which was destroyed by an earthquake in April.

It would be terrible news for the White House. Other than the U.S., China or Japan, no other nation could theoretically move those amounts. In the absence of clear explanations coming from the Treasury, conspiracy theories are filling the void.

On his blog, the Market Ticker, Karl Denninger wonders if the Treasury “has been surreptitiously issuing bonds to, say, Japan, as a means of financing deficits that someone didn’t want reported over the last, oh, say 10 or 20 years.” Adds Denninger: “Let’s hope we get those answers, and this isn’t one of those ‘funny things’ that just disappears into the night.”

This is still a story with far more questions than answers. It’s odd, though, that it’s not garnering more media attention. Interest is likely to grow. The last thing Geithner and Federal Reserve Chairman Ben Bernanke need right now is tens of billions more of U.S. bonds -- or even high-quality fake ones -- suddenly popping up around the globe.

Coca-Cola Seeks Edge With 120-Drink Jet Fountain (Update1)

Coca-Cola Seeks Edge With 120-Drink Jet Fountain (Update1)

April 6 (Bloomberg) -- Coca-Cola Co. is using micro-dosing technology from drugmakers, a smart phone operating system from Microsoft Corp. and style tips from Italian auto designers in its latest attempt to revive falling sales of fountain drinks.

Coca-Cola spent four years developing a self-serve beverage dispenser that can pour as many as 120 drinks. It uses 40 percent less storage space than traditional six- or eight-tap fountains, said Gene Farrell, the project’s manager.

Code-named “Jet,” the company will test the touch-screen- operated fountain in fewer than 10 Atlanta restaurants starting this month and another 70 or more in Southern California during the summer. The company declined to say where the expanded trials would take place or whether any Jets have been pre-sold.

Coca-Cola is betting a larger variety of beverages, including Orange Coke, Powerade and Minute Maid juice, will lure fast-food consumers back to buying drinks with their hamburgers. People even may pay more for greater choice and a better tasting, colder beverage, Farrell said.

“The way you grow profit for everybody is, you grow the size of the pie,” he said. “When there’s new growth, there’s opportunity for everyone.”

Fountain sales for Coca-Cola, which controls 70 percent of the U.S. market and is the exclusive supplier to McDonald’s Corp., have not “grown as robustly as we would have liked,” Farrell said.

Industry volume sales for U.S. fountain drinks probably fell more than 3 percent last year, after a 1.3 percent drop in 2007, according to John Sicher, publisher of Beverage Digest newsletter. He estimates the overall soft-drink market, including fountain, at $72.7 billion.

Fountain Sales

Coca-Cola sells concentrated beverage syrup to restaurants, convenience stores and entertainment venues to be mixed at the fountain with water, carbon dioxide and high-fructose corn syrup sweetener.

Fountain sales account for about 30 percent of revenue and profit in North America, according to Farrell. That would equate to roughly 8 percent of Coca-Cola’s $31.9 billion in global revenue last year. The drinks have helped the world’s largest soda-maker maintain its lead over No. 2 PepsiCo Inc.

Coca-Cola’s stock is little changed this year, compared with a 3.7 percent drop for Pepsi. Coca-Cola shares rose 23 cents to $45.20 at 9:36 a.m. in New York Stock Exchange composite trading.

Jet is the product of more than 20 patents and hundreds of confidentiality agreements.

‘Top of Its Game’

“It shows that Coke is really on top of its game,” said Philip Gorham, an analyst for Morningstar Inc., a Chicago-based investment-information company. “They have momentum.”

The drink mix inside the Jet is Coca-Cola’s most concentrated ever, Farrell said. The 46-ounce cartridges produce nearly as much drink as the five-gallon cardboard-encased concentrate bags now found in back rooms of restaurants.

The concentrate is dispensed with technology adapted from medical equipment used to measure precise amounts of dialysis and cancer drugs. The fountain’s software runs on Microsoft Windows CE, an off-the-shelf computer operating system used in advanced mobile phones.

The curvy fountains come in red, black or silver and carry the familiar white Coca-Cola ribbon. The company settled on the look after consulting with two high-end Italian car designers suggested by Chief Executive Muhtar Kent because of their ability to find “passion in big, boxy things,” Farrell said. The development team also included a former Apple Inc. designer who worked on the iPod.

Getting Customers

Coca-Cola won’t disclose what it has spent to reinvent its fountain unit or how much the units cost to produce. One clue: The development team has grown from seven full-time employees to 50, with another 50 employees contributing time.

Coca-Cola first will target existing customers, some of whom have helped guide and test the fountain, Farrell said.

Danya Proud, a spokeswoman for McDonalds, said it would be premature to discuss what future role, if any, the equipment would play in the fast-food chain’s restaurants.

Gorham, the Morningstar analyst, said he is skeptical the device will boost drink consumption unless Coca-Cola can convert Pepsi-exclusive restaurants.

“This is a cat-and-mouse game and there’s not much about those dispensers that Pepsi couldn’t replicate themselves,” he said.

Gorham saw the machine in February when Coca-Cola displayed it during the Consumer Analyst Group of New York conference. He predicted the Jet’s single spigot and panoply of brands may slow customer lines and hurt sales in busy restaurants.

In testing, the average time it took a customer to pour a drink on a legacy machine was 15 to 17 seconds, Farrell said. A first-time Jet user took 22 to 27 seconds. Refills took 12 to 17 seconds, he said.

‘Cents and Sense’

When asked about the Jet system, Larry Jabbonsky, a PepsiCo spokesman, said his company answers “to our consumers, not our competitors.”

“We’re constantly looking into new ways to offer variety and value but it has to make cents and sense,” he said.

Jet’s capacity will allow Coca-Cola to get new drinks into restaurants faster, Farrell said. Coke Zero, which the company says is its most successful new product since Diet Coke, still is on a fraction of its fountains almost four years after it was introduced.

The Jet follows Coca-Cola’s “Bevariety” fountain dispenser, introduced almost two years ago. Jet’s operating system is a key advancement over Bevariety because it can track sales by the drink and hour, Farrell said.

During the machine’s only public test, at a Willy’s Mexicana Grill in Atlanta, Coca-Cola discovered caffeine-free Diet Coke was popular late in the day. While sales didn’t justify its placement on an eight-tap fountain, the brand was easily included on the Jet, capturing potentially lost sales, Farrell said. Beverage revenue increased 10 percent to 20 percent, according to the restaurant.

“It definitely showed some potential,” Willy Bitter, owner of the 19-outlet Georgia chain, said through a spokeswoman. “Being that it was tested in just one of our stores, it would be hard to predict how it would perform over our entire system.”