Friday, February 25, 2011

Newport Beachians...

...ready to stop the flow of QE2 singlehandedly...

The term “domino effect” has been used since the 1950s to describe the potential for political unrest to become contagious, resulting in a chain reaction. The phrase took on special significance during the Vietnam Era, when it was used to propagate the idea that a communist victory in Vietnam might embolden other communists in the region, prompting them to topple their own governments.

Today, we see the same phrase taking on special significance in the investment world resulting from political unrest in the Middle East and the ongoing Euro-zone debt crisis. For example, the domino effect can be seen in the political turmoil that has sparked a surge in oil prices, increasing inflation risk and leading to additional implications for sovereign risk.

The combined risk of the domino effect, however, is differentiated among regions and, as a result, the balance of duration allocation in a fixed income portfolio has become more delicate. The investment approach should therefore be more towards “safe spread,” i.e. investments that we believe are most likely to withstand a wide range of economic and geopolitical scenarios.

Wednesday, February 23, 2011

Interesting list of effective tax rates...

Alot of short-cuts and guesstimates on this list (how do you calculate marginal tax rates and "other payments" made in furtherance of business in Chad?) must be discounted in, but it is an interesting list of who wishes to import capital. These rates of course do not include the myriad other risks (including expropriation and the risk of regime change leading to higher taxes...a risk especially harmful to high sunk-cost and capital industry).

Tuesday, February 22, 2011


The below study contains several glaring problems. Of note, the "bubble clarification method". As if it were so easy. As stated below, the approach relies on the delta between "fundamental" and empirical levels of price growth rates, and that the empirical price is rising. The difficulty lies in determining what "fundamental" value is, using ONE OF THREE price models (ostensibly using the one that gives the best results in retrospect). Relying on the CAPM model and its silly measure of "beta" as volatility simply assumes historical returns on ASSETS will not be correlated to returns for INVESTORS, who have different (in the language of the paper) "information sets".

So the paper states to merely ride the bubble, properly identified, until it comes time to sell, at which point the paper (for obvious reasons as it is an academic exercise) is conspicuously silent.

Even Mr. Greenspan, who otherwise luxuriated in his reputation as Maestro of economic policy for the previous Millenia stated thusly:

"It is doubtful that bubbles, even if identified early, could be pre-empted short of the central bank inducing a substantial contraction in economic activity—the very outcome we would be seeking to avoid.”

Here is the abstract for the study, which can be found in full here.

We empirically analyze rational investors' optimal response to asset price bubbles.
We define bubbles as a sudden acceleration of price growth beyond the growth in
fundamental value given by an asset pricing model. Our new bubble detection
method requires only a limited time-series of historical returns.
We apply our method to US industries and find strong statistical and economic
support for the riding bubbles hypothesis: when an investor detects a bubble,
her optimal portfolio weight increases significantly.
A dynamic riding bubble strategy that uses only real-time information earns abnormal annual returns of 3% to 8%.

Central to our approach is a new bubble identification method. This method relies
on two main characteristics of asset price bubbles, described for example by Abreu and Brunnermeier (2003): (1) the growth rate of the price is higher than the growth rate of fundamental value and (2) the growth rate of the price experiences a sudden acceleration consistent with the features of the Minsky model described by Kindleberger (2000). An investor concludes that a bubble exists if both conditions are fulfilled. A bubble ends when the investor observed a crash during the previous six months or when a bubble is no longer detectable. The investor estimates the growth rate of fundamental value based on one of three different asset pricing models, the Capital Asset Pricing Model (CAPM), the Fama-French (1993) Three-Factor Model (3F-Model), and the Carhart (1997) Four-Factor Model (4F-Model). To detect a sudden acceleration, the investor conducts a structural change test as in Andrews (1993).

Reproba Noticia

Not all data are created equal.

Of course, one should be as skeptical of industry-sourced data as one is of the "objectivity" of Oscar nominations. Both are sales tactics.

Still, hopefully whatever credibility remained with the below organization and its "data" has evaporated.

WASHINGTON — A housing trade association is examining the possibility
that the data it releases underestimated the collapse of the housing
industry, the Wall Street Journal reported on Monday.

The National Association of Realtors, which issues the monthly
existing home sales report that is closely watched by economists and
financial markets, may have over-counted home sales dating as far back
as 2007, the newspaper said in an article posted to its web site.

NAR's home sales count was at odds with calculations by CoreLogic, a
California real estate analysis firm, according to the report.
CoreLogic says NAR could have overstated home sales by as much as 20

An over-count of home sales may mean that there is a bigger backlog of
unsold homes and that it will take longer for the U.S. housing sector
to climb out of the deep hole it is already in, dragging on the
broader economic recovery.

Event Driven

I am starting to think ratings changes in sovereign debt (given countries who issue their own currency) are merely opportunities for the ratings agencies to capitalize on revenue from information "assymetry", i.e releasing pending changes to favored subsribers or owners of the agency itself. Whether or not this constitutes a violation of securities laws is a matter for further discussion at a later time.

They must know by now the issues surrounding "debt" and sovereign currency issuers. This makes even less sense to me once factoring in the effects of "accord reset" (a nice way of saying the Bretton/Plaza/Smithsonian agreements suddenly being obviated and the resultant effects), it would seem that the risk is present for all sovereign issuers, so why the fascination with Japan, as if it were the only Island in an archipegalso in danger of flooding in the face of a Tsunami?

Now, who is Moody's largest shareholder?

Moody's changed the outlook on Japan's Aa2 bond rating to negative from stable, citing the difficulties facing the government and dimming prospects to stem the rising debt burden.

The move comes after Standard & Poor's last month lowered its debt rating for Japan to double-A-minus from double-A for similar reasons.

The move puts even more pressure on the administration of Prime Minister Naoto Kan, who is facing increasing difficulties in passing a budget for the fiscal year beginning April 1.

Wednesday, February 16, 2011


From the Arab world to the Baltics, the 2nd derivitive of "change" is increasing.

Its so amusing to see various Arab states attempt to divert the unwashed masses by bribes (such as increasing the minimum wage, etc.)...this will of course prompt the opposite of the desired effect as the general populace realizes THEY hold POWER.

This also dovetails nicely into a discussion about the Foreign Corrupt Trade Practices Act in the United States. I will comment about this at length soon.

Tuesday, February 08, 2011


NEW YORK (Reuters)—Al Gore's Generation Investment Management LLP is starting a $500 million fund to invest in Asian stocks, Bloomberg reported on Sunday

Tuesday, February 01, 2011

The tin-hat crowd is aflutter...

...the IMF brazenly states its goal. A world currency is something that never should happen. The power to issue a currency requires power over fiscal policy as well to achieve any sustainable coherence. Europe is slowly learning this painful lesson.

It reminds me of a joke:

"Q: What is a communist?
A: Someone who reads Lenin and Marx

Q: What is an anti-communist?
A: Someone who understands Lenin and Marx"

In other words, even assuming a world currency was technically possible, why would we want one?

Dodd-Frank instructional interactive graph.

The topography...

...of global markets remains very much in flux.

I still hold my beliefs that we have entered into the next phase of deflation, and national policies of "austerity" (which, among other things, always leads to increasingly protectionist and downright mercantilist policy actions).

Thus, come March or so we should experience another sell off in equities, coupled with a strong dollar, decreased rates and a large commodity sell-off.

The recent events in North Africa have punctuated the the threat of action and thrown into stark relief the difference between perceived and actual power of national governments.


Ability to pay? How does this reasoning even apply in an era of computerized spreadsheet debit/credit entries? Countries simply change entries in a spreadsheet...they do not ship gold to foreign locales, nor must they "get" their own sovereign currency "from" somewhere in order to debit or credit these security accounts. Has Japan exibited a decreased "ability" to pay in light of its 190 debt/GDP ratio?

Another possibility is that Moody's is aware of the above, but is publishing this for other, more self-interested reasons.

Moody’s Says Time to U.S. Outlook Change Shortens (Update1)

By Christine Richard

Jan. 27 (Bloomberg) -- Moody’s Investors Service said its time frame for possibly placing a negative outlook on the Aaa rating of U.S. Treasury bonds is shortening as the country’s deficit widens.

The outcome of the November elections, the extension of tax cuts and the chance that Congress will not address deficit reduction have increased Moody ’s uncertainty over the willingness and ability of the U.S. to reduce its debt, the credit-ratings company said today in a report.

“Although no rating action is contemplated at this time, the time frame for possible future actions appears to be shortening, and the probability of assigning a negative outlook in the coming two years is rising,” wrote Steven Hess , a senior credit officer in New York and the author of the report. The rating remains stable, according to the report.

The Benevolent and paternal paper dragon...

...the actions of a state wishing to usher in the peaceful transition to an open society, or another example of its desire to maintain the illusion of control? This in combination of the recent findings of used footage from "Top Gun" in lieu of actual aircraft operations tells us more than official statements from Beijing.

Wary Of Egypt Unrest, China Censors Web

BEIJING — In another era, China’s leaders might have been content to
let discussion of the protests in Egypt float around among private
citizens, then fizzle out.

But challenges in recent years to authoritarian governments around the
globe and violent uprisings in parts of China itself have made Chinese
officials increasingly wary of leaving such talk unchecked, especially
on the Internet, the medium some officials see as central to fanning
the flames of unrest.

So the arbiters of speech sprang into action over the weekend. and — two of the nation’s biggest online portals
— blocked keyword searches of the word “Egypt,” though the mass
protests were being discussed on some Internet chat rooms on Monday.
The use of “Egypt” has also been blocked on Weibo, the Chinese
equivalent of Twitter.