Thursday, March 31, 2011

McIcarus would be needin' ta raise a wee bit o' capital...






This would solve the cross-holding problem...

...but would cause more damage to the EU system. A puzzling idea. As things go from bad to worse removing default risk free status is not something debt holders want to hear.

From Risk Online:

European policymakers and regulators are considering dramatic changes to the capital treatment for government bonds

Regulators and policymakers in the European Union (EU) are weighing three measures that would strip government bonds of their default-risk-free status, making them more costly for banks to hold in capital terms. That might seem a rational response to fears of restructuring or default of Greece, Ireland and Portugal, but it begs the question of whether - and how - a new capital regime would differentiate between issuers whose yields have fanned out across a 900 basis point spectrum.

More fundamentally, regulators would need to consider driving a wedge between eurozone member states, which have a limited guarantee in the form of the European Financial Stability Facility (EFSF), and non-eurozone states, which have the unlimited ability to print money to avoid default.

The idea is anathema to some. "We don't even want to think about it. We are all in the same space - our bonds have all been treated the same. That isn't something we accept could change, and it doesn't make much sense if a stability fund has been created to guarantee us," says Manuela Athayde Marques, head of the Center for Financial Research at Portugal's banking association, the Associação Portuguesa de Bancos, in Lisbon

McIcarus falls to earth

This is precisely what happens when rates, currency, and fiscal policy are not combined.

Irish Prepare to Learn Full Cost of Banking Crisis
Ireland suspends trade in Bank of Ireland, Allied Irish Banks before
stress-test results

Ireland prepared to learn the full cost of its banking crisis on
Thursday when the results of stress tests were expected to reveal that
four banks need billions more in aid, likely giving the government
extra ammunition in its campaign to force some of the losses on
international investors.

As the results loomed, market tensions were at a high, forcing the
suspension of trading in the shares of Bank of Ireland and Allied
Irish Banks. Irish Life & Permanent and the Educational Building
Society were also being tested.

A senior Irish banker, Mike Aynsley, said he expected the tests to
conclude that the four lenders would need another euro18 billion to
euro25 billion ($25 billion to $35 billion) to strengthen them against
any future shocks.

That figure would come on top of the euro46 billion ($65 billion) that
Ireland, a nation of just 1.8 million income-tax payers, has already
paid to prevent the outright collapse of five banks since 2008.
Ireland has repeatedly been forced to raise its worst-case estimates
of bank losses as its property market sinks deeper, forcing many of
construction barons into bankruptcy.

Dow 5000: U.S. is Hellenic Banana Republic

The King of Newport Beach has been in the news alot lately promoting his positions of emerging market debt and attempting to convince the investing public that there is "little value" in U.S. Treasuries (since he publicly said his fund does not own them anymore).

Of course, he has made similiar hyperbolic arguments in the past. All is fair in love and war (and markets as well) so I cannot fault him for talking his book, and I think he knows better.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said Treasuries “have little value” because of the growing U.S. debt burden.
The amounts the U.S. owes on its bonds, combined with obligations for Social Security, Medicare and Medicaid total about $75 trillion, Gross said in his monthly investment outlook, published on the Pimco website.
The U.S. will experience inflation, currency devaluation and low-to-negative interest rates relative to consumer-price gains if it doesn’t reform its entitlement programs, Gross said in the report. Gross “has been selling Treasuries because they have little value within the context of a $75 trillion total debt burden,” he said.

“This country appears to have an off- balance-sheet, unrecorded debt burden of close to 500 percent of GDP. We are out-Greeking the Greeks.”

Wednesday, March 30, 2011

The Recapitulator hears...

...that a retail brokerage is offering physical gold and other precious metals (for 1% commission and .6% storage costs, and cannot be shorted) for its clients.

One of the clearest signals of a bubble about to collapse is the flood of amateurs entering into an environment filled with extremely skilled professionals, thinking that "easy" money can be made.

Piling on...

...from the previous post. An excerpt from Matthew Lynn's new book about the EU and the Euro currency. One of the reasons I started this blog was to contend that the Euro is doomed.

By any reasonable measure, the single currency has been a failure. It hasn't made the economies of Europe converge: If anything, they have moved further apart over the past decade. It hasn't promoted growth, except of the most unsustainable and unbalanced kind: crazy credit booms in Spain and Ireland, reckless public spending in Greece and massive, pointless trade surpluses in Germany.

Nor has it shielded its members from financial instability: In fact, the euro has created instability, visiting a wholly self-made crisis on the European continent. It is a cause of instability, not a cure for it.

Looking forward, there are years of terrible austerity for the high-deficit countries, accompanied by big cuts in living standards and rates of unemployment that will make it virtually impossible for an entire generation of Greeks, Irish or Spanish to build careers for themselves.

In Germany, the Netherlands and France, there will be simmering resentments over the bailouts. Years of "Bild" front pages shrieking about lazy Greeks living well on German taxes will take an inevitable toll on what was until now the most pro- European of countries. Does that strengthen the EU? It doesn't sound like it.

The Sage of Omaha... in my opinion a bit sanguine about the EU experiment.

Warren Buffett told CNBC Thursday that the collapse of the euro zone's single currency is far from "unthinkable."
"I know some people think it's unthinkable...I don't think it's unthinkable," Buffett said in an interview.
Still, Buffett said he believes there will be "huge efforts" put forth to preserve the euro.
In the meantime, struggling peripheral countries like Portugal must find a way to resolve fiscal crises.
"You can't have three or four or five countries that are in effect free-riding on the other countries.
That won't work over time—they have to get their fiscal houses in reasonable harmony," he said.

Tuesday, March 29, 2011


...on the previous post...point 5 from Oliver Blanchard's (he has high ranking in the macro community as being a textbook writer and mathematical expositionist) "9 Things we learned at some conference for macrotheorists" (or something like that) The questioning of assumptions rarely comes up when priesthood cabals gather. Hilarity ensued given that some of the basic definitions used constantly in macrohackbabble talk, such as "liquidity", does not have a precise definition.

5. We may have many policy instruments, but we are not sure how to use them. In many cases, we are uncertain about what they are, how they should be used, and whether or not they will work. Again, many examples came up during the conference.

•We don’t quite know what liquidity is, so a liquidity ratio is one more step into the unknown.
•It was clear that some people believe capital controls work and some don’t.
•Paul Romer made the point that, if you adopt a set of financial regulations and keep them unchanged, the markets will find a way around, and ten years later, you’ll have a financial crisis.
•Mike Spence talked about the relative roles of self-regulation and regulation. Both are needed, but how we combine them is extremely unclear

another "oops, my bad" (in the sense that the body of "knowledge" he thought was "knowledge" turned out to be a bunch of hand waiving and useless graphs)


I non-verbally recite the word "epicycle" when confronted with theoreticians who refuse to entertain the possibility that all or nearly all their assumptions are false, and who continue to tweak their "models" as if these models were asymptotically just "that" close to full and universal understanding of the global economy. This is in reference to the epicycles that our predecessors used to desribe the troublesome orbits of Mercury and their attempts to fit facts into prevailing theory (at the time a Ptolemic circular architecture presumably based in part on the soundness of Platonic this case the circle).

So the below remarks from a respected macro-economist come as no surprise...if only we had more experimentation and data to truly understand...we are so close. Ha. There is no experimentation that can be valid in the real world of animal spirits and reflexivity. There can be no theory of economics without a theory of power...even Marx understood this...and the institutional structures in place at any one time in history are non-repeating events given the various reflexive actions of participants because of them.

That said, the good news is that we recognize that in finance and parts of macroeconomics, the models or frameworks are incomplete. That represents a challenge to the academic community. But it also means that, in the short run, participants and regulators will be operating with incomplete models. This will require judgments (which will be uncomfortable in contrast to the earlier sense of certainty). There will be mistakes. And, as Olivier Blanchard said in his excellent summary, we will proceed step-by-step, evaluating the impacts of policy choices and sometimes reversing course.

This is relatively familiar territory in developing countries, where changes in the institutional depth of the economy mean that models (especially advanced country models) are not very precise in predicting market responses to policy choices. Nevertheless, theory is still useful when used judiciously. In that context, you can think of this as analogous to navigating with charts that are incomplete.

Having said that, we do in principle have the option of returning to old patterns while waiting for different or more complete models to be developed and tested; I think there is a widespread recognition that this would be a risky mistake

Headline of the day...

...James Bullard of the St. Louis Fed and Reuters team up to provide us with this talismanic beacon of illumination on U.S. monetary policy:


Very, very helpful.

Late to the party...

...ratings agencies again display their utility.

S&P Warns It May Downgrade Portuguese Sovereign For Third Time In A Week
Gregory White | Mar. 29, 2011, 6:26 AM | 2 |

S&P has downgraded five Portuguese banks and has now threatened to
downgrade the country's sovereign debt again just days after bringing
it down two notches.

The ratings agency downgraded the Portuguese division of Santander,
the country's largest publicly traded bank, Banco Espirito Santo, and
three others, according to Bloomberg.

And now, only three days after the downgrade of the Portuguese
sovereign from A- to BBB, S&P may be ready to hit the sovereign again.

Commodities and the claims upon them...

...again, the risk is clear, and commodities markets may have started to price this risk instead of assuming a security that "guarantees" a supply of a precious metal is precisely the same thing as owning the physical metal and storing it in your home. Those cryptic "disclosures" regarding the risks of holding Silver and Gold ETS (and other structures) and the "reasonability" of delivery of physical gold to satisfy outstanding claims will be put to the test soon enough. If I were counsel to these companies, I would be actively pursuing preliminary opinions from regulators as to safe harbor conduct.

From the excellent markets website Minyanville:

Just to quickly review, for the month of March (a silver delivery
month) 1,383 contract holders deposited enough cash in their COMEX
accounts to fully fund the purchase of 8.9 million ounces of silver.
As of Thursday, March 24, there were still 632 futures contracts open,
meaning 3.16 million ounces are still awaiting delivery even though
the month is quickly drawing to a close.

The fact that such a large amount of silver contracts remain unfilled
is mystifying to many investors since the COMEX reports 104 million
ounces of silver in inventory. If such a relatively small amount of
silver can strain physical inventory so much, investors have started
to believe that the exchange’s inventory is paper rather than metal.

Monday, March 28, 2011


The U.S. will still be the sole hyperpower once the next phase of global unrest is finished.

Of course, what the "U.S." looks like at that point may be markedly different from the contiguous continental + Alaska, Hawaii (and Puerto Rico, for all intents and purposes). Secession overtures will probably increase, both from states or blocks of states wanting to secede and from states or blocks of states wanting to eject weaker players. It remains a remote possibility, since bloody precedent was set the last time the issue was raised.

But still, I am optimistic long-term. No other nation or "Union" comes close to the cultural and legal institutional infrasctructure the U.S. enjoys. This hyperbolic talk of massive inflation and being slaves to our debtholders is silly and counter-productive. However, the austerity measures (putative and already active) will guarantee more pain ahead. The world is witnessing the slow phase-transformation from cooperation to competition. As I have said before, humanity does not "progress" in some linear form like scientific discovery...and our inability to recognize this false analogy will not prevent the cycle from changing again. Relatively speaking, peace, cooperation, and order has had a wonderful nearly 80 run.

So when the EU fails and recedes back into its traditional adversarial relationships, when China blows up in spectacular fashion under labor unrest, institutionalized corruption, and closes shop for a few decades, when Caliphates are re-established, when Russia re-starts Imperial ambitions in the Baltics, etc...where on earth is capital going to flow where it can enjoy a stable environment in which to survive and grow?

Sunday, March 27, 2011


...all over the EU, and none more important than in Germany.

The environmentalist Greens and the centre-left Social Democrats (SPD) managed an unprecedented political upset in the rich southwestern state, which is normally a stronghold for Merkel's Christian Democratic Union (CDU). Preliminary official results showed that the Greens won 24.2 percent while the SPD took 23.1 percent.

The incumbent CDU and their pro-business Free Democratic (FDP) allies managed 44.3 percent between them, with the conservatives winning 39 percent and the FDP 5.3 percent.

Merkel's Christian Democrats have governed Baden-Württemberg since 1953, but anger over her nuclear policy in light of the Japan crisis as well as decisions on Libya and the euro angered voters in the run-up to the poll.

“We’ve achieved a historic election victory,” said Winfried Kretschmann, who is likely to become Germany's first state premier from the Green party. “I'd like to thank those that voted for us - especially those voting for us for the first time.”

In another state election in neighbouring Rhineland-Palatinate, the Social Democrats looked set to stay in office, but will have to share power with the Greens.

The SPD won 35.8 percent of the vote, the CDU 35.3 percent, and the Greens 15.4 percent. The FDP, which won only 4.2 percent, failed to clear the five-percent hurdle to win seats in the Rhineland-Palatinate state legislature.

The outcome will increase the pressure on Germany's already embattled Foreign Minister Guido Westerwelle, the FDP leader, although analysts said Merkel's centre-right coalition was expected to survive.

“This is a difficult evening for us. We’re naturally disappointed by the election results,” Westerwelle said in Berlin. “Energy policy was decisive. It was a referendum about atomic energy and we have gotten the message.”

But beyond a crushing blow to morale in Berlin, the double state defeat will make it even harder for Merkel to pass legislation in the Bundesrat upper house and likely prompt fresh calls for her to shore up her conservative credentials.

Saturday, March 26, 2011

Circle the wagons...

...the Fed is using all available channels to communicate its "irreproachability" with regard to monetary policy. Most of the arguments contain the usual positivist outcomes as if economics were an exact science where one set of policies is obviously better than another set of policies equally reasoned but containing the opposite policy choices.

The inflation problem is most dependent on the prices of labor. Have we seen any pressure on wages lately? The below excerpt from a newspaper op-ed focuses on the effects of commodity price increases on headline or core levels of inflation.

Given that core inflation is close to 1 percent, overall inflation next year will likely also end up at about 1 percent, well below the Fed’s almost explicit objective of 2 percent.

But wait a moment, the Fed’s critics say. They like to point out that the data haven’t always told the same story about the link between underlying and overall inflation.

For instance, during the 1970s and early 1980s, an era of debilitating inflation, the markets had no confidence in the Fed’s ability to keep prices stable. This meant that any increase in prices, including those for volatile items like food and energy, were almost immediately and fully translated into expectations of higher overall inflation in the future. Those expectations, in turn, gave rise to actual increases in other prices, not just food and energy. (If workers expect that inflation will be 2 percent in the coming year, they will demand a wage increase that is 2 percentage points higher than they otherwise would to keep improving their standard of living.)

So in the ’70s, increases in food and gas prices affected both core and overall inflation. Some believe this is still the case today. But it isn’t.

Friday, March 25, 2011


Very Smart.

Setting up shop in post colonials (in this case, Siam) is quite astute as the paper dragon weakens. The fact that now costs are lower is telling...and ominous for China given the possibility of labor unrest.

Wintek Corp. (2384), a Taiwanese maker of panels for Apple Inc.
(AAPL)’s iPhones, plans to invest as much as $150 million on a new
plant in Vietnam to take advantage of lower labor costs in the
Southeast Asian country.

The shares of Wintek climbed 1.8 percent to NT$51.70 at the 1:30 p.m.
close of trading in Taipei, the biggest gain since March 18. The panel
maker plans to invest $100 million to $150 million on the plant in
northern Vietnam’s Bac Giang province, Jay Huang, a spokesman for
Taichung, Taiwan-based Wintek said by phone today.

Wintek told the Bac Giang Industrial Zones Authority that it will make
touch panels for iPhones and iPads, according to Nguyen Van Hien, the
authority’s chief administrator. Huang declined to confirm or deny
whether the products would be used in the Apple devices.

“There’s no question this is great news for Vietnam and great for the
Vietnamese economy,” said Than Trong Phuc, managing director of Ho Chi
Minh City-based DFJ Vinacapital L.P., a technology investment fund.
“Multinational companies are looking for a second country to China
where they can diversify their investments and save on costs.”

This is not an isolated incident...

...nor is it confined to the Arab/Muslim world. As I have said, depending on economic conditions (and today's GDP figure is not exactly reassuring as the tradition of goosing NOMINAL GDP is standard operating procedure for nations trying to buy time until the next economic expansion) we will see much more of Cloth or Gavel type of choices with respect to how people are ruled and order is achieved.

CAIRO — In post-revolutionary Egypt, where hope and confusion collide
in the daily struggle to build a new nation, religion has emerged as a
powerful political force, following an uprising that was based on
secular ideals.

The Muslim Brotherhood, an Islamist group once banned by the state, is
at the forefront, transformed into a tacit partner with the military
government that many fear will thwart fundamental changes.

It is also clear that the young, educated secular activists who
initially propelled the nonideological revolution are no longer the
driving political force — at least not at the moment.

As the best organized and most extensive opposition movement in Egypt,
the Muslim Brotherhood was expected to have an edge in the contest for
influence. But what surprises many is its link to a military that
vilified it.

“There is evidence the Brotherhood struck some kind of a deal with the
military early on,” said Elijah Zarwan, a senior analyst with the
International Crisis Group.

“It makes sense if you are the military — you want stability and
people off the street. The Brotherhood is one address where you can go
to get 100,000 people off the street.”

Wednesday, March 23, 2011

Sovereignity: The Crozier or the Sword?

We had all better prepare for new models of sovereignity, new country formation, and an increase of power for those who posess MORAL legitimacy, who naturally step in to fill the void of perceived and actual venality amongst secular officals.

This is good news for the Vatican and Mecca.

There is no rupture...

...without damage.

How to expedite the process of nation building and recognition? This is also a problem for the U.S. should economic conditions worsen (and I for one think that they must given the austerity and current opinion railing aginst the budget deficit). I have recently been reading about the exta-constitutional tactics the revered Abraham Lincoln used in order to restrain the south from secession - the man certainly knew the value of force and quickly jettisoned republican ideals in favor of preserving order. Only physical force (or an implicit guarantee of force) can ensure peace in most of these instances. "Human Rights" is a meaningless, vapid concept in the absence of force, and less so in the presence of force.

This past January, more than ninety-eight percent of Southern Sudanese voters confirmed their desire to secede from Sudan and declare an independent state. Although the government of Omar al-Bashir in Khartoum issued a decree recognizing the outcome of the referendum, many concerns persist regarding the promotion and protection of the human rights of the Southern Sudanese people, particularly during the turbulent transition to official statehood in July.
Event Information

More Related Content »
On March 25, the Project on Internal Displacement and the Africa Growth Initiative at Brookings will host a discussion to explore the future of human rights protections in Southern Sudan. The event will feature presentations by the Honorable Ezekiel Lol Gatkuoth, head of mission at the Government of Southern Sudan (GOSS) Mission and the Honorable Elkanah Odembo, Kenyan ambassador to the United States. Following their remarks, Joyce Leader and Andrew Natsios of Georgetown University will offer commentary


The forming of the U.S. Africa Command is already paying dividends. The actions in Northern Africa have been logistically seamless thus far, and will provide excellent headway for the proxy conflict actions coming in Sub-Saharan Africa.

The commander of Africom (a female) is an expert in logistics, and it is interesting to note the shifting of policy priority away from Asia and towards the antipodes.

Tuesday, March 22, 2011

The Palindrome flies his jolly rodger...

Soros thinks the Germans are "confused" in their desire to defend their sovereignity at the expense of the nascent and deeply flawed EU project. His solution is to simply Federalize all European banks. An interesting position, and one common for those with power: simply take power away and distribute to other more friendly locales, while fighting those who would do the same to you without quarter.

Yo, ho ho, a pirate's life for me.

hope they can escape from their deficit predicament if they work hard enough atBerlin is imposing these arrangements under pressure from German public opinion, but the German public has not been told the truth and so is confused. The solution to the euro crisis to be put in place this week will set in stone a two-speed Europe. This will generate resentments that will endanger the EU’s political cohesion.

Two fundamental modifications are required. First, the European financial stability facility must rescue the banking system as well as member states. This will allow the restructuring of sovereign debt without precipitating a banking crisis. The size of the rescue package could stay the same because any amount used for recapitalising or liquidating banks would reduce the amount lent to sovereign states. Bringing the banks under European supervision rather than leaving them in the hands of national authorities would help restore confidence in the banking system.

Second, to create an even playing field, the risk premium on the borrowing costs of countries that abide by the rules will have to be removed. That could be accomplished by converting most sovereign debt into eurobonds; countries would then have to issue their own bonds with collective action clauses and pay the risk premium only on the amounts exceeding the Maastricht criteria. The first step could and should be taken immediately at Thursday’s summit; the second will have to wait. The German public is a long way from accepting it; yet it is needed to re-establish a level playing field. This has to be made clear to give deficit countries it.

Headline grab...

...for the Dallas Fed. Once again, insolvency is not a concern with sovereign currency issuing countries (although inflation certainly is, which would be of concern if there was actual inflation, commodity prices notwithstanding).

I also do not discount the possibility that the Fed is pushing back against futher congressional oversight and is deflecting attention to the "Fiscal" side of things in order to distract from the "monetary policy" side of the ledger. Thus, it appears it was Mr. Fisher who gets the lucky job of Knights errant for his master.

"If we continue down on the path on which the fiscal authorities put us, we will become insolvent, the question is when," Dallas Federal Reserve Bank President Richard Fisher said in a question and answer session after delivering a speech at the University of Frankfurt. "The short-term negotiations are very important, I look at this as a tipping point."

Monday, March 21, 2011

Libya and expediency

Power does truly astonishing things. The below question and response by our President (who was at the time of this question merely a Senator) demonstrates how emotion trumps principal even in extremely discliplined individuals, and how the vast majority of arguments are not truth-finding expeditions, but mechanisms designed to dominate in furtherance of short-term goals. If the President were presented with the below (his brain has likely jettisoned the memory of this in order to preserve congruence with current actions in Libya) he likely would argue the definition of "immiment threat" includes oil supply fluctuations. He would also point to the U.N. resolution and being demonstrative of some threat.

These are the contortions people make when their goal is to hold power. This is the system we have, so I do not begrudge any player in the game who plays it well. But it is instructive to observe what is said under one context, and what is done in another.

Barack Obama's Q&A

2. In what circumstances, if any, would the president have constitutional authority to bomb Iran without seeking a use-of-force authorization from Congress? (Specifically, what about the strategic bombing of suspected nuclear sites -- a situation that does not involve stopping an IMMINENT threat?)

The President does not have power under the Constitution to unilaterally authorize a military attack in a situation that does not involve stopping an actual or imminent threat to the nation.
As Commander-in-Chief, the President does have a duty to protect and defend the United States. In instances of self-defense, the President would be within his constitutional authority to act before advising Congress or seeking its consent. History has shown us time and again, however, that military action is most successful when it is authorized and supported by the Legislative branch. It is always preferable to have the informed consent of Congress prior to any military action.

As for the specific question about bombing suspected nuclear sites, I recently introduced S.J. Res. 23, which states in part that “any offensive military action taken by the United States against Iran must be explicitly authorized by Congress.” The recent NIE tells us that Iran in 2003 halted its effort to design a nuclear weapon. While this does not mean that Iran is no longer a threat to the United States or its allies, it does give us time to conduct aggressive and principled personal diplomacy aimed at preventing Iran from developing nuclear weapons.

This too shall FAIL.

A "quantum leap" in finacial regulatory surveillance...interesting what is the probability that the EU spontaneously combusts?

More of the Khyber pass approach to governmental regulation. The solution is always known in advance (more "official" oversight and control), but the problems have not even materialized. In any other field of human endeavor, this approach would be laughable. In the EU is it "good policy".

EUOBSERVER / FEATURE - After months of often bitter back-room negotiations, European finance ministers have finally given the green light to a radical new centralised EU oversight of national budgeting processes and, broader still, of all economic policies - both of countries that use the single currency and those that do not.

Comment article
The unprecedented shift in powers to the bloc from member-state parliaments, heavily limiting what is known in the jargon as "policy space", or the ability of countries to write their own laws, was saluted by EU economics chief Olli Rehn.

"Today the EU member states are endorsing the basic thrust of the six legislative proposals by the commission," he told reporters after ministers had given their approval to what European decision-makers have dubbed the 'Six Pack'.

The ministers were not endorsing a light work-out of economic sit-ups, but a different sort of regime entirely - a half a dozen new far-reaching laws that the commissioner said "will lead to a quantum leap of economic surveillance in Europe."

The ministers were not endorsing a light work-out of economic sit-ups, but a different sort of regime entirely - a half dozen new far-reaching laws that the commissioner said "will lead to a quantum leap of economic surveillance in Europe."

Although much of the often very technical discussion, aimed at convincing markets of Europe's commitment to tighter fiscal decision-making, has been buried in the back of the financial pages of newspapers, those at the heart of the EU are under no illusion about the profound transformation the bloc is about to undergo.

"What is going on is a silent revolution - a silent revolution in terms of stronger economic governance by small steps," commission President Jose Manuel Barroso said last June after the EU Council first gave the nod to the commission's initial concepts for that would later evolve into the Six Pack.

"The member states have accepted - and I hope they understood it exactly – but they have accepted very important powers of the European institutions regarding surveillance, and a much stricter control of the public finances," he said at the time.

Friday, March 18, 2011


Economists love to talk about the relative diesireability of assets using two basic variables: price and yield. These characteristics form the bedrock for most theories of international economics and have been hoisted upon media truncheons this week as cause for concern and explanations for the fall of the dollar.

In my view, this is a naively myopic view of what assets are and why people, institutions, and other sovereigns buy them.

For example, foerign exchange is used instead of naval action to ensure a low exhange rate-it has nothing to do with the intrinsic desireability of us assets, rather the effects on other parts of the balance scale in case of purchase.

Sovereign bonds and the currencies they are denominated in encompass far more than the traditional definitions of "money". They are now foreign policy transmission systems and brand marketing for the "core values" of whatever sovereign they hail from.

Wednesday, March 16, 2011


One of the themes of this blog is to demonstrate by way of example the benefit (I would say neccesity) of univariate, uniform skepticism. We as humans find it difficult to inject skepticism and critical thought into discussions that contain a subject that we have an emotional connection with.

Thus, the vast majority of what we see and read appeals to our emotions in the attempt to "drop our shields" and attempt to influence what we deem as "important".

This leads to some truly silly conclusions...discussions of behavior given a celebrity's laviciousness, a paramilitary response to state budget cuts (government should be trusted like any other entity you barely know), etc.

The point being that in the collisions between passion and reason, passion wins.

So we should all take some deep breaths before simply assuming a nuclear winter, or that aftershocks in Japan herald the awakening of GODZILLA! From his slumber and represent his measured steps to the mainland, for the media has simply played on our ignorance and posited an extremely unlikely but awful outcome in our minds, and we are locked onto this emotional target like the movie Top Gun...or a Chinese Naval demonstration.

The Fed has a pet Unicorn...

...How else to credibly explain some of the musings emanating from Constitution Avenue?

"Fed + QE2– end of the program won’t be a big deal for Treasuries according to
former Fed official Mishkin - Mishkin said Wednesday the end of the U.S.
Treasury's US$600 billion government bond purchase program in June is unlikely
to have a significant impact on long-term bond yields. DJ

Translation: "I don't think anyone will notice us gone."

ADDENDUM: Yes, I am aware he is a former official, but one who enjoys speical status amongst the euneuch class and is useful for diffusion of official party line.

Tuesday, March 15, 2011

TIC data...

...indicates the world still has a healthy appetite for Treasuries. This on the heels of a very public announcement by the Newport Beach bond man that he has jettisoned his entire inventory of treasuries (now, for the purposes of this discussion, we will not comment on whether or not this is true in a strict sense in light of total derivative exposure and the Newport Beach man's penchant for selling option premium).

This is to be expected. What other currency in the world offers as much safety (from an institutional sense), inflation risk be damned? Which other jurisdiction is most probable to return SOME form of capital to you should Risk across the globe increase?

Monday, March 14, 2011

Markets down

My previous posts regarding a pullback in March obviously did not factor in Nuclear fallout risk. I so admire the markets for this central fact: It never ceases to show you how much you don't know...even if you are right.

You can be "right", but never truly "correct" it seems.

March 15 (Bloomberg) -- Japanese stocks dropped, with the Topix index suffering its worst two-day slump since the 1987 stock market crash, and default risk jumped on concern the nation’s economy will be crippled after its biggest earthquake and a nuclear accident. U.S. index futures, rubber and oil fell.

The MSCI Asia Pacific Index sank 4.3 percent to 125.93 as of 11:50 a.m. in Tokyo. The Topix tumbled 7 percent, Japan’s government bonds rose for a third day and the cost of protecting the nation’s corporate bonds from non-payment surged the most in more than two years. The Australian dollar weakened 1.1 percent. Rubber declined 7.3 percent and oil slid 1.9 percent in New York. Standard & Poor’s 500 Index futures lost 1.4 percent.

Even with...

...180 Billion yen in liquidity injection from the BOJ, and even with Moody's downgrades and associated dire warnings, Japanes Bonds are up. How is this possible given their fiscal situation and the projected increase in governmental spending given this natrual disaster?

Chained to a sinking boat...

Which one realizes they all have keys?

The BIS, the central bank of central banks, said in its quarterly report that Germany had $569bn of exposure to the quartet, France $380bn, and the UK $431bn.

A chunk of British exposure is on behalf of Mid-East and Asian clients banking through London. Italy has just $81bn at risk and seems uniquely insulated from the crisis all around it.

The geography of risk varies greatly. British-based banks and subsidiaries have $225bn at stake in Ireland, and $152bn in Spain, but little in Portugal or Greece. France is up to its neck in Greece with $92bn; a Benelux-led group has $180bn in Spain, and Spain itself has exposure of $109bn to Portugal.

Sunday, March 13, 2011

The Quake...

...the real issue is the importance of Nippon as nexus for various "just in time" global logistic systems.

If power is lacking, the resultant effects are obvious.

Another classic of its kind...

...and worthy of another "in retrospect" moment for the historians of the future, who will count the current bubble in gold (and indeed in most commodities) as a misplaced faith in their ability to substitute as "money".

This snippet from yet another gold ETF prospectus. Again, the claims on physical gold (which open up additional risk as multiple collateral claims may be had for the same cache of gold, especially given current prices) will be far more than the actual gold available.

"The trustee may suspend the delivery or registration of transfers of Shares, or may refuse a particular deposit or transfer at any time, if the trustee or the sponsor think it advisable or any reason....or...during an emergency as result of which delivery, disposal or evaluation of gold is not reasonably practicable"

So, once again, we are compelled to inquire as to what is reasonable. And even more interesting from a risk point of view, the PERSPECTIVE of whom decides what is reasonable falls on trustee OR the sponsor. This is all in light of Net Asset Values being slightly LOWER than a comparable investment in physical gold - despite the risk (but offset of course by storage costs and other risks associated with holding physical gold).

The point being here, is that there is no shortage of investment options to "take advantage" of this latest gold rush, and that in it of itself should make would be gold bugs wary.

Thursday, March 10, 2011

In retrospect...

...The European experiment will be taught as a quaint attempt by historical enemies to compete economically with the prevailing hyperpowers of the day.

More downgrades, which actually have bite to them as individual nations in the Euro area are not sovereign currency issuers.

My main thesis (the the Unites States is in a unique position to benefit from global disorder) remains intact, albeit with the aforesaid short-term market volatility.

Wednesday, March 09, 2011


This will be sure to infuriate her interlocutors...playing the current hand for all its worth. Realpolitik is alive and thriving. Of course, the Chinese could direct the exact same comment to the United States, but once again, the difference between systems of order (and the strong position the U.S. holds relative to the rest of the world) is demonstrated.


Tuesday, March 08, 2011

In retrospect... will seem obvious to historians that this was a plutocratic oligarchy that was able to convince its populace (via censorship and propaganda) that its platonic theory of justice ("everyone know their place") just long enough to create a fully-fledged export economy and concentrate wealth almost exclusively among the ruling communist party...then things went very, very wrong...

China’s economic growth since the turn of the 21st century has been staggering. The values of some of its largest companies, both publicly-traded or solely government-controlled, are equally staggering. But according to a recent study by an independent Chinese think-tank called the Unirule Institute of Economics, China’s economic miracle may not be all its cracked up to be, at least as far as some of its largest companies are concerned.

Massive state-controlled Chinese companies like China National Petroleum Corp., or CNPC; China Petroleum and Chemical Corp. (NYSE: SNP), or Sinopec; Aluminum Corporation of China Ltd. (NYSE: ACH), or Chalco; China Mobile Ltd. (NYSE: CHL); China Telecom Corp. Ltd. (NYSE: CHA); and China United Network Communications Group Co. Ltd. are among the 10 state-owned enterprises (SOEs) that account for 70% of all net profits for SOEs for the years 2001-2008. Just two companies, Sinopec and China Mobile, account for a third of the profits

Monday, March 07, 2011

Cart before the horse

The following statement was issued by a local pension fund manager who, like many similar funds, face rising obligations with lower expected returns on investment...quite the conundrum indeed.

But the following by way of solution is not wise at all:

"He also argues that the program actually is lowering its investment risk because diversification into new asset classes reduces the volatility of the fund while augmenting returns. That's based on past performance at the nation's university endowment funds, after which he's patterned his approach, he says."

Diversification does reduce volatility within a portfolio, but does not reduce systemic volatility throughout asset classes like we just experienced. It is also "unclear" wether volatility is related to returns at all. But even if that were true, there is no reason to think a portfolio that removes MORE risk will DEFINITIVELY generate higher returns simply by entering into other asset categories. And I submit the "past performance" from other universities endowment funds will refute these statements. Unfortunately, it sounds as if this official has a misguided faith in the modern portfolio theory of investment("portable alpha" and other such marketing slogans)

Thursday, March 03, 2011

Science Fiction

The only way for a world currency to work is if the entire human race were simultaneously re-wired with entirely different biological impulses and desires.

There has been a bit of hackademic mumblings about the need and feasibility of a world currency, which assumes (once again, this theme is getting quite a run through on this blog lately) the linear progress of society that somehow jettisons any need for competitive policy and realpolitik, and that countries the world over will willingly subordinate their interests without complaint.

How far have the U.N. And other multi-lateral organizations taken us to Utopia?

Wednesday, March 02, 2011

"Risk" adjusted

Be very, very wary of risk measures that focus on historical volatility (or Beta). Bubble formation and explosion is the more beneficial analysis, but it suffers from quantification difficulties, which will forever banish it from academic circles.

Which is alright by me.

Gold for example. Firms falling over each other to design the latest "innovation" that will "track the value of gold" (while still having only a CLAIM to physical gold somewhere).

If one reads the prospectuses from some of these firms, it becomes very clear that the ability to secure your supply of gold during times when its most needed is handicapped.

This is curious. Gold is ostensibly a hedge against social and political unrest. But the purchasers of these gold ETF structures are assuming that the legal infrastructure to secure their contractual rights will somehow remain intact and escape the unrest...and there contains NO RISK PREMIUM for a holder of these ETS to be fairly compensated for the RISK these provisions create.

For example, one large Gold ETF structure contains the language that physical gold will not be provided if "delivery, disposal, or evaluation of gold is not reasonable".

So what is "reasonable"?

Linear connectivity and trade...

...Is an assumption. There is little evidence to suggest the level and rate of change in global trade will continue to be high and increasing, respectively.

The U.S., once again, holds an enormous advantage vis a vi the rest of the world as its net exports as percent of GDP are much lower than most countries.

The world is ensnared. Some of them know it (my suspicions regarding China are increasingly born out by their actions...even when their ude of propaganda and rhetorical devices are approaching event horizon levels of absurdity) some do not, all attempt to derail the engine at their putative risk.

Cloth or Gavel... which will you be ruled? Edict from on high (suitably communicated through his/her/its chosen vassals - be they Kings or Priests) or through the distilled experience of law and legislation? Both offer compelling systems of order with benefits and limitations.

As the world clamours for various versions of "order" and "freedom", the winners in this process will no doubt be religious plutocracies or a more "conservative" bent. That is, the world will likely be more amenable to rule by "moral" superiors instead of political or economic superiors. They will be "Democracies" in name only...there will be few Republics amongst them.

I have written about this before on this blog, new country formation is obvious. The media is ablaze with the assignment of blame for foreign policy blunders, but rest assured, there will be plenty of opportunity for the Obama administration to absolve itself.

There are trade-offs between religious and secular order. However, the similarities are obvious: a few enjoy privileges undreamed of by the vast majority of subjects, whether or not order is achieved by the cloth or gavel.

Power concentrates, and the mechanism for making law or granting special status is independent of time, place, and position. It is of course no accident that change accelerates during times of economic crisis.

Again, I offer no normative prescription (I lean toward Libertarian thinking, but that also contains a whole host of problems, suffice to say I still maintain the United States sets the best example of society that continually teeters on the brink, but its ability to self-correct has been its lynch pin.), as normative prescription and "design" have done far more harm than good.

Fed Credibility

Below are several comments from various Fed officials concerning the state of the economy. It is quite clear that the Fed is losing its grip on things and its continued credibility with regard to policy going forward is tenuous at best.

That being said, the Fed could do much worse, regardless if it exhibits any mens rea considering what it believes "best" policy should be...the only thing it needs is control of commodity prices (so it can stop arguing about core deflation and getting tongue tied by its econ-wonk remarks focusing on why rising food and fuel prices are not "real" inflation)

Feb. 25 (Bloomberg) -- Federal Reserve Vice Chairman
Janet Yellen said the central bank could use communications to
make policy more accommodative, lower unemployment and raise the
rate of inflation if financial markets expected a tightening of
policy before the Fed intended.
If policy makers expected the Fed’s target rate to stay
lower for longer “and market participants came to share that
view, then financial conditions would become significantly more
accommodative, even in the absence of any change in the current
level of the funds rate,” Yellen said, according to prepared
text of a speech today in New York.
“Such a shift in policy expectations would be associated
with a lower trajectory for the unemployment rate,” Yellen said
at the University of Chicago Booth School of Business’s annual
U.S. Monetary Policy Forum. The shift would also cause “a
somewhat higher path of core inflation,” Yellen said.

I am very happy I did not attend this speech at my alma mater. The laughter would have sort of spoiled the mood. But I could disarm the audience's opprobrium by simply stating "hey, laughter makes the mood lighter, right? I mean if words alone, uttered by the proper august Fed officials CAN SHIFT BILLIONS OF DOLLARS IN CAPITAL AROUND THE WORLD AND EMPLOY MILLIONS IN THIS COUNTRY PER THIS SPEAKER, then a little laughter can make us all less serious about this topic.

and of course, this headline...


Which is sort of contradicted by the following print:

-----------------Price Indexes------
Gross domestic purchases 2.1% 2.1%